Ratan Tata: No One's Doubting Now
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. (MER ) in Bombay.
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.
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 (SZKMF ) 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.
By Manjeet Kripalani in Bombay