The gutsy crossover
The Week— May 15, 2005

There is nothing aggressive-looking about Bombay House, the headquarters of Tata Sons, in Mumbai. But the words bandied about in its corridors are "gutsy", "bold", "ambitious" and "confident". Not the least by chairman Ratan Tata, who launched the group’s international foray five years ago. His message to his team: "We need to be bolder and willing to take bigger risks abroad than we have done."

And how. Tata Tea acquired Tetley in 2000, which was three times its size. Tata Motors acquired Daewoo Motors over ten other bidders and a Spanish bus maker. Tata Steel, a-one-plant-one-town company, is present today in seven countries with the acquisition of NatSteel of Singapore. Tata Chemicals has its foot in Morocco with the purchase of a company there. VSNL paid $130 million dollars (Rs 600 crore) to buy Tyco, which had spent $3 billion to develop its submarine cable network, and has obtained the second telecom operators’ licence in South Africa.

All this has happened in the last four years and the Tatas are getting better at it. The way they went about the Korean acquisition is one example of the Tatas’ international confidence. Tata Motors was late to spot the potential but that did not deter it from jumping into the fray. "It took just days to put a team in for due diligence and make an indicator bid," said Alan Rosling, executive director of Tata Sons, the only foreigner on the Tata Sons board.

Reliving the exercise, Ravi Kant, executive director of Tata Motors commercial vehicles unit, said that they were faced with very short deadlines as a Korean court had declared a timetable of six months. But the biggest hurdle was that the group did not know Korea. "All documents were in Korean and we did not know the laws of the land," he said. Also, while looking at the mechanical and technical aspects of the plant, technology and liabilities, what was clear was that the soft issues were important; the company had not considered them.

"In fact, the very first day we reached Korea, we realised we needed to tackle the soft issues immediately. So we started connecting ourselves with the people there," said Kant. The Tata team had several meetings, at the then acting president’s office, with industry associations and with others who had bought companies in Korea.

Also, they needed to communicate who they were and their capabilities. "India was known for Buddhism and IT," said Kant. "They could not understand how we would take this company forward. We had to market ourselves. We translated all our literature into Korean and made a video film in ten days; we communicated our work ethics and our technological competencies. That assuaged their concerns to some extent. But what clicked was our explanation that we do not have the concept of ownership but the concept of trusteeship." The group’s new-found "ability and appetite for risk-taking", as Rosling put it, is a far cry from its traditional, staid image. "We are conservative in that there are certain values we hold dear to our hearts," said Rosling. "But we have made some gutsy moves. The move into telecom and the Tetley buy were ambitious, aggressive and successful strategic moves. So far no one has done a deal of that size."

The speed with which it all happened has caught competitors and analysts by surprise. The group stepped on the gas from mid 2004 when a flurry of takeovers and acquisitions by different group companies saw the Tatas making more headlines in this period than ever before.

Yet, there is a reluctance to use the world ‘global’ to describe the group’s international presence. The preferred word is "internationalising". For Ratan Tata, going into select geographies is not just to exploit commercial opportunities, but where the group "will have a development role in that country".

The target for international earnings is 30 to 35 per cent of the total turnover in the next few years, up from the current 22 per cent. Driving the international initiatives are the Tata group flagship companies, Tata Motors, Tata Consultancy Services and Tata Steel. In the second rung are Indian Hotels, VSNL and Tata Tea.

Analysts are sceptical about how well the internationalising will work, especially in integrating the management and financing of future buys. But scepticism has dogged Ratan Tata even in his earlier ventures. The Indica car project was scoffed at by observers when the company reported huge losses at the end of year one. But today, Tata Motors is the fifth largest truck maker and third largest bus chassis maker in the world; its passenger cars have found acceptability in the developed markets as well.

There was the question of whether Tata Tea would digest the Tetley acquisition. "The acquisition gives us access to 35 markets and they are all twice our size, making us the second or third largest player in the branded tea business in the world," said Percy Siganporia, managing director of Tata Tea. "That gives us sustainability in terms of volume. When we closed the acquisition in 2000, there was scepticism regarding the value that we had paid. But, it has turned out to be a lucrative acquisition." Every packet of Tetley sold anywhere in the world has the Tata brand on its packaging. Today, Tata Tea clocks a double-digit growth in an otherwise lacklustre tea business.

Similarly, the acquisition of Singapore-based NatSteel Asia Pte’s 1.7-million-tonne annual steel business for Rs 1,313 crore has propelled Tata Steel into a strong regional player overnight. The NatSteel board was immediately reconstituted with local flavour with the vastly experienced B. Muthuraman, managing director of Tata Steel, in the driving seat.

Tata Steel now has a total installed capacity of 6 million tonnes and has access to Singapore, China, Thailand, Vietnam, the Philippines and Australia.

Tata Steel also got a 27 per cent stake in Southern Steel Berhad, a 1.3-million-tonne steel-maker in Malaysia, indirectly. Now, it is ideally located to tap the booming Chinese demand for steel. The other value gain: the margins of NatSteel would go up considerably by "switching from scrap to billets as inputs," said Muthuraman. The strategy is to "achieve growth through greenfield projects and acquisitions—greenfield projects in countries like Iran where steel production is competitive and acquisitions in countries which have finishing capacities."

But analysts like Nirbhay Mahawar of brokerage firm Motilal Oswal say timing is the key to all international growth plans. "In a peak cycle, valuations are not ideal for a buy and Tata Steel must be careful about that," he said. Analysts still question whether the Tatas paid the right price for NatSteel, an acquisition they could have effected at the bottom of the cycle, in 2000 or 2001, at a much cheaper tag. However, the Tatas' policy of making primary steel in India and finished goods near the large markets is a winner.

Daewoo Commercial Vehicle Company, South Korea, adds substantial value to Tata Motors. It has a capacity of 20,000 medium and heavy commercial vehicles and a market share of 25 per cent and the Rs 465-crore deal is the first takeover by an Indian automobile company abroad. Tata Motors followed this up with a quiet buy of 21 per cent equity stake (Rs 70 crore) in Hispano Carrocera SA, a Spanish bus manufacturer with world-class design and development capabilities and a market share of 25 per cent in Spain. It has two manufacturing facilities in Zaragoza, Spain, and in Casablanca, Morocco, with a total production capacity of around 3,000 units annually.

Besides being able to bring these products to India by the year end, the acquisition has opened up new markets. "We will have a stronger presence in Europe," said Kant. "Priority markets are south Asia, the middle east, Africa, Russia and the CIS countries which are throwing up very interesting possibilities. And we have started looking at southeast Asia and two or three countries in Latin America."

Telecom, however, is one area where expectations have exceeded ground realities. Growth has been slow and attempts to bring VSNL under a common brand and leverage on its cash reserves evoked a harsh response. The group is pinning its hopes on the combination of VSNL, Tyco and TCS being able to build a highly competitive global communications solutions company.

The presence of TCS, the one truly global company in the group, with its proven expertise in an array of IT areas and an ambition to break into the world’s top 10, gives the group an enormous advantage. Financial resources can be raised through TCS.

As the group’s footprints in foreign markets grow, Tata Sons, which owns a controlling interest in the bigger group companies, is putting in place a structure and philosophy to institutionalise the process of inorganic growth. Once a group company spots an opportunity for expansion, acquisition or diversification, a team of key men in Bombay House and the Business Review Committee—a subcommittee of the board—step in to finalise the goals, priorities, budget and strategy with individual companies and provide a whole range of support.

Rosling supports the companies in their international ambitions and strategy. Arun Gandhi, an expert on mergers and acquisitions, gets involved once a strategic move becomes concrete. Other key Tata Sons directors help out with HR policies, regulatory approvals and government policies. Ishaat Hussain’s domain is financing requirements, especially since the Tatas favour internal generation of funds by companies, off-loading of equity or providing group support to finance their plans.

Analysts wonder about the Tatas’ ability to raise funds for future acquisitions. TCS, which bankrolled the expansion and acquisition plans through stock sales in the past, may not be called in any more if the Tatas’ mergers and acquisitions plans get institutionalised. One way of raising funds for global acquisitions could be through regional listings. Tata Motors, for instance, was the first Indian engineering company to get listed on the New York Stock Exchange. It is the second Tata group firm to be listed on NYSE after VSNL. Tata Group companies are already listed on bourses in Luxembourg, London and Singapore. On the strength of local performance, these companies would be able to finance their future growth.

Templates and models for institutionalising the group support process have been built. "Coordination is beginning to happen. But it is still evolving," said Kant. Though there is one clear guideline: no acquisitions for the sake of acquisitions. Fit, chemistry and compatibility with the Tata culture and values are all important. As TCS chief executive officer S. Ramadorai said: "We will not go on an acquisition unless the potential candidate is a value addition, has some intellectual property rights and a good talent pool to provide TCS. We don’t want a big acquisition to erode our base."

Also, companies making the acquisition are being helped by those who have already made an international foray. In the countries where it is present, TCS provides advice and help for other group companies in their search for strategic acquisitions. "It’s a long learning. Group companies connect with each other," said Ramadorai. "Access to industry and political forums, best practices and information are shared among various group companies."

In most global acquisitions, local people retain the control, with the head office providing guidance and ensuring corporate governance. "We are trying to be a company with a local presence," said Rosling. "We don’t want to be a cookie-cut Indian company in South Africa or the US. In the countries we operate we want to be seen as having a local flavour. But we also need to pull the strands together internationally across the group. But we are far more tolerant of differences than many American and eastern companies."

After the Daewoo takeover, Tata Motors left the local management team untouched except installing two people from head office for finance and coordination with India. "Initially, they were circumspect, but today it is a fantastic relationship. We are also getting people from Korea on assignments here," said Kant.

Even the Taj group prefers to control only parts of global operations through the central offices in areas like corporate policy, finance, sales and IT. Its focus abroad is in the luxury segment, said Raymond N. Bickson, managing director of the hotel group. About the budget brand, IndiOne, Bickson said: "We will take it abroad after making it fully functional here in India." Up against some of the biggest names in the hospitality industry, the Taj will be mainly taking the Exotica brand, Jiva SPA and luxury apartments, to major countries. With a war chest of $150 million which it raised last year, Bickson and his team are scouting for opportunities in Europe, the UK and North America, with one of the biggest projects currently being planned in Beijing. The strategy is to look for projects from the ground up and lease management takeover. The group now pits itself against Four Seasons, Ritz Carlton and Shangri-la though in terms of size, the Taj group has still far to go.

For all that, the group has only made a modest beginning. Inevitably, the focus has been on the developing markets: Africa, China, southeast Asia, the middle east and Latin America, though officials insist that there is no question of de-emphasising the developed markets. With each buy, the group is getting better at integrating it into its fold and absorbing the best global practices and processes. Also, at assessing risk and mitigating it.

"We have developed some matrices of risk on a geographical basis or a country basis," said Rosling. "We have some way to go to make it sophisticated and actionable." The expertise came in handy in the group’s planned move into Bangladesh to set up a 2.4-million-tonne steel plant, a one-million-tonne fertiliser plant and a 1,000-MW power plant. "We did a very detailed and structured exercise on Bangladesh. We are now discussing with government officials. Initial analysis says we do have a significant business opportunity."

Jigar Shah, vice-president of brokerage firm K.R. Choksey, said that as long as the Tatas were able to manage their acquisitions, things would be fine. "The management will have to support each global plan with enough strategic and financial support," he said.

The process of making brand Tata known internationally is a long process. But as each product enters a new market and builds its brand, the Tata brand identity grows.

As they grow across geographies, the company faces the challenge of getting noticed in terms of quality, pricing and services. In every region, they have to compete with the best in the world. This is one reason the international forays have been modest and selective. This is also a period in which Tata wants to build capacities, gain mind share and improve market share. The ambition and desire to do more are there. "I am sure at some point we will go beyond the Tetley scale," said Rosling. "But we have limited resources so we have to balance risk and reward."

Too much may still depend on Ratan Tata as he pushes his team to consider bolder deals. He has played a key role in all the international expansion moves. "Tata acts as a guide to make sure that you move in the right direction," said Kant. But he has just three more years to go as chairman of Tata Sons and how much of the present appetite for risk will remain after that will have to be seen. But he has firmly set the group on the path of international expansion. But, is he running out of time? "I feel sad," he said. "When you have fire in your belly you were fighting other fires." ]