May 13, 2002

Ta-ta to Tata in troubled times

With his `problem child' - the Indica hatchback - still in the red, Ratan Tata is about to retire, writes Eric Ellis in Bombay

BEING asked to the weekend retreat of one of India's richest men is an invitation too intriguing to pass up.
A Cornell-trained architect, Ratan Tata designed his own stylish sanctuary at Ali Bagh, Bombay's Byron Bay, to separate himself from the relentless demands of India and the sprawling Tata Group he chairs, a $20 billion empire that speaks for 3 per cent of its economy.
Its all very agreeable in this most enchanting of tropical settings. There's a minimalist beach house set in lush lawns by a palm-fringed pool and a library of National Geographic dating to the 1950s. The Indian Ocean virtually laps at the front gate.
"I never have guests here," he says. And that, apparently, includes even "good friends" such as American super-diplomats Henry Kissinger and Richard Holbrooke, who happened to be in town that weekend, staying at Tata's Taj Hotel in Bombay.
Tata suddenly declares the truly relaxing part of the weekend has arrived and I'm ushered to his private helipad, where I'm strapped into his $9 million MD-902 Explorer.
A minute later, with Tata at the controls of the chopper, he bursts through the jungle canopy to Bombay's Santa Cruz Airport, 30 minutes away.
Just to be flying at all this edgy weekend, with New Delhi and Islamabad poised for war over Kashmir, requires official pull. India's missile emplacements are visible below, some of them on the back of Tata trucks, ominously pointing at Pakistan.
"Flying relaxes me," he says. "I find there's great clarity in it."
In the months to come, Ratan Tata will need all the clarity he can summon.
The unmarried 64-year-old is scheduled to step down as Tata's executive chairman before December 23, his 65th birthday. In Corporate India, that's akin to the passing of a royal. In the 134-year-old history of the House of Tata, there have only been five chairmen.
Tata's succession call will be the most important decision of his 40-year career with the family business. But the man who cut his business teeth working in Sydney in the early 1970s in a joint venture with Dalgety is determined to bequeath a more dynamic Tata than the gentle club he inherited.
He has promised to install a man in his 40s at the top of Tata. But first there's a legacy to secure.
At first glance, there's not a lot Melbourne and the western Indian city of Pune have in common beyond famous cricket grounds and a reputation for high-caste provincial snobbery. But if a lineworker sacked when Nissan shut down its old assembly plant at Clayton in 1992 were today to wander around Chikli, on the outskirts of Pune, he'd see his old workstation now pumping out one of India's most popular passenger cars.
The Indica - India's car - is being built by Telco, the automotive division of the Tata group, which bought the remnants of the discarded Nissan line and re-created it on the dusty Deccan plains around Pune.
Ratan Tata's legacy is a boxy 1.4-litre hatchback, the Indica. Understandably for a business empire that shares the epic grandeur of India, the vehicle is immersed in patriotism. Despite its Italian design and Japanese-Australian assembly line, the Indica is hailed as the country's first "indigenous" car, with some 95 per cent of its components made by Indians for Indian conditions.
"The Indica has been a very satisfying project," Tata says. "I wanted to show that such a car was possible in India. With the Indica we've proved the doubters wrong."
Not quite. In Corporate India, the Indica is regarded as the child that the unmarried Ratan Tata never had.
Born in 1997, it's also been a problem child, one that disquiets investors and brought grief into the House of Tata just as the chairman plans his exit.
The Indica has become a monument - and not yet a particularly flattering one - for Ratan Tata's term at his family's dominion of 94 operating companies, 31 listed companies and 225,000 employees.
The car may be popular but it's not yet profitable. The drag on Tata is obvious - last year Tata turned just $600 million in profits on sales of $18 billion.
With no experience in passenger cars, Tata could hardly have chosen a more expensive - and competitive - sector to fashion a legacy. As the Indica plant took shape at Pune, a market already dominated by Maruti Udyog - a joint venture of the Indian Government and Japan's Suzuki Motors - suddenly even got more congested. Foreign giants like Fiat, Ford, Volkswagen and Hyundai then muscled in, chasing wafer-thin margins. But with Tata at the helm, Telco stoically pressed on, aiming at 130,000 Indicas a year by 2002.
Telco has missed that target. This year, the Pune plant will turn out 65,000 vehicles. Before the Indica, Telco enjoyed three of its best ever years, with return on invested capital (ROIC) humming along at 17 per cent in 1996. Today, an internal document obtained by The Australian shows ROIC in 2001 at Telco was negative 4 per cent, easily the worst of the group's main operating divisions. Telco has become a burden for Tata.
Telco's share price has tracked like an internet stock since the Indica project came on stream. From a $24 peak in mid-1996, Telco plumbed $2.40 last August. The news is better in 2002. The flow of blood from Indica seems to have been stemmed. Telco lost $23 million in the December quarter, half that of a year earlier. Telco stock has doubled since August off the low base.
"We're behind where we thought we would be," Tata says. "But the market is just starting to scale up and I think we're very well placed."
A journey to Jamshedpur, the Tata Group's "spiritual home" a subcontinent away near Calcutta, puts Ratan Tata's Indica gamble into historical context. Here the House of Tata is much more than a steel maker. It's the ultimate welfare state. The flagship of the Tata empire, Tata Steel, supplies the city's water, its schools and hospitals, clears the rubbish and even arms a posse of big game hunters to keep killer elephants at bay.
More Kipling than Carnegie, life in clean, green Jamshedpur is paid for by Tata Steel shareholders long before the day's first ingot is cast.
Tata's philanthropic founders defined their role as not just making money but as "benefactors at large".
And there are at least 35,000 Indians in Jamshedpur who would concur, the ones Tata Steel sacked when it came under market pressure to cut costs.
Simply cutting the workers off offended Tata culture, so Tata Steel agreed to pay their last drawn salary every month until age 60.
Wall Street hard-heads dismiss such largesse as unnecessary social baggage and urge Tata to speed the privatisation of Jamshedpur's urban services.
But Tata grandees such as Jamshed Irani, a former Tata Steel chief executive officer and 45-year Tata veteran, insist "it's what makes Tata great".
Perhaps, but it doesn't make for great results.
At $US150 per tonne, Tata Steel is one of the world's cheapest steel producers but analysts say it squanders its competitive advantage. Profits fell 73 per cent to $15 million in the December quarter, despite increased sales. At $1.5 billion, Tata Steel's market worth is 12 times smaller than Korea's Posco, which produces just seven times more steel at the same price. US consultant Stern Stewart ranks Tata Steel as one of India's poorest wealth generators.
Little wonder, then, that Tata Steel's share price is a quarter of where it was 10 years ago.
But in December, Tata plans to "unquestionably honour my own rules" and retire as executive chairman of Tata Sons Ltd, the unlisted holding company at the peak of Tata power.
But this time the succession is different. Ratan Tata's heirless transition has thrown up the very real prospect that the chairmanship could, for the first time, pass from the family and, probably, outside Tata's clannish Parsee community centred on Bombay, India's commercial capital.
A revolution is about to engulf the Tata Group. Being a Tata, or a Parsee, Tata says, is "not an issue" for the new chairman.
"I intend to stay on at Tata Sons as non-executive chairman but the new person will be their own man," he says. "I have already broadly identified these people, two or three likely successors. They don't know yet but they will soon."
If Tata takes the familial route, it favours his 44-year-old stepbrother Noel. He's a core family member, a Parsee and, crucially, is married to Aloo Mistry. She's the daughter of Shapoorji Pallonji Mistry, a 71-year-old king-maker of Corporate India who holds a vital 18 per cent of Tata Sons, the biggest stake outside the 66 per cent held by two charitable trusts Ratan Tata loosely controls.
Step outside the Tata family and the field opens up. There's Rajiv Dube, Telco's 40-year-old head of passenger cars. Another high-flyer is Jamshed Daboo. At 39, he might be a little young, but the chief operating officer of the Taj Hotels group is a key job.
Narasimhan Srinath is also being closely watched. He's not a Parsee but the 39-year-old CEO of Tata Internet is at the sharp end of where Ratan Tata wants to modernise the group.
But if the succession was based on earnings, the new chairman would hail from Tata Consultancy Services.
Asia's largest software company, TCS is easily Tata's most profitable satellite.
In 2001, it returned 61 per cent on invested capital, almost seven times the group average of 9 per cent. At 55, its UCLA-educated chief executive, Subramanian Ramadorai, is double the average age of his 18,000 staff.
TCS represents the type of company Ratan Tata wants most of the group's other 93 to be: nimble and open to change. "We often used to wake up way behind our competitors because we did not change; we were resistant to it," he says. "I wanted it to go away and it hasn't quite done so. I see that as the principal task of my successor."