When Ratan Tata decided to build the Nano, once touted as the world’s cheapest car, the former Tata Group chairman brought together four engineers. Only one of them was from Tata Motors, the group’s main automotive arm. The remaining three came from Tata Technologies, a little-known company from within the salt-to-steel conglomerate.
On June 15, the Tata Group announced its decision to sell a 43% stake in Tata Technologies, which was previously held by Tata Motors (30%) and Tata Capital (13%). An affiliate of private equity (PE) major Warburg Pincus will shell out $360 million (Rs2,300 crore) for the purchase, after which the Tata Group will be left with a minority interest of 43% in the Singapore-based company. The remaining ownership will be held by the management team and other shareholders.
The deal will help cut down some of the nearly Rs80,000 crore of consolidated debt saddling Tata Motors, which is keen on monetising non-core businesses. The move also provides Tata Technologies with an opportunity to leverage Warburg Pincus’s experience and financial heft to pivot its business further away from the Tata Group and expand its work at the cutting edge of the automotive sector.
Beginning as a business unit within Tata Motors, Tata Technologies was spun off as an independent company in 1995 but catered almost exclusively to the mothership. In 2005, a few years before Ratan Tata went on a major acquisition spree that would add Jaguar Land Rover to the group, the company acquired INCAT International, a British design and engineering services firm.
“We had just taken INCAT public in 2004 and Mr Tata suggested that we should put our customer base and high-end capabilities that we’d built offshore with the capacity and cost base that Tata Motors had established in India,” said Warren Harris, an INCAT veteran and now the CEO of Tata Technologies.
So, as the Tata Nano project took shape, Tata Technologies also got into the act, building on its record of working with Tata Motors. “We really honed our frugal engineering capabilities on that particular project,” Harris said. In 2009, for instance, 15 Tata Technologies engineers submitted patent applications for the Tata Nano.
Over the years, Tata Technologies has worked on projects that span the manufacturing sector. Its engineers have crafted fuselages for private jets, designed wings for military transport planes, developed mechanical excavators for the construction sector and helped build a sports utility vehicle for a European carmaker from scratch.
Yet, the company remains relatively unknown outside the automotive industry, especially in India. “I would agree that we’re one of the best kept secrets within the group and within the market,” Harris said. The company primarily provides outsourced engineering and IT services to manufacturers in the automotive, aerospace, and industrial machinery verticals. With its engineering teams based in the UK, US, Sweden, Romania, China, Thailand, and India, Tata Technologies has 8,500 people working across 23 locations. Last fiscal, it posted $423 million (Rs2,900 crore) in revenues, out of which over $350 million (Rs2,250 crore) came from the engineering vertical, where Tata Group companies contributed around half the business.
Harris, however, plans to bring down the company’s dependence on the Tata Group and is pushing for more projects with other original equipment manufacturers (OEMs), especially in the automotive space. “We see the automobile industry being one of the first discrete manufacturing verticals that is going to get fundamentally disrupted over the next five to 10 years,” Harris said.
The automotive industry traditionally involved vertical integration, where the supply chain is closely controlled by the automaker. But that model, according to Harris, is on the cusp of transformation with the emergence of new platforms, like the electric car and autonomous vehicles, which demand a different manufacturing approach. “…we see the supply chain evolving into more of an ecosystem. And we see that organisations like ourselves are going to be able to lay claim to discrete and important parts of that value chain,” he said.
Already, Tata Technologies has built expertise in crafting lightweight body structures, and technology required for deploying onboard sensors and internet connectivity in cars. It is now working with electric vehicle OEMs on the (US) west coast and in China on full vehicle development.
With Warburg Pincus coming onboard, Tata Technologies should be in a position to capitalise on its technology capabilities and expand further into the manufacturing sector. The PE company has a number of experienced manufacturing industry veterans, and has previously invested in the engineering sector. “This kind of network and this kind of connections are invaluable for business development,” Harris said.
“I think that’s (a PE firm’s entry) a blessing in disguise because suddenly there’ll be a big change in culture happening,” said Deepesh Rathore, co-founder of Emerging Markets Automotive Advisors, an automotive consultancy. In the autonomous vehicle segment, for instance, it is companies like Samsung, Google, and Apple that are leading the charge, he pointed out. “So, it makes sense for a small company to be driven by a private equity player than by a car manufacturer,” Rathore added, arguing that an entity with Warburg Pincus could help push Tata Technologies towards the right innovation ecosystem.
But Tata Technologies’ financial numbers haven’t quite kept track with its tech prowess. The plan to reach $1 billion in revenues by 2017, announced not long ago after Harris took over as CEO in 2014, hasn’t quite materialised.
“If (former British prime minister) David Cameron hadn’t decided to leave the European Union, I think it would’ve been an awful lot easier,” Harris said, underscoring the impact of an impending Brexit. “The exposure that we have to the UK and the impact that the depreciating pound has had on the top-line is going to make that (the target) somewhat of the challenge.”
Harris now aims to reach the $1-billion mark over the next three years, under the watchful eyes of Warburg Pincus.