The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Monica Patra, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur
Tata Steel is set to pull out of all its UK operations, including Port Talbot, in a move that could put thousands of jobs at risk.The company announced late on Tuesday night that its board had rejected an “unaffordable” turnaround plan for Port Talbot and instead given the green light to a sale of its UK business.
The move will affect about 15,000 workers and comprises the sites that used to make up British Steel and then Corus, which was bought by Tata Steel in 2007.
Port Talbot is Britain’s biggest steelworks and employs 4,000 people. However, it is losing £1m a day, making the prospect of finding a buyer difficult.
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 rationale 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. Last year, the company had written off 2 billion pounds in impairment costs and that was almost the entire impairment cost. Tata blames cheap imports of Chinese steel, high energy costs and weak demand for threatening the future of its UK steelmaking.