Hobson’s choice for Tata Steel STRATEGIC INTENT
Last month, Tata Steel’s announcement of the proposed joint venture (JV) between its European business and German steel maker Thyssenkrupp generated considerable confidence among analysts back in India. Ever since it acquired Corus back in 2007, the operations have become a millstone around Tata Steel’s neck. And the plan to look at a strategic partner such as Thyssenkrupp, a move which has been in the works for over three years, is seen as a smart way to reduce exposure in Europe, drive consolidation in the European steel industry and also enable the company to focus back on the Indian market. So far, so good.
Except that the proposed JV is by no means a slam dunk. Since then, the news trickling in from the Netherlands, Germany and the UK is clear evidence that there will be serious headwinds to be dealt with. On the face of it, the logic behind forming a JV of two large European steel companies may seem obvious, but it may take a while to build consensus among all stakeholders. And not all of the opposition will be public. There will be considerable sophisticated behind-the-scenes lobbying by forces whose fortunes this deal could adversely impact. Let’s look at it, one by one. Labour unions in both Germany and the Netherlands have considerable clout. And they have an active say in investment decisions through the supervisory board structures, where they have equal representation. And, any memorandum of understanding will need their buy-in. Given the state of manufacturing industry in Europe – and the resultant job squeeze – there is invariably heightened anxiety among worker groups about any attempts to sneak in job cuts. And the works councils in the Netherlands and the Thyssenkrupp unions have already articulated their fears — and suggested that they will oppose the plan, until they are convinced about their independence and job security. While the labour situation in the UK is somewhat different, the spectre of job cuts is likely to be far more pronounced there. Unlike Tata Steel’s Dutch operations and Thyssenkrupp’s German assets, the efficiency of the Tata Steel’s UK operations need considerable improvement. But any attempt to push through any dramatic restructuring could face opposition from the government as well as from the unions. During former Tata group chairman Cyrus Mistry’s reign, frustrated by lack of progress, the Tata group came very close to mothballing its only other existing plant in UK at Port Talbot in Wales. Under current chairman Chandrasekaran, that plan has been taken off the table. Immediately after the proposed JV announcement, the British government exerted pressure on Chandra to commit to fresh investments of £150 million to reline the blast furnaces — as a signal of their long-term commitment to preserving the future of the UK assets.
It won’t be any easy call. No one is quite sure whether the UK steel operation can be pulled up from its bootstraps to become competitive any time soon. And, spending more capital to chivvy up the UK assets, especially when the Dutch and German assets are far more efficient, could prove to be a difficult balancing act. Incremental thinking won’t cut ice either. Importing coal and iron ore from abroad and using expensive power in the UK for processing finished steel is no longer sustainable. That’s why some experts believe that the only long-term solution could lie in gradually switching over to modern electric arc technology, which is based on processing of scrap, as opposed to the traditional blast furnace. Electric arc technology has come of age, especially in the US, with far lower levels of manning. However, whether Tata Steel’s management team in Europe has the understanding or the gumption for the switchover is far from clear.
It is, however, now clear that any new attempt to restructure the UK steel industry will come at the expense of labour. There are efforts underway to build a new public policy narrative that positions steel as an essential industry — and no longer as an employment generator. Yet it won’t be an easy for Westminster to build consensus, especially with the unions and the voting public.
The logic of consolidation – and its resultant impact on steel prices – is bound to meet determined opposition from another quarter: The automobile lobby in Europe. The global auto companies, including the likes of BMW and Mercedes, command considerable influence with the European Commission. And even if they support the JV, there’s a chance that they may insist on specific safeguards that put a cap on price hikes related to their longterm contracts with the steel companies.
That’s not all. Most folks are a bit surprised by the decision to go with a 50:50 JV structure. Decision making won’t be easy. And the added pressure of dealing with the separate supervisory boards in Germany and the Netherlands will make it quite formidable and convoluted.
Finally, like Tata Steel, Thyssenkrupp too has been looking at a range of strategic options, including divesting steel from its portfolio and focussing on high-growth business like elevators. The JV is, therefore, seen as a last ditch attempt by its chief executive Heinrich Hiesinger to build a sustainable steel business in Europe. As things stand, it will be akin to getting a camel to go through the eye of a needle.