Can Viswesvaraya Iron & Steel be revived?

A recent news item on protests by locals against the impending privatisation of Viswesvaraya Iron & Steel Ltd (VISL) made me wistful. A wave of nostalgia swept in; in my younger days there were two quaint places in Karnataka that touched a chord — one, the fictional village of Malgudi made famous by RK Narayan in deference to whom the erstwhile Arasalu railway station has since been renamed as Malgudi, and the other, the steel town of Bhadravati that houses VISL.

I first learnt about VISL from my professor, who, after having risen through the ranks to the position of General Manager, chose to don the hat of a teacher at IIT-Madras. With his inimitable storytelling style, he ignited our interest in ferrous metallurgy. And thanks to his teaching ability, the entire process of iron/steel-making and rolling are etched in memory to this day.

Thereafter, as a young consultant in the 1970s and the 1980s, I recall making reference to VISL repeatedly in market surveys and feasibility studies on steel, in general, and alloy and special steels, in particular.

Hence, the realisation that Bhadravati now resembles a ghost town and that VISL has only 278 employees and 1,400 contract labour, down from a 13,000, makes one wonder what could have been done differently or can still be done to salvage the company bearing the name of an iconic son of India.

Product orientation

VISL was conceived, designed and run by engineers. Established in 1923, it grew over the first half a century of its existence in an era when the term marketing was not in vogue and the economy was sheltered from global competition.

Product orientation with an emphasis on product-mix, more the lingo of engineers, resulted in VISL producing an array of alloy and special steels like tool steel, die steel, ball-bearing steel, and free-cutting steel for which there was limited domestic competition.

The plant was a metallurgist’s delight, with facilities such as blast furnace, ladle refining, vacuum oxygen decarburisation, blooming mill, foundry, spun pipe and ferro-alloy plants sourced from leading suppliers like Voest Alpine, Bohler and Mannessman Demag.

In the pre-liberalisation era, the strong desire for quality and a wide value-added product-mix aided VISL.

However, in the globally competitive post-1991 period, the plant’s modest capacity of 77,000 tonnes per annum (TPA) and lack of focus on the marketing mix elements of price, place and promotion proved to be its undoing.

Consequently, VISL was merged with the behemoth Steel Authority of India (SAIL) in 1998 in the hope of giving it marketing muscle and improving its fortunes.

Critique of a merger strategy

In successful mergers, there is a ‘buy in’ from all stakeholders, including owners, shareholders, employees and customers. In a public sector environment, where the government owns 75 per cent of the equity, its diktat overrides views of other stakeholders and one does not know whether there was a ‘buy in’ from the SAIL management leave alone the employees and customers.

Research has also shown that when the acquiring company recognises and focusses on what value it can get from the company being acquired rather than what it can give, the chances of success are higher. SAIL’s annual capacity of 8 million TPA and sales of ₹30,000-plus crore were 100 times VISL’s, notwithstanding the higher price realisation of alloy and special steels. And, hence, the value-addition to SAIL was minimal.

Integrating organisational cultures is another vital determinant of a successful merger; although one cannot gauge much on this aspect. For a couple of years between 2003 and 2005, VISL did generate profits largely because of a favourable market situation before slipping into the red again. In any merger or takeover it is important that there is a strategic fit between the two companies that confers a competitive advantage to both.

For instance, in the acquisition of Arcelor by Mittal in 2006, which ran successfully for 10 years (before wilting under the onslaught of cheap steel dumped by China in the world markets), although Arcelor claimed that it did not need Mittal, and culturally the two groups were far apart, there was a strategic fit in terms of size which made the merged entity the largest steel producer, accounting for 10 per cent of global capacity.

Consequently, the merger brought in value of $1.6 billion through synergies in purchasing, marketing, sales and general administration.

Overall, because of the absence of a real value-adding motive for SAIL, and given the absence of a strategic fit, the merger was a non-starter.

According to a Harvard Business research report, 70-90 per cent of mergers and acquisitions are failures, particularly in the old economy sector; the SAIL-VISL merger has proved to be no exception to this norm.

The future of VISL?

Pursuant to the disinvestment proposal, expressions of interest (EOI) have been received from bidders, which is being opposed by workers, former employees and residents of the town. Obviously, this an emotional reaction against the privatisation move. The viable options are: (i) acquisition by a genuine buyer with experience in the steel industry, in particular alloy and special steels; (ii) acquisition by a company that supplies to the strategic defence, nuclear and railway sectors wherein alloy and special steels are used in large quantities; (iii) private-pubic partnership between the government/SAIL and the selected private party; or (iv) leasing out facilities to a private producer. In all these options, the interests of stakeholders including the mines are paramount.

The experience of the public sector running iron and steel, power generation and fertiliser plants in the pre-1980s in Russia, China as also in India, has shown that howsoever honourable the intentions of the government are, they do not translate into sustainable performance beneficial to society; the raw greed of free capitalism or the controlled capitalism now practised in China are the more viable options.

VISL as a unit has over a thousand man-years of accumulated knowhow and expertise in the manufacture of alloy and special steels. Therefore, it is imperative that the government quickly completes the disinvestment process and sets in motion the revival of VISL. By manufacturing alloy and special steels including stainless steel for defence, nuclear and railway sectors — over 700,000 TPA of which is imported — VISL will contribute to government’s Atmanirbhar initiative.

Those opposing disinvestment should realise that initially many jobs, if not all, will be saved. Thereafter, it is inevitable that the private producer will increase the capacity of the plant from viability considerations which will generate additional jobs. It should not be a question of private versus public but one based on enterprise, economics, strategic fit, sustainability and benefit to society.

The writer is Professor Emeritus, NMIMS, Bengaluru