When insurance giant AIG ran into problems during the subprime mortgage crisis, how did that affect the company’s two ventures with India’s Tata Group? The impact was surprisingly small, according to Farrokh Kavarana, a director of Tata Sons, who oversees Tata AIG Life Insurance and Tata AIG General Insurance. Tata AIG’s ventures are well capitalized and they more than meet regulators’ solvency norms, he told India Knowledge@Wharton in an interview during the recent Wharton India Economic Forum in Philadelphia. Kavarana received the 2009 Wharton Indian Alumni Award during the Forum.
An edited transcript of the interview follows:
India Knowledge@Wharton: A lot has been written about the world financial crisis and the recession, the greatest crisis since the great depression. How has it affected the Indian economy and the people of India?
Farrokh Kavarana: I do not think it has affected the Indian economy and the 1.2 billion people of India. What has happened is that suddenly, demand has fallen partly because of domestic reasons and partly because exports are down. The reduction in foreign demand has had a multiplier effect on the Indian economy. Just like the rest of the world, India, too, seems to have fallen off the cliff. In the past six to eight months, the drop has been incredibly steep. I have never seen anything like this in my very long career. It is worrying because we do not know where we are all going. Not only the Western developed world, but also India and other developing countries have never had a situation of this magnitude before.
One factor in India’s favor is that the country is self-sufficient in so many ways that it is really a self-contained economy. Just about 20% to 23% of the Indian GDP is accounted for by foreign trade, so more than 75% of the country’s business-oriented GDP — agriculture and so on — is insulated and is not really affected. Our banks are pretty solvent; they have not had the non-performing assets that Western banks have had. We have had our own problems of non-performing assets, but these have been minor. Some problems have come up in areas such as property, car loans, personal finance and things of that nature but nothing of the magnitude where you have banks that need to be nationalized or saved or rescued. India has been well insulated, and we hope that it can continue to be so.
The government of India has followed a sensible policy in not panicking. They have also loosened the taps on money supply to a considerable extent, so industry has enough finance available. Many of us complain about it because it is nice to complain and to egg on the government to open the taps further, which is going to be necessary. Just like the United States, you have to take a long-term view on this. Money supply is being expanded through a whole series of measures. That may create inflation in the long run; that is probably a given, but we see no signs of that yet.
The problem now is to get the world economy and our domestic economy growing, but in a sensible, balanced way. We don’t need any of the excesses we have seen in the past decade or so, both overseas and even in India. For example, we had considerable excess in the property market and even in the stock market. Valuations had reached ridiculous levels, and a reaction was bound to happen.
India Knowledge@Wharton: What about India’s insurance market? Has it been affected by the crisis?
Kavarana: The insurance market has been affected in terms of people going a bit slow on [putting their] savings into other types of savings. Insurance is also a type of savings. If you take plain life coverage, or term insurance, that does not involve savings, it is just pure insurance. But there are programs that are attached to perhaps investments schemes, debt schemes, equity schemes and mixed schemes. People are certainly slowing down on that.
India Knowledge@Wharton: I know that the Tata Group has been involved with AIG. Have AIG’s problems with the subprime crisis in the U.S. had any effect on your joint venture? In fact, it would be helpful to understand the Tata AIG venture and then to understand whether there has been an effect.
Kavarana: I will not obviously speak about AIG per se and the problems that it faces in the United States. It would be wrong for me to comment on that — but certainly I could speak about our joint venture in India. We have two joint ventures, one for life insurance and one for property and casualty insurance. Both companies have an equity holding from AIG of 26% and from the Tatas of 74%.
We have a majority holding, and the companies are properly capitalized; in addition, they are properly regulated by the insurance regulator. We meet solvency norms far beyond what the regulatory authorities require. The normal regulation says that you must have a 150% solvency ratio; in the life company, our solvency ratio is probably near 250%, and in the general company, 200%. We are well capitalized. There is nothing to worry [about].
In fact, we have been very, very happy at the response that we have had from our existing policyholders because as far as they are concerned, they see the Tata name; the AIG name may be known significantly in the Western world or in other countries, [but] it is relatively unknown [in India]. AIG has made a good start at building their brand in India. Unfortunately, these events have happened over the last six to nine months which may leave them a bit bruised and damaged, but it has been a great international name, so we have had no problems with our AIG partnership as such.
They have brought a lot of domain knowledge to the business; we brought in local knowledge [and] in-depth marketing skills — and I believe [these] make for a successful combination. In fact, maybe a lot of people do not know, but before the insurance industry was nationalized, the Tatas had an insurance company in its fold called the New India Assurance Company which was founded by Sir Dorab Tata in the 1930s. And at the time of nationalization in the 1960s and another bout of nationalization in the 1970s, we were the largest private-sector insurance company. So we have some background, some legacy; we are just trying to reclaim our legacy.
India Knowledge@Wharton: And in the course of your career with the Tatas, you have also been involved with Tata Motors, which has been in the news quite a bit. I believe the Nano is about to be launched relatively soon. Given the auto crisis in the U.S., I wonder how you see the source of the crisis here and whether the Tata’s expertise in the auto industry might offer any lessons?
Kavarana: It would be a bit presumptuous to offer something to the United States [auto industry], but in terms of the Nano, yes, it is going to be launched [on March 23] in Bombay. And by “launching” we mean it is really going to be available for the general public to start bookings and hopefully [receive] deliveries. The original plan was, of course, that we would be starting off from a single mother plant in Singur and we would have had Nanos in the streets of India six months ago, but these delays have happened. Now, we are using other plants in Tata Motors to produce the Nano and the production scales will not be very large to start off. But as soon as the plant in Gujarat becomes available and is fully fitted with equipment and commercial runs have happened, then I think we will see some volume sales.
India Knowledge@Wharton: Do you think you might ever sell the Nano in the U.S.?
Kavarana: I would say not for the foreseeable future. It is difficult to say never, or one should never say never, but I think it is unlikely that the United States would be on our priority list. Certainly, Europe would be on our priority list — and again, when I say “priority list” I am talking of, say, three years from now. By the way, I am no longer associated with Tata Motors directly, but at the group level, whatever is public knowledge or semi-public knowledge I can perhaps share with you.
But Mr. Tata himself at the Geneva Motor show made a public statement, I believe, that he hoped the Nano would be available in Europe at a reasonable time in the future. When he was pressed, he said maybe three years, and somebody asked would it really be US$2000 car. He said no, I do not think so, because we will have to meet [more] stringent safety norms [there]. Three years, he thought, was a good enough period in which to get the Nano up to European standards. Again, he was pressed on the price, and he said well, if you want me to give you an approximate price, I would say it is probably US$5000.
India Knowledge@Wharton: Over the course of your career, what would you say is the biggest leadership challenge you ever faced, and how did you overcome it, and what did you learn from it?
Kavarana: Well, I think you face problems and crises all the time, so I would not pick any particular one, but I would just say that we went through a very difficult time at Tata Motors soon after we launched the Indica, which was India’s first really domestically designed and engineered and manufactured car. And it was not a problem created by the car; it was created by demand — demand just collapsed in the economy. It [also] affected the truck business, and Tata Motors at that time was really a truck company. It can now proudly say it is also a car company, but at that time it was very much a truck company. And we were undergoing the transformation into being an automobile company also by creating a separate vertical in our organization. But to change the mindset of [our] people to go from truck manufacturing and quality, to car [manufacturing and quality] was probably the key [challenge], and I bore the brunt of it — not because I was involved in manufacturing at all … but because my executive directorship [involved] overseas exports and business overseas, and [a] key problem was quality.
And I think we started recognize at that time that we had to improve the quality, so we decided in fact to cut down our exports until we got our quality right…. The Indica is, again, a bit like the Nano. It was going to be “cheap” only in terms of price but [offer] value for the money. Today, everybody keeps calling the Nano the cheapest car in the world, but I would rather call it the least expensive car in the world, and it is going to deliver real value for money. Contrary to everybody’s views that it is just a rickshaw or something like that with paneling — no, it is really a full-blooded car. It is no different from [how] we [used to joke] about the Volkswagen: I bought a Volkswagen [in the U.S] as a student for US$2000 at that time. So, we are reverting back to US$2000 car, but a modern car with a smaller engine. But the price of the dollar has fallen considerably, so it is even more efficient and a much greater value for the money today.
And so the quality issue was a major issue [for the Indica], and then of course the recession hit us very badly, so the car side was being supported for a while in its infancy by the truck side of the business in terms of profitability and revenue, and so it was a bad time those two years. But we came out of it very well. The economy revived. The automobile industry cycles, and the lesson to be learned really is that you do not overbuild capacity just on expectation that it is going to be a vertically rising market — that if you have had four good years, [then] the next four years are also going to be good, and the four years after that. [In actuality,] it is a five to six year cycle, and just plan for that. And in recessionary periods, you start maybe putting up capacity which will meet the demand when the next boom starts. But this is a mistake that we all make when we really starting expanding our capacity. So we had a big financial crunch.