14 min read.Updated: 28 Dec 2012, 10:13 AM ISTAveek Datta
First came authority, then efficiency, globalization and innovation
Mumbai: One day in January 1998, Ratan Naval Tata, chairman of Tata Motors Ltd and head of the Tata group, walked out onto a brightly lit stage in a hall in New Delhi’s Pragati Maidan to announce something that would forever change the fortunes of India’s largest truck maker.
The dimensions of a (Maruti) Zen, the cabin size of an Ambassador and the fuel efficiency of a Maruti 800—that was the promise with which Tata announced the Indica, the company’s car.
The launch was presided over by then industry minister Murasoli Maran and Tata dedicated it to India. The symbolism wasn’t lost on anyone present at the launch during Auto Expo, India’s biennial car show: Maran was fighting a bruising battle with Suzuki Motor Corp. over the management of Maruti Udyog Ltd (now Maruti Suzuki India Ltd) in which the state and the Japanese firm were equal partners.
Later that year, bookings opened for the car, and a little over 100,000 people signed up and paid an advance for the Indica.
Despite the manufacturing and quality problems the initial lot of vehicles ran into (and the ₹ 500 crore loss Tata Motors declared in 2001), the Indica became a best-seller and marked the real entry of Tata Motors into cars, although the company had already signalled its intent with the launch of the Sierra, which would be called a cross-over vehicle today, and the Estate, a station wagon.
“I bought one of each for my Mumbai house," a technology entrepreneur who moved from Mumbai to Bangalore once said in a conversation with a Mint editor. “They weren’t good, but I told myself, ‘it’s an Indian company, it’s doing something; we should support it’."
The Indica would change the trajectory of Tata Motors, but it was also more than just a car. Recent history is partial to the Nano, the “ ₹ 1 lakh" car launched by Tata in 2009, but it was the Indica that started it all.
The launch was a sign that Tata Motors had made the transition to serious car-making, an indication of the manufacturing and operational renaissance that characterized the Tata group in the late 1990s and the early 2000s.
By then, Tata—he turns 75 on 28 December, a birthday he shares with the late Dhirubhai Ambani, and steps down as chairman of holding company Tata Sons Ltd—had already established himself at the group where he took the top job in 1991.
He spent the first years establishing his authority over the satraps his uncle and predecessor, the great J.R.D. Tata, had fostered under a decentralized structure. He then embarked on a journey to make the group’s companies more efficient. The third phase was one of globalization. Global operations today make up around 58% of the group’s revenue, from an insignificant share in 1991 (the exact figure isn’t available). The fourth phase was one of innovation. And, just the way it should be, phases two, three and four continue to run concurrently to this day.
The story of the Tata group and Ratan Tata over the past 20 years is one of growth and competition, productivity and efficiency gains, and globalization and innovation. The Tata story is replete with run-ins with the establishment and the political opposition, and failures and frustrations. And, in some ways, it is the story of India itself, only with a happier ending.
“Tata was at the right place at the right time, and could see what was happening around him and respond accordingly," said business historian and author Gita Piramal.
It wasn’t a journey that began well though.
Tata was a surprise choice to head the group after JRD (as J.R.D. Tata was popularly known).
He studied at Cornell University, specialized in architecture, and had an offer from International Business Machines Corp., but returned to India because his grandmother was unwell, and joined Tata Steel Ltd (then known as Tata Iron and Steel Co., or Tisco) as an apprentice on the shop floor of its Jamshedpur plant. The year was 1962.
In 1977, he was asked to turn around another troubled company, the Mumbai-based Empress Mills. Tata managed to do so, but was refused an investment he thought was required. The Mumbai textile workers’ strike led by Datta Samant also hurt the company, which eventually closed down in 1986.
Maybe because of these failures, few people understood why he was chosen as the person who would replace JRD in 1991. At the time, Tata was still perceived as an outsider in Bombay House, the group’s headquarters.
Several group companies were also led by individuals who had been given considerable autonomy by JRD and were, sometimes, more closely associated with their companies than the group’s chairman himself.
Among these executives were Russi Mody at Tata Steel; Darbari Seth at Tata Tea and Tata Chemicals; Ajit Kerkar, who transformed the Taj group (Indian Hotels) into a major hospitality chain; and Nani Palkhivala, a director on the boards of several Tata companies and chairman of the erstwhile Associated Cement Companies (ACC Ltd), in which the Tata group was one of the original promoters.
It had been widely expected that one of these individuals would succeed JRD, and Tata’s appointment resulted in some bitterness—and not all of it remained unvoiced. Mody sparred openly with Tata. Kerkar and the new chairman had different views on the management of the chain.
“J.R.D. Tata had around him a team of senior managers, all of them people of substantial understanding in their respective spheres," Tata said in an interview posted on the Tata group website on 6 December for some time before being inexplicably taken down. “While they may have acceded to his wish that I take over the chairmanship—and this happened suddenly—I must confess that I did not feel any sense of joyousness on their part, because some of them had aspirations to have the job themselves."
In 1993, Mody was sacked after a messy scrap involving the appointment of senior executives. In 1997, Palkhivala quit, citing ill health. And Seth retired in 1995 and Kerkar in 1997, after Tata brought in a new policy that set the retirement age for directors at 70 and senior executives at 65.
“In my personal view, when JRD saw this scramble among the company chiefs to succeed him and the unpleasant innuendos that surfaced, he may have appointed someone who understood the Tata ethos, which was always very important to him; and, perhaps, he thought Ratan Tata was someone who could uphold this ethos," Piramal said.
She added that the concept of succession planning was nascent in JRD’s time. It’s only in the last five years that large business groups have realized the need for this, she said. Indeed, perhaps because of the rocky start that he had, Tata appointed a five-member selection committee, comprising N.A. Soonawala, Shirin Bharucha, R.K. Krishna Kumar, Cyrus Mistry and Lord Kumar Bhattacharya, to identify his successor.
Their choice: Cyrus Mistry, whose father Pallonji Mistry is the single largest individual shareholder in Tata Sons. Cyrus Mistry recused himself from the selection panel when his name came up for consideration.
In hindsight, Tata’s ascension in 1991 was the best thing that could have happened to the Tata group, according to a business historian and writer.
“Tata, like every Indian company, was suddenly in a new environment. It could not keep operating under the old market rules, the old certainties," said Morgen Witzel, a UK-based management writer and author of Tata: The Evolution of a Corporate Brand.
“Ratan Tata’s strategy was to change Tata to help it keep pace with a changing India," he said.
And, after spending nearly five years quelling the challenge of the satraps, that’s just what Tata did.
Once the dust over the succession issue settled, the conglomerate’s new chief came into his own. His primary focus was the improvement of the operational efficiencies of several of the group’s manufacturing companies and reiterating the very conglomerate nature of the entity.
The main beneficiaries of the focus on operations were Tisco and Telco (Tata Engineering and Locomotive Co.). The former soon emerged as one of the lowest-cost steel makers in the world. The two companies were also renamed—Tisco as Tata Steel and Telco as Tata Motors.
Simultaneously, Tata convinced group companies to pay royalty to Tata Sons for the direct or indirect use of the Tata brand name. He also moved towards increasing the promoters’ shareholding in key group firms. Until then, the promoting firms held minority stakes in most group companies, making them vulnerable to takeovers.
The group also exited businesses such as cement, textiles and cosmetics even as it increased its focus on others such as software, and entered telecommunications, finance and retail.
These divestments and investments helped the Tata group “shake off the slightly fusty image it had built up in the 1980s and make it fit for purpose in the modern world", according to Witzel.
Indeed, today, the Tata group’s most profitable company is information technology firm Tata Consultancy Services Ltd (TCS), which boasts around $10 billion (around ₹ 54,700 crore) in revenue and serves customers around the world.
“I think the creation of the corporate brand was quite important. The Tata corporate brand is one of the world’s most valuable global brands because it harnesses the power of the whole group and creates a strong image in the minds of the stakeholders," Witzel added.
Tata himself sees the re-establishment of the group identity as one of his achievements. In the interview that was posted on the group’s website, he said one of his most satisfying moments as chairman was the welding of “the organization together in a more cohesive way than it had been in the past, that it was able to identify itself more as a group".
And, even as some of these efforts to establish himself, improve the operational effectiveness of some companies, and reiterate a group identity were bearing fruit, Tata went out and made a big-ticket global acquisition—the Tetley group in 2000.
In the mid-1990s, Tata Tea had tried and failed to acquire British tea maker Tetley. In 2000, it tried again and succeeded. The acquisition was meant to harness Tata Tea and Tetley’s synergies. Tetley had a well-established distribution network and experience of selling tea bags in markets such as the US, UK, Canada and Europe. Tata Tea was strong in countries like India and in the Middle East, according to Tata Log—Eight Modern Stories From a Timeless Institution, a book by Harish Bhat, managing director and chief executive of Tata Global Beverages Ltd (earlier Tata Tea).
The group’s biggest acquisition to date is Tata Steel’s purchase of Anglo-Dutch steel maker Corus Group Plc in 2007. The company has since been renamed Tata Steel Europe. The acquisition of Corus, which was Europe’s second largest steel maker, catapulted the company into becoming the world’s seventh largest steel producer, although it hasn’t been as financially remunerative as stock market analysts would have liked.
Another acquisition, and more fruitful than the Corus purchase to date, was Tata Motors’ acquisition of the iconic British car maker JaguarLand Rover. The acquisition provided a hedge against the weakness faced by the company’s domestic passenger car business.
There have been several other acquisitions: TCS bought CMC Ltd; Tata Sons acquired a controlling stake in state-run Videsh Sanchar Nigam Ltd (now known as Tata Communications Ltd); Tata Motors bought the heavy vehicles unit of Daewoo Motors in Korea; Tata Steel acquired Singapore’s NatSteel; and Indian Hotels Co. Ltd took over management of The Pierre in New York.
But if globalization reflects the “buy" side of the Tata story, then efforts to innovate indicate the “make" side of it.
In many ways, the Indica started a trend in the Tata group. Every year since, Ratan Tata has feted individuals or teams that have worked on an interesting project even if it didn’t succeed, under a programme called “Dare to Fail".
The Nano is, of course, the pinnacle of this innovation journey, but there have been other successes as well. Among them is Swach, a low-cost water purifier aimed at making clean drinking water—hard to find in rural areas—available to the economically weak. Swach began as a corporate social responsibility initiative by TCS and soon became a business idea, commercially viable on its own.
“He (Tata) has played a strong role in encouraging innovation, but he has not been alone in this," Witzel says. “Tata’s leadership style is to suggest ideas, offer encouragement and motivation, not to lead the charge."
It’s clearly an approach that has paid off.
The group’s aggregate sales at the end of 2011-12, at ₹ 4.51 trillion, are 43 times the turnover in 1992-93, the first full fiscal after Tata took over as chairman. Net profit growth in the same period has been even more spectacular, rising 51 times to ₹ 33,664 crore.
The aggregate market capitalization of the group at ₹ 4.54 trillion in fiscal 2012 is 33 times higher than it was in 1992-93. In the same period, the Sensex, the benchmark equity index of BSE, grew nearly eight times.
The Tata group’s closest competitor, in terms of turnover, is the oil-to-yarn and retail conglomerate Reliance Industries Ltd (RIL). RIL’s net sales in fiscal 2012 were ₹ 3.58 trillion and it had a net profit of ₹ 19,747 crore. Though RIL’s revenue growth in these two decades has been much higher than the Tatas, having grown 90 times, its net profit growth is lower.
“The result of Tata’s strategic thinking reflects in the group’s market capitalization," Piramal said. “What Tata did after taking over wasn’t very different from what Kumar Mangalam Birla did with the Aditya Birla Group after his father’s death."
Kumar Birla took over as chairman of the group in 1995 at the age of 28 after his father’s sudden death and is credited with transforming the Indian business group into a multinational conglomerate.
It hasn’t always been smooth sailing for Ratan Tata or the Tata group. A case in point is the Corus acquisition of 2007, which isn’t panning out too well for the company. Sales and profitability at Tata Steel’s European operations have taken a hit, due to the 2008-09 financial meltdown and the subsequent euro zone crisis. Company executives do not expect the situation to improve any time soon.
The Nano isn’t a huge success either. Tata, in his interview on the group website, said the Nano was marketed like other cars, but “as a minimal automobile at a low price".
“I would love to have a chance to implement a new marketing plan for the product, if that were possible," Tata said.
The emergence of a strong rival to Tata Motors in the passenger car segment, Mahindra and Mahindra Ltd (M&M), is another cause of concern articulated by Tata at the company’s last shareholders’ meeting in August. “We should do a great deal of introspection as to why M&M is ahead of us. I have great respect for the company. But we should look at this in sadness that we let that happen," Tata remarked.
The conglomerate is also sitting on a debt pile of $26 billion (around ₹ 1.42 trillion), a number that is causing concern among some investors. This needs to be seen in the context of the 29 listed group companies’ combined net worth of ₹ 1.43 trillion, and cash and cash equivalents of ₹ 36,289.38 crore, according to data from Capitaline.
The same retirement rule that saw some of JRD’s satraps leave the group will mandate Tata’s retirement as well. “Some people have suggested that the retirement policy should not apply to the chairman," Tata said in his interview on the website. “I have always believed that you don’t make exceptions for yourself. So I took the view that the rule should apply to me too. I realize that I have to live by the rules that I have set and step down when the time comes. And that time has come."
Cyrus Mistry has been working with Tata for a year now, and Tata says the Tata Sons chairman-designate has the analytical skills to steer the business forward and the integrity to uphold the Tata ethos. On Monday, Tata Sons formally announced that Mistry would take over on 28 December and Ratan Tata would become chairman emeritus.
Some of the challenges that lie ahead of Mistry are akin to those Tata faced when he ascended to the top job. The succession this time round may not be as acrimonious as it was during Tata’s time, but with many of Tata’s chieftains nearing retirement, Mistry will have to scout for young talent from within the group and outside to fill the void. He has already started doing that. Madhu Kannan, a former chief executive officer of BSE, was his first hire.
“You can live in a house, drive a car, make a phone call, season your food, insure yourself, wear a watch, walk in shoes, cool yourself with air-conditioning, and stay in a hotel all courtesy of Tata firms," said an article dated 1 December in The Economist. The dilemma is that the group may not necessarily be making money doing all of this. Tata’s telecom business, for instance, is under severe strain following the upheaval in the sector in the wake of the 2G scam, and its future is uncertain. Elsewhere, though Taj is still one of the most respected names in the Indian hospitality industry, Indian Hotels isn’t too profitable, with acquisitions weighing on the firm. Problems with Tata Steel’s European operations persist and the current dynamics of the steel business at home aren’t too exciting either.
Mistry doesn’t just have big shoes to fill, he also needs to hit the ground running.