Tata Steel acquired the Anglo-Dutch steel giant Corus paying nearly $11B in 2007. At that time, Tata Steel although a regional player, was one of the most profitable steel company globally. The rational behind this acquisition was to get access to developed markets in Europe and other places, draw synergy across the capabilities and drive operational efficiency and economies of scale through massive size and resources of the combined entity.
However over the last ten years they have faced several challenges both externally and internally. First the global slow down reduced the overall demand for steel and hence they could not operate in full capacity.
Second, slowdown in the Chinese economy led cheap steel from Chinese manufacturers to the global market further affecting the UK operations of Tata Steel. Internally, the combined entity had multiple cultures embedded in pockets thus making the operational synergy a challenge. In addition, the UK unit had union employees making it difficult to rapidly adjust production to the market demand changes.
As a consequence, over the last few years it seems they had to maintain their production levels in UK despite loosing money. Hence the decision to sell or shutdown.
Certainly the social implications of this decision are hard in in terms of job losses. But Tata Steel is public company and they are accountable to their share holders. I believe that there will now be more consolidation in the steel industry in UK, may be Nationalization or some subsidy from the government to the steel firms as in the case of US auto during global financial crisis. However given the growth rate globally and in China, demand for steel is not going to spike soon.
Hence UK steel makers need to compete with the cheaper steel from China and other countries. It is a both economic and social challenge for UK.
(The author is associate dean of global initiatives at the Ross School of Business, University of Michigan)
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