UK trip to be Cyrus Mistrys litmus test

Written by Aveek Datta | Updated: Nov 3 2014, 09:36am hrs
Just ahead of completing his second year as chairman of the $100 billion-by-revenue Tata Group, Cyrus Mistry is slated to face one of the biggest tests of his leadership skills thus far when he travels to the United Kingdom (UK) in November to meet workers unions at Tata Steel Europe, in a bid to bring them on board as the company looks to divest a significant portion of its assets in that region.

The rationale behind Tata Steels decision to divest its long products business in Europe is clear. It wants to divest assets that havent been remunerative, pare debt, focus on and grow certain specialised businesses.

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The tricky part, for Mistry, would be to address and allay the apprehensions of the 6,500 employees (a fifth of Tata Steel Europes total employee strength) who are associated with the division that Tata Steel Europe wants to sell and who are uncertain about what the future holds for them.

On October 15, Tata Steel Europe issued a statement saying that it had entered into an understanding with Geneva-based Klesch Group to potentially sell its long products division to the latter, after a due diligence process.

Tata Steel Europes chief executive Karl Koehler said in the statement that the company needed capital and expertise to accelerate the pace of innovation on advanced steel solutions through which it wanted to become a premium, customer-centred steel company. We have therefore decided to concentrate our resources mainly on our strip products activities, where we have greater cross-European production and technological synergies, Koehler said.

The long products divisions primary asset is a 4.5 million tonnes (mt) per annum steel mill located in Scunthorpe, UK. The business has other associated facilities in Scotland, France and Germany. The steel mill in Scunthorpe produced 3.2 mt of liquid steel in FY14, around a fifth of Tata Steel Europes total liquid steel production.

Analysts agree that divesting the long products business is the right way forward for Tata Steel Europe.

The profitability of these assets is not known separately. However, these assets are well known to be least profitable among all (of Tata Steels European assets), a report dated October 16 by Motilal Oswal said.

Tata Steel acquired Anglo-Dutch steelmaker Corus Group in 2007 for $7.2 billion. The business ran into rough weather soon thereafter, first with the Lehman Brothers subprime mortgage crisis pushing the world economy into a financial turmoil, and a subsequent recession in the Eurozone.

In its October 15 statement, Tata Steel Europe said that it had invested 1.2 million in its UK operations till date. While Tata Steel Europe was reporting a gradual operational turnaround with the macroeconomic situation in the Eurozone improving, faltering growth and the threat of another slowdown in the region may impact construction and infrastructure creation activity.

As a result, profitability of Tata Steel Europes long products business is likely to remain poor, according to an Axis Capital report dated October 16. The report estimates that based on the global benchmark of some recent transactions in this sector, sale of the long products business could lead to a cash flow of $1.1 billion for Tata Steel, which is around 10% of its current net debt.

But even as the Tata Group works towards achieving future business objectives for Tata Steel, Mistry will have to ensure that the groups overall global reputation as a transparent and employee-friendly organisation doesnt suffer.

The workers unions at Tata Steel Europe, though, arent too pleased with Tata Steel at present, which explains Mistrys impending visit to the UK. The unions claim that they werent given adequate notice of what Tata Steel was planning to do, and werent convinced that a sell-off of the long products business was in their best interest.

The poor way in which Tata Steel handled this major strategic decision, with no consultation with trade unions, is a matter of concern for all our members whether they work in Scunthorpe or Port Talbot, Roy Rickhuss, chairman of the UK Trade Union Steel Committee, was quoted as saying in a British newspaper.

The same article quoted Paul Reuter, national steel officer for Unite, Britains largest trade union, as saying that the unions were officially notified of the potential sale on October 13, just two days before Tata Steel signed the memorandum of understanding with the Klesch Group. In an interview to the same paper, Klesch Group chairman Gary Klesch said that talks to potentially acquire the long products business had begun with Tata Steel in January.

Some of the concerns harboured by employees associated with Tata Steels long products business in Europe include whether there will be job cuts and whether pensions entitled to them will be protected. While there is no clarity on these issues, Klesch had said in his interview that it should not be assumed that there will be job cuts once the deal was done.

Another British newspaper cited the National Trade Union Steel Co-ordinating Committee as stating that it wasnt convinced about the merits of selling the business. Various workers unions associated with Tata Steels sites in UK have also collectively appointed a consultancy firm called Syndex to evaluate the potential sale and called on the Tata Steel management to enter into a period of meaningful consultation to examine all options as far as the best way forward is concerned.

Even the British government is looking into the developments at Tata Steel Europe with UK prime minister David Cameron meeting members of the UK parliament from the Scunthorpe area to discuss the potential sale and its implications on the steel industry and its workers in the region.

It is a potentially tricky situation in which a tight line has to be walked between the needs of Tata Steel Europe on the one hand, and the needs of the workers on the other. The needs and expectations of both have to be managed, and that wont be easy, says Morgen Witzel, a UK-based management writer and author of Tata: The Evolution of a Corporate Brand. British workers and unions have a history of involvement in major decisions, of course, and while it is impossible to know from a distance what has really happened, it seems likely that Mistry and the Tata Steel Europe bosses will need to sit down with the unions again and straighten things out.

Ravindra Chittoor, assistant professor of strategy at the Indian School of Business, Hyderabad, agrees that this is one of the toughest challenges that Mistry has faced till date during his tenure as Tata Group chairman.

A difficult decision needs to be made and Mistry will need to effectively communicate this to the workers, Chittoor said. It is an HR (human resources) challenge that any leader has to face. The potential future scenarios for the business have to be laid out threadbare in front of the employees.

Chittoor says that Mistry will have to impress upon the companys workers in the UK that if Tata Steel Europe retains the long products business and it continues to perform as poorly as it has, it may have an adverse implication for the companys larger steel-making operations. On the other hand, selling off the business may lead to short-term loss of employment, but better operational performance in the long run with greater employment generation potential when things look up, he added.

To be sure, this isnt the first time that Tata Steel has had to swallow a bitter pill in the interest of keeping its European operations afloat. It mothballed a steel mill in UKs Teesside region in 2010, which led to job losses. The steel mill was eventually sold to Thai steelmaker SSI, which helped in salvaging some of the lost jobs. It has also divested some other assets in Europe in the past, but the potential sale of its long products division being contemplated at present is the largest by magnitude, both in terms of steel-making capacity and the number of employees involved.

Maintaining cordial relations with the labour force and government agencies overseas is crucial for the Tata Groups international business. Around 67% of the salt-to-software conglomerates revenues come from outside India, and a significant portion of this comes from the European region, where it owns other businesses like British carmaker Jaguar Land Rover, which was acquired by Tata Motors in 2008.

It remains to be seen how the Tata Group and Mistry manage to do the balancing act between achieving its business objectives and maintaining the goodwill with stakeholders like employees that have helped it expand globally.

One of the consequences of doing business internationally is the need to adapt to different cultures and different ways of doing things. The Tata Group is learning this. Sometimes the hard way, Witzel sums up.