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What's next for Tata Group: An interview with its chairman

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What's next for Tata Group: An interview with its chairman
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What's next for Tata Group: An interview with its chairman - January 22nd, 2006

Ratan Tata explains how the company is expanding abroad while cultivating an emerging mass market at home

The hopes, challenges, and opportunities of India's globalizing economy are closely intertwined with those of Tata Group and its chairman, Ratan N. Tata. The country's second-largest conglomerate—with revenues of $17.8 billion (in the financial year ending 2005) and core interests ranging from steel, cars, and telecommunications to software consulting, hotels, and consumer goods—has come a long way since he stepped up as chairman, in 1991. That also happened to be the year when India launched the economic reforms that were to make it one of the world's fastest-growing economies.
When the 67-year-old Tata, a Cornell-educated architect, succeeded his uncle J. R. D. Tata at the helm of the then-stodgy company, he set out to unite, refocus, and modernize the sprawling group of almost 100 largely independent businesses. Helped by cash from its booming software unit (Tata Consultancy Services) and by the growth of India's economy, he has rebuilt its shareholdings in its largest subsidiaries (by revenue), including Tata Motors and Tata Steel, and increased its revenue sixfold. In 1995 he took on the passenger car business—an effort that three years later resulted in the launch of India's first indigenously designed, developed, and produced car, the Indica. The gamble paid off.
In 2000 Tata Group purchased the United Kingdom's Tetley Tea and followed this move with other big overseas acquisitions and investments. Restructuring or divesting nonperforming businesses, however, has proved to be more difficult.
In an interview with Ranjit Pandit, a director in McKinsey's Mumbai office, Tata spoke about the group's international strategy, his plan to create a $2,200 "people's car," his vision of India as a knowledge center for the world, and his dedication to the social responsibilities required from companies operating in developing markets.
The Quarterly: How would you describe Tata Group's growth strategies in a globalizing economy?
Ratan Tata: We have two guiding arrows. One points overseas, where we want to expand markets for our existing products. The other points right here, to India, where we want to explore the large mass market that is emerging—not by following but by breaking new ground in product development and seeing how we can do something that hasn't been done before.
The Quarterly: How do you select which countries to enter?
Ratan Tata: Our strategy has been a little more modest than a truly global one. We want to expand into geographies where, as a group, we can have a meaningful presence. Even though companies could probably be very satisfied in an Indian context with maybe a 5 percent market share in a foreign country, this is—at least in our view—not a sustainable level. So in the first instance we have chosen countries where we felt we could make an impact and, secondly, where we are able to participate, as we have in India, in the development of that country.
When you visit a country or examine a particular company, I think you intuitively know if there's an opportunity, and then you flesh out that opportunity in one form or other. If we get to the stage of justifying assembly or manufacturing operations, we will seek either to contract them or to invest in facilities in that country. That has been the way we have gone into, say, South Africa. An example of another way is South Korea, where we acquired the Daewoo truck company. We saw an opportunity in an entity that had a certain market share, that had a product line that we did not have, and that was a strategic fit for us. We brought in our marketing reach and made the company more profitable.

The Quarterly: Why South Africa?
Ratan Tata: I have been involved with South Africa for perhaps seven or eight years. There was such an enormous disparity between rich and poor, and I always felt that this large poor community had been exploited over the years. So I met [Thabo] Mbeki before he became president—this was in [Nelson] Mandela's time—and I said we really wanted to do something in South Africa to give to the country rather than take away from it.
One thing led to another. We started professional schools in South Africa that train people in trades so that they can be self-employed, and then I became more involved with the country by joining Mbeki's investment council. Eventually, this led to our launching our cars and trucks in South Africa, where we became quite successful, and then we were awarded a second network operator's contract for telecommunications in all of South Africa.
The Quarterly: Most of these big moves seem to be taking place in other developing countries. When will Tata be ready to go into developed markets?
Ratan Tata: We are, to some extent, in developed economies already. In Western Europe, I think Italy and Spain are among our most promising markets for automobiles. We're in software in several countries. We have made acquisitions to enter the hotel business, including in the United States. And we are now looking at opportunities to invest in steel companies in developed countries, but we are making sure that we have secure access to raw materials, because I really believe that owners of iron ore are going to rule the industry. They will be the OPEC1 of the steel industry.
The Quarterly: Turning to your plans for the Indian market, the most intriguing is perhaps the development of a people's car that would sell for 100,000 rupees.2 What's the thinking behind it?
Ratan Tata: It is propelled by the opportunity, but there is also a social or dreamy side to it. Today in India, you often see four people on a scooter: a man driving, his little kid in front, and his wife on the back holding a baby between them. It's a dangerous form of transportation, and it leads to accidents and hospitalizations and deaths. If we can make something available on four wheels—all-weather and safe—then I think we will have done something for that mass of young Indians. If you could position an all-weather car that was not a glorified scooter or a stripped-down car, then I believe there would be a market potential of one million cars a year.
The Quarterly: How do you make such an undertaking profitable?
Ratan Tata: Today we're producing a $7,000 car, the Indica. Here we're talking about a $2,200 car, which will be smaller and will be produced in larger volumes, with all the high-volume parts manufactured in one plant. We're also looking at more use of plastics on the body and at a very low-cost assembly operation, with some use of modern-day adhesives instead of welding. But the car is in every way a car, with an engine, a suspension, and a steering system designed for its size. We will meet all the emissions requirements. We now have some issues concerning safety, mainly because of the car's modest size, but we will resolve them before the car reaches the market, in about three years' time.
In addition—and this again touches on the social dimension—we're looking at small satellite units, with very low breakeven points, where some of the cars could be assembled, sold, and serviced. We would encourage local entrepreneurs to invest in these units, and we would train these entrepreneurs to assemble the fully knocked-down or semi-knocked-down components that we would send to them, and they would also sell the assembled vehicles and arrange for their servicing. This approach would replace the dealer, and therefore the dealer's margin, with an assembly-cum-retail operation that would be combined with very low-cost service facilities.

The Quarterly: You have launched another new low-cost venture—building a chain of basic hotels, the indiOne. What's the philosophy behind it?
Ratan Tata: It's exactly the same as the philosophy for the car, and it's a philosophy that's also being thrown out as a challenge to our watch company—why can't we produce a watch at a much lower price to go on everyone's wrist? The mandate has gone out to our people that we now really need to look seriously at the needs of the larger part of the Indian income pyramid, where most consumers can be found.3 If we don't do that, I think the Chinese will come and do it for us.
We have been a very measured, very cautious group, which has looked at the market, decided what was safe, and then moved in. We need instead to lead and not just follow. We have to take more risks and gain predominance in that manner. Targeting the larger part of the income pyramid is an important part of what Tata will be doing.
The Quarterly: What about going into China and producing for the emerging middle market there?
'Targeting the larger part of the income pyramid is an important part of what Tata will be doing'
Ratan Tata: We haven't found what we can do as yet in China. It's been very difficult to understand the market, at least for me. It is a market that seems, on the one hand, subservient to international brands and, on the other, very price conscious and very willing to buy unbranded products or local brands. It's pricing isn't fully comprehensible. In Beijing, you know, I was taken to some little alley where watches and clothing were sold. The watches were extremely attractive and very similar to known brands, but some had stopwatch buttons that didn't work. So I don't really understand the Chinese market. But if we could identify the right product, I think we would move in there. We do have a memorandum of understanding with a Chinese car company to manufacture our current car under its brand, but we haven't seen much action from that side.
The Quarterly: China is manufacturer to the world. What position do you see for India in a globalized economy?
Ratan Tata: If we play our cards right as a country, we could be a supplier of IT services and IT solutions to the world. We could also be a product-development center for pharmaceuticals. We could be a very good global R&D center in biotechnology and in some of the emerging technologies, such as nanotechnology, provided we really give them the focus they would need.

Does India have an entrepreneurial advantage over China? See "China and India: The race to growth."
If I may draw a somewhat oblique analogy: Singapore, which has done so much to build its biotech infrastructure, strangely isn't looking at creating any homegrown enterprises. I'm sure 90 to 95 percent of what comes out of Singapore's biotech infrastructure is the work of US companies and others. In India I would say it would be very different. It would be local—Indian—scientists and entrepreneurs establishing start-ups, very similar to the way this happened in Silicon Valley. Do we have the venture capital to support them? Probably not. Do we have government support? Probably not. But if we can get these supporting things in place and synchronize them with the need to create more risk-taking platforms, then I think some very interesting things could happen in India. We may not become the manufacturing base of the world, but I think we could be very much a knowledge center for the world.
The Quarterly: Do you see this as a joint government-business project or as something that happens through market forces?
Ratan Tata: We're so far behind on the infrastructure that the government will have to play a very active role. It may be a public-private partnership, but for the most part it will have to be the government.
The Quarterly: Why would India win in the knowledge area?
Ratan Tata: India has people with skills. And it has people with considerable intellectual capabilities who have been leaving India because the opportunities were not there. We have to create these opportunities. So if you are asking, why should this happen if all things remain as they are, the answer is that it won't. But if we can hold onto our best people in India, if we can attract our best people back, if we can create a sense of opportunity and reward, then I think India could be a very different place.
Indians coming back to India really go through a cultural shock. They give up a lot in terms of the quality of life, the education of their children, the availability of medical facilities. This will also have an impact when we want to hire people who are not Indians, as we will have to do in a world without boundaries. Even if we start only with pockets of the country and make those pockets less of a cultural shock, the benefits will spread. In some ways, this is what China did with the economic zones.
The Quarterly: You serve as chairman of the government's investment commission. Why do you think many foreign companies are reluctant to set up shop in India?
Ratan Tata: In some areas, rules and laws are more investor friendly in India than they are in some other countries, and in some areas they are less so. Most investors today cite caps on foreign investments as a deterrent. But there are sectors where even 100 percent is permitted, and you don't see people rushing in there. India has an impeccable record of repatriation of profits, so it's not that, either. But a new investor looking at India does run up against different ministries, with each one seeming to have a different angle on the investment and throwing up roadblocks. So companies don't really come in as they do in China or Singapore, where they get clearance and are free to start their operations quickly. And once investors are in India, they quite often find that one bureaucrat interprets the law differently from another bureaucrat. All of us in India live with this. You can have an excise official in Maharashtra who takes a different view of the duty structure than an excise person in Bihar does. You'll go to court and fight that, but you're used to it. But a US, European, or Japanese company finds this terribly debilitating and gets all upset over it.
So I think a number of things, including red tape and corruption, deter investors from coming to India, which is a market with a middle class of 250 million people. It is a terrific opportunity for growth because you have the larger part of the pyramid rising in prosperity.
The Quarterly: Tata Group had to change when you stepped up as chairman, in 1991. What do you hope people will say in the future about you and your impact on Tata?
Ratan Tata: We used to live in a world of just raising our top line. I would hope people will say that I've helped make the Tata companies more competitive and more conscious about costs and the bottom line. I would hope they remember me for bringing the group together, because we were often referred to as a loose federation of companies that competed and fought with each other. By creating a common brand and a codified framework for how we operate, I think we have brought the group much closer together. I would feel sad to be remembered for not being able to change the structure of the company more radically.
The Quarterly: What about Tata Group's impact on India's economic development and consumers?
Ratan Tata: What I feel most proud of is that we have been able to grow without compromising any of the values or ethical standards that we consider important. And I am not harping on this hypocritically. It was a major decision to uphold these values and ethics in an environment that is deteriorating around you. If we had compromised them, we could have done much better, grown much faster, and perhaps been regarded as much more successful in the pure business sense. But we would have lost the one differentiation that this group has against others in the country. We would have been just another venal business house.
The Quarterly: Will Tata's social values endure after you leave?
Ratan Tata: I would hope so. I think it is wrong for a company in India to operate in exactly the same way, without any additional responsibilities, as if it were operating in the United States, let's say. And even in the United States, I think if you had an enlightened corporation that went into the Deep South, you would see more of a sense of social responsibility, of doing more for the community, than the company might accept in New York City or Boston. Because it is inevitable that you need to be a good corporate citizen in that kind of environment. And companies that are not good corporate citizens—that don't hold to standards and that allow the environment and the community to suffer—are really criminals in today's world
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