According to a new research paper titled ‘The “New Normal” in the Indian Steel Industry: Achieving high performance in a challenging environment’ released today by Accenture, enhancing five important business capabilities to suit market conditions will be critical for the long-term success of Indian steel companies (SteelCos).
Globally, steel players have been operating in a challenging environment with rising input costs and persistent lower capacity utilization. This is driven by low demand growth in developed markets, accompanied by a structural shift in the global steel industry to developing countries like India and China. The global scenario has been a prologue to the Indian market situation where steel players have started showing signs of down-cycle leading to margin compression despite strong volume growth. This is primarily due to high input costs and a weak macroeconomic environment, both globally and domestically. Declining margins, coupled with sluggish demand growth, have made investors cautious about steel companies, leading to a 30% decline in the enterprise value of Indian steel industry since fiscal year 2010.
Based on Accenture’s engagements with senior industry executives over the last 5 years, the report suggests that in order to survive and thrive in this context, Indian SteelCo’s will need to sharpen their capabilities in five areas:
• Investing in Raw Material Security - Raw material security varies widely across the Indian SteelCo’s and is probably the largest differentiator among the incumbents. As SteelCo’s look to secure their raw materials supplies, the capability to acquire, develop and operate overseas raw material assets has become a strategic imperative given the short terms challenges in securing such assets in India. Even where the raw materials are not shipped to India, the overseas asset helps act as a natural hedge.
• Capital Project Management - SteelCo’s are taking on larger projects at an unprecedented pace as they invest to stay ahead of the demand curve and enhance their market share. Commensurate investments in internal project execution capability have lagged the asset side investments which makes project execution a complex task. Project execution is further compounded by challenges posed by external factors such as regulatory challenges, limited talent pools, contractors and construction labor constraints, stringent environmental norms. All of this reflects in the execution challenges faced by SteelCos. SteelCo’s need to focus on project management as a core capability integral to its growth objectives. They need to focus on selecting the right projects and optimize the scarce resources available, ensure the projects identified are managed in a robust manner and the right enablers in terms of organization, processes and information technology are leveraged to deliver a successful outcome.
• Becoming more Customer Centric - As SteelCos expand, the overlap in their respective market and product footprint is increasing. This coupled with a slowing demand growth means that they are chasing the same business, more frequently. In this scenario, increased customer centricity will differentiate the high performers. SteelCo’s will need to deepen their understanding of buyer values and create innovative products and service offerings targeted at different customer segments. Capability to analyze customer buying patterns will enable the sales force to be more proactive in the selling cycle. Additionally, as customers become more demanding and offering complexity increases, SteelCo’s will need to embrace leading Sales and Distribution practices (e.g. tracking secondary sales, solution selling) from consumer focused industries such as FMCG & Consumer durables to differentiate themselves from their peers.
• Building differentiated Supply Chains - SteelCo’s supply a wide range of products to diverse customers with very different buyer values, causing huge strain on the supply chain. As the overlap in manufacturing capability across their plants increases, SteelCo’s will need to acquire capability to optimize across multiple plants. In order to improve their customer service while controlling inventory, SteelCo’s will need to adapt their Make-To-Order and Make-to-Stock production strategy by customer segments. Given the dynamic market, SteelCo’s will need to enhance flexibility by pushing differentiation as far down in the supply chain as possible (i.e. intermediate stocks and finishing to order). Finally, customizing channel management capabilities for customer segments will enable SteelCo’s to enhance customer service and potentially, extract a premium.
• Securing Human Capital - Over the last decade Indian SteelCo’s have expanded their crude steel capacity 2.5X and integrated upstream (especially into iron ore mining) by tapping skill pools from the incumbent Integrated Steel Plants. SteelCo’s are now faced with the problems of an ageing workforce on the manufacturing shop floor. This has forced a move towards greater automation and, consequently, the need for a highly skilled workforce. As the manufacturing capacity increases, skills additions in critical areas of the steel value chain like Mining, Capital Projects, Supply chain and sales and marketing are in short supply and have become limiting factors for growth. Further, as SteelCo’s embark on aggressive growth plans, securing the leadership pipeline to fuel the growth, programs to attract and retain talent along with a sharp focus on up skilling their current resource pools to stay relevant in the changing scenario will become imperative.
“Indian steel markets are moving toward a new normal. Increased competition with capacity outpacing demand, changing customer expectations and enhanced focus on downstream integration are altering the rules of the game. In this scenario, Indian players who strengthen critical business capabilities will emerge in a better shape when the steel commodity cycle turns again“said Deepak Malkani, Managing Partner, Resources Operating Group, Accenture India.
Globally, steel players have been operating in a challenging environment with rising input costs and persistent lower capacity utilization. This is driven by low demand growth in developed markets, accompanied by a structural shift in the global steel industry to developing countries like India and China. The global scenario has been a prologue to the Indian market situation where steel players have started showing signs of down-cycle leading to margin compression despite strong volume growth. This is primarily due to high input costs and a weak macroeconomic environment, both globally and domestically. Declining margins, coupled with sluggish demand growth, have made investors cautious about steel companies, leading to a 30% decline in the enterprise value of Indian steel industry since fiscal year 2010.
Based on Accenture’s engagements with senior industry executives over the last 5 years, the report suggests that in order to survive and thrive in this context, Indian SteelCo’s will need to sharpen their capabilities in five areas:
• Investing in Raw Material Security - Raw material security varies widely across the Indian SteelCo’s and is probably the largest differentiator among the incumbents. As SteelCo’s look to secure their raw materials supplies, the capability to acquire, develop and operate overseas raw material assets has become a strategic imperative given the short terms challenges in securing such assets in India. Even where the raw materials are not shipped to India, the overseas asset helps act as a natural hedge.
• Capital Project Management - SteelCo’s are taking on larger projects at an unprecedented pace as they invest to stay ahead of the demand curve and enhance their market share. Commensurate investments in internal project execution capability have lagged the asset side investments which makes project execution a complex task. Project execution is further compounded by challenges posed by external factors such as regulatory challenges, limited talent pools, contractors and construction labor constraints, stringent environmental norms. All of this reflects in the execution challenges faced by SteelCos. SteelCo’s need to focus on project management as a core capability integral to its growth objectives. They need to focus on selecting the right projects and optimize the scarce resources available, ensure the projects identified are managed in a robust manner and the right enablers in terms of organization, processes and information technology are leveraged to deliver a successful outcome.
• Becoming more Customer Centric - As SteelCos expand, the overlap in their respective market and product footprint is increasing. This coupled with a slowing demand growth means that they are chasing the same business, more frequently. In this scenario, increased customer centricity will differentiate the high performers. SteelCo’s will need to deepen their understanding of buyer values and create innovative products and service offerings targeted at different customer segments. Capability to analyze customer buying patterns will enable the sales force to be more proactive in the selling cycle. Additionally, as customers become more demanding and offering complexity increases, SteelCo’s will need to embrace leading Sales and Distribution practices (e.g. tracking secondary sales, solution selling) from consumer focused industries such as FMCG & Consumer durables to differentiate themselves from their peers.
• Building differentiated Supply Chains - SteelCo’s supply a wide range of products to diverse customers with very different buyer values, causing huge strain on the supply chain. As the overlap in manufacturing capability across their plants increases, SteelCo’s will need to acquire capability to optimize across multiple plants. In order to improve their customer service while controlling inventory, SteelCo’s will need to adapt their Make-To-Order and Make-to-Stock production strategy by customer segments. Given the dynamic market, SteelCo’s will need to enhance flexibility by pushing differentiation as far down in the supply chain as possible (i.e. intermediate stocks and finishing to order). Finally, customizing channel management capabilities for customer segments will enable SteelCo’s to enhance customer service and potentially, extract a premium.
• Securing Human Capital - Over the last decade Indian SteelCo’s have expanded their crude steel capacity 2.5X and integrated upstream (especially into iron ore mining) by tapping skill pools from the incumbent Integrated Steel Plants. SteelCo’s are now faced with the problems of an ageing workforce on the manufacturing shop floor. This has forced a move towards greater automation and, consequently, the need for a highly skilled workforce. As the manufacturing capacity increases, skills additions in critical areas of the steel value chain like Mining, Capital Projects, Supply chain and sales and marketing are in short supply and have become limiting factors for growth. Further, as SteelCo’s embark on aggressive growth plans, securing the leadership pipeline to fuel the growth, programs to attract and retain talent along with a sharp focus on up skilling their current resource pools to stay relevant in the changing scenario will become imperative.
“Indian steel markets are moving toward a new normal. Increased competition with capacity outpacing demand, changing customer expectations and enhanced focus on downstream integration are altering the rules of the game. In this scenario, Indian players who strengthen critical business capabilities will emerge in a better shape when the steel commodity cycle turns again“said Deepak Malkani, Managing Partner, Resources Operating Group, Accenture India.
