After nearly a decade and a fairly ill-fated takeover, Mumbai-based Tata Steel has apparently decided that it can no longer survive in the UK. Seeking to sell the biggest steelmaking business in Britain, thousands of jobs in an industry that once dominated in the country are now at risk.
An oversupply of steel, falling prices and competition from China has all been blamed, and Tata’s group director Koushik Chatterjee has intimated that the company is now looking for a quick sale as it seeks to cut its losses.
European steel producers are now struggling to contend with the flood of cheap Chinese steel exports, which now accounts for around half of all global steel output, which boosts competition and erodes profits worldwide. Tata Steel already closed plants and cut jobs in the UK last year, and judging by the recent announcement things aren’t looking good for the foreseeable future.
In five years, Tata has lost £2 billion in Britain and its UK-based steelworks have now become a significant burden for the conglomerate. The company held a board meeting in Mumbai on Tuesday and finalised its decision to sell, which will now also affect workers at its other UK-based plants in Rotherham, Corby and Shotton, alongside the already-closed Scunthorpe and Lanarkshire facilities.
However, the Tata Steel crisis also has the potential to have knock-on effects for another business that’s key to Britain, namely the Tata-owned Jaguar Land Rover.
Jaguar Land Rover, like Tata Steel, is wholly owned by the Tata Group, a multinational conglomerate holding company which is responsible for other business including Tata Chemicals, Tetley Tea and luxury goods manufacturer Titan.
Tata purchased Jaguar Land Rover from Ford back in 2008 and has poured a significant amount of investment into the British manufacturer, which has seen it consistently break sales records throughout recent years.
After being bought for £1.3 billion, JLR has had more than £11 billion invested in it, boosting its range of cars and spurring the introduction of several new models. Annual revenues and profits have more than doubled to almost £22 billion and £2.6 billion respectively, while its success has seen staff numbers swell by around 20,000.
It’s just as well too, given that Jaguar Land Rover accounts for an estimated 90 per cent of parent company Tata Motors’ valuation according to estimates from financial organisation Trefis.
However, there’s now fear that Tata Steel’s commitment to making a swift exit from Britain could have a serious knock-on effect on the flourishing Jaguar Land Rover, especially as it reported a £157 million quarterly loss late last year after almost 6,000 of its cars were damaged in the Tianjin port explosion.
Knock-on effect
As early as last December, staff from Jaguar Land Rover also questioned the Indian company’s commitment to the UK after Tata made thousands of cuts to jobs at its British steel plants in an effort to cut the money it was losing.
Workers at JLR’s various plants wrote to Tata chairman Cyrus Mistry to negotiate an urgent meeting, in the hope of seeking assurances that Tata’s redundancies wouldn’t extend to Jaguar Land Rover’s production facilities.
The problem is complicated further by the fact that Jaguar Land Rover uses Tata-produced steel to manufacture its cars. If Tata Steel pulls out of the UK, steel prices could feasibly increase for the car manufacturer, causing all sorts of economic problems further down the line.
More expensive steel would increase the cost of production and therefore the list price of Jaguar Land Rover’s cars, potentially reducing the number of vehicles that it sells and thereby reducing its profitability and putting increased strain on the manufacturer.
A letter to Mr Mistry signed by Ken Smite, head of the Unite union for Jaguar Land Rover’s plant in Halewood, Merseyside, said: “We have watched with increasing concern as the news unfolds that Tata Steel UK intends to dispose of its Scunthorpe plant.
“As automotive workers we know that this industry still relies heavily on steel to manufacture components and vehicles in the UK. The world’s best steel is produced by UK plants, by our Tata colleagues, and we are proud to use it in a number of the vehicles we produce.”
At the time, a Jaguar Land Rover spokesman said that JLR’s use of Tata steel had not been affected by the recent events, while a spokesman for Tata Steel added: “We supply high performance automotive steels to Jaguar Land Rover which are manufactured at our UK plants. We value Jaguar Land Rover's efforts to develop local supply chains.”
However, a statement released by Tata Steel today noted that the past year has been particularly bad for its UK subsidiary as its financial situation has further spiralled downward.
The statement said: “While the global steel demand, especially in developed markets like Europe, has remained muted following the financial crisis of 2008, trading conditions in the UK and Europe have rapidly deteriorated more recently, due to structural factors, including global oversupply of steel, significant increase in third country exports into Europe, high manufacturing costs, continued weakness in domestic market demand in steel and a volatile currency.”
Tata acquired its steel business from Anglo-Dutch steelmaker Corus for $12 billion in 2007, a year before the global economic crash. In doing so, it became the world’s fifth largest steel company and the purchase was the largest-ever overseas buy for an Indian firm.
Corus’ acquisition also coincided with the upcoming 2012 London Olympic Games, which fuelled a huge demand for steel, swelling Tata Steel’s annual capacity to 25 million tonnes from just 8.7 million tonnes, and also giving it access to European markets.
However, given that half of the cost of the acquisition was funded through debt, the global financial crisis hit Tata hard and its UK-based business has proven to be particularly painful since, despite a string of job cuts, sales of assets and attempts at modernisation.
Despite the fact that Tata Steel’s UK division hasn’t done so well, this isn’t the case for Jaguar Land Rover, which is planning to continue its full-frontal assault of new models. Last year saw the introduction of one of the most important Jaguar cars of recent years, the XE, while 2016 will see the release of the new F-PACE crossover and the Range Rover Evoque convertible.
There’s also a replacement for the venerable Defender waiting somewhere in the wings, along with several high-cost projects from the company’s new Jaguar Classic and Special Vehicle Operations sub-brands.
However, it now seems as though the carmaker’s future could be seriously impacted by whatever decision is taken following Tata’s sale of its British steelworks. Two of Tata’s plants which it had previously put up for sale, those at Scunthorpe and Lanarkshire, are in the process of being sold to the Liberty Group and Greybull Capital, so it’s possible JLR could negotiate a deal. Still, it’s probably unlikely that it would enjoy any discount on steel that it may have gotten from Tata.
Government intervention
For the rest of the company’s plants, the future is more uncertain still. Tata has said that it wants to sell its plants “in a time-bounded way”, or in other words pretty quickly. Fairly understandable when your business is losing around a million pounds every single day.
However, it has insisted that it’s not leaving its business high and dry, pointing to the Liberty and Greybull buy-outs, but there’s still a question mark over the future of its other facilities, particularly large plants like Port Talbot.
The government has made assertions that it would be willing to step in and temporarily take over the Tata business until suitable buyers for the plants are found. Business minister Anna Soubry told Radio 4’s Today programme that the government would “look at all options” while Tata tries to find a buyer.
It’s understood that there are currently talks between the government and ministers, with the government considering offering loan guarantees to potential buyers, as well as tighter rules to ensure that major British projects are obliged to buy British steel.
Soubry also noted that the government may look into temporarily nationalising the steel industry in order to protect Tata Steel’s plants and the jobs of the workers employed there until it can ensure that a suitable buyer has been secured. However, many including Labour MP Stephen Kinnock, whose constituency includes Port Talbot, have accused the government of not doing enough to support the industry before Tata decided to pull out of the UK.
On the flip side, although Tata Steel’s efforts to withdraw from the UK potentially spells bad news for the country’s economy and the thousands of workers which depend on it, for Jaguar Land Rover the company may be insulated from the fallout thanks to Tata’s ownership.
The move to sell its British steel plants has been necessitated by the need to recoup the money Tata has haemorrhaged in the recent past, meaning that plugging any potential leaks could leave more capital for investment back into Jaguar Land Rover’s future.
Nevertheless, the question of how the reshuffle will affect the steel used by the carmaker remains. According to data from Trefis, although JLR’s sales are expected to continue to rise until 2020, the unpredictability of overseas economies, particularly the Chinese economy, could cause trouble.
Trefis estimates that if Jaguar Land Rover’s unit sales dip by even two per cent across the board, JLR’s parent company Tata Motors could experience a decline in equity valuation of up to 15 per cent by 2020.
Of course, this could still potentially happen even without the economic landmine that the Tata Steel crisis has become. With the issue still developing it’s hard to predict what the future will hold for either the British steel industry, Jaguar Land Rover or Tata itself. The only thing that can be said for sure is that the next few years won’t be easy.
