Beware the recession politics

Europe’s economic woes seem to have done little to dent the enthusiasm of Indian companies for assets in the region.

Talk of a potential Mahindra & Mahindra bid for a stake in Aston Martin, the British luxury sports carmaker owned by Kuwait’s Investment Dar, continues, while M&A activity by Indian firms in Europe has surged in the past year.

In the year to date, Indian companies have spent a total of $8.4 billion on assets in Europe, more than double last year’s figure of just over $3 billion, according to data gathered for Business Line by Dealogic. (From $17 billion in 2006, before the financial crisis struck, Indian M&A has fallen sharply, with a brief recovery in 2008).

While the majority is in the region’s far east: ($5 billion were pumped into Kazakhstan and a further $1 billion into Azerbaijan), a not-inconsiderable sum has gone into Western Europe, including $917 million into Germany, $407 million into Britain, and even $184 million into Spain, a country whose economy is projected to shrink by minus 1.5 per cent this year, and remain in recession the next.

MIXED EXPERIENCE

The fortunes of those who have chosen to invest over the years have been mixed: Jaguar Land Rover continues to boost Tata Motors (its pre-tax profits rose 77 per cent in the most recent quarter), and changes made by Essar Energy to the British refinery it bought a year-and-a-half ago have already begun to show in the bottomline; this is despite weakness in the European market, which has already led to the closure of several other refineries across the continent. The company has even increased its British workforce slightly.

At the same time, other companies continue to suffer from weakness in their industries: last week, Tata Steel announced that it would be cutting a further 900 jobs in Britain (as market demand and pricing show little sign of improvement), as part of a restructuring programme. Last year, the company cut around 1,200 jobs at its plant in Scunthorpe.

Politics has added to the complexity of doing business in the region: last year’s sale of a Tata Steel plant in north-east England to Thai firm Sahviriya Steel Industries was preceded by a period of tough negotiations and political point scoring, with local and national politicians joining in the heated discussions about the future of a plant in a region of high economic vulnerability (the local MP at one point publicly questioned the company’s commitment to finding a buyer).

Fortunately for Tata Steel, the most recent cuts have been met with a more measured response, recognising the tough circumstances the industry is in Europe, with unions more focused on lambasting the government’s economic policies that they argue had contributed to the situation.

Nowhere have potential political repercussions from the crisis been more evident than in the very recently resolved situation in France, where the socialist government of Francois Hollande pitted itself against Lakshmi Mittal’s Luxembourg-headquartered steel titan ArcelorMittal. The company’s plans to close two blast furnaces at its Florange plant in eastern France with a loss of 629 jobs prompted warnings of temporary nationalisation, including from the President himself, until a buyer came up for the entire site. (ArcelorMittal is eager to keep the rest of it, currently being developed into an automotive hub.) Finally, ArcelorMittal has agreed to invest €180 million in the plant and not lay off any worker.

Quite why ArcelorMittal became the target when so many other French firms have been drastically cutting jobs is unclear.

Others such as PSA Peugeot Citroeon, which is cutting 8,000 jobs, have faced stringent criticism from Arnuad Montebourg, France’s industry minister who has swiftly developed a reputation for his abrasive style and his determination to preserve French jobs.

Among recent efforts, he has tried to persuade Libya’s sovereign wealth fund, unsuccessfully, to keep open a refinery in the Normandy region of the country, should it take over insolvent Swiss refiner Petroplus — even suggesting that France could buy a stake in the company, too.

He’s also been campaigning heavily in support of French consumer goods maker Bic’s efforts to persuade the European Commission to maintain duties on Chinese lighter makers (the company has pledged to invest further in France, though only if the duties are maintained).

These efforts seem to pale into comparison with the treatment meted out to ArcelorMittal, with the threats of nationalisation harking back to the France of the 1980s, when then President Francois Mitterand oversaw a programme of widespread nationalisation covering strategically important industry and the banking sector.

ECONOMIC NATIONALISM

While the vehemence of the response to ArcelorMittal was perhaps partly due to a dispute over the pledges made at the time of the merger in 2006 (the government insisted that Mittal gave assurances about preserving jobs, while the company insists it made it quite clear that it intended to carry on with the restructuring plan that the previous owners had in the works, which included the closures at Florange), the “foreign” angle is one that cannot be discounted.

Indeed, Montebourg’s comment which he subsequently retracted that the company was no longer welcome in France would certainly suggest that.

Ian Begg, professor at the European Institute at the London School of Economics, argues that the popular French expression “delocalisation” referring to the transfer of jobs and capital out of France to elsewhere in the world (for which there is no English equivalent) is symptomatic of the nation’s political culture, which is less open to foreign trade and investment than the rest of Europe.

“It does go back in part to the days when ArcelorMittal was formed, when it was seen as succumbing to overseas investors,” he says.

“The response certainly reflects the degree of economic nationalism that is present on all political sides in France,” says David Lea, a senior European analyst at Control Risks.

“The region of Lorraine has a long history as a heavy industrial region, so a foreign firm coming in and shutting operations is very symbolically sensitive.”

He points to the spate of “boss nappings” of companies undergoing restructuring, many foreign, where employees held executives against their will to press for their demands — which took place back in 2009, and not matched anywhere else in Europe.

Despite dire employment figures and prospects, European governments elsewhere have steered clear of anything akin to a nationalisation threat.

Still, the ArcelorMittal dispute provides a powerful reminder that, in coming to Europe, it’s not just tough economic conditions that Indian firms will have to contend with but the frenzied politics of recession too.

COMMENT NOW