The Tata-Corus Deal: Hype and Reality
-- Dipankar Bhattacharya
THE Empire strikes back! The Indian MNCs have arrived! India Inc. makes waves in the global arena. Over the last few weeks we have seen these screaming headlines again and again not only in economic and business journals but even in our daily newspapers and weekly newsmagazines. What is really happening behind these renewed ‘India shining’ claims?
To identify one single event that has triggered such triumphalist rhetoric, we have the recent $8 billion Tata-Corus deal, the biggest acquisition made so far by an Indian firm. It should however be noted that while the Corus board has accepted the bid, the situation is not yet settled and reports have it that the Brazilian steelmaker CSN has stepped in with a higher bid. Intriguingly enough, Corus, (the result of a union between British Steel and Koninklijke Hoogovens of the Netherlands in 1999) had sales figures more than four times that of Tata Steel. The ranking of Corus among international steel making companies was as high as 9 (with an output of 18.2 m tonnes per annum) compared to Tata Steel’s lowly 55 (5.3 mtpa). But if the takeover materialises, Tata Steel would overnight jump to the fifth highest slot!
For the Tatas, the Corus takeover seems to mark a culmination of a whole series of mega acquisitions in diverse areas over the last five years or so. Beginning with the $431 million acquisition of the UK’s Tetley Tea in 2000, some of the major deals clinched so far by the Tatas include Tata Tea’s acquisition of US-based Energy Brands Inc ($677 million), Tata Steel’s buyout of Singapore’s Natsteel ($486 million) and Thailand’s Millennium Steel, Tata Coffee’s buyout of Eight O’Clock Coffee ($220 million) and Tata Motors’ takeover of the truck division of Daewoo Motors of South Korea.
The Tatas are of course not the only Indian group making such acquisitions. Many other big Indian names in software, electronics, pharmaceuticals and some other sectors have also been engaged of late in similar acquisitions making India emerge more as a source of foreign direct investment outflows than a destination for FDI inflows!
Indeed, figures show that including the Tata-Corus deal, Indian companies have announced overseas acquisitions worth $19.5 billion till October this year, up from $4.5 billion in 2005. In contrast, acquisitions in India by overseas firms add up to $9.06 billion so far this year.
Ironically enough, the UK seems to have currently emerged as the most favoured destination for Indian FDI abroad, edging past the US and the Russian Federation, the two top destinations that accounted respectively for 19 and 18 per cent of total cumulative investment outflows from India during 1996-03. The UK Trade and Investment’s (UKTI) report this year ranked India as the third largest investor in 2005-06, next only to the US and Japan – a jump of five notches from the eighth rank in terms of number of projects the previous year. For many Indian companies, London is also the gateway to Europe – 60 per cent of Indian investment in Europe comes via UK.
While the Tata-Corus deal is itself quite remarkable because of its sheer size and also the fact that it is not the much bigger Corus taking over the smaller Tata Steel but the other way round, equally striking is the fact that in Britain the deal has made only a small economic news without acquiring any political overtones. This stands in sharp contrast to the reaction seen earlier this year in France and Luxembourg when the Mittal Steel, headed by the London-based LN Mittal of Indian origin, took over Arcelor. If the deal has provoked questions in British business circles, they have been primarily over the ‘low’ or ‘inadequate’ price offered by Tata Steel and not so much over whether Corus should offer itself for being taken over or not. This ‘business as usual’ response has been hailed by one economic correspondent as being emblematic of the great dynamism and flexibility of the British economy and an “instinctive, uncanny understanding of the fluid nature of capital, letting investments seek the highest return.”
The fact that Indian companies are making growing foreign investments has also been recognised by the United Nations Conference on Trade and Development in its latest World Investment Report. In UNCTAD’s outward FDI performance index rankings covering 132 economies, India has improved its rank from 80 in 1990 to 54 in 2004. The report records a steady growth in India’s outward FDI in the post-liberalisation era, especially since 1996 (rising from $0.6 billion in 1996 to $5.1 billion by 2003). This rapid growth since 1996 has been fuelled primarily by mergers and acquisitions (as opposed to new ventures), and driven largely by IT-related services and pharmaceuticals.
The rise of the new IT-related services has brought with it a change in both geographical and industrial pattern of India’s outward equity flows in the services sector. While Singapore, Thailand, Sri Lanka and Malaysia took the lion’s share of outward investment in services from India during 1975-90, by the 1990s most Indian FDI in services was concentrated in developed countries, particularly the UK and the US. Cross-border M&As have become an important mode of overseas market entry for Indian companies – during 2000-03 Indian companies were involved in 182 overseas M&As, mostly in the UK and the US as compared to just 60 in 1996-99.
The UNCTAD report describes this growth as “a giant awakening”, but the same report also gives us the larger picture which puts things in their proper perspective. The developed countries still account for 87% of the global FDI outflow and among the top 15 developing countries investing abroad, India is ranked 14th, behind Iran and just ahead of Nigeria, the Indian volume of $5.1 billion in 2003 contributing only 0.6% to the share of the total FDI outflow from top 15 developing economies. Even in the UK where India has now emerged as the third largest foreign investor, Indian companies made up for only £1.02 billion of the £219 billion inward-bound investment in 2005.
What do we make of all these facts and figures? The makers of economic policy in India are citing these mega deals as the ultimate evidence of the success of economic liberalisation in India. In particular, they want the Indian people to celebrate the arrival of the ‘Indian MNCs’ as the new and true face of globalisation. In the early 1990s, the ‘Bombay Club’ had only made a clamour for ‘level-playing field’ for Indian industry within India, but today are not they emerging as much bigger players in the global arena?
Let us take a closer look at these claims. The big jump in India’s outward investment has come in the wake of certain crucial changes in the Reserve Bank of India’s guidelines. Earlier, Indian companies could make overseas investments only to the extent of 50% of their net worth, that too subject to a ceiling of $100 million. Since January 2004, Indian companies are allowed to make any amount of overseas investment by market purchases of foreign exchange without prior approval of the Reserve Bank of India up to 100% of their net worth without any ceiling whatsoever. Furthermore, Indian companies can now invest or make acquisitions abroad in areas unrelated to their business at home. As far as the Tata-Corus deal is concerned, it is not at all clear how the Tatas are making an investment of this magnitude. And also, the figures do not tell us how much of the amount involves an actual export of capital and how much is capital raised abroad.
But more than the finances involved in the deal, what needs to be understood is the logic of industrial consolidation and concentration and centralisation of capital underlying this new type of ‘reverse’ integration with a bigger unit being taken over by a smaller player. Viewed from this angle, the Tata-Corus deal looks quite similar to the takeover of IBM’s computer manufacturing business by China’s Lenovo (the number one manufacturer of PCs in China) or the acquisition of Siemens’ mobile phone manufacturing unit in Germany by BenQ, a Taiwan-based manufacturer of mobile phones. Ratan Tata has justified the Tata-Corus deal as one that has not only added size to his group but also enabled it to achieve a ‘strategic fit’. What it means is the setting up of a chain directly linking the iron ore mines in India to the European market whereby Tata Steel can carry out primary steel production close to its iron-ore deposits, and then ship semi-finished steel for finishing close to foreign consumer markets.
Faced with growing competition from Mittal Steel (following the Arcelor-Mittal deal, it is now the biggest steelmaker with an output of 109.7 m tonnes per annum) and POSCO of Korea, the Tatas have of late been under quite some pressure to hold on to their premier position in Indian steel industry. With its ‘competitive advantage’ of being one of the world’s lowest-cost steel producers and the direct access to the European market now gained through the Corus deal, the Tata group now hopes to increase its competitiveness and there are talks of its building three integrated iron-ore mining and steelworks in Orissa, Jharkhand and Chattisgarh that would add 23mtpa to Tata Steel’s existing capacity. Beyond the steel industry, the Corus deal is also likely to catapult the Tatas back to the number one slot in the Indian economy in terms of assets, a position they had ceded to the Ambanis for quite some years now.
To be sure, such intense corporate competition is also played out in the political arena and perhaps we have already heard the first political salvo with the recent change of guards in Jharkhand, the traditional turf of the Tatas. The NDA government headed by Arjun Munda had apparently become too close to the Mittals and as a ‘course correction’ measure we now see a new government in its place.
Tailpiece: All these years we have been told that the huge investments the country needs can only come from the private sector, and especially in the form of FDI. Now we are being told that India’s FDI outflows have started surpassing the FDI inflows and that this is a sure sign of the country’s growing economic muscle! Industry Secretary Dr Ajai Dua exclaims quite euphorically: “Some large Indian companies and even mid-sized ones have developed an appetite for acquiring global companies.” Finance Secretary Adarsh Kishore however has a different take: “FDI inflow is everyday phenomenon, outflow is occasional... This phenomenon (FDI outflow) has to be viewed in totality. Don’t be worried. It is not a cause for concern.” But when the ‘occasional’ outflow exceeds the cumulative ‘everyday inflow’, does it not also wash away the whole FDI-centric paradigm of ‘economic development’?
Meanwhile, readers must not miss the special Kolkata note in the celebratory chorus. Ganashakti, the CPI(M)’s Bengali daily editorially lauded the Tatas on their latest global expansion and expressed the hope that the greater global profile of the group would now result in matching domestic expansion! Singur peasants beware, if Corus can sell itself to the Tatas, what right do you have to refuse to part with your ‘do bigha zameen’ and retard the glorious global march of the Tatas!