(KFC's African Expansion and Zhejiang Geely Automotive's Purchase of Volvo)

_________ ---------------------------~Z~h~ej~ia~n~~Ge~e~I~~~~~·~ y utomotlve's Purchaseorvofvc Xinjiang Exhibit 1 Geely's Manufacturing Locations summer of2009, thegovernment's "CashforClunkers" program helpedsomewhat withUS$2.85 billionin government-backed rebates.Americans responded,bUY- ing nearly 700,000 vehicles. Butforthe most part,2009 was adismal yearfornew vehicles. Foreignautomak- ers Honda, Nissan,andToyota alsosawsharp declines for 2009.

Honda's saleswereoff22percent, whileNis- san was down 19percent. Nissan'sincreaseinDecember came fromhigher salesofitsVersa compact car.Toyota sales weredown justover 20percent forthe year. Sales of smaller, cheapervehicles, however,helpeddrivegains for some manufacturers. Hyundaicontinued itssurge, with an8percent yearlygain,while itslow-cost Kiabrand reported 2009salesgains ofnearly 10percent. Japanese automaker Subaru,famousforsmall all·wheel-drive cars and sport utility vehicles, said2009 wasitsbest year ever for sales andmarket share.Theyreported a15 percent sales gainforthe year andcalled 2009anunqualified success. But by 20I0, U.S. autosales were sputtering back to life, andanalysts wereprojecting salestocon.ti~ue increasing into2011. Withsalesofaround 11.5mIllIon new carsandtrucks, 20I0 was stillthesecond-worst HainanO year inalmost threedecades, after2009. Thiswasquite a drop from theheights ofthe early 2000s, whencredit was cheap, incentives wererampant, andsales topped 17mil- lion. In2010 Fordsold 1.9million carsandtrucks, an increase of15percent over2009.

II was able tocapture market sharefromrivals GMandToyota. Ford'ssales rose thanks tostrong demand foritspickups, asconstruc- tion companies andother small businesses beganbuy- ing trucks again.TheF-150 pickup wasthebest-selling vehicle inthe United Statesin20IO.

OM sold 2.2mil- lion vehicles in2010, foranincrease of6.3percent over 2009, Chrysler sold1.1million vehicles in2010-8 year- on-year increase of17percent. Thiswasanimpressive rebound, considering thecompany hademerged froma bankruptcy restructuring in2009.

For foreign automakers, winnersincluded South Korea's Hyundai, whichsaiditssales rose24percent for the year to538,000 vehicles, arecord forthe company.

Nissan reported an18percent salesincrease for20I0 to nearly 909,000 vehicles. Hondasoldover 1.2mil- lion vehicles in20I0, a7.6 percent increase. However, Toyota continued tostruggle. Itssales were nat in2010, a casualty ofthe company's tarnishedsafetyrecord.

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In early 2011, it was tooearly totell whether theJapa- nese manufacturers wouldbesignificantly affected by the March 12earthquake andtsunami thatstruck north- eastern Japan.

Car companies haddownsized andthey were produc- ing fewer vehicles, sothey didn't havetoresort tocostly incentives inorder toclear outinventory. Bigincen- tives-like the employee-pricing-for-everyone program in the summer of2005-were onereason buyersflocked to dealerships, Also,buyers hadbeen spooked byfalling home prices andstubbornly highunemployment. Butthe economy wasimproving, andcarcompanies weremore confident about2011.Therecovery inglobal carsales also remained ontrack, withvolumes advancing 6percent above ayear earlier inJanuary 2011.

The Rise ofChina's AutoMarket Although theglobal automarket wassputtering, thiswas not thecase inChina, whereautomobile salesincreased by an explosive 32.4percent in2010. China hadalready over- taken theUnited Statesasthe largest carmarket in2009, and itwas also thelargest market forGeneral Motors vehicles''. Thiswasindicative ofChina's epictransforma- tion toamarket economy andmeteoric economic risethat had seen double digitgrowth ratesformost ofthe past 20 years. China's middleclasswasexpanding rapidly,andits large landmass andinfrastructure couldsupport ahuge car fleet. Moreover, asChina emerged asan economic power, theChinese authorities werehoping toreduce reli- ance onexports andencourage moregrowth fromdomes- tic consumer spending.

China's autoindustry produced 18.06million unitsin 2010. Thiswasupfrom 13.79 million unitsin2009, of which 8million werepassenger cars(sedans, sportutility vehicles, multipurpose vehicles,andcrossovers) and3.41 million unitswerecommercial vehicles(buses,trucks,and tractors). In2009, 13,644,800 carswere soldinChina, The total revenue wasRMB512,81 billion(US$76.67 billion) and profit rosetoRMB 117,28 billion(US$17,53 billion), The growth inthe auto industry wasdriven byincreases in demand forcars inboth thedomestic andoverseas markets.

The growth ofChina's autoindustry wasnothing short ofastounding. Chinaproduced onemillion carsin 1992 andtwomillion carsperyear by2000. AfterChina's entry intotheWorld TradeOrganization (WTO)in200 I, the development ofthe automobile marketaccelerated.

Between 2002and2007, China's national automobile market grewbyanaverage of21 percent, orone million vehicles, year-on-year. In2006 China's vehicleproduction capacity successively exceededsix,then seven million, and in 2007 China produced overeight million automobiles. In 2009,13.759 millionmotorvehicles weremanufactured inChina, surpassing Japanasthe largest automobile maker in the world, In20I0 both sales andproduction topped 18 million units,with13.76 million passenger carsdeliv- ered. Likewise, thenumber ofregistered cars,buses, vans, and trucks onthe road inChina isprojected toexceed 200 million unitsby2020. Forthis reason, Geely,alongwith other carmakers, hadbegun paying increasing attentionto the China market.

China's automobile manufacturers couldbeclassi- fied intotwotypes: jointventures anddomestic indepen- dent manufacturers. Ofthe automobiles produced,44.3 percent werelocalbrands (BYD, Lifan,Chang' an,O y, Chery, Hafei,Jianghuai [JAC],GrearWall,Roewe, etc.).

The restwere produced byjoint ventures withforeign car makers suchasVolkswagen, Mitsubishi,GeneralMotors, Hyundai, Nissan,Honda,Toyota, andsoon. Most ofthe cars manufactured inChina weresoldwithin China, with only 369,600 carsbeing exported in2009. These joint ventures weresoprevalent thatthey hardly leftany mar- ket share forother independent manufacturers. Evenso, Geely wasdetermined inits resolve tobecome amajor player, One reason thatindependent carcompanies haddif- ficulty competing wastheperception thatthey lacked innovative designs.Marketobservers atthe Detroit Auto Show in2006 wereunimpressed bythe simple curvesof mainland cars,They alsocommented onthe shoddy fin- ish and thetinny sounds ofthe doors".

Although Geely engineers weretrying tomodify cardesigns andengi- neering, Mr.

Li knew thatChinese engineers stillhada long waytogo before theycould satisfy thesophisticated tastes ofWestern buyers.Furthermore, Chineseproducts had areputation forinfringing uponothers' intellectual property rights.Forinstance, CheryandGeely were accused ofcopying technology fromGMandToyota, respectively. OMsaidthatChery's popularsmallQQ model wasarip-off ofits Chevrolet Spark.Although neither OMnorToyota prevailed incourt thelawsuits inevitably tarnishedtheimage ofChinese carmakers.

In 2011 Geely wassued bythe British carmaker Land Rover overatrademark dispute.LandRover saidithad been using twoChinese characters 'ILuHu"inChina for its "Land Rover" brandsincetheearly 1990s, butthat in 1999 O y registered the"Lu Hu"trademark knowing that Land Rover wasusing it,s Exhibit 2shows totalauto- mobile salesbyregion.

Geely's Operations :With t~emotto of"passion inprofessional dedication, mnovanon, communication andhard work," Geelyhad created acorporate culturethatcncouraeed innovation and growth. Geelywasfounded ona culture ofentrepre- neurship, research,andinnovation andthis continued into 2011 withongoing investments in'education, training,and R&D. Geely. hadgrown itsworkforce withacommitment ______ --------------------------Z~h~e~jia:l1n~g~G~ee~IY~A~U~to~m~o~tive'spurchaseofVol\lO 1990-1999*2000-2007* 2008# Exhibit 2 International AutomobileSales by Region Total Sales (millions ofunits) North America Canada United States Mexico Western Europe Germany Eastern Europe Russia Asia China India South America Brazil 325 39.20 49.1962.3351.03 16.36 19.4115.8512.68 1.27 1.601.64 1.46 14.55 16.7913.1910.40 0.54 1.021.020.82 13.11 14.5913.5413.62 3.57 3.303.093.81 118 2.554.173.12 0.78 1.372.901.47 6.91 10.45 15.0717.68 0.43 2.914.987.32 0.31 0.781.201.43 1.64 2.193.70 3.93 0.94 1.372.23 2.53 Source: GlobalAutoReport, GlobalEconomic Research.

Note: •average annualsales # annual sales to hard work andquality. Stakeholders hadcome fromall across Chinawithdiverse nationalities oroverseas experi- ences. Inshort, Geely haddeveloped astrong trackrecord amid changing circwnstances.

Research andDevelopment Geelywaswen aware of the importance ofR&D tocorporate sustainability in automotive manufacturing. Therefore,Geelyhadbeen put- ting more than10percent ofits annual salesrevenue into R&D. Forexample, In 2009 Geely invested overRMB 1.2 billion (US$179.4 million)in R&D toback lipitsinde- pendent development path.Geely's R&Dcapabilities were shaped byitsteam ofengineers. TIlecompany hadmore than 1,600 engineers whocame fromallover China, aswen as anumber offoreign engineering expertsandChinese who hadexperience overseas.Theresearch teamexpanded by more than200people duringthefirst three quarters of 2009 andrepresented morethan13percent ofthe firm's overall workforce. Geelyhadestablished theGeely Auto- mobile Research SchoolandtheGeely Engine Research School. Anew R&D center wasplanned tobe built in Hangzhou, withaPhase Iinvestment ofRMB350 million (US$52.3 million).

Geely hadmastered mostofthe key technologies that were crucial toan autornaker, includingknowledge about engines, drivetrains, ancillary powersystems, andinterior and exterior equipment. Thecompany claimedtobe the first Chinese automaker thatindependently researched automobile transmissions. AsofSeptember 2009Geely had achieved morethan1,200 patents, 30ofwhich were granted internationally. Onetechnological advancement was thecreation ofthe world's firstBlow-Our Monitoring and Braking System("BMBS"), aunique technology that helped tocontrol acar when atire blows out.Inaddition, Geely hadinvested inthe research ofnew environmentally sound technologies andoperated aself-developed Energy Effieient BuildingSystem("EEBS") thatreduced noise during theproduction processandcutgas emissions by up to35 percent. Mr.Libelieved thatbymastering tech- nology Geelywould beable tomaintain itscompetitive advantage whenfacing foreign rivals.

Geely placed significant emphasisontraining.

Geely's training program involved allemployees and included regularlectures andeducational sessions.To improve productdesignandquality, Geelybegan cooper- ating withmany foreign automakers. fromsuchcountries r' C~~2B:~i\1.jiang G~iA~~';llve'.

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. 326 International BusinessStrategy (US$10,465).Thetarget market ofthe models manufac- tured atTaizhou ofZhejiang Provincewaseven lower, with prices around RMB30,000 (US$4,485). Inaddition, cost-saving wasachieved throughverticalintegration; by producing manycomponents in-house,Geelywasable to further reducecostsandkeep information regardingits manufacturing processesproprietary.

Although Geelyprimarily beganasaprice leader, it slowly begantoproduce higherquality cars.Management realized that it was difficult tocompete onprice inthe long-term, becausetheprofit margins forlow-end prod- ucts were razor thin.Thus, in2004, having cemented its leading position inthe low-end segment, Geelyventured into themiddle- tohigh-end market.Priortothis, allof Geely's modelsinChina targeted thelow-end ofthe mar- ket, priced fromRMB30,OOO (US$4,485)toRMB80,000 (US$II,960). Bythe end of2004, Geely introduced its first middle-level model,Beauty Leopard, which ranged from RMB80,000 (US$11,960)toRMB 120,000 (US$17,940). Thentheytargeted thesports segment and mid-level portionsofthe market. Forinstance, 23new models wereintroduced atChina's automotive exposi- tion inApril 2008.

Geely introduced theE and EC8, a limousine modelwithdistinct Chinese elements atthe Auto China Show2010(seeExhibit 3).The presence of the E and EC8atthe auto show, which wasasign of the booming Chineseautomobile industry,indicated that the independent Chinesenational automakers hadbegun to manufacture luxurycars.Moreover, inorder torepre- sent anew image, GeelypaidRMB3.6 million(US$0.54 mil1ion) foradesign contest foritsnew logo, including RMB2 million (US$0.30 million)forthe designer. The new logo (seeExhibit 4)was putinto useatthe end of 2007.

Thecompany reiterated in2011 thatitsobjective was to move tothe upper endofthe market andbreak froma traditional relianceonlower-cost modelstoboost average BiU)~$ GEELY AUTOMOBILE Exhibit 4 Geely Logo as South Korea, Germany, andJtaly. Experts fromforeign companies andinstitutes wereinvited toGeely toshare their experience andprovide training. Meanwhile, Geely's employees weresentabroad toreceive professional train- ing. Such opportunities forknowledge exchangegave Geely's employees opportunities tofulfill individual growth, TheR&D initiatives enabledGeelytogain a more advantageous positioninthe local market, andit lifted itsinternational profile,Thesefactors increased Geely's confidence inits ability tocompete inChina as well asoverseas.

Product Positioning intheChina Market Chinese carmakers havenotprovided dataonoverseas salesby country. Butingeneral, exportspaledincomparison to production forthe domestic Chinesemarket.Besides Geely, afew other Chinese automakers alsoconsidered tackling overseas markets, including Chang'an Automo- bile Group, BeijingAutomotive HoldingCo.,andChery Automotive'. In2008 themainland exported644,000 vehicles (worthUS$8.88 billion)according tothe China Association ofAutomobile Manufacturers, whichwasan increase ofapproximately 9.4percent and32.5 percent respectively over2007. However, becauseofthe financial crisis andresulting decreaseinautomobile demandinter- nationally, only370,700 vehicles(worthUS$5.19 billion) were exported in2009.

Initially, Geelycompeted onprice inChina, provid- ing aseries ofmodels ranging inprice fromRMB30,OOO (US$4,485) toRMB80,000 (US$II,960). Theseprices put thedream ofowning anautomobile withinreachof consumers inChina's ruralareas, where incomes were lower, Geely haddeveloped aneffective cost-control sys- tern. First, eachproduct haditsown specialized manufac- turing basetoenhance efficiency. Forinstance, theplant in Shanghai focusedprimarily onmid-level automobiles, whereas theoperations atNingbo ofZhejiang Province manufactured thelower-end models,withprice rang- ing between RMB50,000 (US$7,475)toRMB70,000 Exhibit 3 E and EC8Display atAuto China 2010 Show _____________________ .!'Zh~e~jl~angGeelyAutomotive's PurchaseofVolvo revenue andprofit percarsold. "Wearenot theGee!

f f "" yo lye 0:SIX years ago, chief executive Gui Shengyue said.

The firm would startproduction onthe Emgrand EX?

SUV byJune atanewly builtfactory inChengdu with an initial a,ooual capacity of50,000 units,Guisaid. They were also In the process ofdeveloping eightnewupper- end models." By 2010 thereweremore than 8 mi1lion Geelycars on the road. andthecompany's trademarkwaswell rec- ognized throughout China.Tofurther increase salesand provide after-sale service.Geelyhadbuilt adealership and service network acrossChinaandineach ofits new mar- kets. Ascustomer satisfaction wascritical, Geelybecame the first Chinese automanufacturer toestablish acall center providing around-the-clock service.InDecember 20 I0, Geely became thefirst domestic automaker tosell cars on Taobao Mall(see wWI\I.IQobao.com.cn) China's largest onlineshops.

Geely facedtough competition fromstrong joint venture competitors andonseveral occasions wasnearly driven outofbusiness, butMr. LiShufu remained resil- ient and optimistic. Hedid notattempt to obtain afor- eign partner likemany ofhis competitors. Hebelieved that partnering withaforeign firmwasalosing proposi- lion inthe long run.The Chinese partnershadlittle bar- gaining powerovertheir larger, moreestablished foreign partners. andthey participated verylittleinthe decision making. Furthermore, thealliances oftendidnotbring about theadvanced technology thatwaspromised bythe foreign partner. Instead,foreignpartners oftenmain- tained tightcontrol, withthegoal ofmaximizing their return. Mr.

Li liked theindependence offinancial and operational decisionsthatcame fromremaining freeof a foreign partner.

Overseas MarketDevelopment Historically, Chinese vehicleexportshadprimarily beenlimited to buses andtrucks andother heavy equipment. ButChi- nese manufacturers hadsteadily beenupgrading their Exhi bit5 An Iconic London BlackCabBeing Assembled atthe Coventry Plant technology andproduction efficiencyinan attempt to ~ompete overseas inprivate passenger vehicles.The Im.port andexport. unitofGeely Holding Group,Shang- hai Geely lnternational Corporation, wasfounded inJuly 2002, Offices wereestablished infive strategic markets:

the Middle East,Africa, Southeast Asia.Central America, and South America. Geelyexported about19,000 vehicles in 2009, making itthe second largestautomobile exporter from China.

After itsparticipation inthe 2005 lnternarionale Automobil-Ausstellung (IAA)inFrankfurt, Germany, Geely begantodesign andbuild acar model justfor export toWestern countries. Geelyhadestablished strong international partnershipsandalso made avariety of international investments. Ithad begun working with Magna SteyrofAustria, butthestart dateforexporting vehicles toEurope wasnotconftrmed.? Thecompany had setupproduction plantsinIndonesia andRussia, each withthecapacity toproduce 50,000cars.IIwas reported thatGeely wasintalks withfourtofive coun- tries forfuture cooperation, citingdiscussions to set up assembly plantsinAfrica, Europe, andtheUnited States.

In addition, Geelysigned anagreement withManganese Bronze Holdings inOctober 2006.Manganese manufac- tured thedistinctive Londonblacktaxi(see Exhibit 5), Under theagreement, Geclybecame thelargest share- holder ofthe British autornaker, Atthe same time, the Shanghai LTIAutomobile Components Co.Ltd., ajoint venture withManganese, wasestablished in2007. This venture cameintoproduction inmid-2008. By2011 executives wereconfident thattheLondon blackcab manufacturing venturecouldturnprofitable thatyear.

The Shanghai plantstarted shipping knocked-down car kits tothe Coventry plantforassembly insteadofmak- ing them onsite, amove thatcould savenearly US$5000 per carincosts.

In 2009 Geely acq ed DriveTrain Systems lnter- national PtyLtd., aleading globaltransmission developer headquartered inAustralia. InMarch 2011theGeely MK became thefirst Chinese passenger cartoenter the Australian market,withretail prices beginning at$11.990 Australian dollars(seeExhibit 6).Geely sawAustralia as an ideal testmarket forthe car-savvy Westernconsum- ers before launching inthe United StatesandEurope.

The MKappeared tobe agood value, butitwas only the beginning forGeely's ambitious plansforthe Western markets. Geely haddeveloped anetwork ofmore than500 retail distributors in45 countries acrossfivecontinents and nearly 600service stations. Inaddition, Geelysourced components bothdomestically andinternationally, with many ofits 650 suppliers supplying thefirm from their operations elsewhereinthe world. Geely's Enterp~isc Resource Planning(ERP)after-sale serviceInformation system ensured thatGeely wasintimately involvedwith 327 a 328 Exhibit6The Geely MK,Which WentonSale in Australia inMarch 2011 its network andable torespond quicklytomarket demand as well asanalyze customer patterns.Geelyplanned to expand thisglobal footprint withadditional manufac- turing facilities, dealernetworks, andcustomer support systems.

Questions aboutQuality andSafety Chinawas world-renowned asthe world's workshop-dominating industries fromshoes andtoys totools andbasic elec- tronics. However, when it comes tocars, China isa relatively lateentrant. Although Geelyreceived encour- agement fromtheChinese government, therewere numerous challenges thathadtobe overcome inorder for the company tosucceed. Otherthings equal, low price isassociated withlowquality, andproducts from China hadareputation forshoddy workmanship. For example, the Landwind SUVmade byChinese auto- maker JianglingMotors hadgained areputation forbeing of extremely poorquality,IO andthishadtarnished the image ofChinese automobiles. Theresult ofthe German Allgemeiner DeutscherAutomobil-C1ub (ADAC)test, which wascomparable toEuropean NewCarAssess- ment Programme (NCAP) safetystandards inpassenger cabin protection, was zero outof 5.

The passenger cabin completely collapseduponcollision. Sincesafety wasan important factorinconsumers' decisiontobuy, thetest result seriously erodedWestern consumers' confidence in the safety ofChinese cars.

Oeely stillhadalong waytogo onthe safety and quality fronts!'.

OnDecember 12,2006, atthe Chinese Car andTechnology Researchcentrescrashtestlabora- lory, CNAp, thebody responsible forChinese carsafety, carried outacrash teston Zi YOll Jlan (also translated as Freedom Vessel),asmall sedan fromGeely. Thecrash test was conducted onallaspects ofthe car's outer shell.

Results showed thatthepillar between thedriver doorand rear left-hand sidedoor wasextremely weak 12.

Zi You Jian also took partinaRussian crashtestin 2008.

Thecrash test was conducted bythe Russian magazine AU/amative C232· C~ 28:~ Zfiejhing Gcely Automotive's PurchaseofVolvo- Review:

whichbought thecar forjust under US$12,OOO.

Although thistestwas conducted twoyears afterthefirst test, thecar scored zerostars. Theeditors ofthe magazine began calling thecarthe "Death Vessel.,,13 (SeeYouTube videos' search"Geely CrashTest.") Fer this reason, Geelywasdetermined tomake tech- nological breakthroughs inthe areas ofsafety andquality control, aswell asenergy efficiency andenvironmen- tal protection, anditwas believed theVolvo acquisition could helpinthese areas.

All new Geely carsneeded to pass tests from independent testingcenters withstan- dards specified bythe New CarAssessment Programme (NCAP) inChina. Oeelyalsotook quality control seri- ously. AllGeely facilities wereIS09000 compliant, and theNingbo plantwascertified lSOITSI6949:2002.

Moreover, theGeely teamlaunched afive-year energy efficiency andenvironmentally friendlyautodevelop- ment program todevelop carsnotpowered bystandard gasoline engines.Furthermore, thecompany intendedto develop fivehybrid models inthe near future thatwould incorporate plug-in, stop-run, hybrid,and electric-only systems.

The Volvo Acquisition Details ofthe Merger In2009 Oeely's parentcom- pany, Zhejiang GeelyHoldings, madeabig step toward international expansionbyannouncing itwould acquire Volvo CarCorporation fromFordMotor Company. This US$1.8 billionacquisition was,atthat time, thelargest cross- border acquisition byaChinese privately owned enterprise. Thetransaction agreements included,inaddi- tion tothe stock purchase agreement, furtheragreements on intellectual propertyrights,supply, and R&D arrange- ments between VolvoCars,Geely Group, andFord.

Although initiallythetwo companies wouldoperate independently, futurepotential synergies couldbeenvi- sioned. Forexample, itwas hoped thatGeely couldbenefit from Volvo's advanced safety,quality, andenvironmental technologies. Inparticular, Volvowasknown asaleader in automobile safety.Thisappealed toGeely, whichwaspar- ticularly stungbyhaving theircarlabeled a"death vessel" by overseas crashtesters. Itwas thought thatVolvo could benefit bythe infusion ofnew resources andgreater access to the burgeoning Chinamarket. Geelyhoped topreserve Volvo's existing manufacturing facilitiesinSweden and Belgium. Thecollaborative relationships thatVolvo had built withemployees, unions,suppliers, dealers,and customers werealsovaluable forGeely. Oncompletion of the merger, Volvowould beaseparate company with its own management teamandanew board ofdirectors based inGothenburg, Sweden.Theboard andthemanage- ment would haveamandate todevelop Volvo'sleadership in safety andenvironmental technologies,expandingthe company asaworld-leading premiumbrandwith a pres- ence inmore than 100 markets withambitious plansfor the fast-growing Chinesemarket. _________ ---------------------------.:z~h~e~jia~n~g~Gee~I~Y~A~ut,amotlve's Purchase or Volvo Li Shufu woul~become chairman ofthe board at Volvo CarCorporation andHans-Olov Olssonar id dhi f ' rormer presi entan C ie executive ofVolvo wouldb , h. • ecome V1C~ cairman. InF~bruary 2011,Volvo established its China he~dq~art~r5 In Shanghai andannounced thatIt would build Its first Chinese plantinthe western cityof Chengdu, scheduled toopen in2013 withanannual capac- ity of 100,000 units.

A year after themerger, Volvoman- aged tomake aprofit in201 Q-..-a firstsince 2005. Volvo sold nearly 374,000 unitsglobally, up11.2 percent from the previous year;salesinChina increased 36percent to 30,522 cars, I n China, Volkswagen wasthefirst foreign auto- maker toset upajoint venture in1984. Asaresult Audi cars were viewed asamade-in-China luxurybrandamong government officials.Geely'sstrategy wastograb mar- ket share fromAudi, andtoboost Volvo's Chinasalesto over 200,000 unitsannually by2015, Geely wanted to sell Volvos towealthy Chineseconsumers andespecially government officialsinChina, atprices ranging from USS40,000 forbasic modelsto USSIOO,OOO for high-end luxury models (seeExhibit 7),Although foreign-brand cars sold inChina weremade inChina, thebrands were owned bythe foreign companies. Itwas hoped thatthis would workinVolvo's favor,aspatriotic Chinesecon- sumers mightpreferbuying acar from aChinese-owned company. Itwas thesame strategy thatChinese computer maker Lenovo usedwhen itbought 18M'sPCbusiness and became aworld-class player.However, whitethis strategy mightbenefit VolvoinChina's domestic market, it might harmtheVolvo brandinforeign markets, where the association withChinese-made automobilesmight signify lowerquality orsafety.

It remained tobe seen whether thegains would offsetthelosses.

Turnaround andBranding Challenges Geely's parent company facedachallenge inrestoring Volvoto Exhibit 7 The Volvo S40 long-term profitability, Volvoposted revenue ofUSSI2.4 billion In 2009 byselling 334,000 ears,bUIilrecorded a pretax lossofUSS653 million," Geelyplanned to dou- bl~ Volv~'s salesinEuropc andNorth America andgave ~flma:y Importance tobuilding thebrand's marketshare In China andother emerging markets.Asthe history of General Motors,Ford,andChrysler show,theauto indus- tf?' was ?neofthe mOSI ferociously competitive indus- tries.

Thiswasespecially trueinmature markets likethe United StatesandEurope, whereentrenched incumbents would fighttothe death todefend theirturf,Geely had little experience sellingcarsoutside ofChina, letalone running majormanufacturing operationsinacountry as f~r awa7 andasdifferent asSweden. Ocelylacked expe- nence In the developed countriesinhow tomarket and sell upscale cars.Turning Volvoaround wouldrequire Geely tomake upfront investments toincrease produc- tion capacity andinadvertising andbrand building.

Many industry analystspredicted that13·year-old Geely, barely known abroad, wouldhaveadifficult timeturning around Volvo.

Geely alsofaced challenges regardingbrandmanage- ment. Animportant reasonforthe Volvo acquisition was the value ofthe Volvo brand. InChina, Volvowasconsid- ered asluxurious andsafe asMercedes-Benz andBMW.

Geely wanted toimprove itsbrand namebyacquiring Volvo, soastomove tothe higher endofthe market. As Mr. LiShufu putit,"From myperspective, Volvo'sprod- uct isalready invery good demand. Ourrealchallenge is how weare going toevolve anddevelop theVolvo brand further." However, theability tobuy isnot thesame asthe ability tomanage. Thefacts were thatOeely wasknown as amanufacrurer ofcheap carswith ashort history that included poorsafety andquestionable quality,whileVolvo was apremier European luxurybrand.AsaChinese com- pany, Geely hoped tolocalize Volvocarsforthc Chinese market without diluting theglobal imageandpositioning of the Volvo brand.

Furthermore, it was likely thatcosts would haveto be cut atVolvo, whichwasstilllosing money atthe time of the acquisition. Butthis would bedifficult, giventhat Volvo isknown asaleader insafety andenvironmental technologies. IfGeely began touse more Chinese-made components inVolvo cars,itcould tarnish Volvo's high- end orsafety reputations, Meanwhile,Ocelysoldsubcom- pact carsinemerging marketslikeRussin, Turkey, a~d Venezuela. Itdid notenter theU.S. market, because Its quality standards didn'tmatch U.S,safely andother stan- dards, Geely's basiccarswere soldforUSS6.0oo each, and the company wasstillviewed asalow-end carmaker.

Three months afterthemerger, Volvoanditsnew owner admitted todifferences. Mr.Li,the new chairman of Volvo, disagrced withlheproduct andbrand strategy of company executives backinSweden. Hewanted Volvo to develop largercarsforChin~, wh.i1cVol~o w~nted t~ develop small,fuel-efficient vehicles III keeping withtheir -- ,--=3;.:3~O=-~_ InternationalBusinessStrategy internationalmarketsinmind. Among thesenewmodels would befive hybrid cars,which werecurrently under development. Geelyalsohoped torelease eightnewseries of gasoline anddiesel engines aswell asseven newseries of manual andautomatic transmissions.

In order todo this, it would havetosuccessfully inte- grate itsnew acquisition, whichstillfaced many challenges.

"Volvo cannotfail,"said DavidZhao, autoindustry analyst of Frost & Sullivan, notingthatthegovernment wouldlose face ifGeely's acquisition provedunprofitable".

reputation forbeing environmentally friendly.Shouldthe company targettheChinese consumers' tastesforostenta- tious luxury carsorstick toits mandate ofenvironmental protection andsafety?

Potential CultureClash Pcstacquisition cultural integration hasalways beenachallenge, evenwhen the companies camefromthesame country. Thischallenge is compounded incross-border acquisitions, wherethere are differing nationalculturesontop ofdiffering corpo- rate cultures. Lenovo'sacquisition ofIBM's PCDivision was avivid example. Lenovofacedenormous challenges as itattempted toincorporate itsU.S, division intoits predominantly Chineseorganization. Similarly,although Geely Holdings hadaccumulated someinternational experience fromtheirexport activities, thecompany had limited experience incross-cultural management.Inthis case, theacquirer wassmaller andlessexperienced than the acquired. Volvohadalong andproud tradition and a deeply entrenched corporateculturethatreflected its proud Scandinavian heritage.Thissituation hadthepoten- tial forwounded prideonthe Swedish side,lossofface on the Chinese side,andpolicy disagreements allaround.

Future Growth Geely hadconsistently achievedstrongsalesgrowth. Its revenues roseroughly 55percent toR.MB9.24 billion (USSIAI billion)inthe first halfof20 I0, while netincome surged toRMB804.85 million(USSI22.69 million)from RMB595.91 million(USS90.84 million)forthe same period of200915. Geelywasnever shyabout itsambitions for international expansion.Geelybought sharesinCov- entry, England-based ManganeseBronzeHoldings and owned 20percent ofthe iconic London blackcabmanu- facturer; Traditionally seenasamass-market carmaker, Geely entered theluxury carmarket byacquiring Volvo in 2010.

Geely planned tocontinue increasing itsinternational presence overthecoming fiveyears, withagoal tobuild 15 production basesworldwide. Inaddition, ithoped to sell two-thirds ofits cars outside ofChina andtodouble the global salesofthe newly acquired Volvobrand. Todo so, the company wasgrowing bothorganically throughits existing carbrands andthrough acquisitions andpartner- ships. By2015 Geely planned tohave developed several new carmodels, allcompliant withinternational emis- sions requirements andsuitable forsale overseas and all ofwhich would bedesigned withbothdomestic and Endnotes I.

wWII'.geely.com.

Financial Times lnformation. 2006."Geely onfast lane for expansion." October18.

3. Allison Jackson, ChinaDaily.

20I O.

"China overtakes US as world's largestautomarket." January II.

4, Bernard Simon,"Eastern carmakers fine-tunetheir strategies toensure aslice ofthe lucrative westernmarket," Financial Times, 2007.January 4.

s. "Short Critique," China Daily.

2010.November 15.

6. Andy Cheng, "Chery toSet UpThree Assembly Plants Abroad," Stnocast ChinaTransportation Watch.2007.

January 24.

7, Neil Gough, "Geely's newBUVs toboost profit," South China Morning Post.2011.Geely's newSUVs toboost profits. March24.

8. Toru Shimoharaguchi, "YoungChinaexecschallenge world,"Nikkei Weekly.2011.January 17.

9. Alysha Webb,CrainCommunications. 2006."Despite obstacles, Chinesecarmakers arekeen tocome toEurope:

Players towatch inthe race toexport fromEasttoWest." December I1.

10. China Business lnfocentre, TheWTO Column. 2005.

Can Chinese products surviveacrash test?http://www.

ajroshanghai.com/forulllslillde.x.php?topic= J 30.0.

11.

The Cars Guide.

20I O.

"Moving forwardinthe motoring world." August 20.

12. China CarTimes. 2006."Geely crashtest-Zi YouJian- Free Vessel:' December 13.

13. China CarTimes. 2008."Geely 'DeathVessel." February 4, 14.

Gazelle (Montreal). 2010."China's Geelyhopestotum around Volvo." August 3.

IS. Vinicy Chan,"Asiamoney bestmanaged company awards:

China," Asiamoney. 20I O.

December.

16. Miho Nagano, Geely'sVolvoManagement Challenge:

Selling Made-ln-Chtna Volvos,"Investor's BusinessDaily, July 16th2010. ____----------------------.':~N~D~IA~N~W~IN~E~IN~D~U~ST~RY: GROWINGWITHCHALLENGES 31 ~MITYi RESEARCH CENTER HE,\DQUARTERS BANGALORE Indian WineIndustry Growing WithChallenges Case study Reference no212·036·1 This case waswrItten by Jimmy Thakkar, AmityResearch CentersHeadquarters, Bangalore.ltIs intended tobe used asthe basis forclass discussion ratherthantoillustrate eithereffective or ineffectIve handllngofamanagement situation.Thecase wascompiled frompublished sources.

No part ofthis publication maybecopied, stored,transmitted, reproducedordistributed inany form ormedium whatsoever withoutthepermission ofthe copyright owner.

e thecase forlearning OlrtrlbUltci byKdI, UKud USA www.-.:

ch.com All rlghll reoerved P,lnl~ InUK.nd USA NOI1h A/n...

1 ..17112)958&1 ,.17,11l9YlS .-- ~""tM-W I .... lOtUlt7S090J f ~1Ol11Jo'1)mS .- - 332 InternationalBusinessStrategy 212-036-1 Indian WineIndustry: GrowIngwithChallenges RES); \RClJ CE'\TF.R HEA~l· '\RTERS BANGALORE Author: Ms.Jimmy Thakkar Indian WineIndustry: GrowingwithChallenges Abstract: IndianWinewasexposed tothe world during 1800s, butafter asudden boutofepidemic, the vineyards weredestroyed. SuttheIndianwinebegan tosparkle againafterthevineyards begantotake roots during 1880sto1980s withrenewed vigour.Indiahadbeen oneofthe fastesl growing alcoholic beverages markels inthe world, buthad negligibie consumption ofwine compared toall other alcoholic beverages. Despite having alarge populalion ofaround 1.2billion, consumption ofwine inIndia remained lowcompared toother Asian countries. Theiower percapita consumption levelofwine provided potentialopportunity forwineries to cover ahuge untapped market.Thechanging socio-cultural factorsandinfluence ofthe western culturehad impacted theperception ofindian consumers forwine. Inaddition, increasing disposable income,changing habits, winetourism, wineclubs andfestivals, changing lifestyle,growingpreference ofwomen forWine, greater awareness ofwine andeasier availabilily throughnewerretailformats hadgiven afresh impetus forgrowth to the wine industry inIndia. Yet,industry observers wereskeplical whetherthewine manufacturers andmarketers would beable toleverage socia-cultural changeseffectively, giventhefact thattheindustry wasvexed with myriad taxregulations andparadoxical federalgovernment rulesandregulalions.

Pedagogical Objectives The case study helpstounderstand andanalyse:

• Thegrowth ofthe Indian WineIndustry • Impact ofthe Socia-Cultural factorsimpeding itsgrowth • TheOpportunities andChallenges facedbythe Indian WineIndustry.

Case Study "Economic prosperityhasfound waysofflOWing outInto social prosperity, andtheealing anddrinking outlevels have grown exponentially. Withthis,wine finds center-slage.'" - Sijoor Harish, BrandStrategist & CEO, Harish SijoorConsultants' India wasconsidered tobe the one ofthe fastesl growing economies amongstlhe BRiCnations (Brazil,Russia, India, andChina).' AfterChina, Indiawasthesecond highestpopulist countryinthe world' WithIhegrowing economy.and mcreasmqmiddleclasspopulation, Indianmarket provided promising opportunities forvarious commodities. AnevolVing population, gov~rn~ent regulations,consumerbehaviour, higherincomes, industry advancements, mediaandIncreased globallSatlon hadwitnessed growthforwine market inIndia.' Rajeev 1 "Socfo-cultural ChangesCheerIndia'. WineMarket", http://knowredge.wharton,upenn,edullndlalarticle,Cfm;jsesslOnJd=a8303cd5627c781b3c00194e2f161454632d?artlcleJd=4676 March 15 111 2012 , 2 A Private LabelConsulting FirmSpecialised InBrand andBusiness Strategy.

, "The Wine Market InIndia Opportunities forCanadian WineExporters", h ttp;lIwww.ats-sea.agr.gc.ca/asI15542-eng.hlm.July2010 4lbld.

5 Ibid.

GrowingwithCh,lIengH Samant, ChiefExecutive Officer"SulaVineyards' said:'Thedemographics favorthegrowth ofwine Inevery single way,Young, urbanprofessional womenarestarting todonk socially, whichneverhappened ageneration ago, andalot ofthem arepreferring wine."Although theIndian wineindustry wasatnascent stage,thevast Indian population andchanging socialdynamics providedanapt backdrop forthe beverage toprosper and emerge aspotential alcoholic beverage, TheInfluence ofwestern cullure,theemergence ofnewer retailformats was slowly turning infavour ofthe beverage togain thestatus ofbeing fashionable andmodern drinkamong younger consumers, However,thegrowth ofthe beverage wasbeing stifled duetomyoad taxesand paradoxical federalgovernment regUlationsandstipUlations, Itremained tobe seen whether theIndian wine industry wouldbeable toovercome thehurdles andleverage thechanging socio-eullural environment.

Indian WineIndustry: PoisedtoSparkle The consumption ofalcoholic beverages amongallcivilisations datedbackto3000-200 BC'Alcohol hadvaried uses likemedical, social,religious andrecrealional acrossvarious cullures, Thealcoholic fragmentation and distillation waspractised byIndus valley civilisation during2000BCinIndia' TheIndian alcoholic beverages market wassegmented asFruit-based andGrain-based,1O TheGrain-based alcoholic,beverages weref~rther segmented asdistilled andnon-dlslilled, Thedistilled alcoholic beverages includedIndian-made ForeignLiquor (IMFL), foreignliquorbottled inIndia (FL-BII), foreignliquorboilled Ino~igin (FL-BIO), andcountry liquor.The wine formed partoffruit-based non-distilled acohctcbeverages" (ExhibitI), Exhlbitl Classification ofAlcoholic Beverages 3 I r-utt N"'chW't' 1 tlnlcWnll:.·r ""1"'" Whi ..

l..y ~ NOI' -rdcoholil J Al(tlholJc .L rrllit jllic e -'!-i 11"\.111 Drinks kI f Beverages" http://icpe,inlicpefoodnpac agmgp - ' Source:

"Pac agng 0 , , uerorsintroduced grapevinesinIndia around 2500years Historically, itwas recorded thatthePerSian, conqthearistocrats, Thethree keysegments ofwin~ In India ago,12 Wineasbeverage In India waspatr?"s~, byand Fortified wines." Vltlcullure andwinemaklng were were Premium Wines(StillWines), Sparkling nes,occupationinIndia." ThePort-Style winewas strongly persuaded duringtheBritish andIhePortuguese 'India's Premium WineCompany basedInNashlk.

I crte' Prices" http://www.bl00mberg.comlnewsf2011-G7.

G owth as Duties Boostmp '111 2011 7 Sharma Malavika "IndiaWlnemakers Tapr hiher.than.tokyo,hlml, July27 261lndla'S'Wlnemakers.tap.growth.as.t~x~s.h~~~~j:::ri:~~~:~tatHealth_&_.UbstanceJ\buse_'lcOhol_.t1as3.Pdf a "History ofAlcohol", http://wWw.who n e.

0 e Ibid. ". In/IeefoodnpaCkaglng/pdfs/14_beverlg es.

pdf 10 "Packaging ofBeverages J http.lllcpe.

P ml2011101117lthe.briCs.suprlslng.wlnes-of.lndlai 11 Ibid.

fI dl "http·/IwlneeConomlst.co dlIIndustry-emc pdf 12 "The BRieS:

Surprlsl~,g Wln~~:e~~ePlu~.eUlwp-(:ontentiUPloads/201~~~~~~i~e~s~~ry.no.sour.g~lpes.html, Jlnu.ry 13 "IndIan WineIndustry, http.I';htt ./Iwww.deccanherald.comlconten 14 ''WIne story:Nosour grapes, this J p:

28" 2012 - 334 International BusinessStrategy 212-036-1 Indian WineIndustry: GrowIngwIthChallenges introduced inGoa during thePortuguese ColonistRulewayback inthe 16- C~ntury WhiletheBritish planted wineries inBaramati (anagricu,tura,' towninthe State atMaharashtra), KashmirregionInthe Nort~.and Sur~t (was amajor trading sea-port town In the West region ofIndia)," ButInthe late 1BOOs, aPhylloxera epidemic destroyed Ihevineyards inIndia asmuch asitdid inthe Europe (Annexure I),But, In the, early 19BOs, the Narayangoan basedChaleau lndaqa"(indage)established inthe sl~te ofMaharashtra ~n1tlallyImported the Vitis vinlfera grapevarieties likeCabernet Sauvignon, Chardonnay, Plnotblanc, Plnotnairand Ugnl blanc to produce slilland sparkling winesinIndia andlater exported them,"However, Indianclimate wasnotideal for viticullure, Butfew areas located inMaharashtra suchasDeccan Plateau, aroundBaramati, Nashik,Pune, Sangli andSholapur, asweil asareas around Hyderabad, besidesoutskirts ofBangaiore, Chikkaballapur, Bagalkot andBijapur inKarnataka werefound 10 be ideal forviticulture andwine maklng,19 In India besides, severalnativevarieties oflable grapes likeAnabeshahi, ArkavatiandArkashyam, Bangalore Blue (Isabella) andGulabi (BlackMuscat), TurkishgrapeSultana, weregrown inIndia. Apart fromtheimported French varieties suchasSauvignon blanc,Zinfandel, Cheninblanc andClairette, whichwerealsoseen making inroads inthe Indian winemaking," MohanRao,awine consultant said:'Grape isthe only fruitthatcanbe rnade towine without changing thechemistry init. Grape juicecontains ready-to-ferment sugars,naturalflavour, natural colourandeven yeast, seenasawhite deposit onthe grapes, whichheipthefermentation process.'> On the other hand, Ihenascent winemaking industry inIndia wastrying tomake afoothoid indomestic and international markets.

22 In India, among Iheentire alcoholic beverages category,winewastheleast preferred drink,Moreover, for religious reasonsmostIndians donot consume alcoholicbeverages, Theconsumption ofwine athome was negligible whileconsumption ofwine inhotels wasonthe rise," Indage, SulaVineyards, Grover'sVineyards", Diageo(Nilaya)", Pernod-Ricard" (Seagram'sNineHills) and the Uniled Breweries Group"(UB)(Zinzi andFour Seasons) werethemajor wineproducing companies in India" In2010, SulaVineyards becametheleader inwine sales inIndia, having 20%stake interms ofvolume, followed byUnited SpiritsandGrover Vineyards with15% and9%ofvolume sharesrespectively," Sula Vineyards dominated thelight grape wineandsparkling wine,whileUnited SpiritsruledtheIndian portwine category. Financialproblems inIndage Vintners Vineyards degradeditsvolume sharefrom18%in2009 to5% in 2010," Between 2009and2010, thedomestic brandsmaintained itssupremacy overimported brandsinoff- trade outlets, However, increased importdutiesonwines resulted inthe price gapbetween domestic winesand imported wlnes.31 Major ,importers of~ine inIndia wereAustralia, FranceandIialy, andtheU,S, wasthefourth largest supplier and Singapore remainedfifthduetohike inexcise tariffs," InIndia, major production ofwine lookplace inthe 15 Ibid.

15 A small, sap-eating, greenishInsectthatfeeds onVines.

11 An India WInery Company BasedInNarayangaon.

,. "WIne story:Nosour grapes, thlsl",op.clt.

l'lbld.

20 ibid.

21 ibid.

22 "Grape Fever",http://WWWJbef,org/downloadlfeverJan19.Pdf 23 Tigchandler, "RevisitIngIndiawinemarket", http://tJgchandler,comI2012101/D7IreviSltfng.the·lndlan-wine·markeU, January7IIl2012 2.4 A Wine Making Company BaaedInBangrore .

.is BritIsh BasedMUltinational AlcoholicBeverages CompanyHeadquartered InLondon, UnitedKindom.

2ll A French BasedCompany ProducesDistilledBeverages. g 11 An IndIan Conglomerate CompanyBasedInBangalore.

: :lndian WineMarket: AtA ,~Ianc~n, http://www.tUlteeho.com/Wlne/downloadslWlne_report.pdf Food andBeverage India,http.IIWww.med.govt.nztsectors.industrleS/food.beverage/Pdf.docs-library/Information_ proJectimarket-proflte·lndla.pdf, January2012 :llIlbld.

)1 Ibid.

32 Williams DavidandMishra Shubhl, 'The Indian WineMarkel" http://www.calwlnexport.comlflleslWlne_New%200elhUndls_ 4.'7.2011.pdf,July4th2011 4 INDIANWINEINDUSTRY: GROWINGWITHCHALLENGES 212-036-1 Indian WineIndulfry: GrowingwithChllleng.s state ofMa~rashtra andKarnat~ka,33 Two-thirdofthe wine wasdomestically producedinIhe stete of Maharashtra Industryanalystbeheved thedomeslic wineproducers wouldoonlinue to be dominate theIndtan wine Industry but,consumption ofImported winesw,ereexpected togrow inthe premium andsuper premium Wine se~6ment In~ndla duetothe perception offiner quality towards internationat brands,"Aooording to RNCOS Report,Theconsumption ofImported Wineswillrise ataCAGR ofaround 32 per cent during 2009- 2012, wellabove theindustry's overallgrowth,"" In, 2011, perceplta consumption ofwine inIndia wasonly 10 milliliters annually,~ In 2011, lheUSwas biggest wine consuming marketwithanannual percapita consumption of3,7 billion bottles,~ TheIndian wineinduslry was expected totouch INR 27 bllhon markatthe end of 2012 fromabout INRBbillion in 2008 Interms ofvalue' the consumption wasexpected totouch 14.7million litersin 2012 fromaboul 4,6 millio~ Ihresin 2008,~ According tothe 'Indian WineIndustry Analysis' reportbyRNCOS, 'Redwines arequite popular amongIndians, Over 50% ofthe country's populaton isabove 25 years ofage, andforms ahuge impending oonsumerbasefor the wine industry, Withhigher personal disposable income,andchanging lifestylesandpreferences, thewine consumption volumeinIndia isexpected togrow ataCAGR ofaround 25% during 2011-2014,"" Industry analyst observed thatthere weremuitiple growthdrivers shaping theIndian wineIndustry suchas,rising disposabie income,favorable government policies,winetourism, clubsandfeslivals, changing lifeslylesand perceptions, growingawareness andtheemerging trendofwomen drinking wine,"Aooording 10the industry body Associated ChambersofCommerce andIndustry ofIndia (ASSOCHAM)" 'Besideschanging lifestyleand drinking habits,favourable government policies,risingdisposabie inoomeandgrowth inlourism sectorare paving theway forgrowth ofthe industry,"" Themajor oonsumption areaswereMumbai citywhich accounted for 30% oftotal consumption inindia, DelhiandGoa accounted for 20% each andBengaluru accounted for 15%, while Punjab accounted for 5% and theremaining 10% wasconsumed inthe other partsofIndia," According ASSOCHAM Report,'CitieslikeDelhi, Mumbai, Chandigarh, Bangaiore,Chennaietc.account for majority ofwine oonsumption inIndia, Thechamber feelsIhatasper Iheemerging trendsnon-metros andtierI & tier IIcities willalso form agood portion ofwine consumption inIndia,''' According toSubhir HariSingh, Chairman, KarnatakaWineBoard (KWB)", 'True,thewin~ marl

:w Ibid.

kI" 'I 33 "Socio-cultural ChangesCheerIndia's WineMare I 0p.CI .

3e A leading MarketResearch andInformation Anal'cY·AI·G~~~~p~r~.lndian-e:ommOdlty.COmJcommodltl"llndla.

Win ..

31 "Indian WineConsumptlon toRecord 28percen " Consumption- To_Record.2S.Percent·CAGR,aspx, November13 11l 2009 ~ "Socio-cultural ChangesCheerIndia's WIneMarket", op.clt ~9 ibid. " .a "Indian wineIndustry totouch Rs 2,~OO crmark ~y d20~2 :t.t ch.rs.2700.cr.markobyo2012120110328.hlm, March28*2011 http://www.rediff.com/businessfreportllndlan.wlne.m u~ ry 0 OU '1 "Sparkling FutureAhead forthe Indian WineIndustry, J121112012 http://www .sbwlre.comJpressoreleaseslsbwlre.122357 ~~tm, anuary '2 "Domestic WineAnticipated Growingat21% C~R 'AIIIated_Growlngoato21.CAGR.htm, Janulry19'"2012 http://www.rncos.comIPress_ReleasesIDomestiCo ne- ncp '3 One ofthe Apex Trade Associations ofIndia. b2012" pelt .. "Indian wineindustry totouch Rs2,700 crmark y ,0..

'5 Ibid b2012 end" httP·/lwww.commodltyonlln •.comlnewaJIndllowln ..

, h147mnlltresY-,.

'II "India wineconsumption mayreac .12oend.37704 0 3.31705,html, March30 ltl 2011 consumPtlon.may.reach.147.mn.lltre~.bt~ocletleS RegistrationAcI1960, '7 ARegistered Body under the Karna aa. k t" 0 cit 48 "Socio-cuiturai ChangesCheerIndia'. WmeMar e, p. .

49 "Indian WineIndustry Analysis", JlndianoWlne_lndustryoAnaIYlls-IM296,htm, Janulry2012 http://www.rncos.com/Market.AnaIYSls.RePorts ne 50 India's Firstandonly Magazine Dedicated toWI .

5 = ...... 3.. 3;:;,;;6;...-4 __ Intemettcnel Business S'~trr:.~te2.gy~ _ 212-036-1 Indian WJna/ndustry:

GrOWing withChallenges earliest daysbecause ofvisionaries suchasindage, Grover and Sula. There wasalot ,of buzz surrounding o~r potentially large and untapped market Good money wasspent buiidlng beauliful wmenes and investing In vineyards butother aspects ofthe business suchasdeveioping theconsumer marketlagged.''' Socio-Cultural FactorsAidingGrowth According toRNCOS, 'Thewine industry inIndia isall set tomake astrong comeback thisyear, owing toa steady economic resurgence, Traditionally, Indiahasnotbeen awine consuming nation,butamong other factors, changing habitsofthe people havechanged theface ofthe Indian wineindustry, whichwillfurther support thesector inlong-term."" Macro and micro environment hadledtremendous changeinthe Indian communities, TheIndian societies experienced aconstant transformation, resultinginacceptance ofnew lifestyle, Iraditions and practices, Giobalisation, Industrialisation, Migration and incursion ofmedia hadprovoked people'slifestyle,Therewasa notable changefromagrarian tomodern societies, accompanied bychanges instandard ofliving, Modern lifestyles hadsurrogated traditionalsocieties,resultedintoshifting traitsofthe youths and adults inIndia,53 Where theIndian societies considered wineasliquor, theIndian government ethicallycompelled toshelter its citizens fromitsmisuse," Article47ofthe Indian Constitution statedthat"The State shallregard theraising of the level ofnutrilion and thestandard ofliving ofIts people and theimprovement ofpublic heallh asamong Its primary duties and, inparticular, theSlate shallendeavor tobring about prohibition ofthe consumption except for medicinal purposeofintoxicating drinks and ofdrugs which areinjurious tohealth."" Religionalsoplayed a crucial roleinaffecting eatinghabitsofIndian consumer includingwineconsumption, Historically,inIndia wine was being served inthe religious festivals, itwas considered asillegal drinkinthe eyes ofthe society, But,by 21" Century winewasbeing perceived asurbane drinkinIndia, Despite ofthe religious reasons; easy accessibility toaffordable wines and western cultureaspiration invigorated theconsumption ofwine across the country.58 Socio-cultural changesinIndia hadagreater impactonthe wine industry inIndia, According toSubhash Arora (Arora), President, IndianWineAcademy~, "Drinkingwineasalifestyle choiceiscatching upvery fastWine is now always thereatpiaces whereithadn't beenevenoffered before,likeparties and weddings.''' Indian consumers beganperceiving Wineasseparate drink,Aspiration ofwestern culturehadchanged the perception ofalcoholic consumption, thoughalcohol wasseverely restricted inHindu religion,59 Eminentspirits like beer, whiskey and ginsignifies theculture oftraditional BritishEmpire; butwine wasconsidered asatrendy and modern drinkofyounger audience,eo AccordingtoArti Verma, Associate Director,NieisenCompany" (Nielsen), "Wineholdsadistinct position inthe indian consumers' mind, It is seen asasophisticated, stylish drink ascompared toother alcoholic beverages, likeWhiskey, Scotch and Rum thatareconsidered men'sdrink &1 Ghose Anlndlta, "HeardIton the grapevine", htt p ://www.Hvemlnt.comI2011/10/28193108IHeard.it.on.the o grapevine.htmI J October 29th 2011 52 "IndIan WineIndustry InHigh Spirits InFY 2010", http://www.rncoS,COmlBlog/reportJlst.php1year=http:llwww,rncos,comIBloglblogJeport.php&month=12&blog..pagename=lndl an.Wlne.lndustry o ln·High.Splrlts o ln.FY.2010, December2Btft2009 ""Burden andSoclo EconomIc ImpactofAlcohol- TheBangalore StUdy",http://203.90.70.117/PDS DOCS/B0305.pdf 54 "Comprehensive StUdyof lndlan WineMarket", - http://www.lndlanwlneacademy.comlComprehenslve_StudyJWM_Reference Sectlon.pdf "Ibid, - 58 "The Indian WineMarkel", cp.clt.

57 A New Delhi-baled MarketDevelopment ConSUltancyFirm.

51 McDonald Alyssa,"Despite Problems ofMatching, India'sWineIndustry Booming", htlp:/lwww.daljlworld.com/newsfnews_dlsp.asp?nJd=129012. February5th2012 " "The Wine Market InIndia Opportunities forCanadian WineExporters" op.clt 10 Ibid. '.

81 AGlobal Marketing andAdvertisIng ResearchCompany.

6 INDIANWINEINDUSTRY: GROWINGWITHCHALLENGES __ +-.oa:JI..-I 212-036-1 IndIan WineIndustry:

GrowingwithChallenges or Gin, which isconsidered awoman',s drmk"Lately withmore International playersentering themarket, the Indian co~sum,er has,only p~ogressed mtheir Indulgence ofwine.''' Ascompared toliquor, wineconsidered to be healthier d~lnkasItcontamed lesseralcoholic contentinitAccording toArora:Over thelast five years, wtne as adnnk choice hasstarted tobecome atrend, I,ndlans areknown fordrinking spirits,especially whisky,many of these people arenotchanging fromtheirsignature drink,butadding wineasaselection.''' Growing awareness ofheallh Issueswasalsopr~mptmg someconsumers toswitch 10 wine from beverages withhigher alcohol co~tent Thls factor hadmade wineeven more popular amongst Indianwomen andtheyoung starters, In India, wmeamong thefemale segment wasmore socially acceptable formofdrinking asopposed tohard liquor drink," Ankur Gupta IAnkur), Marketing Head,AMMind Power Solution" said:'",Women arednnking morewine because theyconsider Ita 'sophisticated drink'that'raises theirstature Insocial gatherings'.''' Inurban areasof India, theconsumption ofwine bywomen hadincreased to28.7% inlast five years (2006 -2010) compared to increase inmale consumption of17.3%." Ankurfurther addedthat,"Increased fmandalindependence ofmiddle class women arealso driving demand, asthey canmore easily 'indulge insocial events atbars andat restaurants'.''' Otherfactorresponsible forgrowth wasretail sales thatsupported thefuture popularity ofwine consumption inindia," AsinIndia alcoholic beverages wasindividual stateSUbject, manyslates ofIndia had allowed winetobe retailed byprivate departmental stores,"Forinstance, inDelhi departmental storeskeep wine along withfruits andvegetables, AccordingtoAbhay Kewadkar (Kewadkar), BusinessHeadandDirector, Four Seasons Wines",'Themove willsee a30% riseinwine sales Inthe cily, Availability ofwine onthe shelves ofmodern retailstores willsurely increase itsvisibility andcustomer contact,andwilllead toincrease in sales, Besides, betterstorage conditions willalso ensure thatthequality ofthe product remains intact.''' Various statesallowed winesales through departmental andsupermarkets storesasithelped increase Visibility and availability ofwine alsodistinguishing itfrom liquor inorder todevelop winedrinking cullureacrossthe country,73 According to'Industry Analyst, 'Inthe organized retailsegment, winenowacoounts for30% ofall sales ascompared to22% to25% justayear ago.''' Commenting onthe growth ofrelail wine sales, Subarmanian PonnuVicePresident, FoodandSupply Chain,MaxHypermarkellndla" opined,'Inashort span of lime, winewille";erge asthe single largesl segment inliquorretailing.''' Anotherc,ritical,success factorfor the Indian wineindustry wasemerging trendofthe wine tounsm m l~dla,77 Toattract vsncrs andpromote and educate aboutwines, Winetourism wasdeemed oneofthe best mediums, 21' century Indianconsumers wereverytechno-savvy, UseofInternet aidedWinema~ers todevel?p an education manifestothatassisted inexperimenting andIntroducmg new~me products, TheNeilson Syndicated Wine Study' report2010stated that,'The indian wineindustry haswitnessed phenomenal growthinrecent b 'I dla" http'/Iwww Imagesfood,comlnewl.aspx?ld=2000&toplc=2, July13tl12010 U "Growing wineconsumer ase In n ,.' " 13 "DespIte Problems ofMatching, India'sWineIndustry Booming .cp.clt.

W "Comprehensive Studyofthe Indian WineMarket", op.clt. .

&!I A Leading MarketResearch andInformation ServiceProvider In Indla~ 811 Kakavlatos Panos,"Indian Women Drivesurg9•2 /,n, ;llne.

C~~~:~:::.~urge.in.Wlne.con.umPtlon, November7 1t1 2011 http://www.decanter.comlnews/wlne.newsIS294 nan w 61 ibid.

ui~d. .

M~l~~c~ n "Soclo-cultural ChangesCheerIndia's Wine a er', .

i d II" 7Q Dubey NeeraJ, "SpIrited Intimes ofgloom .

t~e In:ci~~1~~~~O~9~~4~sipM.Pdf http://www.psalegal.com/pdflenewsUne.novem er- n The Flagship Brand of the US Group Company, .

lne" 72 Chatterjee Kakoly,"Cheersl DeihlStores ca~ Sl~~~ :~;~I!c~n.so~n.retal1.WlneIS1639310, September 13 11I 2009 http://www.f1nanClalexpress.comlnewslcheersde snOln India" 13 Arora Subhash, "Wineretailing witnesses n:w dal~&Sectnam~=Fealures%20.

II http://www.retaillng360.com/lndex.asp)(?pa~e-~~~~21201 010211837171796bcfd07, October21201 0 %20Guest%20Column&sectld=8&conlenlld-20 M rk t" op cit 14 "Soclo.cultural ChangesCheerIndia's Wine a er', ..

75 A leading Retailer. 'W'Market" op.clt.

16 "s IItural Changes CheerIndia, me I t~ 17 "~~:~~~rlsm. AnEmerging Trendinthe IndIan :~:.~n~~~~g:Trand.ln.the.lndlan.Wlne.lndu'try.htm, March1"-2012 http://www.mcos.comIPress_ReleaseslWln e- T eurts 7 IIIJ!IIII'II III !' c 338 , International BusinessStrategy 212-036-1 Indian WIneIndustry: GrowingwithChallenges ----------- yearsduetothe entry andintroduction ofseveral newbrands. Thesurvey wasconducted acrossMumbai, Delhi and Bangalore, andexplored consumer perceptions aboutwine,consumption andpurchase habits."" India's middle classpopulation wasrapidly growing inthe world anditwas expected totouch 583million by 2025 Thisdevelopment servedahopeful consumer marketforwine. InIndia, 'young' population inthe age group of20-49 yearsthatwas considered eligiblefordrinking washuge andgrowing In number. By2015, the 'drinking age'population wasestimated totouch 95million tran.slating intoahuge consumer ~ark~tforadult beverages." Changingdemographic factorsofurban population fascinatedtheconsumers eatinghabits, resuiting intotheir shifting inconsumption habits.indianurbanyouthwasheading towards amore western-style cuisine. KapilGrover (Kapil), Director, GroverVineyards statedthat,"Like inIndia, wineconsumption inChina was traditionally atvery lowievels. Butinthe past fewyears ithas galloped andthecountry hasbecome oneof the biggest markets acrosstheworld. Thereisno reason whyIndia should besofar behind. Itis just amatler of time before wereach theinflection point.Butthegovernment alsoneeds todo itsbit tomake iteasier to produce andconsume wine."80 Way Forward AmidstChallenges The Indian wineindustry wasgrowing atvery smaller pace.Ascompared toother alcoholic beverages, wine consumption wasnegligible inIndia. According toSidharth Mallya,General Manager Marketing UnitedSpirits Limited andheirtothe UBGroup, "Thecurrent alcoholic beverage penetration inindia isaround 42.5%,while beer andwhiskey penetration isat 26% and23% respectively. Wineisonly at0.6%. However, fourtimes as many people haveexpressed theirWillingness totaste wine, buthaven't donesofor lack ofthe necessary casual fine-dining experience andopportunity.''' ThoughtheIndian winemarket hadgrown, itaccounted just about 0.8%inthe total share ofwine consumed inAsia." According toInternationai Wine & Spirit Research (IWSR)82 study,'Despite arapid growth seeninthe last few years, Indiaranks alowly 77interms ofwine consumption inthe world.''' With many positives aspects,thenegative traitswere alsoattached withthewine market ofthe country. The wine industry underwent challenges whichthreatened theindustry growth.Theywere -state-wise taxstructure and policies, problems oflogistics & supply chain,improper storagefacilities andtheunder developed Infrastructure. Aisotheother major barrier waslackofawareness aboutthebeverages amongthebuyers and sellers,B5 indian winemakers facedtypical challenge ofdeveloping adomestic marketforwine. There hadbeen substantial increaseinthe number ofwineries inIndia, nearly 75in2011." Oniyfewofthese wineries hadPan India presence ;emaining wereverysmall. Ac,,?rding toPhadtare Hambir,Managing Director,India'sMountain View. Wines", Onlyaha~dfu.1 oflarge wlnenes todaycontrol theIndian market. Government policiesare prohibitive forthe smaller wnenss. ForInstance, eachstatelevies adifferent rateofexcise dutyandother taxes on wlnes."B8 7& "WIne Wins", http://www.retalltng360.comlindex.8apx?Page=artfcle&sectname=Magazlnes%20.

%20SpeclaJ%20Feature&sectld=16&conlentld=201 009092010091414435213084<:194533, September 9th 201 0 7$ "The Wine Market inIndIa Opportunities forCanadian WineExporters", op.clt.

eo "scclc-culrural ChangesCheerIndia'. WineMarket", op.clt.

11 Ibid.

12 "India towitness three-fold IncreaseInwine consumption", htlp:lfartlcles.economJctJmes.lndiatlmes.coml200a_03_ 12JnewsI28419043_1_wlne-consumptlon,wlne_culture_totsl_WIne, March1211I2008 13 A Magazine PrOVidesInsIghtIntoShort TermandLong TermTrends ofWine Industry, J4 "IndIa towitness three-fold IncreaseInwine con8umption", op.clt.

&I Sekhrl Kapil,"InHigh Spirits Winehasstarted gaining massappeal andIsnow one ofthe lead consumables Inthe Indian market", http://www,buslnessworld,lnlbuslne8sworldfbu8InesswOrldlG:ontent/High-SpIrits htmlMay21"2012 16 "SocJo-cultural ChangesCheerIndia'. WineMarket", op.clt. ., 17 A Family Owned Boutique Winery,BasedInNashlk .

.. "Soclc-culturel ChangesCheerIndia'. WIneMarket", op.clt.

8 ________________ ~Ir

Although winewasnon-distillation drink,consumption wasvery lowasitwas considered underthecat aof alcoholic beverages. Commenting onthis Kewadkar said'W',ne anal hI' b egry bed' d' .."coaIC everage, canbetreated asan agro- as In ustry giventhefactthat ~I~e ISmade fromthefermentation ofgrapes. Thereisno distillation Involved In the process. Thisalsomeans ItIS afarmer-friendly industry.'" In India, alcoh~1 dr.inking hadstrong negative sociaiimpact andhence alcohol consumption hadalways remained apolitical Issue.Liquor Industry inindia wasreguiated bythe state government ratherthanthecentral gov.ernmenl. Ho~ever,asthe alcoholic beverages werestatematter, eachofIndia's 29states and6union terntor~~s hadtheir ownrules & regulations andduties & taxes. Eventhepallem ofwine distnbullon andcontrol vanes: According toChandra Alok,Founder andCEO, Gryphon Brands", 'Wineisastate government subject In India andevery statehasItSown taxrules andreguiations. Thismakes itvery difficult tooperate outside one's ownstate. Italso adds tothe end price forthe consumer.''' Soaringimponduties, slateexcise taxes, sales taxand transaction feestossed achallenge forWine importers. Theyencountered variousproblems in obtaining licenseclearance forwine/liquor distributioninrespective staleformarkeling theirpreducl." However, existenceofdifferent rules,regulations andduties Indifferent statesleadstovariation inwine prices.

Taxes andduties commonly imposedonwine were, Excise Outy,Additional Duly,Distillery/Brewery License Fee, Bottling fee,L1tterage fee,Assessment Fee,Franchise Fee,Permit Fee,Gallon ageFee, Raw Material Excise, Availability Fee,Brand/Label Fee,Permit Fee,Transportation Fee,Import PassFee,Export PassFee, EducationallWelfare Cess,VendFee,Sales Tax/Surcharge, LicenseFee,TollTax andTOT." According to Kapil, 'Expect themarket togrow ataminimum of25% year-an-year forthe next 25years. Ifthe government policies change, itcould befar higher.'~ Imposition oftaxes bythe state government increasedtheunit price of wine, leading toreduced consumpficn" Thisaffects winemanufacturers andtraders asIhey were unable to earn highprofits inthe domestic market.Indianconsumers werehighly pricesensitive asthey choose low-cost wines inthe range ofINR 400-800." AccordingtoKewadkar, "Atpresent onaRs 400 bollie ofwine, thesales tax IsRs 130. Thisautomatically drivesupthe cost ofwine, making itan unviable option.Around thewand, wine is treated asabeverage andsaid ingrocery shops.Itonly makes sensetodo the same inIn~ia.'~ In.term~ of Price range, Indianwinesoffered awider variety thanEuropean wlnes.~According toArora, TheIndian ~lne market isstill not very mature. Itis an extremeiy pncesensitive markel.Inthe Imported ran.ge,thepremium segment haswines pricedataround US$20toUS$32 perbottle (of750 mil,andeven higher. Themass segment isin the range ofUS$12 toUS$18 abailie. Theprices areeven morecompetitIVe forthe Indl~n wines, with thepremium segmentinthe range ofUS$10 toUS$12 abotlle. Thefast-moving pncerange ISaround US$6 toUS$7 abottle.'''' Imported winesconfronted antagonism notonly from lowpriced locally pr~duced wines,butalso from seve;~; other restrictive pollcies." Theskyrocketing 161%import dutyonwines disappointed theImporters.

Moreover, suchwines couldonlybesold Inoutlets possessing license,andonly 35% to40% ofoutlets hadsuch lliI Garg Swetl, Ulndustry Proposes 0, eldic,e,nSln~/ffd~~~ery·~p\oposeS.delicenSlngwlnesI45632 7/, November23 rd 2011 http://www.buslnessostandard.comln anew n" 90 "Comparative StudyofThe Indian WineMarket I http://wwW.lndlanWineaCademy.comIComprehenSlve_StudYJWM.Pdf t1 An Independent WineConsultant InIndIa.

rl 'fndla'e WineMarket inFull Flow", I:'111X06LQP51lndla_S_Wlne_Market-ln.Fun-Flow,htm, January15 11I 2012 http://www.hktdc.comllnfolvp/alemklenI1/ox 13 "The Indian Wlne.Market", op.clt,,,."th ssoclales.comJmarketlng-of-wlne~n.lndl •.html M "Marketing WineInState ofIndia, http,Www,se a es "Soclo-cultural ChangesCheerIndia's Wine ~rke_tl'~_~:d~~~;eport, March2012 116 ''Wine InIndia", htlp://wWw.euromonltor.com neofIndian wineIndustry?", e1 "Is protectionism theonly way forwa~d2'4~h: ~~:tld=177&SUbSUbCatjd=718 http://wwwJcrler.orglpage.asp?MenuIDw "u 116 "Industry ProposesDel1censlng ofWlnesTh, op,CI\f IndianwineIndustry?", op.clt.

" "Is protectionism theonly wayforward- ecase 100 "India's WineMarket inFull Flow", op.clt.

101 lbld.

102 ibid.

g • 340 InternationalBusinessStrategy 212·036·1 Indian WineIndustry: GrowingwithChallenges licenses,'" AccordingtoAmit Arawal, Director, HemaConnoisseur Collections(HCC)''',"Thecompetition isnot so much fromdomestic wines,butfrom other liquors, especially whiskyandbeer.'''' However, anothermajorchallenge facedbythe wine manufacturers waspromoting wineinIndia, TheIndian government barreddirectandsurrogate advertisements (sponsoringmajorsportevents, brandrelated promotions, etc)inthe public media forendorsing consumption ofliquor including wine,'06According toPalash Basu, Assistant Manager, Imperial's1911Restaurant andBar"', "Thechallenge ispromoting wineandmaking your customer knowledgeable aboutthewine, thegrape, thetemperature -everyone havetobe trained, even the customer."" Mostliquor andwine promotions weredone byarranging on-premise campaignslikewine tasting events, sponsoring cultural/entertainment events,PointofSales (paS) andgiftmaterials,'" Consumption ofwine flourished throughout thepopulation, socialandcultural issuessuchasmajority ofHindu population preventingconsumption ofwine hadthreatened thegrowth ofthe Industry, InIndia, ethnic and religious clashprolonged tobe aconcerning issue;andthewine industry wouidprobably confrontwiththese challenges inashort time,Where amodern outlooktowards wineintake hadbeen gradually increasing, the customary valuesandperceptions towardsaicoholic beverages werestilideep-rooted inthe Indian culture, These ancient foundations weremajor threats forthe growth ofwine industry, Moreover, thehigh import dutieswereforcing manyforeign winemakers tojoin hands withthelocal wineries to gain entry intotheemerging marketlikeIndia. Arora said:"Wewillsee more ofthe foreign investment inthe wine industry, Withforeign investment comesthetechnology equipment, management andpossibility of marketing requiredtoget past theiniliai hiccups theindustry isfacing."" Itremained tobe seen, whether the nascent wineinduslry wouldbeable toleverage thechanging soclo-cuilural andeconomic environment towards wine consumption.

10) Ibid.

1114 Engaged Inthe Imports andDistribution ofVarious International ProductsInIndia 105 "India's WineMarket inFull Flow", op.clt. ' lila "The Jndian WineMarkel", op.clt.

107 AHotel Based InIndia, loa "IndIa SaysCheers to Booming localWineIndustry", hltp:ffln,reuters,comlartlcleI2008/08121/us·lndla.wine.idINBOM8498620080821 109 ''The Indian WineMarket", cp.cft.

110 Awa! Akankshl, "InvestorstoastIndia's wineIndustry", hltp:llbJogs,ft.comlbeyond·brlcs12011103/1 Ollnvestors·toast·lndJas.wlne·lnduslryl#axzz1xYMmiNFT,March 10th 2011 10 __------------------_...:~N:::D:::~A:N:.:w"::~':'.NE:.'~':'.ND~U::S~TR~Y:.':G:I

300 -150 BC Alexander invadesIndia & introduces newvines inthe area Circa 1526 AD Euro eantravelers brinEuro eanstIewines intocourts ofMu halEm erors, Circa 1600 AD Portuguese selliersinGoa usewine topreserve meatwithgarlic andIndian spices- buildin blockslorthe Ciassic Vindaloo Dish.

Circa 1615 AD Clarellovin Britishsetllers inIndia ianlvines inSurat andKashmir.

1800 -1900 AD Indian winesexhibited andreceived favorably byvisitors 10 the Great Calculla Exhibition of 1884 Circa 1984 AD Wine isovershadowed asIndia becomes oneofIhe largest markets forBritish Ate.Long sea voyages inspirecrealion ofthe legendary IndiaPaleAle.APhylloxera epidemic devaslates theIndian wineindustry likeitdoes Ihrough muchofEurope -a setback that will utthe Indian industr inabe ance forabout acentu Present Farmers inNasik Valley trigger awine revolulion makingtheIndian wineindustry the fastest rowininthe world.

Source: "WineinIndia", http://soultreewine,co,uklhistOry.pdf 11 TATASTEEL'S ACQUISITION OfCORUS (8) __ '-JiCI 110-005-1 ICMR - ~- Cenl.t tol Monagement ••tealch ICMR Center forManagement Research Tata Steel's Acquisition ofCorus (B) ThiS case waswritten by Harlsn Aunder the direction ofVlvek Gupta, /CMR Center for Monagement Research.It was compiled from published sources, andisintended to be used as abasis for closs discussion ratherthantoillustrate eithereffective or ineffective handlingof a management situation.

(02010, ICMRCenter forManagement Research ICMR, Plot # 49, Nagarjuna Hills,Hyderabad 500082, Indio Email: [email protected].

'NVVVV.icmrindio.org e thecase forlearning DI'tflb~ted by o

..:..44.:.-_I-_ln_t_er_n_ational_B_u_sine_ss_S_tra_t"9y~ _ 110-005-1 ICMR ----- C.nl~r fOI Monagemen! •••.atch Tata Steel's Acquisition ofCorus (B) "The company {TataSteelGroup) hasnotbrought downcoststothe extent theyshould have.

There ismore badnews instore, asthe Canis Group disappointment isstill round thecorner.

"I Niraj Shah, Senior Analyst, Centrum Braking", inOctober 2009.

"You don', buylooking atthe short-term, butthelong-term futureofacompany. Coruswasavery good buyasItsfundamentals arequite sound. However, it'spoor show onthe books hasgOI nothing /0 do with itsfundamentals. it'savictim ofthe current globaldownturn. ,,) B. Muthuraman, ManagingDirector,TataSteelLimited, inMarch 2009.

TATA STEEL GROUP REPORTS LOSS On August 27,2009, India-based TataSteel Group (TSG)4 announced disappointing resuItsforthe quarter endedJune2009. Thecompany reportedthatitsnet sales were down by47% atRs 231.8 billion ascompared tothe corresponding quarterofthe previous year.Industry expertswere shocked asthe company reportedanet loss ofRs 22.09 billion forthe quarter ascompared toa profit of39.01 billion inthe quarter endedJune2008 (Refer toExhibit [for Quarterly Performance ofTataSteel).

TSG's management saidthatwhile theyhadmade efforts tobring down thecompany's costs,the prices atits European arm-Corus Group PIc.(Corus) -were impacting theprofit margins. In light orthe recession indeveloped countries,Corusreported lowersalesvolumes illthe European Union (EU).Thecompany's sellingpricesdeclined year-an-year by1% inthe EU. Lower capacity utilization andhigher rawmaterial costimpacted theoperations inEurope.

Commenting onthe efforts TSO'smanagement wastaking toturn around theoperations ofCor us, the company's ManagingDirector,B,Muthuraman (Muthuraman), said,"The results ofTSG for the quarter endedJune2009 reflects theimpact ofthe global economic downturn, particularly in the developed markets.TheGroup iscurrently undertaking severalrestructuring initiatives internally tonot only weather thecurrent stormbuttoemerge muchstronger inthe near future.

The global recovery isexpected tobe slow andthecompany willcontinue tofocus onoperating performance andliquidity management.v' I "Tam SteelQ2Profit Halves; WeakOversees Demand," www.livemint.com.October28. 2009.

2 Founded in1977, Centrum BrakingPvtLtd isone ofthe leading stockbroking andinvestment banking companies inIndia, 3 "Corus wasaVery Good Buy:Muthuraman, TataSteel MD:' http://economictimes.indiatimes.com, March OJ, 2009.

4 Tate Steel Group comprised combinedoperations ofTata Steel (India), TataSteel Thailand, Natxtecl Asia, andCorus.

s "Tara Steel Q!

Cons NetLoss atRs 22.09 Billion," www.moneyconlrol.com.August27.2009.

2 __------------------- T~A'.'.TA~STEEL'SACQUISmONOfCORUS(B) ---- 345 110-005-1 Industry expertspointedoutthat while TataSteel's financial performance onastandalone basis was satisfactory, itsambitious acquisition' ofAnglo-Dutch steelcompany CorusinJanuary 2007, had failed todeliver results.Expressing disappointment, SanjeevPrasad,Executive Directorand Company Head,KotakInstitutional Equities,said,"Wehave torevise consolidated earningper share (EPS) downwards postCorus numbers, Thenumbers comingoutfrom theoverseas businesses seem 10 be alot worse thanwhat weonthe street hadfactored in.ltlooks likethe volume declineisfar more thatwhat wasanticipated. So,let's seewhat's pavedforrecovery out there butitlooks likeit'sgoing tobe another terribletwoquarters foratleast Corus, going forward. TataSteel onastandalone basisseems tobe doing okay.ButIguess, asignificant portion of revenue iscoming from theoverseas operations sincethetime youseestabilization inoverseas volumes -it's very difficult fromaconsolidated levelforthe company toreport decent numbers." THE ACQUISITION On January 31,2007, TataSteel acquired CorusforUS$ 13.70 billion'. Themerged entity,TSG, employed 84,000 peopleacross 45 countries inthe world. Ithad thecapacity toproduce 27 1~iJ[ion tonnes ofsteel perannum, whichmadethemerged entitythe fifth largest steelproducer m t.he world asof early 2007. Commenting onthe acquisition, RatanTata,Chairman, TaraSons, s~ld, "Together, we are awell balanced company, strategically wellplaced tocompete atthe leading edge ofarapidly changing globalsteelindustry." Before theacquisition themajor market for Tata Steel wasIndia.

The Indian market accounted for 69 percent ofthe company's totalsales. Almost halfofCorus' production of~teel, onthe o~h.er hand, wassold inEurope (excluding the UK).

The UK.

cons~med twenty rune percent ofIts production. Aftertheacquisition, theEuropean market(mcludlng the UK) would consume 59 percent of the merged entity'stotalproduction (RefertoTable I for thespread ofTata-Corus markets beforeandafter theacquisition).

Before theAcquisition After theAcquisition Corus Tata-Corus Tata Europe49% Europe 37% India 69% UK 29% Asia 24% Asia (ex.India) 23% NorthAmerica 10% UK 22% Rest ofthe World (ROW) 8% 9%North America 8% Asia 3%ROW 9% ROW Table I Spread of Markets Beforeandafter theAcquisition Source: TataSteel Annual Report,2006~07.

,.. -corus PIc.

byTata Steel Limited and the e~~~tcd syncrgic~ 6 A detailed description on t?C acquISItion ~f~ ICMR casestudy, "Tata Steel's AcqUISitIOn, orCoru~.

and challenges is covered III the awa~~:?~ngwebsite (www.icmrindia.org)andECCH s website The case can be accessed at Number 108-010-1.

(www.ecch.com), ECCHReference '.ganjcev Prasad," www.moneycontrol.com, August 28, 1 "May Review Tata Steel's EPS Post Corus Nos.: ~ 2009. •18tNR andI Powld' 86.13 tNR.. .

As on January 31,2007, IUS Dollar 44. Ik Corus," lntemalionailleraid Tribune.April . .. r European Steernaer , "Tata Steel Completes AcqUISitIOn 0 03,2001.

3 346 International Business Strategy 110-005-1 However, someindustry analystswereskeptical aboutthesuccess. ofthe acq~isition. Vive~Gu~ta, Managing Director,ATKearney (India),said,"The financials oft~IS dea~ req,Ulre high performance levels,perfect post-deal execution, andsustained highsteel pnces.

It IS arisky game and will beokay forTata Steel as long asthe economy isgrowing andnomajor bumps occur.If [these bumps] dooccur, theycanbecome achallenge, and r am reminded ofthe high leverage days of the mid-I 980s.,,10 Many analysts andindustry expertsfeltthat theacquisition wasrather expensive forTata Steel and this move would overvalue thesteel industry worldover.Commenting onthe deal, Sajjan Jindal, Managing Director,JindalSouthWestSteel, said,"The pricepaidisexpensive ...all steel companies mayget re-rated nowbutit's a good dealforthe industry."!' Despite theirapprehension ofthe deal being expensive forTata Steel, industry expertswere optimistic thatitwould enhance India'sposition inthe global steelindustry withtheworld's largest" andfifth largest steelproducers havingrootsinthe country. Stressing onthe synergies that could arisefromthisacquisition, Phanish Puram, Professor ofStrategic andInternational Management, LondonBusiness Schoolsaid,"The Tata-Corus dealisdifferent becauseitlinks low-cost Indianproduction andraw materials andgrowth markets to high-margin marketsand high technology inthe West. Thecostadvantage ofoperating fromIndia canbeleveraged in Western markets, anddifferentiation basedonbetter technology from Corus canwork inthe Asian markets.

Ill) Though thepotential benefitsofthe Corus dealwere widely appreciated, someanalysts were concerned thatthe Corus' acquisition wouldresultinsignificant equity dilution" ofTata Steel.

The company alsobecame highlyleveraged duetothe significant increasein debt" inits capital structure. TheUS$ 6.14 billion debtthatwasraised tofinance theacquisition hadbeen secured through theasset's ofCor usand was tobe serviced bythe cash flows generated byCorus.

Financial expertsalsopointed outtothe risk taken byTata Steel as itpiled onthe debt burden on Corus. Therewasadanger that,Corus's cashinflows wouldreduce ifthe global steelprices declined significantly, leadingtoadefault onthe loan taken. According to the credit ratingagency Standard &Poor's (S&P)I6, themove wasfinancially riskyforTata Steel. According toS&P analyst Anshukant Taneja,"Thesize of the acquisition andthepotential cashoutflow in Tata Steel's offerforCorus couldhaveanadverse impactonitsfinancial risk profile."!" 10 "Did TataSteel Overheat inits Zeal toWin Corus?" Knowledge@Wharton, February08,2007.

11 "India Inc.Hails Tata's Win,"TheTimes ofIndia, January 31,2007.

12 On June 25,2006, India-born LaxmiMittal'.s Rotterdam-based steelcompany MittelSteelCompany N.V.

(the largest steelproducer beforethe.~C.qulSltlOn) acquiredLuxembourg-based ArcelorSA(the second largest steelproducer beforetheacquisition). Thisacquisition resultedinthe formation ofArcelorMittal which became thelargest steelproducer inthe world. ' 13 ;~~~~l tothe Metal: Challenges ofTata Steel's COTUSTakeover," Knowledge@Wharton, October31, 14 Tate Steel's standalone equity sharecapital increased fromRs.7277.3 mill' .FY 2006.07 t Rs 62034.5 millioninFY 2008-09. Ion III 0.

15 Tata Steel's standalonedebtincreased from Rs.

96453.3 millioninFY 2006~07 t Rs 269461 8 ilf in FY 2008-09. o..rm ton 16 S&P isadivision ofMcGra\.v~Hill thatpublishes financialresearchanda1· ksdb dItis f h .... na YSIS onstoe anons.

one ate LOp three companies ill this business, alongwithMoody's andFithR ti 17 C . ., le amgs.

hris Noon, RuthDavid, 'TataPrevails inCorus Battle," www.forbes.com. January31,2007.

4 TATASTEEL'S ACQUISmON OfCORUS (6) 110-005-1 THE GLOBAL STEELINDUSTRY The global steelindustry hadwitnessed anunprecedented boombetween theyear 2002 andmid.

2008. Several majorsteelcompanies acrosstheworld wentonexpanding capacitiesencouraged by the increasing demandled by the significant growthinthe world economy IS and therising priceof the commodity (RefertoExhibit IIfor Top TenSteel producing companies inthe World).

Easy availability ofcredit boosted construction activitybothindeveloped anddeveloping nations.

Growth inthe world economy becamesynonymous withthegrowth inthe global steelindustry because ofthe high utility ofsteel inkey sectors likeinfrastructure, automotives,consumergoods, and industrial.

By July 2008, theprices ofmost ofthe steel products wereattheir peak(Refer to Table IIfor Global SteelPrices between January 2008andJuly 2009).

Table II Global SteelPriees (January 2008-July 2009) (InUSS/tonne) Hot Rolled Hot Rolled Cold Rolled SteelMedium Steel Month Steel Coil Steel Plate Steel Coil Wire Rod Sections Jan-08 639847716621871 Feb-08 699887 772687905 800 978890758 970 Mar-08 9151065 985 852 1042 Apr-08 99811601080 920 1105 May-08 12251144 10051184 Jun-08 1073 1307 J 186 10671234 Jul-08 1099 13001179 1062 1227 Aug-08 1093 12431046 9771154 Sep-08 973 1150 940 811 1045 Oct-08 865 1000 802 676 898 Nov-08 716 659609 780 Dec-08 565901 666626 791 806 Jao-09 575 753 637 574 Feb-09 556719 594526 714 Mar-09 505643 500678 638 576 Apr-09 487 490692 605 556 May-09 474 701 604 579 508 Juo-09 495 515682 604 598 Jul-09 513 Source: www.steelonthenet.com.

.'" ars 2006 and2007.

. IGDP consecutively In me yc te The world economy witnessed a 5~o, g~~~~h a~nd:~~ expected tocontract by 1.3% in2009.

However, thegrowth ratefell to 2.8 0 In 5 - ... ....:3:.4.:.:8;....~ ln.; t.:.er.:..:.national BusinessStrategy _ 110-005-1 The demand forsteel started declining inmid-2008 because of the slowdown witnessed by economies theworld over.Thesub-prime crisisthathademerged inlate 2007 inthe US had an adverse impactonglobal economies. Thebankruptcy ofseveral financial institutions inthe US and Europe ledtocredit tightening by financial institutions. Creditplayed amajor roleinthe capital expenditure ofbusinesses andinretail consumption. Withtheglobal creditcrisis, thedemand for steel came down drastically. Inthe second halfof2008, theglobal demand forsteel fellby20%.

Europe witnessed a44% decline whereas theUK saw a57% decline inthe demand forsteel in 2008. Atthe same time,thecost ofiron orewent up by 65% in2008. Lower demand resultedina fall inthe prices ofsteel products whereashigherrawmaterial costresulted inan increase inthe cost ofproduction forsteel manufacturers, The demand forsteel inseveral sectorslikeconstruction, mechanicalengineering, autornotives, and consumer goods fell sharply duetothe crisis (Refer toFigure I for Global Output Growth in Steel Using Sectors).

Theprices ofsteel products fellbyaround 40%within sixmonths from reaching theirpeaks inJuly 2008.

Figure[ Global Output Growth inSteel Using Sectors (January 2000-July 2009) Output growth " 20,----------- IS t-------I\--------- -Construction 10 t-:-----+-' ....~.......---- -Mechanical S englneerint -Automotive o -5 t---'\\7l~------\\~r- -Consumer durables -10 -MetalGoods -IS t----------J~ -20.l.------ --'-_ 20002001200220031004100S2006200720082009 Source: www.oecd.org.

The demand forsteel from China wasbuoyant tillmid-2008 brh h .

t' ity thtl k I" eeause 0 te uge construction ac IVI a 00 pace In connection withtheBeijing Olympics in2008 AI idh h huge demand forsteel fromChina wasoneofthe main reasons '0 th .

C1' • naiysts sal,tat t e th thid hd d II r emnation In steel prices On e 0 er 1311 , t e eman forsteel fromdeveloped ti .

severely impacted bythe sub-prime crisis(Refer toFigU~: 11~n:ow~scorndingrdsown .asth:y were the US). reman 0 teet In China and 6 ~ ......

_---- - ___________ -------------------------~TA~T~A~ST~E~EL~'S~A~C~QU~I~SIT~IO~N~OF_CO_R_U_S.:.(B.:.) __ ,......iI:llI- ...

Figure II Demand ofSteel inChina andtheUS(January 2007-March 2009) 110-005-1 OIia, lIml 12 Unl,dlules I fV\-...

.....

, v'V " \ \ \ '\ ~t------~ .......---L " , " H'--'-----'---:'>..,L- lSP---------- /~'/Il/II/I//II Source: www.oecd.org.

Many leading globalsteelproducers hadinvested hugeamounts incapacity expansion duringthe boom period. Though thedemand forsteel hadbeen declining indeveloped nationssincethemid- 2000s, steelproducers believedthatthedemand fromdeveloping nationswouldremain high.

However, thisdecoupling theoryproved wrongasthe developing nationstoofaced aneconomic slowdown in2008. Withthesignificant declineinthe demand forsteel (Refer toFigure III for Change inGlobal Demand forSteel), mostofthe major steelcompanies decreasedtheir production tobring supply in line with thedemand. ArcelorMittal, thelargest steelproducer inthe world, hadtoslash production by30% inthe last quarter of2008 andfurther toatotal ofaround 50% by mid-2009.

FigureIU Change inGlobal Demand forSteel (January 2006-March 2009) Millions of melrk tennes 1100,------------- 1400.1---------.-- !l00 .I-----If-I-I-I ......

l20D t--I-I-Ir-Ir-I-I-I-I-t-t-- HOD t1-1-1-1r-1r-1-1-1-t-t-t •• 1000 .11-1-1-J.-I- .....

-t-..

t-t-t1Ht 900 !I--I-~I-II-I-I-+t-lHr-t-.- 800 J.L~.l.,.Jl.,J~ ...........

.L,J.......... ..- 06Ql 06(12 0illJ 0604 01Ql0701 070301Q408Ql 080108030804 09Ql Source: www.oecd.org.

7 350 International BusinessStrategy 110-005-1 According toindustry analysts, hugespeculation favoringtheupward movement ofsteel prices resulted inspeculators pilinglipsteel inventories, whichdrovetheprices upin2008. However, the demand forsteel from China became moderate aftertheBeijing Olympics cametoan end inmid- 2008 andresulted inthe de-stocking ofhuge steelinventories. Thisaccelerated thefall inprice.

Steel consumers likeautomotive manufacturers, infrastructurecompanies,andconsumer goods manufacturers alsoreduced theirsteel inventories asthe demand forproducts wasdeclining.

In addition todeclining steelprices, non-integrated steelcompanies facedtheproblem ofstable input costs. ironareand coke arethetwo main inputs forsteel production andsteel companies which didnor have captive ironaremines hadtodepend onmining companies foriron are. The steel companies enteredintoannual contracts withironoreproducers tosecure thesupply ofiron are. Generally, thesecontracts wereinitiated aroundMarchofevery year.Though ironareprices in the spot market haddeclined byaround 40%bylate 2008, steelcompanies whichhadalready entered intocontracts withironaresuppliers couldnotbenefit fromthelower inputcosts.

According toindustry expertsinearly 2009, steelconsumption wasexpected todecline by14.9% in the year 2009 ledbythe US(-36.6%), Europe(-28.8%) andJapan (-20%). Steelconsumption in China wasexpected todecline by5% in2009 whereas inIndia, itwas expected togo up by 2%.

As of2008, Indiawastheworld's fifthlargest steelproducer butitsper capita consumption was low at46 kgs ascompared tothe global average of198 kgs(Refer toTable IIIfor Top TenSteel Producing Countries).

TableIII Top TenSteel Producing Countries(Z007-08) (In million tonnes) Country Z008Z007 % Growth China 502489 2.6 Japan 118.7120.2 -1.2 United States 91.598.2 -6.8 Russia 68.572.4 -5.4 India 55.153.1 3.7 South Korea 53.551.5 3.8 Germany 45.848.6 -5.6 Ukraine 37.142.8 -13.4 Brazil 33.733.8 -0.2 Italy 30.531.5 -3.4 Source. www.worldsfeeI.OIg.

Several developing nationslikeChina IndiaandBrazil deployed hugea tf t I' .:' mounso'money toarres t te econormc slowdown by~tllnuJatmg demandininfrastructure, automobiles,andthecapital goods sectorandbygeneraung employment. Thestimulus packages brouhtout bseveral developed anddeveloping nauonscrossed US$218 trillion byMarch 2009 g ti Y3 5" f hid' GDPTh . . ,represen mg.

,,0 t ewar .s .estimulus packages hadapositive impactonindustries likeconstruction and ~ulomobJles andalso boosted retailconsumption. Thesemeasures wereexpect dt h it!

Impact onthe demand forsteel globally, e 0 ave aposr rve 8 1iIW _ - TATASTEEL'S ACQUISITION OFCORUS (8) 110-005-1 REALlZING SYNERGIESAFTERTHEACQUISITION Tate .Steel planned to i~lplement theintegration processofCorns attwo levels -strategic and functional.

It had constituted teamsforthis purpose inApril 2007. These twoteams worked in are~s likeman~facturing, procurement,researchanddevelopment (R&D),IT,finance, andcapital projects toachlev~ thetargeted synergies. Duringtheintegration process,Tata Steel andCorus started implementing thebest practices ofeach other inall their plants tocut down oncosts and improve thereturn oninvested capital.

With theacquisition ofCorus, TSG'soperating profitmargins fellto14% from its40% leveland its raw material sufficiency fellto20% from 80%forthe fiscal year2007-08. Themajor reason for the lower profitmargins wasCorus's dependence onexternal sourcesforraw materials, Oneofthe major challenges forTSG wastoachieve rawmaterial self-sufficiency at Corus.

Toward thisend, TSG started scouting forraw material sourcesinAfrica, Australia, andBrazil, TSG hadsetatarget ofachieving rawmaterial self-sufficiency ofatleast 50%atCorus by2012. Il was estimated thatbyachieving 50%rawmaterial self-sufficiency, thecost ofproduction at COTUS would comedown by30%, translating into savings of US$ 60per tonne ofsteel produced.

In November 2007TSGinvested US$88.2million fora35% equity stakeinthe Benga Coalproject along withAustralian miningcompany Riversdale Miningforcoal mining inMozambique, Africa.

The Benga coalproject spanned 25,000hectares withaninfrared coalresource of 1.9 billion tonnes.

TSGacquired theright topurchase aminimum of40% oftile coking coalproduced bythe project oncommercial terms.

In December 2007,TSGentered intoajoint venture (JV) with Sodemi, astate-owned mining company inSouth Africa, forexploring anddeveloping theiron aremines ofMt Nimba inIvory Coast. The75% stake iniron oremining in Mt Nimba required TSGtoinvest between US$I billion andUS$ 1.5billion overaperiod of3 to 4years, Theproject hadanestimated resourceof 700 million to I billion tonnes ofiron are.Asof2009, TSG waslooking formore acquisitions of mining assetsinseveral nations likeAustralia, Canada,andLiberia.

TSG planned totransfer mostofthe raw material projectsithad acquired toCorus whilesomeofit would alsobetransferred toIndian operations. TSOplanned toset upthree Greenfield steel projects inIndia withacombined capacity of 22 million tonnes.

It also h~dplans to,e~pand the capacity atits existing plantstoproduce 10million tonnes ofsteel by20 J I ,from 6.~ million tonnes in mid~2008. Withhugeexpansion plans,analysts fearedthatitsraw material secuntywouldcome down andhence it would require moresupplies inthe future, F I fi .

I 2007-08 TataSteel reported thatithad realized US$76million insynergy or tie mancra year, id "Tata Steelhasderived thebenefits 111 benefits throughtheac~uisilion ofC?rus.

Ratan Tat:n~~t~ arcfrom reduction oftaxation andin the area ofmanufacturing, whereas.1n Corus, th~ b t.the corporate ccnter.,, 19 In itsannual shared services inthe area oflegal, Investor rel~t10nS~ edC't~~t itaimed torealize US$ 450million report forthefinancial year2007-08, Tat.a.~tee rep~a~ch 20 I0 and also toim'prove itsreturn on in synergy benefitsfromtheCorus acqutsitton by invested capitalfromthenprevailing 19%to30% by2012.

d anet income of Rs. 1,315.35 billion as compared to For thefinancial year2007-08, TSGreporte d I ) in fiscal 2006.07 Thenetprofits inthe 2 billi t d by Tata Steel (stan aone '.2006 the Rs. 252.1 IIon pos e 2321billion fromtheRs,41.65 billion reported l,n"" financial year2007-08 wentlip to, Rs, I..

12007.08 includedRs,59.07 billion inactuarial game 07, However, thenetprofit figure Inthe fisca, f dsinvestments (RefertoExhibit III and IV resulting fromthehigher yieldsofCorus pension un for TSG's Consolidated financialStatements).

. 8" www financialexpress.com, August12,2008.

19 "Tata-Corus SynergyRealises$76mn 111 FY 0, .

9 352 International BusinessStrategy 110-005-1 IMPACT OFGLOBAL SLOWDOWN According toindustry experts,thetiming ofthe Tata Steel-Corus dealturned outtobe ~rong because ofthe global economic crisis.Theyopined thatthedeal was?one ~t peak valuation ~s almost allasset classes starteddeclining fromlate2007 onward. Theintensity ofthe economic slowdown anditsimpact onthe global steelindustry wereunanticipated by industry expertsand TSO's management.

The major market ofCarus -Europe, including theUK -faced anextreme adverseimpac~dueto the recession. InOctober 2008,TSOlaunched arestructuring programcalledWeathering the Storm (WTS) totake short-term actionstocut costs andkeep supply inline with thedemand.

Through WTS,TSGtargeted saving £ 600 million byMarch 2009.Someofthe measures ofWTS included elimination ofovertime, alteringshiftpatterns tocut down onshift bonus payments, and reduction ofthird party services. Inaddition tothese measures, thecompany retrainedsomeofits employees duringthefree time thatresulted becauseofadrop inproduction activity.

By March 2009, Corus hadelimiaated atotal of3,500 jobsaspart ofthe WTS program. PhilippeVarin (Varin), CEOof COTUS said,"The current slowdown requiresustoadapt ouroperations tothe changing environment withmaximum speed.Weareadopting proactive andresponsible measures in the areas ofproduction andcosts tooptimize ourresults. Meanwhile, ourstrategy forlong-term growth remains unchanged.v" In January 2009,TSGannounced anotherinitiative namedFitfor Future (FFF)which included measures likedivestments, assetrestructuring, efficiency,andoverheads review.Measures taken under FFFwere toimpact Corus's operations inthe long term. Through FFF,TSOaimed to achieve an improvement inits annual operating profitby £ 200 million. Asapart ofFFF, in January 2009, TSOannounced that 3,500 jobswould beeliminated atCams plants inthe UK and the Netherlands. TSGalsorestructured someofthe assets ofCorus tofocus moreonhigh margin products andonimproving theefficiency ofplants.

For thefinancial year 2008-09, TSOreported anet income ofRs.

1,473.29 billioninrevenues, 12% higher thantherevenues ofthe financial year 2007-08.

Forthesame period, TSO'snetprofit declined by 60% toRs.

49.5 billion. The net profit margin reported inthe financial year 2008-09 was 3.36% ascompared to 9.39% infiscal 2007-08.

However, TSOannounced thatithad changed its accounting policyillfiscal 2008-09 duetowhich it did notrecord theactuarial gain/loss from investments ofCor uspension fundsinits profit andloss statement asitdid infiscal 2007-08. TSO reponed thatitincurred actuarial lossofRs.

54.96 billion andthat ifithad followed thesame accounting policyasofprevious years,thenitwould havereported anet loss ofRs.

5.45 billion for the fiscal 2008-09.

Total deliveries from TSO inFY 2008-09 witnessed a 10% decline toreach 28.54 mi1lion tonnes, reflecting thesluggish demand, especially inEurope inthe second halfofFY 2008-09.

The increase insteel prices in FY 2008-09 ascompared toFY 2007-08 resultedinhigher revenues for FY 2008-09 despitethedecline indeliveries.

TSO reported thatithad realized synergy benefitsof US$ 256million inFY 2008-09.

The production atCorus inthe first halfofFY 2008·09 was 10 million tonnes thesame asithad been inthe first halfofFY 2007-08.

However, withtheslowdown indemand, it was cutby40% in the second halfofFY 2008-09 to6million tonnes,takingtheoverall production forFY 2008-09 down by 20% ascompared tothe production in FY 2007-08.

Acknowledging thedemand side problems at Corus, Muthuraman said,"The recession inworld demand looksdeeper thanwhat we thought sixmonths ago.?" 20 "Corus CutsJobs & Steel Production," http://news.icm.ac.uk, November 10,2008.

21 "Tata Steel FY09 Net Drops 60pet," w,,,w.indianexpress.com, June26,2009.

10 TATASTEEL'S ACQUISITION OFCORUS (6) 110-005-1 The de~iveries ofCarus inFY 2008·09 droppedby14% to20 million tonnesfrom23million tonnes In FY 2007-08. Abouttheproblems facedbythe steel industry inFY 2008-09 Rt T id "Th bdl . ,aan ata SBI .~esector wasa y hit ~rstly by increase iniron oreand coal prices thatputpressure on margms ~~ aJl the steel companres, andsecondly theglobal meltdown thatimpacted thedemand for steel. However, TataSteel reported agrowth of9% indeliveries thatreached 5.23million tonnes inFY 2008-09. Forthesame period, itsnet income increased by23% toRs. 243.15 billion and netprofit wasatRs. 52.0t billion.

In May 2009, TSOhadtoconvince itslenders toreset thecovenants 011 a £ 3.7 billion seniordebt facility", As part ofthe new agreement, TSGwastopre-pay £ 200 million tothe lenders to deleverage the Cams balance sheettosome extent. Thelenders alsoagreed nottoraise theinterest cost onthe remaining lifeofthe loan.

Tara Steel alsocommitted itselftoinvesting £ 425 million in a phased manner intoCorus ofwhich £200 million wouldbeutilized topre-pay thedebt.

In June 2009. creditratingagency Moodydowngraded theratings onboth Tata Steel and Corus, Moody's AssistantVicePresident, IvanPalacios, said,"The rating action reflects theanticipated weakening ofTata Steers consolidated financialprofileovertheintermediate term,driven bythe weakness inthe steel markets andthesignificant operatingchallenges facedbythe company's European operatlcns.?" TataSteel's sharesin the Indian stockexchanges reactednegatively tothe downgrades andthescrip lostmore than11%onJune 08,2009 toclose atRs. 4t2.5 (Refer to Exhibit V for Stock PriceChart ofTata Steel).

Analysts grewskeptical aboutthefinancial viabilityofCorus's operations. During.theacquisiti?n of Corus, Tata Steel hadannounced thatthecash flows fromCorus would be sufficient tocover ItS existing debtobligations andthedebt ithad raised forfunding theacquisition. However,the economic crisisforced TataSteel toinvest itsown money intoCorus.

In June 2009, TSGannounced thatithad realized £ 650 million savings fromitsWTS restructuring program,about£50 million higherthanitstarget bythe end ofMarch 2009.The production atCorus plantshadbeen cutbyatleast 40% because. o~w~ak de~and. TSGannounced that forthe financial year2009-10, ittargeted achieving £ I billion msavings through theWTS program.

tl THE ROAD AHEAD The global demand forsteel remained weakeveninthe second quarter offinancial year ~OO~~ I~; However, theprices ofraw materi~ls formaking st s e$eI 3 'Oe OIl intl;e ye~;~~~8~~~:~~~~~,~rare~~~c for coal felltoUS$ 120pertonne In 2009 fromU peronn for iron orefelltoUS$ 62in2009 fromUS$102pertonne In 2008.

. .I TSG reported poorfinancial resultsinthe Notwithstanding thefallinthe pnces ofraw ma~ena S, dquarter thatended in September 2009.

second quarteroffin~ncial'year 2009~130%For~se2~;c~~ billionascompared to Rs.

440.50 bi11io~ TSG reported a drop III net lOc~me by~t~09'F ;hesame period, TSGreported a net loss of in the second quarter offinancial year208f Rs' ~7 03billion reported inthe second quarterof Rs.

27.19 billion ascompared tonet profit 0..

financial year2008-09.

Q I Loss" v,'VW indianexpress.com, August 28,2009.

22 "Corns-Laden TataSteel Posts Rs 2,209 cr ,... .f C rus This debtwasanon-recourse debt O b 'II' f rthe acqursmon 00.

nr 23 Tara Steel hadborrowed £ 3.

7 IIOn 0.

dd to a this debt obligation from thecash OWS0 collateralized by Corus assetsand Tata Steel mren ePY Corns. S I" vw blonnel.com, June09,2009. .

I 24 "Moody's Downgrades Tatatee, www. .

b thesupplier and their customers. Usual y.

I ontract price erween .

be I k 2S Benchmark pricerepresents the annua c ith ki coalandiron ore producers at certam nctmar steel producers enterintoannual contracts w~ c~l;:ar based on the supply anddemand.

prices. Thesebenchmark pricesarenegotiate eve