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STRATEGY Can TISCO Remake Itself Into Tata Steel? To survive the slowdown, and tomorrow, CEO J.J. Irani is trying to forge ahead with a 5-point restructuring programme. But the results are going to take longer to show. By Chhaya & Rakhi Mazumdar
The key word: core. Yes, TISCO's core activity is steel. But the 92-year-old industrial behemoth has been carrying more baggage than just that. Until recently, TISCO was also making cement and, through a joint venture, roller tapered bearings. That apart, TISCO has, over the years, made investments in a host of other businesses, many of which are deep in the red today. In Jamshedpur (Bihar), where its main plant is located, TISCO behaves more like the town's civic authority than a company. It runs hospitals and schools; maintains roads, lighting, and water-works; and even sponsors community welfare programmes. Simply put, Jamshedpur is managed by TISCO. Should it be? Many may ridicule this approach to business, but TISCO's legacy dates back to a different era. When the company first built its plant in 1915, Jamshedpur had no infrastructure to offer. Rather then depend on anyone, TISCO decided to do it all by itself. In a protected market, with little or no competition, it made sense, and, for 9 decades of its existence, the approach paid TISCO back. Now, faced with nimble-footed competitors and global pressures, the old giant has been shocked into realising that it too has to learn new tricks. That's precisely what Irani has been trying to do in recent times. But things have not been easy, especially in the last 2 years. This industry has been hit by its worst recession ever and, like other steel companies, TISCO's bottomline has had to bear the brunt. In the third quarter of this year, the company's sales inched up by 5 per cent, but its profits fell by more than 60 per cent. Essentially, the squeeze has been on margins.
For Irani, the current crisis has increased the urgency of his task to sharpen TISCO's business focus, and rein in costs so that the company can deal with the troughs in business cycles with less discomfort. It's a 5-point programme that the veteran manager, who holds a doctorate in engineering, has drawn up for the company:
STICKING TO THE KNITTING. There's nothing unique about that check-list; most manufacturing companies in this country have it tucked away somewhere. But Irani has managed to make it work. In December, 1999, he struck a deal to sell TISCO's cement division to the French construction giant, Lafarge. It's a great sell: Lafarge will pay Rs 550 crore and also pick up the division's outstanding loans of Rs 65 crore. More recently, Irani scored again, hiving off TISCO's 40 per cent stake in the roller tapered bearings joint venture to its partner, Timken, for Rs 117 crore. Still, there's lots more left to do. TISCO has investments in a number of other ventures--such as Tata Material Handling Systems, Tinplate Co. of India, Tata Sponge Iron, Tata Metalliks, and Tata Korf Engineering--all of which have accumulated losses. These companies are a drag on the parent. Warns Pankaj Kulkarni, 41, a steel sector consultant: "TISCO needs to take hard decisions about them. At one time, they may have been wise moves, but they've lost their significance now, and account only for loss of valuable management-time." Irani himself agrees: "Even next year, we will continue to withdraw from businesses that do not add value to our core activity of making steel." But, given the slowdown, selling off loss-making units is not going to be an easy task. BRINGING IN THE DOCTORS. High on Irani's agenda is also a restructuring. This is where the company has sought help from outside. In 1998, with the help of McKinsey & Co., TISCO initiated a Total Operating Programme (top) to cut its operational costs. Explains Irani: "It is implemented in one part of the plant in what they call a wave, and then passed on to another section in another wave. We are spreading that methodology throughout the company." One part of top is to help the company leverage the intellectual capital of its employees at all levels, and generate ideas that improve its operations. According to Irani, top will help shave 15 per cent from the company's operational costs in the first year. De-layering is another action area. Like many old manufacturing companies, TISCO has several layers of bureaucracy, which slow down decision-making to a crawl. Now, Irani wants the top management to get constant feedback from all levels--including the shopfloor. So, TISCO now has an internal mail system that allows the workers an assured means to interact with the highest level of the management, and convey any work-related suggestion or viewpoint. Such hot-mail boxes have been placed at numerous locations in the plant.
Being an old steel-maker, TISCO carries with it the baggage of outdated technology, which impacts its productivity. A few years ago, TISCO primarily used the conventional ingot-casting route to steel-making. Over the last few years, it has been switching over to the continuous casting method, which provides it a 95 per cent yield from ore (the conventional method has a yield-rate of only 85 per cent). Last year, TISCO converted 64 per cent of its operations to continuous casting; this year, it will touch 93 per cent. Apart from improving yields, this will also bring down energy-consumption, reducing TISCO's costs further. On another front, TISCO has been able to increase its blast furnace productivity from 2,800 tonnes per day (TPD) to 4,000 TPD. Says T. Mukherjee, 55, Vice-President (Operations), TISCO: "We have also achieved higher oxygen enrichment in the blast-furnaces, which has increased the production of both hot metal and finished steel." However, like the Steel Authority of India, TISCO needs to continuously upgrade its technology in a bid to catch up with the newcomers in the sector. Obviously, it is on the right track. TRIMMING THE FLAB. One of Irani's big worries is his wage-bill. Last year, TISCO's wage-costs (Rs 816 crore) were 12.50 per cent of its turnover. While the company has been able to cut its workforce through successive Voluntary Retirement Schemes (VRSs)--from 77,000, it is down to less than 59,000--what is worrisome is the recurring cost of the VRSs each year. This year, for instance, TISCO will charge Rs 180 crore to the bottomline for funding the VRSs; next year, it could charge another Rs 200 crore. Could TISCO's workforce size be blown out of proportion? A better way of looking at its costs would be to look at its input costs holistically. TISCO has the advantage of captive iron-ore and coal mines, and much of its manpower is employed there. While that means more people working for TISCO, the captive mines are cost-savers. Compared to TISCO's 14.40 per cent, competitor Essar Steel's wage-bill is just 1.46 per cent of sales. Yet, TISCO's raw material costs--because of its integrated plant--are just 15.40 per cent of its turnover. Essar's, in contrast, work out to 41 per cent. Comparing apples to apples, TISCO's raw material and wage-costs put together are 29.80 per cent of its turnover while Essar's is more than 42 per cent. So, although Irani is firm about downsizing, manpower may well be more a notional than a real problem. CLIMBING THE VALUE CHAIN. At the core of the changes that Irani is trying to usher in is changing what TISCO makes. Two-thirds of the company's 3-million tonnes per annum product-mix is made up of low-margin long and semi-finished products, and only a third is hr coils, a higher value-added flat product. This will, hopefully, change once TISCO's 1.20-million tonne per annum Cold Rolling Mill (CRM) is commissioned. Expected to be flagged off next year, the mill will reverse the proportion of high-margin flats in TISCO's finished goods basket: from a third to two-thirds. And the stockmarkets are already yelping in anticipation. Agrees Sheriar Irani, 32, Steel Analyst at Jardine Fleming: "After the implementation of the CRM, TISCO will be in an envious position." Claims B. Muthuraman, 54, Vice-President (CRM Project), TISCO: "The CRM is likely to add Rs 1,400 crore to TISCO's bottomline every year." Clearly, TISCO hopes that its new mill will be the jewel in the crown. In Jamshedpur too, CRM is the buzz, with a hand-picked team of 500 being earmarked for the project. Some of them are being trained at Nippon Steel, TISCO's Japanese technical collaborator. At the complex, an empowered team of workers meets every day to brainstorm, and monitor progress on the project. One of these days, the team is scheduled to have a one-and-a-half day session with Irani himself. Steel isn't a sunrise sector. In fact, the setting sun has been casting long shadows over the industry. Given that, there are only a few things steel companies can do. Says Jardine Fleming's Irani: "They can only cut costs and go in for more value-added products. TISCO is doing both." While that will improve TISCO's margins, Irani must also change the mindset of a 92-year-old institution if it is to celebrate its centenary in the next century in style. That's something the Tata Group's chairman, Ratan Tata, will definitely approve of--and sympathise with. In a sense, therefore, Irani is remaking TISCO--and "also" making steel today. |
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Five years ago, when he had
just taken over as the Managing Director of the Tata Iron & Steel Co. (TISCO), Jamshed
J. Irani used to scoff at something that his predecessor had benignly left behind. It was
an ad slogan, which went: "We Also Make Steel." The usually affable Irani, 61,
was exasperated by that. "What does it mean? `We also make steel?' We make steel.
That is our core activity!" 
Falling demand has meant
falling steel prices: over the last 3 years, they have plummeted by upto Rs 3,000 a tonne.
In addition, the industry has been hit by the dumping of products such as Hot Rolled (hr)
coils--at prices as much as 50 per cent lower than those charged by domestic
manufacturers--by countries such as Russia. Recently, the Government of India lent a
helping hand when it controversially fixed a floor-price of $302 (Rs 12,684) per tonne on
imports of hr coils to protect companies like TISCO. 
For supply chain management,
the company has roped in another management consultancy, Booz-Allen & Hamilton
(BA&H). With TISCO buying Rs 4,000 crore of raw materials a year from hundreds of
vendors across the country, says Irani: "BA&H is helping us set up a procurement
mechanism through efficient vendor-management, long-term contracts, and other systems.
Once the structure is in place, it is expected to reduce our costs." Yet another
consultant, Arthur D. Little, is helping TISCO strengthen its marketing and slash costs.
The target: to cut marketing costs by 25 per cent. 