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.

Comments

[bahaar]

A nation can be a 'superpower' or an 'empire' even while many of its citizens suffer.

logically, there is no connection between military/economic might and social development.
Is there?

[Dhiraj Nayyar]

Hi bahaar, thanks for your observation. My point is precisely that there should be a logical connect between economic/military might and social development before one can claim superpower status. Or else that status is hollow, undeserving and misleading. Unfortunately, in the current scenario, most nations want to illogically claim superpower status well before time, hence 'empires without clothes.'

[confused]

Dhiraj,

Er... Tata has acquired Corus with their own money, it is hardly material if that money comes from banks. If they don't make money, they suffer, why should we worry?

[Dhiraj Nayyar]

Dear confused,

Two reasons why we should be concerned.

1. If the Tata's ever go under because of their huge debts, the government will probably have to bail them out with taxpayers money. This is common pratice the world over, to save employment, shareholder interest, and most of all to save face by cushioning the fall of a national icon, which the Tata's are.

2. There is the small matter of public opinion, and whether it should tend towards jingosim and nationalism, rather than towards solid economic facts and sound reasoning. I would be concerned if it veered towards the former, which it is doing in India at the moment, particularly on this issue and on the issue of India's status as an economic and political superpower.

[UR_Dad]

I think you should limit yourself to writing stories and novels for under 12 year olds. Since, you clearly lack understanding of the global market economies of scale and the implications of globalisation.

This article is clear manifestation of the indgiestion in the West caused by the take over by an Indian coporate.

Good Luck with ur wishfull thinking.

PS: U should consider a change in career for ur own good

[Dhiraj Nayyar]

UR_Dad,

its strange that you accuse me of not understanding global economies of scale and globalisation, when I research professionally precisely in these areas. you clearly haven't understood the nuances in my piece. note that I said not all takeovers are bad. but size (at any cost) isn't always a virtue. and I pointed out the struggling General Motors and Ford as examples. Sound economics warrants a nuanced approach to issues.

And I am clearly not indigested by the takeover of a western firm by an Indian firm. I am Indian and spend much of my time living in India! But nationalism never made for sound economics, whether in the west, or in India.

Overall, I think I know my economics, so I'll stick to a career thereabouts!

and perhaps you can write for the dramatic jingoists, or is it the 12 year olds you prefer?!

[BBB]

The real downfall of India started when the Khajuraho temples were built. The public display of eroticism is against Hinduism. The Khajuraho temples were built from 950 AD - 1150 AD. And shortly after that, Shahabuddin Ghori invaded India in 1175. The erotic sculptures in the Khajuraho temples need to be "broken" out and replaced with beautiful "paintings" of Hindu Gods. There is an argument that these foreign rulers saved India from Mongol invasion, but if Khajuraho temples were never built, even Mongols would have been defeated. Even Alexander the Great attacked India but failed, although western historians made another story out of it but Alexander was defeated. No one who won India ever returned back. Only those who were defeated returned back. For India to regain its old glory, Khajuraho temples and other temples where erotic sculptures/paintings are displayed, they need to go. Pornography is against Hinduism. One can have as much sex as one wants but adultery and pornography is against Hinduism. The erotic sculptures in the Khajuraho temples and other temples need to be "broken" out and replaced with beautiful "paintings" of Hindu Gods. And then India will rise and will remain at the top.