We live in interesting times. The rest of the world has watched with horror and amazement the events that have unfolded in New York, and to a lesser degree London, over the past few weeks. It has been shocking to see famous names laid low, and in particular the impact on ordinary people: employees, savers, borrowers.
The ripples, or possibly I should say the tsunami waves, have spread from the US across the world. Even in India people are questioning the safety of our banks and their exposure to the crisis. Hundreds of bankers and thousands of BPO employees are worried about their jobs. In our own case, the regulators have probed the possible impact of AIG’s problems on our two joint ventures with AIG, in life and general insurance.
Whatever the lessons for the banking industry and its regulation, for me the sub-prime crisis underscores two realities of the world we have created. First, that the pace of change (economic, technological, political) continues to accelerate. And second, that the world today is interconnected and interdependent in ways we have only begun to understand.
It is another aspect of these two phenomena (accelerated change and global interconnectedness) that I wanted to talk to you about briefly today. This is the rise of new multinational companies from what we used to call emerging markets. And the leading example of such a new multinational company is the Group I work for, India’s Tata Group.
The common perception of the Tata Group is that it is India’s largest, best respected, diversified industrial Group. This is true. The Group is based in Bombay. By Indian standards, we are large: last year the Group had aggregate revenues of $63 billion. Ask most Indians what they think of Tatas and words like ‘trust’ and ‘ethics’ would be mentioned most frequently. We are indeed diverse, with interests spanning software, steel, motor vehicles, hotels, power generation, tea, telecom and chemicals, among others. However, I should add that three businesses (Tata Steel, Tata Motors and Tata Consultancy Services) account for almost 80 per cent of our total revenue, and 90 per cent of our profit.
The common perception is that Tatas has a strong tradition and a long history. This is also true. We were founded by Jamsetji Tata in 1868, originally as a textile business. Our founder used the wealth he created in textiles to invest in three projects he thought of critical importance to the development of India: a steel company, the first East of Suez; clean power for Bombay, through hydroelectricity; and a world class university of fundamental science, which came up in Bangalore as the Indian Institute of Science. This tradition of pioneering and contribution to economic development has continued through the past century: India’s first airline in 1932; India’s first software company in 1968; India’s first indigenously designed car in 1998; Asia’s fastest supercomputer in 2007; the world’s most affordable car in 2008.
More important to us than what businesses we are in is how we do business, and for what purpose. I already mentioned that Tatas is known in India for its strong culture of ethics. What is less well known is that the Group is ultimately owned by charitable trusts. The two sons of our founder, Sir Dorab Tata and Sir Ratan Tata, transferred their shares in the holding company, Tata Sons, to trusts, and these trusts are the largest philanthropic organisations in India. The combined community support of the trusts along with the CSR activities of the Group companies amounted to $170m last year.
So the common perception of Tatas is right. Big, diverse, Indian, honest. But it is not the whole story. We are now more than the largest business group in India. We have become the best example of an emerging multinational from a BRIC country.
The internationalisation of Tatas
Ratan Tata stood before the senior leadership of the Tata Group in March 2003 at our Annual Group Management Meeting and challenged everyone that it was now time for our businesses to engage with a global agenda. He had been Chairman for 12 years and had transformed the Group from the loose confederacy of businesses used to operating in the complicated yet protected license raj that he had inherited. He had become Chairman just as Manmohan Singh’s liberalisation policies were initiated after a foreign exchange crisis. Over his first decade at the helm, he had earnt the right to survive in this newly competitive world by restructuring the portfolio of businesses, entering new growth businesses and exiting others, by defining a clear strategic role for the Group Centre, by reducing cost and transforming quality across the Group.
In 2003, 24 per cent of our Group sales, or $2.5 billion, was outside India, and most of that was exports. Five years on, more than 60 per cent of our Group sales is outside India, and that is $38 billion (an increase of 1,400 per cent). Not only has the size of the international business grown, but so has the nature of that business changed, as more senior management, research and development and manufacturing are located offshore, rather than a simple export model. And most importantly, we are beginning to make our presence felt within the global competitive set in a number of industries. Consider the following:
- Five years ago, Tata Steel had a capacity of 3.5mtpa in one plant in India, and 100 per cent of its board, management and employees were Indian. Today Tata Steel has a capacity of 26.5mtpa (making it No 6 globally); primary production in India, the UK, the Netherlands and Singapore; 55 per cent of the staff are non-Indian and 35 per cent of the Board are non-Indian.
- Five years ago, TCS was a $1 billion business employing 20,000 people. Today TCS is a $5.7 billion business, employing 111,000 people in Global Delivery Centres in India, the US, Mexico, Brazil, Uruguay, the UK, Hungary and China. TCS is now No 10 in its industry by sales.
- Five years ago, Tata Chemicals was a $300m business, 98 per cent of which was domestic India. Today Tata Chemicals is a $1.7 billion business, 30 per cent of which is overseas. It is the world’s number two soda ash player with production in the US, UK, the Netherlands, Kenya and India
- Five years ago, VSNL had recently been acquired from the Government of India and was the monopoly long distance telecom carrier to and from India, with all the characteristics of a monopoly. Today, renamed Tata Communications, the company is the No 1 carrier of voice internationally with 74,000 kms of undersea cable. The business is the result of the integration of VSNL with Teleglobe of Canada and Tyco Global Network of the US.
- Tata Motors is three months into the integration of Jaguar LandRover. The development of new products like the Nano and the World Truck, together with overseas assembly in key markets, and the acquisition of JLR and Daewoo Commercial Vehicles has transformed Tata Motors into a major integrated automotive company.
- Today, 30 per cent of the Group’s 350,000 employees are offshore India.
- Tata Steel has major R&D capability in the UK as well as India, while Tata Motors has product technology and design facilities in the UK and Korea as well as India.
- Here in the US, Tatas now employ 17,255 people in software, three hotels (including the Pierre here in New York), beverages (Tetley Tea, Eight O’Clock Coffee, Good Earth tea), chemicals, steel, telecom and engineering services. Last year the Group generated revenues of $5.4 billion in the US.
In sum, over the past five years the Tata Group has been transformed a second time under Mr Tata’s leadership. The first transformation was a domestic one, earning the right to survive global competition. The second transformation has been international, becoming India’s first true multinational.
How has this second transformation been achieved? I would make four points:
- Strategy. First, Mr Tata and the Group Leadership may have challenged our operating companies to engage seriously with an international agenda, but we have not imposed a single strategy across the Group. That would be impossible given our diversity, and completely counter-cultural given our strong culture of decentralisation of management responsibility. The internationalisation strategies of our companies have been developed by our operating management teams, in ways that make sense given the competitive position in and competitive dynamics of the industry they are in. We from the Group Centre have been challenging our teams to re-assess their business models taking into account the new realities of an interconnected world. What opportunities and threats does this throw up? Where are the best places to design, source, manufacture or sell? How to achieve a breakthrough in scale or competitive competences?
- Group synergies. Second, where there is an advantage to being part of the Group, we have endeavoured to realise that. While operating companies are free to invest or sell where it makes sense, we have identified priority markets where there is, or should be, an aggregation of Group interest. These countries include key developed markets like the US and UK, neighbouring countries like Sri Lanka and Bangladesh, and big emerging markets like China, South Africa and South East Asia. We have set up Group offices in Priority 1 large, complex markets in which a number of our companies have an interest, including in the US (which is not always a straight forward market for a Group like us). We have tried to communicate to a key external audience who we are and what we stand for, in the hope that we will be seen as an investor to be welcomed in their country. We have achieved Group synergies in customer impact, cost reduction and knowledge sharing.
- M&A. Third, we have used M&A as part of our strategy, but partly only. TCS has grown almost entirely inorganically, while both Tata Steel and Tata Motors have made transformational deals. In total, we have done 37 cross border acquisitions valued at $18 billion since our first deal to buy Tetley in 2000. Most deals have been modest in size, with only Corus for $12.1 billion and JLR for $2.3 billion being of any real magnitude. Most importantly, we have chosen to integrate these acquisitions in a more cautious, slower, culturally sensitive manner than most business schools would teach or management consultants advise. We have found that getting the acquired teams on our side has yielded real dividends. In not one case have we changed the top leadership of the acquired entities. We have found that people have responded well, even blossomed, under the decentralised, long term, demanding yet supportive culture of Tatas.
- Operating culture. Which brings me, lastly, to culture. The Tata Group is not a single legal entity, we are a family of businesses held together by ultimate control, but more particularly by an approach to business, a philosophy. The words we use are by no means unique: ethical, long term, giving back to society. But these words are universally appealing, and most importantly, we mean them and try to live up to them. As we have internationalised we have spent considerable effort in explaining and nurturing this culture. And we have found it readily, and often enthusiastically, accepted among the people who have joined us overseas. It is good to hear that we have walked away from a particular project because a bribe was asked, or that an investment has been made in a technology despite the risk or the long term nature of its development. Many people, including me, find it motivational to think that a job well done will not just contribute to growth and profit for the company and dividend for the shareholder, but also help in poverty alleviation, or a scholar going to a world class university, or a cancer hospital getting constructed.
Work in progress
We can take pride in something started, but we are all too aware that we have taken just a few first steps on a journey of a thousand miles. And we are doing this at a time when the world economy is suddenly looking fragile, markets are volatile, political risks seem to be rising.
Our competitive position in most industries in which we operate remains behind the global industry leaders. I said we are number 10 in IT services, but IBM is 17 times larger than TCS. We are now number six in steel, but Arcelor Mittal is five times larger than Tata Steel.
Most importantly we are creating a multinational company from scratch, at considerable speed. Consequently we don’t have the depth of experience, the pools of talent, the processes and institutional learning of a GE, a Unilever or a Mitsubishi. In a way we are making it up as we go along, facing each challenge anew without a precedent, a policy or past experience. How do we attract, develop, retain and reward people with the right international capabilities? On what terms should we transfer staff between countries or companies? How should we assess and mitigate risk? When things are going well, how can we create a culture of thinking through downsides without losing the ambition to grow? What balance should we strike between self-confidence and humility?
I started by pointing to the increasing pace of change, and the deep integration of the world we now live in. These factors make life challenging, uncomfortable, yet exciting. They are driving profound changes in business models and opportunities. While we are at a competitive disadvantage in many ways to our more established multinational peers based in the US, Europe or Japan, not having legacy issues and costs can be a real advantage in coping with the rapid change of today.
We believe that tomorrow’s multinational will look, operate and feel differently from multinationals of today. The business model will be more disaggregated, with value addition in more locations. Teams of people working together will no longer need to be co-located, but will be welded together by a common culture and purpose, rapid communication and technology. Activities and employees will be spread across the world, yet bonded together to serve customers rapidly and cost effectively. And increasingly, the multinational will need to earn the license to operate in communities by the way they interact with society and contribute to economic and social development.
The Tata Group may be the best current example of an emerging multinational from an emerging economy. It is also possible that the Tata Group is one early example of the type of global corporate citizen we will see more of in the future. As such, it may be that emerging now, and emerging from the diversity, complexity and opportunity that is India, may prove a long term advantage.