In an increasingly flat world, globalisation is the recipe for both corporate survival and growth. Corporate India has unsurprisingly been going global following economic liberalisation. While the competitive advantage and business model of India's IT industry are well known, they are less readily apparent in manufacturing. Despite the reputation of Indian companies, especially those in the Birla and Tata groups, in cutting costs and improve operational efficiencies, the balance of advantage in manufacturing seems to lie with China and in R&D with the west. In aluminium, for instance, Chinese smelters are the most cost-effective. The workhorse AP-18 smelting technology is the proprietary intellectual property of the French Company, Aluminium Pechiney.
India has for long been an east-west junction. Indian management is consequently uniquely poised to bridge the cultural divide necessary for the emergence of globally integrated companies of the twenty first century ?something the Japanese were unable to accomplish ?combining manufacturing in developing countries and R&D in the west, a point often underscored by Narayana Murthy.
Whatever the business model, mergers and acquisitions must have strategic synergies. How does Hindalco's recent buy out of Novelis measure up? India's biggest integrated aluminium company inputting bauxite ore and marketing semi fabricated aluminium products, Hindalco has modest exports and is small by global standards despite its global cost competitiveness. Novelis operates in 11 countries with a 20 per cent global share of aluminium flat rolled products. Its big primary aluminium deficit however exposes it to huge input price volatilities inherent in commodity markets, and limits upside gains when LME prices are high.
Novelis currently purchases 2.3 million tonnes (MT) of primary aluminium, in addition to producing 1 MT through a mix of smelting and recycling. Eighty per cent of Hindalco's primary aluminium production of 0.5 MT feeds its own downstream facilities. If Hindalco's expansion plans are factored in, it will produce 3 MT of alumina, which can be smelted to produce 1.5 MT of primary metal if its current expansion plans are scaled up. This would at most leave a surplus of 1.1 MT to be ploughed into Novelis, leaving the integrated company short by 1.2 MT in primary metal and susceptible to LME volatilities.
The picture could change dramatically if somehow NALCO, the Indian public sector giant, were to become part of this conglomerate. NALCO currently produces 1.6 MT of alumina, slated to increase to 2.1 MT. After expansion it will produce 0.45 MT of primary metal. It has negligible downstream facilities. If the entire primary metal potential of Nalco and Hindalco, two of the lowest cost producers of alumina internationally, were to feed Novelis?downstream production, a fully integrated NALCO-HINDALCO-NOVELIS combine would be more or less self-sufficient in metal. It would also have access to one of the biggest and best bauxite reserves in the world. One alternative for this combine would be to either toll-smelt or buy into smelting capacity (in China?), ideally hydel-based since smelting is very power-intensive. Even as the global glare is on steel, a major India based TNC could well emerge alongside Alcoa, Alcan and Norsk Hyrdo Aluminium as a global player in aluminium.
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