Lessons from Tata Steel
Tata Steel’s decision is in keeping with the trend of Indian companies selling off overseas assets to either repay debt or exit low-yielding assets
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An epochal event that holds significance for every globalized Indian business brought down the curtains in March when Tata Steel Ltd declared that it will sell off or mothball its UK steel plants. The event contains a lesson for every Indian business aspiring to go global; it also has immense geo-economic and geo-political repercussions.
Tata Steel’s decision is in keeping with the trend of Indian companies selling off overseas assets to either repay debt or exit low-yielding assets. Tata Steel’s decision seems to be a combination of both. Here are some other examples:
• Reliance Industries Ltd sold its Eagle Ford shale oil field in the US for $1.07 billion in June 2015.
• In October 2015, Bharti Airtel Ltd sold close to 8,300 telecom towers in seven African countries. The proceeds: $1.7 billion.
• Suzlon Energy Ltd sold German subsidiary Senvion to private equity company Centerbridge Partners LP for Rs.7,200 crore in January 2015.
• GMR Group sold three overseas operations during 2013: in March it sold a 70% stake in GMR Energy (Singapore) Pte. Ltd for $520 million; in December it offloaded its 40% stake in Istanbul airport and another airline services company for a combined $305 million.
• Avantha Group’s Crompton Greaves Ltd has been selling overseas power equipment assets.
• Fortis Healthcare Ltd sold five overseas assets between 2013 and 2015
This is just an indicative list but does highlight India Inc.’s troubled liaison with globalization. Economic reforms and competitive pressures forced many Indian companies to expand overseas through acquisitions with either (or a combination) of three objectives in mind—to acquire competitive supply chains, to access consumer markets, to buy into developed technology and intellectual property. However, the fault was not in going global but seemingly, in the timing.
But it also begs the question: how did Indian companies end up borrowing so much that it would subsequently force them to jettison their cherished global desires? And, how come they never saw the approaching storm, because most of the loans were contracted either just before the crisis or during the slowdown?
Look at Tata Steel’s UK outing. It acquired the British company Corus Group Plc in April 2007, paying over $12 billion for the purchase, most of it debt. Around the same time, the sub-prime mortgage crisis had started undermining global markets, leading to the cataclysmic closure of Lehman Brothers in September 2008 and the subsequent global financial crisis.
The economic slowdown and continuing weakness in European markets affected sales. Structural factors exacerbated matters—global steel oversupply, surging third-country exports into Europe, high manufacturing and environmental costs, continued weakness in domestic steel demand and a volatile currency.
Many other Indian companies with ambitions of acquiring a global footprint similarly borrowed heavily either in 2007 or, bizarrely, during 2011-12. A bloated appetite for foreign currency loans was fuelled by historically low interest rates in the developed markets. There was also an element of hubris, a misplaced feeling that growth would continue unaffected by global turmoil.
Unfortunately, this also reveals India Inc.’s lack of strategic intent and a bewildering ignorance of geo-economic currents. Numerous speeches by various Reserve Bank of India governors also reveal corporate India’s dalliance with risk: most companies have left their forex exposures unhedged. Consequently, the rupee’s depreciation since 2013 has increased their loan-servicing burden.
Tata Steel’s woes, though, could have an additional set of triggers, which could include the UK’s geo-political snuggling-up to China, or even the country’s vexed relationship with the European Union (EU). China has been dumping cheaper steel in Europe after other large markets—such as the US and India—increased tariff barriers.
Disclosing results for the quarter ending December 2015, Karl-Ulrich Köhler, managing director and chief executive officer of Tata Steel in Europe, stated: “Chinese steel shipments into Europe leapt more than 50% last year, while imports from Russia and South Korea jumped 25% and 30%, respectively. The European steel association has identified that Chinese steel is being exported at prices below the cost of production…”
In a separate statement, Roy Rickhuss, general secretary of the steelworkers’ trade union Community, said: “I would like to see evidence of the Prime Minister’s claims that they have increased procurement of British steel or tackled Chinese dumping of steel in Europe…”
But Europe is wary of jeopardizing its relationship with China—it is the EU’s second largest export market, and fourth largest foreign direct investment (FDI) destination. Both EU and the UK have also dithered on imposing higher steel import duties on apprehensions that it might render end-user industries uncompetitive. Higher tariffs present another predicament for the Conservative government: weighing the cost-benefit of saving the 15,000 jobs at the Tata Steel works versus antagonizing new-found friend China.
Tata Steel now involuntarily finds itself inserted into the Brexit campaign. Advocates of Brexit are arguing that the UK’s split with EU will allow the David Cameron government to rescue ailing steel plants and save 15,000 jobs. Currently, EU rules—bolstered by two recent rulings—restrict state-sponsored lifelines to industry.
A face-saving formula might still be in the works. EU trade commissioner Cecilia Malmstrom’s recent speech provides some clues to such a compromise.
There is a lesson in la affaire Tata Steel for Indian companies going abroad: before investing, India Inc. must do its homework about a country’s potential geo-economic tripwires—specifically, its bilateral and multilateral trade and investment agreements—and geo-political risks.
The author is senior geoeconomics fellow, Gateway House.
Reprinted with permission from Gateway House, a Mumbai-based foreign policy think tank. To read the full version of the article, go to http://www.bit.ly/1qCZLMH