African ventures

The Tata Group's operations in Africa incorporate textbook ingredients for successful business overseas.

D. SAMPATHKUMAR recently in Johannesburg

WITH $20, the maximum that the then foreign exchange regulations would allow for transit expenses, Raman Dhawan set out for Zambia in 1977 to establish the Tata Group's presence in the African continent. Today he heads the Tatas' operations in Africa and presides over an empire that notched up a turnover of upwards of $200 million in 2005-06.

It is a moot point whether the Tatas had visions of such growth when they stepped into Zambia. If gazing 30 long years into the future would be ambitious even by the current standards of corporate crystal gazing where perspective plans and workshops on strategic visions are the order of the day, back in the late 1970s it would have been unprecedented.

In any case, the circumstances surrounding their entry at that point of time had the elements of an accident rather than a piece of conscious strategic design. Indeed, in informal discussions the Tata officials concede that their entry into Zambia back then was almost forced on them. Apparently the Tata dealer whom they had appointed to promote sale of commercial vehicles in that country had decided to pull down the shutters. This left them with a gaping hole in terms of after-sales service for customers in Zambia who had already bought Tata vehicles. Of course, they could have appointed another dealer. But that, they reckoned, could expose them to the risk of a similar situation developing with the new dealer at a later date. And, of course, the new dealer would have needed some time to get his act together and the process of learning could potentially have had adverse implications for customer satisfaction in the interim period. So Telco, as Tata Motors was then known, decided to set up shop on its own. Thus was the first step into Africa, one which is turning out to be more expansive than anything that David Livingstone attempted back in the 19th century.

It is no longer just Tata Motors. The initial commitment to selling and servicing Tata vehicles has been absorbed into a much larger entity, Tata Africa Holdings, an expanded group interest in business ventures in that continent. The Zambian operation controls not just a business in commercial vehicles but a clutch of other businesses as well, such as the export of cut rose flowers grown under greenhouse conditions and a successful hotel. The Zambian affiliate also oversees the operations of the Malawi and Senegalese branches of the group.

As with most things that evolve over time, the Tatas' foray into the African market had a somewhat modest beginning and even the subsequent engagement with that continent grew only in fits and starts. The Tatas formed their venture in Zambia in 1978, but it was to be another 11 years before they ventured into Zimbabwe, their next stop. Their South African venture, into which all their African holdings have since been consolidated, did not come into being until 1994.

Today, the group has already invested close to $100 million in various businesses across different parts of Africa. But more significantly, the Tatas are ready with some big ticket investments in telecommunication, ferrochrome (an input in stainless steel manufacture), hotels and so on. For the continent as a whole, the group is looking at investments in the region of $325 million over the next three years. If they succeed in their bid to acquire a controlling stake in the company Highveld Steel and Vanadium, the scale of investments in South Africa in particular would be pushed up to unprecedented heights. Indeed, if their investment plans fructify, the Tatas could be present across Africa, from Senegal in the west to Kenya in the east and engaged in the production of goods and services ranging from instant coffee to telecommunications.

It is fair to say that what began as a bits and pieces involvement for the Tatas' acquired a strong strategic purpose only in 1994. That was when South Africa emerged as a free nation from apartheid. For prospective entrepreneurs, South Africa at the present juncture holds, for a variety of reasons, the key to penetrating the African market. Not the least of these is the fact that it is the largest and most developed economy in the whole of Africa. It is at present the focal point of a small group of countries such as Lesotho, Swaziland, Namibia and Botswana that constitute a customs union in which customs and excise duties are shared on certain agreed principles. As regional economic and customs integration expands within Africa, South Africa's importance can only grow further. Any strategy for penetrating the African market would have to accord primacy to establishing one's presence in that nation. It is no surprise then that South Africa has become the fulcrum of the Tatas' engagement with the African continent.

Viewed from the perspective of global investment flows, the Tatas' projected investments in Africa are not large. But then, overseas investments by Indian corporates, despite some recent high-profile acquisitions by listed corporates, are not significant by any means. The Reserve Bank of India (RBI) data on foreign direct investments by Indian companies in recent times has pegged this number somewhere in the region of $2-2.5 billion. The year 2005-06 has actually seen a sharp dip, with the first nine months registering an outflow of only around $500 million. Also, Indian corporates are nowhere in the picture when it comes to big ticket acquisitions of the kind that China has done with regard to oil assets, or more recently as Dubai attempted to do in the case of port assets in the United States. In the short run at least, corporate India's overseas ambitions are likely to be modest at best. Certainly Indian companies hesitate to commit major sums of money in greenfield investments. In the event, the Tatas' plans for a $325-million investment in Africa over the next three years marks it out as something special. But the big question is, can they pull it off?

Tata officials believe that as a group they are well equipped in terms of the range of products and services that they can place successfully in the African market. More important, they understand the Third World requirements that are characteristic of much of Africa, and priced attractively too. Tata officials recall with pride a comment attributed to Gandhiji who is reported to have said, "The Tatas represent the spirit of adventure". Certainly there is a touch of the venturesome inasmuch as they are attempting to price out the African market from their more seasoned competitors from the West. It surely must take a lot of courage to foray into a passenger car market dominated by Japanese and French majors, with their `Indicas'.

But no matter, the timing might just be right. Africa has had a love-hate relationship with the West. Politically Africa has denounced the latter, but in matters economic the West has exerted a powerful hold on the ruling elites. The spirit of the Non-Aligned Movement, South-South cooperation and all the ideals that go with the brotherhood of the deprived, may suffuse the political dealings with the East. But economics was always seen as something altogether different. The notion that Western merchandise offered the best in value was deeply entwined with a belief that they alone held the key to a remunerative price for their raw material exports. Without better realisations, prosperity for the masses, as the theory went, was simply unthinkable. In such a milieu, an enterprise from a developing country such as India would lack a certain nurturing political environment.

But two things happened to alter the equation for the better. One, the world order of trade is being decisively rewritten with China overwhelming the West in the manufacturing sector and now India is threatening to do the same across many segments of the services sector. The earlier aura of invincibility that shrouded the West in the eyes of the general public in Africa is seen as nothing more than the proverbial invisible clothes worn by the emperor in Hans Christian Andersen's tale. The second thing that has contributed to changing public perception towards the developing East is the boom in commodity prices in recent years. This has been driven not by a resurgence in demand from the West but principally by China and to a limited extent, India. In short, on both counts, there is a growing realisation within Africa that teaming up with countries such as India is not only good politics but also smart economics.

Investing overseas on the strength of a fund of political goodwill for the home country is no doubt very important. Equally so is having the right portfolio of businesses with which to enter a particular market. But being recognised as a company that is integral to the community being serviced is perhaps just as vital. The Tata Group has identified two initiatives that reinforce its image as a responsible corporate citizen. It has sponsored young South Africans to train in jewellery design at Tata Titan Industries, the watch and jewellery making company from the Tata stable. Then, there will be an extension of the adult literacy programme that Tata Consultancy Services first pioneered in India to Africa and its local languages in collaboration with World Development Bank Trust which is involved in empowering women in South Africa. It has also come out with a scheme for recognising outstanding college students with the award of Tata scholarships.

The Tatas have come into Africa, and more particularly South Africa, with products that have established themselves reasonably well in the Indian market. They have also been careful to restrict themselves to minimal initial investments by working with local partners but with plans of scaling it up as the market evolves. It has sought to integrate itself with the local community as much as is possible for an overseas venture. In other words, it incorporates all the textbook ingredients of how overseas businesses should be seeded. How it manages from here on is certain to be watched with great interest. And not just by management pundits but by their competitors as well.