The world’s biggest bet on India
Thu, September 15, 2022, 4:51 AM
If you want to glimpse the frontier of Indian capitalism, take a trip to Tamil Nadu in the south of the country. New factories with solar panels on their roofs lie on a vast 550-acre (220-hectare) site. Inside, it is reported, Tata is making components for the latest iPhones on behalf of Apple—and in the process finally connecting India to the world’s most sophisticated supply chain, which used to be anchored to China.
The project is not a one-off. It is part of a new and staggering $90bn investment surge by India’s biggest business that is repositioning itself towards its home market and away from its 30-year strategy of fanning out globally. Tata’s ambition to create electronics factories and semiconductor fabs in India could transform its economy. “I firmly believe that this is going to be India’s decade,” says Natarajan Chandrasekaran, who runs the holding company, Tata Sons, which oversees the group.
The change in strategy also reflects the dramatic psychological shift within the business world’s most ardent globalisers, as they adapt to new megatrends. These include the rebasing of strategic manufacturing away from China; the rise of a new energy system; and industrial policy, which in India is being championed by Prime Minister Narendra Modi.
Anyone who follows India, the world’s fastest-growing big economy, may be under the impression that it is run by Mukesh Ambani and Gautam Adani, two swaggering tycoons, whose conglomerates generate headlines and make them Asia’s richest men. Together the “two As” may spend over $100bn in the next five years. Yet Tata is in fact the country’s biggest business measured by market value ($269bn) and operating profits ($16bn last year), spanning everything from steel mills to software. And we estimate that its new plans are larger than any other individual firm’s, encompassing electric vehicles (evs), electronics, battery gigafactories, clean power and chips (see chart 1). If that doesn’t sound ambitious enough, it has also taken on the Everest of corporate turnarounds, buying Air India.
The firm’s scale, reputation and record make it one of the world’s most important companies. With 800m-900m customers across ten business lines, it employs almost 1m people, more than any listed firm anywhere bar Amazon and Walmart. It is also the ultimate survivor. Of the world’s firms worth over $200bn that have remained independent, it is the oldest, founded in 1868, 18 years before Johnson & Johnson was incorporated. When blue-chip multinationals head to India—not just Apple (reportedly), but everyone from Starbucks to Zara—they seek to team up with Tata, the one firm you can really trust. In a twist, Tata is run by technocrats who report to what may be the world’s least-known and richest charity, not tycoons eyeing the Forbes rich list.
To understand where Tata and India are heading in the 2020s and 2030s you have to go back in time. The company has stayed alive by adapting to technological and political change. It made steel for colonial railways, and after independence it coped with India’s socialist detour. When the economy opened up in the early 1990s it helped reinvent white-collar work by selling information-technology outsourcing (it) services. Ratan Tata, the boss between 1991 and 2012, spent the first decade dragging the group into the modern era and the second taking it global through $18bn of cross-border takeovers, including of Jaguar Land Rover, a British carmaker, and Corus, an Anglo-Dutch steelmaker.
Tata’s belief in the boundless opportunities of borderless commerce was shared by many others at the time. Annual investment by Indian firms abroad soared almost 40-fold between 2000 and the peak in 2008; for all emerging markets it rose by four times. China urged its bosses to “go out there”. Even Cemex, Mexico’s cement giant, became an unlikely deal machine.
In, out, shake it all about
Behind the boom lay insecurity as well as optimism. Tata worried India was too corrupt to offer a level playing field. More broadly it and fellow emerging-market firms believed that to tap advanced technologies you had to be in the West. Tellingly, at home in India the fashion then was for “Jugaad Innovation”: basic, frugal engineering that was supposedly a source of advantage. Tata launched the Nano, an ultra-basic car for India that cost $2,000.
This era of reflexive corporate globalism has come to an end. Geographical sprawl weakened the finances of most multinational acquirers. In Tata’s case, we reckon that about two-thirds of its sales were abroad by 2012. Meanwhile, 70% of its capital employed earned a return of less than 10%, our yardstick for underperformance. Net debt had risen to twice gross operating profit. The strain helped trigger a governance crisis as Mr Tata fell out with his successor, Cyrus Mistry, whose family own 18% of Tata’s holding company (Mr Mistry died in a car crash near Mumbai on September 4th). In early 2017 Tata replaced him with Mr Chandrasekaran, the meritocrat’s choice, who had run the thriving it business that had kept the group afloat.
The rise of Mr Chandrasekaran to the pinnacle of Asian business illustrates another sharp change: emerging markets’ technological self-confidence. In the past decade India has created perhaps the world’s most advanced payments systems and a venture-capital scene that has helped fund (at least before the recent worldwide tech slump) more than 100 private tech “unicorns” valued at $1bn or more. The it-services firms, including Tata’s, have more than doubled in size and are far more technically sophisticated. And though Tata might not like to admit it, Mr Ambani’s landmark $46bn ten-year investment in Jio, a domestic 5g telecoms business, has shown that you can profitably deploy vast sums of capital in cutting-edge tech in a developing economy.
More self-confidence in tech has coincided with the last shift, the changing relationship between the role of businesses and the state, championed by Mr Modi’s government. A move in supply chains away from China, new technologies and the energy transition all create opportunities. But who will exploit them?
The usual suspects are not up to snuff. India’s state-run firms are hopeless. Foreign multinationals have ushered in neither industrialisation nor technological breakthroughs. Capital markets have failed to create young firms with enough equity to take big risky bets. India’s last investment cycle, an infrastructure boom in 2003-11, was debt-fuelled and ended in tears. The government and some bosses now favour giant firms. Those include conglomerates as well as specialist companies like jsw Steel and hdfc, a bank which is concluding a $140bn mega-merger.
Some firms, such as Adani Group and Mr Ambani’s Reliance, embrace this role and the proximity to the state it brings. Others are making a more calculated bet that the demands of national development and responsible, profitable business really are compatible. Tata is in the second camp.
As boss, Mr Chandrasekaran is quick and ultra-rational, with a dash of humour, compared with the aristocratic and enigmatic Mr Tata. Emails are dispatched fast. Satraps running subsidiaries are told to deliver performance first and get capital later. Tata’s worst bits are being quietly killed off: Tata Sons has written off $10bn since 2017 as it has exited weak areas like telecoms, and recapitalised fragile divisions.
