Is there a particular framework that managements need to follow during a slowdown?
A slowdown is a given in any economic cycle. But there are some defensive businesses such as staples, pharma and FMCG, which are not as impacted as commodities. Hence, commodity companies have to exercise a lot more prudence in financial management. One needs to constantly monitor the environment. Since it is never possible for managements to predict a slowdown, one should keep enough cash reserves to deal with a downturn. Just ensure that your liabilities can be met during a downturn — either have cash or credit lines. You have to stay prepared for cycles.
Many a times you can’t predict a downturn, how can managements be prepared then?
It’s important to develop sensors like a canary in the mine. So, when I was the finance director at Tata Steel a few decades ago, three to four products would signal quite early that things were slowing down. One was bearings, as it is used across sectors and industries such as auto and electrical goods. Second was roofing sheets. Every industry will have these lead indicators. You have to watch closely. In short, you create your own forecasting tool that will detect any change in the environment.
Management is all about managing risks. Every decision you take as a manager, you have to constantly weigh the risk. It can’t be someone else’s job. I am honestly astounded by the concept of a risk management committee, because I believe, it’s integral to management anyway.
Where do you think managements go wrong?
The trouble is that when times are good, you tend to throw caution to the wind and take on a lot of costs. It is human nature to believe during good times that good times won’t end and vice versa. Hence, during cycles, managements need to keep a watch on costs. Somebody has to be answerable. Every time there is a downturn, there is buzz around layoffs, but no one asks how it happened. How did these costs go up?
How do you prioritise when you are on a cost-cutting spree during a slowdown?
Cutting cost is the most obvious thing to do. But you have to be careful not to stop investing in your growth areas. You need to take a granular approach. You have to take out the fluff, or costs that won’t have a long-term impact. When the pressure is on the CEO, he is more worried about maintaining margins. But the CEO must prune expenditure that’s not important from a strategic point. For instance, if you are setting up a hot strip mill, which is the future for a steel company, you won’t touch that. At Tata Steel, we saved on costs by replacing expensive coking coal with cheaper coking coal. In industries such as capital goods and auto components, you have to look at each component in the build sheet and see how to bring down the cost.
Apart from keeping costs low, are there any must-dos for commodity companies?
One simple strategy is to have diverse markets across geographies. Unfortunately, the steel sector has always looked at the export market opportunistically. That option has been explored only when there has been a recession. I don’t think that’s a good idea. In your mix of sales, you should have a certain percentage of exports, which can be ramped up if there is a slowdown. Pharmaceutical and IT companies have created those opportunities.
Today, however, part of our problem is that there is a global slowdown. Hence, which market do you export to? That’s become a challenge, especially with a tariff war. Secondly, you have to constantly pursue product innovation. For example, 30% of Tata Steel’s sales come from branded steel, which is unheard of globally. Product innovation is important to spur demand as well as to enhance margins. This is also where good marketing and distribution comes into play.
Yet as a commodity company, you can’t escape a downcycle. You have no option but to always be prepared for it.
Take us through your days as the finance director of Tata Steel. How did you cope with some of the most trying business situations?
The first instance was when liberalisation swept through the shores in 1991 and duty on steel was brought down to 5% to 10% from 60%. Suddenly, Indian steel had to compete with imported steel. Tata Steel’s facilities were largely old and obsolete. On the other hand, steel prices were decontrolled. My colleague, R Sankaran, in Jamshedpur, prepared an alarming forecast for the financial year 1993-94. He called me on the hotline and said, “Boss, we are in deep trouble.” In addition, the working capital situation turned dramatically adverse as earlier we used to collect cash in advance before we sold the steel, but now, everyone was asking for credit. I went to Ratan Tata and informed him about the existential crisis that TISCO was facing. Soon, a meeting of the top management was held in Bombay and two taskforces were set up — one to cut costs and the other to maximise revenue. As a result, we achieved a dramatic turnaround and completed the fiscal year with a reasonable profit of #1.2 billion. Determined leadership and outstanding teamwork were what worked wonders then.
Was Corus a bad buy for Tata Steel or did the post-crisis slowdown play spoilsport?
Much has been written about the merits and demerits of the acquisition, largely with the benefit of hindsight. I am very clear that it was a bold and correct decision at that point in time. Tata Steel’s debt position was quite comfortable and it had additional debt capacity. The debt taken for the buyout did not cross any dangerous threshold. It also needs to be remembered that Tata Steel was in danger of becoming marginalised — it was merely a three million tonne steel producer. ArcelorMittal had already reached a capacity of almost 100 million tonne and even the newer Indian private players had caught up. Tata Steel’s efforts to build a new plant had run into various problems around land acquisition, thus a sizeable acquisition became a strategic imperative. It is against this background that the Corus deal has to be viewed. As an asset, the Dutch leg of the Corus business was good, while the UK asset had turned around but had been under-invested over the years. Corus posted the highest profit ever in its history, a year after the acquisition.
While a careful risk assessment had been done, a black swan event occurred after the 2007 acquisition — the 2008 financial crisis. Consequently, steel consumption in the UK, because of the country’s austerity policy, declined 30% and has not recovered even till date. The UK asset then became a serious problem. Tata Steel UK suffered heavy losses and funding these along with the UK pension issue, which also had its roots in the financial crisis, caused Tata Steel’s debt to rise substantially. The management took a drastic decision to cut losses by hiving off the problematic long-product division and closing the pension fund. It’s a pity that the joint venture with German multinational Thyssenkrupp fell through. Nevertheless, starting with the Corus buyout, its subsequent expansion and acquisition of Bhushan Steel in India, Tata Steel has once again emerged as a serious player in the global steel industry.