Engineering services and product development IT services provider Tata Technologies is in expansion mode. From investing in new offices in China and the UK, divesting non-core businesses to a few acquisitions, its CEO and MD, Warren Harris, is leading some major moves for the company to enter a new phase of growth. Sumantra B Barooah met up with him for an exclusive interview. Excerpts.
Being a subsidiary of Tata Motors, Tata Technologies has always earned a huge slice of the overall business from the parent. Where does the captive : non-captive business ratio stand now, and how is it progressing?
We have been fortunate in that the relationship with Tata Motors and perhaps, more importantly, recently the relationship with Jaguar and Land Rover has allowed us to incubate a lot of capability that we have been able to prove and mature within a very supportive environment.
If you look at the business mix today, in the last 12 months, in constant currency terms, we have grown the non-captive services business by over 42 percent. We have managed to improve our average deal size. Traditionally, before we made the push into non-captive, our non-captive deals were hundreds of thousands of dollars.
Now, typically the deals that we are winning outside of JLR and Tata Motors are over 3-5 million dollars and there is a couple of deals that we have won in the last 12 months that have been in excess of 25 million dollars. So these represent complete programmes that have been given to Tata Technologies that we are managing through a combination of onshore and offshore teams.
Has the non-captive business gone past the 50 percent mark for the first time?
The non-captive business is now more that 50 percent of our overall business. On services, we are getting close to 50-50 in terms of captive and non-captive. I expect in the first quarter of the next fiscal year (2017-18), because of the growth rate that we have got on non-captive, we are going to have a bigger non-captive business than we have a captive business.
That’s where we see our future, not that JLR or Tata Motors is not important. They continue to be extremely important to us and we are very proud of our association with both of those brands and both of those organisations. But in terms of growth, we believe that the value proposition that we have proven, the reference points that we have been able to take from JLR, specifically in the recent past, has given us a proposition that is unique in the Indian IT services industry. There's no other organisation that has been entrusted to take on a full vehicle.
I can understand, because of NDAs, you cannot disclose beyond a point but can you tell us how many full vehicle programmes is Tata Technologies working on currently?
Let me just give you a representative selection of the type of work that we are doing at the moment. There's a European OEM that has outsourced a new sports car to us. And that's a carbon fibre sports car, from the ground up. Platform and top hat, and we are doing all of the vehicle integration, doing all of the electrical systems. We are also doing interior and exterior, and we are putting together the plans for a launch initially in Europe and then there will be a transfer to China.
We have got a couple of programmes in China. They are EV programmes that again constitute body structure, the platform and interiors. And, increasingly, we are also working with those same companies on the approach that they take to versioning and configuration management of the software that define the user experience, so increasingly we are moving away from just a pure focus upon mechanical systems and are getting into software and embedded technologies. At the moment, we have probably got 7 or 8 active full vehicle programmes.
Talking about EVs and China, can you give us an idea how big the Chinese market is for Tata Technologies and how do you see it evolving?
In the last 12 months, we did business of over $25 million in China and we have got a 150-strong team there now. We are opening up an office in Shanghai. We have had most of our people on the customer side and in a very small Regus office until recently. We went from 3 million dollars to 25 million dollars last year. We expect a similar growth in the next 12 months. China is growing exponentially for us and that’s a very exciting space.
I would be disappointed if China is not the same size as our US and European organisations in 5 years’ time and so that would position a target of over a hundred million dollars in China. We are really bullish about the market in China and about the ambitions of the Chinese OEMs. They really do believe that they can leapfrog the world with electric vehicles so they are not going to play catch up anymore. If you look at the calibre of talent that the new OEMs are attracting, it is remarkable. When we looked at China about four years ago and you looked at the traditional OEMs, the calibre of people was not what the industry is attracting right now and so I'm absolutely convinced that the Chinese OEMs are going to do very well. Not all of them will do well but the majority will do very well.
I recall the eMO EV concept and the pick-up version thereafter. Did those projects help you to bag new projects?That’s our calling card. That’s a physical manifestation of what we are capable of, and is still important in the context of demonstrating our ability to be able to deliver a lightweight body structure because it's that that really defines the proposition. But eMO was 2012, so it's 5 years ago.
There is a lot of discussion internally as to whether or not we need to upgrade eMO, do we need to interject self-driving capabilities and take some of the innovation that we have been exposed to and the innovation that we have been responsible for in and around the use of different materials and the use of different manufacturing approaches to kind of an upgraded eMO. That’s something that we may consider in the next 12 months.
So, electric mobility is going to be a strong growth driver now for Tata Technologies?
We have a reputation in EVs now, which is growing. We see an inflection point in the market, including in India. I think it will take a little longer in India than it will in China or the United States, but I think it's certainly going to come. We anticipate in the next 3-5 years that the less than one percent market share EVs enjoy will, in some of the mature markets, get up to 3 or 5 percent.
How close do you expect to come to your US$ 1 billion target this year? What are the unexpected developments which didn't augur well in this journey?
This year we expect to go past the half-a-billion mark this year.We have taken some decisions to divest businesses that are not core to us and we've also been impacted by currency. So, when you translate the business into dollars, the depreciation of the pound and the depreciation of the rupee against the dollar has impacted us. But if you look at constant currency growth, the overall business, when you adjust for divestments and currency, has grown at about 14-15 and the non-captive services business has grown by 42 percent.
One of the things we haven’t done in the last 12-18 months is that we haven't bought any company. The plan is very much to replace what we are divesting with business and revenue that's aligned with our strategic goals. We will announce one acquisition in April and we expect to be able to complement that with one or two other transactions in the next 12 months.
In what spaces would those fall in?
We are targeting four areas. One is capability, predominantly engineering capability, and in engineering we are looking at embedded electronics. We are looking at powertrain as areas that will round out our coverage part of the plan.
We are also, on the IT side of things, looking at IoT, diagnostics and digital capabilities that will complement what we deliver to our manufacturing customer base. So, it's a capability vector that we are looking at, and there's also a customer vector. To go into the German market and to establish a scale and relations with a luxury car OEM, is quite challenging. Our plan would be to go and identify an organisation that has a good standing relationship with one of the German OEMs. Japan is also another market where we would like to have a local presence in.
Along with additional capability, new customers, we are looking at geographic expansion. In some territories which are relatively nascent for us, we are looking at reinforcing the infrastructure that we have with targeted acquisitions. Our approach as a company is predicated upon, at a level of maturity after we've initially grown. We want to get to a mix of employees where there are about 70 percent locals and only 30 percent coming from outside because we believe that customer intimacy is so important. Acquisitions that can help accelerate our way to that type of balance is important.
The fourth play is that we are in discussion with a number of our customers about how to manage their captive centres more effectively. A lot of our customers have made investments in low-cost countries like India and they find it very difficult to manage them from Europe or North America. So, those are the four inorganic growth factors that we are looking at.
In terms of acquisition, what's the average size you are looking at?
The sweet spot for the organisation would be somewhere in the region of about $30-40 million.
How much of an impact has Brexit had on Tata Technologies' business?
The Brexit impact, for us, was more of a currency translation issue. The volumes didn't change so the business did not get fundamentally impacted in terms of what we're doing for customers. When you convert pounds to dollars, you get a lot less of them now than you did 12 months ago.
Also, when we are our pricing in pounds and we’re delivering in rupees, then the margins get a little squeezed. We have been a little impacted by that but what we've learned to do, certainly here in India, is drive up the productivity levers to mitigate the margin impact. So, I think when I look at the real impact with Brexit, it's just in terms of how the business is described from a dollar perspective. It's almost a 17-18 percent hit in terms of our UK pound revenues when they are converted to dollars.
What are the investments you are looking at in during 2017-18 including your inorganic growth activities?
Typically for an organisation like us, the capex is about $20-25 million. In addition to that, we will expect another $20-25 million to work through acquisitions and through different investments that we are looking to make.
One of the things that we will celebrate on June 8 is that our European headquarters will open. At the moment, we are in the Coventry University campus, and have been there for a number of years. But we've now got a dedicated 650 persons' facility in Leamington Spa, a state-of-the-art facility. That's a real demonstration of our intent to the market. It's a $ 30 million building and one we've been planning on for the last two years. It's going to have, in addition to the back office and sales support that it would provide for our European organisation, the ability to do the teardown and benchmarking. We'll have the ability to analyse vehicles, put together prototype parts and demonstrate and showcase a lot of the project work we do for our customers.
From what you have shared now and what I have observed for some time, it looks like this is the next growth phase for Tata Technologies.
I couldn't agree more. We have been, in many respects, incubating ability and establishing proof points with many of our customers. What we see now is that we've got the opportunity to expose those points and take the references that they represent to the broader market. Our challenge now is getting the brand out there and build the relationships with many OEMs at the right level as we possibly can. And for those that we have managed to secure over the last 12 months, we've gone from a relatively small presence within these companies to working at scale, which is in many respect, remarkable. We've looked at the life cycle of a relationship in the past. Typically, you start with a small project, then take on a bigger work package and slowly but surely you build up the trust. With one customer in Europe we were doing less than $1 million for 18 months. We went from $1 million to a project award of over $35 million, and in a space of six months.
Does that also bring Tata Technologies closer to an IPO?
The shareholders will, I think, continue to take look at different options of monetising the investment in Tata Technologies and raising capital for us in the future. At this point in time, we don’t need the capital, we don't need the recognition that an IPO would bring.