Assume you are the head of a multinational group some of whose leading businesses are weakened by a troubled market and lack of refinance in overleveraged balance sheets. What’s the likelihood that you pull off an overhaul, sustain a pipeline of innovation and yet find time to foster business co-operation between India and another country?
Ratan Naval Tata, 72, the reticent chairman of the $70.8 billion Tata group, has managed all that.
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“There’s nothing to stop him. They will continue with more bottom of the pyramid ideas and the globalisation,” says Nadir Godrej, director, Godrej group of companies.
The Tatas’ is quite a remarkable story over the past 15 years, of which the last three or four have been quite transformational. “Ratan Tata’s leadership with a steady, focused, unflappable sense of long- term purpose and clear action has a lot to do with this change,” says Ashish J Singh, managing director, Bain & Company.
The stock market too has given a thumbs- up. Listed Tata companies’ market cap rose by 145.23 per cent in calendar 2009, far outstripping Mukesh Ambani firms (48.61 per cent), Anil Ambani companies (13.46 per cent) and even the A V Birla firms (85.88 per cent), according to a study by Capitaline for Financial Chronicle.
It can, therefore, be said that collectively the group has the confidence of the investor. And that confidence reflects how Rata Tata has steered the group through the economic storm at home and abroad. Recognition and high adulation have come from elsewhere also.
In December, the Indus Entrepreneurs gave him the “Entrepreneur extraordinaire lifetime achievement award”. In the same month Claudio Scajola, Italy’s economic development minister, awarded him the “Grand officer rank of the order of merit of the Italian republic”.
In the citation Scajola said, “Tata is universally acknowledged as one of the outstanding business leaders of the world. He epitomises the Indian continent’s vibrant economic growth.”
Earlier, BusinessWeek ranked the Tatas 13th among the “25 most innovative companies” and the Reputation Institute of the US rated it 11th on its list of the world’s most reputable companies.
Narayana Murthy, chief mentor and chairman of Infosys, admits he is a Ratan Tata fan. “To be able to compete with his group is an honour,” he says. Being able to draw such praise from a competitor is what separates Tata from other industrialists. “Tata has taken the group to a new height,” says Shashi Ruia, Essar chairman.
Even people who have never met him are all praise for him. “I am a fan of Tata quality. My motto has always been that the quality of our group’s work should be like theirs,” says Jaiprakash Gaur, chairman of the Jaypee group.
Despite his hectic schedule in overseeing more than 100 companies whose businesses straddle the globe, Tata keeps his human touch. He visited the families of all 80 Taj staff affected in the 26/11 terrorist attack.
As the head of the US-India CEO forum, Tata takes out time to give it clear direction. “He thought the forum was doing too much and needed to focus on specific areas to make an impact,” says Paul Folmsbee, US consul-general in Mumbai. The forum has since focused on infrastructure, clean energy, biotech/e-health, education & removing hurdles in closer Indo-US economic relations.
Ratan Tata’s ambition to globalise the group has taken it past some critical milestones. Tata Steel is now the world’s sixth largest steel maker, Tata Motors ranks among the top five global truck manufacturers, Tata Tea is the world’s second largest branded tea company and Tata Chemicals is the world’s second largest manufacture of soda ash – positions that could not have been earned without aggressive acquisitions.
“In hindsight the timing of some of the acquisitions was wrong,” says Godrej. But the group is strong enough to make mistakes and yet not be hurt. “I believe the Tatas will not regret buying the assets they have as these are valuable operations.”
Not a maverick group, the Tatas take decisions carefully. Srinivasa Addepalli, senior vice-president for corporate strategy at Tata Communications, says, “As a group we think from a decade’s perspective, rather than a few quarters. Our aggression is backed by a lot of conservative evaluation so that risks are well factored in. We focus on all the downsides and how we will mitigate those while taking care not to factor in all the upsides in our evaluation.”
Not everybody agrees. The research head of a Mumbai brokerage says the group is still “not out of the woods”. “Corus is still shutting down plants and Jaguar- Land Rover a question mark.”
The investment banking head at a financial services company says, “There was a lot of fat in the system. They have made some serious mistakes and Tata Motors could have sunk. But they have done a good job in getting fit again.”
A senior board member of a rival group questions the basis of the Tatas’ globalisation policy. “The footprints of Corus, JLR and Tetley are not directed at growth markets bur at saturated markets. They are investing in building up their top line rather than in emerging markets. They, therefore, run the risk of exposure to shrinking developed markets but with the cost of capital of developing economies. I fail to see how it makes financial sense.”
According to the head of a foreign private equity fund, the Tatas’ globalisation plans are a mix of “ambition and folly”. “We have long complained complain that Indian firms are happy to compete in the domestic market where they can manage the ecosystem. So we now want to go global; this is a strong and legitimate aspiration. The folly, however, is that the ambition has to be grounded in an honest assessment of one’s own capabilities and an evaluation of the market and products not quite like ours. I think they got this assessment and the timing of the acquisitions wrong,” he explains.
Some analysts believe the group will give globalisation a rest. “The group will have to practise discipline for some time and fix things. Hence, the near term priorities will be maintenance and growth,” says an investment banker.
That said, Tata has proved his ability to acquire diverse businesses overseas, meshing different cultures and nationalities to work for common goals. In the beverages business, for instance, there is a clearly multi-racial management team from India, the UK, the US and South Africa, among others. An American leads its hotel business.
The tram effort works. “The Tatas have a far more structured processes than most Indian companies. As a result they are not solely dependent on leadership to pull things together,” says Singh. R Gopalakrishnan, the only executive director on the board of Tata Sons. How the chairman holds the team together makes the difference. And in keeping the team together and working, Tata has used delegation, not micro-management.
Ratan Tata said on one occasion that his greatest satisfaction had been seeing India open up, the Indian consumer get choice and the Indian entrepreneur a chance to flourish based on merit rather than influence and hierarchy.
“At various lower levels in the past politicians have sought gratification (from us). But by and large most of them know that we do not give (them),” he had said. This principled approach, however, has not been without setbacks. At Singur in West Bengal, Ratan Tata had to abandon plans to set up the Nano plant. Again, in Orissa, the group faces problems in getting land for new steel plants. Its plans to mine titanium in Tuticorin in Tamil Nadu have run into popular resistance.
He has not minced words to say who was to blame. “There are unfortunately strong vested interest groups in the private sector working against the true potential of India. People who are not from that area and exploit residents, often provoke conflicts. Leaders will need to reconcile and balance between cultivated land and industrial land and ensure no injustice or long-term detriment is caused to the landowner,” said Tata.
The Tata group differs from other major industrial families in one crucial respect. Unlike the Ambanis or the Birlas, the Tata family or investment entities they own, do no not control the promoters’ stake in its group companies. Most of the promoters’ stake is held by the unlisted Tata Sons, two-thirds of whose equity is held by philanthropic trusts. “We, therefore, do not have to bother about quarter-to- quarter performance and can take a long-term view unlike an institutional investor impatient for returns,” said Gopalakrishnan.
Perhaps because of this long-term focus, the top half a dozen listed companies in the group have delivered a compounded annual return of 28 per cent or more over the past decade.
As much is acknowledged by Godrej: “Ratan Tata is very focused on doing the right things and building what’s good for the long term.”
Yet this long-term perspective may foment significant short-term pain too, as is seen in the impact of the acquisitions. “They have one very strong asset, TCS, which gives the group strength. Their ability to boldly do things is what makes them invincible. They are a very principled group that takes a very long- term view of everything, including going global,” says Godrej.
The strong treasury skills available in Tata Sons and operating companies ensured financing even of troubled firms. Cross- holdings within the group also helped, as was seen when some companies in trouble were able to sell their shares in TCS to raise money. Of course, this caused a temporary setback to the TCS share, but it has bounced back since.
Suzanne Smith, regional managing director for ratings at Standard & Poor’s, sees the group as one with diversified holdings and conservatively managed with a great deal of financial flexibility.
She acknowledges that TCS provides immense financial flexibility to the entire group. TCS itself has very strong finances and hasn’t experienced any distress in the global slowdown. Tata Steel and Tata Motors have suffered some distress due to the overseas acquisitions but neither is anywhere near defaulting, she adds.
Many cash-short Tata firms were able to raise both equity and long-term debt when the market opened up. This led to de-leveraging which boosted their valuations. “The management has come out reasonably well as they have been quick to react. They didn’t compromise in terms of managing the human aspects of downsizing and even at the worst of times roped in NTT DoCoMo as a partner in Tata Teleservices at a crazy valuation (equity value of over $10.38 billion),” says the research head of a Mumbai brokerage.
Banks have been supportive, mainly because the trust and goodwill the Tatas enjoy. This was exhibited when Tata Motors faced difficulty in raising refinance for the debt taken to buy JLR acquisition. The group CFO of a south-based business house says State Bank of India, perhaps for the first time in recent history, gave a guarantee for repayment on behalf of Tata Motors.
Tatas, perhaps, are the only Indian group that is attempting to infuse a bit of altruism into business. Witness their Nano and the cheap water purifier. “Our philosophy is to enhance the quality of life of the Indian people. Access to water, drinking water and nutrition is the foundation of this quest,” said Tata.
That does not come without technological innovation. The Nano is one example; another is the Eka supercomputer which in 2008 was ranked the world’s fourth fastest. “In creating the Nano our objective was not to make the cheapest car but rather to create something that would reach more people than all the existing products addressed,” said Tata. This same philosophy marks the group’s low- cost housing and low- cost water purifier ventures. Linked to this is corporate social responsibility. Already, the development- related expenditure of the trusts and Tata companies amounts to about 4 per cent of the net profits of all its companies. While he has demolished the culture of individuals becoming all-powerful satraps, Tata has built a formidable team of leaders around him, who are given much greater freedom to function than in any other business group in the country.
“In Indian groups, individuals often become and remain important. But Ratan Tata has consciously decided that a few individuals will not again control the future of the group. Despite this he has built a strong cadre of leaders who are independent executives but are not chieftains,” says Singh of Bain & Co. He sees Tata as a person who is very secure in what he does and is, therefore, able to step back and delegate power – very unlike some Indian promoters who want to be involved in everything.
“Ratan Tata’s leadership style is very future-oriented. With his long term perspective, he has focused on supporting, organising and developing the people in Tata Teleservices which had led to friendly teamwork and creative collaboration,” says Toshinari Kunieda, senior vice- president & managing director of the global business division of NTT DoCoMo.
One key factor in the group is that the leadership team at the top tends to have longevity. “This allows them to take long- term bets and see them through,” said a senior Tata executive who has worked earlier for multinationals.” Addepalli says decisions in the group are taken with a lot of thought about the long term, about where to get into and why. “Once a decision is taken, we tend to keep up investments and provide appropriate support both in terms of management and capital.” For instance, the Teleglobe acquisition, where the group persevered and provided the right kind of management support through a turbulent period. Banks see this and continue their support too.
Ratan Tata is only the fifth chairman in the 140- year history of the group. “The chairman is not there for only two years at the end of which he collects his pension, as in some other companies,” said Gopalakrishnan.
Despite the long- term orientation, the management teams retain the ability to react with speed. When Ratan Tata gave out a call to conserve cash, tie up long-term finance even at slightly higher rates, and defer non-essential capital expenditure, companies across the group restructured operations to release cash from working capital cycles.
Yet, the group is accused of nursing a geriatric team at the top. As India gets younger, the Tata top management is greying. Save Tata Chemicals and TCS, all Tata companies are led by people on the wrong side of 50.
“They need to bring in more young blood who will think differently. It is crucial to involve Gen Next in drawing up blueprints for strategy and growth,” said the top executive of a rival group. Others talk of the group’s inability to yet find a successor to Ratan Tata, who, however, is on record that a reputed consultant has asked to scour the world for candidates. In the past, the Tata Sons board raised the retirement age for its chairman twice from 65 years to 70 and then to 75 years.
Keki Dadiseth, once director of Unilever’s home and personal care business worldwide and a fellow Parsi, was earlier rumoured to have been short-listed. Recently the name of Arun Sarin, former CEO of Vodafone Plc, was also heard as a possible contender.
“The big question mark is who takes over from Ratan Tata. The sign of good management is that one has more candidates to choose from than can be accommodated. Is that the case with the Tatas?” asks the head of a Mumbai-based investment bank.
Is anyone being groomed on the quiet? A senior executive at another large family owned business in Mumbai thinks so. He says, “It should not be difficult for them to map all the professional CEOs in their peer set and prepare a short list of candidates. The fact that the chairman’s retirement age has been extended twice perhaps indicates that someone internally will be announced as successor.”
If that be so, the most obvious choice appears to be Noel Tata, managing director of Trent and Ratan Tata’s half- brother. Outsider observers say Noel has yet to prove his mettle in handling businesses that differ widely in scale, size and variety. But he has been getting a fair bit of grounding. He took over the reins of Trent from his mother Simone Tata and expanded the fashion retail business into hyper marts, music and book retailing and piloted a tie-up with Tesco of the UK. He also serves on the board of the group’s other consumer-oriented businesses such as Voltas and Titan in addition to Tata Investment Corporation. Insiders say Noel shares Ratan Tata’s sharp business skills and acumen. He has been able to introduce an employee stock option plan in Trent, the only Tata company to do so. Even TCS does not have one. Noel and Ratan do not serve on the same boards, which implies that former does nor have to periodically report to his half brother. Another parallel exists: Ratan Tata, before becoming chairman, was independently running Nelco.
In 1938, JRD Tata, then 34 and relatively unknown, took over from Nowroji Saklatvala as group chairman, both on the strength of his surname and the will of the late Dorabji Tata. JRD’s mother was French, as is Noel’s mother. Noel’s wife is the daughter of Cyrus Pallonji Mistry, the largest non-Tata shareholder of Tata Sons. If Noel does take over when Ratan turns 75, he will have a two-decade run before retirement. Ratan Tata still has a good three years to go before retirement. He is certain to use this time to put in place the building blocks for the future. Tata has pulled group together in a coherent, corrected the extreme decentralisation and went global. He has built brand equity for the Tatas on the global stage. “He has emerged a statesman in his own right,” says a senior Tata group functionary.
So what’s the priority for the next three years in the House of Tatas? The global economic crisis is not fully over. Managements are still very cautious. For the Tatas, completing mega power projects is a priority. In steel and automobiles, getting the international acquisitions story right remains work in progress. Then there is Ratan Tata’s goal of sustainable growth in the light of climate change, by ensuring lower carbon footprints in all that the group does. Mergers & acquisitions still remain a priority, says Aaddepalli. “Of course, given the environment, we are much more careful. The preference has shifted to alliances and strategic partnerships. M&As allow us to fulfil the strategic vision faster but the appetite for risk has reduced globally,” he says.
So rather than hogging headlines for bold acquisitions, the focus will be on consolidation. Group companies are taking a fresh look at their cost structure, with outside help where necessary. “When you are under pressure you come up with new ways of doing things. But there has been no drastic course correction. Going after global growth does not mean that the growing Indian market is being overlooked. We will definitely tap opportunities in our home market better, that’s a given,” says Addepalli.
And how is the group going to achieve that? By following Ratan Tata’s three priorities: Innovation, innovation, innovation.