Ratan Tata has retired as executive chairman of the Tata group on reaching the age of 65. How good has he been for India’s largest industrial group?
I have sometimes criticised him over the years, but my overall verdict has to be very positive. Ratan Tata saved from decline and fall a shaky empire he inherited from JRD Tata.
For all the praises lavished on JRD, the fact is that he created an industrial group seriously unready to face a new era of economic reform, globalisation and knowledge-intensity.
Many other industrial empires crumbled under the new pressures: look at the Singhanias, Shrirams, Walchands, and minor Birlas. But Ratan Tata saw the new era as one of opportunities rather than threats.
Instead of joining the Bombay Club, he reshaped his group to cater to the 21st century. The rest is history.
The old JRD empire was mainly on commodities — steel, chemicals, tea. Telco stood out for engineering skills, but none of the other companies.
The group was mediocre in consumer goods: its textile mills, Tata Oil, and Nelco were always market stragglers despite limited competition during the neta-babu raj.
When JRD chose Ratan as his successor, there was much sneering all round. Ratan had been in charge of Nelco and failed to make it a success.
He was beaten hollow in TV sets by newcomers like Videocon, BPL and Onida. But he had already articulated a vision of a new-look Tata empire based on high technology, a concept whose significance few comprehended during the licence-permit raj. His vision got off to a bad start.
JRD allowed him to start high-tech ventures abroad such as Elxsi for making computers and Plantek for biotechnology. Both flopped, and the sneers increased. When Ratan Tata was given the top job at Telco after Sumant Moolgaokar’s departure, many expected disaster.
A major challenge arose soon at Telco in the form of a strike by labour leader Rajan Nair, who sometimes resorted to violence. Many people counselled Ratan to compromise: after all, violent trade union leaders like Datta Samant were commonplace.
But Ratan Tata refused to compromise, and eventually broke the long strike. This was his first major victory, and turned some of the jeers into cheers.
In the market for light commercial vehicles, Telco’s locally-engineered models thrashed DCM-Toyota, Nissan-Allwyn and Swaraj Mazda, all boasting Japanese know-how.
This vindicated his stress on technology. Next, he had to oust the old barons that had run major Tata group companies for so long that they looked like private baronies. Rusi Mody of Tata Steel refused to go, point blank.
But with JRD’s backing, Ratan was gradually able to force out the aged brigade and take total control. This was a turning point.
To meet the challenge of economic liberalisation, he did what would earlier have been unthinkable: he got out of several venerable Tata businesses.
He closed down all the textile mills, which were the foundation of the Tata group in the late 1880s. He sold Tata Oil. The future, he saw clearly, lay in technology.
His greatest achievement is the emergence of Tata Consultancy Services as India’s IT powerhouse. Unfazed by earlier failures at Elxsi and Plantek, Ratan never flagged in his hi-tech thrust.
This was greatly facilitated by economic reform. Today, TCS is the flagship of the Tata Group, not Tata Steel, as in JRD’s days. Nothing better sums up the transformation.
He always had a vision of Telco as a great car manufacturer. But his first attempts, the Tata Sierra and Tata Estate, were actually small trucks parading as cars.
Many analysts felt Telco should stick to trucks: attempting to become a car manufacturer in the new area of global competition could drive Telco deep into the red.
This is what actually happened. The Indica was initially a flop, and Telco suffered record losses. But then Ratan’s faith in Telco’s engineering skills were vindicated.
A new re-engineered Indica proved a hit, and is now being marketed abroad by Rover. Global success!
What about his errors? The biggest was his decision to impose a royalty on all Tata group companies for the use of the Tata brand name, to be paid to the holding company, Tata Sons. The money was used to increase the holding of Tata Sons in group companies, which was rather low. But while this suited Tata Sons, it was a plain loot of the shareholders of the group companies.
The Tata name was made famous by the group companies, not Tata Sons. If anything, Tata Sons should have paid the group companies. The Tata royalty was plain bad corporate governance.
His other big failure was to miss the IPO (initial public offer) boom in 1999-00. Share prices of technology companies were going through the roof in those days, and Wipro once traded at a P/E of over 500. Many companies were recording profit growth of 100% annually. But I spoke to TCS chief Ramdurai at the time, and he said emphatically that profit growth on a long-term basis could not exceed 30-35%.
In other words, TCS insiders realised that stocks were grossly overvalued, and so an unprecedented opportunity had come to go public at an astronomical price.
The share premium would have been more than enough to give Tata Sons all the money it needed to increase its stake in Tata group companies, and abolish the Tata royalty.
But Ratan missed the bus: there was no IPO. This cost the company thousands of crores in foregone share premium. TCS may go public in 2003, but at a much lower price than it could have got in 2000.
Yet these errors pale in comparison with Ratan’s conversion of the Tata group into a high-tech empire fit for the 21st century. The difference between the Tatas and Birlas today can be viewed, with only modest exaggeration, as the difference between the Indica and the Ambassador.