Tata Engineering -- Tough ride ahead

Raghuvir Srinivasan

CANDOUR does not come easy to most people, leave alone CEOs.

It is not very often that CEOs accept, on record, that their company could have done better. And when a CEO does this more than once, then it is something to be taken note of.

In his Chairman's Statement annexed to the 2000-01 Annual Report of the company, Mr Ratan Tata, Chairman, Tata Engineering and Locomotive Company, has frankly accepted that his company ``did not perform as well as it should have in the marketplace'' and that ``it should have performed better... by protecting or possibly even growing its market share''.

Mr Tata did something similar in 1997-98, the last time his company under-performed the industry.

So, what is great about it, critics may ask. Having posted a massive Rs 500.34 crore loss in 2000-01, he is only acknowledging the ground situation, they may say. But the significant point is that even while stating the obvious, Mr Tata is not attempting to find any scapegoats for the bad performance.

He admits that his company did not perform to potential. And that bad industry conditions notwithstanding, Tata Engineering could have performed better. As they say, corrective action cannot come unless one accepts the existence of the problem. And that is precisely what Mr Tata has done. In effect, he seems to be telling his stakeholders that there is a problem and he has taken note of it. It is another matter whether he is able to turn things around for the company. That, only time can tell.

In all fairness to Mr Tata and the others at the company's helm, it is not going to be an easy job. The challenges ahead of Tata Engineering are tremendous. The massive loss posted by the company is not the disease, it is only the symptom of what ails the company.

The challenge on the passenger car front aside, Tata Engineering needs to address some basic issues in the bread-and-butter business of commercial vehicles. In fact, much of the blame for the huge loss in 2000-01 should go to the under-performance of the commercial vehicles division.

The passenger car business is not going to stabilise in the near term and till it does, it is the commercial vehicles business that has to offer much needed shelter to the company's earnings.

It was, of course, a tough year for the commercial vehicles industry itself. But Tata Engineering compounded its own problems through some strategic errors such as misreading market signals for its Cummins engine-fitted vehicles.

It persisted with the higher priced Cummins engine platform in the hope that truck operators would eventually switch to it. But the fall in freight rates and goods movements resulted in truck operators either postponing purchases or going to competitor Ashok Leyland. Forget about increasing market share, Tata Engineering could not protect its existing market share, which dipped to 63 per cent by March 2001 from 67 per cent in March 2000.

Even as it grapples with the problems in the commercial vehicles business, the passenger car unit faces stiffer challenges. On Friday, the company announced the result of the joint feasibility study that it initiated in January with PSA Peugeot Citroen on the prospects of the introduction of a mid-size sedan based on the Citroen-2 platform. The results of the study confirm something that was known all along -- that there are not enough volumes to be had in the segment where the platform was proposed.

In a sense, Tata Engineering is now back to square one. As a car manufacturer it cannot be a one-model company, especially given the competition in the market. It needs models across the major segments and even within them. The challenge will be in both acquiring technology and finding the resources for further investment. With the Peugeot arrangement proving unfeasible, the pressure is now on the company to come up with an alternative quickly. The only other choice would be to hive-off the car project as a separate venture which most analysts think is the right thing to do.

The Indica V2, launched early this year appears to be regaining ground lost by the original version. But given the state of the passenger car market and the competition there, it is going to be an uphill task for Tata Engineering to push volumes to the break-even level of 90,000 cars this year. Thus, 2001-02 is going to be yet another year where the company's fortunes will ride on the commercial vehicles business.

Tata Engineering must be fervently hoping for a turnaround in the commercial vehicles industry's prospects of which there is no firm indication at the moment. Yes, sales of heavy commercial vehicles in June have been the highest in the last three months. The monsoon has been exceptionally good as well, in terms of intensity and spread of precipitation.

But the critical support from infrastructure spending is not coming in yet. If prospects for the commercial vehicles industry do not improve by the second half of this fiscal, Tata Engineering may have a real problem on its hands.

The company is presently being driven by Mr Tata himself with active assistance from Mr R. Gopalakrishnan, Executive Director, Tata Sons. But the absence of a managing director at the helm is certainly a cause for concern especially given the challenges that the company now faces. Both Mr Tata and Mr Gopalakrishnan have other responsibilities and it is important that Tata Engineering is headed by a person totally devoted to it.

Whichever way one looks at it, this fiscal is going to be crucial in determining the long-term fortunes of Tata Engineering. Having read Mr Tata's candid letter to them, Tata Engineering shareholders must now be watching his moves to get the company back on the road. Mr Tata's is one chair in contemporary corporate India that not too many people may envy.