Analysis: Tradition, sprawl confront next Tata Group leader

MUMBAI Fri May 27, 2011 5:52am BST

Ratan Tata, Chairman of the Tata Group, gestures during the annual general meeting of Tata Steel Ltd., in Mumbai August 13, 2010. REUTERS/Danish Siddiqui

Ratan Tata, Chairman of the Tata Group, gestures during the annual general meeting of Tata Steel Ltd., in Mumbai August 13, 2010.

Credit: Reuters/Danish Siddiqui

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MUMBAI (Reuters) - Ratan Tata, retiring soon as chairman of India's sprawling Tata conglomerate, is known for making sketches of the company's next car model and fussing over details of a hotel's design.

Whoever succeeds him in India's highest-profile job is likely to be less caught up in details and more focused on taming an unwieldy $67 billion business that earns pedestrian returns and is saddled with debt after an acquisition spree.

The search for a successor to head the enterprise, founded by 73-year-old Ratan Tata's great-grandfather in 1868, has not gone entirely as planned. Last August, Ratan Tata, who has been at the helm for 20 years, had predicted it would announce a successor by March this year.

No announcement is imminent, a source with direct knowledge of the matter told Reuters earlier this week.

The delay underscores the challenges facing the group, which for the first time in its 143-year history is looking outside the family, and the companies, to fill the top spot.

Tata's new boss must manage a group that was founded as a textile company, but now spans everything from cars and consultancy to telecoms and tea, and embodies India's global ambitions. Two-thirds of Tata's revenue is generated abroad.

Succession is an increasingly important risk factor for investors in corporate India, dominated by family dynasties.

"It has been tough to find someone who is a natural fit for the role," said the person with direct knowledge of the matter, declining to be identified because details about the search are not public. "We will probably change what we are looking for," the person said, referring to the search criteria.

Some of the top names in India's formidable executive diaspora have been in the mix at various stages in the process.

The search committee approached PepsiCo (PEP.N) Chief Executive Indra Nooyi, an Indian-born American, who declined to enter the race for personal reasons, two sources said.

Arun Sarin, former CEO of British telecoms giant Vodafone (VOD.L) and now a California-based senior adviser at private equity firm KKR, was also considered, the source with direct knowledge of the matter said.

One potential front-runner yet to win the full support of the five-member search panel is Ratan Tata's half-brother, 54-year-old Noel Tata, sources with direct knowledge of the matter told Reuters.

Noel Tata is the son-in-law of Pallonji Mistry, the single largest shareholder in group holding company Tata Sons. He was recently moved into the top spot at the group's international operations in a move seen aimed at grooming him for the top job.

But Ratan Tata hinted in an interview with The Times of London that Noel was not ready for the role.

"I think if he is to run this he should have greater exposure than he has had. Partly his not having it has been his own choice," he was quoted as saying.

A spokesman for Tata Sons said the panel had interviewed internal and external candidates. Seven candidates remain on the list, including some from within Tata, the source with direct knowledge of the matter said.

LARGE SCALE, SMALL PROFITS

Tata has grown, mainly through acquisitions, from a $5 billion group to a $68 billion giant during Ratan Tata's time in charge.

But scale and scope have not translated to big profits and pose a key challenge for Tata's successor. In the fiscal year ending in March 2010, the most recent year for which group data is available, Tata's 98 units generated revenue of $67.4 billion but turned profits of just $1.7 billion.

"Investors would definitely like to see a much bigger profit," said Taina Erajuuri, a Helsinki-based portfolio manager at FIM India, which owns shares in Tata Consultancy Services (TCS.NS), Tata Motors (TAMO.NS), Tata Steel (TISC.NS) and Titan Industries (TITN.NS), the group's jewelery and watch retailer.

Two acquisitions made near the top of the market in 2007 and 2008 -- Tata Steel's $13 billion deal for Anglo-Dutch steelmaker Corus and Tata Motors' $2.3 billion purchase of luxury car brands Jaguar and Land Rover -- put the group on the global map but have left the two companies with $14 billion of net debt on their books.

While Tata Motors turned around Jaguar Land Rover, it has had less success with the Nano car, Ratan Tata's brainchild marketed as a safer alternative for families commuting on two-wheelers, a common sight in India.

Only 110,000 Nanos, touted as the world's cheapest car, have been sold since sales began in April 2009, well below market expectations and the company's eventual target of 1 million per year. The Nano's image took a knock when some burst into flames.

Tata Motors shares are down 13.3 percent this year after rising nearly 65 percent in 2010.

The top 10 listed companies in the group generated $62.5 billion in revenue in fiscal 2010, earning $2.1 billion in profit. That means the other 88 firms generated only 7.5 percent of the group's total revenue and collectively posted a loss.

Even Indian Hotels, which includes the storied Pierre hotel in New York and Mumbai's Taj Mahal Palace, the target of terror attacks in 2008 and home to U.S. President Barack Obama and his wife when they visited the country last year, is loss-making.

"The priority of the successor would be to increase profit, streamline businesses, consolidate where there are synergies, list the companies that can be listed when the market is right, and sell what they can do without," Erajuuri said.

TOUGH CHOICES

Tata's diversity means it is battling on multiple fronts, which will require discipline and focus from its next leader and will force some tough decisions.

TCS, India's largest software services exporter, faces intense competition from the likes of local rival Infosys (INFY.NS) and foreign players such as IBM (IBM.N) and Accenture.

The group's telecoms business is stuck in a ferocious price war with more than a dozen rivals and has seen Ratan Tata personally dragged into an embarrassing corruption scandal.

"Indian telecoms is a fragmented space, and consolidation is inevitable," Erajuuri said. "Tata is a very small player, and the successor will have to do something -- either buy or sell."

Tata is also trying to expand its retail business to take advantage of burgeoning demand in Asia's third-largest economy.

"Retail probably needs a bit more attention," said Saurabh Mukherjea, head of equities at Ambit Capital in Mumbai. "That's one leg of our economic story they haven't been able to squeeze as much juice out of as they would have probably liked to, given the strength of the Tata brand."

The group has also said it wants to build up its brand in the United States.

RATAN TATA

The Tata group was founded as a textile business in 1868 by Ratan's great-grandfather Jamsetji Tata, a member of the close-knit Parsi community -- Persian Zoroastrians who fled to India around the 10th century. His older son expanded into steel, insurance and the production of soaps and cooking oil.

Jamsetji's nephew took over for a brief period, after which the baton went to JRD Tata, who led the group for 53 years. He founded mainstay companies Tata Motors and Tata Consultancy Services, the biggest contributor to the group's profit.

An aviation enthusiast, JRD Tata launched India's first commercial airline. In 1932, it took to the skies in Indian aviation's maiden flight with JRD Tata at the controls.

Ratan Tata inherited that love of aviation and is a licensed pilot with a degree in architecture from Cornell University.

Unmarried and living a relatively frugal life with his dogs, he has closely guarded the group's reputation for high ethical standards in a country rife with corruption.

But the group's telecom unit has been dragged into one of India's largest corruption scandals in which operators have been accused of getting licenses out of turn, possibly costing India $39 billion in revenue. Tata's telecom unit has not been charged but Ratan Tata was questioned by a parliamentary panel.

He has also been accused, by an executive arrested in the case, of a quid pro quo agreement with India's former telecom minister, which Tata has denied.

Interested in science and engineering, Tata drew the initial sketches of the Nano and Indica cars, and has spent an entire morning discussing the details of refurbishing a hotel.

The shy and private Tata is less engaged in management reviews and personnel issues, those who know him say. Polite and considerate, he is not a natural communicator.

"Ratan is very hands-on with things he enjoys in a way that's not feasible for someone to come into the company at this point and do," said Bala Balachandran, a professor at the Kellogg School of Management at Northwestern University and a friend of Ratan Tata for 24 years.

"But the bigger challenge for any successor, and even more so for someone from outside the family, will be living up to the legacy and the constant comparisons bound to happen," he said.

TRADITION AND SUCCESSION

Unlike most of India's big business houses, the Tata group is not family owned and Ratan Tata is absent from the Forbes list of billionaires. Tata Sons holds the bulk of shares in key companies, and philanthropic trusts endowed by the Tata family own 66 percent of Tata Sons. Mistry owns about 18 percent.

However, all five chairmen have been from the family, a trend Ratan Tata is keen on breaking, sources have said.

"He would prefer an expat. But what's desirable is often different from what's feasible," said a person familiar with his thinking.

Hiring an outsider from the family would be a departure for a business community where owners still look first to their children to take over, with occasionally damaging consequences, as the long-feuding billionaire Ambani brothers showed.

"As we mature as an economy, you will see an increasing trend of family-run conglomerates bringing in external professionals to take over the reins," Ambit's Mukherjea said.

"Tata is probably the first of the titanic Indian conglomerates to reach that juncture, but there will be plenty of others who will follow," he said.

One reason for the delay in naming a successor is that members of the search panel are in disagreement over at least two candidates, a source said.

In a move that could help the successor, the search committee has recommended a restructuring of the Tata Sons board by bringing on independent directors and younger executives from the group's companies, sources said.

The Tata legacy remains key to the group's ethos.

Bombay House, where most of Tata's top executives are based, is a Mumbai landmark. Visitors to the 87-year-old colonial-style building are greeted with a documentary on the group's history, focusing in detail on the leaders of the corporate dynasty.

Ratan Tata's successor, especially if an outsider, may feel less beholden to that legacy.

"If you look at companies like GE, each successor stamped his own mark," said Morgen Witzel, author of Tata: The Evolution of a Corporate Brand. "JRD and Ratan identify themselves by the company. Tata's style is servant leader."

"So they are probably not looking for a Jack Welch or a Jeff Immelt," Witzel said, referring to the current and former CEOs at General Electric (GE.N). "They are probably looking for someone who can maintain the culture and carry the ethos, not someone who would institute significant change."

(Additional reporting by Sumeet Chatterjee and Prashant Mehra; Editing by Tony Munroe and Bill Tarrant)

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