Tuesday, August 21, 2007

Tata Steel - Renaissance

Business India, July 23-August 5, 2001
New steel

Tata Steel, the 90-year-old pioneer in steel making, has absorbed the shocks of liberalisation and turned from Tata’s ugly duckling into a swan

Shivanand Kanavi

“The treasury has its source in the mines; from the treasury the army comes into being. With the treasury and the army, the earth is obtained with the treasury as its ornament.”
Arthashastra, by Kautilya, Chapter 2, Section12

The mother of all Indian tomes on statecraft and political economy, Arthashastra, was written not too far from the village of Sakchi (renamed Jamshedpur in 1919) over two millennia ago. Tata Steel confirms this ancient wisdom in many ways. During 2000-1, Tisco had the most profits within the House of Tata, after TCS.

Today, J.J. Irani the outgoing MD of Tisco, under whose leadership the company has undergone a remarkable transformation in the last decade, proudly points out that World Steel Dynamics (WSD), a US-based research firm, has placed Tata Steel on top of 12 world-class steel-makers (see table). The peer list includes such global giants as Nippon Steel, Usinor, Posco and Nucor. The 17 parameters compared for grading included operating costs, ownership of iron ore and coking coal, location, skills of manpower, power cost, on-going cost-cutting efforts, downstream business, borrowing costs and quality of management. Though such surveys were not done earlier, one can say that Tata Steel has not been in this elite club, far less has it topped it. A few years back, the public sector SAIL did better than Tisco, leading several people to question Tatas’ wisdom in continuing with the steel business. Some even said the group should focus on I T, perhaps even automobiles, and exit steel. But the Tatas abhor the idea of exiting a business when it is in trouble. (See Ratan Tata interview:“Given the right incentives, India can be a steel supplier to the world”) i

It has taken nearly 10 years of dogged effort to trim costs, improve operational efficiency, spend large sums to modernise the plant, develop a high-margin downstream product mix and increase labour productivity – all of which has turned this ugly duckling into a swan.

The company, which came into being in 1907, started production of pig iron from its blast furnace 90 years ago in 1911. Which is why many people even now, react to Tisco’s profits by saying: “Oh they have a depreciated plant”. The truth is, Tisco today has one of the most modern plants. As far as cold rolling, it is the most modern plant, not only in India but in the world. Except for the seven blast furnaces, which range from probably the oldest working blast furnace in the world – BFA, built in 1911 and a modern one B F-G, built in the ’90s – the rest of the integrated plant has undergone a total revamp. “In the early ’80s, I told JRD that if we do not modernize the plant, we might soon turn it into a steel industry museum and stand at the gates selling tickets,” reminisces Jamshed Irani, the out-going managing director who led the transformation in Jamshedpur in the last decade.

The steel shop was also transformed, from an open hearth process to the modern basic oxygen furnace (also called LD shop). Then came continuous casting. However, the product mix of Tisco was still primarily ‘longs’ used in construction. So, first of all, a shift was made to a modern wire rod mill and when ‘flats’ consumption increased in the country, a hot rolled coil mill was built. The last element, recently added, in this modernizing effort was the cold rolling mill along with galvanising lines.

Cold rolled coils are used in the automotive industry and the white goods industry, in refrigerators, air conditioners and washing machines. The galvanised sheets are used for mundane applications such as roofing to outer skin panels of cars. Thus, Tisco today has the most complete product mix as an integrated steel maker. One of the reasons for it staying afloat and even making profits in an industrial slump, is this product mix, which other steel makers in India lack. So, today when the flats are not fetching a good margin, the better margins in longs are helping the bottom-line.

Sajjan Jindal, vice-chairman and managing director of Jindal Vijaynagar Steel, points out, “The strengths of Tisco are: control over raw materials, a highly-skilled operating team, fully integrated plant including rolling mill, Tata brand equity, mixed product profile (flats and longs), cheaper access to capital being an AAA company. While we pay an average of 17 per cent, they pay 12 per cent — which is even below PLR.”

The planning and commissioning of the 1.2 MTPA cold rolling mill has been an important achievement for Tisco in many ways. It has not only added high-value products, which can fetch three times the price of hot rolled coil, but seems to have energized huge segments of management. The project managers felt it important enough to chronicle the saga in a hardbound book The Lotus and the Chrysanthemum. Besides the intrinsic importance of the project, what comes out clearly is the enthusiasm that the project generated in the company and the H R fallout. The project was completed at a rock bottom price of Rs1,600 crore and in a world record time of 26 months. Whereas, a similar cold rolling project took 38 months for Baoshan in China, 37 months for Siam United Steel in Thailand, 31months for Bethleheim Steel in the US and 29 months for Posco in South Korea. The phase of “modernisation of the mind” as Irani calls it, has clearly begun.

“It is an issue of leadership and motivating people. Rigorous followup – we used I T tools for project management – a lot of weekly meetings etc. We had a lot of problems from local vendors, but we made them come every month and make presentations with photographs on progress achieved. When we started, I had not seen a cold rolling mill (CRM), so we created a technology team, which went all around the world to see the CRM,” says B.D. Muthuraman, the new managing director who was in charge of the CRM project.

“Given right incentives, India can be a steel supplier to the world”--Ratan Tata

In a free-wheeling hour-long interview, Tata group chairman Ratan Tata
spoke to Shivanand Kanavi about the challenges faced at Tisco. Excerpts:

How do you look at your nine years as chairman of Tata Steel?

When I became the chairman, Tata Steel had just come out of the administered price regime where price increases were simply passed on to the consumer. The month I took over there was a crisis because freight equalisation had been discontinued and we were adversely affected since the major markets were in the south and the west. Tata Steel had come out of a seller’s market and hadn’t really oriented itself to the customer.

We set up two task forces, one to look at realisation and the other to look at costs, both of which were headed by Jamshed Irani. They went about looking at issues in a real hard way. We made some progress on both those scores. We started benchmarking ourselves with the best of the breed in the world. That really paid off, in terms of keeping great pressure on the level of our costs.

We also made a decision not to expand but modernise our facilities, and to move into flat products, which we saw as the growth area. We went through some difficult years in terms of cash flow and liquidity as we increased our levels of borrowings to see the various phases of modernisation through. Finally, the hot rolled mill and subsequently the cold rolled mill came into being. For a period of time, Tata Steel did not look hot to investors and analysts until we moved to the last phase of what we were doing.

The leadership in Jamshedpur has had a tremendous role to play in what was achieved. Jamshed Irani and his team have resolutely gone about making this transition, with no pulls and pressures that it should have been done in another way.

I think the only distraction would have been the view that Tata Steel should grow to 15 million tonnes, that it should be a volume producer as against a company that would be the best in its class. And perhaps, the period when one thought that Gopalpur would be the focal point of growth. I felt that growth in steel is going to be a difficult one and that we should consolidate ourselves and improve our operations before we looked at expansion.

What stops India from becoming the steel supplier to the world?

There are several issues. Koreans operate at 9:1 debt equity ratio, their interest rates are close to 1-2 per cent, whereas it is 18 per cent here. Tisco has had the benefit of the
Steel Development Fund, which is softer but which does not cover everything. The social costs in India and Tisco are a part of our baggage. Posco, for example, will bulldoze a plant that is obsolete and build another one in its place that is newer. We can’t do that in India. We need a MITI like approach to become supplier to the world. Here the steel industry has never been given the required incentives.

To build a modern company in Bihar must have been quite a challenge.

The credit has to go to a very strong community spirit in Jamshedpur. The people of
Jamshedpur have a very strong sense of pride, and there is a sense of fear that it should not become like the rest. When I lived there, in the ’60s, there was a time when for Rs15,000 somebody could get killed. Finally, we had a good SP who cleaned up the place. So the rot can happen in Jamshedpur also. Tata Steel has been a fair corporate citizen, it has given a lot to the community. It has administered not in its own self -interest, but in the broader interest of the community.

Don’t investors question why you give away Rs100 crore every year to Jamshedpur and surroundings?

In particular, foreign shareholders think that this is baggage we are carrying and, in a manner of speaking, it is. But if you look at the industrial harmony and so on, I don’t think you can ascribe a value to it. This is a cost you have and despite that if you are still going to be the lowest cost steel producer, then no one should mind.

Instead of investing in ferrochrome and titanium why don’t you acquire steel?

Within India Tata Steel has looked at some options. But we recognized that, regrettably, the steel industry does not cover the cost of capital — and this is the global situation. Therefore, you do see reductions in capacities in various parts of the world. If you have to invest thousands of crores, as we did in the modernisation of the plant, and if it doesn’t give us a return that is equal to the cost of capital, then we have destroyed shareholder value. Moreover, just because you are Tata Steel does not mean that steel can be your only growth area. In the world you have companies that started in fertilizers and now are in pharmaceuticals. Companies like Mannesman that were in steel are now in telecom.

There are other group companies operating in the area of telecom, then why Tata Steel?

Tata Steel has not decided to get into telecom. We said let’s parcel out various parts of the telecom activity and look at the Group as a whole being in telecom. Ideally, you would have got one consolidated telecom company in the Group. But again, shareholders say: ‘This is my money and all I have is dividend returns from the company’. So, another way to do it is, you parcel it out even though that is a less efficient way of doing it. The bits are not in competition but complement each other. Maybe one day we will merge those into one.

Are you looking at acquiring steel plants abroad?

We are looking at plants abroad. However, we should be sure that we can manage that extra capacity on a global basis also. You could get a huge asset at a very good price, but you might end up having surplus capacity, which will be outside India. You then have to support it in terms of foreign exchange and we do not have a foreign base to do it. So we may be cautious in looking at these plants. Our ethic also prevents us from walking away from an acquisition when it sours.

Did McKinsey’s advise you to dump steel?

McKinsey’s did not tell us to dump this or dump that. McKinsey’s just gave us discussion notes in various industries. They raised some serious questions regarding the steel industry and whether it destroyed shareholder value. And I must say they awakened us to the fact that we had to do much more in steel to make it an investor-attractive area of business.

Last year Tata Steel made the most profits in the Group after TCS.

We need to be a little circumspect. Tisco has now got two high margin plants on line. It has shed its old processes. Crucial to producing and sustaining these results is growth in demand in its user industries, like auto, white goods and construction. Even if domestic demand picks up but there is over capacity in the world then you will be faced with low cost imports.

However, there are two pluses; one is that steel is a commodity. Hence, Tata Steel has been able to go all-out in production, covering its cost and dropping its price. The other advantage is, if the Indian market got bad you could export it. In product markets like trucks or refrigerators you can’t do both these things.

“The language in the project changed as well. We call our workers ‘associates’. They used to make presentations regularly. In any project, the operating manuals come from the suppliers, in our case Standard Operating Practice Instructions was written by our workers. It has been used as a training document. Our operators kept redrafting it. Thus, they have ownership now. We look at the manual and make additions based on experience,” adds Muthuraman.

“We were operating the steel melting plant for 90 years in a particular way, whereas here things had to be done differently. So we segregated the project. We gave everybody a uniform. Even I have to wear it when I go into C R M. We selected a higher class of people, all of who know how to use computers, and used a different salary structure — a large part of the salary is variable (performance linked). The union also agreed to it. That experiment has succeeded and we are now moving for this type of organizational structure and salaries in other departments also. There are only three levels there, whereas in the rest of the plant there are 11 levels. Instead of forcing this model on others, we wanted them to feel that they want it themselves — and it is working,” says Irani.

A major factor, which led to a record low cost for the C R M, has been the optimum usage of in-house capabilities. “Our principle for the last 20 years has been to build as much as possible ourselves. We have a Growth Shop in Jamshedpur built by Sumant Moolgaonkar 30 years back for the express purpose of building steel plant equipment. So we naturally used it for the hot strip mill, LD project. For the wire and rod mill project we negotiated with our ultimate suppliers to give us the drawings to be used only by us and not to be exported — and we have maintained our word. Similarly, we did use Hitachi’s drawings for CRM but we do not then make it for others unethically,” explains Irani.

Sajjan Jindal was most impressed on his recent Jamshedpur visit. He told Business India: “It is a world-class facility. The highly skilled team at Tisco will make a winner out of it. Quality and marketing the automotive grade is a problem since it is a new product. It will take a little time, but they will do it. Tisco also got the cold rolling mill at a very good price, since nobody else was building a mill at that time.”

Along with modernising the plant came the emphasis on customers. “You have to see the change in our marketing offices in Kolkata and throughout the country to understand the change in the mindset,” says Firdaus Vandrewala, deputy managing director, international projects, who was till recently in charge of marketing. “From a totally sellers’ market during the control regime, we have moved into a highly customer friendly attitude with a very high usage and ERP tools and IT in general. We are constantly monitoring customer satisfaction and one of the most important programmes in the plant is the ‘Customer Week’, which we hold regularly. During the week, we invite our customers to see the plant and make suggestions and register any complaints which will be immediately addressed,” adds Vandrewala. Business India visited Jamshedpur during one such Customer Week programme. The importance attached to the programme was very clear, since all the top executives, including Irani and Muthuraman, excused themselves from interviews and photo-shoots to attend to the customers.

As far as manufacturing practices are concerned, Tisco has a long tradition of benchmarking with the First World even a century ago. In his endeavour to usher in a modern steel age in India, visionary Jamsetji Tata travelled extensively across the world and saw the best steel plants in Great Britain, Germany and the US and consulted with the best geologists and mining engineers, before he raised the money from the Indian public. The tradition was carried forward by Dorab Tata, who implemented his father’s vision in the jungles of Chota Nagpur near the village of Sakchi. He had the blast furnace set up by the Americans, the steel shop by the Germans, the coke ovens by the Welsh.

The control regime in independent India, of course, greatly reduced the opportunities to grow into a global giant. At the same time, by providing administered prices and other protection, it removed the edge from the steel business. However, Malay Mukherjee, COO, Ispat International, remembers his days in Bhilai: “During my time in S A I L, I had visited Tisco a number of times. Each time I learnt something from them and introduced many good practices in our SAIL plants. I got great satisfaction when, during my time in Bhilai, we won the first Prime Minister’s award as the best steel plant. Tata Steel was second. The satisfaction came from the fact that on many of the subjects we were judged on, I had implemented what I had learned during my visits to Tisco. I have maintained contacts over the years and I have been impressed by the progress they have made in modernizing the plant and putting in proper technology for quality improvements.”

Today Tisco is being hailed as one of the lowest-cost producers of steel in the world. A fact reiterated by a report by Consumer Research Unit of the UK. Incidentally, the report does not consider L.N. Mittal’s plant in Kazakhstan, which claims to be almost 30 per cent lower in cost than Tisco. This controversy aside, the cost consciousness in Tisco warms the cockles of Ishaat Hussain’s heart. “Everywhere you go in Tisco you will find an obsession with cost,” says Hussain, who is director, Tata Sons, and an old Tisco hand.

What did Tisco actually do to achieve the low-cost producer status? Answers Tridib Mukherjee, deputy managing director, who is in charge of operations and marketing: “We concentrated on four to five areas. First of all, we looked at our strengths. We have captive raw materials like coal, iron ore and lime stone so we can be the cheapest hot metal producers. When we looked at that part, we found that we were using up to 30 per cent of imported scrap as feedstock. This was totally unnecessary and we reduced it over a period of time to 5 per cent. Secondly, we increased the output of hot metal by increasing what we could get out of existing assets like blast furnaces. We used to produce 2,800 tonnes per day with our B F-G, which we gradually took up to 4,000 tpd. We benchmarked with the best practices of leaders like Nippon, CST (Brazil) and Posco in this regard. We fine-tuned our sinter plant and increased production from 2.4 MT of sinter to 3.9 MT, which is as good as having one sinter plant free. Similarly, we were using imported coal for coke ovens and found that by changing the way we charge the ovens to Stamp Charging, we could produce high-quality coke with our own pulverised coal. Now our mix is 70:30 for Indian and imported coke. We were also able to develop highquality low phosphorous steel with our own technology. This was necessary since our ore contains high phosphorous. For this we had to develop a dolomite-free process. We reduced the labour from 72,000 to 48,000. A major factor for cost reduction is, of course, employee involvement. We received literally thousands of suggestions. Our estimate is that the suggestions have saved us Rs250 crore last year,” says Mukherjee.

The stamp charging technology for coke ovens was seen by Irani in a power plant in Germany in the ’80s. He then convinced his colleagues to invest in redoing the coke ovens for this new method, which has proven a great success. But Irani explains that cost consciousness is more mindset than a specific project. “We attacked energy consumption. The use of liquid fuel has been eliminated by generating enough gas from coke oven and blast furnace. That gas is used to heat up steel before rolling it out. We have a material in India, called Blue Dust, which is grey in colour, very rich in iron but as fine as talcum powder. It cannot be used in the blast furnace in a powder form. So we put up a new sinter plant and developed the appropriate technology with Lurgi, which saved us money since we used to throw the Blue Dust away earlier. It has also extended the life of our mines. We improved the yields in our mills by benchmarking. There must be at least 500 items in each department for cost reduction. Cost consciousness is an attitude. It is not just one single project. For example, now that we are all on e-mail, our STD spend comes down,” he adds.

Today, prominent bill boards at the plant and in Jamshedpur city no longer say: ‘We also make steel’ Instead they say: ‘Cost, Customer and Code’. While the exhortation about cost and customer is as clear as daylight in today’s competitive market place, one wonders what the code is all about. The insistence on boy scout like adherence to the Tata code of conduct and good corporate practice in yesterday’s Bihar or today’s Jharkhand, sounds impractical to pragmatists, leave alone the cynics.

How do Tatas run a First World company in a Fourth World environment? The articulate A.N. Singh, director in charge of township services, is an authority of sorts on the subject. He served in the I P S for 22 years in Bihar before he took voluntary retirement and joined Tata Steel. “The moment you play according to their rules, you will remain in the Fourth World. Of course, delays will take place. There is a great amount of poverty and lack of will to administer the laws of the country. But Tata Steel has been doing business for 90 years and there are others also doing reasonably well. If we can do it with our code of conduct, I do see a future. For example, we are in an island of peace in West Bokaro, surrounded by extremists. One of the reasons is our sense of corporate responsibility and being able to vibe with the community. For example, in West Bokaro we have open cast coal mines. The community living around us has realized for decades that they are flourishing because this coal mine is being run by the Tatas,” says Singh.

Irani adds: “Laloo Prasad Yadav is my friend, and right in the beginning I made it clear what friendship stood for. I said to him: ‘You have your rules and we have ours. We will do everything by your rules. We will not ask you to give a sales tax benefit here, or some short cut there. In return, don’t ask us for any underhand thing and break our value system.’ And to his credit, he has never made an indecent proposal. He asked us to clean up Patna, which we do as our social responsibility. He wanted a college to be built in Samastipur. We did that since we encourage education. He asked us to build a Tata ward for children in Patna hospital, which was in a very pitiable condition and we did that. Now we are doing a hospital in Hazaribagh. Laloo told somebody: ‘Going for anything illegal to the Tatas is like going to an Udupi restaurant and asking for a tandoori chicken’. Sometimes people come to Jamshedpur with expectations and then find in a week or longer that the Tatas won’t give money and they give up. If I find any of our officers has done underhand things, then I sack him instantly,” says Irani. No wonder Irani has earned the sobriquet from some leading politicians of Jharkhand— “the prime minister of Jharkhand.

When we enquired as to the truth of these assertions from a prominent businessman in Jamshedpur, who is not “burdened” by any code of conduct, he said: “Of course, it is true. That is why Tisco takes three months to get something done from the government in matters which take me three telephone calls.”

The emphasis on quality in Tisco has been recognised by Indian industry and several awards are pouring in. But the one that makes Tisco people walk a little taller within the Tata group is the J.R.D. Tata award for excellence in quality, which has been fashioned on the Malcolm Baldridge award. It makes them proud that this 90-year-old company, which many people thought stood for stodginess in the group, has made it to the top, while other companies in the group have not even reached the qualifying mark.

Irani, however, is not carried away by the hype about being the lowest cost producer in the world. He admits that if the advantage of coal and iron ore mines – which Posco and Nippon Steel do not have – is taken away, then Tisco will be one of the efficient producers and not necessarily the lowestcost producer. He points out that the World Steel Dynamics report clearly gives the same number of points to all the top 12 steel makers regarding ongoing cost-cutting programmes and the proactive quality of the management. So, Tisco’s position at the top can be temporary. “Living in today’s world means running to stand still,” is the advice he gives to Muthuraman.

The wily Kautilya seems to have hit the nail on its head about Tisco by stating: “The treasury has its source in the mines....”


prasad rangnekar said...

hi shivanand!

i landed into this blog accidentally, but i feel it's a great k-portal. kudos to u for the blog

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