The Hindu Business Line : `India can make steel much cheaper than China'

Tata Steel is reorienting its business strategy and is poised to enter a new growth phase, with its steel production capacity set to double to 7.5-8 million tonnes. Reinforcing his bullishness on the long-term prospects for steel, Mr B. Muthuraman, Managing Director, Tata Steel, dwelt at length on the "China factor" in metals, the company's globalisation efforts and their challenge of servicing the automotive OE market in a big way in future.

Excerpts from the interview:

The China vs India comparison inevitably comes up in all sectors including steel. How do you think the "China factor" will influence the Indian steel industry?

We cannot delink ourselves from what is happening in the world. It is just that it is happening in China today. Tomorrow it will happen in India and the rest of the world will be linking itself to India. After China reaches 350-400 million tonnes its consumption will plateau, and India will take off. Every year India will require three-four million tonnes more and then India will become the driving force of world steel consumption. If you look at the relative growth rates of China and India, you will find that about 15 years ago, India's current consumption was China's consumption. So, India is behind China by 15-17 years. This difference is probably also because the start of India's economic liberalisation was around 20 years later than China. I have hopes that by 2020, we will have our consumption similar to what China has today.

You have talked about setting up steel plants in alternative locations as a part of your globalisation strategy? How are you mapping it out, considering the capacity growth that has already taken place in China?

Our global aspirations have nothing to do with China. For other steel companies in the world, say, in Europe, their globalisation strategy includes India. Without India, nobody will have any global strategy, because it is a very powerful country for future growth. If you know what is happening, every major steel company in the world has come to India to attempt setting up steel plants. But we are already in India, so we do not have to bother about some other country. So, globalisation is really all about putting the correct parts of the value chain in the correct places in the world. India can produce steel much cheaper than China. So, why go to China? You need to be able to go to China to be able to sell that steel or finish that steel, not to make that steel. So, when we are thinking of alternative locations, which are part of the globalisation strategy of making semi-finished steel in India and taking it to our own locations in China, Vietnam, Philippines or Thailand and so on, where the basic structure is a high cost structure.

The average cost of production of steel in China is $50 more than in India. So, globalisation does not mean putting a plant somewhere. Globalisation really means an understanding of the value creation potential in steel. Steel has a long value chain, each of the parts in the value chain has a value creation and cost incurrence. Where it is best done in the world is the place where to you need to put it.

Since domestic demand will be the key driver of steel consumption, what do you think will be the projections for future steel growth?

It is difficult to make projections. For instance, let us assume infrastructure does not grow in India. Steel production will not grow. Steel consumption may grow and we may have to import steel. For steel production, we have to create conditions by which economic production can take place. Like good iron-ore mines, large-scale mines and correct technology, India will also grow in line with China. I personally believe that by 2015, India will probably cross 120 -130 million tonnes of steel. By 2010, we should be in the region of 55-60 million tonnes.

In a sense, will your growth plans be affected if infrastructure development and the Indian economy does not take off as expected?

Tata Steel's growth plans are not based on the growth curve of India. It need not be linked. The more important aspect is competitiveness and not the demand gap scenario. I never look at the demand gap and that to me is the least important. Let us assume for a moment that the steel production is 34 million tonnes but domestic consumption drops to 20 million tonnes. I will still cater to the domestic demand. What is important is the competitiveness of a company and not the demand gap. Demand gap is for an overall picture and the country's plan. Competitiveness is in terms of costs, market image, positioning and product quality. These are far more important for the plans that I make than the demand-supply gap. I am more interested in the micro demand supply gap, like how many cars are being made or how the domestic appliances industry is moving. I am the only supplier for the car industry and I will be the only supplier in the next couple of years. So, our plan of 15 million tonnes is based on a combination of these factors and not the macro picture that India will grow from 34 million tonnes to 120 million tonnes.

Do you think you will continue to realise productivity gains, even as you embark on the next stage of your expansion plans?

When we finish our one million tonne expansion programme (expected to be completed by September 2005), my costs will become less. And then when I finish the 2.4 million tonne programme (which has been approved recently by the Board of Tata Steel), my costs will be even lesser than it is today. We are improving product mix and reducing costs simultaneously. While we are downsizing our employee base, we are also adding to our employee base every year. The answer is not only in downsizing, but adding the right mix of people.

Where does your expansion projects stand at Jamshedpur and a greenfield plant in Orissa which has been talked about for some time now?

We are implementing the one million tonne project and we are planning to add another 2.4 million tonne at Jamshedpur taking our total capacity to 7.5-8 million tonnes. We are looking at the possibility of putting up a steel plant in Orissa. That will be the base for our globalisation efforts. We are looking for acquisitions in South-East Asia. We are looking at a number of plants, so that we can connect our global and Indian operations and get the best value as Indian steel is cheaper than the rest.

As far as the Orissa project goes, what is the difference between the Gopalpur project planned in 1996-97 and the latest one in the works?

The important thing is that Gopalpur (steel project) could not come up because there was no infrastructure there, whereas, now we are putting up the infrastructure. I am putting up the port at Dhamra, so I know that the infrastructure is under my control. That is the very big difference. I will build the port only if I am able to build the steel plant. These two are connected. In Gopalpur some port company had to build the port and it has not come up even today.

Your attempts at breaking into the automotive OE market has met with success, but what are the issues involved for you to be able to garner a bigger share of the market?

We are already there in the automotive OE market. Supplying steel to car manufacturers is not easy. There is nobody in India who is capable of making it and Tata Steel is also learning it only in the last three years. For example, in the car industry, I have a market share of about 30 per cent. No else has any market share. From that 30 per cent, I want to increase it to 70 per cent. This shortfall has nothing to do with the car manufacturer. It has to do with me. I am not able to as yet supply that kind of steel. It is not an easy thing. There are only 12-13 steel companies in the world that are able to supply to car manufacturers. It takes a long time and it is a knowledge-based manufacturing product. So, it will take some more time for us to supply. Car manufacturers will actually want to buy from India. They do not want to import, but Indian steel companies are not able to supply yet. But Tata Steel is the only company that is supplying today.

At the end of 2009, after the 2.4 million tonne expansion, we will be having a 60 per cent market share of the expanded automobile market. Today we have approximately a 25 per cent market share of the current automobile market. We are going in for this target in a big way. We are, for example, modifying the processes in Jamshedpur. We are changing one of our casters into a vertical caster, which is a very important thing for supplying to the car industry. We are adding online scarfing machines and our supply chain management is getting fine-tuned. Without these changes, it will not be possible to supply to the car industry. The passenger car industry's expectations are high and no Indian steel company is geared to do that well. Tata Steel can do that reasonably well. But we want to equip ourselves to do that much better.

Just because steel is made somewhere overseas, it does not necessarily have to be better. But expertise is available in some parts of the world and it is not available in some other parts of the world. We have never supplied to cars before, because India never made cars of the kind that we see now. We were making the Ambassador and the Premier Padmini, which did not require great quality. Only in the last five-six years have newer generation cars come into this market. So, the Indian steel industry is now gearing itself to make that. Typically, it will take a steel company five to six years to learn to supply to the car industry. We are the only ones making that attempt to learn and supply.

It is also an issue of the culture, because supplying to car companies requires research and development capability and efforts. It requires application engineering, and an understanding of the future of the automobile industry. It requires the steel maker to sit down and do a value management exercise with the customers. These are things, which certain companies can do, not all companies can manage such an issue. Our aim and efforts will be to go more and more into OE supplies. While we do that we will also be in the retail market with certain things, which require retailing. For example, we cannot sell constructional steel through OE, since the end-customer himself is the OE.

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