March 01, 1994 | International Business Week

India's Mr. Business — Remaking Industrial Giant Tata

"Our critical task is to refocus. Over the long term we must restructure and divest noncore businesses."

For 83 years, the city of Jamshedpur in eastern India has been an economic utopia. The sprawling, garden-filled town is home of Tata Iron and Steel Co., whose 78,000 workers enjoy guaranteed lifelong employment, free housing, education, medical care, and even use of health clubs. To keep Jamshedpur from becoming "an island of prosperity in a sea of poverty," as Managing Director Jamshed Irani puts it, Tata helps supply wells, medical care, and power plants to dozens of nearby villages. This high degree of social responsibility is one reason why Tata Steel hasn't lost a day's production to a strike in six decades.

But Tata's beneficence is being sorely tried by India's new era of economic reform. As the country opens to greater foreign investment, the standards of success are shifting. During a January road show in Hong Kong to promote Tata Steel's $100 million Eurobond offering, analysts pelted executives with questions about how they would improve the company's paltry 3.7percent profits. "The emphasis so far has been on creating jobs, not wealth," concedes Irani. "We will now be forced to balance loyalty against productivity."

At stake is whether Tata, India's largest business group, can transform itself fast enough to survive at the top. The $5 billion Tata Empire is made up of 46 companies that churn out everything from tea and trucks to cosmetics and computer software. But there is no single management structure, and profits are scarce (table). That's why it is difficult to shift gears as Prime Minister P.V. Narasimha Rao drops import barriers and allows multinationals to move in. Rao is also taking on the "license raj," a gaggle of regulations that has protected Tata and other manufacturers from competition.

Tenuous Ties
To remain No. 1, Tata realizes that it can't afford old school paternalism or other antiquated management practices. Like many family-run business empires in India, the group is a grab bag of companies, some privately held, some publicly traded. Unlike a Japanese keiretsu, ties among different independent minded pieces of the empire are often tenuous at best, sharing little more than the name Tata. All of which means Tata will have to rationalize and streamline, adding to huge social and political tensions in a country without a safety net for the unemployed.

Watching Tata's struggle carefully are U.S. and European multinationals: Tata companies have formed joint ventures or alliances with a virtual who's who of foreign business partners, including AT and T, Mercedes-Benz, IBM, Silicon Graphics, Germany's Klockner Industrie-An-lagen, and America's Cummins Engine, among others.

The task of leading Tata through its perilous transition falls to 56-year-old Ratan Tata. A Cornell University architecture graduate, he became chairman in 1991 but gained full control only late last year with the death of his distant uncle, former Chairman J. R. D. Tata. Reflecting his U. S. training, Ratan wants to make the empire a leader in a few key industries-trucks and autos, computer services, steel, and construction engineering-as well as a domestic pioneer in advanced industries, such as multimedia software and telecommunications.

He also wants to tie Tata companies more closely together financially to help them collaborate on achieving strategic goals. "Our critical task is to refocus," he says in his Bombay office, whose abstract paintings and modern Scandinavian furniture sharply contrast with the brownstone facade of Tata's colonial-era headquarters. "Over the long term we must restructure and divest noncore businesses."

His foreign business partners believe Tata has the right approach. "Ratan has vision," says Balas T. Kuchinad, New Delhi-based president of AT and T India Ltd., which last year forged a $35 million joint venture with Tata to make phone lines and switching systems. Over the next five years, the group plans to plow nearly $3 billion into expansion and boost sales to $8 billion, including $1 billion in exports.

But Tata's growth is lagging behind other Indian corporate dynasties. One, the Godrej Group, has divided into two branches, which have joined forces with Procter and Gamble and General Electric in a bid to dominate markets for detergents and home appliances. And under jet-setting heir Vijay Mallya, 38, UB Group has shaken up the local liquor industry by teaming up with foreign distillers. Each recognized earlier than Tata that the passing of Indian-style socialism is exposing them to tough competitive pressures. "Every single client I talk to now worries about competition," says Sid Khanna, managing director of Andersen Consulting Ltd. in Bombay.

Ratan Tata won't have a free hand in remaking Tata, because many of its senior executives run their companies like fiedoms. Laws passed in the 1970s limiting cross-holdings have left the family with less than 4percent of holding company Tata Sons. Independent charities own about 80percent, the result of donations by childless patriarchs. What's more, Tata Sons' interest in its key subsidiaries ranges from 9percent down to just 2percent. "The major challenge for Ratan is to hold everyone together," says Nimesh N. Kampani, chairman of Bombay's J. M. Financial and Investment Consultancy Services.

The group's fractured nature is part of the legacy of J.R.D. Tata, who ruled the group from 1938 until his death last year. The debonair, easygoing chairman gave subsidiaries plenty of freedom. The first battle to impose international management standards took place last April, when Ratan Tata played a big role in sacking Russi Mody, the popular but defiant chairman of Tata Steel. Sniffs Mody: "Nobody said boo to J.R.D. because we loved him. Ratan hasn't earned that respect." Known for wolfing down 16-egg omelettes and dining with workers on the shop floor, Mody now runs his own trading company in Calcutta and is threatening to get back at Tata by taking over the management of a state-owned steel mill near Jamshedpur so he can compete head-on.

Hard-nosed management has never been a Tata trademark. Its holding company, Tata Sons, was founded in 1868 by textile merchant Jamshedji Tata, regarded as the father of modern Indian industry. Jamshedji belonged to a priestly class of Parsees the Zoroastrian religious sect descended from Persian exiles. Before he died in 1904, he had started work on Tata Steel in Jamshedpur, a city his company hacked out of tiger-in-feasted jungles. With its own iron and coal mines, Tata Steel came to symbolize the Indian ideal of self-reliance.

After India's independence in 1947, the group's expansion stalled. Under the governments of Jawaharlal Nehru and Indira Gandhi, New Delhi ignored Tata's applications for industrial licenses and allowed better-connected competitors to gain ground. "Big was bad," recalls Tata Sons Finance Director N.A. Soonavala. "And we were the biggest."

After returning in 1962 from eight years in the U.S. Ratan Tata worked his way up through several group companies. Unlike the family elders, he adopted an unpretentious lifestyle. Raised in a mansion and chauffeured to school in a Rolls-Royce, Ratan chose to live in a simple South Bombay apartment and drive a Buick.

Bright Prospects
By 1982, he and other young executives drew up a master plan for restructuring the group. The plan was ignored until Ratan inherited the throne in 1991. By that time, he also had become chairman of holding company Tata Industries, Tata Steel, and carmaker Tata Engineering and Locomotive (Telco)-companies that remain his power base.

With India's economy now surging at a 5percent clip and apparently on the verge of a prolonged upswing, the prospects are bright that Ratan Tata can finally start implementing his plan. Optimism is especially high at Telco, which controls 70percent of India's truck market and produces the popular Sierra minivan, which Telco designed on its own.

Like Tata Steel, the automotive operation, set in lush rolling hills in the western city of Pune, is a workers' showcase. The company's spic-and-span factories are so self-sufficient that they not only produce more than half of the parts that go into the 80,000 Tata trucks and vans produced annually but also make most of the molds and automated machine tools the company uses. Its trucks are popular with drivers because they hold up on India's potholed highways and are easy to repair. With its $14,240, Sierra Tata has pioneered the recreation-vehicle market. And in light commercial vehicles, it has taken on the Japanese by grabbing a 46percent share of the market since beginning production in 1986.

Ratan Tata's dream, however, is to become a major player in passenger cars. With fewer than four cars for every 1,000 citizens and a middle class of 200 million, the growth potential is enormous. Currently, 73percent of the market belongs to Maruti Udyog Ltd., a joint venture between Suzuki Motor Corp. and the Indian government that produces the popular $7,260 Maruti 800 subcompact. General Motors, Ford, and Volkswagen also are looking to begin assembly in India.

Moreover, Telco in early March signed a $150 million joint venture with Mercedes-Benz to produce 20,000 Mercedes 220 series luxury cars annually by next year, half for export to the Middle East and South Africa. And that's just the beginning. Determined not to be dependent on foreign companies, Tata hopes to launch a compact car within three years and has blueprints for a subcompact. "We may have overdone it with self-reliance," says Telco Managing Director J/E. Talaulicar. "But by learning the hard way, we are confident in our ability to absorb technology."

Shifting Landscape
In fact, Tata wants to become a force in sophisticated and profitable software and service niches. That's a shift from the game plan Ratan Tata first mapped out a decade ago. Then, the competition in hardware was limited, but it has since exploded, particularly from the likes of Taiwan and South Korea. And easing of import restrictions by New Delhi has made it less economical to assemble locally. So Tata's joint venture with IBM formed in 1992, has shelved plans to produce the Personal System/2 and will instead concentrate on sales support. Still, with computer sales in India forecasted to grow from 160,000 to 1 million annually over the next five years, IBM expects its business there to mushroom.

Tata believes that the more challenging niches of software and design play to India's strength: a large pool of highly talented mathematicians and engineers that the rest of Asia is still trying to duplicate. Mostly through group companies that Ratan personally controls, he has struck a raft of alliances with software companies. At a joint venture with Silicon Graphics Inc., for example, engineers are working on cutting-edge tasks such as programs that produce three-dimensional images based on data from magnetic-resonance scans. These allow doctors to examine any point of a human brain.

Tata Honeywell, with an all-Indian staff of 300, is doing a fast-growing $20 million business programming huge automated control systems used in petrochemical, power, and heavy industrial plants around the world. "The Tata name draws the highest-caliber talent in the country," says Martin B. K. Mueller, Asia director of Honeywell's industrial unit. "They can become a global center of excellence in applications software."

Or take Tata Consultancy Services, headed by 70-year-old F.C. Kohli, the doyen of India's thriving computer-software industry. With 3,900 engineers developing elaborate applications for clients ranging from Citibank and Northern Telecom to Fireman's Fund Insurance, Tata Consultancy accounts for nearly one-third of India's software exports of $220 million. Sales are growing by 25percent annually.

In sophisticated manufacturing niches, Tata has forged a broad-based alliance with French companies, including Dassault Aviation and Societe Nationale des Poudres et Explosifs, to develop advanced industrial materials and composites for armored vehicles, telecommunications and power transmission. AT and T and Tata hope to begin production of telecommunication switches this year.

Kinder Cuts
What holds the group back, however is the depth of the problems at its older, inefficient units. At Tata Steel, for example, profit margins shrank from 9.7percent to 3.7percent last year, so the company is closing inefficient shops and trying to refocus on higher-margin products, such as low-carbon steel. Company officials concede that to become efficient, the 78,000-strong labour force should be cut by about a third. Loath to spoil its record of labour peace, however, Tata Steel has promised it will not attempt wholesale layoffs. It has offered early-retirement packages, but fewer than 1,000 workers have accepted the offer.

The group is paring back in other areas. After watching the market share of a soap unit dwindle, Tata sold it to Hindustan Lever Ltd., owned by Unilever PLC, a move that some Indian politicians and even a few Tata executives have criticized as selling out to foreigners. It also backed out of a 1991 joint venture with PepsiCo Inc. after Coca-Cola Co. entered the market last year. Pepsi wanted Tata to hike its investment from $15 million to $100 million. That was too much for Tata, which sold its share.

Analysts have hailed Ratan Tata's efforts, but doubts continue to persist over whether Tata will remain India's premier group. The analysts are skeptical that Ratan will succeed in stitching the group together through bigger cross-investments, which would require immense capital and risk putting subsidiaries in play as takeover targets. Tata would be better off divesting all but a handful of businesses, they argue, and use the money to build world-class companies.

Many observers also suspect that Ratan Tata has entangled himself in too many foreign ventures, some of which compete against one other, without the money and management depth needed for making them market leaders. "Our concern is that he seems to be the only real decision-maker at the group," says one foreign partner.

Still, Tata seems to have sold most of the brain trust inside his Bombay headquarters on his mission. Nobody pretends the challenge is easy. "We are rigid and are in way too many products," concedes Tata Sons Director Freddie A. Mehta. "But there's no use asking the government to reform if we don't do it ourselves." Just as Tata represented India's corporate ideals for most of the century, it will be the company to watch for those who are wondering if India can make a successful passage into the world of the page