2017

MARKET ENTRY: Case

Study of Tata Steel and
the Indonesian Market
YOUR NAME HERE
Contents
1 Introduction ........................................................................................................................ 2

2 Company profile ................................................................................................................. 2

3 Overview of Indonesia Market ........................................................................................... 3

4 Analysis of Entry Conditions ............................................................................................. 4

4.1 The Uppsala Model Analysis of Tata Steel entering Indonesia .................................. 4

4.2 The OLI Framework of Market Entry ......................................................................... 6

5 Entry Mode Recommendations .......................................................................................... 8

5.1 Joint Venture ............................................................................................................... 8

5.2 Acquisitions................................................................................................................. 9

5.3 Greenfield FDI ............................................................................................................ 9

6 Conclusion ........................................................................................................................ 10

REFERENCES ........................................................................................................................ 11
1 Introduction
Nowadays, globalisation and technological advances have made it easier for companies to
expand beyond their domestic borders. Expanding to international markets provides firm with
new market opportunities, as well as new know-how and challenges (McGregor, 2008). Many
studies have been conducted to help firms construct optimal market entry strategies (Sengupta,
2007). This paper analyses the case study of Tata Steel. The company is a global steel mining
and processing company. Recently, a market entry opportunity has been presented in Indonesia
when the country government lifted a ban for foreign steel operators (Mining Journal, 2016).
This paper examines this market entry opportunities using relevant frameworks and provides
recommendations for Tata Steel to efficiently enter the Indonesian market.

2 Company profile
Tata Steel is a subsidiary of the Tata Group, the largest Indian conglomerate. In 2015, Tata
Steel is ranked 10th among the largest steel producers in the world. Founded in 1907, Tata Steel
has more than 100 years of history. Tata Steel was the building block of the Tata Group, and
was founded by Jamshetji Tata (Pandey, 2006). The firm quickly became the largest steel
processor in the British Empire. In the 1950s, the company began to expand internationally
through a series of M&A transactions to acquire domestic Indian and foreign companies. Tata
Steel remains an ambitious firm until current days with recent acquisitions include $487 million
purchase of NatSteel in 2004 £5 billion M&A transactions of Brazilian Corus in 2007 (Tata,
2015). Tata Steel is headquartered in Kolkata, India. The firm has a top-down approach of
management, and has field offices in the United Kingdom, the UAE, Southeast Asia, Europe,
and Canada. Tata Steel sells steel to a variety of customers, mostly firms in the construction,
automotive, and other heavy industry companies.

Tata Group has a very strong presence in Southeast Asia. In recent years, Tata has purchased
stakes in steel companies in Thailand, Malaysia, and Vietnam. Among the large markets in the
Southeast Asia region, Indonesia is the only country where Tata has not set up facilities. Hence,
exploring and penetrating this market could provide Tata Steel with an important step to
complete its dominant in the region.
3 Overview of Indonesia Market
Before diving into analysing the entry mode and entry condition of Tata Steel into Indonesia,
it is important to understand the overall business environment of the country, as well as its steel
industry landscape. There are several useful frameworks to analyse the business climate of a
country. Among them, the PESTLE is a commonly used framework due to its ease to use and
comprehensive structure (Williams, 2009). The PESTLE framework analyses the macro
business environment through several angles: Political, Economical, Social, Technological,
Legal, and Environmental.

 Political: Indonesia is a democratic country, gaining independent in 1945, and is the

world largest Muslim country by population. Indonesia has a stable political system
with two major parties. The nation has diplomatic relationships with most countries,
and is the member of several key trade organisations such as the World Trade
Organisation and the ASEAN community (the trade agreement between Southeast
Asian countries). The relationship between India, Tata Steel home country, and
Indonesia is a warm relationship, due to similarities of interests between the countries.
India and Indonesia share the sea water along the Indian Ocean, making it easy for two
countries to trade with each other (Astuty, 2015).
 Economical: Indonesia is the largest economy in Southeast Asia by overall GDP. In
2013, Indonesia recorded close to $900 billion of GBP. The country is considered an
emerging market by most investors. In the last decade, Indonesia has maintained a
strong GDP growth rate of over 5% annually, making it one of the fastest growing
economies in Asia. Indonesia is an attractive market with a large population of over
250 million people, a lot of natural resources, and is located at a strategic sea trade route
connecting East Asia, West Asia, and Australia (Central Intelligence Agency, 2016).
 Social: Located entirely on islands, Indonesia has an impressive population of 250
million people, mostly concentrated in major cities and provinces. The population
density of the country is over 140 people / km2, ranking third in Southeast Asia.
Indonesia has a young population, with over 120 million people are within the working
age. Indonesia is the world largest Muslim country, with over 85% of its people are
registered Muslim. However, the nation’s culture shows significant influence of
 Hinduism and Buddhism, making its Muslimism different to those in the Middle East
and North Africa (Central Intelligence Agency, 2016).
 Legal: In 2014, Indonesia ban steel ore export to help protecting domestic companies.
The country has announced that it would re-open doors for foreign firms in 2017 to
boost its economy and attract more FDI. Regulations in Indonesia is reputed as being
strict and protective. However, in recent years Indonesia has attempted to become more
welcoming to compete with other emerging markets nearby such as Vietnam and
Malaysia. Nonetheless, to conduct business in this country, it is advisable that firms
seek to employ local legal partners to help navigate through a web of legislations and
approval processes (Expat.Org, 2015).
 Environment: even though the Indonesian government has attempted to develop a green
economy in recent years, Indonesia face environmental issues such as pollution and
deforestation. Indonesia is subjected to frequent natural disasters such as tsunami, and
forest fires. Currently, there are a few steel operators in the country. However, both the
two largest American steel producers have recently been involved in several
environmental scandals. As of 2014, Indonesia is the third green gas emission producer
in the world, after only China and the United States (Vidal, 2014).
The overall business environment of Indonesia, as stated, is quite promising. The country has
recently announced to re-open its steel industry for foreign investors, making it easy for firms
with financial and operational strengths like Tata Steel to come in. Indonesia has a big and
growing economy, with the fourth largest population in the world. Setting up sale offices and
facilities in Indonesia, hence, could prove to be beneficial for Indonesia.

4 Analysis of Entry Conditions

In this section, the paper analyses the entry conditions of Tata Steel into the Indonesian market.
There are a few frameworks to analyse the entry condition into a new market. Notably, the
Uppsala model and the OLI framework are commonly used frameworks due to their easy
application. This paper reviews the Indonesian market entry condition of Tata Steel, employing
these two models.

4.1 The Uppsala Model Analysis of Tata Steel entering Indonesia

The Uppsala Model argues that firms should first gain experience in their domestic markets
before moving abroad. In addition, expanding to countries that have similar cultural and
political system to the home country is a natural step for firms because it reduces the risks that
firm take. Finally, the Uppsala Model recommends using exports/licencing method before
committing to heavy investment and intense FDI engagements (Wall & Rees, 2004).

The Uppsala Model supports Tata Steel’s expansion into Indonesia greatly. First, Tata Steel
has already had a strong presence in both India and Southeast Asia. For over a hundred years,
Tata Steel has been ranked among the top steel producers in India. The company has obviously
accumulated a wealth of experience through domestic operation. For more than fifty years,
Tata Steel has continuously expanded to foreign markets. One of the most aggressive markets
of Tata Steel is the Southeast Asia region. The firm has set up operations in three major
Southeast Asia countries: Malaysia, Vietnam, and Thailand, all through major acquisition
deals. In addition, Tata Steel has sale offices in Singapore, the major financial hub of the area.
Hence, the Uppsala Model condition of having sufficient home market experience is applicable
to Tata.

The second condition of the Uppsala model states that firms should first consider countries that
are like the home country, and are connected to the home country geographically. Under this
condition, Indonesia is a good place for Tata Steel to move into. First, Indonesia and India is
quite close geographically. The countries are connected by the Indian Ocean, providing an easy
trade route for transportations of goods. In addition, India and Indonesia has a strong diplomatic
relationship, making it easy for Tata to conduct business in Indonesia. Furthermore, Indonesia,
after a few years of consideration, has decided to allow foreign firms to open steel facilities on
its soils. In term of culture, India Hinduism and Buddhism have strong influence on the
Indonesian culture. Hence, it is natural for Tata to enter this market. In fact, the only reason
that Tata has not set up facilities in Indonesia was the Indonesian government’s ban of foreign
steel producers in 2014. As the ban is lifted, Tata should act quickly to establish dominance in
this market.

Finally, the Uppsala model encourages companies to expand gradually through smaller steps
such as exports / licensing to build up knowledge and experience of a local country before
committing to more intense activities. However, it is quite difficult for Tata Steel to just export
and license steel sales in Indonesia. The reason is because Indonesia is rich in steel ore. Hence,
it is cheaper to produce steel in the country compared to importing. Hence, Tata will have
higher costs compare to its competitors if the company choose to license. On the other hand,
Tata has strong financial foundation to engage in takeover activities like it did in Malaysia,
Thailand, and Vietnam. Since Tata has already successfully expanded through acquisitions in
the past, the company can employ a similar strategy to enter the Indonesian market.

4.2 The OLI Framework of Market Entry

The second common market entry framework is the OLI Framework. The OLI Framework,
also known as the eclectic paradigm, is a theory related to the internationalisation of
corporations. The framework is useful to help companies decide which entry mode is suitable,
based on the competitive advantages they have (Hill, 2012). The OLI Framework focuses on
three competitive advantages: ownership advantages, location advantages, and internalisation
advantages.

 Ownership advantages refer to the competitive advantages of the company that is

looking to expand internationally. These competitive advantages include core
competencies, size, financial strengths, and technical know-how. The OLI framework
argues that the greater the competitive advantages, the more likely the firm is willing
to engage in exporting activities.
 Location advantages refer to the attractions of the countries that the multinational firms
are expanding into. The location advantages include factors such as labour costs, legal
and political environment, geographical location, and the availability of resources and
market demands. For example, a country with sea routes going through it, low labour
rates, and plenty of natural resources is considered an attractive market to expand into.
 Internalisation advantages refer to the advantages of the firm expanding by itself rather
than using joint ventures and licensing. The greater the internalisation advantages, the
more likely firms commit to direct FDI.

The table below explains the suitable market entry that firms can use, given the categories of
advantages.
According to the OLI framework, when a firm only has Ownership advantages, it should enter
the market through licensing. When there are Ownership advantages and Internalisation
advantages, the firm should export. Finally, if the firm has all the three advantages, it should
consider FDI.

In the case of Tata Steel and Indonesia, the firm has all three advantages.
 First, Tata Steel is a strong and competitive steel producer, not only in India but also in
the world. The firm is ranked among the top producers globally for many years. The
competencies of Tata Steel, including financial strengths and technical know-how, is
better than the largest steel companies in Indonesia. Now, there is no large international
steel company in Indonesia due to the government ban. Hence, Tata Steel satisfies the
first condition of the OLI framework.
 Second, Tata Steel has internalisation advantages of setting up its own facilities
compared to licensing. The reason is because steel production is a commodity
production. Research shown that firms working in the commodity sector are benefited
from the economic of scale. As Tata Steel set up facilities of its own in Indonesia, the
firm can enjoy the benefits of large volume cost-saving.
 Third, Indonesia has location advantages for Tata Steel. Indonesia is located on an
important sea trade routes connecting three regions: East Asia, West Asia, and
Australia. The company has a low labour rate, young population, and plenty of iron ore
mines. In addition, Indonesia has a big domestic market. Hence, it is attractive for Tata
Steel to enter this market.
Through this analyse the OLI framework supports Tata Steel’s direct investments in Indonesia.
The firm should consider commitments such as takeover bids and facility investments because
it has all three advantages specified by the framework.

5 Entry Mode Recommendations

In this section, the paper discusses several market entry modes that are applicable for Tata Steel
into the Indonesian market. Both the OLI framework and the Uppsala model recommend that
Tata Steel engages in direct investments in Indonesia. However, the PESTLE analysis shows
that it could be difficult for foreign steel companies to navigate through the complex legislation
web of this country. Hence, it is useful for Tata Steel to have several market entry plans. This
way, the firm can use the appropriate entry method when the conditions are met and the
circumstances are right. The three recommended market entry modes are Joint Venture,
Acquisitions, and Greenfield FDI.

5.1 Joint Venture

Joint Venture is a common practice in the mining and oil and gas industries. Joint Venture refer
to an entity set up by two or more companies. The investing companies are called Joint Venture
Partners. Joint Ventures are set up to achieve specific objectives. It is a useful structure because
firms can cooperate with each other without having to merge. The Joint Venture Partners’
responsibilities and benefits are only limited to the Joint Ventures, making it easier to manage.
In practice, firms often set up Joint Ventures in the mining industry to raise capital or to acquire
mining licences.

In the case study of Tata Steel, Joint Venture is a useful tool to create presence in the Indonesia
market. As mentioned, it is difficult and time consuming to acquire business licences and
mining licences in Indonesia. However, there are domestic companies with mining licences but
do not have the financial capabilities and technical capabilities to fully exploit the licences.
Tata Steel can team up with these firms through setting up joint ventures. In these entities, Tata
Steel can provide the funds and the technical know-how to help licence holders begin the
mining and processing operations. The net income from the joint ventures could be split
between the parties accordingly.
5.2 Acquisitions
Acquisition is a more aggressive market entry mode compared to Joint Venture. While Joint
Venture refers to a company teaming up with local firms to set up projects, Acquisition happens
then the foreign firms purchase partially or fully the local firm. Acquisition has some
advantages for large companies. First, it saves time because the purchasing firm does not need
to set up new structures. Second, it does not add new capacity to the market, keeping the market
equilibrium the same. Third, the purchasing firm can right away use the administration system,
supply chain system, and customer base of the purchased firm. However, Acquisitions are often
costly because the purchasing firm must buy the local firm with premiums.

For Tata Steel, acquisition is one of the widely-used methods when this firm enter new markets.
Tata Steel made a series of large acquisitions when it entered the Thailand, Malaysian,
Brazilian, and Vietnamese markets. With a large financial footing, Tata Steel can buy a local
steel manufacturer in Indonesia and take advantage of the local knowledge and connections
that firm has. Then, Tata Steel can gradually implement its own competencies into the new
firm and further develop the firm. If the legal environment is friendly, acquisition could be
more advantageous for Tata Steel because the firm would be able to enjoy 100% of the
economic benefits.

5.3 Greenfield FDI

Greenfield FDI is a market entry mode in which a company creates a brand-new subsidiary in
the market it wishes to enter. Greenfield FDI essentially sets up a new market player, and often
requires heavy investments. This method is preferable when the market has no potential
acquisition or joint venture opportunity at a reasonable price. This entry mode provides the
investors with complete control and brand new conditions. The subsidiary firm is freed from
integration issues. However, greenfield FDI is often considered the riskiest options for firms
because of two reasons. First, it requires a lot of investments and does not provide existing
local expertise and connection. Second, the new subsidiary adds new capacity into the market,
causing movements in prices and stir competitions. For a conservative market like Indonesia,
greenfield FDI could triggers the government to issue protective legislations. Hence, it is not
advisable that Tata Steel use this entry mode, unless there is no other available option.
6 Conclusion
Expanding internationally is a necessary step for firms who have growth beyond the capacity
of their domestic markets. Tata Steel, through its hundred-year history, has grown into a global
powerhouse in the steel market. The company has established presences in over fifty countries
around the world. With the recent ban lift for foreign steel producers, Indonesia becomes an
attractive destination for Tata Steel. The OLI framework and the Uppsala model recommend
Tata Steel to commit direct investments in this market. There are several entry modes that Tata
Steel can employ to penetrate this market. Overall, Joint Ventures and Acquisitions are the
recommended method for the company. Greenfield FDI is also recommended. However, this
method should be considered secondarily due to higher risks involved.
 REFERENCES
Astuty, D.W., 2015. The Extraordinary Solution for Indonesia Economic Crisis: Shariah
Capital Market. Journal of Islamic Banking and Finance, 3(2).
Central Intelligence Agency, 2016. The World Factbook: INDONESIA. Central Intelligence
Agency. Available at: https://www.cia.gov/library/publications/the-world-
factbook/geos/id.html [Accessed January 6, 2017].
Expat.Org, 2015. Doing Business in Indonesia - Company establishment and foreign direct
investment in Indonesia. Doing Business in Indonesia - Company establishment and
foreign direct investment in Indonesia. Available at:
http://www.expat.or.id/business/companyestablishment.html [Accessed January 6,
2017].
Hill, C.W.L., 2012. International business, New York: McGraw-Hill Professional.
McGregor, H., 2008. Globalisation, London: Wayland.
Mining Journal, 2016. Indonesia to ease mineral export ban from 2017. Mining.com.
Available at: http://www.mining.com/indonesia-to-ease-mineral-export-ban-from-2017/
[Accessed January 6, 2017].
Pandey, S.N., 2006. Tata steel: becoming world class, New Delhi, India: Shri Ram Centre for
Industrial Relations and Human Resources.
Sengupta, J., 2007. Entry and Market Structure. Dynamics of Entry and Market Evolution,
pp.75–117.
Tata Group, 2015. Tata group financials. Tata group financials - Investor desk - Tata group.
Available at: http://www.tata.com/htm/Group_Investor_GroupFinancials.htm
[Accessed January 6, 2017].
Vidal, J., 2014. Rate of deforestation in Indonesia overtakes Brazil, says study. The
Guardian. Available at: https://www.theguardian.com/environment/2014/jun/29/rate-
of-deforestation-in-indonesia-overtakes-brazil-says-study [Accessed January 6, 2017].
Wall, S. & Rees, B., 2004. International business, New York: Financial Times/Prentice Hall.
Williams, C., 2009. Principles of management, Mason, OH: South-Western Cengage Learning.