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The Rediff Interview/ Ratan Tata

We will see growth through acquisitions: Ratan Tata

A year ago, and eight years after he succeeded JRD Tata, Ratan Tata finally moved across the corridor on the fourth floor of Bombay House, into JRD's old office - but after substantial remodelling to include an expansive visitor's area, several cubicles for staff officers and (next to his own spacious office) a meeting room overlooking shrubbery on a terrace.

The colour scheme is a stark black and white, with relief provided by slashes of red. The ambience is businesslike, restrained and unpretentious, with only the sense of space being used to convey corporate power.

The 150-year old, Rs 45,000-crore (Rs 450 billion) Tata group is shedding its conservatism and looking at growing aggressively through mergers and acquisitions, including in steel, and sees major growth in the group's IT and hospitality businesses coming from expansion outside India.

The group spans seven key sectors and has 80-odd companies in businesses as diverse as chemicals, engineering, steel, telecommunications and IT services.

In recent times, the group has acquired companies to expand its business portfolio. It acquired management control at Videsh Sanchar Nigam Ltd and CMC, when the government divested part of its equity in them.

Earlier, it acquired the UK-based company, Tetley, the tea company. Similarly, Tata Consultancy Services, a division of Tata Sons, is looking at acquiring IT companies overseas and Indian Hotels is said to be on the brink of making an announcement on an overseas hotels acquisition.

In a wide-ranging interview with Business Standard, the Tata group chairman talked, among other things, about vested interests being the biggest hurdle to business growth, the Tata Finance affair and the group's plans to grow through acquisitions. Excerpts:

What do you see as the future growth drivers for the group?

We will see major growth in the information technology and telecommunications areas. We have staked a great deal of funds and human resources in them. We will also see investments and no stagnancy in the areas of steel and automobiles, in India and outside.

In all the areas we are in, we will see some growth through acquisitions rather than organic growth only. In the telecommunications area and steel also, we are looking at expanding capacity through acquisitions.

The Tata group had announced a change in strategy and said that the group would shift from being a commodities group to a services group. In this context, where does the issue of TCS going public stand?

Services and branded products, as against commodities. There has been a tremendous shift towards branded products in percentage terms of the total from where we were when we started.

On TCS (Tata Consultancy Services), our plans will be led by whether we believe the market is right for us. Today, the markets, not only in India but all over the world, are not what they were. We are not at all sorry that we didn't make that move when the market was at its peak.

When you look at the portfolio of businesses which you have, and you look into the future, what do you see?

If I were to step back and make a statement on that, I think the Tatas have by and large been long term players in most of the industries they've been in.

If anything today, software services is a sort of pinnacle industry. Down the road it may also turn out to be a dog. Who knows, it could be replaced by biotechnology and lose its lustre in comparison to that.

We have a big stake in the telecom industry. The industry is considered to be a difficult one and does not attract investors.

But tele-density in the country has still got to be built. And I think we will be there through these bad times, hopefully to reap the rewards of the good times when they follow.

Today, our new endeavours look a little bleak because the industry looks bleak. There will be a shootout in the industry, consolidation will take place and we will be there and hope to be a significant player.

In IT, we are growing. We hope to make a significant play in China which we see as the next emerging area of IT services and we hope to be there in a big way.

In most of the industries where we have a prominent or dominant position, our intention is to continue to hold that predominant position and improve our margins in those businesses.

I believe you will see a lot more divestment or consolidation of our businesses than you have seen.

Much of what we have done is not noticeable. As I have always said, the start is going to be slow as this is the first time we have done this in a group that is 150 years old. So when you have an industry that you want to sell, the employees are suddenly Tata employees and they ask why are we being picked up for sale. It happened in Tomco and some of the other companies.

Once it becomes clear that unless they meet some of the parameters, be they business parameters or those on tax or returns, they will have to go. Once that falls into place, the acceleration of that will take place too.

We sold Hitech Drilling, Petrodyne, Forbes. There are some more as we move forward. We've also had some closures. Tata Steel is closing or merging several of its 18-odd subsidiaries into a more meaningful entity.

Don't you have an untidy structure in both IT and telecom and are not quite sure how it fits into a piece?

We are quite sure how it fits into a piece, but there are other reasons why it can't. In telecom, we have a problem in terms of policy where you can't have the same company doing cellular and basic.

It is a policy framework that affects everybody. If you say we don't have a holding company, you will see that happening in the next few years.

What's been your experience so far with the group executive office (GEO) and the other attempts to shake up the group? How far have you progressed?

It's going okay. It's not going as well or in as meshed a manner as one would have thought. One reason is that the GEO needs to be expanded which we are in the process of looking at.

While expanding the GEO, will you induct people who might be potential successors to you?

Yes. They will be worthy people who are potential successors and they would be from within the group or from outside.

What does retirement mean for you and what changes at 65?

At 65, it means that you can't hold an executive office and you can't undertake executive duties. For me it means changing from being executive chairman of Tata Sons, to being non-executive chairman of Tata Sons, which JRD was all through his life.

So if you become non-executive chairman, does that mean there will be a group chief executive?

There probably will not be a group chief executive but there will be a successor to the group head by the time I leave, when I reach the age of 70.

So what you're saying is that you're still some distance away from saying who will be succeeding you.

I'm not saying that. I have a responsibility to put somebody in place, which I shall do.

Whether that happens two years from now or three years from now or six months from now will depend to some extent on the person and to some extent on the feeling that that person is going to take the group forward in a particular way.

For argument's sake, if you were non-executive chairman of Tata Sons, would you have still got involved in, let's say, crisis management in the Tata Finance situation or would somebody else have handled it?

I think it would have been absolutely identical.

So nothing really changes, except in the personal sense?

Yes. Because executive chairman or otherwise, let me ask you what my connection with Tata Finance is except to decide how the group deals with that particular situation. It is exactly the same.

There are reports that three or four internal candidates have been identified and that Tata Sons directors have been asked to groom them. Is this correct?

No. And I don't know where that came from. But we are trying to identify in the group between 100-150 star performers in the ages of 35-45 and 45-55.

And what we'd like to do is to expose these people, obviously the 35-45 category one way and the 45-55 another way, to a variety of industries and functions and interactions with the GEO, with the executive directors, so that they have greater visibility within the group and are better groomed for positions.

How do you explain the problem that the group has had with its old stalwarts? Kerkar, Talaulicar, Fredie Mehta, Pendse...is there an issue there somewhere that you need to address?

No. I don't know why this is being made an issue because almost each of these have had different contexts. We will always have aberrations of one sort or another.

The main issue is how you deal with them. I don't want to go further into this other than to say that perhaps in the past these never came out.

Or that you gave too much independence?

No. I repeat with some degree of care what I'm saying. In the past where there were issues of this nature, the properness or improperness of an act was either condoned or overlooked.

The Russi Mody issue is not what we are talking about. Darbari Seth's name keeps coming up but that was never an issue. And there was never any conflict with Darbari Seth that caused him to leave. He retired and so that was not an issue.

I know that Darbari's son's name was brought in because he had a disagreement with the board. This again had nothing to do with a shootout or anything of that nature.

The Kerkar issue again was an issue that was similar in the context of the powerful CEO who almost owned the company and yet owned nothing in the financial sense. And in some ways, the Pendse issue has been the same kind of issue.

The learning from that is that the board should be more attentive, interactive and proactive on issues of this nature. Some of this has now become statutory which was not the case earlier.

But certainly governance at the board level has to change quite substantially in the Tatas. Many of the Tata boards have not been as interactive or as involved in depth as they perhaps should have been.

In the next two years, several senior Tata Sons directors are going to retire. Have you found replacements for them?

Just yesterday we initiated a note of priority to deal with this issue because we recognise that in a few years, not only there but in companies also, we will have this gap.

And the softest option is to change the retirement age. The consensus is that we ought not to do that.

How will you address this?

What we have done is the obvious thing - we are looking at names and we have initiated an inventory of all the younger people.

And it is an opportunity to look at the growth of the younger people in the organisation as also to fan out outside the organisation to try and see who we can attract as independent directors.

Where does Noel Tata stand in this?

Noel is really involved in his first operative job. He seems to be deeply engrossed in it. It's a company in a new area for the Tatas. If it grows, I think Noel will grow with it. I'm glad he's getting that kind of exposure and we'll see where that leads him.

You don't have any gameplan to groom him for the chairmanship...

In all our plans - and I say that very measuredly - people like Noel (and not because of Noel's last name), will all have a chance for career growth.

Do you regret the VSNL acquisition?

No, I don't. I regret that we are going through the present controversy because it is unfortunate and needless.

Did the group make a mistake in not looking at the fine print at the time of the acquisition?

No. If it's being said that we missed some fine print, I think it is not the case. I think the fine print was so big that you couldn't make any determination of it one way or another.

And in one form or another either the government is going to be exposed to that or it has to be decided by the courts.

Does the group have an image problem? At one level it's obvious the group commands enormous respect and at another level a sense comes through that the Tatas are getting a bad image and bad press.

Yes, we are getting a bad press. Hopefully the press believes in what it is saying rather than being motivated to do what it is doing.

I don't think we have a bad image. We feel that our image is being sullied and it hurts me to see this image being sullied. I believe that we are being damned for bringing the Tata Finance matter out into the open.

On the Tata Finance thing, I wouldn't spend even a moment arguing with you that there was poor governance. But no one has said that the Tatas made the whole board resign.

The board of WorldCom did not resign, but the entire board of Tata Finance was made to resign and was reconstituted. But no one has said that it was act of corrective measure or a recognition of what took place.

Do you see corporate rivalry anywhere in this?

That's something that I can't comment on. It's been said all around that it is corporate rivalry. I can only say that I am amazed at the amount of visibility that all of this is getting.

And when somebody says that somebody wants to sully our image, I can easily believe that that might be so. If you ask me if it's corporate rivalry, I have no direct evidence. Everything I hear and everything I've been told say so.

Are you closer to your objective of doubling the group's turnover every four years and profits every three years?

When we set those objectives, India was going through a growth phase. During the first year and a half, we were on our way to meeting those objectives.

Then we went into what I call the demand recession. Many of our major companies like Telco and Tisco did badly, not at the same time but at different times.

What it led me to do finally was to say that these objectives were out of sync with what was happening in the country and that we should focus on improving our margins, on restructuring individual companies.

So the quick answer to your question is, no, we are not anywhere near meeting those objectives and given the businesses we were in there was no way we could have met those objectives.

Have you then restated those objectives?

No. We just decided that we would put them back into context as soon as we were on the same kind of national growth path that we were in.

How do you see the way the stock market assesses your group companies?

We have in some cases underperformed the market. Several of our companies are in businesses which, in the new context, are considered to be dogs by the stock market. It's not just Tata Steel.

The steel industry is not the darling of analysts and investors. The same is true of automobiles.

All this changed very suddenly over the last six-seven years and it's only the new economy businesses that have been attracting attention, and the services sector which has by and large seen growth.

So by and large we have fared very poorly in the stock market, in a manner of speaking.

It depends on what you take as your reference. Tata Engineering, for example, had a stock price of Rs 60 a year back. It is now Rs 120-130. But the Indian stock market unfortunately doesn't seem to go on the basis of company performance.

We've had a terrific recovery in Tata Engineering but there does not seem to be a reflection of that even when we announce our quarterly results.

We don't have today the reflection of TCS in the market at this moment which would offset what is happening to old economy stocks.

And returns on capital employed?

I know it's not faring well. (But) if you were look at where we were before we undertook some really hard work that the external economy forced on us, we are doing much better.

Tata Engineering has improved its return on invested capital quite substantially from what it was two years ago, and to some extent so has Tata Steel.

What are the biggest challenges in the Indian environment when you are running a business?

The greatest negative we face in India is that the country's directions and policies are today dominated by vested interests groups, and these have a much greater impact on policies than they have in other countries.

The government, by and large, or Parliament, by and large, seems to look to those vested interest groups. By that I do not mean large segments of the population - I mean vested interest groups, very often industry itself.

Is that the biggest problem when you see what the group wants to do?

It's not what the group wants to do. It affects demand, growth; it's not an issue that is stopping the group from growing. It is certainly creating inequities in Indian industry.

Can India be a base for significant growth in exports of manufactured products?

My personal view is that we have lost our ability to be the factory of the world, for a variety of reasons.

The cost of manufacturing, power, fuel, infrastructure costs relating to logistics, getting the product to the marketplace, taxes on raw materials -- all of those things put together create an environment where, in fact, manufacturing products are at a disadvantage on a global basis.

So long as India was protected by high tariffs, Indian products appeared to be competitive.

To give you an example, we are about to embark in Tata Steel on taking ferro chrome ore to South Africa, refine it and sell it to Japan because the powe r costs in South Africa are 50 cents a unit and in India it is something like five times that.

Similarly, if you look at fertilisers, it is the same. Input costs are out of sync with what they are in other countries.

Take the automotive industry, where the cost of raw material may be 70 percent of the cost of your product. Or the electronic industry where raw material costs are of the same kind of order.

There, every percentage point really hurts you if it is more expensive, or helps you if it is not. And it is in that area that India has lost out.

If you put that against the export competitiveness of Tata Steel and Tata Engineering, would you still say that?

One of the greatest benefits that Tata Steel has is that it has its own ore mines. I have often said that if Tata Steel were to cost its ore on the same basis as Posco, we won't be the lowest cost producer in the world.

I believe that India should not give up the opportunity to be the factory of the world, which is definitely gravitating towards China.

Do you see companies like Indian Hotels, Tata Tea and TCS really focusing on global demand more than domestic demand as a driver for growth?

I see them focusing on growing outside India. It's not instead of domestic demand. There is no doubt that in the hospitality area, India is missing this enormous opportunity.

Today, we have 2.4 million tourists to India against 7 million in Singapore and 20 million in Hawaii. We have got something to ask ourselves why we don't have 5 or 7million tourists a year. So are we anywhere near where we ought to be in hotel capacity and related services?

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