A series of setbacks over recent months have placed a question mark over the Tata group's avowed aspiration to be a global conglomerate
A series of setbacks over recent months have placed a question mark over the Tata group’s avowed aspiration to be a global conglomerate. Tata Steel’s travails in Europe have been well documented. Briefly it has had to write off almost the entire investment it made in buying Corus Group in 2007. And just when it seemed some of the red ink would be stanched by the relative success of Tata Motors’ investment in Jaguar Land Rover, Brexit stuck, casting some doubts over the future of UK’s largest private employer. Not surprisingly, following the referendum, Tata Motors Ltd’s stock dropped the most since 2012. Even the jewel in the Tata crown, India’s largest software exporter Tata Consultancy Services Ltd, faces severe headwinds with 28% of its revenues last year coming from Europe.
The Tata group’s woes fit the raging narrative on deglobalization of supply chains worldwide, with experts claiming that the big winners in the future are likely to be countries and regions with large internal markets. That would mark the end of the era of globalization with its free flow of capital across national borders and trade agreements that replaced protectionism.
Set against that, the Reliance group’s much more India-focused strategy looks to be a far more stable bet today. India’s ever increasing hunger for energy means that the falling international prices of oil have not been a dampener on Reliance Industries Ltd’s (RIL) refining profits. In fact, for fiscal 2016, RIL’s net profit was up 17.2% despite a 23.8% drop in revenue. Significantly, RIL has invested more in India than any other private firm. The group’s DNA is built on the vision that India is the market and given the country’s demographics, its growth is far more sustainable than that of the rest of the world.
Consequently, right from its earliest days, the company’s bet has been on the domestic market. Thus, the group’s latest and highly ambitious diversification into telecom, where it has already sunk nearly $20 billion, is also a play on the rising demand for data-based telecom services in India.
By contrast, the Tata group has had a global outlook right from its very inception in 1868, when its founder, Jamsetji Nusserwanji Tata, started off his business career with international trade in China and England. In 2014-15, the Tata group’s $73.4 billion of international revenues amounted to 67.5% of its total revenues, with the UK and the US being the two main overseas revenue contributors.
The last 15 years have been a particularly busy period in terms of its global drive. Beginning with Tata Tea’s acquisition of Tetley in 2000, Tata companies made a rash of overseas acquisitions. Among them are Corus by Tata Steel, Jaguar and Land Rover by Tata Motors and Brunner Mond by Tata Chemicals—all in the UK; Daewoo Commercial Vehicles by Tata Motors in South Korea; NatSteel in Singapore and Millennium Steel in Thailand by Tata Steel; Eight O’ Clock Coffee by Tata Tea and Tyco Global Network by Tata Communications in the US. It isn’t a coincidence that over 50% of Tata Steels’ revenues now come from its global operations but this has come at huge cost with the company’s consolidated net debt nearly ₹ 80,000 crore, most of it owing to acquisitions made for its loss-making Europe operations.
For the first decade of this century, it appeared that Tata’s strategy to spread its wings was allowing it to grow rapidly in multiple markets, while effectively derisking against tailwinds at home. As domestic consumption stalled in the stasis years of 2007-2011, and world demand for commodities and services recovered from the financial crisis, most Tata group businesses abroad showed robust growth. Indeed, by June 2011, driven by gains in market wealth of companies like TCS, Tata Motors, and Tata Steel, the 148-year-old conglomerate had overtaken the combined market wealth of the two Reliance groups put together.
Then the wheels started coming off globalization with European demand going into a deep slumber and China flooding the world markets with cheap commodities even as it fought its internal demons. It isn’t a situation that is likely to change any time soon. As Ian Bremmer, global research professor at New York University and founder of the Eurasia Group, writes in his latest weekly newsletter, “Global trade looks even more alarming when measured in price terms: having fallen 13% in 2015 to $16.5 trillion from $19 trillion in 2014 though this reflects both exchange rate effects (a stronger dollar) and price effects (lower commodity prices). China focusing on domestic demand rather than exports for growth is worth watching closely: if wheels start falling off Chinese reform, that’s the tipping point for a big hit to globalization."
It isn’t that Mukesh Ambani has been averse to sinking money in overseas ventures, but he is known to be tightfisted and believes no asset is worth acquiring “at any cost" in the way the Tata group did when it bought Corus. Which probably explains why a man who is famed as a highly skilful deal maker, failed to acquire bankrupt petrochemical company LyondellBasell Industries NV in 2010. Ambani, it was said, walked away from the bid once “the value proposition was tilted away". RIL also lost out to BP plc in buying Value Creation Inc., a Canadian oil sands company. RIL did purchase stakes in US shale gas sites, a move where its failings have echoed Tata’s troubles with its overseas ventures. Following this, RIL seems to have hunkered down, preferring instead to invest in making its domestic plants more complex and efficient at using feedstock and their own byproducts while investing in new domestic businesses where growth would be purely home grown.
So has Dhirubhai Ambani’s vision for India triumphed Tata’s quest for a global footprint? It may be too early to pass any judgments since the gains from globalization can’t be measured only in terms of immediate revenues or profits. The Tata group is now in process of winding down some of its global assets and with a renewed push for its steel, housing and auto business in India, it looks like India-first for now. But deglobalization’s threat may be a trifle exaggerated and businesses have a way of adjusting to new realities quite rapidly. So don’t bet on the Tatas coming home for keeps.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.
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