Tata's global dream turns nasty
MUMBAI - "Be prepared for hard decisions," Tata group chairman Ratan Tata warned in a New Year letter addressed to 350,000 Tata employees worldwide, acknowledging the unprecedented troubled times facing the 140-year-old Tata dynasty, one of Asia's oldest and most respected conglomerates.
The challenges faced at Bombay House, the stately 84-year-old corporate home of the Tatas in the Indian financial center of Mumbai, must be unprecedented: Tata Motors is struggling to raise funds in the capital market, thousands of Tata workers face lay-offs, factories are being shut down, supposedly temporarily, top executives are considering taking pay cuts and newly acquired iconic car brands Jaguar and Land Rover look to European government bailouts for survival.
Tata group's global revenues from its 98 companies were estimated at US$62.5 billion in the 2007-08 fiscal year, according to company figures; over 60% came from overseas business. That made sense when the world economy was driving ahead on all cylinders. Now it leaves the group well exposed to the global downturn.
Rata Tata, a 71-year-old never-married bachelor and reclusive billionaire, called the current economic crisis the worst "we have faced in our living history". But the turmoil that is challenging his business empire cannot entirely be pegged to recession and currency fluctuations.
Tata himself has presided over a recent series of questionable decisions by his Mumbai-based conglomerate. For the past seven years, the Tata group has been on a high-adrenalin worldwide acquisition spree that prompted more cautiously minded Tata watchers to warn of unnecessary risks.
Since 2000, the group has spent US$18 billion of mostly borrowed money to buy big global brands such as Tetley (tea), Brunner Mond (soda ash), Corus (steel), Jaguar and Land Rover (car) in Britain; Daewoo Commercial Vehicles in South Korea; Tyco Global Network and GeneralChemical in the US; Millennium Steel in Thailand and NatSteel in Singapore.
That merely gives a flavor of the group's expansion. In the same period, the Tata group acquired outright or merged and bought 21% or more equity stakes in 53 companies, including 15 in India, 11 companies in Europe, nine in the US, six in the UK, six in the Asia-Pacific, a 50% equity interest in the Chinese company China Enterprise Communications and the rest in South America and Africa.
This haste to develop a global profile through purchases with borrowed money - rather than working hard to develop a strong quality Tata brand worldwide - is coming unstuck with the current global recession and plunging consumer spending.
Ratan Tata can blame current troubles on bad luck, bad times, bad planning or a combination of all three, but he has had warning. In 2007, market analysts questioned whether Tata Steel had overpaid by as much as 20% the $12 billion it spent to buy the Anglo-Dutch steel giant Corus.
Two years later, Corus, Europe's second-largest steel maker, is facing 3,500 job cuts and is asking European governments for a multi-billion dollar bailout.
Shrunk revenues have choked Tata's ability to repay debt. Symbolizing these woes is flagship company Tata Motors Ltd - India's largest auto company, the world's fourth-largest truck maker and second-largest bus manufacturer. It is now being crushed under an estimated total debt of $2.7 billion, while its entire market capitalization is $1.6 billion as of January 29.
On February 5, Tata Motors managing director Ravi Kant told local media that 75% of its purchases from suppliers had been paid immediately through agreements with banks under a "bill-marketing" scheme, under which banks pay Tata's suppliers and Tata later repays the banks.
Tata Motors posted a net loss of $54 million in the financial quarter ended December 31 2008, its worst in seven years. That leaves 23,000 Tata Motors employees worldwide staring at an uncertain future involving "hard decisions" Ratan Tata mentioned.
Ratan Tata's global ambitions have not been impressed 3.5 million shareholders of the Tata group. In 1995, Tata Motors stock at the National Stock Exchange ended on a year high of 695 rupees (US$15); this year it has managed a high of 189 rupees, with a 90% plunge in the past year.
Tata Motors faces investor disapproval after using a $2 billion loan to buy, just as the global economic storm burst, loss-making British car brands Jaguar and Land Rover for $2.3 billion, after previous owner Ford Motor accumulated $15 billion in losses in the two years before the sale.
Tata Motors' efforts to raise working capital and debt-repayment funds through the share market flopped last year, and management has shown no magic wand to revive the UK car company other than holding out its hat for a $3 billion bailout by the British government.
Another marker of Tata Motors' disorientation was seen closer to home last year when political protests over factory land in India's West Bengal state forced the company to relocate the factory site for production of the much-publicized Nano, the world's "lowest cost" car at 100,000 rupees (US$2,000).
The Nano car project had come in for criticism against a backdrop of intensifying debates over the environmental and energy costs of personal transport compared with shared transport, as questions over the marketing of the Nano to India's middle-class millions arose.
Ratan Tata's choice of Narendra Modi as his new patron for the Nano brought new criticism, after Modi, chief minister of the west coast state of Gujarat, enabled the Tatas to slash through red tape to buy land for a replacement Nano factory site in an astounding three days.
International rights groups such Human Rights Watch have blamed Modi for engineering in 2002 communal riots in Gujarat that killed an estimated 2,000. He has since been denied a visa to enter the US, while the Maryland-based Coalition against Genocide has asked the US State Department for this to be a lifetime ban.
It is also possible that the move to Gujarat, more developed and industrialized than West Bengal, cannot offer the low labor costs needed to make the Nano a viable marketing reality. While the Gujarat plant has yet to be built, Tata Motors plans to produce about 4,000 Nano cars a month at a smaller factory in Uttarakhand, eastern India. Advance bookings for the Nano are expected to start at the end of this month.
Adding to signs of confused branding in its hasty expansion, Tata Motors declared plans to sell its luxury brand Jaguar cars in India. Seen in combination with its project to produce the world's cheapest car, the marketing strategy seemed as remarkable as Rolex announcing plans to make plastic watches so everyone can own a wristwatch. Yet the desire to produce the Nano appears more in line with Ratan Tata's background.
Ratan Naval Tata, great grandson of Tata group founder Jamsetji Tata, took over as chairman in 1991 from his uncle JRD Tata (1904-1993), the charismatic founder of civil aviation in India. In a decade, the publicity shy Ratan Tata was credited with increasing Tata Group annual revenues 10-fold to $62.5 billion.
Tata, an admirer of US president John F Kennedy and Professor Amar Bose, inventor of Bose speakers, lives in a modest bachelor's flat in Colaba, a busy tourist district in south Mumbai. His job experience includes washing dishes as a student in the US while studying architecture at Cornell University, and shoveling coal as a floor worker in the Tata steel factory in Jamshedpur, eastern India.
"I appreciate a person who does a little bit of overkill, even though it is not necessary," Tata told an in-house interviewer in June 2002. "I get very, very frustrated and upset if someone does things in a sloppy manner."
Tata has reasons to be annoyed with himself with what now appears some sloppy strategic planning and running into a recession with large debt payments due.
Whether Jamsetji Nusserwanji Tata, the visionary 19th-century founder of the Tata Group, would have done business with the likes of genocide-accused Narendra Modi is doubtful, but more interesting would have been Jamsetji's take on a Tata company, Tata Motors, seeking bailouts from a British government.
Jamsetji broke the family centuries-old family tradition of being Zoroastrian community priests and entered business two years after India's First War of Independence in 1857. With nationalistic fervor, he vowed to industrially free India from European dominance.
In 1868, Jamsetji started a small trading firm to set rolling the Tata Group. In 1907, he established the Tata Iron and Steel Company, now Tata Steel, in Jamshedpur as India's first iron and steel plant.
In 1912, the far-sighted Jamsetji Tata launched perhaps the world's first version of corporate social responsibility. He offered his workers shorter eight-hour shifts, healthy, well-aired workplaces, gratuities and a provident fund.
Jamsetji believed that India's road map out of poverty would involve giving opportunity, not handouts. So he established the JN Tata Endowment in 1892 to fund Indians wishing to study in England, and the Indian Institute of Science in 1909 that is now considered a premier institution in the sub-continent.
Following the Tata philanthropy drive, his two sons, Dorab Tata (1859-1932) and Ratan Tata (1871-1918) established two trusts that form two of the biggest entities in Tata Trusts, which owns 66% of equity capital in Tata Sons, making it the world's largest philanthropic group.
The law of cause and effect ensures that this rich investment in goodwill will pay dividends and protect the Tata House from ruin, even as Ratan Tata faces multiple challenges that include finding his successor.
Tata is due to retire in December 2012. He says the next Tata chief will have to be someone who will ensure that philanthropy continues being the primary shareholder in the group holding company, Tata Sons.
But more immediately, Tata faces the choice on how he wants to globalize, whether it can be better done through Tata creations such as the Eka supercomputer, ranked in 2008 as the world's fourth-fastest, or going on a high-risk worldwide acquisition spree of big name brands, before giving his managers sufficient time to integrate operations.
The New York-based Reputation Institute in 2008 rated the Tata Group as the "World's Sixth Most Reputed Firm" (after Toyota, Google, IKEA, Ferrero and Johnson & Johnson) but Tata has to decide whether he wants to focus more on developing the quality of existing core businesses, rather than adding further to his tally of nearly 100 diverse firms.
With more focus, Ratan Tata may need to use his reputed talent for turning around loss-making companies to turn around Tata Motors. Some hope dawned on January 28 when Tata Motors announced that it had secured a $450 million, 12-year contract from Delhi Transport Corporation to build and maintain 1,625 buses to improve public transport in New Delhi.
Such development of existing Tata Group businesses involving a larger public interest could be a return to its core values, as well as the wiser road ahead.