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Christabelle
Noronha and Saloni Meghani
Tata Steel is amongst the lowest-cost steel producers
in the world. It has been exporting its products for
more than 25 years already. It uses some of the world's
best practices in operations, business processes and
marketing. Over the years, the company has sought the
best benchmarks for management, manufacturing excellence,
operating practices, training, branding and customer
and retail value with the help of several leading consultants
and steel manufacturing companies.
What then would be the implication
of globalisation, which means different things to different
people, for this company that is almost 100 years old?
Most companies are global in some way or another. Does
Tata Steel consider itself global? No. "Not significantly
enough. We are planning our business model to become
more global," says B. Muthuraman, managing director,
Tata Steel.
As Tata Steel charts out its
coordinates on the world map, lets take a look at the
why, what and where of their strategy:
Why?
Even though Tata Steel can meet its growth aspiration
within the current marketplace, it is looking at taking
on the world more as a strategic option. Chetan Tolia,
chief (strategy and planning), says "We are looking
at how Tata Steel should position itself in the globalising
steel industry, so that we do not remain a very good
but small regional player."
Globalisation is very relevant
to Tata Steel’s growth trajectory because the steel
market is increasingly becoming global. "A global
market is one where a single price holds and all customers
can buy that product at this price excluding the transaction
and transportation costs. In the steel industry, in
every region the regional prices are increasingly being
set by global trends.
"Over 25 per cent of the
world’s steel production is globally traded. This
was less than about 15 per cent only about a decade
ago. The steel industry has been globalising very rapidly.
The minerals business is also global. While iron ore
has been traded for almost over a century, ferro alloys
have been traded for over 50 years," Mr Tolia says.
Tata Steel is advantageously
poised to make the entire world its playing field. Natural
resources like iron ore and ferro alloys are not available
in too many geographical locations and India has them
in plenty.
The company can monetise some
of these resources and use the cash flow to support
global initiatives. Secondly, not many steel plants
can adapt to market conditions as well as Tata Steel.
The company can use its world-class marketing abilities
to replicate its success all over the world.
The next natural sequence of
questions, then, include what, where and how to globalise.
Mr Muthuraman says that these issues are very closely
linked to how a company looks at its business. "A
truly global company is one where global thinking prevails
and decides every aspect of business – where to
manufacture, where to research, what type of people
to employ and where and how to market the products and
services. It is fundamental to think through every aspect
of the business in a global context to maximise profits.
"In order to do this, one
must have a very good understanding of the value chain
and the potential of each of its parts. At the end of
an exercise to determine which part of the value chain
creates the maximum value at which location and how,
you may find that manufacturing is best done in one
place while the market is in another, research should
be done somewhere else and methods of serving the customer
are different in each place. But at the end of such
an exercise, one may also come to the conclusion that
the most value creating opportunity is to be at home.
If you have applied the global test for arriving at
such a decision, you are a global company. So globalisation
should be seen as a means of value creation and not
merely as a means of physical presence," he says.
"Carrying out such an exercise
will throw up the model that best suits us," he
adds. The company is keeping its time-honoured tradition
of thinking each step out.
What?
Tata Steel has decided, first of all, that it wants
to be in the business of steel, minerals and related
areas. It believes that even though there are many applications
where steel has to give way to some other material,
there are also many new uses of steel to be encouraged.
"I see a situation where steel usage will increase,"
says Mr Muthuraman.
Where?
Having zeroed in on its product of focus, Tata Steel
would be in a position to figure out where the markets
lie and understand the growth potential in these areas.
A share of a market relevant enough to make an impact
on Tata Steel's bottom line is what the company is concentrating
on.
"India and China are growing.
The East European countries have been bottled up for
a long time and have just perked up. Activities like
construction and sale of more cars here are going to
increase their steel consumption. There is going to
be a market in the US for a long time because it comprises
almost 300 million people with a very high quality of
life," says Mr Muthuraman. "It is necessary
to evaluate each one of the large and-or fast growing
regions," says Mr Tolia.
Currently, China accounts for
a quarter of the steel consumption in the world at over
200 million tons. North America is at 100 million tons,
Europe at 150 million tons, South East Asia, including
Japan, Korea and Taiwan, is at another 200 million tons.
The Middle East, the CIS and East Europe, and Africa
consume about 30 million tons each while South America
consumes another 20.
The crucial question, according
to Mr Muthuraman, is how best to serve the identified
markets. What are their characteristics? What are the
keys to creating value in these markets? What are the
requirements of end users in terms of product quality,
delivery and service? It is also important to figure
out from where these markets are best served and where
steel should be manufactured taking the cost and logistics
for service and delivery into account.
The US, for instance, may have
a good steel market but if a manufacturing facility
is set up there, it will probably run at a loss. "It
is very important to understand where value gets added
in a market place. If I manufacture in India because
it is easier to dominate the Chinese market by being
here I would consider myself global because I have applied
a global mindset to take that decision. Just by setting
up a ferro chrome project in South Africa I do not become
global," says Mr Muthuraman.
So the jigsaw puzzle, with the
right pieces in the right place, has to be worked out.
How?
As the global steel industry is fragmented and awash
with extra capacity worth 15 to 20 per cent of consumption,
setting up greenfield ventures may not always be a justifiable
strategy. So Tata Steel plans to take the acquisition
route to globalisation in the immediate future. It could
then use the acquired plant or capability as a foothold
for the greenfield approach.
"It is necessary to look
at establishing local manufacturing presence backed
with a strong supply chain and sound marketing around
the plant and in that region. This will enable us to
leverage the capabilities we have built up in Jamshedpur.
Plus, steel has historically been a nationalistic industry
and people won't start shedding their mindset overnight.
So it is going to be important to establish local capacities
to go beyond the few percentage points of market share
that we could establish through only exports,"
Mr Tolia says.
Tata Steel does not wish to overlook
the fact that historically, a third of the acquisitions
worldwide do not make profits, deliver the objectives
for which they have been made or create value. It plans
to tread carefully in identifying the opportunity, negotiating
the deal and then merging that acquisition into the
parent with speed. "Each of these stages is critical
to successfully achieving and sustaining the gains,"
says Mr Tolia.
But given Tata Steel's record
for rock solid strategising, it seems unlikely that
its blueprint for globalisation will leave any stone
unturned. Steel waters run deep.
Other articles on the Tata
Group and globalisation:
Uploaded on January 5, 2004
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