thyssenkrupp and Tata Steel signed a memorandum of understanding (MoU) to combine their European steel activities in a 50/50 joint venture. Their aim is to create a leading European flat steel player to be positioned as quality and technology leader. The new entity is set to have pro-forma sales of about €15 billion (US$18 billion) and a workforce of about 48,000, currently at 34 locations. Shipments are envisioned to be about 21 million tons a year.
To be named thyssenkrupp Tata Steel, the planned joint venture will be managed through a lean holding company based in the Netherlands. It is to have a two-tier management structure comprising a management board and a supervisory board. Both boards are to have equal representation from thyssenkrupp and Tata. The codetermination structures in Germany, the Netherlands and Great Britain will be retained.
thyssenkrupp intends to contribute its Steel Europe business to the planned joint venture. There are also plans for the joint venture to include thyssenkrupp MillServices & Systems GmbH, a steel mill services provider that is part of the Materials Services business. Tata would add all of its flat steel activities in Europe.
Under the planned joint venture, we are giving the European steel activities of thyssenkrupp and Tata a lasting future. We are tackling the structural challenges of the European steel industry and creating a strong No. 2. [ArcelorMittal is the top EU steel producer. -Ed.] In Tata, we have found a partner with a very good strategic and cultural fit. Not only do we share a clear performance orientation, but also the same understanding of entrepreneurial responsibility toward workforce and society.—Dr. Heinrich Hiesinger, CEO of thyssenkrupp AG
The Tata Group and thyssenkrupp have a strong heritage in the global steel industry and share similar culture and values. This partnership is a momentous occasion for both partners, who will focus on building a strong European steel enterprise. The strategic logic of the proposed joint venture in Europe is based on very strong fundamentals and I am confident that thyssenkrupp Tata Steel will have a great future.—Natarajan Chandrasekaran, Chairman of Tata Steel
In the initial years—from closing onward—the joint venture partners plan to focus on establishing the joint venture and leveraging synergies. These are anticipated among other things from integrating sales, administration, research and development, joint optimization of procurement, logistics and service centers as well as improved capacity utilization in downstream processing. After the ramp-up phase, the joint venture partners expect annual synergies of €400 million to €600 million.
The production network is to be reviewed starting in 2020 with the aim of integrating and optimizing the production strategy for the entire joint venture. The two companies said that is not yet possible to quantify the additional synergies from this integration in detail. The scope for optimization also depends on numerous external factors such as the outcome of the Brexit negotiations and the implications that follow. Other external parameters include the development of the regulatory environment in areas such as emission trading and international trade policy.
The two joint venture partners expect that leveraging the cost synergies across the entire entity will require a reduction in workforce over the years ahead by up to 2,000 jobs in administration and potentially up to 2,000 jobs in production. This burden is expected to be shared roughly evenly between the two parties, which means a total of about 2,000 jobs at thyssenkrupp.
The steel industry has faced massive challenges in Europe for many years. There is structural overcapacity in supply and constantly high import pressure. This leads to the fact that various stages in the value chain are operating well below capacity. Consequently, all producers are under pressure to fill capacity and forced to pass on restructuring gains to the market time and again. The result is a downward spiral and a need for restructuring about every three to four years, with major steel assets coming under threat of closure in the medium-term.
The planned joint venture marks another milestone on thyssenkrupp’s strategic way forward. In its evolution into a strong industrial group, thyssenkrupp has two priority aims: reducing dependency on the highly volatile steel business and enabling optimum development of all business areas.
In the months ahead, due diligence will be conducted. In the process, the negotiating parties will give each other access to confidential business documents to the extent permissible between competitors. Based on this as well as on discussions with the entire Supervisory Board, it is envisaged to sign a contract in early 2018. Closing—the effective start of the joint venture—could take place in late 2018 following antitrust approval by the relevant authorities.