Along with Harpal Singh, close to 800 customers in Delhi and Mumbai also became proud owners of India’s first modern car. Initially, sales were restricted to these two cities, but by March 1984, they had been extended to Kolkata, Chennai and Chandigarh, practically exhausting the first year’s production of 852 cars. The response was enthusiastic. Suddenly, a car became a much more affordable symbol of upward mobility. The 800, in some respects, became both a status symbol and a social leveller, as it was found parked both outside the cramped houses of grocery shopowners in congested localities as well as the driveways of industrialists. It also led to a new sense of freedom for women. The wife of one big industrialist told me that now she could move around on her own, whereas earlier she always had to rely on a driver. The Ambassador and the Padmini were not so easy to drive, and there were always some questions about their reliability on the road. As time elapsed more and more women started to drive themselves, as the 800 gave them the confidence that the car would not have problems.
The demand was huge, and the pressure to increase production was immense. There was a large premium on the car and despite Maruti’s efforts to ensure that there was no black marketing, there were many complaints of this happening. The sales system adopted by Maruti insulated the company from allegations of sharing the premium, as cars were made available to customers in accordance with the computerized delivery list. Nevertheless, it was not a happy situation, and the management realized that the only answer was to increase output. Within a few months of starting production, the factory was rolling out a hundred cars a day. ‘Such a rapid rate of build-up of production is unprecedented in the Indian automobile industry,’ Krishnamurthy exulted in the first annual report for 1983-84. The two private sector car companies, even after being in existence for over thirty years, had not exceeded a combined production of about 130-140 cars a day. Better still, the company was also able to generate profit from the first year itself—a good Rs. 1.7 crore—though the project report, approved by the government and SMC, had projected losses up to 1987-88. Car production is capital intensive, and companies break even only after about three years. Maruti was able to make profits because of the interest earning on the Rs. 133 crore of booking deposits, and the absence of any working capital borrowing. This interest income helped to meet the higher cost of production, mainly due to a stronger dollar, which pushed up the cost of importing the CKD kits and steel.
While the efforts to rapidly increase the production of the 800 were in full swing, preparations were also going ahead to ensure that the van was launched by the scheduled date of December 1984. This meant developing and homologating (testing to see if the vehicles conform to various local regulations and then certifying for sale) a whole lot of components which were different from those used in the 800. New dies had to be procured, and a separate welding line installed for putting together the white body of the van. The painting line for the car and the van was common, but a new assembly line was also needed for the latter. Thus civil works, equipment procurement and installation and training of workers had to be carried out along with assembling the 800. SMC was well versed in such activities and ensured that both sets of activity proceeded as scheduled. The van was launched by N.D. Tiwari on 14 December 1984, exactly a year after the 800.
Within months of the launch of the 800, the company came to know that SMC was introducing a new model of this car (SS80) in Japan towards the end of 1984. This new model had not been in production when the collaboration was being negotiated. This was not surprising, as models are frequently changed in competitive markets. However, when the specifications of the new model were studied, it was found that while all the external dimensions remained the same (as they had to meet the law which gave concessions to small cars in Japan) clever design had created a larger cabin space and more legroom for the passengers in the rear seat. Krishnamurthy and I were convinced that this extra space would greatly enhance the long-term acceptability of the car for the Indian users, and felt that SMC should be persuaded to manufacture the new model in India.
In June 1984, Krishnamurthy made a presentation to the board and sought a decision on whether to switch to the new model. The issue was that Maruti and the vendors had already spent a substantial amount of money on the tooling for the old model as well as for its components. Since some of the components of the new model would be different, those vendors would have to write off the cost of the tooling and Maruti would have to compensate them. A quick decision was needed so that the appropriate press dies could be ordered. The board voted in favour of changing the model and Krishnamurthy left for Japan, along with the director production, to discuss this matter with Suzuki.
However, the response in Japan was not very enthusiastic. Suzuki did not want the model to be changed, not only because of the need to write off investments made by Maruti, but also because it would require SMC to again prepare and send all the documents for the transfer of technology. This would be a great deal of additional work. In addition, there would certainly be some delay in the localization of components. However, Krishnamurthy explained at length why the new model was much more suitable for Indian needs and that its introduction would enable Maruti to increase market share rapidly. He also very forcefully stressed the importance of Maruti products being technologically as up to date as possible, since this was a national project. He took a firm line, banging on Suzuki’s table to stress his point that Maruti did not enter into the collaboration to produce old models. As in the case of the conveyor for the assembly line, and the multi-spot welding machine, Maruti’s firmness paid off. Suzuki agreed to introduce the new model of the car, appreciating the long-term benefit to the company from having a better product. Once the decision was taken, SMC worked overtime to speed up the process and the first new model car was sold in June 1986. By that time the car was priced much higher, at Rs. 63,900, due to an increase in taxes and input costs.
The customers who had booked for the old model retained their priority for the new model. In September 1986, fresh bookings were invited for the new 800, as the old list was running out. So high was the acceptance of the car that 157,000 people booked for it despite restrictions being imposed on the number of bookings a customer could make, and knowing that delivery of the car could take a long time. This response convinced even the diehard sceptics that Maruti was going to be a success, even as a government company. Component makers realized that becoming a supplier to Maruti would give them volumes never thought possible, and it was a business opportunity of a lifetime. Becoming a Maruti dealer became an even more attractive opportunity and the pressure for becoming a dealer increased manifold.
Maruti was called upon to take a difficult decision soon after the first bookings had been made. The pick-up truck, a purely commercial vehicle that was part of the original project along with the 800 and the van, got a very poor response—bookings of just 2,000. In the project report, the pick-up truck was expected to account for 20 per cent of total production. The booking response showed that the customers did not want this vehicle, and manufacturing it in small volumes would not be viable. The company realized it had made a serious error of judgement in not recognizing that petrol-driven commercial vehicles could never compete with diesel-driven ones, as the government-determined price of diesel was much lower than petrol. SMC had estimated that the pick-up truck would be very successful because of good experience in other Asian countries. In Pakistan, it was used for rural transport, after being fitted with a canvas top, and sold in large numbers. However, India had a vehicle called the Tempo, which carried a load slightly more than the pick-up truck and ran on diesel. The highly value-conscious Indian customers immediately realized that the pick-up truck would always lose out to the Tempo, because of the Tempo’s lower operating costs. Realizing that the truck would be a failure, Maruti decided to drop its production and to write off the costs incurred till then in tooling and other related activities. This experience was a reminder to Maruti on the importance of correctly assessing the behaviour of Indian customers, and the dangers of transferring experience of other countries to India, without careful examination.
In December 1984, exactly a year after the 800 was launched, Maruti rolled out its van. There were two versions—one with a high roof and the other with a flat roof. The high-roof van, it was thought, would be particularly useful for those who wanted to use the vehicle both for carrying passengers as well as for commercial use. In Japan, for example, dry-cleaners and florists used it for making home deliveries. It was hoped that such usage would also develop in India. These expectations were not fulfilled to the extent hoped. Maruti also tried to popularize the van for carrying children to school and a version was developed for this purpose.
After a good initial response, the sale of the vans started to drop. One reason was that the vehicle did not have an engine in front, but it was placed under the front seats. As a result, the van had a flat front, instead of a bonnet like most cars. The driver and front-seat passenger were unhappy at there being no buffer for them in case of a collision. Accidents did occur, and it was seen that the vehicle was no more dangerous than cars and over time, this feeling of insecurity faded away. The van also tended to overturn if corners were taken at high speeds. This was more likely to happen with the high roof version than the flat-roof model. Maruti had to educate drivers that the van did have a higher centre of gravity, and hence it was important to take corners at lower speeds.
With sales of the van remaining below expectations, Maruti asked its advertising agency, Rediffusion, to rework the marketing strategy in 1988. A market survey done by Rediffusion showed that many potential customers thought that owning a vehicle which was being primarily projected for commercial use was infra dig. The name itself had a commercial connotation. Rediffusion recommended that the vehicle be repositioned as a car which provided maximum space at minimum cost. This approach was accepted. In December 1987, the vehicle’s name was changed to ‘Omni’ and it was widely advertised as the most economical and spacious passenger vehicle in the market. The advertising campaign concentrated on the space it provided for people and baggage as well as its suitability for weekend travel. The campaign also focussed on dispelling myths about the safety of the vehicle. The new pitch worked and sales rose 21 per cent the very next year. The advertising campaign became a national-award winner. However, production of the high-roof version was given up, as the demand for this version remained very low.
In 1990-91 Omni sales suddenly dipped by 4 per cent, followed by another 9 per cent in 1991-92. This time it was found that the users were not finding the rear seat comfortable enough, and the suspension also needed improvement. Maruti carried out the required changes, using its own engineering team. In addition, with the help of SMC, it modified the carburettor to improve the fuel efficiency of the car. The result was something the customers liked and there was again a surge in sales. The Omni has continued to be a popular vehicle till now.
This maiden attempt by Maruti to make changes to designs given by SMC, and the success in the market, generated a great deal of confidence among its engineers. They became willing to take on more challenging tasks. This was reflected in Maruti deciding to try and adapt the 800 to meet European specifications, and then getting it homologated for sale in France and other countries. At that point SMC did not have the resources to allocate for this work, and also felt that the emission standards might not be met using a carburettor.
Meanwhile, the operating environment in India was getting more difficult. Expenditure on raw materials and components increased substantially. There was a 55 per cent rise in the cost of steel in 1984, while the prices of tyres and other components also rose, as did the import bill thanks to the strengthening of the yen against the dollar, and the weakening of the rupee against all currencies.
The automobile sector was also getting its first whiff of liberalization. It had started around the time of Maruti’s nationalization, when the government allowed foreign collaborations for light commercial vehicles. In 1983, the government had approved the tie-ups of Delhi-based DCM with Toyota, and Eicher Goodearth with Mitsubishi, and a year later of Chandigarh-based Swaraj Vehicles with Mazda Motor Corporation and Allwyn, a Andhra Pradesh government-owned company, with Nissan Motors.
In 1985-86, its second year of production, Maruti produced 52,000 vehicles, which was a number higher than the combined production of Hindustan Motors and Premier Automobiles. However, these companies were not sitting idle. Both had started gearing up for competition in 1983 itself. As a first step, they had lobbied against the excise and customs concessions proposed for Maruti on fuel-efficiency norms. The Association of Indian Automobile Industry (AIAM)10 made several representations that the concessions should not be restricted to cars below 1000 cc but be given to all fuel-efficient cars (the Fiat and Ambassador had 1100 cc and 1400 cc engines respectively). The government finally conceded the point and extended the benefits to cars above 1000 cc.
In 1983, both Hindustan Motors and Premier Automobiles announced plans for manufacturing fuel-efficient cars with modern body styling.11 Hindustan Motors started work on the Hindustan Contessa, collaborating with Vauxhall Motors for the body and Isuzu Motors for the engine. The Contessa had a body larger and heavier than the Ambassador, and Hindustan Motors first introduced it with the same engine as the Ambassador. This was a big mistake, as the car was underpowered, and it was not well accepted. Later, when the much more powerful Isuzu engine was mounted, the company had a hard time overcoming the reputation which the Contessa had acquired. The lesson was that a vehicle should be built right the first time, and make-do solutions do not work. Premier Automobiles, for its part, tied up with Nissan for the NE-118, and increased its licensed capacity from 18,000 cars to 28,600 in 1984. This car was a very old model, and was introduced probably because the investment required was low. The market response was lukewarm. At about the same time, Standard Motors decided to introduce a 2000 cc car from the British firm, Rover. There were great expectations from the car, which was expensive, but it flopped. Here too the car used an old engine, and its performance was not anything like that of the Rover cars in the international market. Indian customers were disappointed, and the message conveyed to manufacturers was that they wanted technology which was up to date and relevant to Indian conditions.
The same message came out loud and clear in the success of the two-wheeler manufacturer, Hero Honda. Bajaj Automobiles Limited had for a long time enjoyed a virtual monopoly in the scooter segment, and its products had a long waiting period. BAL had obtained technology from Vespa in Italy in 1960, and though they brought in other models and variants, the top-selling scooter with a two-stroke engine was still based on the Vespa technology long after the licence expired in 1977. Hero Honda, established in 1984, introduced four-stroke engine motorcycles in 1985, and the market gradually switched from the old technology scooters to the much more fuel efficient and cleaner motorcycles. Hero Honda overtook Bajaj in terms of sales volumes and became the largest two-wheeler company in India. The market had voted against old technology. The fortunes of Bajaj revived only after it introduced a contemporary motorcycle based on technology from Kawasaki. It seemed as if scooters were on the way out, till Honda Scooters Limited introduced scooters with the latest design and technology. Honda scooters have been selling very well.
Early in 1985, the government announced the policy of broadbanding of licences, under which vehicle manufacturers could rework their licences hitherto given for specific products (scooters, light motorcycles, heavy motorcycles, cars, jeeps) to cover an entire category (for example, two-wheelers and four-wheelers) and firms were free to choose the mix of products in each category. This was perhaps the first loosening of the draconian licence system. That year, several manufacturers, hoping to take advantage of broadbanding, sought permission for technical collaborations for new cars, pick-up vans and LCVs.12 A year later, both Hindustan Motors and Premier Automobiles increased their licensed capacities—the former from 30,000 to 50,000 and the latter from 28,600 to 50,000.
Even as other companies were gearing up for new products, Maruti launched SMC’s four-wheel drive vehicle in December 1985. The vehicle was called the Gypsy, to signify its ability to go anywhere and freely roam around, despite SMC’s reservations on the name. In Europe, the word gypsy carried somewhat negative connotations. The Prime Minister, Rajiv Gandhi, came to the factory to give away the keys of the first few vehicles. He himself owned a Gypsy and loved to drive it, often heading off on his own, to the dismay of security personnel.
The Gypsy was the first modern four-wheel drive vehicle in the Indian market. Till then, Indian roads only saw jeeps, which were of World War II vintage, and were manufactured by Mumbai-based Mahindra and Mahindra (M&M). They were noisy and expensive to run, but had a monopoly of sales to the government. They were used by the Army, paramilitary forces, police as well as all the field departments of Central and state governments. Maruti decided to cut into this market.
Among the early successes it had was with the Delhi Police. Ved Marwah was the police commissioner and had been given a mandate to improve the efficiency of the force. He wanted to reduce the response time of the police to any complaint and realized that this could be done only if the police force had faster and more reliable vehicles. The jeeps currently in use were just not suited to the purpose. He got interested in the Gypsy and came to see me in my office. When he made the proposal for a bulk order of Gypsys, I was naturally thrilled and agreed immediately. He faced some roadblocks in the home ministry, where there was a strong lobby rooting for the jeeps that were already in use. However, he got his way and the ubiquitous Delhi Police Gypsys roaming around the Capital’s roads have been a familiar sight since then.
The advantages of the Gypsy over the Jeep were obvious. Nevertheless, Maruti realized that selling the vehicle to governments and displacing M&M would be tough. Thus, it was decided to market the vehicle aggressively and build a strong brand image. The advertisements focussed on its versatility, reliability and performance in all terrains. ‘Imagine long drives in wild, bumpy and treacherous conditions being described as comfy’, said one advertisement, with a picture of a Gypsy splashing through a water body in a verdant countryside setting. The Gypsy was used by an Army-sponsored expedition and driven from Leh in Ladakh to the northeastern states. Articles were written about the Gypsy and its ability to perform in adverse conditions in the media. The vehicle was entered in the Himalayan car rally, and performed extremely well.
There was a small market for the vehicle from the private sector as well. Construction companies and those offering adventure tourism started to use the Gypsy. Some individuals also bought the Gypsy for travelling to their farms or for use as a sports vehicle. The Gypsys from SMC came with a canvas top and were not air-conditioned. Soon there was a demand for a hardtop as well as air-conditioning. The class of people wanting to use a Gypsy for personal driving were not willing to do so without air-conditioning. While fitting an air-conditioner was not difficult, the effectiveness of cooling in the soft top was inadequate. A hard top was really essential for increasing sales. Maruti developed vendors for the hard top. These were produced by a hand-moulding process, and production was slow and not of very good quality. Customer acceptability was not very high. SMC did not have technology for a mechanized way of producing a hard top for the Gypsy, and all attempts to develop such a process in India proved unacceptable. This remained one of the reasons why Gypsy sales could not be increased.
Maruti offered the Gypsy to the army, in replacement to the Jeep and the Jonga, a vehicle produced in a government factory in Jabalpur, but using obsolete technology. The Gypsy underwent rigorous testing by user formations in high altitudes, extreme cold and in the desert in summer months. Those using the Gypsy were very happy with it and found performance and reliability superior to the Jeep. The next, and what proved to be a much harder step, was to actually sell and deliver the vehicle to the army, where purchases were all made through a specialized section of the Army Supply Corps.
The first purchase order from the army for 900 canvas-topped Gypsies came in January 1991 and the vehicles were to be delivered before 31 March of that year. Maruti manufactured the vehicles and they were parked for inspection in the factory. Army rules required that each vehicle be inspected by their own inspectors. The inspecting team would check only seven or eight vehicles in a day. It was obviously impossible to complete inspection of 900 vehicles in the time available. The inspection agency would not accept our submission that the vehicles were mass produced, following a well-documented system for quality control, and that sample checking should be adequate. They would also generally not accept Maruti’s explanation that what were being pointed out as defects were not really defects.
As was foreseen, the delivery date expired before the bulk of the vehicles had been inspected. Once that happened, inspections stopped. The purchase order had to be revalidated before the remaining vehicles could be inspected. The process of revalidation took another nine to ten months. In the meantime, the vehicles were standing in the open in the factory, braving the elements. The system was not concerned about the consequences.
K. Kumar made several visits to the army headquarters and met officers at various levels, to explain the Maruti-SMC system for ensuring uniformity of quality and adherence to specifications. He pleaded for expediting the process of inspection, but in vain. Kumar and I then met Lt. Gen. M.S. Bhullar, who was director general quality assurance in the army, and pointed out that exposure to the sun and rain would damage the vehicles and neither Maruti nor the army was gaining by rigidly following tortuous government procedures. Quality, I argued, was produced, not inspected and suggested that the army work out some less cumbersome methods of inspection. But the army was not willing to accept this point of view. After this experience, sale of Gypsys to the army came to a virtual stop. However, a new customer was found in the air force. Though part of the same government, and subject to the same rules, we encountered no problems in making sales, or during the inspection process.
It was only several years later that Maruti could evolve a system of making sales to the army. In 1995, the company had taken ISO certification and around 1998, convinced the army to let it go for self-certification. The army inspection then was confined to random checks on 10 or 15 vehicles and could be managed.
Meanwhile, there were new problems. The 1986-87 Union Budget increased excise duties on all vehicles from 20 per cent to 25 per cent and the customs duty on components from 45 percent to 50 per cent. The additional tax burden came on top of the continued strengthening of the dollar and the yen against the rupee—the yen alone by 22 per cent—raising prices of raw materials and components as well as of the controlled prices of steel and power.13 As a result, after holding the price line for four years, Maruti had to increase the prices of its cars. The impact of this was felt only the following year. The growth of the automobile market slowed down.
Despite this, 1986-87 was a landmark year for Maruti, not only because of the unveiling of the new 800 cc car. For the first time, it sold more cars—74,511—than other passenger car manufacturers put together, who managed only 51,383 cars. Maruti had clearly won the battle, and it kept increasing its lead thereafter. All the major investments envisaged in the original project were completed and the factory was now set to manufacture its mandated 100,000 vehicles. In 1987, SMC exercised its option to increase its stake in the company to 40 per cent, as stated in the original joint venture agreement. It was, in a sense, an affirmation of the fact that Suzuki had got over its initial reservations about investing large amounts of money in India and in a public sector company. Increasing equity was a vote of confidence in the Indian economy, and the future of Maruti. This year was also significant because the four-year-old Maruti set its ambitious sights on foreign markets. Although the project report had talked about exports—indeed, in the original terms for collaboration there was a 50 per cent export target—nobody really believed this was possible.
On the face of it, the idea was bizarre—India was hardly known for exports of sophisticated engineering products those days. But I had two reasons for pushing for exports.
First, of course, was the need to earn foreign exchange. Maruti was attracting brickbats for being a huge foreign exchange guzzler and it was necessary to soften the criticism by earning dollars. Having a special quota for making out-of-turn car allotments for those who could pay in foreign exchange was also driven by the same consideration.
But a far more important reason related to creating a more customer-oriented and quality-conscious work culture in Maruti. I saw exports as a way of benchmarking the company’s performance against international standards and exposing it to competition. By then the total dominance of Maruti in the domestic market was established and it was clear that there would be no real domestic competition. The demand-supply gap in the car market had still not been bridged. As a result, dealers were more like distributors than sales agents. The consumers, never having been earlier exposed to international standards of quality and service, did not have high expectations. Maruti was being praised for the quality of its vehicles and customer service. I recognized that we really had a long way to go before we could compare ourselves with international manufacturers, and the danger of complacency setting in at Maruti was very high. I believed that exporting cars to the western world would help Maruti improve its own performance and standards, since we would be receiving feedback and criticism from really competitive markets.
Krishnamurthy, as the non-executive chairman, was not very enthusiastic and cautioned me of the risks attendant on exporting cars. The profits would be small, whereas all the cars that Maruti could produce could be sold much more profitably in the domestic market. Further we could damage our reputation in international markets if we fell below the minimum standards of acceptability. But I felt that the learning experience and the confidence that dealing with global markets would bring would stand the company in good stead in the long term, and be worth the money spent. There was strong support from Dr Kumar and his team, and that helped me in deciding to take up the challenge.
East Europe (most of the countries in that region then belonged to the erstwhile Soviet Bloc) was a natural target market, for various reasons. The only cars in the countries behind the Iron Curtain then were those made within the Bloc—the Lada, built by AvtoVAZ, a firm based in the erstwhile Soviet Union, and the Trabant, made by an erstwhile East German firm, VEB Sachsenring. These cars were using old technology and were very heavy consumers of petrol. Customers, if given a chance, were bound to prefer a more modern and economical vehicle.
The first step was taken when Dr Peter Medgyessy, who was the deputy prime minister and finance minister of the Republic of Hungary, visited India. Maruti was already a showpiece of the public sector and the government had scheduled a visit by him to the Maruti factory. I showed him around and he was very impressed with the factory and the 800 cc car. He felt that the car would be ideal for Hungary if it could be homologated there and some arrangement for balancing the foreign exchange required to import cars could be worked out.
I held discussions with different ministries to explore how the foreign exchange balancing could be done. India was buying power equipment from Hungary and the trade balance was adverse to India. Exporting cars would help narrow the trade gap. The government approved the idea that the value of cars exported could be set off against the import of power equipment.
Meanwhile Dr Kumar worked at getting homologation approvals. The standards in Hungary were somewhat easier than in western Europe and approvals could be secured without much difficulty. Dr Medgyessy accepted the idea that car imports by Hungary could be made against new orders for power equipment from there. He was really quite keen to introduce the 800 in Hungary as it would save petrol and be a feather in his cap.
The first order of exports came and, in 1986, an agreement was signed with a firm called Mogurt for the export of between 500 and 5,000 cars a year over the next five years. Mogurt would import, sell and service the cars. It was also the firm exporting power equipment to India. Maruti had to import components specific for left-hand drive vehicles from Japan, and also fit seat belts, which Indian cars did not have at that time.
On 24 October 1987—a red letter day for Maruti—the minister of industry, J. Vengala Rao, handed over the keys of a Maruti 800 to Dr Medgyessy at a function held in the compound of the majestic Parliament building in Budapest. I took the deputy prime minister and the industries minister for a short drive in one of the 800 cc cars, with the security policemen holding their breaths. I brought them both back quite safely!
Maruti exported a total of 500 cars to Hungary in the first year, which increased to almost 1,500 in 1990-91 and soared to nearly 4,400 the following year. The cars became very popular. These exports had another very significant fallout. Dr Medgyessy, who rose to become the prime minister, paid an official visit to Japan. He visited the SMC headquarters at Hamamatsu, no doubt because of the success of Maruti cars. There, discussions with Suzuki led to SMC establishing a manufacturing plant in Hungary, in equal partnership with the government of Hungary. Obviously, Suzuki liked the Indian model of a partnership with the government, and replicated it in Hungary. He became the Consul General for Hungary in Japan, perhaps as a reward for making an investment in a car-manufacturing factory in that country. SMC also started to import Hungarian wines, which are of high quality, for sale in Japan.
With cars being sold in Hungary, it was comparatively easier to sell cars in Czechoslovakia and Yugoslavia. Homologation of the cars was required to be done in each of these countries, as standards varied to some extent. Kumar and his team were up to the task and inquiries made from Hungary by officials of these two countries resulted in Maruti getting quick approvals, as the cars were reported to be performing very well. The arrangements were similar, and exports from India had to be balanced by imports from these countries.
We were, however, not going to be satisfied with exporting to the rather insular eastern European markets. Exporting to them gave everyone greater confidence, but we had to enter western Europe. This was a more attractive and really competitive market and the challenge was to succeed in countries in this part of the world. SMC, which had earlier been selling the old model of the 800 cc car in some of those countries, had discontinued sale of this model, and was selling only its bigger cars. This was largely because Japanese cars had a quota in Europe, and it was more profitable to sell big cars rather than small cars. Maruti, therefore, thought there was a good opportunity to sell the 800 cc car to western Europe, provided it was not hit by the quota rules.
When Maruti first mooted the idea, SMC was not supportive. It discouraged Maruti, saying that Indian-made cars were unlikely to be accepted in Europe, that it was too early for Maruti to start thinking of exports to western Europe, and that homologation would be extremely difficult. SMC engineers were fully occupied and would not be able to support homologation of Maruti cars. Perhaps SMC was also worried about its brand image getting tarnished if Indian cars bombed in western Europe.
I was, however, determined to go ahead. The east Europe experience had raised the confidence levels of everyone. In 1989, I asked Kumar and his team to get the 800 homologated in France. He took up the challenge and his teams worked very hard understanding the rules and requirements. SMC, despite its initial reluctance, did help in areas where the Maruti team felt its knowledge was inadequate. The homologation was done at a French institute, UTAC. For the first time, the 800 cc car was subjected to a crash test. Fortunately it passed all tests and the car was certified for sale in France. That was a day of rejoicing.
A. Chardonnet, the SMC dealer in France, was appointed as the dealer for Maruti also. I visited government officials in Paris along with Patrick Chardonnet, the owner of the dealership, and it was decided that the car would be sold under the Maruti name, and ‘Suzuki’ would not be found written anywhere on the vehicle. The car was to be supplied as an Indian car, so that quota rules for imports from Japan did not apply. Even the various manuals had to be revised to delete all reference to SMC. It was also necessary to ensure that value addition in India met the limit specified in the EU rules, because at that time cars from India could be imported with no duty.
The first Maruti 800 landed in France in 1989, to be sold as the Alto. Chardonnet organized a gala launch at a posh hotel in Paris, with elephants in attendance. A nine-foot pyramid of champagne glasses was put up in the hall. Champagne was poured into the topmost glass from where it trickled down to the rest. In the first year itself, 2,833 cars were exported to France. Many Indians visiting Paris would spot a Maruti car, and duly communicated this to me on return. It gave everyone a great sense of pride and joy. Based on the homologation in France, Maruti’s next market in Europe was the Netherlands. The car met with even greater success in that country and the Alto became the largest selling car in that category. Sales were then extended to England, Italy, and Malta.
SMC was particularly doubtful of Maruti’s success in Italy, which was seen as a captive market of Fiat, and it was well known that Fiat had enormous political power. However, the Indian ambassador, Kuldip Sehdev, was very supportive. While posted in Hungary, he had been fully involved in the success of Maruti in that country. Once again he came out in support of Maruti. With his help and contacts I was confident that there would be no serious issues with the government. Since the 800 was very competitive with the Fiat small cars, being more fuel efficient and lower priced, there was no reason why it should not be able to sell well.
Maruti used SMC’s dealer in Italy, Autoexpo, whose owner, Romano Artioli, was obsessed with automobiles. He too was very keen to make a success of the 800. Later one of his ventures was to buy the iconic Bugatti factory, which had been virtually closed down. He revived the company and produced a few cars. However, the venture was not successful, as there were few buyers for this very exotic car, perhaps because of its high price. His wife, meanwhile, opened boutiques where she was selling various lifestyle products under the Bugatti brand name. These boutiques lasted longer than the car venture.
Artioli did a good job and the 800 was selling in large numbers within a year. Italy continued to be a good market for Maruti till 2004, when sales had to be discontinued because the car could not meet the new regulations in Europe relating to emissions and safety. Over 41,000 cars had been sold in Italy till then. When SMC saw that Maruti had managed to get its cars homologated for France and Italy, and that cars were selling well, it changed its attitude and got its dealers in Belgium and the United Kingdom to also start selling Maruti cars.
Maruti was approached by J.A. Gasan for a dealership in Malta. SMC had a dealer in that country, but he did not want to sell Maruti vehicles, because he was not convinced that they would be accepted by the consumers. Under these circumstances, Maruti could appoint Gasan as its dealer for Malta. Besides the car, the Gypsy was also exported and both vehicles sold very well. When the success of Maruti vehicles in Malta was evident, the SMC dealer put pressure to be appointed to sell Maruti vehicles. We could not do so as Gasan was doing a good job and we had a contract with him.
Europe was not the only market that Maruti tapped. Over the next few years it entered all continents, except North America. In 1989, the Gypsy pick-up was homologated for sale in Australia and in several West African countries. In Australia, farmers would load the back of the vehicle with bales of hay, put the car in first gear, get in the back themselves and start pitching hay for the sheep and cattle to feed on, while the vehicle traversed the vast farms without a driver.
The 800 was already a common sight on roads in Bangladesh, Sri Lanka, Nepal, Bhutan and Mauritius, where it had been sold since 1987. In 1992, Maruti made an entry into the South American market, debuting in Chile. Selling cars to South America was not easy, because of the high cost of shipping. However, Maruti could work out an arrangement with Japanese shipping company NYK under which ship carriers, returning empty to Japan after delivering cars to Europe, would load the vehicles meant for Chile and carry them to Japan. There they would be transhipped to vessels going to Chile via the Pacific. This arrangement was much more economical than shipping directly to South America and enabled Maruti to be competitive.
Towards the end of the 1980s, the government tried to improve the performance of public sector undertakings by signing memorandums of understanding (MoUs) with them. The intention was to enter into a kind of contract with each PSU, where it would commit to achieving certain targets, and the government would do what was required for those targets to be achieved. Maruti signed the first MoU in 1988 and, continued to do so till it ceased to be a PSU in 1992. We were, by and large, able to achieve the targets committed to the government. The MoU scheme did not really help in bringing about improvements in the management of PSUs, as the fundamental factors which were responsible for the inadequate performance of PSUs could not be resolved in this manner. However, we could use the MOU mechanism to get approval to introduce a productivity-linked incentive scheme for all employees.
The product development plan proposed by Maruti in one of the MoUs included a larger three-box sedan car. Maruti had always been interested in such a car and that is why it had seriously considered the Volkswagen Jetta and Golf in 1981 and 1982. However, at the time of the tie-up with SMC, the latter did not have a three-box car in its stable. It was only in 1985 that SMC developed and sold a three-box car in a joint venture established with General Motors in the United States. The car, with a 1.3 litre engine, had both a sedan and a hatchback version and was launched in Japan in 1989.
Maruti decided to manufacture this car, but, instead of investing in facilities to manufacture a 1.3 litre engine, it was decided to use the 1 litre engine. This engine was already being manufactured for the Gypsy and thus no new investments were required for engine production. We had already submitted a proposal to the government for manufacturing this car in 1986 and got the green signal in July 1988. The project to manufacture this car involved an investment of Rs. 97 crore and was to be financed by internal resources. However, to meet the foreign currency requirements, a loan of $40 million was arranged in 1990-91. At that time the foreign exchange reserves of the government were very low and foreign currency could not be allocated to us.
The 970 cc Maruti 1000 hit the roads in November 1990. The system for making bookings for the car was the same as was earlier used for the 800, as it was expected that the demand would be far higher than the supply. The car was exhibited in a number of cities with the press being invited for the previews. The expectation that demand would be high was correct and Maruti got 251,000 bookings when it called for them in November and December 1989. Maruti, however, kept only 25,000 bookings, selected through a computerized draw. The deposits given by the other customers were returned to them. Maruti did not want to keep customers waiting for long periods of time. The cars for the successful allottees were to be delivered over a one-and-a-half-year period from the start of production.
However, the car had one major problem—the pick-up was somewhat inadequate when the car was running with the air-conditioner on and had to go up an incline. To address this issue, and seeing the success of the 1000 cc car, SMC agreed that we could manufacture the 1.3 litre engine and upgrade our car. Maruti had enough funds from its internal resources to finance the required investment. In addition, the Army had suggested that the Gypsy would become much more acceptable if it had a more powerful engine. Thus, it was possible to get reasonable volumes to make manufacturing the 1.3 litre engine a viable proposition.
The 1000 was launched in perhaps the most trying of times for the automobile industry, resulting from a combination of domestic and global economic and political factors. The country was rocked by agitations—the violent protests against job reservations for backward classes implemented by the National Front government on the basis of the B.P. Mandal Commission Report and rath yatra by Bharatiya Janata Party leader L.K. Advani to gather support for the Ayodhya movement. This disrupted the movement of vehicles and the supply of raw materials.
The 1990 Gulf war brought its own set of problems, with the government taking steps to reduce fuel consumption and keep the oil import bill down. These, according to the AIAM, only created a psychology of shortage, leading to long queues at petrol pumps, and increased turnaround time for transport vehicles. This, in turn, adversely affected transport of inputs and of finished products.
Inflation rates had started to climb, being fuelled by the high fiscal deficits that the government had been incurring through lax financial management. Foreign exchange reserves were fast dwindling, because exports had been steadily declining over many years. Indian industry, thanks to decades of protection, was largely unable to export manufactured goods, due to lack of competitiveness. A very serious economic crisis was looming.
The government took a raft of measures to conserve foreign exchange. In November 1990, it abolished certain categories of imports under open general licence (OGL), apart from placing restrictions on letters of credit and remittances as well as import financing. Customs duty was raised twice and touched 80 per cent in December 1990. The combined effect of all this—and several other measures—was to make imports very expensive. Maruti too felt the heat. The release of foreign exchange for the phased manufacturing programme was severely restricted. Maruti had to buy replenishment licences at a premium to fulfil its production targets. The value of the rupee against the dollar also declined sharply, and this pushed up the provisions the company had to make for repayment of outstanding foreign exchange loans. Excise duty was also raised. All these factors pushed up costs by 8-10 per cent, leaving manufacturers with little option but to increase prices. Combined with the increase in fuel prices, this naturally softened the demand for cars.14
Maruti held its own admirably in this adverse scenario; while sales of other vehicles dropped from 70,994 in 1989-90 to 67,408 in 1990-91, Maruti’s sales increased from 1,08,440 to 1,10,031. Apart from launching the 1000 cc car, sales also got buoyed by a large order of 1,500 Gypsys from the Army.
If 1990 was a difficult year, 1991 was even worse. Despite the fact that car sales had started to decline in 1990 because of price increases necessitated by excise and custom duty hikes, the government again raised excise duty on cars from 52.5 per cent to 66 per cent in July 1991. AIAM calculated the tax component at 120 per cent of the ex-factory price of passenger cars. Between August 1989 and July 1991, the price of the 800 increased 65 per cent, from Rs. 100,680 to Rs. 166,629. Car prices had been revised upward seven times in that period for most models.
Prices of raw materials and components also kept climbing, mainly because of increases in the administered prices of steel and aluminium and power, and strong inflationary trends. The cost of imports also increased, because of a devaluation of the rupee against the dollar by 18 per cent in July 1991, the need to provide margin money by importers and a requirement to buy EXIM scrips for imports. High interest rates and tightening of money supply pushed up the costs of production and also affected demand for car loans, the interest on which increased by about 10 per cent in 1991-92. Reduced depreciation benefits on cars affected car purchases by companies and independent professionals.
Cars sales declined by 7 per cent. While sales of other cars fell by 28 per cent, Maruti clocked a 6 per cent increase in the sales of its cars and increased its market share to 66 per cent. Maruti sales may also have turned negative since the sales of the Omni and the 1000 cc car were declining. However, we cut prices to maintain sales growth. The prices of the Omni, which had been raised by 8 per cent in December 1991, were reduced by 4 per cent in January 1992. Similarly, the price of the 1000 cc car was slashed by 6 per cent in January 1992. The company still managed to make a profit of Rs. 6.61 crore in 1991-92, though it was lower than the previous year’s profit of Rs. 8.82 crore.
Maruti’s profitability in those difficult days had a lot to do with its robust exports, which grew 367 per cent. But it was to face some hiccups there as well. In 1991, Europe announced more stringent emission norms for cars, to come into effect from 1993. This could well have put a halt to exports to that continent, unless the cars were modified. SMC felt there was no point making efforts to modify the 800, since it was planning to launch a new car in Europe—the Zen (which was also to be sold as the Alto, since the brand name had been established)—in 1993. Maruti, however, argued that stopping exports would not be in its interests, as it had certain export obligations and also got some export-linked concessions.
I asked Kumar to see whether the 800 could be modified to meet the new emission norms. There were some interim regulations and the idea was to get the vehicle homologated so that exports could continue till 1993. However, that proved to be a very difficult task given SMC’s reluctance to support what was thought to be a futile effort. For example, Maruti could not get some components as original equipment from Japan. Maruti decided to buy them as spare parts, and fitted them on the vehicles. Kumar’s team persisted with their efforts, and Maruti could get the car homologated—successfully—at TUV, an agency in the Netherlands. However, SMC, which was still vehemently opposed to the idea, said it would not stand guarantee for export of the 800 as it was not sure of what modifications Maruti had done. I kept trying to persuade them, but in vain.
Ultimately, Artioli, who was equally keen to keep on importing these vehicles, stepped forward and said he would be personally responsible for their import, and for any damages arising from their performance, and would not ask SMC to bear any costs. It was only after this letter—and some more persuasion from me—that SMC finally agreed that Maruti could export these vehicles to Italy and subsequently to the Netherlands for two more years.
For Maruti, the successful export of the modified car was further testimony to the fact that it had the research and development capability to carry out significant modifications, even though its laboratory was lacking many facilities. One outcome of this incident was that SMC recognized the capabilities of Indian engineers and accepted the need for Maruti to have adequate engineering and development capabilities in India.
Things were, however, beginning to change for the Indian economy and for Maruti. July 1991 saw the initiation of the first major liberalization of the Indian economy, which brought delicensing and deregulation in its wake. Following intensive lobbying by the automobile industry, the government reduced the excise duty on cars to 55 per cent, though that was still 18.25 per cent higher than the duty prevailing in February 1990. For Maruti, a new chapter was about to be written, with SMC increasing its stake in the company to 50 per cent. When this happened Maruti no longer remained a government company. A lot of things were going to be transformed, as a result.