Tata, the headiest brew in the world


May 5, 2008

An Indian Giant

Tea, cars, steel, IT… Tata, the headiest brew in the world

India’s extraordinary conglomerate has found unique solutions to many of its problems. But it’s still unclear what will happen when the boss retires

The favourite boast of executives of the Tata Group is that it accompanies the average Indian throughout the day. They wake to the alarm of its Titan clocks, drink its tea or coffee for breakfast, wear clothes bought from its Westside shopping centres, take a Tata car or bus to work on a computer set up by Tata Consultancy Services, lunch in a Tata hotel, arrange their evening appointments on a Tata mobile phone and use Tata power to light their homes.

These days, the influence of the Indian conglomerate is spreading beyond its home country. Back in 2000, it made the first major acquisition by an Indian group when it acquired the Tetley tea company; last year, that was trumped when it bought steelmaker Corus for £6.2bn, while in March it was confirmed as the purchaser of British icons Jaguar and Land-Rover from Ford. Next month, it will make its first foray into UK financial services when New Star launches an Indian investment fund that will be managed by Tata Asset Management.

That spending spree, together with less high profile acquisitions like chemicals company Brunner Mond, US business General Chemical Industrial Products and the truck-making business of South Korea’s Daewoo, means that India now represents just a quarter of the group’s interests, a smaller proportion than the UK; and it means that Tata can count itself among the world leaders in industries as various as tea, steel, consultancy services and soda ash, the key ingredient in washing soda.

Much of the credit for the transformation goes to the reclusive Ratan Tata, who has chaired the group since 1991. While he does not even get a walk-on part in Keepers of the Flame, the film that reverently charts the group’s 140-year history, when the history of his chairmanship is finally written, he will be credited as being at least as influential as group pioneers such as founder Jamsetji Tata or JRD Tata, Ratan’s predecessor who led the group for a marathon 51 years.

They played a key role in India’s transformation from British protectorate to vibrant modern industrial country, starting the country’s first airline, bank and insurance company – all since nationalised – as well as opening its first textile factory, power and steel plants. But Ratan has kept Tata at the forefront of India’s emergence as a burgeoning international economy.

‘Ten years ago, when we set up the group executive office, we took the view that we must look at the business globally,’ says Ishaat Hussain, finance director of Tata Sons, which holds the bulk of the shareholdings of Tata’s sprawling empire. ‘From a strategic point of view, Tetley was the first big acquisition and no one can argue that was not a success. Then there was Corus, [making] Tata Steel the sixth largest company in the world.’

The rule of thumb is that each business must be capable of holding a position within the top two or three in its industry. Some have questioned the group’s focus on global expansion at a time when the Indian economy is growing rapidly – in the year to March 2008, its economy grew by almost 9 per cent, beaten only by China within Asia, and growth has averaged more than 8 per cent over the last five years.

But Hussain points to a range of Indian projects and says: ‘I can prove we are not overlooking the opportunities in India while we are growing overseas.’

The highest profile of these initiatives is the motor division’s Nano, the ultra-basic, pared-down runabout designed to be the first ‘1 lakh’ (100,000 rupee or £1,250) car in the world.

While that has attracted much criticism from environmentalists alarmed by the prospect of millions of Indians adding to the country’s already soaring emissions, Tata has already had approaches from countries in Africa, South American and elsewhere in Asia about manufacturing the car there. Meanwhile, its jewellery business Titan has been given a similar challenge to create the first 200-rupee (£2.50) watch – it has got the price down to 350 rupees so far.

Financial services is also, says Hussain a ‘major thrust’ for the group: Tata Asset Management, established just 14 years ago, already has a management arrangement in Japan similar to the one planned with New Star in the UK; it has insurance joint ventures with AIG; and it offers a full range of banking services apart from deposit-taking – reflecting Indian legislation, which bans industrial companies from owning a bank. That could change next year, allowing Tata to take the final step to creating a full-service bank.

‘We Indians are far more thrifty than the Americans,’ says Hussain, pointing to the dramatic growth in India’s financial services – such as savings rising by a third, insurance by almost 40 per cent.

Tata’s steel business, too has been expanding rapidly, constrained only by the difficulties of accessing raw materials, such as coal and iron ore, and establishing new plants – the environmental lobby is at least as vociferous in India as it is elsewhere.

‘A key paradigm of [Tata’s] founder was to own our raw materials. Our challenge is to get the raw materials for [Tata Steel],’ said Hussain. ‘The question is why Corus did not do it.’ Its senior executives have recently been scouting for supplies in Brazil and elsewhere.

Tata is also involved in the much-needed development of India’s infrastructure, as its recent success in winning a contract to build a 4,000MW power station at Gujarat demonstrates.

Ratan’s attention has also been focused on restructuring the group. The organisation he inherited was a sprawling mish-mash of businesses, one typical of an economy that is gradually emerging from decades of heavy state control and regulation, and was involved in everything from soap to saris. It was also going through a rough patch: the steel business, now one of the fastest-growing parts of the group, then looked more like a dinosaur industry, while its truck business had collapsed. And the senior management of its various businesses, instead of collaborating, were more often competing.

Ratan’s regime has been one of quiet revolution: he introduced a rule requiring chief executives to retire at 75, then reduced that to 65, helping him flush out some of the old guard in the operating companies. Then he disposed of those businesses that he deemed incapable of getting into the top three within their sectors – including textiles, the first business established by founder Jamsetji, and cosmetics. Now, the group is focused on seven core areas – engineering, materials, energy, chemicals, services, consumer products and information systems.

Next, he tackled the issue of its complex structure – a morass of minority stakes and cross-shareholdings, public and private. Indeed, outside investors cannot even buy into the main company, Tata Sons, which remains private despite repeated speculation that Ratan is considering floating at least some of the company. Only 27 of the 85-odd companies in the group have listings – although some of the giants do, such as Tata Steel, Tata Power, Tata Communications and Tata Motors: combined, their market capital is more than $65bn (£32bn).

Hussain describes it as a ‘unique model’. While Tata Sons has majority stakes in the newer businesses, like consultancy, financial services and telecoms, in other key areas – including steel, motors and power – the holdings are only around 30 to 35 per cent.

‘They are not subsidiaries, but we are the single largest shareholder, so we can exert influence,’ he says. The chairman is normally a Tata nominee – Ratan heads the large ones – and it will lead the selection of chief executives, but the strategy and business of the individual companies is ultimately under the control of the executive management.

Ratan has, however, given the group more central focus with the creation of two committees – the ‘group executive office’ and the ‘group corporate centre’, which determine the overall strategy and direction of the group as well as taking responsibility for areas like acquisitions and financing.

The nucleus of the idea for the Corus acquisition, for example, came from within Tata Steel, but was approved by Tata Sons, which gave it the financial support. Hussain says there are ‘two or three’ principles that determine whether an acquisition proposal will be supported, including whether it fits into the current group structure, and whether it stays within corporate ethical codes: alcohol and cigarette businesses, for example, are both ruled out.

Financial returns, too, are clearly important, but, says Hussain, money is not paramount. While things like the quality of the product and the market share of the group are ‘very important for us … we take a very holistic view of the business. We do not buy into the American and British view, which believe that business’s role is just to make money and nothing else. It is true that we need to make money, but there are constraints on how much we can make.’

That rather egalitarian view is reflected in the group’s ownership structure: 66 per cent of Tata Sons is owned by trusts established by earlier family members like Jamsetji’s sons Sir Ratan Tata and Sir Dorabji Tata, and an ethical culture is heavily promoted within the group. Between the trusts and the companies, around $100m a year is spent on social welfare programmes while 10,000 of Tata’s 200,0000 employees are on its various volunteering programmes.

That philanthropic element permeates its approach to business. In an interview last year, Ratan said: ‘The view I take is that there is no issue if I am in the ballpark in terms of dividend payments and the bottom line, and if we still remain competitive. If one went to Tata Steel, for example, you could take a broom and sweep out a lot of these costs [such as maintaining municipal services in the company’s model steel community, Jamshedpur]. You could turn it into a more conventional company. But you would have great discontent. And I think it would change the environment and atmosphere.

‘We certainly don’t do all these things in other countries. But here, we have this responsibility. Remember that Tata Steel went from 78,000 employees [in 1994] to 38,000 today – with no labour unrest. You could never do that unless there was faith between the employer and employee.’

It also explains why the management of companies it acquires tend to remain in place, and integration is gradual. Thus, while Tata is well aware that Corus’s British plants are well behind its Dutch ones – and its own Indian plants, which are the world’s lowest-cost producers – that is more likely to be addressed by investment in processes and raw material sourcing than wholesale sackings and closures.

The social conscience reflects the religious beliefs of the Tata family, who are Parsees, or descendants of the Zoroastrians who fled persecution in Iran more than 1,000 years ago. A close-knit community, they tend to marry within the faith – and the increasing difficulty of doing that as the community has gradually dwindled has given the Tata group one of its biggest challenges for the future: who will be the next chairman of the group?

Ratan is 70 and a bachelor while just one other Tata still works within the group – Ratan’s half-brother Noel, who runs its Westside clothing subsidiary. The succession question is the biggest facing the group but also the one to which there are no clear solutions. Hussain says he has no answer: ‘Mr Tata says “Trust me, I will put a successor in place.”‘

Nor will Hussain be drawn on whether it would make a difference if the group was headed by someone from outside the family. ‘The important thing is that we must have the best man in the job. That will be Mr Tata’s criteria for putting succession in place.’

Original article here