Tata-Corus: India's New Steel Giant

Published: February 14, 2007

Author: Tarun Khanna
Executive Summary:
By acquiring Anglo-Dutch steel firm Corus, India's Tata Steel is now one of the world's top five steel makers.
Professor Tarun Khanna says the fact that the deal is the largest out of India and generated by the private
sector makes this a notable event. But now comes the hard part—making the merger work. Can Tata avoid
mistakes made by Chinese companies? From The Economic Times/India Times. Key concepts include:

• Tata's acquisition of Corus is notable not only for creating a new steel giant, but also because this deal
was a private sector venture far from Indian government influence.

• Tata should be able to make the merger work by virtue of its position of financial strength as well as
previous cross-border experiences. The West should not underestimate this heretofore relatively
unknown competitor.

Tarun Khanna is the Jorge Paulo Lemann Professor at Harvard Business School.

The Tata Group is celebrating its acquisition of the Anglo-Dutch steel firm Corus, and the catapulting of
Tata Steel into world steel's big-five status (by revenue). It should. The $11 billion deal is a marker in the

ground. Not that it is the biggest deal ever from an emerging market.

Recent deals, even attempts, have been bigger. For example, Brazilian firm Companhia Vale do Rio Doce

successfully acquired most of Canadian nickel company Inco Limited for $19 billion last year, and Chinese petro

giant CNOOC tried, but failed, to pull off an $18 billion acquisition of Unocal in the U.S.

But Tata-Corus is the largest out of India, and is done by a private sector entity of its own volition, away from

the shadow of state influence. For these reasons, it bears noticing.

The same euphoria surrounded Shenzhen-based TCL Multimedia when it acquired the French company

Thomson's TV assets to become the biggest TV manufacturer in the world (by volume, even if not by revenue)

in 2004, just twelve years after TCL entered the TV business in mainland China.

Tata Steel is … acquiring from a position of strength amidst a boom in the world steel market.

In that case, as in Tata-Corus, the rationale was to supplement the customer-facing front-end in the developed

markets, with a lower-cost back-end in an emerging market. That is, TCL was trying to buy a sales and

marketing structure and a set of brands. Much like Tata is with Corus. But that story had a sorry ending.
TCL chairman Li Dongsheng was awarded a French accolade, Officer de La Legion D'Honneur, the highest

honor France had yet bestowed upon a Chinese entrepreneur, but his shareholders don't have much to show

for the deal.

TCL had to write off much of its investment. The CNOOC-Unocal deal, in the different setting of the oil industry,

also had a sorry ending. So, it is perhaps worth reflecting why Tata-Corus might be different. I believe it will

be. Here's why.

First, CNOOC's bid collapsed amid Washington intrigue. The Chinese proved to be babes-in-the-wood in

navigating the Byzantine corridors of Washington's power, and underestimated a relentless backlash that

unwound the deal. While politics and steel are not alien to each other, there is nothing in Tata-Corus like the

level of political concern in the CNOOC-Unocal situation.

Second, TCL acquired Thomson's assets from a position of weakness. Margins at TCL were under pressure from

cut-throat competition in mainland China. Even though TCL was one of the largest Chinese TV manufacturers

(even prior to the acquisition of Thomson's assets), commodity TVs and other consumer electronics items were

not producing good returns.

In contrast, Tata Steel is one of the most profitable, if not the most profitable, steel companies in the world,

and is acquiring from a position of strength amid a boom in the world steel market. This will buy it valuable

experimenting time and learning space.

Third, there was much difficulty in integrating Chinese and French management. Some of this surely stemmed

from language considerations. To an extent, the Indians' greater command of the world's lingua franca will

lubricate the inevitably-difficult integration process.

Fourth, the Tatas have built up some experience in the past few years with cross-border acquisitions. Some of

this lies within Tata Steel itself, as in its acquisition in Singapore. And the rest lies in the broader ambit of the

Tata group through its acquisitions of Daewoo's truck assets in South Korea, Tetley Tea in the U.K. and ritzy

hotel properties on the U.S. East Coast.

TCL had some experience taking over factories in Vietnam and environs, and also a failed bid for a much

smaller German company, but nothing to prepare it for the Thomson assets' integration.
Fifth, there is learning in the ambience. That is, India Inc. has built up, and is building up, its own cross-border

acquisition capability. This arises not just from entrepreneurs who have been doing this for years like the Birlas

and Asian Paints but also from more recent moves by India's pharmaceuticals, software, and auto component

sectors, among others.

Cross-border experiences with integrating diverse management teams, communicating across borders and

time zones, and integrating compensation practices, are not as new to the Tata group as they might well have

been to the hapless TCL management team.

And finally, my feeling is that the Indians are still underestimated in the West, at least relative to the Chinese.

This complacency might well prove to be the biggest weapon available to the new big-five kid on the block

from Jamshedpur.