Interview with Ratan Tata, chairman of India's Tata group of companies

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TIME: What factors will be critical for the success of your new small car, the Indica?

Tata: The pricing will be the key. We have worked to the objective of having it around the Maruti-Suzuki 800. We shouldn't end up being substantially higher.

TIME: You will have a lot of competition. Hyundai and Daewoo already have small cars in the market. Fiat is expected to bring the Palio to India next year and Opel may bring the Corsa.

Tata: Yes, but these cars are going to be positioned around the Maruti Zen, not around the Maruti 800. I am more concerned about the Koreans, whose pricing is more aggressive.

TIME: Do you think the Koreans could trigger a price war?

Tata: They will try to be below us, to beat us but I doubt they will go below us because they will then upset a lot of buyers who have already booked their cars and paid up in full.

TIME: The small car is obviously a major gamble for you.

Tata: Let me put this in perspective., When I joined Telco in 1986, the then chairman Sumant Moolgaokar wanted to develop a passenger car. So we first went into a pick-up and then the Tata Estate model as in-house efforts on one platform. These were credible and creditable efforts, if a little crude. Then we initiated the Sierra, which was again a cut-and-paste job on the same platform. These were all bridge vehicles: rough and tough, not so well finished. We were making the transition to a manufacturer with a full range of vehicles, but we were making it inadequately. Our mindset was still the same as when we made vehicles for [truck] operators and not for car owners. But in this process we learnt a lot, often at the cost of the customer.

All these vehicles were on manual lines. Our first automated line for passenger vehicles was for the Safari. That was our first major investment in this area. But when we decided on what finally became the Indica, we needed volumes. This meant a still larger investment: not just for this car but so that we also created facilities for other cars.

For the Indica, we have tried to create a separate organization that will manufacture and market it: somewhat like what General Motors did for their Saturn project. We have set up a plant adjacent to our existing plant. But we have hedged the car gamble to the best extent that we can. In the worst possible case, even if the car initiative were to bomb, an investment of some $400 million will not gamble away the company. Our going in to the car business may be a gamble, yes, but not as much of a gamble as in getting into a new business or adopting a new technology.

TIME: And your emotional investment?

Tata: Only to the extent of being a chief executive and directing it. The plans to enter the car sector were there even before I joined Telco. TIME: Do you see the Indica as your first big statement as chairman of the Tata group?

Tata: Since I got involved in Telco we first developed the first modular truck, the 407, then the 709 and now the 2213. These trucks broke away from the old face of Telco trucks. I was also just as much involved with the Safari, but nobody talks about the Safari. My involvement has been there with all Telco's projects--somehow the car has got hyped up.

TIME: If the Indica project were to bomb how would that impact on the Tata group?

Tata: Let's first define "bombing." Let's say instead of producing 150,000-200,000 cars, as we hope, we end up producing only 50,000 or so. If the average realization per car is even as little as $600-$800 per car, we make money. For me, "bombing" would mean having to sell the car at a still lower price.

At the same time, what we are getting for our investment is a plant that will produce cars, not just this car. Most of the jigs and fixtures that are there are not specific to the small car. I see the project not so much as a gamble as an investment in building the infrastructure of Telco.

TIME: But the project is being seen by outside analysts as a gamble ... Tata: Is the Indica more of a gamble than, say, Mercedes gambling on a low-priced small car? For Mercedes, this decision to go in for a small car was even more of a gamble because it is a gamble with their image of being the maker of the world's best luxury cars. Telco has no other image except of being a maker of commercial vehicles.

TIME: O.K., say the car is a success. What comes next?

Tata: We will need to develop variants of the same vehicle: maybe an estate version, or a three-box version. We will also look at the export markets in some countries. Not necessarily the developed countries but African countries, Southeast Asian economies, Australia. Our cars are more suited to Australia than those made by Japanese or Korean companies. In South Africa, also, we have hopes: in fact the car is undergoing road testing there right now. TIME: What about Telco's truck-making operations? Tata: Telco is totally committed to commercial vehicles where it is bound to remain a major player. What may well happen in the future is we may split the company into two business units.

TIME: Most Indian car makers opted for joint ventures with international players. Why didn't Telco do the same?

Tata: We thought about it. Chrysler asked to see us after they broke up with Mahindra & Mahindra. They said we should get to know each other. We showed them our cars. They were then interested in tying up with somebody to manufacture the Neon. We looked at the option but didn't think it would do. We thought the Cirrus, in fact, would do but that there couldn't be much of a differential in the pricing. We talked, but after a while things somehow went to sleep. They wanted only a joint venture but we didn't want that. Anyway the relationship has continued. We've had technical exchanges, they have helped us in building testing facilities, in building disciplines.

TIME: Do you always prefer to go it alone?

Tata: Not always. We do have a joint venture with Mercedes. But we don't really have a choice in the case of those joint ventures which would tantamount to our giving up the company. Let's say that Toyota came with a proposal for a JV and wanted us to produce the cars they wanted. If that's all we do, it would virtually amount to giving up management control of company.

TIME: Then there's Concorde, your joint venture with Jardines. What do they bring to the table?

Tata: Firstly, Jardine Matheson is a strategic partner with Tata Industries (a Tata group company that promoted new ventures). Concorde is a joint venture with Jardine for setting up a car distributorship set up for Telco products. Jardine is the largest dealer of Mercedes in the world. They also sell cars for two or three Japanese makers. Concorde is a JV which they are running, not us. We have taken a stake. Their experience in this field is vast. They will bring in a new paradigm in car distributorship and customer support. We have all along been a truck manufacturer and so that's what our dealers have mostly sold. Indian car buyers have not really been exposed to customer care in a competitive environment. Honda has done a very good job, having given dealerships to new guys, mostly non-resident Indians. They have set distinctive and impressive standards. Concorde will set up model dealers. Our whole standards of customer care would upgrade if we have six or seven dealers with Jardine's standards.

TIME: How do you read the state of the Indian economy?

Tata: For the past 18 months or so, there has been a loss of sentiment, a dilution in the clarity of direction. Investments have been put on hold. This has come on the back of a period of aggressive expansion and diversification by industry. A gap has emerged between the economic fundamentals, which are far healthier than in our Asian neighbors, and the sentiment. It is this sentiment which has to change, which can only happen when we get back our sense of being on the move. This will not happen through sops. My greatest concern is that [the government is] still saying there is nothing wrong. That's dangerous because then there's nothing they feel they need to do.

TIME: What difference has the slowdown in the economy made to the projections of the Indica project?

Tata: The slowdown has not affected our strategy very much. It is just that the market will be smaller. The earlier optimistic projections were for an end-millennium demand of between 700,000-1 million cars per annum, with 60% in the small-car segment. The proportion remains the same but the likely demand in a year's time will be smaller than anticipated earlier. What is certain is that the low-priced segment will be the healthiest segment even though a lot of expected conversions from two-wheelers to cars may not take place.