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May 14, 2013, 01.45 PM IST | Source: Forbes India

Putting the shine back into Tata Steel

The 106-year-old giant faces the toughest challenges of its existence. Can Cyrus Mistry hammer it back into shape?

Putting the shine back into Tata Steel
Prince Mathews Thomas/ Forbes India

The 106-year-old giant faces the toughest challenges of its existence. Can Cyrus Mistry hammer it back into shape?

To be, or not to be, that is the question:
Whether ’tis Nobler in the mind to suffer
The Slings and Arrows of outrageous Fortune,
Or to take Arms against a Sea of troubles,
And by opposing end them
- Hamlet, William Shakespeare

On March 3, when Cyrus Pallonji Mistry took the podium at Jamshedpur to address the assembled crowd, it was his first public appearance since he formally took over as chairman of Tata Sons in December 2012.

For Jamshedpur, and for the Tata group, March 3 is a special date: 174 years ago, Jamsetji Nusserwanji Tata was born. At the turn of the twentieth century, he had displayed remarkable foresight—and stoked industrial development in India—by deciding to build a steel company here. That decision also marked a new phase for the group. It began to diversify into the entity that it is now, making everything from steel to trucks to cars to software to salt, among other things. Most remarkably, it has also earned an enormous reservoir of trust and goodwill, no easy task, in India or elsewhere.

Mistry looked relaxed, calm. No one knew what was going through his mind; no surprise that, because he’s always been a bit of a recluse who keeps his own counsel. (He declined to talk to us for this story.)

It is entirely possible that Mistry’s unruffled demeanour had to do with the fact that he had already been thinking hard about Tata Steel much before he took formal charge, as people close to him say. Ever since his appointment as a director on the board of Tata Sons in 2006, he had insider access to the deep workings of the group and its various firms. After he took over as chairman, he visited both Kalinganagar, where a massive new plant is coming up, and Jamshedpur, where capacities are being augmented, and had asked hard questions of senior executives.

Here’s the thing.

Tata Steel is 106 years old, the largest entity in the group, and it brings in $26 billion in revenues. The century-old factory in Jamshedpur is a cash cow. Production capacities there will have touched 10 million tonnes by the time you read this story. On paper, this holds the potential to ramp up sales by 1 million tonnes towards the end of financial year 2013 and deliver $250 million in operational profitability. And its cost of production is the lowest in the world.

At Kalinganagar, in Odisha, steel will start rolling out of Phase I by October 2014. This phase will add 3 million tonnes to Tata Steel’s capacity. Two years down the line, it will double. In short, the company’s Indian operations hold the potential to manufacture 16 million tonnes of steel.
Which is small change when you look at what might have been.

You see, once upon a time Tata Steel had ambitions to create a behemoth that would produce up to 100 million tonnes of steel each year. That was one of the reasons why Ratan Tata had paid $13 billion to acquire the UK-based Corus, which is now Tata Steel Europe (TSE). Until date, it remains the largest acquisition by any Indian company.

The European Offensive
Corus was created when British Steel merged with a Dutch company called Hoogovens in the late 1980s. But, as Uday Chaturvedi, a Tata steel veteran who had a stint as MD of Corus Strip Products (CSP), a unit of Tata Steel Europe, says, “They practically functioned as two companies and even competed for the same orders until recently.” Not just that, Chaturvedi recalls how the Dutch unit received investments and specialised in producing steel that catered to the growing automobile manufacturing business in Europe. British Steel’s units in the UK, however, remained starved for investments because its primary customers—those in the construction business—were simply not growing.

And because the steel business was nationalised in the UK in the late ’60s, “the organisational structure had become bloated and bureaucratic”, says Michael Leahy, general secretary of the British Trade Union Community.

Other problems existed that undermined the company’s competitiveness. According to Chaturvedi, “A robust supply chain management is needed to cut costs, improving lead time with customers, to have correct working capital and making sure there are no stock-out.” But that hadn’t happened either. As a result, Corus kept falling behind its rivals.

These issues weren’t obvious when Tata Steel acquired Corus; that was the time the UK company was riding a steel boom fuelled by demand from China. Because the going was good, the Indian management thought it wise to adopt a ‘soft hand’ approach on integrating the Indian and European operations. In hindsight, that was a bad move. Malay Mukherjee, a former director at ArcelorMittal, the world’s largest steel maker, says, “It is crucial you start integrating within six months of an acquisition. Else it gets too late.” He says his earlier boss, Lakshmi Mittal, who created a steel empire buying and turning around assets, would always have a post-acquisition team ready.

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