The Hindu Business Line : Tata group: A phase of `material' change

"I think all companies need to keep looking at their business definition and, possibly from time to time, to see if that definition needs to be redefined. If you take the example of Tata Steel, they could say that they are a steel company and find themselves in a shrinking market where steel is under threat of being replaced by some other material. The question is: what do we call ourselves? One view was that steel is a material, so can we be a materials company? We don't have to be in all materials, but can we be in composites, can we be in plastics, laminates, etc? The automotive business needs to think similarly, and so does the chemicals business. We have to keep looking at ourselves and asking: what is our business?"

That was Mr Ratan Tata's response to a question on his calling Tata Steel a "materials company' rather than a mere "steel company", posted on the group Web site www.tata.com. Tata Tea's $677-million acquisition of Energy Brands Inc., US, reflects exactly this philosophy of Mr Tata. Essentially a tea marketing company, Tata Tea has now broken new ground and ventured into wellness beverages through this acquisition. To transpose the logic in Mr Tata's quote above, Tata Tea may have just begun the process of redefining itself as a beverages (materials) company rather than a tea (steel) company. This is a significant shift, not just for Tata Tea but for the group, as more such moves could well be in the offing from the other outfits — indeed, as Mr Tata has said, in automobiles, chemicals and so on. And this probably represents the third phase of Mr Ratan Tata's stewardship of the group.

Phased evolution

His period of almost a decade and a half at the helm of the group has been characterised by two clear phases till now. The first was of exiting unviable, non-profitable businesses (such as Tomco) where the group could not count amongst the top three players.

The second involved taking the group international, not just in terms of increased exports but in actively and aggressively acquiring companies in related industries wherever they came up for sale, from South Korea to Spain and UK to the US.

The third phase has just begun: One of consolidation and redefining businesses to reflect the globalised environment. Critical in this is the strategy of continuously evaluating the businesses of the existing companies to keep them abreast of the times and make them evolve along with the market. Thus, if the tea market constrains the growth impulses of Tata Tea, the company will look beyond it to related areas such as wellness beverages.

Consolidation, the toughest phase

It is this philosophy that is reflected in the quote of Mr Ratan Tata at the beginning of this column. This new phase that the group seems to have embarked upon may yet prove to be the most challenging in its evolution over the last decade. A lot of this challenge is because the second phase of the evolution — acquiring businesses abroad — is yet to be consolidated.

Whether it is Daewoo Commercial Vehicle Company (Tata Motors), Nat Steel and Millenium Steel (Tata Steel) or Tyco Global Networks (VSNL), the four most prominent acquisitions of the group in recent times, the benefits are yet to be significantly felt by the group, either in terms of profits on the balance-sheet or in terms of business synergies. Of course, synergies are gradually being established — a heavy truck of Daewoo has been introduced in India and Tyco has also helped VSNL in the international long distance business — but the point is that the benefits are only just beginning to accrue.

To be fair, consolidation of acquisitions per se, not to talk of cross-border ones, is a challenging, time-consuming process. And major group companies such as Tata Motors, Tata Steel, VSNL, Tata Tea and Tata Chemicals are right in the middle of that process. The scale of this process of taking the group multinational can be imagined from the fact that about $3.5 billion has been spent by various Tata companies on international acquisitions in the last six years since the first buy in 2000 of Tetley, UK. And the process is still on and will continue for some time to come.

That is exactly why the latest phase of redefining businesses of individual companies is extremely challenging. Tata Tea, for instance, does not only have to grapple with the challenge of integrating and consolidating its various acquisitions, including EBI now, but also learn the tricks of the wellness beverages business in an all-new market.

Redefining businesses

Whether this phase is also successfully executed by the group like the first two will be known in time but the odds are quite favourable given its core financial and leadership strengths. There could be errors along the way in implementation as in acquiring a wrong company or entering a business that may prove to be unprofitable. But these are par for the course and should not be cause for concern as long as they are undone quickly.

The most interesting aspect of all this is that the Tata group has come roaring back into the reckoning as the foremost business group in the country. From a slumbering, gentle giant, it is now an aggressive group not afraid to take chances and grab opportunities. And to think that it has managed this transformation without cutting corners and keeping its reputation for fair business practices largely intact is creditable indeed. At the end of it all, that may turn out to be its biggest achievement.

More Stories on : Insight | Mergers & Acquisitions | In Focus | Tata Steel Ltd | Tata Tea Ltd

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