LAKSHMI MITTAL ESTABLISHED A STEEL PLANT IN TRINIDAD AND TOBAGO. DISCUSS THE SOURCING, LOGISTICS AND LOCATION DECISIONS HE MAY HAVE FACED.

PROF VENKATESH GANAPATHY

INTERNATIONAL BUSINESS QUESTION PAPER – BANGALORE UNIVERSITY

Acquisitions 1989 Iron and Steel Company of Trinidad & Tobago Iscot Steel Plant in Trinidad & Tobago Loss making companies Within one year, Mittal turned around these

plants. This made Mittal’s entry into the US easier.

Trademark strategies of Lakshmi Mittal Buy old rundown steel mills from

governments at throwaway prices and turn them around.

Plants in Romania, the Czech Republic and Poland between 2001 and 2004.

Expand production in steel mills.

Location decisions Select a location where there is already a loss

making steel mill Where natural resources are available Where governments looking out for strategic

partnerships to deal with the losses made by the steel mills.

Where markets for finished products are close by.

Influence of technology in decision making Jakarta plant, Indonesia switched over to

new electric arc technology in steel manufacture.

Mini mills – flexible set up, lower costs. High quality. Investigate alternative raw material

sources.

Sourcing challenges… Blast furnaces – pig iron raw material. Mini mills – scrap steel raw material. Mittal’s prediction – price of scrap steel

would increase. Mittal started looking out for sourcing

alternative raw material for the steel mill.

DRI technology DRI – Direct Reduced Iron. Process involved a special treatment Iron ore was smelted directly No oxygen No melting Result was ….?

Benefits of DRI technologyCOST EFFICIENCIES OF 40-50% !

So, just by sourcing alternative, cheaper raw material aided by new technology, costs were reduced !

Lease and acquisition Initially the Trinidad and Tobago plants

were on lease, later on these were acquired by Mittal.

Robust decisions… Mittal used the state run Trinidad and Tobago

mills to use DRI technology and products from mills were shipped to the plant in Jakarta.

Benefits of Transfer pricing from one subsidiary to another!

In the next few years, Mittal became an expert of DRI technology.

This led to cost reductions to the tune of 50% in many of his operations.

Decision making• 1980s – Governments in West selling state-owned

steel plants at sharp discounts.• Acquiring them – better strategy than building a

new mill.• Mittal’s preference – steel plant with DRI (directly

reduced iron) technology.• Mittal had the foresight to realise that in case

steel mills did not use the DRI technology, then operational efficiency would be impacted by rise in the price of scrap raw material. He was right!

Problem or Opportunity? While for others, economic recession

was a problem – for Mittal, it was an opportunity.

Mittal’s success formula Reduce costs Layoffs – he replaced the Germans with

Indians and saved $ 18 million in salary costs.

Ship steel where best price could be obtained Intensive capital investments – modernize

plants, expand production.

Trinidad plant – jewel in the crown Access to one of the world’s largest

suppliers of DRI This led Mittal to produce steel at a cost

much less than his competitors. Later on Mittal purchased the plant and

renamed it Caribbean Ispat Limited (CIL).

Manufacturing strategy 90% Direct Reduced Iron 10% Scrap

Location decisions were also based on Availability of natural gas Modern shipping terminals that could

handle cargo 24 x 7 Ease of exporting from host country to

other countries

DRI expertise turns into a goldmine! Over a period, Mittal became so

proficient in DRI technology that production capacity of DRI became the highest in the world!

DRI so produced was supplied to other subsidiaries of Arcelor Mittal.

Why Trinidad & Tobago ? Caribbean & Central American countries ranked

both these places as second-best for cost effectiveness, third best in terms of country competitiveness & fifth best in terms of economic potential.

Largest exports to USA Strong trade relations Access to regional and international markets Low inflation, steady growth, stable economy,

organised financial system

Why Trinidad & Tobago ? (Cont’d) Success of FDI ! 400 MNCs set base in Trinidad & Tobago – Fujitsu,

Microsoft, IBM.. T&T have CARICOM (Caribbean community) trade

agreements with Venezuela, Colombia, Dominician Republic, Costa Rica.

Investment treaties with France, USA, Canada, Cuba and other Caribbean nations

Funding from Govt, rebates, lower customs duty and value added taxes, incentives for free trade zones.

Logistics decisions Mittal’s strategy was to improve last mile

supply chain delivery. Move process industries closer to areas

where natural resources abound. Project evaluation and feasibility studies Clear understanding of infrastructural

constraints.

Sourcing - make or buy Make or buy depends on

Cost Production capacity Quality Timing

Mittal based his decisions on these parameters

Mittal’s interview in 2006 to Fortune magazine I realized that life is too short to build a

steel company from the scratch

Mittal’s success formula was based on… Strategy of expanding into the US by

pouncing on bankrupt companies and turning them around.

Mittal’s working style Nice Tyrant (Oxy moron) Cut throat yet humble businessman A perfectionist Oversees plants in 16 countries sitting in London Studies data Conference calls Weekends – visiting steel mills and meeting

managers.

Mittal’s ultimate dream is … To consolidate fragmented steel industry

Penetrate markets in emerging economies like China and India.