Changing India's corporate culture
Outlook - January 2000

Prodded by economic reforms, Indian companies have undergone an often painful transformation. But as this business leader explains, much more work needs to be done to make them truly competitive

After a half century of protectionism, during which even the manufacture of safety pins was tightly regulated, India threw open its doors to both domestic and international competition in 1991. Since then the changes have been dramatic.

While the Indian economy as a whole has grown at an average rate of more than 5% annually in this period, many larger companies have seen their fortunes decline precipitously (although weak bankruptcy laws and cumbersome liquidation procedures make going out of the business virtually impossible). These days a far more telling indicator of the changing Indian economy can be found at the Bombay Stock Exchange, where trading is dominated by technology-oriented start-ups in industries like computer software and pharmaceuticals. These have replaced the likes of cement and steel stocks, highly favoured sectors during the protectionist era of the "License Raj".

One of the few traditional Indian groups to survive the brutal consequences of the nine-year reform programme is Tata Sons, the country's largest business group and an industrial power for more than 100 years. The group is a conglomerate of 80 operating companies, with interests as diverse as steel, trucks, cars, cement, ball bearings, hotels, oil drilling, construction, telecommunications, fertiliser and earthmoving equipment.

The newest jewel in the Tata crown is the Indica, the first passenger care wholly manufactured in India. The company introduced the car in early 1999, without the benefit of an international auto-maker as a partner; advance orders for the Indica have kept assembly lines running overtime for a year.

Tata has also made forays outside of heavy industry. Indeed, the fact that computer software is the fastest growing industry in India today is due in no small measure to Tata Consultancy Services, the country's largest and most successful software company, with 1998 export sales of nearly $400 million.

Ratan Tata, who took over as Chairman of the group the year the reforms were introduced, has been credited with having successfully steered the company through a particularly traumatic period. Economic reform, with its new emphasis on competition, presented the unwieldy agglomeration of companies with what Tata calls "the very daunting task of defining what our core business is."

In his effort to remake the group in the face of this challenge, Tata reconstituted the board of the parent holding company to reflect the younger team, initiated the process of selling off a number of businesses, ended several international partnerships and beat back some determined competition from the Japanese in the trucking industry. Tata also tried, unsuccessfully, to get three successive governments to agree to his plans to set up a domestic airline in partnership with Singapore Airlines.

Likely to be unveiled in the new century is what could easily be the biggest foreign acquisition by an Indian company: a pending take-over of Tetley, the UK-based tea bag company, by Tata Tea, which is expected to cost about $400 million.

Though the reforms have been painful, the 62-years-old Tata, who studied architecture at Cornell University, seems to have welcomed them. Reflecting on what changes have meant to India, he told Outlook, that Indian businesses "cannot turn to the government for protection. I think there should be some soul-searching on how they should play in the new competitive environment." For his part, this means an ongoing pursuit of a leaner corporate structure, which he hopes to have in place early in 2000.

In a rare interview, Tata spent an hour at his Bombay headquarters with N Radhakrishnan, a business journalist, talking about the effects of the reform programme on industry, and about what doing business in India will mean in the future - for companies within and outside the country.

Economic reforms were introduced in 1991. From the point of view of Indian industry, what else needs to be done?
We have seen considerable reform in industrial licensing. Entry barriers and red tape have been erased. But fiscal reform and reforms in company law have not yet happened. The same holds for labour legislation.

Have the reform fundamentally alerted the corporate culture in India?
I think the environment has become more competitive. That has made Indian industry more concerned with a) its customers, b) the quality of its products, and c) its brand image in the marketplace.

Have Indian companies generally done well in this newly competitive environment?
In the last couple of years, companies have found themselves going through a very difficult period. They have had to cut costs and be more mindful of inventory levels. By and large, Indian industry did not worry about things of this nature earlier. Companies were in a seller's market. They could maximise production and very often pass on the inefficiencies to the consumer through higher prices. That (mentality) is under pressure now, and I think that is a good thing.

And individual companies?
Some have supported the reform process, while others have only paid lip service to it, seeking protection behind the scenes. Many new companies have come to the fore because they have made a fresh start and didn't carry any baggage. They have often come with new technology that is more advanced than what others have. That does not mean that all the others are falling by the wayside. Some have, while others have risen to the occasion.

So, how will many of these companies survive if they don't have the necessary skills or resources?
What is the alternative, if they don't open up? The easiest option is not to open up, to build walls - but that carries a cost to consumers. Another alternative is to open up selectively, but this is very subjective. One person's raw material is another person's finished product.

There is another way - perhaps the most painful way - and that is to open up fully: The strong live and the weak die. There is some bloodshed, and out of it emerges a much leaner industry, which tends to survive. I often ask myself, what happened in a country like Spain? It had its own industry. Now big brands operate there, but local brands found their own niches. They might not be big, but they are strong.

Is there anything peculiarly Indian that could threaten survival?
One of the weaknesses of Indian industry is that in many areas - like consumer goods - it is very fragmented. Individually, the companies might not be able to survive. What is needed is a consortium of like companies in one industry, presenting a strong front to the multinationals. The Swiss watch industry did this.
At Tatas, we believe that is we are not among the top three in an industry, we should look seriously at what it would take to become one of the top three players - or think about exiting the industry.

How would you rate the performance of your own group? Has the emerging business environment led to a new paradigm in terms of management thinking and practices?
New demands are being made on the group companies in a variety of areas. For the first time they are being confronted with a new set of performance criteria. The Tatas are rising to the occasion, but we have a long way to go.

There is awareness both within individual companies and in the group that we need to force the change. It would be pompous of me to say that there is a new paradigm. Changes are always slow and painful. And this has been happening at a time of great economic difficulty. I think that in the longer term, we will see a considerable change in the way Tata companies look at their operations.

Tata Tea made a bid of around $400 million for Tetley, the world's second-largest tea bag company. It is the first time an Indian company has made a bid of this size. Is this the beginning of a new way of thinking within the group?
The strategy is to acquire a brand with an international presence. Tetley has a strong position in tea bags, and we have a strong position in tea. So it enables us to promote our product through a brand that is known in the western world. It would have taken much more effort and much more money to create the same level of awareness for the Tata Tea brand overseas.

What kind of challenges does this present for your managers?
If you think globally, you will have to look at global managers as well. It is conceivable that Tetley will be managed not by Indians but by managers in the country of operations, who know the market better.

In general, as a group, we have been very inward looking, seeing only India as our market. We have not focused adequately on growing overseas. Part of (the reason) was due to foreign exchange restrictions. Now that these restrictions have been eased extensively, we should be looking at growing overseas in a serious manner. By growing overseas, I don't mean just exporting our products but looking at acquisitions, alliances and things of this nature.

Should Indian industry employ this as part of its growth strategy?
Not as a whole, but I would say that in selective industries we should. There are some industries in which India can play a significant global role. Indian companies should look seriously at having a presence in other countries - by acquisitions or by establishing their own manufacturing facilities or marketing presence. Software and information technology is one industry that comes to mind immediately.

On the domestic front, your joint ventures and alliances with international companies have followed a seemingly curious pattern. You are in the process of parting, or have already parted ways, with Unisys, IBM, Mercedes Benz India and Bell Canada. Ventures with Cummins, Lucent, BP and Honeywell continues to prosper. What is the logic that drives your joint ventures?
As you grow and want to enter a new business, what you have to ask yourself is you have the time, the technology and the resources to build the business from scratch. In a high tech business, you have to ask whether you have the capability to not only introduce new technology but to upgrade constantly. That often means you need (either) the necessary investment and scale to amortise the investment, or a partner in the industry that has the product and technology. That has been our driving logic in joining hands with IBM, Lucent or Honeywell. In most case, I can say that the Tata companies are long-term players in partnerships. But unfortunately, after they get established, many multinational companies want to become majority stakeholders, or win the company. Our policy has been that we won't be passive investors; we always go for an equal partnership. And if the pressures (from the joint venture partners) are strong, then [we have them buy us out], or we buy them out.

In your car venture, you decided to go it alone even though most people thought that you would be better off with a partner.
I said that we would collaborate only in areas where we don't have a presence. We were already in the automotive industry, but not in cars. I was convinced that we had the basic capabilities to develop and manufacture a car. We didn't have all the technology, but we could obtain it. We would have taken a partner who was willing to jointly produce a car but who didn't want a stake in Telco (Tata Son's truck-maker, which produces the new car). But every car company we spoke to wanted a joint venture in which they would have ownership. That would have meant two negatives for Telco. One, the joint venture would have been off Telco' s books. Two, history shows that after a product is established, the partner wants to increase its stake to a majority holding. For these reasons, we went alone.

Many observers fear that India does not have a sufficiently large managerial pool to match the needs of the country's rapid industrial growth. What has been your experience?
There are many competent professionals in the country who have not been given the chance to operate at CEO levels. If you look around, you see companies run professionally by people who 15 years ago were virtually unknown. Therefore, though there are a lot of managers around, the question is whether you are willing to take a chance with someone you don't know well.

Can you envision Indian companies employing foreign managers to run
their operations?
At Indian Hotels (a Tata Company), we have an English manager running a Delhi hotel. We should not be afraid of saying that we are an Indian company if we [are] run by an English manager any more than an American company should be concerned about its identity if it chooses an Indian CEO.

Indian companies feared that once the economy was opened up, the multinationals would take over - first, Indian markets; eventually, Indian companies. In hindsight, do you think this fear was justified?
I think some of that is true. The counter for Indian companies against the take-over threat is a high market capitalisation, which makes the price of the take-over expensive. Or the existing shareholders could rally around and vote against the take-over. For many Indian companies, both seem difficult propositions.

How should companies themselves be responding?
If an Indian company that was in the predominant position before the multinationals came in suddenly finds its market eroded, it says something about the way that company took the market for granted. But I think there certainly is a challenge from multinationals that have established brands, large budgets from promotions and mature products.

I have a view that is probably not very popular with many of my counterparts: They are not running the economy for themselves but rather for the consumers. They should not turn to the government for protection. I think there should be some soul-searching on how they should play in the new competitive environment.