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Home , Birla family, Lakshmi Mittal, SsangYong Motor, Tata Daewoo

Special Report Research Institute

Background and Performance of Indian Firms Entering the Korean Market

Jung, Moo-sup Mahindra Ssangyong Showing Potential for Inclusive Growth _P60

Choi, Yoon-jung The Rise of Tata , Made Possible through Localization and Synergy _P66

Lee, Dae-woo Korea Prospers under Indian Company _P74 special report Research Institute

Mahindra Ssangyong Showing

Potential for Inclusive Growth Jung, Moo-sup _ Professor, Department of International Trade, Dong-A University

Mahindra & Mahindra and Ssangyong Motor’s joint press conference at the Renaissance Hotel in Korea. From left to right, Mahindra & Mahindra President Pawan Kumar Goenka, CFO Bharat Doshi, and Ssangyong Motor President Lee Yoo-il field questions from reporters.

Mahindra & Mahindra, one of ’s leading carmakers, entered the Korean market with its conclusion of an agreement to acquire Ssangyong Motor on November 23, 2010. It was the fifth-largest merger and acquisition (M&A) deal in the global industry in 2011, holding much significance for both Mahindra and Ssangyong.

Saving Cash-strapped Ssangyong Even after Acquisition

Until it was acquired by Mahindra, Ssangyong con- stantly suffered hard times under court receiver- ship, including a strike and factory occupation that lasted 77 days from May 22 to August 6, 2009. After a series of meetings, a South Korean court ap- proved a rescue plan for Ssangyong Motor on De- cember 17. After the lead manager for the sale of the struggling automaker was selected in February 2010 and public notice of the sale was made in May of that year, seven companies submitted let- ters of intent (LOI) for Ssangyong, with Mahindra being selected as the preferred bidder. Mahindra signed a memorandum of understanding (MOU) with Ssangyong on August 23, 2010. After conduct-

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Turismo and the Korando C, have been well re- ceived in the market. Ssangyong’s total sales also continue to increase. Mahindra already has a business network for as- sembling products in India and exporting semi-fin- ished products. As a result, Ssangyong’s exports to India and overseas sales are rapidly increasing. “Ssangyong is expected to see sales of than 150,000 units in 2013, higher than its target of 149,000,” said Lee You-il, the president of Ssangyong Motor, at the that began on March 5, 2013. Within one and a half months from the release in early February, more than 3,000 units of Turismo were sold. Ssangyong plants went into

full operation to meet www.internationalrivers.orgthe orders, and workers who had been forced to take unpaid leaves for the last four years returned to work. Its Pyeongtaek plant, which had operated for only four hours a day, is currently in operation 11 hours a day. Bloomberg Mahindra Ssangyong Shows Potential Ssangyong’s Sales and Profit/Loss Trend ing due diligence, Mahindra invested a total of deficits, which totaled KRW 100 billion in both 2009 2010 2011 2012 KRW 522.5 billion in March 2011 (KRW 427.1 billion 2011 and 2012 after the acquisition by Mahindra. Whenever I have an opportunity to lecture on Sales in new paid-in capital and KRW 95.4 billion in cor- However, there is a silver lining in Ssangyong’s Indian companies, I never fail to talk about Mahin- 1.07 2.07 2.77 2.86 (KRW 1 Trillion) porate bonds) to acquire a 70% stake in Ssangyong. future. Mahindra has made bold new investments dra Ssangyong as it has some interesting features. Operating profit -2,934 -550 -1,412 -991 Even though two years have passed since the to normalize the operation of Ssangyong. First, Mahindra Ssangyong is an important case (KRW 100 Million) Net income acquisition, Ssangyong is still in the red, and its to- Ssangyong’s sales and stock price are gradually study showing the possibility of mutual growth be- -3,463 81 -1,124 -1,061 (KRW 100 Million) tal market value is lower than what Mahindra paid rising thanks to Mahindra’s efforts to expand over- tween Korea and India, the leading candidate to Net income to sales ratio (%) -32.46 0.39 -4.06 -3.7 to acquire it. As of March 26, 2013, Ssangyong’s to- seas sales through its existing overseas sales net- become the next China. Mahindra Ssangyong is a Note: Based on the December settlement and individual GAAP standards tal market value was about KRW 730 billion, and works. In February 2012, Mahindra unveiled a plan typical cooperation model for attracting capital the value of Mahindra's initial 70% stake was worth to invest KRW 295.8 billion in a project to develop from and expanding access to emerging countries only about KRW 510 billion, showing that new engines and small crossover utility vehicles. and it is also regarded as an effective model for Ssangyong is suffering some capital losses. Such This investment plan is gaining ground as the Korean economy to enter emerging markets. capital losses have been attributed to mounting Ssangyong’s new models, including the Korando This model pursues growth for both Mahindra and

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Ssangyong’s Market Capitalization and Sales Trend (KRW 10 Billion) changes, aiming for mutual growth between the tribute greatly to turning deficits into surpluses.

946 Market capitalization Annual sales two. However, it seems to take more time to verify Ssangyong and Mahindra must create synergy in how effective this acquisition model would work, order to increase overseas sales. Given that it will 746 and the takeover of Ssangyong by Mahindra is a take at least three to four years to realize such syn- 569 good test bed for such verification. ergy, Ssangyong will be able to achieve its goal There is another thing I always talk about this year—the third year after its acquisition. 551 460 483 Ssangyong during lectures: Ssangyong’s market Achieving success for both Ssangyong and Ma- value will become much higher in the future. I hindra by creating synergy can be an exemplary even predicted that its market value would surely model which would allow the Korean economy 342 328 330 344 295 312 250 206 207 277 286 double within a year. I began to say this last sum- and companies to pursue mutual growth with

62 73 mer. If my prediction proves correct, its market emerging economies and companies. Emerging 112 65 88 107 value will surely double in price from last August economies, including India, must nurture manufac- Dec.2002 Dec.2003 Dec.2004 Dec.2005 Dec.2006 Dec.2007 Dec.2008 Dec.2009 Mar.2010 Dec.2011 Dec.2012 Mar.2013 to KRW 10,000 per share this August. turing in order to meet the demands of populations Source: Ssangyong Motor’s annual reports Such a prediction is not too wild considering with increasing purchasing power. Companies in Ssangyong’s long-term stock price and sales emerging countries without a manufacturing base trends. Ssangyong’s sales continued to increase af- can practically utilize Korean companies and the ter 2009 and totaled about KRW 2.9 trillion in 2012. Korean manufacturing ecosystem. Even though Ssangyong as Mahindra acquired Ssangyong un- global companies. Chinese and Indian companies This figure is quite close to the sales figure of KRW Korea has technologies as sophisticated as those der court receivership at a reasonable price and have one thing in common: they purchase foreign 3.1 trillion it reached in 2007 when its total market of advanced countries such as Japan, Germany, Ssangyong utilized Mahindra’s management re- companies that have advanced management re- value was over KRW 5 trillion. and the U.S., their prices are not that high. Korea sources, such as its capital and sales networks. sources, including advanced technologies and and Korean companies offer many benefits to In- Second, it is a good case study for comparing brands. But their goals and methods for carrying dia: geographic benefits to target the Chinese and Chinese and Indian companies as Ssangyong went out M&As are slightly different. For this reason, Anticipating Success through Synergy other Asian markets, strong competitive brands, through both a failed takeover by China’s leading much attention is being paid to whether the Indian and its status as an FTA hub. automaker Shanghai Corp company will be able to succeed better than the The most daunting and difficult task for Ssangyong The domestic markets and growth potential of (SAIC) and the recent acquisition by India’s lead- Chinese company in the acquisition of the cash- is to address the deficit-running business and go emerging countries are critical for the sustainable ing automaker Mahindra. Chinese companies strapped South Korean automaker. into the black. However, it is not easy to turn growth of the Korean economy as it seeks to join have acquired foreign companies in order to ac- Third, foreign M&A deals led by companies in chronic deficits into recurring surpluses, because the ranks of advanced countries. Therefore, it is quire advanced management resources required emerging countries, mainly India, are different investment in R&D of new models and marketing necessary for Korean companies to enter emerg- as they pursue growth utilizing China’s vast do- from those led by companies in advanced coun- costs are enormous and the margin ratio is not ing markets on their own, and at the same time, mestic market and cheap labor. On the other tries. M&As of advanced foreign companies led by high. If new investment bears fruit and economies attract capital from emerging countries. The suc- hand, with long-term business experience in ad- companies in emerging countries aim to create of scale are realized through increased overseas cessful win-win strategy between Ssangyong and vanced English-speaking countries, Indian compa- synergy between acquired and acquiring compa- sales, it will not be impossible for Ssangyong to Mahindra will become an important test bed for nies are growing as they pursue expansion both in nies. This model basically respects the acquired stop running deficits. the possibility of mutual and inclusive growth of domestic and foreign markets through M&As of companies and tries to minimize post-acquisition Increased overseas sales are expected to con- the Korean and emerging economies.

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The Rise of , Made Possible through Localization and Synergy Choi, Yoon-jung _ Senior Researcher, Korea Institute for International Economic Policy

In 2004 expressed its intent to purchase Daewoo’s commercial vehicle unit under court receivership. It was the first M&A deal in Korea carried out by an Indian com- pany, and Tata’s first foreign M&A deal.

Why Indian Companies Seek Cross-border M&A Deals

The history of Indian companies’ overseas expan- sion dates back to 1992, when the Indian govern- ment began unveiling policy guidelines to expand foreign investment opportunities in an effort to open its economy. Indian companies, which had gained knowledge in advanced foreign technolo- gies, felt the urgency to enter new foreign markets. Indian companies’ foreign expansion began in- creasing exponentially in 2003, as the Indian econ- omy entered a high growth trajectory. India’s for- eign direct investment (FDI), which stood at only

Bloomberg USD 1.7 billion in 2004, surged to nearly USD 20

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billion both in 2007 and 2008. One remarkable trend in foreign investment Tata Motors’ Overseas Expansion by developing countries, such as that of India, and Acquisition of Daewoo is that M&A is on the rise. Developing countries Commercial Vehicle Co. accounted for nearly 30% of cross-border M&As worldwide in 2009, and India accounted for 8% Since its establishment 145 years ago, in 2010, an immense increase from the previous has been a household name in India. Tata was the year. first company to pioneer some of India’s key in- There are four main causes for this increase. dustries, including steel, power, service, and avia- First, India’s ample investment capital. As the Indi- tion. Armed with such benchmarking experiences, an economy has enjoyed incredible growth since Tata also established Tata Consultancy Services 2003, foreign capital rushed to the Indian stock (TCS), India’s first software firm. Leveraging its market, granting leeway for investment. Second, own technology, Tata Motors launched Tata Indi- market liberalizations that took place in 1991 ca in 1998 and released the , an innova- eased government policies, which had formerly tive “people’s car,” in 2008. stood in the way of Indian companies. Currently, Tata Motors, Tata Group’s core business, is Indian companies are allowed to hold pure for- leading India’s automobile industry. Tata Motors is eign subsidiaries and engage in joint investment the country’s market leader in commercial vehi- without upper limits. cles, and among the top three in the compact, Third, Indian companies have accumulated mid-size, and utility vehicle segments. The compa- global experience in their approach to foreign ny is also the world’s fourth largest manufac- capital, labor control and management, and client turer and third largest manufacturer. service, based on their experience in the service With the opening of the Indian market in the industry, which includes business process out- 1990s, Tata Motors faced a crisis. As Volvo and Bloomberg sourcing (BPO). With the Indian market now open other world-class automakers entered the Indian 30 30% more widely, Indian companies were pushed to truck market in the late 1990s, Tata Motors began Shares of India and Developing Countries 25 secure advanced technologies, increase brand to lose ground. In FY 2000, Tata Motors recorded in Global M&As competitiveness in the global market, and build af- its worst deficit of INR 5 billion. In March 2004, ((Unit: %)) 20 finities with global clients. In doing so, they began Tata Motors pursued innovation by acquiring Dae- Developing countries India 15 10 to buy foreign companies for scrap values. Finally, woo Commercial Vehicle Co., the truck unit of 8% domestic influences forced Indian companies to ’s ailing Daewoo. This M&A deal was 5 go overseas; many noted that the main cause for not foreseen, but Daewoo Commercial Vehicle 0 looking beyond India was to avoid the poor busi- Co. became the first acquired company of Tata 2005 2006 2007 2008 2009 2010 2011 ness environment, which included restrictions, bu- Motors. Source: World Investment Report 2012, UnCTAD reaucracy, and bribery. Tata’s purchase of Daewoo was a success. As

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Tata achieved quality improvement after the ac- medium and heavy-duty to small trucks, ing markets, such as China and India, and demand list. quisition and gained competitiveness in Damas- compact trucks, and , Tata Daewoo is devel- for new equipped with state-of-the-art tech- Tata Daewoo Commercial Vehicle’s manage- sized , the company developed a small oping related products in phases. nologies in advanced countries. Korea can gain ment philosophy is modeled after that of Tata Mo- , the Ace, and found great success. the upper hand in the development of future intel- tors. Even under harsh economic conditions, Tata Since then, Tata Motors has rapidly gained ground ligent vehicles, taking advantage of its advanced Daewoo complied with a collective bargaining on world-class automakers via its M&As, which in- A Globalized Growth Model information and communications technologies. agreement to give 42 out of 300 workers a regular cluded the acquisition of a 21% stake in Hispano in the Automobile Industry Tata Group has its own fortes, including advanced position in 2009, thus becoming an example for Carrocera SA and a strategic alliance with Italian technologies and skilled personnel in information other companies. The company also takes the carmaker Fiat. Korea’s commercial vehicle market, on the wane and communications and software. How to inte- lead in public interest projects, such as offering Since its establishment in March 2004, Tata after 2001, saw its annual production decrease by grate the advantages of both companies and maxi- scholarships and mentoring programs to socially Daewoo Commercial Vehicle Co. has moved be- 7.9% on average through 2005. However, the pro- mize synergy is Tata Daewoo’s current task at marginalized youth, engaging the participation of yond its core business of manufacturing heavy-du- duction rate began to rise once more in 2006, hand. all employees in the “Love Sharing Campaign,” ty trucks to include medium trucks, an advance at- thanks to increasing exports. Currently sixty per- and signing an MOU with Korea’s Ministry of Edu- tained through product development and facility cent of domestic 24-ton payload capacity truck de- cation, Science and Technology to boost educa- investment. Maintaining Tata Daewoo’s autonomy mand is met via importing. Even though imported A Trustworthy Company tion contributions. Thanks to such efforts, Tata as a Korean company, Tata Motors has retained heavy trucks are more expensive than domestic Even under Crisis Daewoo was awarded the Ministerial Citation of an independent Korean management system. Tata heavy trucks, they hold the largest market share Health and Welfare at the “2012 National Sharing Motors also has a management system that differ- due to advanced technology and quality service. Tata Group’s management performance offers Ko- Grand Awards.” entiates itself from other multinational automakers, Tata’s development plan for a “world truck” aims rea significant insight. The group puts its highest For now, Indian companies doing business in such as GM, in that it pursues joint development at developing tractor trailers across all levels, from priority on holding true to the promises it makes Korea may serve as a threat to Korean companies, of new models and joint technology ownership. 2.5 tons to 90 tons. These will be tailored to the to customers and employees, operating under a especially when their areas of business and mar- As a result, Tata Daewoo’s sales doubled in six global market, and Tata will manufacture them at motto of “trust-based management.” Comprising kets overlap. Indian companies’ overseas expan- years and exports increased fivefold by utilizing plants in Korea and India for export to the global two-thirds of the equity of , Tata Group’s sion through M&A’s has been deemed successful. Tata Group’s global networks. Having exported its market. It is strongly anticipated that Tata Dae- holding company, owned by charitable trusts, Tata As Indian companies accelerate overseas expan- trucks to more than 60 countries, including UAE, woo’s global role will broaden in years to come. Sons has a business structure in which the wealth sion, it is only a matter of time until competition South Africa, Algeria, and India, Tata Daewoo was Meanwhile, the global car market is heralding that gets passed on to society increases propor- between Korean and Indian companies grows the only Korean heavy-duty truck manufacturer, groundbreaking changes. After the 2008 global fi- tionally with better business outcomes. Tata Group fiercer. Although Indian companies fall behind Ko- taking home the 2008 200 Million Dollar Export nancial crisis GM went bankrupt; under- has been the most admired company for 145 years rean companies in terms of technology, their man- Tower Award. Its workforce also increased by ap- went massive recalls in 2009 and China emerged according to Nielson India. In 2009, the Reputation agement ability and minds are world-class, sur- proximately 60%, to 1,350 members. as the world’s largest automobile manufacturer. Institute ranked Tata Group the 11th most reputa- passing those of Korean companies. Korean Tata Daewoo, together with its parent compa- The auto industry accounts for 13% of Korea’s ex- ble company in the world. In 2011, Brand Finance, companies should discard any defensive attitude. ny, Tata Motors, has established a medium-to-long- ports and is responsible for 11% of manufacturing a UK-based consultancy firm, ranked Tata the 41st Instead, they should carefully examine the man- term plan to become a global market leader in the jobs. The industry also holds considerable forward most valuable brand in the world, valuing at USD agement know-how of Tata Motors, a know-how commercial vehicle market by 2021. To this end, and backward linkages. In the future, the car in- 15.7 billion. In 2010, Business Week ranked Tata that is recognized both domestically and interna- in an effort to expand its export production from dustry must satisfy both surging demand in emerg- 17th among the “50 Most Innovative Companies” tionally

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Novelis Korea Prospers under

Indian Company Lee, Dae-woo _ Senior Principal Researcher, POSCO Research Institute

This articles deals with Novelis Korea whose Korea. As , headquartered in Birla Group is India’s third largest corporation af- largest stockholder is now an Indian compa- , is the crown jewel of the multinational ter Tata and Reliance and does business in coun- Stockholders of Novelis Korea upon its Establishment ny after its parent company’s acquisition. Aditya Birla Grou, Novelist Korea also fell under tries including India, Thailand, Laos, , the umbrella of . Through the Philippine, Egypt, Canada, Australia, China, U.S., Name of stockholders No. of stocks Equity ratio acquisition of Novelis, Hindalco Industries U.K., Germany, Hungary, and Portugal. Its busi- Alcan Aluminium Limited 79,386 68.0 Novelis Korea: From Canadian emerged as the world’s largest rolled aluminum ness areas include viscose staple fiber, non-fer- Daehan Cable 16,864 14.4 to Indian Holding producer and Asia’s leading primary aluminum rous metal, cement, viscose filament yarn, cloth- Samyang Metal 10,612 7.7 producer. ing, carbon black, chemical products, fertilizer, Seol Won-rang 8,999 0.8 Novelis Korea is a manufacturer of flat-rolled alu- The governing structure changed once more in sponge iron, insulator, financial service, telecom, Others 848 100.0 minum products, including beverage cans and 2011. Novelis announced that it would pay about BPO, and IT service. Total 116,709 packages. It is a joint venture between Alcan, the KRW 350 million in cash to acquire 31.2% of the to- The Birla family hails from the Marwari trading Source: Audit report world’s largest aluminum company in Canada, tal issued and outstanding shares of Novelis Ko- caste of the northwestern state of , as Novelis Korea’s performance(Unit: KRW 1Million) and Korea-based Daehan Cable. The company rea, according to an agreement with Daehan Ca- does the company chairman, Lakshmi Mittal, who was established on September 1, 1999 with the ini- ble and other minority stockholders of Novelis has turned the company into the world’s largest 1999 2012 tial capital of KRW 16.5 billion. Headquartered in Korea. Novelis, which had a 67.9% share of Novelis steel manufacturer. In 1857, B.D. Birla moved to Cal- Sales 86,662 1,821,250 Youngju, North Gyeongsang Province in Korea, Korea, increased its shareholding to 99%. Through cutta, India’s largest city at that time, and founded Operating profit △2,980 103,047 Novelis Korea aims to develop, manufacture, and this acquisition, Novelis aims to hold on to its ex- his own business. In the early 20th century, the Net profit △3,764 86,662 sell flat-rolled and other aluminum products. Major isting vision, seeking strategic opportunities in line company thrived under his son, G.D. Birla, a close Asset 367,034 1,299,015 shareholders in the establishment are listed in the with rapidly growing Asian and Middle Eastern friend of who had reportedly con- Debt 131,648 651,182 following table. In 1999, its first year, Novelis Korea markets. It also plans to invest USD 400 million to tributed to the Indian independence movement. Capital 235,385 647,833 ran a net deficit of KRW 3.7 billion. Since then, increase its production capacity of aluminum The Aditya Birla Group has actively participated in Source: Audit report however, the company has reached solvency with rolled products as well as expand recycling facili- the fields of education, culture, medical care, and KRW 1.8 trillion in annual sales, KRW 86.6 billion ties. As such, Novelis Korea has completed its philanthropy, consistently falling in line with corpo- in net profit, and a debt ratio of 100% in 2012. transformation into an Indian “sub”-subsidiary. rate social responsibility trends. The group ranked With this growth the company has also experi- in as one of India’s “Best Employers”in 2007. enced incidents that have changed its governing The Aditya Birla Group is regarded as India’s structure. In 2005, Alcan spun off its aluminum Aditya Birla Group: India’s premiere multinational corporation. In 1969 Aditya rolled product business into Novelis in order to First Multinational Firm Vikram Birla, grandson of G.D.Birla, left India, once strengthen business, with Novelis becoming the known as the License Raj, to found a textile com- largest stockholder of Novelis Korea. Following Headquartered in Mumbai, Hindalco Industries is pany in Thailand. Under A.V. Birla’s leadership, the spin-off, Novelis emerged as the world’s leader Asia’s leader in aluminum and copper, and Aditya Birla Group currently does business in 20 in aluminum rolling and recycling. In 2007 Hindal- stands as the Aditya Birla Group’s main enter- countries, including those in Southeast Asia, Chi- co Industries, another leader in the aluminum in- prise. The Aditya Birla Group is a multinational na, Australia, and Canada. More than half of its dustry, purchased Novelis, and the Indian compa- corporation worth USD 40 billion with more than sales occur overseas. ny became the largest stockholder of Novelis 133,000 employees in 33 countries. The Aditya Hindalco Industries, Novelis Korea’s acquiring

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company, was founded in 1958 and is structured with advanced technologies. around two strategic enterprises: aluminum and Still, tradesmanship and fluency in English are copper. Its sales in 2011 stood at approximately not the only causes for Indian companies’ success USD 5.5 billion. Hindalco’s copper unit has the in M&A; Indian companies are also skilled at post- unique distinction of being the world’s largest cop- merger integration (PMI). Granted, not all Indian per smelter at a single location. companies are equally skilled in the PMI process; however, India’s representative companies, such as Tata and Birla Group, are known to be adept at Korean Companies Should Recognize M&A and PMI. the M&A Capability of Indian MNEs Behind such skillful M&A and PMI seems to lie a distinct Indian ability to accept the differences of As seen in the case of Novelis Korea, in which the others. A one-sided argument makes the PMI pro- largest stockholder shifted suddenly to an Indian cess complicated and eventually leads to the fail- proprietor, companies cannot help but forge close ure of the M&A deal. Japanese, Korean, and Chi- relations with India. Such were the cases of Mahin- nese companies are especially weak at this, dra Ssangyong and Tata Daewoo Commercial Ve- mainly because of their cultural background of not hicle Co. as well. Novelis Korea’s case is some- accepting others’ differences. what different from those of Mahindra Ssangyong Even if acquiring companies are adept at toler- and Tata Daewoo Commercial Vehicle Co., in ance, performance growth cannot be taken for which Indian companies directly acquired Korean granted. Companies carrying out acquisitions must companies. In the case of Novelis Korea, a multi- build transparent performance evaluation systems national company was acquired by an Indian and foment the necessary senses of motivation. In company, thus the Korean subsidiary of the multi- this respect, Indian companies’ management sys- national company came to fall under the auspices tems are evolving gradually. Globalized Indian of an Indian corporation. In essence, the two cases companies have faster globalization rates in cor- are the same in that the Korean companies were porate governance and general management than eventually bought by Indian companies. domestic demand–based companies. Indian companies are standing out in the global It has grown difficult to view the acquisition of M&A market, capitalizing on their tradesman ship Korean companies by Indian companies as isolat- and fluency in English. Indian companies’ acquisi- ed events. Three large Korean companies have al- tion of Korean companies is sure to continue in ready been purchased by Indian corporations, the future. The M&A deals of Mahindra Ssangyong and the number of such cases will continue to rise and Tata Daewoo were carried out mainly to se- in the future. The time has come for Korean com- cure the Korean companies’ advanced technolo- panies to examine closely the strengths of Indian

Bloomberg gies. There are many other Korean companies companies and learn from their examples.

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