India’s Tiger : Ratan Tata


November 14, 2006

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Ratan Tata turned a sleepy firm into a global power by targeting the low end of the market

It’s not that Ratan Tata finds the rich uninteresting–after all he’s one of them. No, it’s more the case that he finds the opportunities to be richer at the bottom end of the consumer universe. “Everyone is catering to the top of the pyramid,” says the 69-year-old at his office in Bombay House, the Tata group’s elegant Edwardian headquarters in India’s business capital. “The challenge we’ve given to all our companies is to address a different market. Pare your margins. Create new markets.”

The Tata group’s global clout means that its chairman’s thoughts get concrete results. Tata comprises 96 companies, including the world’s second largest tea business (Tata Tea), Asia’s largest software firm (Tata Consultancy Services), a steel giant (Tata Steel), a hotel chain (Indian Hotels) and a sprawling vehicle-manufacturing arm (Tata Motors) that includes a bicycle factory in Zambia and a project to make a car selling for $2,200. Since Tata became chairman in 1991, he has multiplied the Tata group revenues seven times to an annual $21.13 billion. Since 2000, the group’s market value has multiplied almost 18 times to $49.1 billion. For the past six years, Tata has been on a $1.9 billion shopping spree that has netted Britain’s Tetley Tea, South Korea’s Daewoo Commercial Vehicles, Singapore’s NatSteel and New York City’s Pierre Hotel, among more than a dozen other acquisitions.

And it’s not over yet. Anglo-Dutch steelmaker Corus agreed last month to an $8 billion takeover bid by Tata Steel. The deal is the largest-ever Indian acquisition of a foreign firm, and it will catapult Tata from the world’s 56th largest steel producer to the fifth. “All credit goes to Ratan Tata,” says Sanjay Bhandarkar, managing director of the N.M. Rothschild private bank in India. “He clearly has a vision and knows what he’s doing.”

India’s industrial heritage cannot be separated from the Tata name. The company’s founder, J.N. Tata, was a nationalist driven by the idea of a strong, self-reliant India. He gave the country its first steel mill, first hydroelectric plant, first textile mill, first shipping line, first cement factory and even its first world-class hotel. His successors–among them J.R.D. Tata, India’s first pilot–created the first airline, first motor company, first bank and first chemical plant. And much like H.J. Heinz in the U.S., J.N. Tata attached social welfare to his business. Tata Steel introduced a series of worker benefits that would become common only much later in the West: the eight-hour day in 1912, maternity benefits in 1928 and profit sharing in 1934.

The family’s reward for this progressive capitalism was to have its airline and insurance arm nationalized by the post-independence government in 1947. For decades the Tatas lay low while the “license Raj” slowly made India globally uncompetitive.

When Ratan took over from J.R.D. in 1991, reform was on the way and state-sponsored monopolies were on the way out. The new chairman saw the need to overhaul the firm’s culture. He ordered each company to meet performance targets–to be No. 1 or No. 2 in its market–and to meet quantified goals for leadership and innovation or be sold. Tata Steel, for example, shed half its 78,000 workers between 1994 and 2005. “The Tata group’s relationship with its employees changed from the patriarchal to the practical,” reads the Tata code of honor, which sets groupwide standards of conduct. Subir Gokarn, chief economist at ratings agency Crisil, says Tata read the runes of change and largely avoided the rash of business failures that followed reform: “He survived the bloodbath. Those who made no changes became extinct.”

Tata signaled a new prominence for the emerging Asian conglomerate in 2000 when the most Indian of brands bought one of the most English, Tetley Tea. At $435 million, the deal was the biggest in Indian history. For Tata, buying an iconic Western brand was not the goal. Growing Tata Tea was. “We look for the acquisition of companies that fill a product gap or have a strategic connection with what we do, wherever that company might be,” he says. The same holds true for the latest steel deal: it fills a gap. Corus makes a wide range of high-end products not in Tata Steel’s repertoire. The pairing will give Corus access to cheaper steel while handing new markets and know-how to Tata.

One aspect of the past that still survives is J.N. Tata’s idealism. Tata Sons, the holding company that manages the group, is 66% owned by 11 charitable trusts, which spent $379 million on social causes in 2003-04. Other Tata companies donated an additional $97.8 million. Beneficiaries range from educational, health and scientific institutes to the Ganges River’s giant mahseer fish, saved from extinction by a Tata-funded breeding program.

What really excites Tata is his ability to combine the group’s philanthropic heritage with modern business sense. Targeting the bottom of the income pyramid ticks both boxes. Tata points out that consumption, as it is understood in the West, is still a dream for all but a fraction of 3 billion people in the developing world. Only 58 million Indians, out of the country’s 1.1 billion population, earn more than $4,400 a year, according to New Delhi’s National Council of Applied Economic Research. The challenge is to make consumers out of people whose disposable income is meager but growing.

One of Tata’s answers is the $2,200 car, a four-door, rear-engine runabout he designed himself that’s currently under development. Another is the Ace, a 700-cc truck that Tata Motors sells for less than $5,000; it’s a runaway success. Purchases of these vehicles are supported by low-interest consumer loans from Tata Finance. Tata’s hotel chain is building 200 hotels across India under the Ginger brand, offering air-conditioned rooms with wireless Internet access for 1,000 rupees ($22), one-twentieth of the cost typically paid by business travelers today.

That same strategy is behind Tata’s affinity for Africa. In South Africa he has invested in mining, tourism and engine makers. There’s an instant-coffee plant in Uganda, a bus factory in Senegal and a phosphate plant in Morocco. “We look at countries where we can play a role in development,” says Tata. “Our hope in each is to create an enterprise that looks like a local company but happens to be owned by a company in India.”

Tata says the company’s success proves his approach is good business as well as good karma. “We are not in anything for charity.” The company is not free from controversy. In January, Tata Steel’s plans to build a mill in the eastern state of Orissa went tragically awry when police fired on protesters who accused the state government–acting as a broker in the development–of making a profit on the sale of their land. Twelve people were killed. But to lay off 40,000 employees in Jamshedpur, Tata Steel offered to pay their salaries until retirement along with free health care for life, and allowed workers to keep their company houses for three years. Initiatives like these have kept the group free of strikes.

Tata is hinting at making himself redundant, which would let him spend more time with his beloved dogs and pursue his one rich-guy indulgence: his car collection. But in targeting a billion with a few dollars rather than a few with a billion dollars, he has created a legacy and a growth engine that won’t run out of momentum anytime soon.