This two-part series is the second installment from a young American guest blogger based in Mumbai, India. Over a period of time, we have exchanged a number of ideas and views related to the metals markets and macro-economic issues particularly associated with the fast-growing Indian market. Because of his strategic role in an Indian manufacturing company, our author prefers to contribute anonymously; but his approach and balance so closely mirrors our own that we have encouraged him to write the occasional piece for us as a guest author.
In October 2006, Tata Steel committed to the purchase of the established Belgian steel maker Corus and brought to international headlines what industry experts already knew: while global players in the raw materials supply business have distinctively turned to face India and its rapidly expanding appetite for metals, Indian steel manufacturers have shown surprising interest in investing abroad. While the world’s major steel companies are no strangers to acquisition activity, it is curious that Indian companies are interested in investing their rupees abroad in a time when the steelmakers of the world are expressing strong interest in accessing their growing local market. Steelmakers invest abroad to access to raw materials, technology, and/or new markets for their finished products, though it’s worth exploring the motivations driving Indian firms’ recent investments abroad.
Access to raw materials
While Indian firms are blessed with a dependable domestic supply of iron ore (245 million metric tons produced domestically in 2009, according to the India Steel Handbook), one example of a resource worth leaving home for is coking coal, an ingredient in relatively short local supply India imports about 30 million tons per year that they must acquire abroad, either through trading arrangements or direct asset investments.
The search for raw materials access certainly explains a number of recent foreign investments by Indian companies, and has in fact become a strategic concern at the national level. International Coal Ventures Ltd, the “special purpose vehicle incorporated in 2009 by a consortium of major Indian steel and raw materials firms, was created at the request of the government for the purpose of acquiring both thermal and coking coal assets abroad. The consortium, lead by SAIL and Coal India, is considering the purchase of coal assets in Australia, Indonesia, Mozambique, and the United States, according to Reuters. While raw materials access is definitely the motivation behind these types of asset acquisitions, this motivation does not explain the real headlining cases of outward Indian investment through deals like Essar’s Algoma acquisition or Tata’s purchase of Corus and Singapore-based NatSteel.
Searching for R&D
The second reason firms spend abroad is to acquire technology. Indian steelmakers operate relatively dated manufacturing facilities and do not produce the sophisticated finished steel products for which expanding markets such as the automobile industry are raising demand (India’s auto industry has a ways to go, but growth is strong: there are currently 12 vehicles per 1000 residents, but sales are growing yearly at roughly 25 percent). Industries like autos will require more steel as well, as higher quality steel components and safety and performance standards rise with the country’s fortunes, so it’s logical to conclude that Indian steelmakers are interested in acquiring new technology from the countries that have it. In addition, it’s easy to make the assumption (as the newspapers often report) that steel buyouts are planned with technology sourcing in mind. Some industry insiders suggest, however, that technology acquisition is a false assertion as a motivator for OFDI. “You don’t need to buy a European steel company to get their technology, says a Mumbai analyst. “If your market will support more sophisticated products, you can buy what you need from equipment manufacturers or, if you have a tie-up with a Japanese company, you could get help with your R&D from them, as the East Asians are more than willing to trade their expertise for a chance to access the Indian market.
Seeking new markets
The third motivation for foreign investment is to gain access to new markets. Despite their low cost of production, Indian steelmakers have never been major global suppliers of finished steel, so an interest in foreign markets can be expected for local companies looking to diversify their businesses.
In virtually any other country, the explanation of a need to expand to new markets would suffice, but for Indian steelmakers the explanation unravels when one considers that India is and is likely going to remain one of the world’s fastest growing new markets for steel products in the foreseeable future. Why would an Indian steel company, with limited resources to invest, look anywhere but home if it were searching for new markets?
(Continued in Part Two.)
MetalMiner and its sister site, Spend Matters, along with Nucor, will host a live simulcast, International Trade Breaking Point on March 1, 2011. If your company sources products from overseas, you will not want to miss this half-day event: