India Inc must foray abroad with caution
T. C. A. Ramanujam
Indian companies are foraying into developed countries even as their Chinese counterparts are concentrating on the less developed nations of Africa. Though this is a tribute to Indian managerial and entrepreneurial skills, India Inc must also watch out for reverse takeover bids, says T. C. A. RAMANUJAM.
Do you mean to say that Tatas propose to make steel rails to British specifications? Why, I will undertake to eat every pound of steel rail they succeed in making.
Sir Frederick Upcott, Chief Commissioner of Indian Railways in 1902.
In February 1912, when the first steel ingot rolled out of Jamshedpur and the first export of steel rails was made to Mesopotamia, the then Tata head made the acerbic comment: "If Sir Fredrick had carried out his undertaking, he would certainly have had some slight indigestion". Not only has the five-million-tonne Tata Steel since become a force to reckon with in domestic industry, its bid in London last month for the takeover of the 18-million-tonne capacity Corus has raised hopes of the formation of the world’s fifth largest steel-producing conglomerate.
"Brand India has begun to make its mark on the world stage. This is just a beginning and the best is yet to come," commented Dr Manmohan Singh, a leader not normally given to hype.
Murmurs about "reverse colonisation" were heard in the international finance capital. If, despite French steel major CSN’s recent counter offer, the Tata-Corus deal does go through, it will represent the largest overseas acquisition by any Indian firm. The Tatas will spend Rs 37,858 crore, an amount equal to double the Foreign Direct Investment received in India in 2005, on this buy. Tata Steel will gain access to large markets in Europe, and to technology for steel production. Corus would gain from the low productivity cost of Tata Steel.
Takeovers
Unlike the Lakshmi Mittal-Arcelor deal, the Tata-Corus engagement represents a friendly takeover. The Mittal Group, in the words of The Economist, had "swallowed Arcelor, the European steel company, while Tata Steel wants to marry Corus for the love of the market and technology". Assurances have been given that the interests of the workers and pension funds in the UK and the Netherlands will be protected. This is reminiscent of protests heard in India when there is a takeover of an Indian firm by a foreign multinational. Yet, the daring Tata Steel venture is only a pointer to several other takeovers and acquisitions by Indian corporate houses. Videocon has been shortlisted in its bid for the Korean giant Daewoo Electronics for Rs 3,400 crore. There have been acquisitions by Satyam Computers, HCL Technologies, Escorts, Bharat Forge, APJ International, Tata Tea, AV Birla group, Tata Coffee, Tata Motors, Apollo Tyres and a host of other entities.
A study by the Federation of Indian Chambers of Commerce and Industries indicates that between 2000 and 2006, there were 307 acquisitions totalling over Rs 90,000 crore. The international incomes of many of the Indian corporate houses have become substantial.
As the Planning Commission Deputy Chairman, Dr Montek Singh Ahluwalia, said well of these takeovers: "Indians have superior management skills. Acquisitions are essential to make a global impact." No doubt, this is a tribute the Indian managerial and entrepreneurial skills.
Policy implications
There are clear policy implications of these deals. It looks as though, for once, India’s outbound investments have overtaken the FDI inflows. The financial and tax implications of such international ventures are enormous and it will require all the ingenuity of the industry captains to ensure that the integration process is smooth and not a drag on performance. Even the Chinese found that such integration was not easy.
The China-Africa example
There can be a revealing comparison between the attitudes of Indian corporate houses and those from China. Chinese companies have found Africa a virgin territory with few products made locally and little competition. Top leaders from China visited many parts of Africa and Beijing hosted a China-Africa summit recently. Chinese companies are buying up commodities from Africa such as oil, metals and farm produce to give a boost to China’s surging economic growth.
The rise in commodities prices have done good for Africa and even Sub-Saharan Africa’s real GDP increased from 2.6 per cent to 4.4 per cent in three years. Africa’s economy has grown nearly by sixper cent. China takes copper and cobalt from Congo and Zambia, iron ore and platinum from South Africa and Gabon, and raw cotton from West and Central Africa. Chinese companies are acquiring stakes for this purpose in African enterprises. China has acquired an interest in Nigerian oil fields. Construction activity in Angola has boomed thanks to Chinese intervention. China is passing on its technology also. Africa is becoming a processor of commodities and a competitive supplier of cheap goods and services to China and India.
China is also selling its cheap products in Africa. The Africans like the Chinese prices, says The Economist (October 28). Chinese companies are bringing in much of their own labour, rather than hiring locals. Thousands of Chinese workers were brought to build the 1,860-km Tazara Railway between Lusaka and Dar es Salaam.
Foray into West
Indian companies are foraying into the developed countries of the West. Their Chinese counterparts are concentrating on the less developed African continent. The well-known parable of two salesmen trying to find a market for their shoes comes to mind. Both went to the same region. One reported that nobody wears shoes and hence there can be no market. The other wrote enthusiastically that it was a virgin territory to be conquered by the shoe company by flooding its wares among people who are not used to footwear.
FDI into India
We may applaud the foreign takeovers of Indian corporate houses. But it may be useful to remember that there are two sides to globalisation. Foreign multinationals are not idle spectators on the international financial scene. FDI may not flow in up to the desired level, as in China, but foreign institutional investors have been increasing their stakes in such companies as Infosys, Reliance Industries and ONGC.
They have acquired substantial stakes in HDFC (68 per cent), Satyam (46 per cent) and ICICI Bank 45 per cent. Corporate raiding is also a two-way street. Indian companies better watch out against hostile takeovers, lest they are surprised. Yet, for the moment, the bold Tata bid in Europe is pleasant to contemplate.
(The author is a former Chief Commissioner of Income-Tax.)
Source:
