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Ratan
Tata: No one's doubting now
He
has transformed Tata from an overgrown conglomerate
into an agile global force
BusinessWeek
— July 26, 2004
The
entrance to Bombay's Birla Matushree Auditorium
is festooned with blue and red bunting. Outside,
scores of people mill about, waiters serve free
coffee and soda, and a long queue waits to get
into the hall. Suddenly a flurry of excitement
sweeps the crowd. What's the attraction? No, it's
not an appearance by the latest Bollywood starlet.
It's a tall, graying man in a conservative suit:
Ratan N. Tata, 67-year-old chairman of Tata group,
arriving to lead the annual meeting of Tata Motors,
the group's largest company. "When Ratan Tata
is there, you don't have to worry about anything,"
says longtime shareowner Pravin D. Shah as the
chairman strides by.
Tata, India's largest conglomerate, has certainly
achieved the kind of results that set shareholders'
hearts aflutter. The group's revenues are up 30%
since 2002, to $12.8 billion last year, and profits
have grown 60%, to $1.2 billion. Stock prices
of the group's biggest publicly traded companies,
Tata Motors and Tata Steel, have tripled in that
period. And this summer, Tata is expected to raise
$1.2 billion by selling 13% of Tata Consultancy
Services (TCS), Asia's largest software-services
player and pioneer of the outsourcing business
that has fueled India's fast-growing economy.
The initial public offering will boost the group's
international profile as Ratan Tata gears up to
make Tata a global player. "TCS exemplifies our
dual thrust: It is a dominant player within the
country, but it will also focus our growth outside
India," he says.
It's a sweet moment for the gentlemanly Tata.
Since 1991, when he took over as chairman at the
behest of his uncle J.R.D. Tata, he has faced
plenty of opposition as he dragged the group out
of the cozy — but stifling — embrace of socialist
India and streamlined the overgrown conglomerate.
J.R.D. Tata had been a darling of the Indian Establishment,
but many observers were skeptical about his untested
nephew. Ratan Tata's plan — sketched out a decade
before he became chairman, back when he ran the
group's business-development arm — was to build
a more focused company without abandoning the
best of Tata's manufacturing tradition.
It took the better part of a decade, but Tata's
vision is paying off. Today, the group has interests
from autos and steel to software and telecom and
is prospering as India's economy booms. "The group
is now well-positioned to benefit from India's
rapid growth and evolution as a global sourcing
base," says Amit Chandra, a managing director
at investment bank DSP Merrill Lynch Ltd. in Bombay.
Household name
The group has come a long way in its 136-year
history. It was founded by Jamsetji Tata, who
started a textile-trading business in 1868 in
Bombay and then built the country's first steel
mill and hydroelectric plant. Since then, Tata
products have become interwoven with the fabric
of Indian life. Indians season their food with
Tata salt, drink Tata tea, drive Tata cars, and
use Tata's power, air conditioners, and phone
networks. They stay in Tata hotels and wear Tata
watches. India's infrastructure is built with
Tata's steel, and its companies and government
agencies run Tata's software.
Ratan Tata isn't satisfied: He wants the world
— not just India — to embrace Tata products. So
for the past four years he has been in global
expansion mode. In 2000, Tata Tea Ltd. paid $435
million for Britain's Tetley Tea, a company three
times its size, to gain a ready-made international
brand. In March, Tata bought Daewoo's commercial
truck operation for $102 million, with the idea
of using Daewoo technology for his truckmaking
operation and establishing a springboard into
other Asian markets. In Britain, MG Rover Group
Ltd. is selling Tata-built Indica compact cars
under its own brand name, while Tata trucks ply
roads from Malaysia to South Africa. The lodging
division is expanding into luxury and business
hotels around the world. And TCS is looking to
buy software houses in North and South America.
Tata, though, isn't neglecting his home turf.
He is using the group's engineering and technological
skills to innovate and develop affordable, high-quality
products and services for a young, emerging class
of Indians with big aspirations but limited means.
In June, Tata's Indian Hotels Co. launched indiOne
— a chain of $20-a-night self-service hostelries
that feature Wi-Fi connections and flat-screen
TVs. By early next year, Tata Motors plans to
roll out the first prototype of a four-door car
expected to sell for just $2,200. Tata says the
ventures are meant to be profitable, but he admits
he is also motivated by a family tradition of
charity and good works. "It's the foundation on
which the group was built," says Tata. Investors
are watching to see whether such a model can generate
the kind of profits they're accustomed to seeing
from Tata. "The challenge is to ensure that the
group's sense of social obligation doesn't collide
with shareholder-value creation," says Ajay Sondhi,
managing director of investment bank Kotak Mahindra
Capital in Bombay. "But if anyone can pull it
off, it is the Tatas."
Tata's riskiest bet may be on telecommunications.
In 2002, the group paid $530 million for 46% of
the state-owned international telecom monopoly,
VSNL. That investment has been something of a
lemon. The sector was deregulated soon after,
and instead of benefiting from the monopoly, Tata
faced a flood of new competitors. Tata has invested
$2 billion in licenses and infrastructure for
a mobile network, but in 18 months it has attracted
just 2 million subscribers and remains a distant
fifth in the market. Ratan Tata is nonetheless
doubling down his bet and plans to invest an additional
$3 billion to expand the network, install new
technology, and market its service. Investors
worried about Tata's slow pace in cellular are
lauding the move. "The group was conservative
on telecom for too long," says Dinshaw Irani,
who heads portfolio management at Bombay brokerage
SSKI Investor Services. "The infusion of funds
isn't a moment too soon."
Built-in social conscience
The frenetic activity represents a big change
of pace for the old-world Tata group. Although
the conglomerate has always been run by a Tata,
family members own only a tiny stake in Tata Sons,
the holding company that controls the group's
ownership in the various enterprises. Instead,
Tata Sons is run by a pair of trusts that get
dividends from the group's operations. That money
is deployed for social services such as education
grants and health care for the poor. Very little
wends its way back into the pockets of Tata family
members.
That management structure — while laudable — combined
with India's restrictive socialist governments
to hold back the group's growth for years. Tata
companies came to be run by genteel consent and
permission, rather than by aggressive ownership
control. The group degenerated into a bunch of
randomly run fiefdoms, with octogenarians on the
boards and no modern management systems, checks,
or controls. By 1991, when India liberalized its
economy, shares in Tata companies languished in
Bombay's then high-flying stock market.
That year, the board appointed Ratan Tata chairman
even though investors and employees doubted his
ability to pull the group forward. A shy and reticent
man, Tata's career had been undistinguished, with
desultory stints in various divisions. His early
ambition was to be an architect. After earning
an architecture degree at Cornell University,
he worked for a few months at a Los Angeles architectural
firm. But his uncle pressed Ratan to join the
family business. "I often wanted to return to
the U.S. Sometimes I felt I wasn't getting anywhere,"
Tata says. "Many times my name was a disadvantage.
My elders didn't want to be seen to be favoring
me." So Tata was never offered (and never asked
for) company benefits such as subsidized loans
for refrigerators — precious perks in the socialist,
supply-short India of those days.
Shortly after joining the group, Tata spent three
years in the steel business, "shoveling limestone
in the steel-melting shops, working with the foreman
at the blast furnaces," he recalls. Tata loved
the shop floor, and the experience gave him a
comfort level with the factory workers across
the vast Tata empire that he still deeply values.
After his stint with steel, Tata put in time at
the auto and software divisions, then faced his
first real test: He was given charge of Tata Sons'
limping consumer-electronics business. Tata got
the company back into the black, but the business
was ignored by the group, and it was soon shuttered.
In 1981, Tata joined the group's business-development
arm and started writing his dream plan. It envisioned
a restructured Tata in eight core industries,
including Old Economy stalwarts such as steel
and utilities, as well as the more forward-looking
information-technology and biotechnology businesses.
Top management ignored the proposal.
When he got the top job, Tata pulled his plan
out of the filing cabinet and set about shaking
up the pedigreed but plodding conglomerate. He
sold off noncore businesses such as cosmetics
and cooking oil. He shrank the group to 80 companies
from 250 and angered some investors by strengthening
Tata Sons' stake in group companies to at least
26% — which gives the group the right to block
takeovers — from as little as 1.7% before.
Doubters watched in amazement as the nonconfrontational
and aristocratic Tata started to develop battle
instincts. After a year of bitter public spats
with powerful group chieftains — especially in
the steel and hotel businesses — Tata ousted them
and installed new management. Then he tackled
Tata Motors. The truckmaker had too many employees
and too many suppliers, and costs were climbing
while market share was slipping. So Tata halved
the number of suppliers, to 600, using the company's
clout in the truck market to get better prices
from the survivors, and instituted a rigorous
quality-control program in Tata's factories. He
sold off real estate holdings and other noncore
assets and exited joint ventures such as one with
DaimlerChrysler to make the E-class Mercedes —
a luxury few Indians could afford. Finally, he
introduced a voluntary retirement scheme to trim
employment by 40%, to 22,000. That generated $250
million in cash, which Tata Motors used to pay
down debts that were pushing $1 billion.
Fast repairs
Then he fulfilled a long-cherished dream of his
uncle's by making a move into passenger cars.
In 1991, Tata Motors introduced a station wagon
and later a sport-utility vehicle. Then, in 1999,
amid much skepticism, he invested $400 million
in the Indica, a four-door hatchback that sells
for just $5,100. Known as "Ratan's folly," the
Indica would have to face off against Suzuki Motor
Corp.'s popular compacts. But Tata took a personal
interest in the project, often spending weekends
at the factory to help with the rollout. Initially,
customers groused about a grinding gear shift,
poor air-conditioning, and lousy tires. So Tata's
engineers swung into action, going to showrooms
and talking to customers about their complaints.
In six months, many of the problems were fixed,
and a new version of the Indica, the V2, was launched.
Now the car is the third-biggest seller in India.
Will Tata realize his dream of remaking the group
into a global giant? There are hurdles ahead,
and Tata doesn't have much time — he retires in
three years. He won't disclose his succession
plan, but the market is abuzz that his half-brother,
Noel Tata, 47, who runs the group's small retailing
business and hasn't had a high profile, will inherit
the mantle. For now, though, the show is all Ratan
Tata's, and Indians — and the world — are watching.
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