If Tata Steel can ward off a rival bid for the Anglo-Dutch steel giant Corus, the nearly $8bn deal will be the biggest overseas deal so far by a fast-globalising India. Indian firms have been in an expansive and acquisitive mood in recent years and a hot destination appears to be the UK.
In what appears to be a reversal of an historical trend – colonial Britain’s investments in the 19th century went into tea, coffee, railways, mining and mercantile establishments in India – the latest numbers indicate that Indian companies in the 21st century are investing more in the UK than British firms are investing in India.
Middle England’s marketing gurus greeted Tata Steel’s proposed acquisition of Corus as being akin to “Mahatma Gandhi buying Lancashire cotton mills” and declared the former British colony is “buying Britain up”.
This is surely an exaggeration, but it is ironic that it is the same Tata that set up India’s iron and steel industry 99 years ago, in a field that British industry at the height of its power was “so hesitant” (to borrow an expression of Professor Amartya Sen in one of his essays in The Argumentative Indian) to get into, that has now acquired a pillar of the UK’s industrial establishment.
Rather than reflecting any sort of empire-strikes-back rationale, it is sheer economics that has driven India’s largest investment so far in the UK. Although Corus is more than three times the size of Tata Steel in terms of output, it had been looking for a strategic partner due to the high costs of its British plants that lacked captive sources of raw materials. Tata Steel, which is able to produce steel at the world’s lowest cost of $160 a ton compared with Corus’ $540 a ton, therefore appears to be the partner that Corus was looking for.
From Tata’s point of view, the Corus acquisition offers access to important markets in Europe. Corus makes value-added products, such as flat steels used in vehicle bodies, besides other products for electrical and engineering industries.
Shipping semi-finished slabs from India and turning out specialty steels from Corus’ finishing facilities in the UK and Europe at competitive prices is perhaps the biggest advantage for Tata Steel from this deal. Some of Corus’ inefficient facilities can also be shipped to India to bolster Tata Steel’s domestic expansion plans.
European entry point
Tata is one of a growing number of Indian companies investing in Britain to secure a bridgehead to the European market. More than 430 Indian companies are currently based in the UK, accounting for 30% of all foreign investment in London. There were 76 Indian inward investment projects into the UK worth $2bn in 2005-06.
India is the third largest source of inward investment into the UK. Twenty-three companies have listed on the London Stock Exchange, enabling them to tap into the world’s largest pool of capital and provide entry into global markets, according to Anmol Nayyar, a corporate solicitor at UK-based law firm Ashurst.
Mergers and acquisitions appear to be driving India’s presence in the UK. There were 10 Indian M&A deals in the UK during the first half of 2006, according to Grant Thornton India, a financial and business advisory firm. They included a merger of India’s telecom software company Subex Systems with Azure Solutions for $140m and Gujarat Heavy Chemicals takeover of the UK’s largest home textiles retail chain, Rosebys, for $40m. With an average size of $47m in the first half of 2006, the 10 deals entail investments of $470m – higher than the UK’s investments in India of $261m in 2005-06.
Scarcely a day passes without an announcement of an Indian company heading for the UK. Their growing presence spans a broad range of industries, including information communications technology (ICT), automobiles, pharmaceuticals, and food and beverages. Latest reports indicate that India’s United Breweries has made an unsolicited bid for Whyte and Mackay, a Scottish distiller.
Nicholas Piramal, a leading Indian pharmaceutical company, has announced the purchase of a manufacturing plant from Pfizer, the world’s largest pharmaceutical company, in Northumberland. An association of garment manufacturers from Tirupur, a fast-growing manufacturing town in the southern Indian state of Tamil Nadu, plans to open a warehouse in Felixstowe, Suffolk, to supply retailers such as Mothercare and GAP with their clothing directly. Early in 2006, Mahindra and Mahindra, India’s largest maker of utility vehicles and tractors, took over Stokes Forgings Group, a West Midlands maker of precision car parts. And Brunner Mond Group, based in England’s north west, became part of the world’s third largest soda-ash manufacturer when Tata Chemicals acquired it in 2006.
Facilitating this trend is India’s increasingly liberal economic environment. With a robust foreign exchange build up of $150bn, controls on capital outflows have become progressively more liberal over the years. The Reserve Bank, India’s central bank, thus asks fewer questions regarding acquisitions of foreign companies.
More important is access to cheap capital: domestic interest rates are half the level they were in real terms a decade ago. Indian firms have also been allowed to borrow cheaply on international debt markets to realise their globalising aspirations.
According to a recent survey by the India Brand Equity Foundation (IBEF), the ICT sector accounts for almost 50% of investment from Indian companies in the UK. The thrust has been spearheaded by a clutch of information technology and software companies such as Tata Consultancy Services (TCS), Infosys, Wipro and HCL.
The UK represents a strategic focus for forays into world markets, especially that of Europe, rather than being an empire-strikes-back target.
S Ramadorai, CEO of TCS, says: “The UK is a very important market for TCS strategically. Globally, it is the second largest market [after the US] and contributed 20% of TCS’ revenues in the first quarter of 2006-07. We have been in this market for close to three decades and have forged deep relationships with our customers and the community there.
“Last year, we created a new business in the area of life and pensions processing in the UK by taking over the servicing of closed life insurance books from the Pearl Group, as well as 1000 people and facilities in Peterborough [Cambridgeshire] to house the new operation.”
Indian IT companies are taking advantage of the UK’s natural advantages as a regional headquarters for Europe, besides tapping its enormous market potential. An example is DreamQuest Pvt, a leading IT infrastructure provider based in Bangalore, capital of the southern state of Karnataka.
Another factor spurring more IT and software-related investments in the UK is the growing trend of ‘near-shoring’, whereby leading Indian companies are setting up call centre operations in Britain to improve the service to customers who want their back-end operations closer home.
ICICI OneSource, a Mumbai-based outsourcing company, has announced plans to build a 1000-person call centre in Belfast, Northern Ireland, its first in the UK. This follows last year’s acquisition of a call centre operator in the area by HCL Technologies, another Indian company.
In October 2001, HCL entered into a strategic alliance with British Telecom to offer business process outsourcing services through the latter’s 400-seat Apollo Contact Centre in Belfast. This joint venture completely passed into HCL’s hands in 2005 and the Belfast centre now employs 2000.
Such moves present an interesting twist to the usual pattern of British companies outsourcing jobs to workers in call centres located in India with Indian-based companies employing more and more British nationals in call centres based in the UK to do the same jobs.
Near-shoring is bound to gather momentum following the recent incidents of data theft reported by a UK television channel, which claimed that thousands of credit card and passport details of UK customers were sold to a middleman. Indian companies are therefore bound to locate where their important UK customers are based.
Indian firms’ investment intentions in the UK have surged beyond the ICT arena, however, into emerging sectors such as food and beverages, pharmaceuticals and engineering. Most companies cite global expansion plans as the most important reason for setting up operations in the UK, according to the IBEF survey.
A forerunner of Tata Steel’s Corus acquisition was the group’s purchase of the UK’s Tetley Tea for $435m in 2000. Indian firms’ stakes in the UK have grown bigger since then and dwarf the UK’s investments in India.