Analysis. JLR and Corus: the contrasting tales of two British purchases

The contrast in the fates of Tata’s 2007 purchase of Corus’ steel assets, and its 2008 acquisition of Jaguar Land Rover, could not be starker. As JLR continues to be the golden goose of the Tata Motors family — it is now the UK’s largest carmaker, and is set to make over half-a-million cars in the current fiscal — Corus’ European assets have proved the Achilles heel of Tata’s global steel business.

Tata Steel estimates that the European business loses around £1 million a day and, in the past five months alone, has announced plans to cut over 2,000 jobs in the UK.

The board’s decision, announced late on Tuesday, to reject a turnaround plan for the Welsh Port Talbot plant, and recommend that options be explored including the sale of the entire UK business, reflects the bleak outlook for the business.

On the face of it the JLR and Corus acquisitions bear similarities: both were investments made in what were at that time challenging industries, and both took place as the global economy and financial system plunged into crisis.

Similar strategies The strategy adopted by the Tatas for both were similar too: the group was by and large willing to adopt a hands-off approach, giving senior management of its European operations a free hand to make the necessary changes, backed by major investments from India, bringing in experienced and successful professionals from within the industry to push things forward.

(Tata’s hands-off approach when it came to JLR assets has been lauded by analysts, in contrast with the strategy adopted by previous JLR owners, Ford Motor).

Drawing on internal and external advice, both businesses also attempted to swiftly adapt to changing market conditions.

JLR responded to the demands of the luxury car market globally, while Tata Steel’s European business attempted to focus more and more on high margin value added products, tailored to specific industries such as auto making, to overcome the challenges of low margins and over-capacity in the industry.

But in the end it was external conditions that determined their fate. While JLR, along with the rest of Britain’s car industry, has gone from strength to strength (in 2015 British car manufacturing reached its highest levels in a decade), the steel industry has dwindled fast.

Industry trends There are a number of reasons for this. Among the most significant has been the flood of cheap Chinese imports.

Driven by the fall in demand in its domestic market, Chinese steelmakers have pumped much of their products on to global markets, at a time when global demand is already weak, leaving many steelmakers with higher cost bases struggling.

While the US has been swift and aggressive in protecting its industry, quickly introducing high levies on certain categories of products, Europe has been slower to act.

Europe has been constrained in the level of levies it is able to impose on non-EU imports because of its subscription to the WTO’s lesser duty rule, under which duties below the margin of dumping are imposed.

UK policies haven’t helped either. A compensation scheme for the energy intensive industry came in far later than planned, while other reforms that the industry had hoped for (such as a reduction in the levies on certain forms of capital investment) failed to materialise in the most recent budget.

The British government has faced sharp criticism for failing to do enough to support the troubled industry, and not coming up with a comprehensive industrial policy, unlike many other European nations.

Moral challenge Add to this a costly pension scheme (last summer the company negotiated a deal with unions that reduced the costs but still kept its defined benefit pension scheme open to existing members), and the moral challenge of cutting jobs in communities already facing tough economic conditions and highly dependent on the industry, it is perhaps unsurprising that Tata Steel has come to this tough decision.

No easy sale The big question going forward will be whether, how and when it will be able to sell the assets. Analysts believe the company will struggle to sell the UK assets in one go — some will prove more attractive than others within the business, and buyers are likely to encounter the same challenges faced by Tata Steel.

The good news is that to date it has proved successful at finding buyers — Tata Steel is in negotiations with private equity firm Greybull over its long products division, while Liberty House has acquired two of its Scottish assets.

The UK and Welsh governments have pledged to look at “all options” to ensure the survival of Port Talbot and the wider Tata Steel business, including temporary nationalisation till a buyer can be found.

But whether its interventions prove to be too late remains to be seen.

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