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Indian Steel Industry at the Crossroads

Volume 14, Number 2 Article by Gautam Sinha , Satyajit Jena September, 2002

Indian Steel Industry at the Crossroads: A Strategic Perspective :

In the post liberalisation era, the Indian steel industry is passing through an intensely turbulent transformation, belying the rosy forecasts of the early 90s. The international recession in steel is expected to persist for at least two more years, along with competition of a high order, posing a serious threat to the Indian steel industry.

Gautam Sinha and Satyajit Jena attempt to link the intrinsic and extrinsic forces operating on the Indian steel industry in order to gain a holistic understanding of it. Using performance indices such as Debt-Equity Ratio, Return on Networth, Net Sales/ Total Assets and Net Profit/ Net Sales, they find that the industry is passing through a difficult phase characterised by increasing debt, low asset utilisation, industry wide losses (except in the case of Tata Steel) and intense competition. The declining performance of the industry is reflected in the falling share prices of steel companies. This dismal financial performance, argue the authors, is not adequately explained by the liberalisation and globalisation of the Indian economy. Using the Industry Analysis Model developed by George Day, an extension of Porter’s Five Forces model, the authors analyse the industry. The parameters for analysis include Industry Competitors, Potential Entrants, Threat of Substitutes, Power of Buyers, Power of Suppliers, Government and Regulatory Intervention, Technological Changes, and Growth and Volatility of Market Demand. Each force is a summation of many sub-forces and elements. The elements of each of the forces have been analysed, and the extent of their effect on the industry estimated.

Based on this analysis, the authors suggest some strategies by which the industry can win through the difficult phase. Some of these are: promoting steel consumption in newer applications and markets including steel-intensive construction, and agricultural and rural sectors; enhancing product differentiation and brand building; increasing the switching cost of the customers through downstream integration; and participating as equity-partners in steel-intensive projects such as highways, gas and oil pipelines and urban development projects.

Reprint No 02305