Tempest in a teapot
Society Magazine — March, 2005

Ratan Tata is turning one of India' most storied and stodgy conglomerates into a global player.

Skimming over the hills of North-eastern India in a propeller, visitors to one of the Tata Group's big iron ore mines one can make out the rice paddy and cashew and guava farms of old India. Once at the company airstrip they are served piping hot tea in fine bone china, smack on the tarmac.

The mine is a long way from the shiny skyscrapers and lightening-fast trading o the world's financial capitals. Yet it is the start of the value chain for Tata Steel, the history laden and now resurgent centrepiece of Tata Group, the approximately $14 billion (sales) family conglomerate based in Mumbai, India. The Tata group holds stakes in 90 companies, most of which sell products under the Tata brand, and its transformation tracks what India was and what it has become. Its chairman Ratan Tata, FORBES's Asian Businessman of the Year, straddles these two worlds. He has spent the past decade more than doubling revenue while dragging Tata into the modern business world, where technology combined with cheap labour can make for a potent competitor.

Tata, who studied architecture at Cornell University and returned to India at the age of 27 to join the business in 1962, is "probably one of the three or four best business leaders I have ever met," says Henry Schacht, former chairman of Cummins Engine. He got to know Ratan when Ratan ran Tata Motors and says, "He understood what needed to be done and how it needed to be done in India." Amar Bose, chief of audio icon Bose Corp. and a long time friend of Tata, adds," He saw a very closed society that he was a part of, and he had to find a way to open that up."

Tata Group is blessed with a bounding domestic economy that still provides 77% of sales, but in the past year it has worked to move beyond that. Tata Steel, which Ratan Tata also runs, bought Singapore's Nat Steel to take aim at markets in China, Australia and Southeast Asia. Tata Motors bought a big Korean truck maker Daewoo Commercial Vehicles, to help it expand in China, Korea and Thailand; it also listed on the New York Stock Exchange. Tata's telecom and Internet unit, VSNL, agreed to buy Tyco's undersea fibre-optic between Singapore and Chennai, India. And Tata Consultancy Services went public with panache, cashing in on the global outsourcing boom.

These moves would have been unthinkable in 1991, when Ratan Tata took over from the revered JRD Tata, a distant relative who had been the Tata Group's chairman for 53 years. (JRD in turn, was the second chief in the group's history and a distant cousin of Tata's founder Jamshetji Tata, who started the business in 1868), JRD Tata had stepped down at 86, tapping Ratan, who had proven himself as a turnaround artist at Tata's neglected electronics unit and at other lagging businesses. "I was always put after trying to fix failing companies," Tata, 67 says.

At the time India was in debt crisis, its foreign exchange reserves had plummeted, and its leaders knew they must scuttle central planning and open the economy to the outside world. For decades Tata Group had lumbered along, and as Ratan Tata assumed the chairmanship, he admitted privately that the conglomerate was in "frightening" shape — even worse than he had feared.

"The group operated in a protected environment," he says today. "The less-sensitive companies didn't worry about their competition, didn't worry about their costs and had not looked at newer technology. Many of them didn't even look at market shares."

But fixing it was a mess. Each of the group's more than 90 companies was run by a different titan — most were over the age of 70 — who could resist direction from the group chairman. Tata Sons, the conglomerate's holding company, owned only tiny stakes in its offspring. Any sway Ratan Tata inherited owed entirely to tradition.

To gain real powers, Tata appointed himself chairman of each of the group's largest companies. "This was viewed as an ego trip," he says. Undaunted, he had the holding company buy up controlling interests in all the major operating units and forced a number of ageing lions to retire when they resisted his changes. "There were shootouts," he says.

Ratan Tata also focussed on fixing Tata Steel, one of the largest divisions and central to the group's heritage: Ratan himself had apprenticed at a blast furnace there when he was 28. Tata Steel traces its origins to early ambitions of Tata's founder, Jamshetji Tata, who worked for decades to give India its first steel plant. He was a nationalist who believed India must produce its own steel and electricity to attain industrialisation and self-sufficiency. India has the world's third-largest deposits of iron ore, the main ingredient in steel.

In 1904 Jamshetji paid the British half a rupee for a license to build a steel mill near a huge hill of iron ore by a railroad station used by the Brits. In a town later renamed Jamshedpur in his honour, Jamshetji produced India's first steel in 1912. Today ownership of the iron mines help make Tata one of the world's lowest cost steel makers.

Ratan Tata took the top job at Tata Steel in 1993, two years after ascending to group chairman, and he soon realised that old-guard unit was in trouble. In his first staff meeting he was told the company would produce a loss of $26 million for the year because freight rates had gone up. In the past Tata Steel could have just raised prices in lockstep with government mandated rates, but in 1992 the industry had been deregulated. So the new chairman ordered an 8% cost reduction to avoid the loss — and his Tata Steel management was stunned. "We could hardly eat. Some of our directors held their heads in their hands," says Tridibesh Mukherjee, now deputy-managing director at Tata Steel. "At the time it seemed impossible until then costs used to go up every year."

Tata Steel retained six big consulting firms to inspect it. "Arthur D Little told us that we were no good," remembers B Muthuraman, Tata Steel managing director. "They told us our equipment was bad, our processes were poor, we had too many people, our marketing was bad and we would not survive long in its global economy. It was a real indictment."

McKinsey & Co went even further, advising selling off the steel company outright. Privately, Ratan Tata rejected the advice — "We can't sell this company; it is the vanguard of what we stand for" — but then he had McKinsey deliver the dire recommendations to his managers to shock them into action. "It did create a little bit of tension," Tata recalls.

His game worked. Tata Steel increased production without spending more, and by year-end 1993 it had avoided the expected loss and broken even. Since then Tata Steel has spent $2.3 billion closing decrepit factories and modernising mines, collieries and steelworks as well as building a new blast furnace. He also cut the steel unit's workforce from 79,000 to 41,000 unheard of in India, where laws make cutbacks difficult.

From 1993 to 2004 productivity skyrocketed from 78 tons of steel per worker per year to 264 tons, thanks to plant upgrades and fewer defects. Helped by record prices, the unit now brings in more after-tax profit than any other Tata sibling — $380 million on revenue of $2.6 billion last year. The steel company aims to triple annual capacity to 15 million tons in five years (albeit still far behind Korea's Posco and Arcelor of Luxembourg). It plans to spend $700 million on a 2.4 million-ton mill in Bangladesh. And it's shopping for plants in Iran and Ukraine.

Tata Steel's shock therapy, moreover, became the norm for other units in Tata Group. Ratan Tata has decreed that the group's operating companies should be first, second or third best in the industry — or should be sold. "I've often been misunderstood as someone who is too critical of our companies," he says, "but there is nothing negative in being critical in order to be the best."