The first board meeting of the new public sector company, Maruti Udyog Ltd, was held on 24 February 1981—the day the company was incorporated—in Room 174, Udyog Bhavan, New Delhi, which housed the Department of Heavy Industry under the industry ministry, the administrative ministry of Maruti. It was just a formality and the meeting only took note of the incorporation of the company.
A second board meeting took place on 15 April 1981, and took stock of the progress of the project. Two of the board members—humble joint secretaries at that time—would later go on to play significant roles in Indian economic management. One was Yashwant Sinha, who became India’s finance minister thrice, and the other was D.R. Mehta, who became chairman of the Securities and Exchange Board of India. The board meeting also passed a resolution creating posts of a part-time chairman and a vice-chairman-cum-managing director. Work had already begun on identifying suitable persons for these positions.
Nationalizing the assets of Sanjay’s Maruti Motors, and incorporating a new government company was easy. Achieving the objectives of nationalization would not be that simple. That this was weighing on Mrs Gandhi’s mind was clear from a conversation she had with V. Krishnamurthy, whom she selected to play a crucial role in the company. ‘The Congress party is under ridicule,’ Krishnamurthy remembers her as saying when they met to discuss his assignment. She was probably referring to the spate of allegations that Maruti had been nationalized to financially benefit the Gandhi family. The issue was also hotly debated in Parliament, where it often figured during question hour. She had to set all speculation at rest by making the project succeed. Mrs Gandhi, despite having an aggressive policy towards nationalizing important economic institutions, probably realized the limitations of the public sector for achieving excellence.
She understood that getting the right people to manage Maruti would be a key factor for success and decided to get the best of the private sector and the public sector. From the private sector, Mrs Gandhi drafted Sumant Moolgaokar, the legendary chairman of Telco (Tata Engineering and Locomotive Company Ltd, now known as Tata Motors), as the non-executive chairman. Moolgaokar was a very respected name, and recognized as the doyen of the automobile industry. His association gave credibility to a project that was, at that time, seen to have been born in sin. It brought a person on board who knew the industry, even though Moolgaokar’s experience was with commercial vehicles and not passenger cars. The government could hardly tap the two other passenger car companies—Premier Automobiles and Hindustan Motors—since they were rivals. Telco was only manufacturing commercial vehicles then and posed no threat. Significantly, the government had in the past started many companies to manufacture products about which it had no knowledge, but had never appointed the chairman and CEO of a private company to head it. This precedent was never followed again, though in a sense the arrangement was perhaps a precursor to the public-private-partnership system that, in the 2000s, was to become the most effective mode for implementing infrastructure projects.
From the public sector, she roped in Krishnamurthy, who had gained fame as the person responsible for turning around the unwieldy and slothful Bharat Heavy Electricals Ltd (BHEL) into an efficient, customer-focussed organization. A month or so after Maruti was nationalized, Krishnamurthy, who had been out of the government for several months, was summoned to meet Mrs Gandhi. She offered him the job of vice-chairman-cum-managing director of Maruti, in recognition of his outstanding managerial abilities, and ignoring the fact that she had approved the termination of his contract as secretary, heavy industries, a few months earlier. L.K. Jha, who was her principal secretary at that time and had, in the early 1960s, headed the Low Cost Car Committee, was with her. Krishnamurthy’s immediate reaction was to refuse, since he had faced problems with the minister of heavy industries, Charanjit Chanana. However, Mrs Gandhi was not to be denied and Krishnamurthy had to give in. The first board meeting with Moolgaokar and Krishnamurthy present was held on 29 April 1981 at the Tata guest house on the posh Prithviraj Road in central Delhi.
When Krishnamurthy agreed to become part of Maruti, the brief given to him was simple and clear: get a car on the road by December 1983. That was just about two and a half years away. There was little time to lose. Krishnamurthy realized that the project wouldn’t get off the ground with the usual government meandering and political interference that was part of public sector management. He hinted as much to Mrs Gandhi. She told him to be in touch with Rajiv Gandhi, who would sort out any problem. Arun Nehru, who had served as the CEO of a private sector company in Calcutta, and was related to Mrs Gandhi, became the pointsman for the project. Between them, they took ruthless, hard decisions without wasting any time. This was again an unusual arrangement made by Mrs Gandhi in order to ensure that Maruti was successful. Similar arrangements were never made to ensure the success of other, perhaps far more economically vital, public sector projects. The arrangement conveyed a message to all politicians to keep their hands off Maruti, and to the civil servants that unnecessary obstacles should not be raised. The progress of the project later showed the effectiveness of the arrangement.
Realizing that people would be the key to achieving the task given, Krishnamurthy set about building his team. The first to come on board was D.S. Gupta, who was appointed staff officer. He was an MBA from the prestigious Indian Institute of Management, Ahmedabad, and had worked with Krishnamurthy for several years in BHEL. I came on board next. I had just ended a two-year deputation from the Indian Administrative Service (IAS) to BHEL as its director, commercial. Krishnamurthy and I had interacted when I was joint secretary in the ministry of energy. I was selected to be director, marketing and sales, but was initially appointed officer on special duty till the Cabinet Committee for Appointments cleared the appointment to the post of a director. The first meeting of the top management of Maruti—who were all new to the automobile industry—took place in July 1981 in Hansalaya building—notable at the time for being one of the city’s tallest buildings—on Barakhamba Road, off Connaught Place, which was now the company’s head office.
Besides determining the deadline for start of production, the government had also decided that Maruti should produce 100,000 vehicles a year, of which 50,000 units should be bought back by the licensor, so that foreign exchange outflow could be minimized. The heavy industries ministry had started the process of finding foreign collaborators in November 1980, writing to several automobile manufacturers in Europe and Japan and inviting them to submit their offers. While some companies had indicated their interest even before the letter was written, the general response was poor. Chanana had visited various European firms, British Leyland in the United Kingdom and Peugeot in France in late 1980 and early 1981. French firm Renault, German firms Volkswagen and MAN AG (which manufactured commercial vehicles) and Ford submitted detailed proposals. The ministry zeroed in on Renault as a possible partner and selected the Renault 18 (R-18), a 1647 cc engine car, a little bigger than the Ambassador. As a consequence Renault set up an office in India and posted two officers here. The R-18, launched in 1978, came in sedan and pick-up truck versions; the car was to be sold in India and Renault agreed to buy back the pick-up truck for export.
The new Maruti management found that there was need to collect more data before it could go ahead with the ministry’s selection of the Renault product. Accordingly, a revised questionnaire was sent in July 1981 to those prospective collaborators, including Renault, who had responded positively earlier. Krishnamurthy was given broad hints by various people that the R-18 was the chosen car and it was pointless to look at any other car. One person involved in the negotiations with Renault told Gupta and me not to waste our time. ‘A decision is not going to be taken here; it has already been taken in Udyog Bhavan,’ he said. Krishnamurthy, however, had already been forewarned by Rajiv Gandhi that there would be many people who would say a decision has been taken but that Krishnamurthy should be very careful and use his discretion. In one of their meetings, Rajiv told Krishnamurthy about a hotelier waiting outside who wanted to be introduced to him. The hotelier, Rajiv said, would tell him that a decision on Renault had been taken. ‘Listen with one ear and throw it out from the other,’ Krishnamurthy recalls Rajiv telling him. Sure enough, the hotelier told Krishnamurthy, ‘I believe you are looking at various cars, but it has already been decided that the collaboration will be with Renault.’
On receipt of replies to the new questionnaire, the Maruti team studied the economics of the Renault project—at what price the completely knocked down (CKD) kits would be brought in, the cost of the final assembled product (which worked out to Rs. 1.15 lakh including import duty and sundry costs)—and the terms and conditions for the buyback of the pick-up trucks, among other things. The result showed that the project would not be viable. The export price of the pick-up truck was even lower than the FOB (freight on board) price of the CKD kit in France. This meant that the price of the pick-up trucks exported from India would be lower than the price at which the CKD kits were exported from France. Besides this difference, Maruti would have to bear the cost of freight from France to Gurgaon, all production costs for assembling the pick-up trucks and again the freight cost to the port of export. Renault justified the export price on the ground that the price had to be competitive in south Asian markets, where the vehicles would be sold and where Japanese pick-up trucks would be the benchmark. While this was commercially valid, the Maruti management did not see any reason why pick-up trucks should be exported at a heavy loss, which would endanger the entire project. In addition, the cost of the car was also much higher than that of the Ambassador and the Premier Padmini, and it was unlikely that Maruti could attain the desired volume of sales at this price. It was becoming clear that the Renault R-18 was not a good choice, and the buyback clause was likely to be a huge handicap.
I then proposed that Maruti commission a market survey to assess what the customers wanted, knowing which would enable the company to sell 50,000 or more cars a year. It was feared that in the context of the stagnant car market, it might not be possible to attain even such levels of sale. In addition, the findings of the survey could be used to convince the Planning Commission and the Public Investment Board about the viability of the project. It was also necessary to bear in mind that the Maruti project was supposed to make a small people’s car and the R-18 did not fit the bill. The heavy industries ministry, however, was not very keen on a market survey, as it was felt that given the size of Indian families, the R-18 was obviously the right choice. Why waste time and spend money on a market survey? Nevertheless, we decided to go ahead with the survey.
We were also battling resistance from within regarding what Maruti should manufacture. Moolgaokar was opposed to the idea of the company manufacturing passenger cars, especially small cars, which he declared to be unsafe and unsuitable for India. These, he often told us, had no future in India and the Prime Minister should be persuaded that Maruti should manufacture light commercial vehicles (LCVs). In fact, that was the thrust of his conversation with me when I paid him a courtesy call at the Tata guest house. However, to his credit, Moolgaokar respected his limits as non-executive chairman and always conveyed his views to Krishnamurthy; not once did he go over his head to the powers that be.
In August 1981 the heavy industries minister, Charanjit Chanana, was replaced by Narayan Dutt Tiwari. It was widely believed that Mrs Gandhi was probably not satisfied with his stewardship of the Maruti project. Mrs Gandhi had full trust in Tiwari, who had immense administrative experience and would ensure that no hurdles came in the way of the project. At the same time, the secretary, heavy industries, K.S. Rajan, was replaced by D.V. Kapur, former chairman and managing director of the public sector National Thermal Power Corporation (NTPC). Kapur had earlier worked in BHEL, under Krishnamurthy, and had done an outstanding job in establishing NTPC from scratch. He had both technical and commercial experience and was seen as a good person to try and improve the functioning of a host of public sector industries under the industry ministry. I also had a good equation with him, as I had piloted the creation of NTPC as joint secretary in the Ministry of Energy. I was the ministry representative on the board of NTPC and had accompanied Kapur in negotiations with the World Bank, and when a foreign consultant was sought to be selected for the first NTPC project. This helped considerably in the initial years of establishing Maruti. Rajan continued as secretary, technical development. A few days into his job, Kapur recalls a senior official advising him, at a social do, to drop the idea of revisiting the Renault deal. Clearly, there was more than the usual interest in ensuring that Renault became Maruti’s partner.
On 2 September 1981, the Maruti board was reconstituted and Arun Nehru was nominated as a director, overlooking a norm that members of Parliament should not serve as directors on the boards of public sector undertakings. Nehru was already involved in matters relating to Maruti. His presence on the board was designed to ensure that his association became closer, and board decisions would carry more weight in the government. Ignoring another norm that only joint secretaries of ministries should be directors of public sector companies, the secretaries of the ministries of heavy industry, technical development and finance were placed on the Maruti board. This too was a step taken to ensure that board decisions were accepted by the ministries without too much questioning. Implicit was the thought that Maruti should really be board managed and the role of the government should be minimized. This was the way to ensure that the December 1983 deadline was maintained.
The issue of what car to manufacture became somewhat acrimonious at one of the first meetings of the full newly constituted board, which I attended as OSD and special invitee. The board sat on sofas—there was no formal board table—at the Hansalaya office. Kapur recalls Moolgaokar saying, ‘Gentlemen, before we start anything, I would like to express a strong view—Maruti should not manufacture cars.’ There was a stunned silence. Then someone asked, ‘What should it do?’ Moolgaokar, Kapur remembers, said it should manufacture LCVs. Heated discussions followed. Kapur pointed out that, even assuming Moolgaokar was right, it would not be easy for the government to accept this view straightaway, considering it had committed to Parliament, while nationalizing Maruti, that the new company would manufacture a people’s car. Moolgaokar was adamant and no other agenda item was discussed. At one point Moolgaokar even suggested that since he appeared to be the only contrary voice, the minutes should record his note of dissent. Kapur then blurted out, ‘Mr Chairman, you will be creating history.’ He pointed out there may have been instances of a chairman appending a note of dissent, but not in the very first meeting. He suggested that the note of dissent should not be put in.
In the event, the minutes of that meeting record that the board felt the company ‘should produce cars and commercial vehicles in accordance with the decision of the government and that immediate action should be taken to collect all relevant information on the various options which could be examined by the board for selecting the specific models to be assembled/ manufactured by the company’. This was my bureaucratic experience cutting in to keep all options open and prevent a crisis! It was decided that a team from Maruti should immediately visit some manufacturers in Europe and Japan both to explore options and to ‘convey the company’s seriousness of purpose’. In the course of the discussions, the team could explore alternative options to enable Maruti to earn foreign exchange and ensure the active involvement of the collaborator in the working and success of the project. This included possible financial participation in the form of equity, so that the induction of appropriate technology and products could be negotiated at the most favourable terms to the company. If necessary, it was decided, the board could approach the government to change the parameters for collaboration—that the collaborator should not only give the licence to manufacture the chosen car but should also pick up 40 per cent equity in Maruti Udyog and buy back 50 per cent of the production. The board also gave the green signal to commission a market survey, which would provide data to help in the decision-making process, and also take up the preparation of detailed project reports.
The market survey, conducted by the Indian Market Research Bureau (IMRB), was a revelation and contradicted the logic that was used to justify the choice of the R-18. It showed that over 90 per cent of car usage in India was with less than four passengers; over 90 per cent of the usage was within the city and not for outstation trips; and the greatest value was attached to fuel efficiency, reliability and low price. None of these conditions—except reliability—was being met by the R-18. It was apparent the Renault project was not suitable; not only was it highly loss-making, it was also not what the consumer wanted. Only a small car would meet the needs of the Indian market. But what small car? In the pre-Internet age, Gupta and I made a start by studying several books on cars being manufactured in the world, including World Cars. We learnt that the United States was clearly not an appropriate source of technology, as no small cars were used in that country. Even in Europe, the choices were limited, with Fiat apparently being the best in making small cars. However, it was most unlikely that Fiat would collaborate on cars with Maruti. Not only was Gianni Agnelli, the head of Fiat, who had earlier visited India, not impressed with the idea of manufacturing cars here, but Fiat already had a relationship with Premier Automobiles, even though there was no active collaboration at that time. Japan seemed to have a number of small car makers, but the information available in the books was very scanty and incomplete. It seemed that there would be no way of determining the options available for manufacturing a small car in India without visiting the manufacturers.
A decision was taken to visit the bi-annual Frankfurt motor show to meet the European car manufacturers. In September 1981, Moolgaokar, Krishnamurthy, Gupta, an executive from Tata Administrative Services and I flew to Europe. Two British consultants joined us in Europe and they proved very useful, educating us on the automobile industry and the technical aspects of car design and performance. However, these consultants were not very favourably disposed towards small cars, and expressed a view that a small engine may not necessarily mean a car with higher fuel efficiency. They did not think that small cars being manufactured by Japanese manufacturers would be suitable for Maruti. At that time Japan was already giving the European manufacturers a hard time and that may have had something to do with the consultants trying to keep Maruti away from Japan.
At the time of our visit, European manufacturers doubted the robustness of the Indian car market, as well as the merits of being a minority partner in a government-managed company. Their fears were not without basis. Though the Indian economy had grown 7.2 per cent in 1980-81, it was not seen as a very vibrant economy. The demand for cars had been stagnant for a decade. Cars were highly taxed and were considered a luxury item. The economy was still closed and highly controlled and the business environment for foreigners was not friendly. If the number of cars produced was small, royalties would not yield much income. The stringent localization conditions would mean that profits from the sale of imported components would be low. The world car market was going through a downswing at that time and European car makers were battling stiff competition from Japanese cars on their home turf. Getting into an unfamiliar, and what appeared to be an unattractive market, was hardly a priority.
During discussions in Europe the team found that all manufacturers were very uncomfortable with the buyback condition. The British consultants also advised Maruti’s negotiators that a compulsory buyback condition would not work. If the quality and cost of the car were up to international standards, it would get sold without any written agreements. However, if they weren’t, then no buyback condition would work as many reasons, including defects in quality and performance, could be found to abort an agreement. On the contrary, such a condition would only drive away potential collaborators. Krishnamurthy saw the logic of the argument and took up the matter with the ministry. The condition was dropped, but it was decided that components should be exported to make up for the outgo of foreign exchange in importing CKD kits.
In Europe, the Maruti team visited the Fiat headquarters in Turin, Italy, Peugeot in Sochaux, France, the Volkswagen plant in Wolfsburg, Daimler-Benz in Stuttgart and MAN AG in Munich, Germany. It also went to the Turin-based automotive design firm, I.D.E.A. Institute, with the thought of getting a car designed for Maruti. A concept design was shown to the team. This design and the Indica, which Tata Motors launched in 1998, are very similar. Not surprising since Tata Motors also used I.D.E.A. to design the Indica. However, the thought of getting the car designed had to be abandoned since I.D.E.A. said the tooling itself would take two-and-a-half to three years to manufacture. With a December 1983 deadline to meet, this was not a feasible option. The team did not go to the United Kingdom to visit British Leyland, as Maruti was keen on the Metro, which was a small car, but the company was not willing to offer that, arguing it was too sophisticated for India.
Discussions with Daimler-Benz and MAN were confined to commercial vehicles only. Daimler-Benz executives had earlier met Moolgaokar and Krishnamurthy in Delhi on 15 June 1981. The Benz team, which visited the Maruti factory and agreed to the condition of 50 per cent buyback of vehicles for export, suggested one of their light commercial vehicles for the project, but said their small car would not fit into the range of cars Maruti was looking for.
During the visit to Turin, the team found that the existing relationship between Fiat and Premier Automobiles would be an obstacle to any association with Maruti to make cars. Fiat preferred that Maruti collaborate with its fully owned subsidiary, IVECO, to make commercial vehicles. In fact, in an earlier meeting held in Delhi in May 1981, Fiat executives had indicated that a production volume of 100,000 vehicles was not an economical size and that it would require huge investments to modify European cars to Indian conditions. They, therefore, suggested that instead of producing an entire car in India, Maruti should produce certain components that were cheaper to manufacture here—but not the engine—while Fiat would produce components that were cheaper to make in Europe. Fiat also felt that the Maruti factory site at Gurgaon was not the best location from the point of view of exports since it was 1,500 km away from the nearest port. Fiat executives also pointed out that the company’s experiences with licensing agreements in Brazil, the USSR (as it was then) and Spain were not very satisfactory.
Since, after the market survey, Maruti was looking for a small car, Fiat offered its Fiat 127, a super-mini car it had launched in 1971. It was, as senior Fiat executive Dr G. Calvi wrote to Krishnamurthy after the team returned from Europe, ‘a car of great reliability and still the most sold model in Europe’. Importantly, it was available in a right-hand drive model and also a derived utility version—the Fiorino delivery van and mini-bus. This was shown when the team visited IVECO. But nothing came of this and Fiat was never a serious contender for a partnership.
During the visit to Renault, we explained our preference for a small car, and why the R-18 was not considered suitable. Renault did have a small car in its stable—the 782 cc Renault 5 (R-5), but it was a model launched in 1972. This was too old to be considered. Renault suggested the 1397 cc R-9, which had been launched that year. However, the price of the car was high, and Maruti could not have sold the car in India anywhere near the benchmark price of Rs. 50,000 determined after the market survey. Renault was also reluctant to invest any cash in the equity of Maruti.
Peugeot, which till that time was only producing large cars, was in the process of developing a small car. Code named M-24, it later became the highly successful Peugeot 205. The Maruti team test drove the car and liked it. However, it was to hit the market only in 1983. It would have taken a lot of time to adapt it for India and make all the arrangements for shipping CKD kits and transferring technology. It could not have been taken up for manufacture in India till at least the end of 1984. That didn’t suit Maruti, since its deadline for start of production was the end of 1983.
Volkswagen was keen to collaborate and offered the Gol, an entry-level sub-compact car designed and sold in Brazil and launched in 1980 and a cheaper version of the Golf, as well as the Jetta, the sedan version of the Gol. Volkswagen explained that a buyback condition could not be accepted. However, they appreciated the government’s desire to reduce the foreign exchange outgo and proposed to establish an engine-manufacturing facility in Maruti and to buy back the engines from Maruti. This proposition was the only one which seemed feasible. The team returned with the idea of going ahead with Volkswagen and Nehru approved the idea.
Meanwhile, British Leyland thought that India may not be such a bad market and, in November 1981, flew in its mediumsized Morris Ital—a 1275 cc car giving 11 km to the litre in city driving, which had been launched in 1980—along with a team of officials for discussions. The company also offered to sell its existing plant to Maruti to manufacture the car.
The idea of buying second-hand machinery had some appeal, given the high initial investment in putting up a plant—a serious issue for the company. The world automobile industry was going through a recession and many companies had cut back production and even closed their plants. The possibility of getting good machines at reasonable prices was, therefore, attractive. However, a big obstacle to this car was its price. And according to reports, the Ital had not been a successful model in the United Kingdom.
The Maruti team and the heavy industries ministry took stock after the Europe trip. Volkswagen had made the only firm and suitable offer. However, the Jetta’s assembled cost in India worked out to Rs. 75,000, much higher than the target price. But time was running out and there were no other options. The Maruti management felt that the Japanese car options also needed to be checked out to see if something better could be found. Nehru felt a trip to Japan would be a waste of time as the Japanese response till then had not been very encouraging. While recognizing that Japanese companies might not be willing to come to India, the Maruti team and Kapur strongly felt all options should be explored before taking a decision. After all, going to Japan would cause a delay of only fifteen days or so.
Nehru agreed, and Kapur, Krishnamurthy, Gupta and I headed for Japan, timing our visit with the Tokyo Motor Show held from 30 October to 11 November. Initially, we planned to go via Australia to check out Ford’s offer of the Laser. A senior Ford executive from Australia, Ralph Peters, had, on his own, exhibited great interest in the Maruti project. He visited Maruti in June 1981 and came again several times. Not only was he a source of considerable information to the management, but he seemed genuinely interested in helping the development of Maruti. Apparently he believed that the Indian market had good potential, and that Ford should get into this country. He proposed that Maruti consider the production of the Laser, a compact car sold by Ford in Asia and South America. He was the first to suggest that it would be better for Maruti to export components to Ford operations in Europe and the United Kingdom in order to reduce foreign exchange outflows, rather than think of exporting vehicles. Investing in the equity of Maruti would have to be approved by Ford headquarters in Detroit, and he was not sure whether the company would agree to being a minority partner with only 40 per cent stake; Ford had always been a majority partner in joint ventures. Just before we were to start on this trip, we were informed that Ford headquarters had nixed the idea of a partnership with Maruti. Obviously, Detroit did not share the vision of Peters, who was deeply disappointed and came all the way to India to apologize.
Sumitomo Corporation, one of the leading Japanese trading houses, offered to help arrange meetings and explain the Japanese way of doing things. There was very little contact between Japan and India till then and Indians were largely unaware of the Japanese way of doing business, except that it was quite different from the western style. Japanese companies were also a bit wary about India. There was virtually no Japanese investment in India, and most Japanese knew very little about the country. The idea of having a major trading company guiding the Maruti team was obviously a very good one.
In Japan, our team met representatives from Daihatsu Motors, Toyota Motors (which are part of the same stable), Nissan Motors, Mitsubishi Motor Company, Honda Motors, Suzuki Motors and Isuzu Motors (which manufactured heavy commercial vehicles) at the Tokyo motor show. The huge range of vehicles made in Japan was available at one place. For the first time we realized that not only did Japan make small cars, it also built variants for different market segments on the same platform. The possibility of expanding the market by reaching out to different users became apparent. This was the basis of the decision that collaboration with a Japanese company would be most advantageous as besides the small car, Maruti could also make the van and the pick-up truck. In Japan small cars were mainly used in the smaller cities. Kapur remembers that we did not see any small cars in Tokyo, except at the Auto Show. However, when we went to Kyoto and the suburbs we saw a large number of small cars on the roads, a majority of them of 547 cc engine capacity.
Toyota expressed disinterest in the Maruti project, since the company was already talking to Delhi-based conglomerate DCM for a light commercial vehicle venture. Apparently Toyota also had a policy of not having a government as a partner. Honda also did not show any interest. Suzuki Motor Corporation (SMC) too was very lukewarm and did not exhibit any real interest in getting involved with Maruti. Mitsubishi offered the 650 cc Minica. This came with the other variants on the same platform. Nissan offered the 1270 cc Sunny, launched in 1966 along with the 600 cc Subaru. This was manufactured by the automobile division of Fuji Heavy Industries, a part of the Nissan family. Daihatsu also exhibited interest and suggested both the 617 cc Cuore and the 993 cc Charade.
Daihatsu had earlier written to Maruti in June 1981 pointing out that its 550 cc and 1000 cc products were attracting a lot of interest in the world automobile market. Later in October, the late H.P. Nanda, chairman and managing director of Delhi-based commercial vehicles and engineering firm Escorts, wrote to Krishnamurthy saying that his company would represent Daihatsu in India and had the first option for manufacturing its commercial vehicles. He mentioned Daihatsu’s 617 cc Cuore, which was claimed to give 22 km to the litre in city driving, but said this may not be suitable for Indian conditions. A week later, S. Sawada, head of Daihatsu’s export division, wrote to me suggesting the 993 cc Charade (a derivative of the Cuore) as a possible product, since it was highly fuel efficient and equalled the performance of 1300 cc and 1600 cc cars.
It became clear to us that Japanese cars best fitted the idea of a people’s car and were especially suitable for crowded cities and narrow roads. They could seat four persons, had luggage space and were more fuel efficient than other cars. Their cost in Japan, including taxes, was Rs. 30,000. Overall, they were a better choice than the European cars. We said as much at a stock-taking exercise with Tiwari and Nehru after our return from Japan. At that meeting, there was general agreement that the Morris Ital would not be appropriate. Cars larger and more powerful than the Ambassador would not, it was felt, be suitable for the Indian market. Any new car must be cheaper—and more fuel efficient—than existing cars. Foreign exchange constraints meant that it was important to keep fuel consumption down (most of India’s fuel requirements are met by imports). The savings could be used to import CKD kits.
However, while in Europe the idea of buying back cars was not acceptable, Japanese companies were also uncomfortable about buy-back of components manufactured in India. There was an open question regarding the quality of Indian products. But, more importantly, Japanese manufacturers kept inventories of only three hours. The just-in time system could not really work if components were to come from India, unless inventories were held elsewhere in Japan. This would be too costly. It was then decided that manufacturers should be asked to make offers to produce cars under a licence agreement without insisting on a buyback clause involving either cars or components.
A few days later, I wrote to Daihatsu seeking offers for both the manufacture of the Cuore and its derivatives, as well as the 1290 cc Charmant. Later, I also asked them to make proposals dwithout a buy-back clause, after which Daihatsu responded by saying it would like to study the Indian component industry first.
Around that time, Maruti got an indication that Volkswagen was no longer interested in proceeding further in collaborating with the company. Volkswagen’s interest in Maruti had been exhibited at the level of a board member. However, the CEO, Toni Schmucker, rejected the idea when it came to him for approval.
After returning from Japan, we reported our findings to Tiwari and Nehru. The advantages of the Japanese products over what Europe had offered were obvious and, in any case, the one viable European offer from Volkswagen had been withdrawn. The thought that a Japanese car would most closely approximate Sanjay’s idea of a people’s car was politically very attractive. Both Tiwari and Nehru accepted the idea of going ahead with the Japanese, making a small car and not making commercial vehicles. At that point, Daihatsu seemed to be the best option available to Maruti.
This decision had an immediate fallout. The media was suddenly abuzz with the news that Moolgaokar was resigning as chairman. When Krishnamurthy told Moolgaokar that Maruti would be manufacturing a small car, and not making light commercial vehicles, Moolgaokar indicated that he wouldn’t like to be associated with the project. The media speculations were not without basis.
Kapur soon got a sealed letter, which he had to open himself. When he did, he found it was a very brief resignation letter from Moolgaokar, citing no reasons. The first thought that occurred to Kapur was that the resignation had not come at an opportune time, since the winter session of Parliament was on and the noise over the nationalization of Maruti had not died down entirely. He told Tiwari about the letter when he met him in the evening. They decided that the matter should be kept under wraps till the Parliament session was over. The resignation was accepted with effect from 24 December 1981. No one involved in Maruti was surprised at the development. Krishnamurthy had briefed Mrs Gandhi and Rajiv about Moolgaokar’s steadfast opposition to the idea of manufacturing small cars, and Rajiv had conceded that he should be allowed to go. The exit of Moolgaokar, recalls Nehru, sent out a very strong message—nothing would be allowed to come in the way of manufacturing a small car. The post of chairman was not filled till 1983, when Krishnamurthy became the chairman and managing director (CMD).
At its first meeting without Moolgaokar, the Maruti board decided that the production of passenger cars should be taken up first, and that of commercial models later. It completely ruled out the idea of producing a big car. The car to be produced, it decided, should preferably be below 1000 cc engine capacity and priced lower than other cars in the market. It authorized the management to evaluate collaboration offers and select the most appropriate one, which should meet the conditions of producing a people’s car, minimizing the outflow of foreign exchange and ensuring the commercial viability of the project.
By now manufacturers came to believe that the project would be implemented and interest started picking up. In December, Mitsubishi sent a team to Delhi for discussions on the Minica and the 1245 cc Colt. The Minica had only two doors, and the experience of the Standard car had shown that such cars were not popular. Mitsubishi indicated its willingness to modify the design to make it a four-door car. January saw visits by Peugeot, Daihatsu and Nissan.
Talks with Daihatsu were proceeding well and were in an advanced stage. A team came to India on a week-long visit for negotiations with Maruti in the second half of January 1982. Maruti officials took Daihatsu representatives across the country to meet vendors and see their factories. Daihatsu offered a choice of the Cuore or the Charade for a small car in the first phase of the project and the Charmant in the second phase. They suggested the S65 model as the commercial vehicle derivative of the Charade for the LCV part of the project. The first year of operation would see the rollout of 15,000 cars and LCVs which would be increased to 100,000 over five years.
Daihatsu agreed to give Maruti a final offer containing their commercial and technical conditions by the middle of February. If it was going ahead with the venture, top executives would come for final negotiations by the end of February and an agreement could be signed by March. A collaboration appeared to be on the cards, well in time to meet the December 1983 deadline.
By mid-January, Daihatsu, Nissan/Subaru and Mitsubishi were the only companies in the running for partnering Maruti. British Leyland’s Morris Ital was not found suitable. Renault had not supplied information that had been sought about the R-9. In any case, the car was above 1000 cc and, therefore, not acceptable. Though Fiat’s 127 was below 1000 cc capacity and within the parameters set for the project, the price was too high. Fiat had also indicated that its capacity to render engineering and technical assistance was limited. Peugeot had a good car and its offer was the best among the European manufacturers. However, that company could not meet Maruti’s time schedule. What further weighed in favour of the Japanese firms was that their cars had commercial spin-offs like vans and pick-up trucks while Peugeot’s M-24 did not. It was decided to get final offers from all the firms and then take stock of the situation.
Little did anyone know of a completely new and unexpected twist in the tale that was going to surface.
One day, in February 1982, I was handed over a telex message in my office. My blood ran cold when I read it. The telex was from Daihatsu to Escorts, assuring the latter that it intended to manufacture a car with it, and that it was maintaining the relationship with Maruti only to understand the Indian automobile market, the relationship with vendors and dealers, and other matters. How it landed up at the Maruti office is a mystery that has never been solved. However, the upshot was that instead of getting the conditions of collaboration from Daihatsu, Maruti was virtually stranded without a viable partnership opening. The development was unexpected and left the management very angry. The government was also very upset both with Escorts and Daihatsu.
When all seemed lost, providence provided a solution in the form of SMC. A telex arrived within days of the Daihatsu fiasco, saying that SMC was very interested in the project and if it was not too late, it would also like to participate in the selection process. I telexed back saying Maruti was ready to talk, but SMC should send a team as early as possible, as time was running out.
This unexpected development was also one of those events which show how chance shapes events and destinies. An article had appeared in the 31 January 1982 issue of India Today which recapitulated the twists and turns in the Maruti saga since nationalization, the status of negotiations carried out till then with European and Japanese car companies, and carried a picture of the Daihatsu Cuore as the likely choice for Maruti. A SMC team was in Chennai in January-February 1982 in connection with the motorcycle project with TVS Motors. A director of SMC, flying from Chennai to Delhi to catch his flight to Tokyo, read the India Today article. He was horrified that SMC’s arch rival, Daihatsu, was apparently walking away with such a big project and the SMC board was not even aware of this. He promptly alerted SMC headquarters, which lost no time in contacting Maruti.
Till then, SMC had not been in the picture as a potential partner at all. It later transpired that the letter which Maruti had written to Japanese car companies before the visit made in November 1981 had gone to the overseas engineering division instead of the overseas marketing division. This was treated as a routine inquiry and was apparently not brought to the attention of anyone in the top management of Suzuki. The Maruti team had met executives of the overseas engineering division at the Tokyo Motor show, and they obviously had no knowledge or understanding of the importance of the Indian project for SMC. The Maruti team had no way of knowing that it had met the wrong people, and did not pursue SMC after the somewhat cold reception at the motor show and the lack of interest exhibited by the engineers there. In fact, SMC should have been the company of choice, because it had all the variants of the small car, and was even then selling more small cars than any other Japanese manufacturer. A mistake at SMC’s end could have proved very costly for both companies, but was remedied by sheer chance.
SMC quickly followed up my telex. S. Nakanishi, who was then a young executive in the overseas marketing department, and is presently the managing director of Maruti Suzuki India Limited, was the first to arrive. A day later, T. Aonuma, who was more senior and a manager in SMC’s project in Pakistan, came to India for talks with Maruti and the ministry. They were told about the project, its political importance and support, and the very tight time schedule. An offer was needed urgently if SMC was to be considered. Nakanishi asked what price would make them competitive with others in the race. Some rough calculations on how the CKD price would translate into a retail price were done, and what our target price was so as to reach a sale volume of 100,000 units a year. SMC was asked to give a detailed commercial proposal in the next week or ten days. Within a few days, SMC sent what Kapur recalls as a three-metre-long telex with a complete proposal for collaborating to manufacture an 800 cc car. The price offered was more or less the same as what had been suggested in Delhi during discussions.
Around the same time, a Maruti board meeting on 5 March 1982 noted that Daihatsu had ‘regretted its inability to collaborate with us on grounds of non-availability of manpower resources’. On 4 March 1982, Nanda had written to Krishnamurthy, in what seemed to be an attempt to make amends. He said Escorts and Daihatsu were in talks for a LCV venture but that he had made it clear, in the presence of a Maruti director, that Maruti should be given first preference for a collaboration on both a car and a LCV and Escorts would step in only if Maruti collaborates with another firm. ‘Contrary to my understanding with them, they have decided not to collaborate with MUL which I do not consider is a good decision,’ Nanda’s letter said.
By then, British Leyland having been informed that the Ital was not acceptable and Maruti was looking for a small car, got back, offering the Mini, Britain’s iconic, but old, two-door car. Around this time, Volkswagen too tried to get back into the race. Schmucker had retired in December due to ill health and was succeeded by Carl Hahn, a former Volkswagen executive who was heading the German tyre company Continental Tyres. Thanks to a joint venture Continental Tyres had with Modi Tyres in India, Hahn knew India and was keen for Volkswagen to have a presence. Volkswagen got in touch with Maruti again and there were several meetings between the management of the two companies. The last one was as late as 1 March 1982, where the Volkswagen team suggested that the project be developed in steps and a production level of 100,000 cars should be reached in a number of stages. A market plan, they said, could be developed based on the Polo-Derby family (Polo was another super-mini from the Volkswagen stable introduced in the mid-1970s, and the Derby was its sedan variant) and the Jetta-Golf. The two teams also had detailed discussions on franchising and the dealership network. Volkswagen was very clear that the project must keep the unique image that the company enjoyed. The company was told that a 50 per cent buy-back of production was not absolutely essential, though balancing of foreign exchange would be desirable. However, by the time Volkswagen reverted, it was too late.
Action was hotting up on the Japan front.
Two days after the 5 March board meeting, Krishnamurthy, Kapur, Gupta and I headed off to Japan, for final talks with Nissan, Mitsubishi, Subaru and SMC. We also met Daihatsu, in spite of what had happened, just to have alternatives to present to the government.
A meeting had been scheduled with the SMC president, Osamu Suzuki, at the Imperial Hotel in Tokyo. The meeting started early and had to finish by about noon, which was the Japanese time for lunch. Suzuki had an afternoon flight to the United States, where he had discussions scheduled with General Motors regarding the joint venture being negotiated between the two companies. Though it was just a preliminary meeting, where the Indian side explained the Maruti project, its objectives and the government’s conditions, Krishnamurthy recalls that it was clear that there was a meeting of minds. Suzuki asked the Maruti team to stay on in Japan till he returned, so that they could have another meeting in Hamamatsu, the SMC headquarters.
Suzuki had become president of SMC in 1977. He was the son-in-law of the previous president and had assumed the ‘Suzuki’ name after marriage, as sometimes happens in Japan. He saw—what most others missed—that the Indian project could be crucial for the fulfilment of his ambitions and dreams to rapidly expand SMC, and keep it as an independent manufacturer. In hindsight, he has been proved more than right.
We then visited Mitsubishi headquarters in Tokyo. The meeting took place in a large hall where there was a long table. There were about forty senior Mitsubishi executives sitting on one side, strictly in accordance with their seniority protocol. On the other side were four of us. It was a unique, and overawing experience, and definitely created the feeling that Mitsubishi was too large a company with too many layers of management. Getting to talk to anyone near the top of the management pyramid would be almost like scaling Mount Everest. Later, when he was giving his assessment to Mrs Gandhi, Krishnamurthy remarked that the Mitsubishi budget was larger than that of the Indian government and it would be difficult for any of the Maruti executives to access even the second rung of the management.
That stood out in sharp contrast to the meeting with SMC at Hamamatsu a few days later. There were just four SMC representatives, including Suzuki himself. The immediate sense that Krishnamurthy got was that this was a manageable organization, where Maruti could get access to the top leadership. What impressed him was Suzuki’s quick decision making. It was also apparent that Suzuki was very cost conscious. The offices were not even air-conditioned. It had nothing like the beautiful guest house with a huge garden, in the centre of Tokyo, which Mitsubishi had used to entertain the Maruti team.
The discussions with SMC revolved around the nitty-gritty of the proposed collaboration—whether it would be possible to manufacture a car of the quality of Japanese cars at the target price of Rs. 50,000 and whether the quality could be maintained, given the working culture of the public sector. Suzuki had his apprehensions and he voiced them. SMC had a plant in Pakistan in those days and Suzuki was unhappy with its performance, which he blamed on the work culture. He was disturbed about workers regularly reporting late for work, frequent absenteeism and the break for prayers five times a day. If Maruti wanted the same quality as was being achieved in Japan, within the proposed price, he made it very clear that it must be prepared to work the way SMC did.
On the Air-India flight back to India, Gupta and I spent the entire time evaluating the proposals from the various companies. The management was racing against time, and wanted board and government approval to the choice of a partner as soon as possible. The CKD import price of the Suzuki SS80 (which later became the Maruti 800) was the lowest of all the European and Japanese models (Renault’s R-9, Peugeot’s M-24, British Leyland’s Mini, Nissan-Fuji’s Subaru and Mitsubishi’s Minica). SMC also offered the best terms for training Maruti personnel in Japan and had quoted the lowest charges for its experts who would be sent to India. The evaluation showed that SMC’s offer was financially the best, and this was recommended to the Maruti board. An additional point in SMC’s favour was our impression that it would not work in a bureaucratic manner and would help Maruti become a quality, low-cost manufacturer.
Both the board and the government agreed with the evaluation made by us and approved the proposal to sign a non-binding memorandum of understanding (MoU) with SMC. This would then be followed up with further negotiations to finalize the legal documentation.
With a firm proposal more or less in hand, Maruti decided to apply for a composite licence of 140,000 passenger cars and commercial vehicles. Though the plant capacity was intended to be only 100,000 vehicles a year, the company decided to apply for a licence for a higher number to cater for future expansion, a common practice in the days of licensing, since the process of getting a licence was a cumbersome one. We knew that, at that point of time, getting a licence would be a piece of cake. It decided that the company should first manufacture the 800 cc passenger car, followed by the van and the pick-up truck.
On 1 April, Suzuki came to India with a team of executives. He met Prime Minister Indira Gandhi, Tiwari and other top government functionaries, visited the Maruti factory and had further discussions on the collaboration. Earlier, Nakanishi had submitted a report on the Maruti project, which went to the SMC board and led to the project being approved. A formal and detailed MoU between SMC and Maruti was signed on 14 April 1982. SMC agreed to provide technical collaboration and licence to manufacture an 800 cc car, the Carry van and a pick-up truck and a four-wheel drive. Apart from a lump-sum payment of $2.4 million, Maruti would pay royalty of 2.15 per cent. SMC agreed to pick up an agreed stake in the equity of Maruti, subject to a cap of $25 million.
The decision of SMC to partner the government in the Maruti project was in many ways surprising and did not follow the usual Japanese procedures for taking investment decisions in a foreign country. Those days, India was not on the radar of most Japanese corporations as a destination for investment. Generally, Japanese companies invested in foreign companies after they saw successful investments being made by the bigger Japanese firms. SMC, at that time, was hardly a leader. India’s political closeness to the erstwhile USSR and the strong socialist thinking in industrial policy were contrary to Japanese beliefs. Normally the Japanese make their own market survey before taking any major investment decision. No such exercise had been undertaken by SMC. The giants of the Japanese automobile industry, like Toyota, Nissan, Mitsubishi and Honda, were not in India. Being a minority partner in a government company was itself seen as a recipe for disaster. The embassy of Japan in India was understood to disfavour the project. Suzuki took the decision to enter India in less than two months after the first meeting—surely an all-time record. Not surprisingly, the reaction in Japan was less than positive. Business circles were sure the venture would fail and that SMC would withdraw in a few years.
The decision to partner the government was clearly a top-down decision taken by Suzuki himself, based on Nakanishi’s positive report. The speed of decision making was a result of the pressure from the Indian side as well as the dynamism and ability of Suzuki to take truly entrepreneurial risks. When asked as to why he took what appeared to most people, including the Japanese embassy in India, as an unwarranted risk, Suzuki explained that he always believed that it was people who determined how any project performed, and everything else was secondary. He said that at the time of the first meeting with Krishnamurthy and me, he was convinced that he could work with us and ensure success. If he did not have this feeling, he would not have asked the Maruti team to stay back till he returned from the United States. I wonder how many people in the world could take a decision to invest $25 million on this ground. Suzuki showed that his faith in the importance of people as the basis for doing business was better than the technical evaluations which companies made and which showed that India was not a good place to invest money.
Negotiations on the details of the joint venture agreement now started in full earnest. Work also started on preparing a project report needed for Maruti to obtain the necessary government approvals. The process involved getting the project report approved by the Planning Commission and the Public Investment Board, before it could be placed before the Cabinet Committee for Economic Affairs by the Department of Heavy Industry. The licence and joint venture agreements were also to be approved by the ministries of finance, law and heavy industries.
The May 1982 project report estimated an investment of Rs. 221.935 crore, with a debt-equity ratio of 60:40. It involved the manufacture of 40,000 cars, 40,000 vans and 20,000 pick-up trucks, all with an 800 cc engine. The plant was expected to reach full capacity utilization of 100,000 vehicles by 1988-89, by when the indigenization levels would reach 95.7 per cent.
Maruti projected the demand for passenger cars at 105,000 by 1989-90, which was lower than the figure of 200,000 set out in a report of a working group of the Development Council for Automobiles and Allied Industries in August 1981. The working group was set up to estimate production targets for the 1980s. Two months later, a sub group had scaled the demand projection down to 150,000. Maruti’s projection of 105,000 was worked out on the basis of the demand for new cars (which was assumed to grow at a compound growth rate of 5 per cent a year) and the replacement demand for cars that were older than twenty-five years at a rate of 17,460 cars a year.
However, the Planning Commission found the replacement demand too optimistic considering that only 69,247 cars had been replaced since the 1950s.9 The Project Appraisal Division of the commission pointed out that the materialization of the demand would depend on the price of the car and tax and duty concessions would be needed to reach the target price proposed by Maruti. The commission picked holes in other parts of the report as well, pointing out that the estimates of capital costs, operating cost and working capital were ‘fraught with uncertainties’. Maruti pointed out that these estimates were prepared with the involvement of SMC personnel, who were experts in this area, and the chances of overruns would be consequently low. It was also pointed out that all projects had some factor of uncertainty in the estimates, as evidenced by the record of cost and time overruns in almost every single public investment in projects. The late Sukhamoy Chakravarty, a noted economist, who was economic advisor to the Prime Minister, also wrote a note saying the country should not fritter away foreign exchange resources on a project like this.
Several meetings were held with Planning Commission officials to get them to give the green signal to the project. Apart from the formal meetings, Maruti executives working on the project report shuttled between various desks of the Project Appraisal Division to sort things out. While some progress was made, time was running out. Ultimately, Maruti could only get around this problem by pulling the right levers, with the help of Nehru.
In the summer of 1982, Suzuki sent a team with a few cars of each model for testing in Indian driving conditions. The cars could be imported after going through the process of getting an import licence. This was not easy and required some telephone calls to be made. It was also clarified that cars would be needed for marketing purposes as the customers would need to see the product before they could be expected to book the cars in advance. They were driven by Japanese technicians from Kolkata to Delhi and then to Shimla, Mumbai and other places, covering a total of 10,000 km over different terrains. There was huge public interest in the cars wherever they went. This was very encouraging for Maruti and Suzuki. The test running itself led to several modifications in the cars to suit Indian driving conditions. These included higher ground clearance, stronger and more durable horns and more sturdy shock absorbers.
After the Japanese had completed the test runs, Maruti received requests from various automobile magazines and others for being allowed to test drive the cars. Maruti was willing to do so in order to spread knowledge about these cars. One of the persons given a car to drive was Major Ravi Kapur, who drove the car to Shimla. On his way back, he was blinded by the lights of an approaching truck and crashed into the back of a truck parked on the roadside without any warning lights. Two persons travelling with Major Kapur were killed, while he himself remained in coma for several months. Fortunately he recovered fully.
Meanwhile, Krishnamurthy, Gupta and I went again to Japan to negotiate the various agreements that had to be signed. We spent much of June and July 1982 in Tokyo and Hamamatsu. That is where we got our first taste of Suzuki’s famed cost consciousness. Summer in Japan was sweltering hot, but there was no air-conditioning in SMC’s offices in Hamamatsu. Suzuki explained that air-conditioning was not good for health! Fresh air was much better. The clause-by-clause negotiations were carried out by Gupta and myself with the SMC team led by one of its directors. Periodically, I would report to Krishnamurthy and take directions. Discussions would start at 9 a.m. and continue till late night. Progress was slow, as everything I said had to be translated into Japanese and what the Japanese team said was translated into English. Every few days both teams moved to Tokyo so that all the clauses agreed between SMC and Maruti could be discussed with the former’s lawyer in Tokyo, M. Yanase. The final versions of the agreements were drafted by him.
We had been warned that the Japanese were very tough negotiators. Not only did they do their homework very well and were fully prepared on facts and figures but they had enormous patience. The opposite negotiating teams were at times beaten because they were not able to match this patience. We also understood that the Japanese saying ‘we understand’ or nodding their head did not mean that they had agreed to what was said. Agreement required the Japanese team leader to specifically say what he had agreed to. Our negotiating strategy took account of these factors. We were determined to show no impatience and to sit in the meetings as long as necessary. We would also do our homework thoroughly. The SMC side was impressed by the fact that we were negotiating, even with Yanase, without any lawyer. But what made perhaps a bigger impact was my ability to do mental calculations faster than they could using a calculator!
Initially, SMC had expressed grave doubts on Maruti’s time schedule of finalizing the agreements within a couple of months so that they could be cleared by the government and signed on 2 October 1982. They mentioned that negotiations with General Motors on similar agreements had started many months earlier and were unlikely to end for many more months. I, however, insisted that this time schedule had to be followed if the deadline of starting production in December 1983 was to be met.
SMC was not willing to take 40 per cent equity in Maruti, as desired by the government, as it said it did not have that much spare cash. A limit of $25 million had been set in the MoU. The initial estimate for the project was about $220 million and 40 per cent equity meant that $88 million would be the total subscribed capital. Suzuki agreed to subscribe 25 per cent or $22 million. In a meeting in the Maruti office in Hansalaya, I explained to SMC the additional benefits a minority shareholder obtained under the Companies Act, if his equity was 26 per cent. SMC immediately agreed to increase their share to 26 per cent. In order to meet the government requirement of 40 per cent equity, SMC agreed to take an option to go up to 40 per cent within five years.
The benefit to Maruti from explaining the benefit of taking 26 per cent equity was gaining the trust of SMC. It made no real operational difference because under the terms of the joint venture agreement, and the major policy decisions agreement, Maruti could not have ignored or overruled SMC’s views on any major matter. The project would have already failed if a situation ever arose where the government and SMC opposed each other in a shareholders’ meeting over a special resolution. However, my pointing out the legal rights which would accrue to SMC helped in building the feeling that we would work in a fair and transparent manner. Trust and confidence between partners is the key to the long-term success of any joint venture, especially where technology and production know-how is entirely with one partner.
SMC was, not unnaturally, worried about the possible dangers of working as a partner in a government company. To allay its fears, a clause was added that the joint venture would be operated with the objective of fully achieving the purposes of the licence agreement and the project, as well as making profits. Generating profits was never an objective set for public sector companies; managers were not rewarded for making profits or punished for making losses. The insertion of this clause was to drive home the fact that Maruti should not be like other public sector undertakings and generating profit would be an important objective. At the same time, the observance of the terms of the licence agreement would help in maintaining quality standards and a proper management structure, without resulting in overstaffing.
The groundwork was beginning in Delhi as well. Strategies for vendor development, marketing and distribution of the vehicles and registration of customers were finalized. The board, at one time, suggested that Maruti should be a holding company and a separate subsidiary—which would be a joint venture with SMC, with a debt-equity ratio of 3:2—should be incorporated for the implementation of the project. The subsidiary would have a 40 per cent foreign equity holding, held either entirely by SMC and its subsidiaries or with up to 10 per cent by the International Finance Corporation (the private sector lending arm of the World Bank). Of the remaining 60 per cent, MUL would hold a maximum of 40 per cent, while financial institutions or the public would hold the rest. The board had a sound rationale for this. SMC was an unknown brand in India at that time. Besides, Maruti was also supposed to manufacture commercial vehicles, which were not part of the SMC range of vehicles. A subsidiary structure would have given Maruti the flexibility to work out other arrangements for commercial vehicles.
Suzuki, however, was not keen on the idea and at a meeting with Krishnamurthy in August indicated that SMC would prefer to have equity of Maruti Udyog and not of a subsidiary company. Krishnamurthy agreed but indicated that the decision may have to be reviewed if there was a legal complication in SMC investing directly in Maruti. There wasn’t—40 per cent foreign investment was allowed in Indian firms—and finally, Maruti issued equity to SMC to the extent required to give it 26 per cent stake in the enlarged equity base.
At one point, the government considered piggybacking on Maruti to get SMC, given its expertise in manufacturing two-wheelers, to help revive the ailing public sector Scooters India. Scooters India was based in Kanpur and Tiwari, who hailed from Uttar Pradesh and had been chief minister of the state, was keen on reviving it. If SMC agreed, then Scooters India could come under Maruti, which would be a 100 per cent holding company, with Maruti Suzuki manufacturing cars and Scooters India, a separate subsidiary company, making scooters. The two companies would have a common chairman and a few common directors. SMC engineers went to Lucknow and studied the company. Not surprisingly, Suzuki did not find the idea acceptable, and the proposal was given a quiet burial (to the unexpressed relief of the Maruti management as well). Privately, Suzuki said that putting money into Scooters India would be like pouring water into a bucket without a bottom.
Maruti had worked out a total investment of $226.82 million in the project. One of Suzuki’s strengths was the ability to cut capital costs. True to character, he wanted this brought down to $200 million. One of the ways to do so was to make the production totally manual. However, Maruti was strongly of the view that some amount of automation should be introduced, particularly where it would result in better quality. Krishnamurthy had to argue this matter with Suzuki and finally conveyor belt systems, a couple of robots, automatic painting guns and some other machines were included in the project. At the same time, Maruti agreed to keep the project cost at $200 million. The equity subscription was made on this basis by both parties. Suzuki was very doubtful of the cost-control capabilities of Indians. Later, however, Maruti with the help of SMC engineers, surprised him by completing the project in Rs. 180 crore ($180 million).
Krishnamurthy also tried to persuade SMC to help Maruti in raising finances for the debt portion of the investment. Interest rates in Japan then were much lower than in India. However, SMC was not in favour and currency risk was one of the main considerations. Suzuki did not also want to stand guarantor for any loan. As it happened the yen appreciated very sharply and if MUL had taken a yen loan it would have been very costly. Suzuki indicated that he would like to sign the joint venture agreement only after financing arrangements were tied up. This resulted in the government providing the loan funds, as was usual for government projects.
The pricing and mode of payment for the CKD kits and imported components was another tricky issue. While the initial CKD price, expressed in US dollars, was available in the offer made by SMC, the question was how prices would be determined in the future. It was decided that there should be a price escalation formula based on the cost of the key inputs used for manufacturing a car. The Japanese government published data on the movement of prices of all such materials and so an authentic source of information was available. Suzuki produced a formula to determine the cost of the CKD parts. I suggested an extra input—the impact of labour productivity (for which indices were also published). SMC agreed to include this factor in its formula and it was incorporated in the Sales and Purchase agreement.
The result worked very much in Maruti’s favour. For the ten years that the licence agreement was valid (1982-1992), while material costs went up, labour productivity also increased. The net impact, according to the formula agreed upon, was that there was no increase in the CKD price. I had made this suggestion because I had seen in BHEL that price escalation formulas almost invariably resulted in annual increases in the price of imported inputs, and that improvements in productivity were all in favour of the producer.
SMC wanted to deal with the issue of exchange rate fluctuations, since the CKD price was expressed in dollars whereas costs in Japan were in yen. Suzuki suggested a formula which would result in both parties sharing the impact of a change in the dollar-yen rate. This provided that if the dollar remained in the 210-240 yen range, the dollar price would remain unchanged. However, if the yen weakened beyond 240 to the dollar, SMC and Maruti would share the gain. If it strengthened beyond 210 yen, there would be a 50-50 sharing of the loss.
This was to prove valuable in the long run. After the first two-three years, the yen strengthened very sharply against the dollar, even reaching the level of 80 for a short time. The result was that SMC’s sale price, expressed in yen, started falling as the yen appreciated. Over the years, SMC received far less yen for a component than they had received in 1984. If the price of the CKD kit had been expressed in yen, or if this formula were not incorporated in the agreement, Maruti would have had to pay a much higher amount as the dollar price each year would have reflected the change in the exchange rate. Despite the obvious benefit to Maruti resulting from the sharing of the exchange risk, during 1995-97 the government frequently asserted that SMC was making enormous profits from the sale of CKD parts, whereas the fact was that it was making a loss. Calculations of the yen earnings for components, given by me, were just ignored by the bureaucracy.
After three months of tortuous negotiations, the agreements were finally ready to be processed. SMC had its own legal department while Maruti hired Delhi law firm J.B. Dadachanji. The law ministry also had to vet the agreement. A problem cropped up at that stage. An additional secretary in the ministry, apparently piqued at what he felt was my brusqueness, raised objections to some of the clauses. Time was running out and finally, law minister Ashoke Sen’s intervention was sought. An early morning meeting was arranged between me and law ministry officials and the matter was sorted out.
Finally, at 12 p.m. on 2 October 1982, bang on deadline, two agreements got signed, with the government, SMC and Maruti being the signatories. One was a licence agreement on technology transfer between Maruti Udyog and SMC. The other was a joint venture between the Government of India and SMC. A third agreement was signed between SMC and Maruti and covered the sale and supply of CKD components for the ten years of the licence period.
A piquant problem arose after the signing ceremony. The agreement was to be toasted. But 2 October—Mahatma Gandhi’s birth anniversary—was a dry day. Maruti, therefore, booked a suite at the public sector Ashoka Hotel and champagne bottles were somehow procured and duly uncorked.
It was a moment to celebrate. The people’s car had finally been put on the road to realization. And it was also time to get down to work. There was little time to lose. A car had to roll out of the factory in exactly fourteen months.