by Rakesh Mohan
A company like Tata Motors, for instance, had a licence to manufacture just 50,000 commercial vehicles per year in the mid-1970s. The average cost of a truck was Rs 100,000 per vehicle, and the profit margin was a mere Rs 4000 on each vehicle. There was an underdeveloped vendor base and the company had to produce everything that went into a truck. In that era of scarcity, it was virtually impossible to import anything; yet, certain critical things had to be bought abroad—for instance, pens (and ink) to make blueprints. It cost a whopping Rs 3500 to import a single drawing pen, equivalent to the profit from a whole truck!
The odds were loaded heavily against the Tata group. It was a relatively small Indian business entity in a world dominated by giants with deep pockets; it lacked scale and operated mainly in just one market—India—when its international rivals had the advantage of operations across the globe. It was involved in a bewildering assortment of industries, and lacked focus, thanks to the restrictive laws. Most of its revenues and profits were derived from commodity businesses; its own few brands were weak compared with global brands.
Bound by an older, slower style of functioning, the Tata group had considerable work ahead to face the fast-paced competition of the future. It was concerned about quality, but given the lack of customer orientation, a mark of the protected Indian industry in general, it had to do a lot more to match market-savvy rivals. And quality had yet to pervade all aspects of operations and strategizing.
Ratan Tata started a series of dinner meetings with his acquaintances at McKinsey. Through these discussions, he came to the conclusion that the group should be restructured to become more competitive, to provide better returns to the shareholders, to be more nimble-footed or more proactive to the changing scene, than it had been in the past. These meetings led to the articulation of a set of papers for discussion with the Tata Sons board. The plan was to critically look at the many Tata companies through a group mechanism that did not exist until that point of time. It should be mentioned that the MRTP regulations also imposed burdens on the group concept.
It was thus that the GEO (Group Executive Office) was born, which I joined from my perch as vice chairman of HLL. The intention was that the GEO would consist of a group of executive directors of Tata Sons, who would have the responsibility of overseeing the performance of various operating companies. The GEO would also look critically at restructuring the group by way of mergers, acquisitions of our core businesses, as also divestments of companies that were in businesses which were not considered core or where the Tata market position was not predominant. Several of these ideas and concepts could be considered because of liberalization in the business environment.
Ratan Tata’s first hard decision was on the Tata Oil Mills Company (TOMCO), which had built a detergents-and-soaps business for the group since 1923. The Tata group was identifying the core sectors to concentrate on and grow. TOMCO had been losing money for some years and it appeared as though the business would not fit into the Tata view of its future. Soaps and detergents were, on the other hand, core to HLL. It was, therefore, an opportune moment for the two companies to ink a mutually beneficial agreement. The Tata decision to exit TOMCO and the HLL appetite to acquire it for growth went through the appropriate processes. TOMCO was acquired and merged into HLL.
The TOMCO sale was a dramatic development, unimaginable just a few years back in the India of old. Not surprisingly, it emerged as the most newsworthy and sizeable acquisition of the time. There were difficulties galore—the regulatory formalities, getting the proposals passed through the respective boards, resolving the legal aspects of the merger, etc.. It was a crucial turn in the HLL growth story, and just as crucial a step in the Tata divestment approach. Ratan Tata faced so much criticism from within the group that, as he confessed later, he became hesitant to undertake further divestments. TOMCO’s managers received the HLL integration team with considerable suspicion, though the two learnt to work collaboratively to consummate the deal. The HLL integration team was delighted when Ratan Tata expressed his appreciation of how the team handled the acquisition.
Talent and Capital
To appreciate the constraints under which companies had operated prior to liberalization, I also mention two additional points on management talent and access to capital. After all, people and capital are key factors of production.
The remuneration paid to directors of companies used to be controlled by the Companies Act. Even if a company was making reasonable profits, the managerial remuneration was restricted by Company Law. Throughout the Licence Permit Raj, there had been significant brain drain of talent from India because top professionals sought pastures in overseas markets for better remuneration. After liberalization, the pernicious ceiling on remuneration was significantly relaxed. Profit-making companies could pay their top talent using principles of meritocracy, market rates and affordability. The scenario changed the talent market dramatically. Over a period of time, professional talent in India could earn and save pretty much what was possible in other countries. Thus, the managerial talent market also got liberalized by the events of 1991.
HLL stepped up the globalization of its managers by seconding about 1000 managers abroad over the next quarter of a century. At any point of time, 100 HLL managers were on overseas secondment in jobs within Unilever. In this way, a large pool of managers with a global mindset was trained. Many continued within Unilever and HLL but, in due course, several found leadership roles in other companies in the Indian industry. Tata also placed human resource development on its transformation agenda when its work with McKinsey was ready for implementation. Tata Consultancy (TCS), for example, had to design and implement HR systems for the tens of thousands of knowledge workers it was recruiting each year. In the new century, TCS was recruiting 5000–6000 technically qualified engineers per month, and training them to deal with a global mindset, of customers who were largely overseas!
With regard to equity capital, the office of the Controller of Capital Issues (CCI) got abolished. Companies could now test the market to price their fresh equity on a market-based approach. This required improved corporate governance. The appointment of a hugely talented civil servant, G.V. Ramkrishna, as chairman of SEBI (Securities and Exchange Board of India) brought in new regulations, which allowed new degrees of responsible freedom to well-intentioned companies. Indian entrepreneurs grew very fast into the new growth areas such as software, telecom and infrastructure. Meaningful and successful IPOs such as Infosys, Tata Consultancy, Biocon and Bharti Telecom would have been impossible under the earlier regime of the CCI. The league table of the top 100 companies witnessed big churn in the rankings through the entry and exit of players.
The Later Years of Liberalization
HLL
Apart from pushing for organic growth and an early acquisition of TOMCO, HLL refocused its thrust on several vectors. Since this essay is about liberalization, only those initiatives are highlighted that could not be undertaken earlier due to restrictions. First was a major product-quality drive by benchmarking locally produced products with imports, pointing to the urgent need for upgradation. HLL internally proselytized techniques such as TPM, and considered imports of machines and packaging materials, as required. Second was the special emphasis on product innovation and the setting up of a second international R & D centre at Bangalore. Third was extended, multifarious business collaborations with the parent Unilever. Earlier, Unilever could not be remitted brand, technical or service fees, but such expenses could now be paid under the new dispensation.
Being a global leader in ice creams, Unilever had for long been very keen on establishing an ice-cream business in India. Under the Licence Permit Raj, dairy ice cream was reserved for the small-scale manufacturer, being one out of some 750 items so reserved. On the grounds that vegetable fat-based product, which was called ‘frozen dessert’ by HLL, was different from dairy ice cream, Brooke Bond Lipton set up a brand-new investment at Nashik and launched Walls Frozen Desserts. Thi
s became very controversial at that time, though the controversy died a natural death with subsequent de-reservation of several reserved items, including ice cream.
After acquiring TOMCO, there were many more high-profile M&A activities. HLL went on to acquire Lakmé from Tata after appropriate governance processes were done on both sides. HLL also divested its phosphate chemicals business to Tata Chemicals. The acquisition of the public-sector company Modern Bakeries from the government followed. Later, HLL divested its hair-oil brand Nihar and purchased an Ayurvedic hair-oil brand called Indulekha. Cadbury’s ice-cream operations were acquired by Brooke Bond Lipton. The company entered into a hugely complex deal to acquire four independent Kwality ice-cream entities, all of which used a common brand name. This would help Unilever to establish an ice-cream business in India. Kissan tomato products business was acquired from the flamboyant Vijay Mallya, as also the Zahura tomato plant from PepsiCo India. It was an appropriate vehicle for the ambitious plans that Brooke Bond’s foods business had for the branded products market.
When I was managing director of Brooke Bond Lipton, I found a company whose employees had experienced as many as ten mergers within just the previous four years: first, Brooke Bond acquired Lipton, then Doom Dooma Assam and Tea Estates India, followed by Kissan, Milkfoods, Zahura and four differently owned Kwality entities. All this was possible in such a short time because of liberalization. As an aside, I might point out that the resultant company suffered from a considerable bout of indigestion. In a quandary about how to handle management morale, I casually asked an assistant hailing from Kerala what the future bore for the company. Being a trained astrologer, he promptly cast the company horoscope after ascertaining the date of birth from the company’s registration certificate, and pronounced, ‘This company has so far behaved as a man and has given the company’s name to several people he married. The company will get peace of mind by behaving like a woman and by taking the name of the husband she should marry.’ His astrological opinion did not at all influence the subsequent decision to merge Brooke Bond Lipton with Hindustan Lever! It became the biggest merger and was also highly controversial because it led to some legal cases.
Before liberalization, India was quite insulated from global media, trends and thoughts. The winds of liberalization brought in global ideas into business, and in the case of HLL, this began in the mid-1980s, a tad ahead of liberalization. HLL strived to be productive not only in economic terms but also in terms of benefitting the environment. HLL started the first experiment with Chhindwara in Madhya Pradesh, where it began to recycle significant quantities of treated effluent back into process or on land for irrigation. This saved cost for the company but ensured that HLL’s operations would not strain the rural environment. The chemical engineers in the factories explored the possibility of designing zero-effluent factories long before it became a part of sustainability programmes. Reforestation attempts at Khamgaon in Maharashtra were started for similar reasons.
In 1991, HLL earned a revenue of $700 million, which has grown to over $5 billion now. The company’s market capitalization has grown from $900 million to over $28 billion currently.
Tata
The Tata group seized the opportunities presented by the reforms and embarked on a remarkable journey that has, over the past quarter century, transformed it into a vibrant and global business house. Tata began executing a disciplined programme of transformation within a few years of liberalization. The group devised four ‘welding’ mechanisms:
The setting up of the GEO;
The setting up of a common, unified brand;
An explicit code of conduct, which had been implicit all the earlier years; and
A set of operating requirements for companies that used the brand.
With MRTP gone, Ratan Tata increased the group ownership in the major companies and re-established Tata Sons as the focal point of the group, an opposite action to what J.R.D. Tata had done earlier to comply with the MRTP legislation. Where increase of shareholding was not possible, as in the case of Associated Cement Company, Tata shareholding was sold to an international cement major. Some group companies such as Forbes Forbes Campbell and Co. Ltd and Tata Infomedia were divested from Tata. There were multiple companies in the same market space and, over time, attempts were made to rationalize them; for example, Tata Steel’s power plants were bought by Tata Power. The group company, Tata Infotech, and public-sector company, CMC, were both acquired by TCS at different points of time and later were merged with Tata Consultancy in separate public transactions.
The serial mention of these moves does not mean that the decisions were easily accepted or implemented through a ‘command and control’ mechanism. Each one required a de novo debate with directors of different boards; each one was perceived at the time to be a ‘non-Tata way’ of solving a problem; and there followed a sequence of cajoling, determination and doggedness while implementing.
Several Tata companies also had their heads buried in the sand. Many businesses looked inwards and measured themselves against their own past performance. The external impression was that Tata was less nimble than others, more resistant to change and extremely set in its ways. Unless Tata companies were benchmarked against the brightest and the best, the probability of change was going to be low. In the early years, Ratan Tata observed candidly, ‘We have yet to seek excellence in all that we do. We hang a picture slightly crooked and live with it for ten years; this should bother us the first time we see it, and keep on bothering us until it is set right.’
The Tata group adopted the Tata Business Excellence Model (TBEM), based on the quality-improvement framework developed for the Malcolm Baldrige National Quality Awards, first launched in the US as a means of responding to the quality challenge presented by Japan Inc. in the 1980s. In February 1995, the first batch of assessors met at the Tata Management Training Centre for in-depth training on the Baldrige model. They assessed twelve Tata companies, and the average score was an abysmal 215 out of a maximum score of 1000 (in 2016, the major Tata companies crossed 500, with several of them passing 600). The alarm bells rang loud and clear. The journey was to be long, painful and exhausting, but liberalization demanded that Tata undertake the journey, even for survival.
The first winner of the JRD Quality Values Award for performance within the TBEM framework, Tata Steel in 2000, went on to win the Deming Prize in 2008, and then the coveted Grand Deming Prize in 2012. Indeed, TBEM set the tone and created the foundation for a critical transformational exercise in the group. It has also been the glue in binding the group together and enhancing the Tata brand. The opening up of the economy, the removal of unnecessary restrictions relating to investments and the relaxation in foreign-exchange rules emboldened the Tata group to break out of its traditional orbit and head for other geographies. This created capabilities within Tata companies to compete successfully in the Indian market, and thereafter grow in international markets with the confidence of being able to hold their own against their global peers.
There were many group company events and anecdotes that related closely to liberalization, but four are particularly worth mentioning. The first is the dramatic restructuring undertaken by Tata Steel during the 1990s. Within a decade, Tata Steel had been transformed by downsizing the workforce to about half its starting size. The remarkable feature was that this tough decision was implemented with empathy and humaneness; the Tata action became symbolic of how to do disagreeable things in an agreeable way. The plants were modernized with new technologies and a management mindset was instilled, one which could dream of and execute big transformations.
The second event is the entry of Tata Motors into the passenger-car business. During the earlier stewardship of J.R.D. Tata and Sumant Moolgaokar during the 1970s, truck-maker TELCO, as it was then known, was denied an industrial licence to manufacture passenger cars in a new joint venture with Honda. When Ratan Tata took over as chairman of Tata Motors, he proposed something daring: to design and l
aunch an indigenous passenger car, ground up. Tata Indica was launched in 1999, and later, the Tata Nano. Irrespective of the market reception or performance of these products, even a critic or cynic would concede that both events were transformative not only for Tata, but for all of India Inc.
The third is the difficult decision by Tata Sons to press ahead with a Tata Consultancy Services (TCS) IPO. By the mid-1990s, TCS cash flows had become material through the Y2K boom. TCS evolved the practice of retaining half its profit with the balance being used by Tata Sons. This was a huge benefit to Tata Sons as they were able to use the TCS export revenues to reduce the tax exposure on the dividend income. Further, an aggressive TCS, ranked beyond thirty among global IT players in 2000, set itself the hairy goal of breaking into the top ten globally, not just in terms of revenue but also profitability and other transparently stated metrics. The company had worked with Professor Pankaj Ghemawat but, in a sense, stumbled onto this audacious goal through its internal brainstorming. The company set about its task through a huge organizational transformation to help its people think globally about customers, work processes and quality. On 25 August 2004, as the success of the TCS IPO became clear, easily India’s largest and most complex IPO, there was jubilation within Tata and a new aspiration for Indian business houses in general.
All of the above three events are positive stories for liberalization. The fourth event concerned airlines and was not a happy ending. As the parent of Air India before the iconic company was nationalized, Tata always harboured a deep desire to re-enter the airline business. When airline entry rules were liberalized in the 1990s, Tata spent considerable effort to execute a business plan through a JV with Singapore Airlines. After a great deal of advocacy and diligence, Tata’s efforts were frustrated and the company unhappily withdrew its application. It was a painful reminder that crony capitalism was still alive and kicking in a rapidly liberalizing India!
