April 21, 2002
Tata Steels Itself For Change
The House of Tata, big and historic, is one of India's most beloved companies. It is also a mess
Eric Ellis, Mumbai
Sitting at the controls of his McDonnell Douglas helicopter 1,500 feet above Mumbai, Ratan Tata, scion of one of India's wealthiest families, is the master of much that he surveys. Off to the left is the majestic Taj Mahal hotel, a Tata property. To the right is a Tata power plant, which generates 80% of the electricity for India's largest city. On the highways below, Tata cars, trucks, and buses belch the smog that hazes over the flight path. There's a billboard for Tata Tea, and others for Tata's credit cards, department stores, and watches. Telephone wires carry calls made through Tata's long-distance operator, VSNL. And in the distance, a few buildings from Tata's head office, is the Bombay Stock Exchange, where trades are managed on platforms designed by Tata Consultancy Services (TCS), Asia's biggest software company.
Landing the chopper at Mumbai's Santa Cruz Airport and climbing into the cockpit of his $25 million Dassault Falcon jet to practice takeoffs, the shy and sometimes awkward Tata seems remarkably at ease. But 11 years after taking control of the family-run Tata Group--and less than a year before he retires--the 64-year-old chairman is encountering more than a little turbulence on the ground.
From a bird's-eye view, the 134-year-old Tata Group still looks awesome. With 95 operating companies (31 of them publicly traded) and 230,000 employees, it is India's largest private-sector employer, its biggest taxpayer, and its greatest foreign-exchange earner. It operates India's largest private steel manufacturer, its largest chain of luxury hotels, and its largest private power utility.
But up close the picture isn't so impressive. During Ratan Tata's tenure, the group's two biggest companies--Tata Steel and Telco--have been among the worst investments in India, losing 75% of their value. Group revenues have more than doubled since 1991, mostly through acquisitions, but profits have increased by less than a third. Tata officials say the conglomerate made just $330 million in the most recent fiscal year, on revenues of $9 billion. The results would have been far worse without TCS, which has seen its earnings jump 40-fold since 1992.
This sclerosis has enabled Tata's parvenu rival, the Ambani family's Reliance Group, to eclipse Tata as India's leading corporation by sales, profits, margins, market capitalization, and plaudits from India's business press. That's a cruel cut for the venerable House of Tata--and things could get worse. In April the Ambanis merged their two main companies, Reliance Industries and Reliance Petroleum, to create what they anticipate will be India's first privately owned FORTUNE Global 500 company, with annual revenues of about $12 billion.
Tata likes to see itself as the embodiment of Indian values--and in many ways it is. Like India, Tata is a loose federation that somehow hangs together. Like India, it has missed chance after chance to progress as others have passed it by. Like India, part of Tata is open, efficient, global, and forward-looking, but most of it is not. And like India, Tata knows its business culture must change but hasn't had the nerve, or the heart, to fully break with the past that holds it hostage.
When Ratan Tata took over from his octogenarian uncle, J.R.D. Tata, who had been chairman for 58 years, his strategic mantra was to get "back to basics." He organized Tata into seven sectors, pensioned off geriatric managers, reined in rogue fiefdoms, and gave rising stars like TCS room to make deals independently.
But after this promising start, Tata demurred on some of the harder restructuring decisions. If anything, he has added to the clutter, getting involved in unfamiliar fields like retailing and passenger cars. It follows that a conglomerate that makes steel might also make trucks. But should it make salt and watches and teapots and artificial limbs? Should it run an Internet service provider? An insurance company?
It doesn't help that Tata companies have incestuous ties. Tata Steel and Tata Power both bought stakes in VSNL, the telephone carrier. Tata Chemicals owns chunks of the tea subsidiary, the hotel division, the fund management arm, the finance company, and Tata Telecom. Tata Industries, which makes watches, is partly owned by Tata Tea.
The management structure is only a little less confusing. Each of the seven sectors reports to Tata Sons, the group's primary holding company, of which Ratan Tata is chairman. He also heads two family trusts that own 66% of Tata Sons. After he steps down from Tata Sons in December, he will stay on as the trusts' chairman and probably as Tata Sons' non-executive chairman. That means his successor will not have full control.
There are no divisional heads for Tata's seven sectors, just the CEOs of component companies and sometimes, as at the automaker Telco, not even that. Day-to-day control of the group is vested in the Mumbai-based Group Executive Office, a cadre of four administrators chaired by--who else?--Ratan Tata. Executives grumble that they aren't sure if they report to the GEO, Tata Sons, or both.
Given the confusing lines of authority, it's not surprising that Tata has stumbled. In the 1990s, while Satyam, Wipro, and Infosys emerged as India's IT heroes, Tata missed a big payday by not taking TCS public. A $500 million gamble in the passenger-car business has steered Telco to heavy losses. Within the group, though, there's little but praise for Ratan Tata. Royroth Krishnakumar, a wily 64-year-old who runs Taj Hotels and Tata Tea, says the chairman is a "very savvy businessman who has brought discipline to Tata." But Sanjeev Mohta, head of Indian research with ABN Amro in Mumbai, articulates a more widely held view. "They have a great empire," he says, "but they are not a great business. They have missed one opportunity after another."
The Tata empire was built on the first Indian-owned cotton mill, started in 1886 by Jamsedji Tata, Ratan Tata's great-grandfather. Jamsedji Tata was a believer in swadeshi, or economic self-reliance. A Parsee, a member of a tiny religious minority whose origins are in ancient Persia, he may have felt obliged to prove his commitment to India. At any rate, he helped fund India's Congress Party, which led India to independence in 1947, and began the Tata tradition of corporate beneficence. The swadeshi movement underpinned Gandhism and later inspired socialist Prime Minister Jawaharlal Nehru and his daughter Indira, who also became Prime Minister. The Nehru family's "license raj" kept foreigners out and stifled domestic competition. Having a license usually meant having a monopoly. While Tata publicly argued for reform, it also benefited from having a lot of licenses and not a lot of competition in industries ranging from trucks to soda ash.
India began to dismantle the license raj in 1991, just three months after Ratan Tata became group chairman. Direct state support for Tata has dried up since then, but the group still benefits from indirect support in the form of high tariffs and an investment environment that repels competition. The spirit of swadeshi continues to imbue much of the group, which remains overstaffed and clogged with marginal operations.
Tata Steel, Telco, and TCS are the three most important companies in the group. Together they generate more than half of the total revenues, and Tata Steel and TCS account for almost 75% of the profits. As these three go, so goes Tata. The problem is, they are going in different directions.
A journey to Tata Steel's hometown of Jamshedpur, 150 miles west of Calcutta, is the best way to see what the company calls "Tata Culture" at its most generous. Named after the founder of Tata and carved out of a jungle in the early 1900s, Jamshedpur is India's Pittsburgh. Statues of Tata chairmen (some erected by grateful employees) are everywhere, testaments to a unique corporate cult of personality.
The Tata Group does not see its mission in India as solely to make money. According to company literature, Tata also wants to "improve the quality of life of the communities we serve." These are not just words. Tata has a reputation in India for being an enlightened employer and an honest company. It has avoided major business and political scandals, a remarkable record in a country where corruption is common. Tata says the group has sometimes lost deals because it wouldn't pay bribes.
In Jamshedpur, a clean, green city of one million people, Tata is more than the biggest employer in town. It is an overwhelming presence, providing the most comprehensive social services of any Indian city. At a cost of $30 million a year, the company pays for water, schools, garbage removal, and hospitals. It even arms a posse of hunters to keep killer elephants at bay. When Tata Steel decided to lay off 35,000 workers in 1999 to cut costs, the sackings so offended Tata Culture that the company agreed to pay the workers' salaries until the age of 60. That meant, of course, that Tata got the worst of both worlds--it hurt workers' feelings without reducing costs much. With 45,000 employees, Tata Steel still remains overstaffed. Private-sector competitor Essar produces about half of Tata Steel's output with just 1,300 employees. A survey of 500 Indian companies by Business Today, an Indian magazine, and Stern Stewart, a U.S. consultancy, ranked Tata Steel 496th in how much value was created by management. (Reliance was fourth.)
Tata says it wants to "privatize" the expensive urban services it pays for--that's the word company officials use, betraying their view of Tata as the de facto government of Jamshedpur. But grandees like Jamshed Irani, a former Tata Steel CEO and 45-year Tata veteran, insist that the welfare net "is what makes Tata great." Ratan Tata recognizes there's probably a sell-by date for Tata Steel's corporate generosity, which in Jamshedpur goes way beyond what any other branch of the group offers. He also defends it. "Yes, it's expensive to run Jamshedpur, and yes, we are scaling back our commitment there, but we are also proud that we've never had serious industrial problems. There's got to be a reason for that." The message is clear: In this most pukka of Indian dynasties, being loved is more highly prized than being profitable.
If Tata Steel comes nearest to defining Tata Culture, then TCS is the company furthest from it. Perhaps that's why it is so successful. Subramanian Ramadorai, the 57-year-old U.S.-educated CEO, is twice the average age of his 19,000 employees. He jokes that most of them "wouldn't really know who Gandhi is--and I doubt would really care either." What they do know is how to run a business. Founded in 1968, TCS is easily Tata's most profitable division, earning $129 million on sales of $700 million in the last fiscal year. (Tata Steel, by contrast, reported profits of $115 million on revenues of $1.6 billion for the same period.) TCS brought in 13% of the group's revenues and 40% of its profits, and it returned 61% on invested capital, against a group average of 9%. With 92 offices around the world, including 33 in the U.S., TCS is also the most international of Tata subsidiaries. Half of its revenues come from outside India, compared with 5% for the whole group. Tetley Tea, a recent acquisition, is the only other Tata company with significant foreign earnings.
Ratan Tata sees in the success of TCS the kind of dynamic international future he would like the whole company to have. "I see us becoming very strong in IT services--in communications and telecom infrastructure," he says. And he's putting his money where his mouth is. In February, Tata outbid Reliance to buy a controlling 25% stake of state-owned VSNL, India's international telecommunications service provider, for $500 million, with an option to buy more. Last October, it bought 51% of state-owned CMC, one of India's bigger infotech companies.
Even here, though, the story is one of missed chances. TCS is among India's great prizes, long coveted by investment bankers. But Tata spurned countless pleas to take it public. At the height of the dot-com boom, TCS was valued at about $20 billion. Now it's worth half that amount.
Tata explains the lost opportunity as yet another form of company altruism. In this case, he says, "there was clearly a bubble, and we didn't want to be in a situation where someone came to us and said 'We bought this now-depleted stock because it was Tata.' " So now, long after it could have scored big, Tata Sons will sell 10% of TCS this summer, says group finance director Ishaat Hussain. He hopes to raise about $1 billion.
Sanjeev Mohta of ABN Amro says the success of TCS has been a wake-up call for Tata: "They are only now stressing this services side. That's a good idea, but they should have done it a long time ago." Ratan Tata agrees. "We often used to wake up way behind our competitors because we did not change," he says. "I wanted [that attitude] to go away, and it hasn't quite done so. That is the challenge of my successor."
Another challenge for his successor is what to do about Telco, the locus of Ratan Tata's magnificent obsession with becoming India's Henry Ford. Tata's equivalent of the Model T is the Indica (an abbreviation for "India's car")--a boxy, 1.4-liter hatchback. Tata hails the Indica as India's first indigenous car because, he says, 95% of its components are made by Indians (albeit designed by Italian draftsmen and assembled in a secondhand Nissan plant transported from Australia). "I wanted to show that such a car was possible in India," Tata says. "We have proved the doubters wrong."
Not yet. The Indica, conceived in 1993 and launched in 1997, is the child the unmarried Ratan Tata never had. Unfortunately, it is a problem child that has brought grief to the company. Telco, which had a near monopoly on the sale of trucks and buses, grew fat on government and military contracts. Its trucks were not highly engineered, but they were tough and easy to repair. ("Tata OK" is the quirky slogan of Indian truckers.) In 1996, the year before the first Indicas rolled off the assembly line, Telco earned a record net profit of $158 million.
Telco still has more than 70% of the market for trucks and buses; foreign models are not often seen on Indian roads because of trade restrictions and the near impossibility of starting a truck factory from scratch. But, thanks to the Indica, what Telco doesn't have anymore is profits. Last year the company lost a record $104 million, and its return on invested capital (-4%) was easily the worst of the group's main units. Mohta describes the Indica as "one of India's top five corporate blunders of the last ten years." But Ratan Tata remains devoted to the project, seeing the Indica as the very stuff on which India and the House of Tata were founded.
He could hardly have chosen a more expensive--and competitive--sector in which to fashion a legacy. As the Indica plant rose from the Deccan plains near Pune in the late 1990s, India's car market suddenly grew congested. Maruti Udyog, a joint venture of the Indian government and Japan's Suzuki Motors, had relegated Hindustan Motors' stately workhorse, the Ambassador, to relic status and grabbed 80% of the market. Then foreign giants like Fiat, Ford, Volkswagen, and Hyundai muscled in. Still, Telco pressed on, aiming to produce 150,000 Indicas a year by 2002. In fact, the Pune plant will turn out less than half that number this year. In January, Standard & Poor's lowered Telco's credit rating to BB-. The rating, says S&P director Craig Parker, "reflects the extremely weak operational profitability arising from the persistent weak demand in the Indian commercial-vehicle market, sub-optimal asset utilization in the company's small-car business, and strong competition from domestic manufacturers."
Tata admits the Indica has had a rough start, but he insists the worst is over. The most recent models, launched in February 2001, are quieter and more powerful than the original ones, and a new sedan is getting good reviews. Telco estimates that Indica is winning 22.1% of new-car sales, a percentage that has risen steadily. In January, Indica posted record sales, an increase of 148% over the year before. This good news, combined with cost reductions (including job cuts) and financial restructuring, could return Telco to profitability next year.
"We are behind where we thought we would be," admits Tata. "But the market is just starting to scale up, and I think we are very well placed going forward." Car industry observers tend to agree. Hormazd Sorabjee, editor of Autocar India, says the Indica is "one of the most successful turnarounds in the market." Investors, too, are reasonably optimistic, boosting the share price from a low of $1.20 last August to $2.60. But they cannot be happy that the price is still down almost 80% from its peak in mid-1996.
In order to compete with the majors, Tata will have to invest another fortune to expand its range of models--something Ratan Tata's successor may be unwilling to do. And there is persistent talk that the Pune facility will be sold to a foreign carmaker. (DaimlerChrysler owns 10% of Telco.)
If Tata is worried that the Indica will tarnish his reputation, it didn't show on a recent visit to Pune, where he boasted that the immaculate plant is India's most modern manufacturing facility. But things weren't going so smoothly a few days later at India's Auto Expo in Delhi, where he unveiled the latest Indica. As a former Miss India gushed that the model was "a milestone for our proud nation," the power failed, plunging the convention center into darkness. Tata, sitting next to an official from the Prime Minister's office, fumed. An underling's spin that the launch had "gone well by Indian standards" didn't wash with the chairman. A week later he was still sore: "You can be world class in terms of facilities, but the mindsets of some of our people are not, and that's something we have to work at."
The next Tata chairman will have plenty of un-finished business to deal with. Ratan Tata, with one foot stuck in the past and one in the future, hasn't had the steel to get rid of businesses that don't pay their way. The result has been a corporate masala: part Oracle, part Bethlehem Steel, part Ford, part AT&T, and a dusting of small, obscure businesses. Parts of the Tata Group create value rather than destroy it: Communications and IT now make up about 27% of group revenues, compared with less than 1% in 1991, and are on target to contribute almost half this year's earnings. The obvious strategy is to invest heavily in those sectors. If the next chairman feels it would be an offense against Tata Culture to give up, say, making bathroom fixtures, he should at least avoid pouring capital into such lackluster enterprises.
But if the way forward is clear, the line of succession remains murky. Tata, who has no heirs, has yet to make a decision about the next chairman, although he suggests that he has already identified two or three likely successors. It goes against Tata Culture to show ambition. Clubbability and good breeding are what matter. "If anyone pushes himself forward, he will fall on his face," says Jamshed Irani.
Tata says he wants to "leave behind an organization that has people in their 40s as the heads of our companies, not people in their 50s and 60s." Being a Tata or a Parsee, he says, is "not an issue." If he keeps his word, that would exclude Tata's senior executives and anyone from the Group Executive Office. Who's left? One possibility is his 44-year-old stepbrother Noel, the CEO of Trent, Tata's department-store chain. Trent is not regarded as a core business, which could work against him; on the other hand, it can't hurt that he is married to Aloo Mistry, daughter of Mumbai businessman Shapoorji Pallonji Mistry, who holds 18% of Tata Sons, the biggest stake other than those held by the two Tata trusts. Step outside the Tata family and there's Rajiv Dube, 40--he's Mr. Indica and the rising star closest to the chairman. Narasimhan Srinath, 40, the CEO of Tata Internet, and Jamshed Daboo, 39, the Parsee chief operating officer of the Taj Hotels group, Tata's biggest foreign-exchange earner, also have to be considered candidates.
Sitting in the minimalist beach house he designed for himself in Ali Bagh, Mumbai's Hamptons-on-the-Maharashtra-coast, Ratan Tata leafs through a January 1944 FORTUNE story headlined "The House of Tata: The Industrial Giant of India, a Backward Industrial Country, Fights for the Empire that Occasionally Helped, Occasionally Hindered Its Growth."
Nearly six decades later India remains an industrially backward nation. Tata, who studied architecture at Cornell University and worked on John F. Kennedy's presidential campaign before being summoned home by his dying grandmother in 1962, figures India is about 15 years behind the West. That is an optimistic assessment, but having abandoned Nehrunomics, India is at least growing faster than in the past. And its success in software shows that when its entrepreneurs are not actively hindered from doing business, they can compete with anyone.
Is Tata's once highflying empire ready to soar again? There's no doubt the group is more dynamic than when Ratan Tata took the controls. The investments he made in telecoms and IT could pay off for years to come. But it is not a high-performance company, as investors are only too aware, and it has no strategic direction. Ratan Tata has kept the group from crashing, but it will be up to his successor to bring it out of its tailspin.