BSM636 Advanced topics in international business Group Coursework A recent Global finance article identifies India as a significant contributor

to global corporate earnings. Global firms like the British Vodafone managed to cut its global losses due to their strong performances in India. Swiss Holicim (which is the world's second largest manufacturer for cement) spent more than 2 bn (SFr) Swiss Francs on acquisition in India to counter the weakening housing market in the United States (Chase 2007;12). These strategies reflect the contribution from one of the fastest growing economies of the world - 9.3% first quarter of fiscal year 06-07 (see Fig 1.1) The growing interest in India is not only restricted to the large multinational corporations but also the small and medium sized enterprises. This is linked to the country's attractiveness as a low-cost production site, huge potential within the local market (population 1.1 bn; Fig 1.1), human skills & etc. Furthermore new waves of mergers & acquisitions in the western world over the last few years have been carried out by the breed of large Indian firms (e.g. Mittal Arcelor or Tata - Chorus) have given India the image of a major global player in the world arena. While India has become an attractive destination for multinational firms investing foreign capital into the country, it has also become a significant source of outflows. This paper aims to discuss the way globalisation has affected India & the country's one of most prolific firms Tata Steel. We also aim to discuss the rationale behind the overseas acquisitions by the firm. Brooks et al (2010; 308) state that growing interdependence between the various national economies has resulted in a trend towards a global market, production & competition. According to them, the process of 'globalisation' is a process which erupted in phases consuming the various countries of the world by liberation of trade barriers. Globalisation is a social phenomenon & liberalisation India's tool used to attain globalisation. Though conceptually distinct, they are linked process and two sides of the same coin. Globalisation is the more comprehensive process which pressures closed economies (like India prior to 1990's) to liberate trade barriers (Goldstein 2008: 4). India's economic liberalisation began in the early 1990's. This de-regularisation & reduced controls over foreign trade and investment has contributed directly to the accelerated growth of over 7% per annum since 1997 (www.cia.gov). FDI stock in India rose from less than US$2 bn in 91' to almost US$40 bn in 04' (UNCTAD online database). There are recent talks of further de-regulating FDI restrictions e.g. facilitating FDI in Retail. The new Economic reform known as the LPG model - Liberalisation, Privatisation & Globalisation aimed at turning the nation globally competitive by enhancing the economic growth. Comparing the data available uptill 03' (Fig 1.2) reveals a tremendous shift in inward FDI. There was also a remarkable spike (from1.41 to 56.6) of FDI in the services sector (Fig1.3). Such inward FDI have facilitated the enormous growth for both domestic and foreign firms providing services like TCS & IBM respectively (since liberalisation).

With the arrival of globalisation, priorities within manufacturing industries have also shifted i.e. from Chemical industries before the 90's* ranked top to motor vehicles, transport equipment, IT industry, food & beverages all exceeding the latter in 2000. A consequence of globalisation was that Indian firms benefitted from technology transfers. However Athreye and Kapur (2001: 418) noted as per surveys done in the early 90's that almost 50% of the foreign investors in India deliberately did not transfer up-to date technology to their Indian subsidiaries or joint venture citing the country's weak intellectual property rights. Conversely Kathuria (2002) argues that domestic firms which invested in R&D were the ones who benefitted from foreign technology spill-over. A result that the extent that India benefitted from technology transfers personified in import of capital goods which seems limited. Fig 1.2 depicts a sweeping turn-around of the Indian economy since the 1990's with respect to the international trade patterns. With the opening up of the borders not only did the exports take a major surge but the reduction in duty rates facilitated increase in imports. Since liberalisation, India's exports have consistently building up from 66.2% in 1990-91 to covering 80.3% of its imports by 2001-03 largely on account of increased inward FDI & deposits from non-resident Indians. Globalisation did not only create FDI but also led to the migration of labour. As per Buckley et al, (2012: 4), the British left English language as a legacy of the colonial rule. So far language has been a strong driver of globalisation as it reduces transaction costs. This has enabled many Indian firms to become leading business service providers, for e.g.TCS & Infosys. This has also assisted skilled workers to migrate abroad. Since 1991, India has experienced a spiked remittance growth. Remittances totalled $US2.1 bn in 1991 which then surged to $US25.7 bn in 2006 (about 3% of India's GDP) There was a major surge in the services sector. According to The Times of India (April 28, 2005), the city of Bangalore reported a 52% rise (to US$6 bn) in software exports. Given the above any economic surge is not without a debate. Socialists and Politicians have continuously dwelt on about the growing inequality of income as a result of increased globalisation. Some leftist politicians have complained about the increased salaries of computer & IT professionals adding to the 'great divide'. India's route to globalisation and industrialisation did not go well with the steel-mill workers in India as firms were now built as self sufficiently industrialised (Dua et al, 1998; 157).Economists like Bhagwati (2004) however argue that globalisation has more benefits than costs and thus need to be supported. The global OFDI flows are conventionally dominated by the MNC's from developed nations (Buckley et al, 2012: 1). However India and China have emerged as significant investors in foreign markets. India's OFDI figures have substantially increased since the 90's to $US77 bn at the end of 2009 (UNCTAD, 2010). * For example, the share of the chemical industry in overall FDI stocks declined from almost 30 percent in 1987 to 3.4 percent in 2000, even though FDI stocks in this industry increased fivefold to Rs. 26.2 billion in 2000.

India although tends to control on its FDI outflows for prudential reasons (Mohan, 2008 pg 246), it has allowed a steady liberalisation of overseas investments by Indian firms. Fig 1.3 illustrates the net FDI outflow keeping a steady pace with the net inflow since 2000. To sum up while India has turned into an attractive destination for FDI, the country is also becoming a source of outflows as many Indian firms view outward investment as an important dimension of their corporate strategy. According to Pradhan (2008) before 1991 when India was a relatively closed economy, over 80% of OFDI was concentrated in other developing countries & were primarily Greenfield in nature. Once the trade barriers were dismantled & the policies governing OFDI having undergone significant liberalisation Indian enterprises took the liberty to invest in any ratio they feel appropriate with hardly any control by the Reserve Bank (Kumar 2008). This liberalisation has offered various strategic drivers to the Indian Firms. The Tata group is one of the most respected corporate houses in India and Tata Steel is one of the largest and most cost efficient producers of Steel globally. Although the Tata group has been around for almost 150 years (established in 1868) (Tata.com), it has been aggressively involved with large acquisitions to extend its global footprint since the liberation of Indian economy. According to Mr.B. Murthuraman (MD, Tata Steel) the manufacturing sector in India has realised the need to be driven by technology in order to survive the fierce global competition & deliver on the customer needs. Chetan Tolia (Chief Strategy & Planning) states on the company website that Tata steel are looking how the company should position itself in the globalising steel industry, so that they do not only remain a very good but small regional player as sooner or later they would lose their competitive edge to the other global player aspiring to capitalise the globalising Indian market. (www.tata.com). Since India's trade liberation, Tata Steel has made several inroads into foreign markets through Foreign Direct Investment (FDI) especially in countries such as USA. As The Economic Times (2011) reports (Fig 1.4): Acting US Commerce Secretary Rebecca Blank claims after a tour of Thomas Steel Strip Corporation, a member of the Tata Steel Europe Group and a manufacturer of cold-rolled strips usually used as steel castings for batteries: "It's a story worth listening to, a story that needs more characters like Tata Steel. In order to create all the jobs we need, we have to attract more businesses like Tata to our shores and do more to keep great US firms here." Ms Blank also highlights the importance of FDI, not only in the United States, but for countries all around the world. She also emphasises on why foreign companies, such as Tata Steel, invest in the USA: Its easy to see why they would want to be here. The American workforce is one of the best educated, most productive and most innovative in the world. Hence, FDI is beneficial to Tata as well as the USA economy as it stimulates as it strengthens economic productivity and job creation. India, astonishingly, have reduced their outbound FDI by 46.7% from November 2011 to December 2011. In contrast, Inbound FDI in India has been hugely popular in the recent past. India witnessed the second highest growth in FDI inflows in the world during 2011, which

helped generate over two lakh jobs, reflecting robust faith of international investors in Indian growth and allaying fears of its fading global sheen, a private survey showed. (Economic Times, 2012). The Indian Government has shown an inclination towards supporting Tata Steels FDI (Fig 1.5) plans by approving a Rs 1,100 core investment to issue warrants as a part of a fund mobilisation plan. (Business Line, 2012). Tata Steel Ltd also committed an investment worth $35.32 million in its Singapore-based unit Tata Steel Asia Holdings Pte Ltd and $1.5 million in another Singaporean subsidiary Tata NYK Shipping Pte Ltd. (Contify Investment, 2012). As we proceed, will discuss the various impacts, globalisation has had on both the global steel market & Tata Steel the firm.

The world iron-ore and steel is undergoing significant reformation with developing economies like China, India & South - Korea emerging as key players. 1970-1992 saw roughly 330% & a 190% rise in consumption of steel in China & India respectively & a fall of 15% in the European Union, 8% in Japan, 23% in North-America (B. Stephan Labson 1997: 239). There has been a significant change in the pattern of the steel industry with the reduction in production of iron-ore in Western Europe & rise in regions with high iron-ore resources and access to deep water ports (For e.g. Brazil & Australia). India, South Africa, Canada & Sweden all export in excess of 15 ml tonnes annually. As per B. Stephan Labson (1997: 243) the global annual steel consumption grew by 90.3% from the year 1994-2000. China and India accounted for 20.8 ml tonnes & 7.7 ml tonnes respectively (Fig 1.3. - consumption difference between the year 1994-2000). The Asian region (sum of net imports by China, India & other Asian nations) rose from 38 mn tonnes in 1994 to 61.1 mn in 2000 (Fig 1.3.1) which pointed clearly towards the rapid industrialisation in the Asian region International trade economists like Heckscher-Ohlin state that countries export goods that make intensive use of factors (i.e. land, labour & capital) that are locally abundant, while import goods that make use of factors that are locally scarce (Hill, 2011; 159). This theory explains the increase of steel consumption in countries such as China and India where labour and land are cheaper when compared to countries like Japan and North America. The Pattern of trade also depicts the shift of manufacturing industries from the Industrialised economies to either China or India justifying the rising steel consumption in both the above countries (Fig 1.3.2). Fig 1.3.2 depicts the pattern of rise in exports from the newly industrialising economies to the already industrialised economies, European Union and the United States. Heckscher-Ohlin also suggest that trade is usually affected by distance, cultural similarities & the relations between countries. Trade patterns followed by Tata Steel post India' liberalisation to

penetrate neighbouring Asian Markets by acquiring Thailand's Millenium Steel & Singapore's Natsteel area explained by the above theory of internationalisation. According to the Heckscher-Ohlin theory, trade only occurs between industries - inter industry trade where countries specialise in producing goods where the factor endowments are high. According to Grimwade (2000; 105), industries with standardised products are i.e. Steel, inter-industry trade are more important. The Global steel industries as identified by Krugman (1995; 341), however has the characteristics of being more intra-industries trade as levels of intra-industry trade increase with higher levels of differentiations. In the case of the Steel industry, the differentiations do not arise due to the form of product but due to the factors effecting price such as land and labour. The Heckscher-Ohlin theory fails to identify 'Economies of scale' as an important factor which gives firms the ability to carry out International trade. According to Krugman (1995; 329), trade facilitates specialisation of production & scale of economies which help reduce unit cost of production to make a firm more competitive. Krugman (1995;342) adds that revolution in technology and communication plays a great role to determine the global trade. In 2007, Tata Steel acquired the Anglo-Dutch firm Corus for $US 11bn which enhanced the opportunity of Tata to enter the EU. In the words of John Quigley (Editor, Industry Publication Steel week) There are not many opportunities for producers in emerging lowcost markets to gain access to the markets of Europe other than by acquiring a company like Corus, (guardian.co.uk).The acquisition of a firm four times the size of its own, Tata indicated that it aspired to expand its steel business on a global scale thereby exploiting the benefits of globalisation through economies of scale. Economies of scale in this case will help the industry and the firm both spread its cost thus reducing the end cost of the product to the consumer. Krugman (1995; 343) goes further to suggest that concentration of industries near the raw materials plays an integral role to determine efficient exploitation of resources. This theory when applied to Tata's domestic steel production at their Jamshedpur plant reflects the logic of setting up the steel plant close to the iron-ore & coal deposits which helps the company save huge transportation cost which in-turn would help reduce cost per unit. From the above analysis, we can conclude that although the Heckscher-Ohlin theory describes the patterns of the Steel industry, Krugman's New Trade theory is best fitted to describe the changing trade patterns of the Global steel industry & Tata Steel due to the factors such as economies of scale.

After the adoption of globalisation and liberalisation policies, The Steel Industry has become one of the fastest growing manufacturing industries all over the world. Its popularity has

particularly blossomed in developing nations such as China. This steady growth can be analysed by the referring to Fig 1.6.1-1.6.2 However, production has shifted drastically to developing countries (Fig 1.7) over the last few years. As we can see, Indias steel sector has grown rapidly and is on the rise even today. India has traditionally been a large producer of steel. However, it had been controlled by government regulations before the economic reforms. In the future decades, the Steel Industry is expected to become a strong force in the nations economy. Steel production in India has grown from 17 MT in 1990 to 36 MT in 2003. It was expected that by 2011, the steel production in India will grow to 66 MT. (Economy Watch, 2010). However, as we can see in Fig 1.7, India has already surpassed those expectations. Price regulations for iron and steel were abolished when the economic reforms came into force and now prices solely depend on the market forces. (Ministry of Steel) On a global front, Tata faces competition from companies mainly situated in developing nations. As we can see, ArcelorMittal is the leading producer of Steel all over the world at roughly 10 percent of total production. The table also shows close competition amongst the leading firms in the sector. Hence, we can categorize the worlds steel market structure as an oligopolistic one where there is no clear monopoly. In India, Tata faces fierce competition from several companies. Steel Authority of India Limited (SAIL) is the largest producer of Steel in the country. However, TISCO is the largest privately owned Steel Company in the Country. Hence, its main competitors are ESSAR Steel Ltd (ESSAR), JSW Steel Ltd (JSWL), ISPAT Industries Ltd and Jindal Steel & Power Ltd. (Fig 1.9) The government has made an emphatic attempt on emphasizing on Research and Development in the Steel Industry. The Steel Ministry has proposed Rs 450 crore budgetary support for research and development activities in the sector during the 12th Five-Year Plan (2012-17), four times more than in the previous Plan. (Economic Times, 2011) Mark Bernard Denys, chief of R&D and scientific services at the steel maker, talks about the differences in the importance of R&D in Europe and India: What I like in India is the strong desire to do good research, a desire to question, to understand and to explore. This I sometimes missed in Europe, where due to limited growth and margins we need to be far more pragmatic and results-oriented. Here it seems that we believe more strongly in the promise of new technology, and we dare to act on it. On the other hand, our hands on approach to R&D in Europe is also very powerful. In Europe our researchers are superbly connected to the colleagues in operations, we talk their language and they readily come to us for advice. So really, there are strengths on both sides and great possibilities to learn.

Reports claim that Tata currently spends less than 1% of its total revenues on R&D. However, Denys claims that there is a changing trend within the company: R&D in Tata Steel Europe is a leading partner in the Ultra Low CO2 Steelmaking project, a consortium of 48 companies and institutes. Together we develop radically new technologies to reduce CO2 emissions by 50%. Together we have already spent Rs.450 crore in exploring new technologies, and we have taken the first steps to start industrializing the iron making technologies of the future. The 6 million tonnes per annum Kalinganagar Greenfield plant in Orissa will use the latest technology to produce premium flat products such as API (American petroleum industries), Dual Phase, TRIP (transformation induced plasticity) steel and other advanced high strength steel that we are at present developing. We will produce both coated and uncoated steel strip to specifically care to the future needs of our customers in the automotive and the engineering segments. It is too early to comment on Chhattisgarh as we are still in land acquisition stage. As we can see, Tata Steel and India had an incredible spike in their growth with the introduction and adoption of the globalisation and trade liberalisation policies. Further, India and Tata Steel fit into Krugman's New Trade Theory defining changing patterns in the Steel Industry. From the analysis we conclude that Tata steel has been a resounding success in the foreign markets due to their market seeking FDI entry mode.

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Appendix Fig 1.1 - India statistic's

1.2 - FDI & Export trends

Fig 1.3 - Sector wise distribution of FDI trends

Fig 1.3.1

Fig 1.3.2

Figure 1.4 FDI Equity Inflows in US

(Rao and Dhar,2011)

Figure 1.5 FDI outflow from India

(Subramanian, Sachdeva and Morris, 2010)

(India CEIC database team, 2011)

Figure 1.6.1 The growth of Steel Industry

Figure 1.6.2 Largest producers of crude steel as of 2004 Country China Japan United States Russia South Korea Germany Ukraine Brazil India Italy Crude Steel Production (MTPA) 272.5 112.7 98.9 65.6 47.5 46.4 38.7 32.9 32.6 28.4

Figure 1.7: Top 10 steel-producing countries

Rank Country 1 2 3 4 5 6 7 8 9 10 China Japan

2011 2010 %2011/2010 695.5 638.7 8.9 107.6 109.6 -1.8

United States 86.2 80.5 7.1 India Russia 72.2 68.3 5.7 68.7 66.9 2.7

South Korea 68.5 58.9 16.2 Germany Ukraine Brazil Turkey 44.3 43.8 1.0 35.3 33.4 5.7 35.2 32.9 6.8 34.1 29.1 17.0

Figure 1.8 The largest steel producing countries as of 2010-2011 NUMBER COMPANY 1. 2. 3. 4. 5. 6. 7. 8. 9. ArcelorMittal Baosteel Posco Nippon Steel JFE Holdings Jiangsu Shagang Group Tata Steel U.S. Steel COUNTRY Luxembourg China South Korea Japan Japan China India USA OUTPUT/YR (MT) 98,200,000 37,000,000 35,400,000 35,000,000 31,100,000 23,200,000 23,200,000 22,300,000 22,100,000

Anshan Iron & Steel Group China (Ansteel)

10.

Gerdau

Brazil

18,700,000

Figure 1.9 -The market share of Tatas competitors within India

Company

Production Steel (in MT)

of Market Share (%)

SAIL TISCO RNIL ESSAR,ISPT, JSWL OTHERS

13.5 5.2 3.5 8.4

32 11 8 19

14.5

30

Figure 2 - Balance sheet of Tata Steel over the last 5 years

Figure 2.1- Revenue of Arcelor-Mittal In Millions of USD (except for per share items)
2011-12-31 Revenue 93,973.00 2010-12-31 78,025.00 2009-12-31 61,021.00 2008-12-31 116,942.00