The Hindu Business Line : The Tatas' African safari

A calibrated entry into an overseas market offers the best bet for eventual success. The Tata foray in South Africa exemplifies the art of choosing the right business model for overseas markets

TATA MOTORS' mini truck

Choosing the right market to make an overseas foray is perhaps the easiest of the strategic challenges confronting a business. The choice of product/products and the appropriate business model with which to challenge the incumbents are much tougher.

In making an overseas foray companies could adopt one of two possible approaches: It could be a well-orchestrated mega investment plan that integrates the whole value creation process both up and down the stream.

For added effect, you could nudge or arm-twist the entire Tier I suppliers into signing in on the deal. The entire approach carries with it all the subtlety of a Butch Cassidy and the Sundance Kid announcing their plans for cleaning out the local bank of all its surplus cash by firing in the air from both revolvers.

But there is also a stealthier approach. You enter the new market in so small a way that you are hardly noticed. You strike roots. Become part of the local milieu and before anyone realises it you are as much a local operation as anything else. This does three things.

One, it helps keep the level of investments down in the initial phase of setting up a business. Two, it helps you to understand the market and spot opportunities. Lastly, foreign enterprises often trigger xenophobic fears in the host country. Dubai Ports failed attempts to gain control of US ports or the bid by Chinese Oil Company to go for the assets of Unocal are good examples of this phenomenon.

A calibrated entry into an overseas market offers the best bet for eventual success. For an enterprise hailing from a country such as India that doesn't pack a huge amount of strategic punch in global affairs, such an approach is all the more welcome. Interestingly enough, the Tata approach to doing business in Africa exemplifies this. There is an element of caution and adherence to the principle of incrementalism in scaling up operations. It demonstrates a clear understanding of where their competitive strengths lie and what competencies or resources out of their current pool of domestic operations that can be leveraged for profits.

Take the case of its commercial vehicle business in South Africa. While intra-city public transport in much of South Africa consists of vehicles that are nothing more than an over-sized Maruti Omni, there is a clear need for buses with seating capacity in the range of 14 to 35. That Tatas have a product that is cost-effective and conforms to basic operational requirements in these markets is not in doubt. But for all that Tatas did not respond to this situation by rolling out mega investment plans in vehicle manufacture. It is more a case of one cautious step at a time. To begin with, they went in with a somewhat modest plan of building bus bodies out of fully-assembled bus chassis exported out of India.

The initial experience has been satisfactory and there are now plans for upgrading this to a vehicle assembly plant for which they are in the process of identifying suitable land. In time, there might be investments leading up to the manufacture of various vehicle aggregates. Who knows, it might end up mirroring the classical example of investment by a multinational corporation bringing with it its own component suppliers.

The Tata telecommunications venture in South Africa underscores another facet of strategic planning. The business model chosen for its telecom foray has provision for multiple layers of de-risking the investments committed to the project. They are in effect saying that, "we think our plan A should work but even if that doesn't, plan B should do the trick and then, of course, there is always plan C."

Consider the evidence. They have been granted a second fixed line telephony licence. Now, the telecom business is not for the faint-hearted given the scale of investments that a typical project would require. It is well recognised that an incumbent player enjoys a huge advantage vis-à-vis later entrants. The strategy of taking away market share from an existing player doesn't work as easily as it might in the case of some fast moving consumer goods such as toilet soap or toothpaste unless there is a compelling value proposition.

The key underpinning to the Tata strategy aimed at attracting retail customers in large numbers lies in the promise of high-speed Internet connectivity at an affordable price. This in turn requires keeping the investments in building such an infrastructure as low as possible so that the tariff need not be pegged at a level that allows for servicing of a larger equity base. They have ensured this by co-opting other strategic local investors who have investments already on the ground for such a purpose. These investors own a significant chunk of long-distance fibre optic cable infrastructure so essential to the promise of high-speed Internet connectivity. For linking individual subscriber to the existing telecom backbone they have hit upon the faster and cost-effective solution of using wireless-in-local loop technology. This is something on which the Tatas have rich experience within India as they have rolled out such a network across many States. Of course, there are still regulatory issues to be sorted out. But they can hopefully be sorted out before the network goes on stream.

If this bet doesn't come good there is a fall-back position. They are also targeting the enterprise segment for both data and voice traffic leveraging the Teleglobe technology that Tatas control through VSNL. As a third option they are also contemplating using the infrastructure to aggregate the traffic originating from existing telecom service providers (both fixed and mobile) and become a wholesale vendor of bandwidth for international voice and data traffic.

Overases investments fall under one of two categories. You see the overseas market as one that could be serviced with surplus production capacity in the home country. So the investments in the host country consist mainly of setting up sales and service networks. In time setting up fresh capacity in the host country to exploit expanding opportunities could scale this up. But there is also a third possibility. The overseas investment could also act as a source of critical inputs needed for production in the home market because of cost efficiencies in the production process that the new market offers. Thus, Tatas' ferro chrome venture in South Africa tries to capitalise on the cheaper cost of producing power to manufacture a mineral input that is critical to steel making.

While all this helps to derisk investments in overseas projects in a commercial sense, political forces too can some times undermine the prospects. One can counter this by establishing oneself as a player committed to the local community by participating in socially purposeful activities. In Africa, the Tatas are engaged in promoting adult literacy, leveraging the software development initiatives undertaken in the India context. There are also programmes for training women in jewellery design and ceramic artefacts. It has also instituted scholarships for deserving students pursuing higher education. While initiatives such as these may or may not make a lasting impact on the social structure in the host country, they can help counteract to some extent, the effect of forces inimical to one's business interest.

Overseas investments are fraught with both political and business risks. Business risks can be countered by a carefully calibrated strategy of choosing the right product for entry coupled with an appropriate business model for that venture. Even political risks can be handled with sophisticated community initiatives. But ultimately they remain hostage to the foreign policy agenda of the home country of one's business. The best-laid plans of an Indian business for a foray into a country such as Iran might quite easily come unstuck in the wake of the foreign policy stance of the Government on the question of Iranian nuclear ambitions. But in time as Indian businesses make deep inroads into overseas economies it may even begin to dictate the conduct of India's foreign policy itself. But that will surely be the day.

More Stories on : Management | Overseas Investments | Tata Motors Ltd

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