Is Tata Motors on the verge of turnaround?

Tata Motors along with other group companies of Tata Sons has seen reshuffling in the management post-Mr. Chandrasekaran outset as group Chairman.  The management under the new leadership has focused exclusively on building talents in the organization. The new team has settled the Docomo row and has also helped divest Tata Teleservices to Bharti. Further, they have moved on steel with their joint venture with ThyssenKrupp. With this, Mr. Chandrasekaran has removed a lot of cross-holding and rolled out a strategic plan to simplify the group.

Coming on Tata motors, the new leadership has taken steps to turn around the domestic business. Further, it must encourage itself towards new technology and business models. They launched few competing models. And a handful of new models of the passenger vehicle is in pipeline which is expected to capture its market share. To compete in future, TML has showcased electric Tiago, electric RaceMo and also have the plan to bid for 11 cities for the state-of-the-art 12-meter electric bus. To make Tata motors presence strong in SUV market, they are coming up with 45X and H5X models in India.

All these are helping grow sales of TML, but the question to any long-term investor is still unanswered. Is it a right time to enter Tata Motors share or still have to wait? The current blog is the 2nd part of the trio blogs series on Tata Motors. The first one was “Cyrus & crisis – are they synonymous for Tata Motors Ltd?.” The current blog covers historical facts of the company, the working style and reason for Mr. Cyrus failure. It will further discuss the new chairman’s style of working and the requirement for the turnaround of its business.

Decision-making process at Tata group

Tata Trust owns 66% of Tata Sons Ltd. These Trusts along with Tata Sons, in turn, holds the bulk of shares in all Tata groups companies, including TML. Thus, both Tata Trust and Tata Sons together have the controlling stake in all group companies. The board of Tata Sons traditionally had one-third of the members from Tata Trusts. In general, 11 board members are there out of which three are from Trusts. These three holds veto power on all strategic decisions by Tata Sons. Additionally, there are four independent directors that give the board a more independent appearance.

The chairman of Tata Sons needs to convince and get proposals approved by the board before implementation. Each group companies need consent from the Tata Sons board to carry out principal policies. So the Chairman always needs to work in sync with Tata Trusts. Board meetings generally held twice a quarter. And those plans that require investments from Tata Sons are generally considered apart from long-term plans. Also, the two-thirds majority is required to approve such plans. On the operational front, all Tata CEOs run their respective companies independently with limited guidance from Tata Sons.

Do your own research on Tata Motors Ltd share price before investing. 

The role of Tata Trust

Tata Trusts is run by retired Tata executives and the members of Tata family. It is the keeper of the group’s long history of ethics and philanthropy. And it’s the duty of the Trusts to ensures understanding of the value of accountability by each employee towards the organization. Trust also ensure that the values of Tata Group are intact. The most important values relate to making income flows for disbursal into the philanthropic areas. This is why Trust always involve in the final judgment of any of the company’s affair. More often they exercise their holding to order change in specific companies or to demand something specific. To keep the group on the growth path, the leaders have to ensure it is done ethically. They have also to adhere to the Tata way of transparency and good governance.

Tata trusts follow the footsteps of group founder Jamsetji Nusserwanji Tata. The generations of Tata family members have granted their wealth to Tata Trusts. Since the chairmanship of JRD Tata (1938), the Trusts initiated to include capable executives in the operational decision-making process. The Trusts influence, however, has remained strong in its grip, is the largest shareholder.

Ratan Tata way of running the Trusts

Ratan Tata as the chairman of the Tata Trusts has a very close and informal working relationship with the new chairman. And he had also shown deep confidence in his leadership. This informal and close working environment was somewhat missing in case of Mistry. And with him, Ratan Tata had only a formal working relationship. This might have resulted in communication gap within the organization, resulting in his removal.

This is evident from the fact that after Ratan Tata retirement as Chairman of Tata group in 2012, most of the group companies failed to perform well and had seen a series of stumbles thereafter. This is the phase of Mistry as chairman of the group and after his removal in 2016, the company seems to take the fresh breath. The Tata Group went through major management shake-up in February 2017, to shape up the future of the group as a whole after which the new chairman implemented a series of actions to revamp the losses of the group at the fastest pace.

In his five decades of committed service, Ratan Tata had led the group on an expansion drive. The group managed to acquire marquee brands such as Tetley Tea, Corus steel, Jaguar and Land Rover. This help Tata group to establish its global footprint.  Ratan developed and launched the $2,000 Nano project which was not a success.

How is Tata Trusts expected to function in future?

Historically, Tata Group has shown confidence in big changes. Tata companies have constantly reinvented themselves to be relevant over more than 150 years of its existence and are expected to continue to do so. The management always looks at change, both in terms of moving people to companies where they may be better-suited, but also looking at the overall structure of companies in the group. And the tight ownership of Tata Trusts over Tata Sons and other group companies will ensure this to happen in future as well.

Further, in order to tighten the ownership of Tata Trusts, Tata Sons is planned to become a private limited company. This seems to be necessary because the most prominent member of the family, Ratan Tata, is likely to be in the final stretch of his long career. This will not only prevent the Mistry family from selling its stake to any rival or outsider.  But also, the later generations of the Tata family will only be considered for the top post in the group if they demonstrate their abilities and not for merely carrying the Tata name.

In the coming future under the strict guidance of Tata Trusts, Tata companies may venture into potential new fields such as aerospace and defense, value-added information technology services like data analytics, and medical research. For achieving this the Trust had already given a shape by the name Tata iQ.

What went wrong with Cyrus Mistry chairmanship of Tata Sons

From 2010 itself, Tata Group was in search of a person who can take responsibilities of the group reins post-Chairman Ratan Tata’s retirement. And after almost two years of uncompromising hunting, finally, Ratan Tata himself found his successor for the giant and mazy conglomerate. He himself, approached Cyrus Mistry as he advances towards his retirement in 2012. At that time Tata was under pressure from the board to consider an insider to lead as chairman of the Tata Group. Some eligible one who was part of the family and had experience of the group companies.

Till then Mistry had served on Tata Sons board for six years. So when Ratan nominated Cyrus, not only board members but Tata Trust also approved. However, this decision to lead the family conglomerate by Cyrus was taken as the surprise to total disappointment by the Mumbai business community in 2011, itself.

However, even after four years of his successful handling the affairs of the Tata groups, Cyrus failed to bring any substantial change in the working environment, resulting in deteriorating performance. Even, Cyrus abolished two committees created by Mr. Ratan Tata and replaced them with a “Group Executive Council”, the GEC, just within one year of his working as Chairman. The two groups were the Group Corporate Centre (GCC) and the Group Executive Office (GEO).

The GEC seems to be the major source of disconnect among another leadership team within the group companies. Tata CEOs used to run their respective companies independently with only limited guidance from Tata Sons. And the interference of GEC with the independent working of group companies might not have worked well resulting in the sharp decline in the overall performances. JLR was the exception as it business grew year after year even under Mistry regime.

Why did Mr. Ratan Tata intervene in 2016 to remove Mr. Mistry?

I am not sure but the deteriorating performance of nearly all group companies including TML would have been the sole reason of Ratan Tata re-intervention in the matter in 2016, resulting in the removal of Mistry from the post of chairman of Tata Sons and subsequently from other posts and boards as well.

Just before his removal, Mistry had proposed to the board of Tata Sons an INR 381.6-billion investment plan to turn around certain businesses. The bulk of his proposed investment was for the telecom businesses. The plan also had provisions for Tata Sons to set aside INR 20.3 billion rupees to increase its stake in Tata Motors. The board disapproved all of Mistry’s proposals on the ground that it’s not a plan but merely an outline.

By the end of Ratan Tata’s tenure in 2012, the group had annual revenues of $100 billion compared with $6 billion in the financial year 1996.

How far Natarajan Chandrasekaran decisions are good for Tata group

Before becoming chairman of Tata Sons, he turned Tata Consultancy Services into a crown jewel of the group. He is the third person without the Tata name and also the first from outside the Tata family. Though he does not have Tata DNA but is an insider, a man who worked with the group over 30 years. He may replicate the success of TCS in most of the group companies. It is also anticipated that he will also continue applying the value system that has made him, in the eyes of the Tata family, deserving of the post.

Ratan Tata strongly supports Natarajan Chandrasekaran and with this, he was able to solve some pending issues with the group within 8 months of his assuming as chairman of Tata Sons. Chandrasekaran is with the group for a long time and has also worked closely with Mr. Ratan Tata. This makes their relationship less formal and the communication flow is also better.

Chandrasekaran’s actions so far 

• One was sorting out a payment dispute between Tata Group and Japan’s NTT Docomo, which had moved to withdraw from a foundering telecom joint venture. In March, the Indian conglomerate agreed to rescind its objection to an international arbitration court’s decision to award Docomo $1.17 billion in compensation.
• The group sold the troubled consumer telecom operations to Bharti Airtel. Under Mistry, the telecom business generated losses of about $2 billion. This business was debt-laden of around INR 310 billion and was incurring monthly cash losses also. Ratan urged Mistry to take the decision but there was none.
• The company agreed to merge its Tata Steel Europe business with Germany’s ThyssenKrupp. This merger is possible without much loss of the job.
• He also helped stop Tata Motors’ market share decline. However, the major task now to restructure Tata Motors.
• He is yet to resolve the Nano issue, Tata’s pet project. It continues to be a drain on Tata Motors’ profits.

What Tata motors management needs to focus on

The management of Tata Motors needs prompt address on the following four areas—

• Cost, quality, and productivity,
• Improving customer experience,
• Frequent new product introduction, and (at least two new models every year);
• Sprucing up the brand image.

New innovative products are the demand of the time. The intense competition from new brands is capturing the Indian market from once favored Tata Motors. So the company must begin new product cycle to departure from the past in terms of quality and design. Also, they must deepen its focus on quality and design in order to compete in both domestic front and export market. Especially in passenger vehicle segment, the company must ensure that the new upcoming models and its variant must appeal and interest young generation so as to re-establish their brand image and find Tata cars engaging.

Furthermore, to make each existing customers loyal towards Tata brand, the company must also focus adequately on the service front. Management must ensure quick complaint redressed. TOp management must approach each consumer complaint on time. Poor service leads to dissatisfaction among consumers. And it leads to a wrong brand image. This is harmful in long run for any company. The relevant department must be able to diagnose any problems quickly and act in time for its reversal. There should never be any lack of spare parts for any of the existing variant in the market.

Dealers are the main link between customers and the company. So the relationship with every dealer is very important. They should give priority to any of their issues and solve them optimally. A happy dealer in return will result in happy customer and hence good brand image.

What is the management planning for Tata Motors turnaround?

The sharp fall in market share and gaps in product portfolios in the last couple of years had prompted the team under newly appointed chairman N. Chandrasekaran to evaluate what went wrong. This emphasized them for the need of a turnaround plan in May 2017 board meeting. They realized that the prerequisite for the turnaround is proper alignment from the top to the bottom. And thus, in order to succeed, the board of Tata Motors domestic segment, under the new leadership, initiated closely monitoring and implementing each plan thereafter so as to turnaround the domestic operation. Further, they also started reviewing the progress on monthly basis.

Chandrasekaran may also open to discussion restructuring plan of Tata Motors with Ratan as every proposal is subject to discussion and consensus. Of course with major controlling shareholders.

The management of TML has identified the following pillars of the domestic business turnaround –

• Increasing market share through new product introductions,
• Managing costs, and
• Improving quality.

And to achieve them, the key initiatives laid down include cost reductions, organizational streamlining, elimination of product delays, and improved supply chains. They also plan to monetize non-core assets to fund growth and to exit from non-core businesses. On cost cutting, they expect to save at least Rs.1500 crore in FY 2017-18. The overall objective is to regain lost ground and return to profitability.

Measures exercised for Tata Motors turnaround by the new management

• Tata Motors CEO and MD Butschek had let go some senior executives in order to create a lean and accountable organization. He also seems to have a good working relationship with the chairman and the board. He had projected to achieve 15% market share in the Indian market. For this, they have budgeted Rs.2500 crore in its passenger vehicles unit, and more than Rs.1500 crore in commercial vehicles business annually over coming years. Butschek closely monitors day-to-day performance and keep everything on track through a war-room in his office.
• The commercial vehicle business is Tata Motors is the cash cow. It fetches more than seven out of every ten rupees of its India revenues. The management had decided to introduce 10 commercial vehicles for domestic market till next year. They also project that this will add 5% to the existing market share.
• There is an organizational structural change in TML. This will help all departments work in sync with each other so that to help connect customers with stakeholders better. For this, they have introduced a new corporate banner, Connecting Aspirations.
• To unlock values at subsidiaries Chandrasekaran, may work out to streamline the group’s complicated shareholding structure. This may also help reduce the massive debt load. Some group companies sold stakes in one another to the main holding company. This will help simplify cross-shareholding arrangements and releases fund to reduce the debt load.

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