Empire with No Clothes: Lessons for India from America

If you are thinking the United States and George W. Bush you are right too, but I am thinking of something closer to my home in India, which may not be that dissimilar. The felling of Saddam Hussein’s statue in central Baghdad and the proclamation of victory in the war against Iraq seems a distant memory. What Bush and his advisers forgot was to be ready to manage the empire after the conquest. Sadly they forgot to take their clothes, and were completely exposed, caught rather embarassingly with their pants down. Three years on George Bush stands as the emperor with no clothes as anarchy reigns in Iraq and the costs of war to his own people rise, be it the loss of life or the drain on resources. The superpower humbled by its own incompetence.

What, you might ask, does this have to do with happenings in India? Well, something unusual happened last week: an ageing Indian company, no less than a hundred years old took over a much younger and bigger company in Europe. The Tata Steel takeoever  of the Anglo-Dutch behemoth Corus Steel was greeted with a chorus of euphoria in India, not dissimilar to the euphoria in America after the fall of Baghdad in 2003. India, some claim, is now a superpower spreading its economic might and empire, while the Tata’s are the army, leading the triumphant charge. A scratch below the surface of triumph conceals a reality check which all in the euphoric chorus would be well advised to take heed of.

Can India possibly claim to be superpower, the new emperor, just because some of it’s corporates are taking over firms abroad. Corporate might hasn’t turned into well-being for the majority of the people who still languish in poverty, illiteracy, hunger: basically dismal human conditions. Even possessing a few nuclear weapons doesn’t change this fact. And if half a country’s population cannot read, feed or cloth itself, what does that say about the empire? Even the American empire seems hollow when it is estimated that one in six people in the US is functionally illiterate, a large number of them live in poverty, where poverty is often a function of race, and where hurricanes like Katrina leave the mighty government fumbling for solutions.

But let’s return again to to the Indian empire. What of the valiant army, the foot soldiers, the Tata Group in this case. Are they creatings trong empires or merely those in name but no substance? A closer examination of some of the facts about this takeoever and takeovers in general may shed some light.

To begin, creating an empire, whether corporate or political costs money. And someone has to pay. The Tata’s have paid $12.1 billion for Corus. Money that is borrowed and has to be paid back, with interest. Will the new conglomorate be profitable enough to make their investment worthwhile?

One may argue that Tata Steel is now a giant, the fifth largest steel company in the world. But giants aren’t always profitable or successful. Look what happened to Corus. Look elsewhere at what is happening to other gigantic firms: General Motors is struggling, so is Ford. And these are legendary firms, which we were told, have sales in excess of the GDP of many developing countries.

But Tata Corus may be different. Possibly. Note, however, the fact that Tata Steel has acquired a firm which is much less efficient than itself, both in terms of profit margins which are about half of Tata’s and in terms of costs, which are much higher especially the costs of labour. Thus, the immediate outcome for the combined entity is a fall in profitability and efficieny from the level of Tata Steel. Think the outcome for Germany after the more prosperous West united with the less prosperous East, and you’ll get the picture. Thus, a lot of hard work is needed to pull Tata Corus up. Is Ratan Tata’s homework ebtter than George W. Bush’s, or is it an act of bravado based more on hope than on hard economic calculus? Have the Tata’s over-stretched themselves in order to ‘ win their battle’ (prompted by a jingoistic nation and it’s over enthusiastic media) for Corus, against CSN from Brazil? Groege Bush and his army are certainly over-stretched in Iraq, and feeling the heat. Even the highest quality steel can melt under extreme temperatures.

What makes things even more complicated for the Tata’s with Corus is that steel is a sunset industry in the West. The demand for steel and the production of steel in the UK, which is the home of Corus, has fallen steadily over the last thirty years. Steel in a sunrise industry in emerging markets. So it makes sense acquiring firms in say China and Brazil but does it make the same sense acquiring an Anglo-Dutch firm which basically services small and shrinking markets. Again, time will tell, but the outcome is far from certain.

An investigation into the technical side reveals evidence from economic literature on the subject suggesting that mergers and acquisitions do not always lead to higher profits for the new company, or indeed higher share prices. In fact, a lot of evidence from the industrialized countries, where a majority of mergers and acquisitions have hitherto occurred, shows the opposite. What does happen for certain is a downsizing of jobs.

Acquiring a firm in a different country brings its own adjustment problems. A probable clash of managerial and worker cultures. A resistance to control by a firm seen to be from the developing world. Again the analogy with what the Americans are facing in Iraq is obvious.

If this is sounding very pessimistic, let it not. It is not meant to be. The Tata’s have achieved a lot, both in India and abroad, especially under the able stewardship of Ratan Tata. In fact, some of their earlier acquisitions of steel firms in Thailand and Singapiore  made good sense. As did their takeoever of the bankrupt Daewoo Commercial Vehicles at a very reasonable price. India as a country, too, has made great strides over the last sixty years. But proclamations of conquest, and of empire, or of superpower status seem premature. Almost like hubris before a fall. Just like Iraq 2003. Caution is the better part of valor, and the enthusiasts would do well to temper their emotions, and let those in charge do their homework dilligently, without the pressure of jingoism and nationalism. The outcomes, in that case, are likely to be way superior.

It would seem wiser to be in a situation where one is all dressed up with nowhere to go, than to rush towards an empire with no clothes.