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The Handover

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They say body language defines personality. On 29 December 2011 — exactly one year before he was to retire — Tata group chairman Ratan Tata called on Gujarat chief minister Narendra Modi to introduce his heir Cyrus Mistry. This was the second courtesy call, after the duo met Union commerce minister Anand Sharma in Delhi. Tata and Mistry were dressed in black and white, respectively, without jacket or tie. Tata sat relaxed but formal. Mistry, on the other hand, had his sleeves rolled up, and with his right leg crossed over his left in a stance popularly known as the American Figure Four. People with that stance are believed to be competitive and argumentative and they dominate discussions. With Sharma, both Tata and Mistry were dressed formally and so was their stance.
 
Later in the meeting though, 44-year-old Mistry showed his warmth towards the Gujarat leader by clasping Modi’s hand with both hands, just as Tata did. Tata has made no secret of his regard for Modi despite the latter’s anti-secular image. Modi had, after all, gone all out to create space for the Nano manufacturing plant at Sanand in Ahmedabad after Tata decided to stop work at Singur in West Bengal due to the opposition led by Mamata Banerjee. Tata’s opinion of Gujarat and Modi seem to be shared by Mistry.
 
There are both similarities and dissimilarities between Tata and his successor. Tata is an introvert and extremely formal in most of his interactions, though he is also courteous to a fault. Once, Tata pointed out the downside of his persona in an interview to an in-house magazine: “I avoided being an easily accessible person and, as a consequence, the group has probably not had the visibility and the public relations positives that it should have garnered.”
 
For all his efforts to maintain his privacy though, every move by Tata has attracted immense scrutiny — simply because he is the chairman of India’s largest conglomerate with over 100 companies and group revenues estimated to be in excess of $100 billion (about Rs 5 lakh crore).
 
Mistry has big shoes to fill. Like the man he is succeeding as chairman, Mistry also seems to like his privacy. He has maintained a studiously low profile even after he was anointed successor. But he seems considerably more informal in his interactions if his first few public appearances are any indication. At his first shareholders’ meet on 29 June 2012 for Tata Consultancy Services (TCS), he was seen mingling with board members and aged shareholders. Later, at a Tata Chemicals shareholders’ meet, he was spotted controlling his laughter when the microphone malfunctioned at the start of a presentation by managing director Ramakrishnan Mukundan.
 
Mistry has experienced the Tata way of life in his six years on the Tata Sons board, where he was inducted after his father, construction tycoon Pallonji Shapoorji Mistry — the single-largest shareholder in Tata Sons with 18.4 per cent stake — retired. Tata Sons is the promoter of the major operating firms in the group. Mistry is a civil engineer by profession and has his family legacy in the construction business. Firms owned by his family have built several of Mumbai’s landmarks, including the Mumbai headquarters of the Reserve Bank of India, the HSBC building at Fort and the new State Bank of India headquarters at Nariman Point in Mumbai.
 
Read Also: 'Be Your Own Man', Tata Tells Mistry
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Mistry is supposed to have an inclusive style, similar to that of Tata. People close to him say he is mature beyond his age, a trait Tata liked.
 
Despite that, Mistry will be under unprecedented scrutiny as the new chairman beginning 28 December, just as Tata was when he succeeded his uncle, the legendary JRD Tata, in March 1991. There were many reservations about Ratan Tata’s abilities. He also faced tremendous resistance from many of the group’s satraps who were used to great independence under JRD. Indeed, in his first decade as chairman, Ratan Tata did not distinguish himself, particularly when it came to growing the group’s revenues. The compound annual growth rate (CAGR) of the Tata group was 13.75 between 1991 and 2006. Part of the reason was that he had to consolidate his authority over the group, bring in his own trusted managers, and bind what was a loose confederation into a tighter group. Post-2006, Tata devised an ambitious growth strategy built around large global takeovers, which has seen group revenues move up from Rs 96,723 crore in 2006 to Rs 4.8 lakh crore by March 2012, with 58 per cent of the turnover coming from abroad.
 

The question is: can Mistry better Ratan Tata’s record? Also, can the inheritor handle the issues that need tackling in the Tata group as it prepares for Vision 2022, by when Tata expects the group to hit $500 billion in revenues.
 
The Hook Of Legacy
The story of the Tatas began with Jamsetji Nusserwanji Tata, an entrepreneur from a family of Zoroastrian priests, who started trading with the Chinese in 1868. He made a fortune and became an industrialist by setting up cotton mills for exports. Jamsetji was a man of pride — there is an apocryphal story that he set up the Taj Mahal Palace Hotel facing the Gateway of India because he was refused entry to a British-owned hotel. The marquee luxury hotel dwarfed the British hotels in grandeur and elegance.
 
THE MISTRY FILES
1968: The youngest son of construction tycoon Pallonji S. Mistry’s is born
1991: Joins the Shapoorji Pallonji Group as a director; becomes managing director of the construction business in 1994
2006: Joins Tata Sons as its director after the retirement of his father, the single-largest shareholder in Tata Sons
2010: Tata group sets up a selection committee, which includes Mistry, to look for a successor to Ratan Tata
2011: Tata Sons appoints Mistry as the vice-chairman and anoints him as Ratan Tata’s successor
2012: Board of Tata Sons appoints Mistry as group chairman from 28 December

But Jamsetji’s vision of building steel and power plants was fulfilled by his son Dorab. Yet, the group’s real expansion began in the 1930s under the chairmanship of JRD Tata. Tata Chemicals was set up in 1939, Tata Engineering and Locomotive Company (now Tata Motors) and Tata Industries in 1945, Voltas (1954), Tata Tea (1962, now Tata Global Beverages), TCS (1968) and Titan Industries (1984).
 
break-page-break
 
When Ratan Tata took over as chairman, critics felt he was not a worthy successor to JRD. However, he showed a core of steel by taking on the powerful satraps — Russi Mody, Darbari Seth and Ajit Kerkar — in his efforts to consolidate his hold over the group. Says a senior Tata insider: “At one point of time, Tata wanted to handle the dissidents legally, after finding crores of rupees taken out of company accounts. But senior directors like R.K. Krishna Kumar dissuaded him from taking that path.” It took Tata some time to take complete control. In fact, in the first decade of economic reforms, even though Tata started many initiatives, his boldest moves were many years away. The Tata group consolidated, merged group firms in similar businesses, exited some industries altogether, and entered new ones. The 250-firm group shrank to just over a 100.
 
In the initial period of his chairmanship, Tata encouraged group firms to go for market leadership. “He wanted them to be among the top three in their areas of business in India,” says Mukundan of Tata Chemicals. Tata urged managers to work towards EVA (economic value-added)-positive balance sheets, meaning firms must generate a return that exceeds interest and opportunity cost of the invested capital. 
 
A series of initiatives were taken during Tata’s early years. In 1996, Tata Teleservices was set up to tap the burgeoning telecom market; in 1998, the Indica, India’s first indigenously made car, was successfully launched; in 2002, the group acquired VSNL, India’s largest international telecom service provider; and in 2004, TCS went public in the largest private sector initial public offering in India until then.
 
But in the second phase, which began after group firms in the domestic market were strengthened, Tata asked the question: why are we not looking beyond India? The result was a chain of acquisitions after 2000. One of the first big buys was British tea giant Tetley, which was bought by Tata Tea (now Tata Global Beverages). “It was the first time that any Indian company had gone out and acquired a brand, an intangible asset. Tetley was a heritage brand,” says Harish Bhat, managing director of Tata Global Beverages (TGB). Later, Tata Tea acquired a slew of brands — Eight O’Clock Coffee, Grand Coffee, Good Earth Tea, Vitax and Jemca.
 
Tata always wanted the group to be a global force. Says Bhat, “In an annual meet in the early 1990s, Tata introduced the need for globalisation. He said the world was getting integrated, creating big opportunities. So he called forth Tata companies to foray into overseas markets.”
 
Other acquisitions followed soon after: that of South Korean truck maker Daewoo Motors by Tata Motors in 2004; Singapore-based NatSteel by Tata Steel; and UK’s Brunner Mond Group by Tata Chemicals in 2005. The mother of all deals came in 2007, when Tata Steel acquired Corus, the Anglo-Dutch giant, in a bidding war. Then, Tata Motors bought marquee brands Jaguar and Land Rover (JLR) from Ford Motor Company.
 
While the group was on a shopping spree, Mukundan says Tata asked another question: Are we innovative enough to meet the world’s demands? Tata Chemicals set up an innovation centre in Pune, focusing on nano and biotechnology. The Swach water purifier has been developed at this centre. The company, which is growing its consumer business under the i-Shakti brand, introduced packaged dals. Tata Salt introduced flavoured salts and pepper called Tata Salt Flavoritz. 
 
TGB’s market capitalisation has doubled in the past year. Bhat says TGB too is focused on innovation. In 2003, it launched Tata Tea Gold, an upgrade for Tata Tea. It recently formed a joint venture with Starbucks for a coffee chain.
 
Nano, the low-cost car launched by Tata Motors, is among the better known examples of innovation from the Tata stable. Tata was deeply involved in the conceptualisation of the car. Nano’s sales, however, disappointed. In an interview recently, Tata said, “Nano was meant to be an affordable car for the family, a vehicle that delivers outstanding value for money. Unfortunately, it has come to be perceived as a low-priced car and various stigmas have been attached to it…. I would love to have a chance to implement a new marketing plan for the product, if that were possible.”

Stones Unturned
Turning around the Nano along with reengineering Tata Motors is going to be a big challenge for Mistry. According to Karl Slym, the new managing director of Tata Motors, “The capability and durability of Tata cars have improved. But consumers (still) have a negative perception about the cars. Changing their perception is the short-term challenge.”
 
Slym and his team are planning to widen the portfolio. “We want to continue as a big player in the commercial vehicle business. I do not see any threat to our position, still we need to improve our capabilities with clear management,” he says. “On the passenger vehicle side, we want to become a strong number 2 in the near future.”
 
Overseas, JLR is well poised after the hiccups during the downturn. Many termed the $2.3 billion acquisition as “playing with fire”. But JLR posted a profit after tax of $2.3 billion in FY12. “The cumulative PAT in the past three financial years has been over $3.9 billion,” says a Tata Motors executive. JLR’s sales went up 29 per cent, mostly due to retail volumes growing in markets such as China and Russia.
 
But Mistry cannot afford to be smug about JLR’s success. Other businesses too need to better their performance. Kannan Ramaswamy, the William D. Hacker chair professor of management at Thunderbird School of Global Business in Arizona, says, “The Tatas are seen as relative newcomers despite their historical forays into global markets. This perception is largely due to the fact that they have not yet had any appreciable success on a global scale. Much of their claim to fame still revolves around the recognition of TCS, for example.”
 
TCS, the only Indian IT firm with $10 billion in revenues, has to enhance its presence in markets such as China, Japan, Latin America, Europe and West Asia, according to managing director N. Chandrasekaran. Industry coverage, service capabilities and enhancing client relationships are its next challenges. Recently, TCS crossed Mukesh Ambani-controlled Reliance Industries in market value for a short period. More than half of the the Tata group’s 31 listed companies’ aggregate market capitalisation (about $90 billion) comes from TCS alone.
 
If Tata Motors is excelling in overseas markets and struggling in India, the case of Tata Steel is just the opposite. The $12-billion acquisition of Corus, four times its size, is hurting its balance sheet due to a prolonged slowdown. Five years into the acquisition, Tata Steel is still reeling under a debt of $12.3 billion on its books. Internal actions towards improving productivity and cost cuts that started two years ago have not delivered results yet.
 
Analysts say Tata Steel would continue to fare badly in Europe until the euro zone crisis is resolved. It needs to own resources — iron ore and coking coal mines — to control input costs and improve margins, says Sanjay Jain, an analyst at Motilal Oswal. Tata Steel’s Thailand unit will be another source of worry for Mistry. It recorded a 11 per cent dip in sales of finished goods last fiscal because of the floods.
 
Yet another challenge will be turning around the ultra mega power project owned by Tata Power at Mundra. High prices of imported coal have left the project in the red. Tata Power had bought four mines, including a 30 per cent stake in Bumi Resources in Indonesia, to secure coal for Mundra. But just before the commissioning of the first unit, Indonesia changed the rules for exporting coal, making it expensive. Anil Sardana, MD, Tata Power, says, “Our bid for Mundra revolved around Indonesian coal.” 
 
Reviving Mundra will test all of Mistry’s lobbying skills. Tata Power, for instance, needs to have the tariffs revised upwards in the 25-year power purchase agreement it signed — not an easy proposition under current circumstances.
 
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As for Tata Chemicals, Mukundan says the biggest challenge will be finding resources to meet the India growth story. “The growth will create opportunities. The rise of new needs will be a challenge. Can we innovate to meet these needs? Also, we need to grow while being cost-competitive. Moreover, growth will put pressure on sustainability.”
 
Sardana says raising capital will be a key challenge. Power is a capital-intensive sector. India’s power deficit will open up more opportunities for private players. So, growing at the pace of the opportunities will be another concern, he adds.
 
TGB generates 70 per cent of its revenues from tea. Despite being a global company, its presence in large coffee-drinking countries such as the US and Russia is insignificant. Can coffee and water match tea? That is the challenge before Bhat. Also, the company needs to create iconic brands and launch more products.
 
Acquisition and expansion in overseas markets are the focus of Indian Hotels. But the fact is that most hotels under the Taj brand, including its overseas properties, seem to be unprofitable. Raymond Bickson, MD of Indian Hotels, says, “The company has been profitable overall, but the problem has been with the timing of our foray into the US. The crash of the global economy followed our foray. The properties are gaining momentum, but at a slower pace than our Asian hotels.” In India too, the international hotel brands entering the market are a threat. “The challenge is about maintaining our leadership position and continuing to be relevant 20 years from now, when our inventory would have tripled from what it is today,” says Bickson, adding that Mistry’s interest in construction will help the hotel chain when it adds capacity.
 
GLOBAL VISION: Early on, Ratan Tata realised the potential of an integrated world and went in for big ticket acquisitions globally
The retail business, Trent, headed by Noel Tata, may seem to be on safer ground, but is yet to reach scale. Trent has formats like Westside, Star Bazaar, Sisley and Fashion Yatra which are stable, say analysts. Mistry will have to set the group’s retail agenda along with Noel. Besides, a host of smaller group firms in oil exploration (Tata Petrodyne) and housing (Tata Housing Development Company and Tata Realty) have hidden value that need to be unearthed. The Tatas have other retail brands as well — Infiniti (which includes Croma) and Tanishq.
 
Analysts wonder whether another round of consolidation is the need of the hour. For instance, the subsidiaries of TGB — Tata Coffee and Mount Everest Mineral Water — are separate listed firms. Tata Chemicals has owned a majority stake in Rallis since 2009. Cellphone companies Tata Teleservices (Maharashtra) and Tata Teleservices are still two separate entities. There are multiple companies in steel and related businesses. At one point, there were overlaps in the areas of business of Tata Realty and Infrastructure and Tata Housing. 
 
The consolidation could help ring-fence businesses from economic instabilities by leveraging the balance sheet and improving the debt-raising capacity. At the peak of the downturn, the smaller entities have struggled to survive. 
Under Tata’s reign, the group had consolidated into seven verticals — information systems and communications, automotive and engineering, metals, services, energy, consumer products and chemicals. Mistry may need to drive the next wave of integration despite the challenges of geographies, cultures and lifestyles.
 
The Old Man, And The New Man
By choosing Mistry, an outsider, Tatas have exhibited the wisdom that goes above and beyond many business families, says Dana Telford, consultant with Chicago-based Family Business Consulting Group. But the Mistry family has had longstanding ties with the Tatas. Mistry’s grandfather Shapoorji has been holding a stake in Tata Sons since 1938. He bought the stake from heirs and trustees of F.E. Dinshaw, a lender to the Tatas. Shapoorji was a silent member of the board, never exerting the clout that his shareholding gave him. The bond between the families grew stronger when son Pallonji’s daughter Aloo (Cyrus’s sister) married Ratan Tata’s half-brother Noel.
 
But how will the group react to the change? Mistry is stepping into Tata’s shoes without playing any major role in the group, says Kavil Ramachandran, Thomas Schmidheiny chair professor of family business at ISB, Hyderabad. “But unlike Tata, he is not going to face hostilities and turf wars. The political environment within seems to be fine, but he will have to prove his business acumen soon in a market that is going to be hostile for some more time,” he says. While Tata faced internal crises, Mistry is likely to face external crises. The big challenge is to make the most of the current global downturn and emerge stronger.
 
Mistry, however, takes charge with a handful of advantages too. There are no satraps. Some of the old guard — like Tata Motors’ Ravi Kant, Tata Steel’s B. Muthuraman and TCS’s S. Ramadorai — are passing on the baton anyway. Besides, Tata is still around to play peacemaker, if needed. Mistry is taking over the reins of a well-oiled machine with an established pool of senior management. But negotiating the challenging waters of the global economy will require far greater levels of agility, alacrity and deftness. Mistry will surely be tested very early depending on what comes out of Europe, US, and China, all of which are going through their own share of growth challenges.
 
nevin(dot)john(at)abp(dot)in
 
(This story was published in Businessworld Issue Dated 31-12-2012)
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