The tension between the two equal partners in Maruti could not have come at a worse time. India’s automobile policy was in the process of being overhauled and Maruti was likely to get some serious competition.
In 1994, almost forty years after its protectionist policies saw the exit of foreign automobile makers from India, the government delicensed car production. This meant that anyone could establish a factory for manufacturing cars, without seeking government permission. Foreign companies were also allowed to invest 100 per cent equity in a car manufacturing company in India. However, if a new manufacturer was proposing to import capital goods, or components for manufacturing cars, he had to sign an MoU with the Directorate General of Foreign Trade committing to balance the foreign exchange cost of such imports with the value of equity brought in and exports from India. These exports could be any goods or commodity and not necessarily cars or automobile components.
Foreign car manufacturers had been watching, with some degree of envy, the success enjoyed by SMC in India. The large deposits collected by Maruti from customers waiting for cars, the almost 20 per cent growth of sales every year and the high profits being made by the company were not available anywhere in the world at that time. The automobile component industry had also developed and made manufacturing in India much easier and more economical. Thus delicensing was seen as an opportunity to invest in a growing and profitable market. Many companies lost no time in tying up with Indian firms to start automobile ventures. South Korean auto major Daewoo Motors tied up with DCM, whose venture with Toyota to manufacture light commercial vehicles was doing badly. Toyota wanted to exit and Daewoo presented the opportunity to them to do so. The DCM-Daewoo joint venture converted the light commercial vehicle factory into one for making cars. The Cielo was launched in 1995, followed by the Matiz in 1999. The cars did quite well till Daewoo’s troubles in Korea led to the Indian operations closing down.
French firm Peugeot tied up with Premier Automobiles in 1994 to make Peugeot cars. This project was really doomed to failure from the start because of a number of mistakes made. Many of those who invested in this project lost their money. General Motors found a partner in Hindustan Motors. However, it was decided not to use Hindustan Motor’s facilities in Kolkata but establish a brand new manufacturing site near Baroda in Gujarat. General Motors wanted to create a different work culture and this new plant was used to manufacture Opel cars. Honda Motors formed a joint venture with Delhi-based Siel (Shriram Industrial Enterprises Ltd, a spin-off from the DCM group) in 1995. Honda had known the group earlier through its very successful joint venture with them to make portable generating sets. The late Lala Charat Ram also had very good contacts and relationships with the Japanese. The project has flourished and Honda cars are doing reasonably well in India. The following year, Ford tied up with Mumbai-based commercial vehicles manufacturer Mahindra and Mahindra, while Hyundai Motor Corporation chose to set up a wholly owned subsidiary in 1996.
However, several problems were encountered in operationalizing the policy. Initially there was a big issue in determining what constituted a CKD kit and a SKD kit. For purposes of custom duties, a SKD kit attracted the much higher duty which was levied on an imported fully built car, while a CKD kit had a comparatively lower duty. This led to many disputes and legal proceedings between the car companies and the customs department. Some manufacturers were suspected of bringing in components which would constitute a SKD kit, but beating the system by importing those parts through two different ports! Companies were also not able to meet their export commitments.
After some time, as the foreign exchange balances of the government rose, the policy was liberalized. In November 1997, during Maran’s tenure, a new policy was announced. Companies would have to invest a minimum of $50 million over a four-year period and the venture would have to become foreign exchange neutral within seven years. They would have to localize 50 per cent of production within three years of starting production and 70 per cent within seven years. Apart from cars, they would be allowed to export components and ancillaries and would get a moratorium of two years for meeting their export commitments. The policy was far more liberal compared to the PMP requirements of the pre-liberalization era.
Meanwhile, despite the difficult relations with the government, and the introduction of some competition, Maruti continued to make steady progress. Domestic sales increased by 22 per cent in 1996-97 over 1995-96 and the market share went to 79.6 per cent from 76.4 per cent in 1995-96. The bulk of this growth came from the smaller cars. In the bigger car segment, Maruti’s market share dropped by almost half, from 65.8 per cent in 1995-96 to 38.2 per cent in 1996-97, as the number of players in the car market increased. However, the volume of sales did not decline. In 1997-98, the year I retired, Maruti again increased sales by 4.2 per cent and market share reached 82.7 per cent. This was the highest level ever reached and after that a slow but steady decline started. To an extent this was due to competition, but the disputes with the government and their impact also played a part.
Other issues were hanging fire. One related to the renewal of the licence agreement for the Maruti 800 and the Omni which had expired in November 1992, and for the Gypsy in December 1993. The government was reluctant to approve extension of the licences, arguing that technology had already been transferred to India and there was no need to pay any further royalty on these products. On the other hand, the management of Maruti realized that it did not have the same capabilities as SMC to make improvements and changes in the vehicles, and these would have to come from Japan. These models were no longer in production in Japan, and SMC would not work on making improvements on them unless they were paid to do so. Thus, paying a royalty was essential, as otherwise the vehicles would remain without any improvements or changes. That would be something similar to what happened to the Ambassador and the Premier Padmini after the collaboration with their foreign partners expired. SMC had already expressed its desire to discontinue the 800 since the royalty was ending. I had negotiated a lower royalty, but the approval to this was being delayed in the government.
It took a great deal of effort to persuade the government to understand the value of keeping SMC working on making improvements, and it was pointed out that the royalty would now be less than half. Finally, the board passed a resolution, in September 1995, with the concurrence of the government directors, agreeing to the renewal of the agreement. The royalties on the 800, Omni and Gypsy would be what had earlier been agreed upon between SMC and the Maruti team and would be paid with effect from the dates on which the earlier royalties had ended.
In February 1997, there was a change of guard at the ministry. Prasad was transferred as secretary in the newly created Department of Industrial Policy and Promotion and was replaced as secretary, heavy industries, as well as chairman of Maruti, by Prabir Sengupta. But that did not make any difference to the face-off between SMC and the government. Perhaps Sengupta felt that any change of policy regarding SMC or moderation of the government’s attitude might result in his being accused of having been ‘influenced’ by SMC. It was much safer to continue to act as if the ministry was protecting national interests by not accepting SMC’s proposals about making further investments and improvements in Maruti, or on how to fund these investments, or consulting SMC on whom to appoint as the next managing director.
The flashpoint came when, at a board meeting on 27 August 1997, the government nominated Bhaskarudu as managing director to succeed me, as my five-year term ended that day. Suzuki objected on the grounds that SMC had not been consulted and made it very clear that Bhaskarudu was not acceptable. The government argued that consultation was not necessary, since it was its turn to nominate the managing director under the 1992 agreement. Suzuki did not agree and suggested that Maruti remain without a managing director till the next annual general meeting (AGM), with a committee of directors running the company, an idea that Sengupta and Mukherji rejected outright. The question of a vote was raised. Both parties had an equal number of directors but Sengupta, as the chairman, had a casting vote in the event of a tie. SMC decided not to press for a vote as it thought it would lose. Bhaskarudu was approved by the board as the next managing director. It is an interesting thought as to what would have happened if a vote had been taken. Bhaskarudu could not have voted as he was interested in the resolution. In that event, SMC directors could have defeated the resolution. This would have created a stalemate and a situation which would have been hard to resolve.
The government had wanted to hold the AGM on the same day. This was possible if all the shareholders agreed to waive the statutory notice. SMC refused to do so. Thus the AGM had to be held later after following the legal procedure.
What had particularly riled Suzuki was the fact that SMC had been writing to the government for months, asking for consultations on the next managing director, but the government had not responded. Instead, it had acted unilaterally in naming Bhaskarudu on the day when my term ended. The meaning was clear. The government did not think that its partner in the project should be consulted regarding the managing director. It ignored the fact that in 1992 SMC had written to the government that it was nominating me as managing director, and the government had also written back mentioning the complaints against me but saying that it would accept whoever Suzuki finally decided to nominate.
The already bitter battle turned acrimonious, with Suzuki questioning Bhaskarudu’s credentials to be the managing director. In a statement issued on 9 September, he lamented that ‘it is extremely regrettable that the Indian government notified us of the appointment of a person who Suzuki believes is not suitable for the post of managing director of a joint company’. He went on to add that ‘the appointments of top management should be discussed and agreed between partners of the joint venture at least two months in advance’.
SMC decided to take the legal route and filed a writ in the Delhi High Court asking for Bhaskarudu’s appointment to be quashed and a stay on the AGM, or at least prohibiting the AGM from ratifying the board’s decision on the managing director. The high court asked the two partners to sort out the problems, but when they could not, it dismissed SMC’s petition on the morning of the AGM, holding that the parties should go for arbitration as provided in the agreement between them.
Consequent to Bhaskarudu becoming the managing director, SMC claimed the post of chairman, arguing that the five-year term of the government nominee had ended. The government did not agree, saying that it had appointed a chairman only in 1996 and the five-year term would count from that date. It did not accept the reasoning that not appointing the chairman in 1992, when it could have, was its own decision, and that SMC had not prevented it from doing so. Consequently, SMC’s right to appoint the chairman after five years should not be compromised due to the government’s own inaction, the company argued. The result was that from 28 August 1997 both the chairman and the managing director became government nominees. At that stage, logic and fair play were lost in the heat of passion. This was clearly against the spirit, if not also the letter, of the joint venture agreement signed when both partners acquired an equal number of shares in Maruti.
Meanwhile Suzuki was examining its other legal options. The conclusion reached was that filing an arbitration proceeding, in accordance with the joint venture agreement, would be the best bet. The arbitration would be carried out in Paris. SMC sought legal opinion both in India and abroad. In India, eminent lawyer Soli Sorabjee gave an opinion that the government should have consulted SMC before appointing Bhaskarudu. That was also the view taken by a former Chief Justice of India, P.N. Bhagwati. An arbitration petition was filed and SMC hired Amarchand Mangaldas as its solicitors. No separate legal action was taken on the matter of who should nominate the chairman.
With a case pending at the International Council for Arbitration (ICA), relations between the government and SMC were hardly cordial. By then very bitter words had been exchanged, with Maran saying SMC was free to exit from Maruti and that a number of foreign firms would be quite willing to step in. In fact there was a great deal of speculation as to why the government had taken such a hard stance against SMC, despite the runaway success of the project. The public sector had received a much-needed boost from the performance and reputation of Maruti. The government had been using it as a showpiece to flaunt the modernization of Indian industry, and to show that India could produce high quality engineering products, and attain productivity and costs levels which had enabled its cars to sell in Europe. Why risk all this by entering into a dispute with SMC?
The government could not have been unaware that it did not have the know-how or the technology to run an automobile plant, where there was a need to periodically develop and introduce new models. The industry had been delicensed and competition was growing. Without help from SMC, Maruti could not possibly compete with the international manufacturers who were in India. The late Lalit Suri, a leading businessman and hotelier, who was quite close to the government, told me that this approach had been adopted because Daewoo had offered to buy SMC’s stake if it became available with the Japanese company exiting the project. The government was quite happy with this prospect. It possibly believed that Daewoo would be an adequate replacement for SMC. I pointed out that going along with Daewoo would mean shutting down the Maruti plant for twelve to eighteen months, since the factory would have to be modified to produce Daewoo cars. Manufacture of products licensed by Suzuki could not have continued. All the vendors would also need time to change their tooling to make parts for Daewoo cars, and the parts would have to be homologated, which itself would be a time-consuming exercise. Investments made for Maruti cars would have to be scrapped and would be a costly business.
I also asked Suri to check out Daewoo’s creditworthiness, since it was already a highly leveraged company and my understanding was that it was financially quite weak. Would Daewoo really have the financial ability to do what it was apparently promising to do? Suri reverted to me a few days later, admitting that Daewoo’s creditworthiness was indeed very low and banking on it replacing SMC was likely to be risky. The Daewoo idea died out after that. Three years later, Daewoo was officially bankrupt.
The immediate fallout of the dispute was on Maruti’s fledgling research and development (R&D) programme. After 1992, SMC had been seeking an extension in the licence agreement for the 800 and then for the Omni and the Gypsy. The government, however, argued that SMC was making very little contribution to the technology for the vehicles, that there was no need for any further royalty to be paid. Differing views on this, and the new engine, resulted in the government proposing that Maruti’s own R&D should make the company self-sufficient in engineering capability. The question was, how. Kumar had earlier submitted a detailed note on the subject to the board, which suggested sending Maruti engineers to Japan where they would work in SMC’s design and development office for two years, after which they would return and start similar work in India. Maruti decided to send thirty-five to forty engineers in batches of five to seven a year. It also committed to the government that it would have the capability to complete the first minor change of a car by 2003 and a full body change by 2007-08. The first batch of two engineers left for Japan in 1994-95 and another batch went in 1996.
After the showdown over the managing director, a furious SMC said that the agreement for R&D training was over and that it would not take any more trainees. The facility which had been extended by SMC was in any case outside the scope of the joint venture agreement but SMC had agreed to Maruti’s request as a means of strengthening the company. Between 1994-95 and 1996, Maruti had spent close to Rs. 50 crore on training of manpower and establishment of R&D facilities. Maruti engineers started going back to SMC after the dispute was settled and now SMC is actively working to establish a full-fledged design and engineering capability in Maruti. The dispute between the partners set back this process by at least five years. When the Ministry of Heavy Industries was trying to assert its ‘sovereign rights’ over SMC in the management of Maruti, the loss which the company would suffer in the long term, due to lack of technology transfer and delay in building internal capabilities was not given adequate consideration. Bhaskarudu was happy becoming the managing director even if it meant losing the support and cooperation of SMC. He should have realized the need to also keep Suzuki on his side.
Meanwhile, the chairman and chief executive officer of General Motors, John F. Smith, on a visit to India in November 1997, offered to mediate between the government and SMC. General Motors was then a 20 per cent equity holder in Suzuki Japan. However, nothing came of this effort. That very month, the United Front government fell and fresh elections were announced for February-March 1998. In December 1997 Sengupta had been transferred as secretary in the Ministry of Petroleum and Natural Gas (though he continued as Maruti chairman) and was replaced by P. Shankar. For SMC, this was a window of opportunity, as the minister would also change if a new political formation came to power. Keeping an eye on the future, they kept in touch with Shankar, who was an officer who understood the futileness of the dispute and the harm it was causing to the growth of Maruti and the automobile industry in India.
On 23 March 1998, another coalition, this time headed by the Bharatiya Janata Party (BJP), assumed office. The late Sikandar Bakht of the BJP became the new industry minister. There was now the possibility of a more pragmatic and business-like view being taken. However, SMC had to tread carefully, since known multinational-baiters, including George Fernandes, were part of the government, and the BJP also had a strong swadeshi brigade. SMC directors Y. Saito and J. Sugimori met Shankar to build a rapport with the new set-up in the industry ministry and see if the arbitration case could be settled outside the ICA.
Simultaneously there were several good Samaritan efforts being made. One of them was by Tarun Das, who was director general of the Confederation of Indian Industry (CII). He pointed out to the government how the dispute, and the long-drawn tension, was affecting investor sentiment. The new government realized this, as well as the fact that running a car manufacturing project was neither its business nor within its competence. It therefore decided to resolve the issue, and soon after taking over, Bakht told the minister of state for industry, Sukhbir Singh Badal, and Shankar, to negotiate with SMC.
SMC, on its part, also opened up other channels to the BJP, inviting member of Parliament Shatrughan Sinha to Hamamatsu for celebrations relating to fifty years of Indian independence. SMC’s representative in India, N. Kawahara, remained in touch not only with Sinha but also the late Pramod Mahajan, party general secretary, who was then political advisor to the Prime Minister. The approach was to convey SMC’s deep interest in India and the Maruti project, and try and explain how the dispute was causing harm to all the parties. SMC reiterated that it had never sought to challenge the sovereign rights of the State but did need to protect its own business interests and those of Maruti. The government was sympathetic and understood the possible reasons as to why relations between the government and SMC had suddenly soured, despite Maruti performing so well.
Even as the discussions were going on, a completely unexpected strategic-political development took place and worked in SMC’s favour. On 11 and 13 May 1998, India conducted a series of nuclear tests, inviting sanctions from across the world. The sanctions imposed by Japan, with its strong anti-nuclear sentiment, were among the strongest. Ending the face-off with SMC was one way of earning brownie points with the Japanese government.
Meanwhile, time was running out. The ICA was to deliver its verdict on 20 June. SMC was confident it had a strong case but still favoured an out-of-court settlement. After all, scoring a legal victory over the partner—especially when the partner was the government of a country—could hardly make for future good business or working relationships. In the first week of that month, three top SMC executives—Sugimori, Y. Saito and K. Saito—flew to India, amid strict secrecy, to put the finishing touches to a compromise agreement on the basis of which the arbitration proceedings could be withdrawn.
On 8 June 1998, Bakht announced in Parliament that the government and SMC had worked out a compromise. SMC would withdraw its case in the ICA and would appoint Y. Saito as chairman till 2002, while the government would withdraw Sengupta. Bhaskarudu, whose term, in normal circumstances, would have ended in August 2002, would step down in December 1999. Khattar, SMC’s original choice for the post, would take over then. Khattar was brought back to the board as joint managing director from 1 July 1998, with the understanding that he would be designated second managing director exactly a year later. The agreement also said that the Maruti board would devise appropriate administrative measures to enhance the effective control of the company, including the formation of two board sub-committees for purchase and marketing in order to strengthen its competitiveness.
The announcement caused a furore in Parliament, with the opposition terming the compromise a sell-out by the government, the most stinging attacks coming from former industry ministers Karunakaran and Maran and from Jaipal Reddy, who had been the chairman of the Assurances Committee of the Rajya Sabha. Two points particularly incensed them. One was that both the posts of chairman and managing director were being filled by SMC’s nominees. Secondly, they felt the new agreement gave SMC control over day-to-day management of the company through clause 6.3. The clause read:
The experience and expertise of Suzuki shall be recognized and respected with respect to the technology and management of Maruti, which includes important decisions on day-to-day management as well as decisions on management policies.
This, it was argued, went further than the 1992 agreement which said SMC’s concurrence would be sought on key decisions. There was a demand for an inquiry by a joint parliamentary committee into the whole affair. The government was clear in its mind that what it was doing was in the best interests of India. It stood firm and did not concede to any of the demands of the opposition. Subsequent events relating to the growth of Maruti and its contribution to the further development of the Indian automobile industry, as well as exports, prove that the decision to settle the dispute, give management control to SMC and list the company at a later date, were really the best in the national interests. If the approach towards the management of Maruti and the attitude to SMC, adopted in 1995 by Prasad and Karunakaran and continued by Maran and Sengupta, had not been changed, Maruti would have possibly become like most of the PSUs.
That crisis had blown over. It was now time to move ahead and recover lost ground.
The economy was slowing down, with growth slipping to 4.3 per cent in 1997-98. The automobile industry, including the commercial vehicle and two-wheeler segments, could not remain unscathed—growth came down to 1.6 per cent. Within that, the passenger car segment did slightly better, but even here growth was subdued at 4 per cent. Maruti had managed an 8 per cent growth in sales, despite a depressed market, and increased its market share to 82.9 per cent. But that dominant position was about to be challenged, with a host of new entrants driving into the arena. Hyundai’s Santro and Daewoo’s Matiz were both due to hit the roads later in the year, while General Motors’ Corsa was expected to be launched in 1999. As it happened, both the Matiz and the Corsa got delayed; the Matiz was launched in 1999 and Corsa in 2000.
The two-year stand-off had resulted in the project for changing the body shell of the 800—by developing engineering capabilities in Maruti—being shelved. The need for making this change was obvious—the shape of the car had remained the same since 1986 and market feedback indicated that customers wanted a change.
Meanwhile, the two production lines in Maruti, with a nominal installed capacity of 240,000 units a year, were actually working close to 140 per cent of that capacity. There was a need to install additional capacity. Work on a third line had started in 1998, after large delays caused by the dispute regarding its location, and this plant was commissioned in Gurgaon in 1999.
The outlook for passenger cars had started to worsen in 1998, with the overall market shrinking by 5 per cent. Not only was the economy going through a slowdown, customers also postponed purchase decisions, waiting to assess the new cars that had been announced and would be rolled out shortly. Maruti could not buck the industry trend; its sales dropped 5 per cent in 1998-99. This was the first time since its inception that sales had declined, and it was not a very auspicious start to the term of the new managing director.
The company’s immediate priority was to recover lost ground. On 1 July 1998, less than a month after the new agreement between the government and SMC was concluded, Kumar (who was brought back to the board on 22 June, a few days short of two years since he was removed) was in Hamamatsu to discuss the new models and cars that should be launched, necessary if Maruti were not to lose market share and successfully face increasing competition.
The bigger immediate challenge was to meet the Euro-I (also called Bharat Stage I) norms by June 1999, because cars which did not comply could not be sold in areas where this norm was made applicable. Pollution levels in Delhi were increasing and the Delhi-based Centre for Science and Environment (CSE), headed by Sunita Narain, had been focussing on automobile emissions, particularly on how diesel vehicles were creating unacceptable levels of pollution. The Supreme Court had taken cognizance of this problem and had appointed a committee under former bureaucrat Bhure Lal to study how to deal with the problem. Khattar and Sunita Narain were members of the committee. At that time, the main diesel car in the market was Tata Motors’ Indica. There was a strong belief in Tata Motors that the CSE was attacking diesel cars at Khattar’s behest. It seemed to me that Tata Motors was possibly underestimating the integrity of Sunita Narain, and overestimating Khattar’s influence over her. Nevertheless this adversely affected relations between Maruti and Tata Motors.
Meanwhile, the government had indicated that Euro 1 norms would be applied in Delhi and some other metro cities in 2001. However, the Supreme Court wanted to know why the norms could not be made applicable in Delhi from an earlier date. I have been informed that no consultations were held with Maruti, and possibly Hindustan Motors and Premier Automobiles, by the Association of Indian Automobile Manufacturers. Since petrol cars were expected to need multi-point fuel injection (MPFI) systems to meet these norms, which no car manufacturer was ready with, it was unlikely that these three companies would have agreed to the date being advanced. However, the association, possibly with the approval of the president, V.M. Raval, conveyed to the Court that Euro 1 norms could be applied in Delhi from 1999. The only cars that were likely to meet these norms were the diesel ones, for which these were comparatively lax. As a result of the association’s reply, the Court ordered that Euro 1 would apply to car sales in Delhi from June 1999, two years ahead of what the government had indicated. In other metro cities, the norms were applied two years later.
Premier Automobiles and Hindustan Motors had to stop the sale of their petrol cars in Delhi. The diesel Ambassador, however, could meet the norms, and continued to sell. The efforts made earlier by Maruti to enable the 800 to meet European emission norms in 1991 came in handy now. Contrary to accepted technical thinking, it managed to modify the carburettor of the 800 to meet the Euro-I norms and continued to sell the car in Delhi. SMC was unhappy about the 800 being sold with a carburettor, and refused to be associated with the effort to comply with Euro-I. SMC engineers carried out emission checks on many occasions to determine whether we were really meeting the standards. The work done by Kumar was sound and no fault could be found. Even the Automobile Research Association of India (ARAI) would carry out six-monthly checks. Maruti cars passed every time. This was a real feather in the cap of our engineers. Maruti had also developed fuel injection systems for the Zen and the Esteem. Consequently, Maruti could maintain its sale volumes in Delhi. Sales of the carburettor version of the 800 continued till 2005, when the MPFI system was introduced.
In June 1999, six months before Bhaskarudu’s tenure was to end in December, the government appointed him a member of the Public Enterprises Selection Board (PESB). He moved to his new assignment in August. The government apparently realized the futility of having a lame-duck managing director, and recognized the need to have one who would have an incentive for reviving the fortunes of the company. Khattar was now in full charge and had to fulfil the expectations of both shareholders. The government had taken a big political risk by agreeing to give SMC de facto control over Maruti at that point, and to give de jure control when SMC acquired a majority equity holding in a few years’ time. To be able to justify this, Maruti needed to prosper and the government needed to gain handsomely from the sale of its equity holding.
Work got under way at a hectic pace on launching new cars, without which Maruti could not hope to regain its market share. This started what came to be dubbed as Maruti’s second automobile revolution. Maruti launched new vehicles—the Baleno and the Wagon-R, the latter targeted at the Hyundai Santro, which had become very popular by then. The Baleno never sold in any large numbers, but did fulfil the objective of giving Maruti a presence in the large car segment. Variants of existing cars followed and Maruti was soon fighting its way back into the reckoning. In 1999-2000, Maruti clocked an all-time high in its history—it sold 3.85 lakh cars, an increase of 24.2 per cent over the previous year. The automobile industry as a whole also logged good sales growth, 48.6 per cent over the previous year. Indeed, 1999-2000 was a landmark year for Maruti. It became the largest Asian car company outside of Japan and South Korea, rolling out 400,000 cars. It was the first Indian automobile company to do so and also to get ISO 14001 certification for its environmental management.
Maruti was getting to see some good news after a long time. But it barely got a chance to revel in it.
On 23 March 2000, the Maruti Udyog Employees Union served a sixteen-point charter of demands mainly relating to revision of the incentive scheme. While discussions were going on between the union and the management on these, the company was preparing for the launch of the Alto. This was a small car, meant eventually to replace the 800 as the entry-level car. The union was not in a mood to arrive at a reasonable settlement. It had got used to being pampered during the time of Bhaskarudu, and had enjoyed considerable power, due to its political links with the Left and the role it felt it had played in ensuring that Bhaskarudu, and not Khattar, became the managing director in 1997. Its leadership, unfortunately, believed that the role of the union was to create confrontations with the management. Hence these discussions were not making any real progress, and it wanted to display its strength and force the management to bow to its demands. The union leadership also probably felt that it would not remain as powerful under Khattar and wanted to establish its importance. In order to do so, and to create pressure, the workers started a relay hunger strike in September, which escalated into go-slow and led to a dharna and a gherao of the canteen in October 2000. The management, rightly, took the view that a productivity incentive scheme did not require concurrence of the union, and consultations were adequate. Accordingly, on 11 October, a productivity performance and profitability-linked incentive scheme was notified.
Meanwhile, finding that the management was not accepting its demands regarding the incentive scheme, the union had been orchestrating a staggered two-hours tool-down strike, moving from department to department, bringing production down to a mere 299 vehicles a day. This could not be tolerated. A day after notifying the new incentive scheme, the management suspended nearly eighty workers and declared that from the next day, only those workers who signed a good conduct undertaking would be allowed into the factory. Those who did not would be considered to be on illegal strike. A stand-off followed, which lasted for three months, ending on 9 January 2001, when the union called off the strike and agreed to accept the 11 October incentive package.
Did this strike mean that the efforts made from 1983 to create a new work culture had failed? Could it be interpreted to mean that workers and managements could never work in cooperation, with the common objective of furthering the growth of the company? Would the union and management again become adversaries? I believe that the validity of the approach towards educating the workers and management winning their trust remains as important as ever. This strike happened because the union, and its leadership, got involved in the power struggle for appointment to the post of managing director.
Having just come out of a three-month strike, the management had to walk a tight rope. The union had been made to back down, but there was little to gain by rubbing in the point. Real progress required the cooperation of the workers. Without their active support and involvement there could not be real improvements in productivity or substantial reductions in cost. Fortunately, the new union leadership remembered that in the past they had benefited enormously by cooperating with the management, which led to the prosperity of the company as well as all workers. They saw that what had happened was an aberration caused by the ambitions of essentially one or two leaders, and a management which had encouraged them. The strike had caused both workers and the company to lose, and the future prosperity of the workers could only be assured if Maruti once again attained its dominant market position. Since the management was once again extending the hand of cooperation the workers also decided that full cooperation would be the best option for them.
There were sighs of relief, but the crisis had taken its toll on the company. As it is, the two years of problems with the government had left it unprepared to take on the newer cars that had hit the market. Overall car sales were down and in June 2000, three months before the strike, Maruti was holding a stock of close to 17,000 unsold cars. With dealers also putting pressure, because of high inventory holding costs, the company had little choice but to cut prices of its entry-level models in end-June. The three-month strike left Maruti unable to make up for the price cuts through increased sales. At the end of 2000-2001, Maruti had sold only 3.35 lakh vehicles, a 12 per cent drop over the previous year. That was not all. For the first time in its history of eighteen years, the company posted a loss of Rs. 269.4 crore, a huge fall from the previous year’s profit of Rs. 330 crore. This was a blow to the pride of the company and galvanized SMC, the management and the workers into restoring high standards of performance.
In order to reduce costs, a large number of activities were rationalized, and the company had to deal with the problem of surplus manpower that was created as a result. It was agreed that this would be done by offering a handsome voluntary retirement scheme. This saw 19 per cent of employees leaving the company. While there was a large initial outflow of money in the form of compensation, it helped to improve productivity and reduce recurring costs.
In 2002, Maruti took up Challenge 30, a project which required that the supply chain department reduce costs of all components by 30 per cent over the next three years. To achieve this, vendors had to be made more efficient and productive, with higher local content in their products, so that lower prices could be negotiated. A very detailed programme was worked out, with the macro target broken up into monthly goals—by department, division and individuals—which were monitored every month and results reported to Japan. After I joined the board in 2003, I was involved in this monitoring along with T. Kobayashi, the joint managing director. At the end of three years, in 2005, the target of 30 per cent had been exceeded by a couple of points. A further challenge, again to reduce costs by 30 per cent, was taken up for the period 2005-08, and this too was achieved, though it was a much harder task.
At the same time as Challenge 30 was started, the production department took up Challenge 50, which required a 50 per cent increase in in-house productivity over the same three-year period. The result was an achievement of just under 50 per cent. For 2005-08 the goal was set at 20 per cent improvement in productivity and this target was met.
The sales and marketing department undertook Challenge 60, which required increasing the market share to 60 per cent. The success on this front was not so good and the market share plateaued at 55 per cent. Even after 2005, the market share has remained around 54 per cent.
By then, the Indian market was exposed to the products of a large number of international manufacturers, who had established operations in India. All of them were anxious to gain market share and had introduced models in all segments, except the entry-level A1 segment. Customers, who till only a few years back had very limited options, now had problems of choice. Many of them, who were perfectly happy with the performance of their Maruti cars, decided to buy some other car only because they wanted to experience change. SMC realized that the market had changed: it would no longer be possible to satisfy customers by offering high quality products at low prices. The customer also wanted, like users abroad, the pleasure of changing models every few years. It was now necessary to address this aspect, even though this would necessarily mean higher costs of production. Facelifts, minor changes and full model changes became part of the scope of discussion in the product development committee meetings, and the role of the engineering division substantially increased. It was clear that this work would have to be increasingly done in India, because manpower resources in Japan were limited.
Competition in the marketplace also made it harder for the dealers to generate profits. Waiting lists had disappeared, and dealers could no longer enjoy the luxury of getting paid in advance, and, therefore, not needing working capital. They now had to keep adequate inventory of all models, as customers were not willing to wait for delivery and would buy another make if a Maruti dealer quoted a long waiting period. Often a customer would talk with different dealers, negotiating the best price. As a result, margins provided by Maruti to dealers started to erode. Maruti also decided that as a policy, dealers should employ sales persons to generate business and not rely on brokers to bring customers, or hope that customers would just walk in. The dependence on brokers was considered to be highly risky in a competitive market, as these persons were driven only by money and could be wooed away by a competitor offering a higher commission. Lastly, Maruti was also expanding the dealership network, to provide better customer convenience, as well as higher availability of managerial resources and working capital, and this led to some fall in the sale volume of many dealers. It thus became necessary to find other ways of enhancing dealer profitability.
A study was done by a leading consultancy firm, A.T. Kearney, and based on its recommendations, Maruti added a number of new activities designed to open sources of income for dealers. These included selling insurance and finance, giving extended warranties and opening outlets for the sale of used cars. Maruti itself established subsidiary companies to support these activities.
All this paid off. At the end of 2001-02, Maruti was back in the black, with a profit of Rs. 104.5 crore, despite the fact that the automobile industry continued to be sluggish. Maruti itself logged a mere 1 per cent sales growth, with sales of the 800 and the Omni actually declining by 3 per cent.
But by that time, Maruti was preparing to embark on another phase of its life.
In February 2001, the government decided that Maruti should be listed and that the government would gradually disinvest its equity in Maruti. A team, which included the secretaries of the Ministry of Disinvestment and the Department of Heavy Industry, as well as the managing director and chief executive officer of ICICI, K.V. Kamath, were deputed to negotiate with SMC and finalize the modalities of the government’s exit from Maruti. After a month of negotiations, it was decided that the disinvestment would happen in two stages—first a rights issue by Maruti, with the government renouncing its rights shares to SMC, and then a two-step sale of part of the government stake through an initial public offer (IPO). The remaining government equity would be sold by 2007, and as long as the government had at least 10 per cent equity it would continue to have a seat on the board. SMC was to pay a control premium to the government—the price of getting management control over the company—which would come when SMC’s equity increased to over 50 per cent.
Negotiations then began over valuation of Maruti shares, the pricing of the rights issue and the control premium that SMC was to pay. This was not an easy task given the measure of distrust that had crept in between the two sides, as a result of the developments of 1996-98. With three consultancy firms appointed to value the company—KPMG, Ernst & Young and S.B. Billimoria—giving three different valuations, an average was worked out—Rs. 3,280. It was decided that the size of the rights issue would be Rs. 400 crore.
The negotiations over the control premium caused some friction. SMC initially offered Rs. 170 crore. The government felt this was too low, especially since SMC had not paid any control premium in 1992. The government argued that SMC would now get total control over management, whereas in 1992 it was only sharing management with the government. The secretary, heavy industries, who was aware that I was advising SMC, spoke to me and said that the government would be willing to accept a control premium of Rs. 1,000 crore. I had conveyed this to Suzuki in Japan. Long-drawn-out bargaining finally resulted in the control premium being raised to Rs. 286 crore at first and then being finalized at Rs. 1,000 crore. SMC was also initially not willing to underwrite the public issue by the government of its shares, but was later persuaded to do so.
On 30 May 2002, following the rights issue which brought down the government’s stake to 45.4 per cent, SMC took complete control of the steering wheel at Maruti.
This was followed in 2003 by Maruti’s first public issue, with the government offloading 27.5 per cent of its stake in the company. The Rs. 100 face value of the equity was considered too high and it was decided to keep the face value at Rs. 5. The floor price of Rs. 115 was mentioned in the red herring prospectus, and the upper price was set at Rs. 125. It was perhaps not a great time to go to the market, which was a bit bearish. However, that did not seem to matter. The issue was oversubscribed ten times, and the price for the issue was determined to be Rs. 125. Many people thought that this was too high a price. Even the chairman of Life Insurance Corporation, which was a very large investor in the stock market, told Khattar that he would not subscribe at this price. Later, LIC was to buy Maruti shares at a much higher price! The shares, however, opened at Rs. 165 at the time of listing and kept rising. One consequence of the price rise was that many individual shareholders sold their shares as they perhaps thought that the shares could not rise further, and the number of individual shareholders declined over the years. The initial price of the shares also prompted the government to exercise the green-shoe option (where more shares than originally planned can be sold) and it sold another 10 per cent of holding, bringing its stake in the company down to 18.3 per cent.
A last skirmish, though, between SMC and the government was still to happen. Once again, the issue was a new plant.
It was sparked off on 13 September 2004, when Suzuki, at a press conference in Tokyo after a SMC board meeting, announced that the company would invest Rs. 1,524 crore to set up another joint venture with Maruti, called Maruti Suzuki Automobiles India Ltd (MSAIL) to manufacture cars at Manesar. Unfortunately the announcement made was not very clear about the structure of this new company and who would control its management. Nobody in India also thought it necessary to get a clarification and instead there was an uproar, both in government circles and in the stock market, as it was assumed that SMC would control this new company, and compete with Maruti through the Manesar plant. As a consequence, Maruti would get stepmotherly treatment in getting technology and new models. The profits and market share of Maruti would drop.
This led to panic selling of Maruti shares by investors. Maruti share prices fell 10 per cent in one day and the company lost close to Rs. 300 crore in market capitalization over two trading sessions. The government was livid. For one, such matters should have been discussed in the Maruti board, of which the government was still a part. Besides, government regulations at that time required that a foreign partner of an existing joint venture must get a no-objection certificate from the Indian partner if it was to set up a wholly owned subsidiary in the same line of business. The government feared the value of its remaining shares would erode, not exactly a welcome development at the time as the government still had to sell its remaining 18.3 per cent stake. Heavy industries minister Santosh Mohan Dev charged SMC with keeping the government in the dark and ministry officials wrote to the Foreign Investment Promotion Board asking it not to clear SMC applications relating to this venture. Nakanishi, who was then the chairman, and Khattar rushed to the ministry to explain that Maruti would be a majority owner of MSAIL, which would be a subsidiary controlled by Maruti. The incident showed the importance of very clear and complete information being disclosed, at the very first opportunity, in such sensitive matters. While clarifications do lead to normalcy, in the interim period much damage is possible. The government accepted the explanation and the matter was resolved amicably. The stock market duly corrected share values.
There was a history to the establishment of MSAIL. The Gurgaon site had been fully developed with the establishment of three manufacturing plants. There was no scope for any further development here. A new site was needed for future expansion and Manesar was selected. Khattar was successful in negotiating with the Haryana government to purchase 600 acres of land there, on very reasonable terms. The intention was to establish the next production facility there, along with an R&D centre having a full-fledged test track, and also keep some land for vendors. SMC wanted this plant to be very similar to the plant in Kosai, Japan, so that there could be a high level of automation, and the best SMC practices could be established here from the start. Suzuki did not want this plant to become an extension of the Gurgaon plant, which had been built over twenty years and had much more manual operations. He wanted the plants at Gurgaon and Manesar to compete with each other in areas like productivity and quality, with each being a benchmark for the other. At the same time, it was always the intention that in areas like human resource management, supply chain and sales and marketing, the two plants should work as one. For this reason, at the stage of planning the project, he wanted the Manesar plant to be a SMC subsidiary and not a Maruti subsidiary.
Many of the Japanese executives who were in India were not convinced that this would necessarily be a good idea, but since Suzuki had already made up his mind, they did not try and persuade him to change it. When they found that I was of the same opinion as them, they asked me to discuss this issue with Suzuki. I did so and explained the political consequences of having a separate company and the possibility of an adverse government reaction. I had argued with Suzuki that since Maruti was also now a SMC subsidiary, the objectives of the Gurgaon and Manesar plants competing to attain better productivity, lower costs and higher quality could be as well achieved by keeping the Manesar plant as a Maruti subsidiary. Suzuki immediately realized the political implications of having a separate company. Without further argument he agreed that the Manesar company would be a Maruti subsidiary, with Maruti holding the majority equity. Despite this decision, there was a subsequent communication failure.
The subsidiary company (MSAIL) was established, with Suzuki having 30 per cent equity and Maruti investing 70 per cent. Since SMC owned 54 per cent of Maruti, this meant that its financial interest in MSAIL would be to the extent of 67.8 per cent. Investments for establishing another manufacturing line in Manesar were soon approved. Equipment orders were placed and a foreign exchange loan was finalized to pay for the equipment.
Meanwhile, with the help of a consulting company, the system for getting the two companies to coordinate their working was studied. As already planned, the two companies were to have common supply chain development including vendors, common sales and marketing including dealers, while Maruti would manage the human resource aspect. However, during discussions with the consultant, many tricky issues, including those of transfer pricing and taxation, arose and after a great deal of thinking, it was concluded that a solution which would not result in tax litigation on a large scale would not be possible. There were also issues of corporate governance and maintaining arms-length operations, since Maruti was a listed company and the shareholding of SMC was different in the two companies.
The senior Japanese managers in India and Khattar all agreed that having separate companies was not a good idea. It was once again left to me to have another discussion with Suzuki and explain the complications involved in the arrangements, and the risk of expensive litigation. Once again, Suzuki was very receptive and agreed to change the earlier decision to have MSAIL as a separate subsidiary. Maruti and MSAIL were to be merged, but the Gurgaon and Manesar plants would be separate profit centres for internal control purposes. Each would still serve as a benchmark for the other in terms of key production parameters.
On the same day as the MSAIL announcement Suzuki made another announcement that SMC would invest Rs. 427 crore in Suzuki Metal India Limited, and rename this company as Suzuki Powertrain India Limited. The company was till then primarily making aluminium castings for engine blocks and cylinder heads. It was now intended to include the manufacture of petrol and diesel engines as well as transmission gears for Maruti vehicles. The equity holding of SMC in Suzuki Metals initially was 51 per cent, the rest being with Maruti. It was now intended that Suzuki would hold 70 per cent equity and Maruti 30 per cent. Read with the initial interpretation of the MSAIL structuring, this announcement too did not go down too well, but when the correct position was understood, the move was welcomed. The government had for a very long time been wanting gears to be manufactured in India.
Over the next three years, the government sold off its stake in two tranches. It sold 8 per cent in January 2006. On 10 May 2007, the government sold its remaining 10.27 per cent stake in Maruti, about twenty-six years after it had established a 100 per cent owned company in February 1981. Four months later, Maruti Udyog Ltd was rechristened Maruti Suzuki India Ltd.
By then the modernization of the automobile industry—one of the objectives of taking over the assets of Maruti Limited—had been well and truly achieved. Maruti was the largest car manufacturer in the country, with twelve vehicles across different categories of the automobile sector, barring commercial vehicles. And it remained the leader, with 55.8 per cent market share.