2008 Oxford Business &Economics Conference Program ISBN : 978-0-9742114-7-3

The Employee Buy out: Case of Tata Tea

Dr Deepika M G, Faculty, Icfai Business School, Bangalore, India

ABSTRACT

The article discusses about the Employee Buy Out business model adopted by Tatas on their exit from plantation business in their southern plantation operations in Munnar district of Kerala in India. Tata Tea had sold off 17 tea estates in southern India to the company formed by its employees named Kanan Devan Hills Plantation Company Pvt. Ltd.(KDHPCL). In sharp contrast to the situation in the tea industry experiencing closures affecting thousands of employees, KDHPCL with 13,000 employees could not only recover within a year the loss of $ 24 million run up by Tata Tea, but could also register a post tax surplus of $ 50,000 as on March 31st 2006. However, when Tata Tea went onto implement a similar model in the North Indian Plantation Operations, it met with considerable resistance. The article discusses about the crisis that was facing the tea industry in India, the role played by Tatas in the formation of the KDHPCL and the challenges faced by the employees of South Indian Plantation Operations in accomplishing this unique business model. It also critically reviews the factors that are essential for the success of Employee Buy Out, by enumerating the factors that led to the success of EBO in southern operation of Tatas and its failure in their northern operations.

INTRODUCTION

In February 2007, Tata Tea, an INR 3500 crore beverages company, decided to divest a major portion of its shares in its North Indian Plantation Operation (NIPO) to a group of investors and its own employee co-operatives. To be called as Amalgamated Plantations Pvt. Ltd. (APPL), it would cover a vast portion of tea estates of 24,000 hectares in Assam and West Bengal. Retaining only 20% of its stake in the new company, the remaining was to be bought by Infrastructure Leasing and Financial Services (IL&FS), World Bank Funded – International Finance Corporation (IFC), Global Managed Services, a Mumbai based consultancy firm, Tata Investment Corporation and a few agribusiness companies. Employees were expected to own a stake in the range of 15-20% (Business Standard, 2007). Detaching itself from plantation business directly, the company would focus only on marketing of its produce and enhancing of its brand image in tea business. Two years ago in 2005, the company had carried out a similar exercise in its South India Plantations leading to the birth of Kanan Devan Hills Plantations Company Pvt. Ltd (KDHPCL), a milestone in the history of tea plantation in India.

India being one of the largest producers and exporters of tea in the world represents a unique model of plantation agriculture. A notable percentage of tea plantations are owned by big companies like HLL (Hindustan Lever Ltd, which is now HUL, Hindustan Unilever Ltd) and Tatas. HLL controls nearly 40% of packed tea market in India followed by Tatas with a market share of 21% (Goddard, 2005). Traditionally Indian tea has been rated as one of the best in the world and therefore was enjoying a good export market. But since last few years, the tea industry has been in a perilous position with excess of production, declining prices for its producers and severe competition from the rest of the world. The rising cost of production with falling prices is making these companies sell the plantations and exit from tea cropping activity. While HLL sold its tea plantations to some private companies, the Tatas in their South Indian Plantation Operations (SIPO) followed a unique model of selling the plantations to the employees of the company. The Tata Tea has sold off 17 tea estates in the South to the co-operatives formed by its employees named Kanan Devan Hills Plantation Company Pvt Ltd (KDHPCL). In sharp contrast to the situation that was brewing in the tea industry experiencing closures – affecting thousands of employees – the KDHPCL with 13,000 employees not only recovered within a year the loss of $ 24 million run up by Tata Tea, but could also register a post tax surplus of $ 50,000 as on March 31st 2006 (Devaraj, 2007).

With the above background, the article tries to meet the following objectives:

Ø  To understand the crisis facing the Indian tea industry in India and analyze the reasons for its lost leadership position in world markets.

Ø  To analyze the factors that led to the success of EBO model in the southern operations of Tata Tea in Munnar in India with the formation of the new company Kanan Devan Hills Plantations Company Ltd (KDHPCL).

Ø  To identify the causes behind a similar EBO model facing resistance while being implemented in the Northern operations.

Ø  To review and examine the factors needed for the success of EBO model through two contrasting experience experienced by the Tatas in implementing the EBO Model.

Ø  Finally in understanding in what way has the EBO Model ensured corporate social responsibility of the company, Tata Tea and social transformation as a whole?

Tea in India

Tea is one of the most popular beverages in the world. It is said that quantity of tea consumed in the world is next only to water. The most common of the tea plants has a scientific name Camellia Sinensis, an evergreen shrub, found in Southern China, North India, Myanmar and Cambodia (Hicks, 2001). Indian Assam tea is rated as one of the best teas in this species. The major tea producing countries are spread across in the continents of Asia, Africa and South America. The countries that produce tea are mostly developing economies with rich labour resources. China, India, Sri Lanka, Kenya, Turkey, Indonesia, Vietnam, Japan are some of the major producers of tea in the world (FAO, Statistical database, various years). Of these Sri Lanka, Kenya, China and India are the major exporters. Import demand is largely seen in Russian Federation, UK, USA, Pakistan, Japan, Saudi Arabia and Germany. World tea production has increased drastically since the mid-1990s. In 2006, the total production of tea in the world stood to around 3.6 million tons which had increased from 2.5 million tons in 1990 (FAO, Statistical database, various years).

India took a lot of pride for its tea cultivation mainly due to the fact that tea has been indigenous to India and tea industry has been a substantial contributor to the country’s GDP and its foreign exchange earning. It contributes to around 30% of global tea production. But since last few years India has lost the position of first rank in the production of tea to China and has followed Sri Lanka, Kenya and China obtaining the fourth position in terms of tea exports in the world (see Appendix I, II and III). The trends in the area, production and yield of tea in India reveal that there has been stagnation in tea production since the late nineties and exports have been falling which has been largely due to the crisis that has stuck the tea plantations in India (Appendix IV and V). Tea industry is highly labour intensive in nature which directly employs over one million workers and generates income for another 10 million people. 50% of the workforce is female. The total turnover of the tea industry is around INR 10,000 crore. Calcutta, Guwahati, Siliguri, Cochin, Coonoor, Coimbatore are some of the major auction centers for marketing of tea in India (Tea Board of India http://www.teauction.com/industry/indiantea.asp)

Crisis in Tea plantations in India

In contrast to what prevailed in the initial days of the tea plantation industry that enjoyed a wide export market and a unique status in Indian agriculture, the tea plantations were stuck with severe crisis from the early 1990s. At least 19 plantations in Kerala, 30 in West Bengal and 70 in Assam have downed their shutters. More than 60,000 workers lost their jobs and livelihoods of many more were threatened (Goddard, 2005). For the tea workers, who are largely migrant laborers, few alternatives were left as means of livelihood. The cause for such a crisis cannot be attributed to one single factor. Producer prices had dropped sharply (see Appendix VI). There was a decline in the global demand for tea, especially decline in demand for low quality tea in the world market. India’s exports in 2003 had fallen by 13% which was the lowest in the decade largely due to the weaker demand from the Russian Federation, UAE and the UK who are our major importers (FAO, Committee on Commodity Problems, 2005). As revealed by the management of Tata Tea, tea cultivation being highly labour intensive, the situation worsened for plantation owners with the increasing labour costs. Competition from other countries in terms of tea production has been on the rise. The world tea production had reached a record high of 3.2 million tons in 2004. The expansion of tea production was due mainly to the increases recorded in Turkey, China, Kenya, Malawi, Sri Lanka and Indonesia. (FAO, Committee on Commodity problems, 2005). As seen in Appendix III exports from China, Kenya and Srilanka has been growing drastically taking over the exports from India since the early nineties. The lower prices for Indian tea is attributed largely to the ageing tea bushes in estates and also due to the lower prices fetched by CTC tea. (CTC refers to cut, tear and curl, a method of manufacturing black tea in India, whereby the tea leaves are machine chopped into uniform and small pieces). Small plantation growers are more comfortable producing the CTC types, as domestic consumption is certain even if price realisation is lower. India is a CTC consumption country whereas the world prefers the orthodox variety. The higher age of tea plants in India vis-à-vis those in some of the tea producing countries has affected the quality and yield in the plantations. Analysis from the demand side reveals that there is a shift in the composition of demand for tea in developed countries. The increased use of tea bags and soluble instant tea effectively reduced the quantity of tea leaves needed per cup (TED Case studies, Indian Tea and Environment, 1997).

Since much of tea whole-selling is done through auctions, the fall in the auction prices has severely affected the producers (see Appendix VI). The estate owners seem to have exploited the situation by replacing permanent workers with casual laborers denying the legal entitlements even to do with housing and healthcare facilities to its workers (Goddard, 2005). In 2006, HLL transferred the entire tea plantation business in Assam and Tamil Nadu to wholly owned subsidiaries. HLL’s Doom Dooma division consists of seven tea estates spreading to around 31,000 hectares of plantations. Doom Dooma made an operating loss of INR 6.7 crores in 2002, INR 21.9 crores in 2003 and INR 7.6 crores in 2004 (domain-b.com, 2006). It is in order to focus on the brand building and to breakout from the crisis facing the industry, these companies decided to walk out of the plantations business.

But in sharp contrast to the falling producer prices in the tea plantations, the tea companies were reaping sufficient profits with the increasing retail prices (Appendix VI). From INR 86 per kg in 1999, the retail price for medium grade tea in India has increased to INR 119 per kg in 2002. Tata tea had recorded healthy profit margins in the last two years owing to improved realization on garden tea and strong performance of its branded tea operations. As companies’ management reveal, tea business in India has a good margin profile which offers enough scope for value addition and differentiation through packaging (Goddard, 2005). This finally led Tatas to exit the plantation business and concentrate only on retail sales.

The Tata Group

The Tata Group consists of 96 operating companies in the sectors of information systems and communication, engineering materials, services, energy, consumer products and chemicals. It is one of the oldest of the Indian companies established in the second half of the 19th century in pre-independent India. Jamshetji Tata, its founding father had the objective of nation building through aligning business opportunities. The importance of this company to India’s economic performance is reflected through its revenue of $ 21.9 billion (in the year 2005-2006) and a market capitalisation of $ 52.3 billion. The Tata Group companies employ nearly 2,50,000 people and have operations in more than 54 countries across six continents. Integrity, understanding, excellence, unity and responsibility are studded as core values of the company (Tata Group profile, www.tata.com)

History of Tata Tea

In the year 1964, the Tatas in collaboration with the UK based James Finlay and company, established Tata Finlay. Tata Tea in its real sense originated in the year 1983, when James Finlay sold their shares completely to Tatas. The Tata Tea Group of Companies consisting of Tata Tea and Tetley Group – which were merged in the year 2000 with Tatas – is the second largest branded tea operator, spread across 40 countries. The Tetley Group has been contributing around 2/3rds of the total turnover of Tata Tea Ltd. Their head quarter is located in the city of Kolkata in India (History of Tata Tea http://www.tatatea.com/history.htm).

Branded black tea and Plantation bulk tea are its two products in the domestic market. Tata Tea, Tetley, Kanan Devan, Chakra Gold and Gemini are their five brands dominating Indian market. Their distribution network caters to around 1.7 million retail outlets in the country and the brand is accorded ‘Super Brand’ recognition in India. Their instant tea, which is manufactured in its 100% export oriented unit in Munnar in Kerala, is largely targeted for its western export market – bestowed with a special flavor of liquor. Tata Tetley together offer special products such as round tea bags, string and tag tea bags and packet tea. The company has received ISO9002 recognition for quality assurance. The market for its instant tea is spread across East Europe, CIS, Middle East, Australia and South Africa (http://www.tata.com/tata_tetley/index.htm).