The first 192 cars to roll out of the factory in December 1983 were almost entirely Japanese cars, with only the tyres and the batteries being Indian, supplies coming from Chennai-based MRF and Kolkata-based Chloride India (later renamed Exide Industries) respectively. The indigenization percentage was a mere 2.7666 per cent and it stayed at less than 10 per cent till March 1984.
The December 1983 deadline of starting production and sale of cars necessitated starting production with imported SKD kits. SMC said this could be possible only if painted body shells, along with virtually all of the other components of a car, were imported. Where these components were required to be assembled using fixtures and special tooling like the door, the engine or the transmission system, they were imported as sub-assemblies. There was no time to install the welding and paint shops, without which the body panels could not be assembled. A similar position existed regarding the other major assemblies. An advantage of following this approach was that the workers could learn how to assemble and test the cars, before upstream activities were undertaken. The step-by-step approach to doing complicated tasks, we found as we went along, was typical of the Japanese way. It helped to reduce mistakes and underutilization of capacities.
The use of local components was dictated by their availability—or rather the lack of it. We had to make special efforts with Chloride India and MRF so that there could be some Indian components in the first cars. In any case, the procedure for the acceptance of locally made components for use in SMC was quite elaborate and time-consuming. Any significant use of Indian components in the first cars to be produced could only have been possible if some acceptable components were already being produced in India. This was not the case.
In the project report prepared for approval of investment by the government, Maruti had to indicate the extent to which each vehicle would be localized every year. This was the phased manufacturing programme (PMP), which applied to all foreign technical collaboration agreements. The purpose was to ensure that technology was transferred and absorbed in India, and also to limit the outflow of scarce foreign currency. The government believed that once the components were manufactured in India, technology transfer would have taken place, and the capacity to make further improvements and design better components would automatically develop. This did not happen for many reasons, including the lack of incentive for manufacturers to develop such capabilities. This and other policies regarding the inflow of technology and prevention of competition led to virtually all products, originally produced with the then current foreign technology, gradually becoming obsolete and India never developing, till the 1990s, the ability to export manufactured products. The Directorate-General of Technical Development (DGTD), responsible for technology development, failed to understand that Indian companies operating in a non-competitive environment had no commercial need to create engineering and design capabilities.
In the automobile sector, when a vendor entered into a licence agreement with a foreign manufacturer to produce a component, the agreement rarely included any provision to develop R&D and design capabilities in India. This was the general practice prevailing across other industries till then. One reason was that foreign companies were very reluctant to part with their core intellectual property, unless they had a controlling interest in the Indian company. Another was the fact that vendors, in the early years of Maruti, did not want to increase their investment costs, or licence fee costs, which would have been required if they were to establish a proper design and engineering centre. Vendors who had to make simple components, which did not require know-how from abroad, were also not keen at that time to spend money on any elaborate design facilities. In addition, the volume of production of components and the turnover were at levels that did not make investments in development capabilities viable.
Thus the technology transfer as a result of the PMP was largely limited to creating the ability to manufacture specific components. However, the localization programme did serve the purpose of saving foreign currency and insulating products from the effects of currency fluctuations. This itself was of considerable benefit.
The DGTD was responsible for the implementation of the PMP, and reviewed the localization efforts of all those who had foreign collaborations which required import of components. The finance ministry would only issue an import licence and release foreign exchange on the basis of what was recommended by the DGTD. Failure to meet PMP targets could result in production levels having to be reduced so that the total foreign exchange released was kept within the limits determined by the government.
Maruti had committed to achieving 95 per cent indigenization in five years. An indicative list of components to be localized each year had been prepared in consultation with SMC, and was based on considerations of availability of technology and ease of local manufacture, among other things. The company had discussions every year with the DGTD to determine the local content for the following year and to get the necessary import licences. Since Maruti had a long waiting list of customers, and had committed both to them and the government that a production volume of 100,000 units a year would be achieved in the fifth year, the fulfilment of localization targets became a high priority, as otherwise shortage of foreign currency released by the government would have led to curtailment of production volumes.
Though the Maruti localization programme was driven mainly by the need to conserve scarce foreign exchange, the lower wage and manufacturing costs in India also provided compelling logic for increasing indigenization levels. In addition, high import content would make exports—which was always an objective of the Maruti project—difficult. In fact, localization protected Maruti from the impact of the considerable depreciation of the rupee, and it could maintain competitive price levels, allowing the 800 to become among the lowest cost cars in the world. Over time, as volumes of production of this car increased, and the rupee depreciated, the price of most locally made components became lower than the FOB price of the same components.
The PMP was often severely criticized and blamed for the poor quality and high prices of Indian products. Import substitution, in most cases, resulted in vendors supplying high cost and poor quality components. One of the reasons was that the production volumes were small. Thus, in the case of the two cars being earlier manufactured in India, the combined volume was barely 40,000 after thirty years of going into production. This volume was usually split between two or more suppliers for each part. This was too small for vendors to adopt good manufacturing systems and buy high quality tooling. All the overhead costs, including management salaries, had to be recovered from the limited production volumes. When volumes increase, the fixed costs do not increase in proportion and cost of production declines. Quality and cost are really related to volumes being above a minimum threshold level. That is why the volume of production for Maruti was fixed at 100,000 units a year. The customers of the components—the automobile companies—also did not demand high quality as this was not necessary for selling their products and making profits. The original equipment manufacturers (OEMs) did not consider getting involved with improving vendor production systems as part of their responsibility. They accepted whatever was available, and could tell the few customers who complained about quality that the fault was of the vendors, and the PMP system, since they could not import better parts.
Maruti offered much higher volumes to vendors, promising a production of 100,000 units a year. The involvement of SMC with Maruti, and the adoption of Japanese standards of quality, also meant that there was a demand for quality components and no vendor component could be accepted unless it met a minimum standard. Thus, two of the essential conditions for better quality and lower costs were met. The Maruti experience of working with vendors showed that if vendor development was undertaken in a systematic way, the environment was positive, and vendors were educated and motivated to improve, they would do so. The problems and limitations of vendors had to be understood and dealt with in a pragmatic manner. With hindsight, the PMP resulted in Maruti avoiding the huge extra costs that would have had to be paid if import content had been higher, because of the yen appreciating from 230 to the dollar to around 100. The four light commercial vehicle projects, all with Japanese collaborations, which were started around the same time as Maruti, ran into severe cost problems due to yen appreciation.
Maruti, however, had to face an uphill task in developing the vendor base. The state of India’s component industry in the early 1980s was pathetic and is summed up in this observation by Krishnamurthy in Maruti’s first annual report:
It has been plagued with low levels of demand which do not permit the use of modern technologies, poor quality of inputs, inadequate infrastructural support and lack of incentive for bringing about improvements in product quality and customer service.
Besides the low volume of component production, which made it virtually impossible to produce good quality at a reasonable price, another reason for the poor health of the component industry was the stagnation in the car industry, both in terms of volume as well as technology. The absence of competition, and the low priority accorded to cars in the economic policy of the government, led to the absence of any incentive and opportunity for the industry to upgrade quality and technology. For almost the entire period after 1950, the supply of cars was less than the demand, with long waiting periods. In this situation, the manufacturers had little concern for providing quality cars to their customers (they, on their part, would argue that the highly regulated Indian business environment hampered them at every stage). Since the production volume was limited by the licence conditions, there was no real incentive to reduce costs and improve quality so as to grow the market and get a bigger market share. Enough profit, including the cash premium at the point of sale, could be made even otherwise.
The poor quality of original equipment (the parts used in the original car) meant a thriving market for spare parts, the shoddy quality of which ensured a steady demand of replacement pieces. There were enough stories about automobile manufacturers themselves, or their relatives, having majority or full stake in component manufacturing companies and making their profits from selling spare parts at high prices. The absence of competition was a blessing for those in the manufacturing business.
All this was going to change with the coming of Maruti. The company was bringing in a modern product that required components that could not be produced without upgrading the manufacturing processes, as well as the materials used. The testing procedures, before a component was accepted for use, were stringent and SMC would not compromise on quality standards. The objective of modernizing the automobile industry could not, in any case, have been achieved if the component industry were not modernized.
Maruti recognized the huge challenge before it, as hundreds of suppliers had to be persuaded to not only upgrade technology and manufacturing processes but also change their attitude to quality and meeting obligations and commitments. Most vendors did not think that a small delay in meeting their supply schedules, or some shortfall in quantities, was a significant matter. They were quite accustomed to changing the source of supply of their inputs and did not realize that this could impact on quality. Many vendors would change their manufacturing process in some area, thinking it would not matter. Maruti had to make them realize that the key to quality lay in consistently, without any deviation, following the approved procedure for manufacture, including the source of supply of inputs and the approved manufacturing process. If any change was to be made anywhere, it had to be first approved by Maruti. The task before Maruti was made harder by the time constraints imposed by the PMP. There was no luxury of a slow and steady process of improvement in quality, if the multiple objectives of meeting PMP targets, maintaining high quality and rapidly increasing volumes were to be achieved.
The problem of developing good vendors was compounded by the fact that in 1982 there were few people in India who would have taken a bet, at almost any odds, on the success of Maruti, or the company achieving a production volume of anywhere near 100,000 units within five years. Maruti was seen as a political project. It was in the public sector, whose overall record of meeting targets and commitments was quite poor. Maruti was to make a low priority product, and the management had no experience at all of this industry. Not surprisingly, the industry was highly sceptical about Maruti achieving its targets, both in terms of time and numbers.
‘Maruti is a public sector undertaking. What safeguards do we have if we make investments believing Maruti, and the demand doesn’t materialize?’ was one question that was always thrown at Maruti executives. Vendors were worried about who would compensate them for any losses and how they could get any redress from a public sector undertaking. When Surinder Kapur, chairman and managing director of Sona Koyo Steering, decided to go into a joint venture with Maruti and Koyo Seiko to manufacture steering systems in 1986, people thought him a fool for taking a government company as his partner and warned him that he would face a lot of problems. Other partners of Maruti in part joint ventures faced a similar reaction from their well-wishers.
Another factor working in the mind of potential vendors was the belief that SMC, like other Japanese companies, would not readily accept Indian-made parts, or help the localization process, as they would prefer to export these from Japan. This belief was not really borne out by experience, as there were no examples of Japanese companies having invested in India and failing to implement the PMP. Those who expressed doubts about the Japanese not supporting local production were perhaps looking at the localization levels in some of the south Asian countries. These were low and it was assumed that it was the reluctance of the Japanese to localize which was preventing higher local production. However, the circumstances in these countries and India were not the same, particularly in terms of the level of industrial development and the quality of engineers and managers. In those days India was far ahead of most south Asian countries. Nevertheless, it was quite a task for the Maruti management to dispel this apprehension. At all levels vendors were repeatedly assured that if they made components of the quality required, Maruti would buy from them. Most components would be tested and homologated in India by Indian engineers, and vendors should have confidence in their adopting a very objective approach.
The highly enthusiastic response to Maruti products was reflected in the large bookings received in 1983. This made people reconsider the market potential for Maruti cars. During 1984-85, the first full year of operations, Maruti exceeded its production target of 20,000 units. As 1985-86 progressed, it was apparent that the target of 40,000 units would also be exceeded. This dispelled doubts about the ability of Maruti to achieve the declared production targets. Maruti had already started to increase production facilities from the initial 40,000 units to 100,000 units. At that point, vendors, as many others, changed their attitude and realized that Maruti might not fail, and could even dominate the car market in India. There was a sudden rush of people wanting to be vendors and make investments.
Japanese component makers were as sceptical about the prospects of Maruti as the Indian vendors, and were accordingly quite reluctant to even enter into licence agreements with Indian companies. However, seeing the progress achieved till 1985-86, they too changed their approach and became quite willing to form joint ventures and give technology to Indian companies. At that time, the maximum foreign investment allowed was 40 per cent and so the question of Japanese part makers setting up their own subsidiaries in India did not arise.
There were a number of serious constraints in implementing the localization programme. Maruti was a government company, and thus was an ‘Instrument of State’ in terms of the Constitution. Unlike a private company, Maruti could not just select a manufacturer, even if we were convinced that it was the best, and place orders to produce a component. Nor could Maruti divide business between vendors without following some reasonable system. Consequently, the processes that Maruti had to follow took much longer and required much more paperwork.
A second obstacle was the policy of small-scale sector reservations, under which the government reserved a large number of products, including automobile components, for manufacture by this sector. Small-scale industries were defined in terms of the investment made in buildings and machinery. The prescribed ceiling of investment stipulated at that time was far too low for many of the components to be manufactured with the appropriate technology and in the quantities required. Quality could not be built into the processes because the correct equipment could not be bought within the ceiling, and SMC would not approve components that were not manufactured according to the correct process and which would thus not meet the quality and performance standards.
Continuous efforts, drawing upon scarce managerial resources, had to be deployed to persuade officers in the DGTD and the industries ministry to de-reserve specific components. It had to be demonstrated that project costs would necessarily be far higher than the limits prescribed for a small-scale unit, if the volumes and the quality required for Maruti were to be produced. Fortunately, officials in the ministry were very receptive and acted quickly to de-reserve critical components so that Maruti could meet the PMP targets. Undoubtedly this liberalization of policy contributed significantly to the modernization of the component industry and the growth of automobile manufacturing in India.
At that time, the Indian automobile manufacturers produced close to 50 per cent of the components of a vehicle in-house. This meant that besides the critical components like the engine, many other components were also made by the vehicle manufacturer. The problems of quality and reliability of supplies from vendors probably made them opt for ‘make’ rather than ‘buy’. SMC, and Japanese manufacturers in general, followed a different policy. In-house production of components was limited to only those that were critical for performance or appearance, like the engine, gearbox and outer body panels. All other components were outsourced to vendors. This reduced investment costs, and thus risk, for the vehicle manufacturer. It also reduced cost of manufacturing components, as vendors could supply to more than one manufacturer, attain higher volumes and derive benefits of scale. Further, the vendors, having larger volumes and turnover, could establish research and development (R&D) facilities and develop components for new models by themselves. This reduced the time taken to develop new models and also the cost to be incurred by the vehicle manufacturer.
This policy worked well in Japan as vendors there made it a point of honour to not let down their customers in terms of quality or meeting their delivery obligations. Maruti decided to follow the same policy. Thus the dependence on vendors was to be to the extent of about 75 per cent of the value of all components, excluding steel, paints and similar items. Given the state of vendors in India in 1983, this was perhaps a huge risk, as besides developing the technological capability for manufacturing parts, vendors also had to develop a new attitude towards their obligations to Maruti. SMC was of the definite opinion that this was the correct route to follow for the long term, and that Maruti’s management must recognize the scope and importance of the task and make sure that it was done. SMC’s views were perhaps also shaped by the need to keep the investment in Maruti to as low a level as possible, so that the risk was minimized.
At the time when the agreements with SMC were signed there was not a single component of the Suzuki car which was available in India. The battery prescribed by SMC was with a polyurethane case, against the traditional hard rubber batteries being made in India. The tyres were smaller than those being used in cars in India then, and also had higher specifications. These were the first to be developed, and became available in time for start of production.
The challenge before Maruti—the most serious one, according to Krishnamurthy’s note in the first annual report—was to devise a vendor development policy which would not only comply with the PMP, but also provide components of the right quality, quantity and at the right price and time. To that end, Maruti decided that the company’s approach to vendors would be quite different from the prevailing practice. The relationship between automobile manufacturers and vendors in those days was almost a subservient one. Baba Kalyani, chairman and managing director of Pune-based Bharat Forge, remembers that automobile manufacturers treated component makers as people necessary to the system but not necessarily contributing to it. Component makers were not treated with respect, and were not expected to question any decision or practice of the vehicle manufacturer.
The Maruti management decided to treat vendors as important partners, jointly working to create a modern automobile industry. It was quite obvious that Maruti could not achieve its PMP commitments or production targets without vendors fulfilling their obligations. With such a high proportion of the car coming from vendors, the quality and cost of products would be largely determined by the quality and cost of the parts supplied by the vendors. We did not think that blaming vendors or government policy for sub-standard quality was an acceptable option. In any case, SMC would not agree to this, as its international image for quality and performance would be sullied. It was, thus, in Maruti’s and SMC’s interest to do everything possible to enable vendors to meet targets of quality, cost and reliability of production.
Vendors had to be told about this new approach. At first they were sceptical about whether Maruti really meant what it was saying. The concept of a transparent and interactive relationship with their customer was quite novel. They were unused to getting solid support from the vehicle manufacturers and had to fend for themselves. I explained the logic behind our policy, and the fundamental interdependence of Maruti on its vendors and vice versa. I told them that the more Maruti could sell, the higher would be the supply of parts from each vendor, and consequently their profits would grow. However, Maruti could only sell more if the parts supplied met all the specifications and were produced at the lowest possible cost. The customers would buy more if they could get high quality cars at affordable prices. Consequently, both Maruti and vendors had to take a long-term view of how to build higher and sustainable demand.
On the other hand, if Maruti did not grow, the vendors would also have no opportunities for growth. This would happen if the customers did not like the cars and there were quality problems. Thus, the vendors had to understand that their growth and profitability depended on the growth and profitability of Maruti. There was almost total interdependency between Maruti and its vendors, and both had to work as partners, supporting each other in every possible way. This included Maruti implementing a pricing system that was fair and enabled vendors to make reasonable profits, as a vendor would lose interest if he did not make profits.
There was considerable risk in adopting this approach, as Maruti was a public sector company. In the government system, a public servant who helps a private party to make profits is viewed with suspicion. If Maruti executives helped vendors in ways which enhanced their growth and profitability, motives could be attributed. That is why the vendor policy was approved in 1982 by the board and why Maruti decisions regarding pricing of components, sharing of business between vendors and other issues were all committee decisions. However, as seen earlier, all these precautions did not prevent the CBI filing a case for ‘abuse of position’ against Krishnamurthy and me in respect of a contract awarded to a vendor.
An important component of the vendor policy was building a long-term relationship with them. Under the public sector procurement policy then prevailing, a public sector undertaking was required to invite quotations for supply of components every one or two years, and award the contract to the lowest bidder. The Maruti management realized that this system would be highly detrimental to the company’s interests. Vendors, uncertain about future business, would have no incentive to make the required capital investments, as a large part of these investments would be specific to manufacturing parts which could be used only on Maruti vehicles. Most of the equipment and tooling installed could not be used for production of parts for other vehicles. Even if some equipment could be used for another manufacturer, the production capacity that needed to be installed for Maruti would be much higher than the demand from another manufacturer, and hence there would be idle capacity if business from Maruti did not continue. In such circumstances, vendors were unlikely to make the required investments.
Further, if a vendor was uncertain of the future of his business—which would be the case if tenders were invited every two years—he would consider that making investments to improve productivity and quality were too risky, and unlikely to result in profits. This would have adverse effects in the long term. He would also not invest in R&D. The lowest bidder system generally encouraged cost reduction by compromising on quality.
Maruti wanted its suppliers to invest in appropriate quality of capital goods, high quality tooling, and right operating procedures and realized that in order to do this, the vendors would need an assurance of long-term business. The board approved this approach. A vendor would be dropped only if he proved incapable of improvement and meeting Maruti standards.
In any such long-term arrangement, the system of price determination is a critical factor for success. Maruti decided that as a rule, prices of components would be negotiated every year. The initial price level would be fixed on an analysis of the costs of production. The vendor was required to present a break-up of costs and Maruti engineers did their own homework on estimating the likely production cost of each component. The landed cost of the CKD parts (which included shipping, customs duty and clearance costs) was another guide to price fixation. A locally made part was expected to have a lower cost than the landed cost of that part. This was not always possible at the time of start of production, but Maruti engineers had to ensure that with increasing volumes and localization, costs came below the landed cost. Prices were fixed, by negotiation, taking all these factors into account. Prices were then renegotiated annually on the basis of increases in manufacturing costs relating to labour and materials and also reduction in costs because of better productivity, lower rejections and higher volumes of production. Provision was made for variations in statutory duties or foreign exchange rates. ‘Such an arrangement,’ the board note said, ‘would give to vendors the assurance that subject to their good performance, their growth and profitability at reasonable levels would be certain.’
Maruti also decided not to have multiple vendors for each component, the norm in the industry at that time. One reason for multiple vendors was the reservation policy, which prompted one manufacturer to establish a number of companies to make the same component, so that each company remained within the definition of a small-scale unit. In case the production was combined in a single unit, the investment would exceed the ceiling for a small-scale unit, thus depriving it of the various benefits it would have got. The incentive structure prescribed for promoting small industries worked against the concept of economies of scale and professional management. Another reason for multiple vendors was to reduce the risk of failing to obtain adequate supply of components. A large number of suppliers, the Maruti strategy paper said, would make it difficult to ensure that the same part, supplied by different vendors, had the same high quality, and would also hamper vendor management. In addition, multiple vendors would make it much harder to attain economies of scale, and would not be in the interest of either Maruti or the vendors.
Keeping all this in mind, Maruti decided to have two suppliers for each component. Two suppliers were considered essential to reduce risk of interruption of supplies.
The policy also provided that more than two suppliers could be considered for low technology items, where maintaining quality would not be a problem, but in no case was the number to exceed three. Though the strategy paper noted the risks involved in having just a single supplier, it suggested that this could be considered in cases where substantial economies of scale could be achieved and if the price was attractive enough for Maruti to take the risk. This was done for some components like rear axle assemblies. In the initial one and a half years, however, Maruti decided to have only one supplier for each component, since the volumes required would be small. A second supplier would be brought in when production crossed 3,500 vehicles a month. This, it was argued, would help the first vendor achieve a reasonable level of production and give time to the second vendor to establish itself.
The vendor development work started almost immediately after the agreements were signed with SMC in October 1982. Initial appointment of vendors was a critical task, not only from the point of view of the ability of the vendor to meet requirements in the future, but also to ensure that there was no violation of Constitutional requirements and to safeguard against possible charges of favouritism that could lead to vigilance inquiries. Thus Maruti decided to follow a stringent and transparent vendor selection process. A Vendor Committee, which comprised the executive in charge of vendor development, the chief engineer and the head of finance, was appointed for this purpose.
Advertisements were issued in newspapers inviting potential vendors to visit the factory, see the components to be localized and to submit expressions of interest. This took care of the requirement of giving everyone an equal opportunity to compete for the business. Maruti had imported a few CKD kits from Japan and displayed all the components in the factory premises. The components to be developed were divided into two categories—those in which vendors had the manufacturing technology but had to meet the specifications given by SMC (like tyres, shock absorbers, bulbs), and those which not only had to meet SMC specifications but where new technology would be required. The components were further subdivided according to the year when they were expected to be localized. The decision on this had been taken in consultation with SMC, based on the degree of difficulty of manufacturing, the expected time required for bringing in the technology and the investment required.
Interested parties had to submit full information about themselves, including what facilities they had, their experience in manufacturing and management set-up. Maruti engineers then did a preliminary screening and those who appeared to be suitable were shortlisted. A group of engineers then visited the factories of the applicants to verify the information given and also to judge their capabilities. The need to visit the factories and see production facilities was in line with the Japanese practice that the best decisions were taken after seeing the real situation with one’s own eyes. On this basis, vendors were registered with Maruti, and a decision taken as to what component could be manufactured by each one of them.
Usually three vendors were shortlisted for each part. It was expected that not all of them would succeed in meeting the Maruti requirements and so some margin had to be kept. Of course, in many cases three potential vendors just did not exist. Drawings and sample parts were then supplied and the vendors were required to manufacture a few pieces and make an offer to Maruti, indicating the time schedule for commercial production and the price at that time. All this work was done at the level of engineers, under the supervision of the heads of vendor development and engineering, and helped by Japanese experts.
When the vendor, after going through the process, submitted prototypes, the engineering department tested them and, if they were approved and it appeared that the vendor could become a commercial supplier of the part, the Vendor Committee held price negotiations. Once these were successfully concluded, the committee made a specific recommendation to the managing director for approving the selection of the vendor and the proposed price. On receiving this approval, a letter of intent (LoI) was issued to the vendor, who was then required to give a larger lot of supplies, which had to be produced following the prescribed production process for mass production.
A second round of testing followed, which involved fitting the component on the car and running the vehicle for 20,000 km on a test track. Shock absorbers and other safety-related components were tested for 40,000 km and over more taxing road conditions. Several parts could be undergoing testing at one time on a single car. The parts were periodically inspected for wear and tear during the testing, and at the end to see if they measured up to the required reliability standards. This was a completely new practice in India and this testing process often resulted in parts having to be modified because wear and tear in Indian conditions was different from what was anticipated, based on the experience in Japan. The process of testing components did result in making the localization slower and often caused much frustration to the vendor. However, everybody conceded that one of the reasons why Maruti vehicles soon acquired a reputation for reliability and quality was this testing process.
Vendors were not happy having to wait to start commercial supplies till the testing was complete, but SMC was very clear that there could be no short cuts in this respect. SMC did not want to risk its reputation for making reliable, value-for-money products to be jeopardized by even 0.5 per cent component failures. In addition to road testing, the parts were also tried for fitment on the assembly line. This was to ensure that once local parts were accepted for use, there should be absolutely no slowing down of the assembly lines and, consequently, loss of productivity levels because the workers were having problems fitting local parts. This was again an example of how meticulous the Japanese were in ensuring that once a decision was taken, its implementation should proceed very smoothly. Only if a part cleared all these tests did the vendor get a production order. The share of business was decided by the vendor department from time to time, based on price and performance.
Another difficult decision in respect of each part was to decide when it should be deleted from the CKD kit. The contents of a CKD kit had to be decided and orders placed with SMC five months before the month in which the imported parts would be used on the Maruti production lines. This was the time required for SMC to place orders with its vendors, for the vendors to manufacture and supply the parts, and for SMC to ship them to Gurgaon. Maruti had to anticipate which parts, and in what quantities a vendor would be able to produce six months in advance, in order to decide to delete those parts from the import list. Given the somewhat disorganized state of many vendors, this was no easy task, and often created situations of crisis, as many vendors failed to meet their commitments.
Amid all the scepticism, there were some component manufacturers who recognized that Maruti was the harbinger of a generational leap for the industry. From operating on the basis of low volumes and high margins, they now had the opportunity to shift to a system of high volumes with comparatively thin margins. From relying largely on unskilled labour, they had to employ a larger number of skilled workers, given that not only was a lot of design and engineering work involved, but the manufacturing process required use of more sophisticated equipment and adherence to systems.
In the early 1980s, Bharat Forge was a small company with total sales of less than Rs. 20 crore, supplying to Tata Motors, Ashok Leyland, Hindustan Motors and Premier Automobiles. But it was an aggressive company and Kalyani decided to piggyback on the opportunity provided by Maruti to change itself. It set up new facilities for its supplies to Maruti, including a new brake plant in Jalgaon, apart from new manufacturing equipment and technology for its forging business. For example, it changed forging technology from the traditional use of hammers to forging presses. Over the years it has grown rapidly, exporting a substantial part of its production. It has adopted the inorganic route to growth and acquired a number of forging companies in Europe. It now has a turnover in excess of a billion dollars and operates in six countries.
In order to make sure that vendors did not become complacent, Maruti decided to introduce a vendor-rating system to evaluate companies on quality, number of rejections, timeliness of delivery and general attitude to business. They were also assessed periodically on steps being taken to improve productivity, upgrade technology and reduce costs of production. The vendor ratings were used to determine the share of business between vendors supplying the same component. When new models were introduced, and the parts to be developed became more sophisticated, the vendor chosen to produce that part was selected on the basis of his performance record.
Maruti also changed the system of making payments to vendors. The supply contract with component manufacturers contained the usual provision of thirty-day credit for the buyer. However, after a few years of operation, Maruti offered to make payments in fifteen days, with a 0.5 per cent discount for early payment. The vendors were delighted, as most of their customers rarely paid them even within thirty days, and they were constantly facing cash flow problems. Working capital could not be easily obtained from banks, and interest rates were high. Money from private moneylenders was very expensive. So, getting paid in fifteen days, and by a manufacturer who was buying a large part of their output, was a boon.
As a result, they started to give Maruti priority over other customers in making supplies whenever they had any manufacturing problems and output was curtailed. Another change made was that vendors were not allowed to come inside the Maruti office for receiving payments. This was partly to avoid loss of productivity in the office, which would result from a large number of visitors, and partly to avoid possibilities of any unhealthy practices developing in the process of vendors receiving payment.
As the possibilities of Maruti beating the odds and becoming a success story increased, many people wanted to invest in component manufacturing and become suppliers to Maruti. It did not matter if they had no experience of any kind of manufacturing. Most of them did not know what they should manufacture. People would often approach me for help to enter into a licence agreement with a Japanese component manufacturer, or request that they be allotted some component which they could manufacture. Many of them suggested that it should be a component which could be also sold in large numbers in the spare part market. It was believed that spare part sales generated much larger profits. They were disappointed to learn that Maruti’s policy was to not to allow vendors to sell spare parts in the marketplace. I also advised them that Japanese component manufacturers were unlikely to form partnerships with companies or persons who had no manufacturing experience.
Some thought that political connections could be a substitute for experience, because Maruti was a public sector company. Mathur recalls one politician approaching him in his office at the factory and saying that he had ten acres of land next to the Maruti factory and a few crores of rupees. ‘You tell me what I should produce.’ Mathur replied that he would not be able to offer any suggestions and that he could see the components displayed, choose what he wanted to manufacture, get the technology and return with a sample. ‘Come back then and we’ll discuss it.’ The politician went into a monologue about how close he was to Mrs Gandhi and that she had sent him. As Mathur listened patiently, the man said, ‘I want you to know that I got Mr Krishnamurthy his job.’
That gave Mathur an opening. He said, ‘Saab, since he is beholden to you, why don’t you go and ask him? In my case, Mr Krishnamurthy gave me my job. So if he asks me to do something I’ll do it efficiently. But you will have to speak to him first.’ The man left quietly. The next morning, on the way to the weekly project review meeting, Mathur told Krishnamurthy, ‘Sir, yesterday I was privileged to meet the person who gave you your job,’ and recounted the incident. Krishnamurthy laughed and said he would take care of the matter. The politician never reverted. The message went out to the Maruti management—no compromises.
The management understood that it would be very difficult to ensure quality and performance if a vendor was aware that his connections were powerful enough to influence the management and get him a product to manufacture. The situation would be very similar to a vendor being a close relative of the promoter of a private car company.
As the process of localizing components progressed, more and more vendors became part of the Maruti family of suppliers. All of them had to make changes in their production systems and increase their manufacturing capacities, as the volumes required by Maruti were not only higher than what they had been used to, but increased every year by significant amounts. Most of the vendors were those who were already car component manufacturers, like the TVS group, Bharat Forge, Hydraulics India, tyre and battery makers and so on. Some others were established companies, but had never worked with the automobile industry. One example was Goodlass Nerolac, a paint company which had been catering only to the domestic finishes market. This company decided to foray into automotive finishes and set up a plant exclusively for Maruti after entering into a joint venture with Kansai Paints of Japan. This partnership worked well and the joint venture was a success.
There were a slew of small companies and first-generation entrepreneurs who were ambitious and willing to work hard and learn the business. Maruti provided immense growth opportunities for such people. Arvind Dham, an architect with a course in construction management, started Amtek Auto in 1985 to supply connecting rod assemblies to Maruti. He has since made it to the Forbes annual list of billionaires. Amtek Auto is now part of the Amtek Group, whose manufacturing activities include forging, aluminium casting and machining.
Rico Auto was another company, established in 1984 by Arvind Kapoor, which started making high-pressure aluminium castings and ferro castings in 1986 for both Maruti and Hero Honda. It now has international operations and a turnover nearing $300 million. The Shakti Group in Chennai first became dealers for Maruti. When Maruti had problems in getting adequate supply of brake drums, M. Manickam, the CEO of the group, expressed a desire to get into this business. Maruti agreed, as the group appeared very professional. The job was very well done and I asked Manickam to develop steering knuckles, a key safety component, which other vendors were unwilling to develop, as each knuckle had to be X-rayed for defects. A large investment was required for this. Manickam agreed to get the required technology. Shakti not only became the main supplier to Maruti, but also started exporting this part. I would often urge Manickam to expand casting capacity, and also start machining components as much greater value was added by doing this. The Shakti group developed excellent expertise and has now acquired large casting companies in Europe.
Maruti acted virtually as a midwife to a large number of vendors, handholding them at every stage. Maruti was often involved in helping them find the right collaborator, aiding with joint venture agreements and getting approvals and licences, arranging financial assistance and negotiating with financial institutions for providing working capital, persuading state governments to allot land, giving short-term advances for them to pay customs duties and importing tooling, and sending Maruti engineers to help them with their production systems.
One of the major requirements of the vendors was to get the appropriate technology for making components that could meet Maruti’s specifications and performance standards. Clearly, the most suitable partner would be a vendor supplying similar parts to SMC, or at least another Japanese vendor familiar with the requirements of Japanese car makers. Maruti was flooded with requests from Indian manufacturers to help them in getting such collaborations. Component manufacturers in Japan, as well as SMC, were inundated with proposals from a large number of Indian companies, and did not know how to make a choice. They did not have the resources to visit all the applicants and study their capabilities. They wanted Maruti’s help in identifying a suitable partner.
The problem was that as a public sector entity, Maruti could not directly get involved in promoting collaborations between private companies in India and Japan. Any such action could be called into question by the CBI and the vigilance authorities. Explanations would have to be given as to why a particular party was selected and it could be alleged that this was for some consideration. In addition, those who were not selected could go to court and Maruti would need to convince the judge of the reasons why these companies were rejected. This would have been an enormously time-consuming process, besides creating risk for those involved. On the other hand, time was of the essence in arranging collaborations if the localization targets were to be met. Delays would hurt us more than anyone else. Unfortunately, the system did not recognize this.
Difficult as the problem appeared to be, the solution also lay within the system, which essentially required that the right process should be followed on paper. So Maruti decided to set down on paper its inability to get involved in arranging collaborations between Indian and Japanese companies and informed all concerned accordingly. Informally, however, Maruti engineers and the vendor department would evaluate the applicants seeking collaborations, and decide a shortlist of those who appeared to be the most suitable. The local SMC experts would be involved in this process. The top management would be kept informed. This list, with the reasons for selection, would be conveyed orally either directly or through SMC, whose help was often taken to introduce Indian vendors to Japanese companies. The Japanese company was always asked to check out the companies being suggested before finalizing any agreements.
As a result, close to forty joint ventures and technical agreements between Indian and Japanese component manufacturers were signed in a short period of time, and this greatly facilitated the process of localization. There were no allegations of any wrongdoing in this process. Among the more successful joint ventures were those of Kalyani Brakes, part of the Kalyani Group, to which Bharat Forge also belonged, with Nabco, a Japanese leader in the brake business. Another major success was the Noida-based Motherson Auto, which started as a supplier of wiring harnesses, entered into multiple collaboration agreements and joint ventures and is now known as Motherson Sumi, incorporating the name of their partner, Sumitomo Wiring Systems.
Mathur and the late Dr R.D. Deshpande, who was the first head of engineering, were in charge of developing Maruti vendors. They had their task cut out for them. Mathur describes it graphically: ‘Ensuring that the production line was not disrupted was like feeding a shark which eats round the clock. We were buying 1,200 or 1,300 components. Even if we had a crisis on one component every three years, it was still a crisis every day for us.’ The crisis could take the form of a quality problem, disruption of production due to shortage of raw materials or imported sub-components, labour unrest or disruption in the transportation system due to a number of reasons.
In all foreign collaborations, the government was keen that the technical agreement should cover not just know-how for manufacturing and testing, but also know why—why products are designed the way they are and the underlying technology behind the design. The reason was to facilitate absorption of technology and create the ability for further improvements, so that further extensions of licence agreements should not be required. This was clearly not possible for the components which SMC bought from its vendors, since it was the vendors who had the intellectual property rights. However, for the localization of components, it was necessary to give complete and detailed drawings of the components and SMC was in a position to supply these to Maruti.
The drawings that came from Japan, however, posed a huge problem. When the vendor started to use the drawings to manufacture components, in many cases the product produced differed from the sample supplied by SMC. Maruti’s engineering department was very unhappy, being used to the western system, where drawings were sacrosanct, and could not understand why the component produced according to the drawing did not match the sample which came from SMC. When the matter was taken up with SMC, the explanation was that components were being improved and modified constantly, and it was not considered essential to spend scarce and expensive engineering man-hours to modify the drawings all the time. Drawings thus often became out of date. It was suggested that the sample products should be taken as the reference. Maruti then starting updating the drawings from the samples before passing them on to the vendors. In addition, it gave the vendors five sets of components and kept five sets, so that checking would be easier.
In 1985, Maruti was faced with the problem of vapour locks on the fuel pump, which pumps petrol from the fuel tank to the carburettor. A common problem in the Ambassador and the Premier Padmini was that in summer, or when going up to the mountains, a vapour lock would develop in the fuel pump and bring the car to a stop. As this was due to overheating, the solution was to put a moist cloth over the fuel pump and keep wetting it with cold water after every thirty minutes. Since a fuel pump was a comparatively simple item, Maruti took up its localization early and the localized pump was first used in 1985.
That year, Delhi had one of the hottest summers in history and the same vapour lock problem occurred in a few cars when the temperature crossed 45 degrees centigrade. This was a big blow to our pride even though the number of cases was not large, being confined to seven or eight out of every 1,000 cars sold in Delhi. The matter was also raised in Parliament and that added further urgency to finding a solution. As a first step, Maruti flew in 30,000 pumps from Japan, which threw the foreign exchange budget out of gear because even the airfare was paid in foreign exchange. This was nevertheless considered necessary, to ensure that the problem was immediately resolved. The pumps which were developing vapour locks were replaced free of cost. The customers were happy, as they had not expected such quick and effective a remedy. Perhaps this was the first instance of a ‘recall’ in India. The rest of the imported pumps were used on the production line. The engineers in Maruti compared the imported pump with the one that had been localized, and it was found that the localized pump had a small dimensional variation in one component. Once this part was corrected, the problem disappeared.
On one occasion, Chennai-based Wheels India, which was using imported steel to manufacture wheel rims, had made a mistake in its application for an import licence. The imported material was held up at the port and could not be cleared. Consequently, production was delayed and the pipeline ran dry because trucks took ten to fifteen days to reach Delhi from Chennai. The only solution to keep the lines running was to airlift the wheels from Chennai, till the normal delivery cycle by trucks was restored. The costs were borne by Wheels India.
Logistics posed another headache. The largest quantity of tyres was supplied by MRF and Dunlop, whose plants were in Tamil Nadu. Tyres were bulky and required large space for storage. With production levels at near 800 vehicles a day, 4,000 tyres were required daily. One week’s inventory meant 28,000 tyres, posing a storage nightmare. If kept in the open, water would accumulate inside them when it rained. On the other hand, the covered space required for storage would be huge. The maximum inventory was required during the rainy season, when transportation disruptions were most likely to occur, but this was the time when storage in the open would create difficulties. Thus it was very hard to determine the correct inventory level in the factory, and at times there would be shortage of tyres. Cars were then produced without the spare wheel being fitted with a tyre. The tyre was fitted later when new stocks arrived.
The rear axles too came by truck from Chennai. This was one of the few cases where Maruti had a single supplier. Trucks would break down or be stranded by floods during the monsoons. Or else, they would be held up for days at octroi posts on practically every state border. Truck drivers were not trained to keep Maruti, or even their own management, informed of what was happening. Though they were supposed to call from every major town on the route, few did this. There were a large number of thefts in Madhya Pradesh, with entire trucks getting hijacked. During the 1984 anti-Sikh riots following Mrs Gandhi’s assassination, several Sikh drivers disappeared and there was no way of knowing whether they were hiding to save themselves or had been killed. On such occasions the rear axles had to be transported by train, with someone accompanying them, to ensure they reached the factory in forty-eight hours and production lines could be kept running.
Maintaining full production and preventing stoppage of assembly lines was a priority objective with Maruti. It was realized that the single most critical factor in maintaining production would be the supply of components according to schedule. Thus, the weekly management committee meetings identified components where the inventory was becoming critical, or where there could be problems with a vendor maintaining adequate level of supplies. This detailed and frequent monitoring by top management of the supply chain was effective as, over the years, Maruti not only met but also exceeded its production targets. The credit for this also goes to the young officers in the purchase and vendor departments, who worked as if they were personally responsible for meeting production targets. The fact that purchase of components, inventory and consumption had been computerized also made it possible to do monitoring more effectively. However, there were many instances where the level of a component shown by the computer differed from the physical stock. There were a number of reasons why this happened and it became necessary to train those in charge of the store to not only rely on the computer data but to also cross-check with the physical situation.
Despite all the efforts made, there were shortfalls in the indigenization programme. In the directors’ report in Maruti’s first annual report, Krishnamurthy noted that ‘despite the best efforts of the company, considerable difficulties have been encountered in obtaining quality products and in accordance with the schedules promised by the vendors’. Some of these were well-established companies which took ‘longer than promised in developing acceptable samples’ and were not able to keep up with Maruti’s production requirements. Consequently, Maruti had to fall back on emergency imports and even fly domestically manufactured components that should normally have been transported by trucks.
Even the process of flying in components was not as simple as one would think. Due to security reasons, there was a cooling period of twenty-four hours before cargo would be cleared for acceptance by airlines. People from the purchase department would wait at the airport so that the minute this period ended, they could take charge of the components and get them loaded. In Delhi, the items were unloaded and transferred directly to the assembly line, regardless of the time of day. As a result of all these problems, more parts had to be imported and the indigenization programme had to be revised downward. The target of 31.5 per cent indigenization up to March 1985 was brought down to 23 per cent.
The lament about vendor failures was repeated the following year in the chairman’s address to the board of directors. Krishnamurthy noted that soon after the introduction of the 800, the company had started rolling out 5,000 vehicles a month and needed the component manufacturers to match their pace of supplies with Maruti’s consumption. ‘However, most of the component manufacturers have not been able to respond to this need in the short period of time available during which Maruti has built up its production volume.’
Maruti then decided to get even more involved with its vendors, forming joint ventures to manufacture components that were critical to the quality of the vehicles, or were bulky to transport, or required high technology and large investments, or where the economies of scale dictated a single source.15 In Japan, SMC also had an equity stake in several of its component suppliers. The idea of forming joint ventures emanated from the experience of SMC, which was keen that this be speedily implemented. SMC decided that, in addition to Maruti, it would also subscribe to the equity in those joint ventures where technology from Japan was required.
Having a stake in the companies enabled Maruti to be involved in all aspects of the establishment of the production facilities and the processes for manufacture. The establishment of these joint ventures greatly helped in achieving the PMP targets, besides reducing the problems relating to quality and stability of supplies.
Initially, five joint ventures were formed. These were to manufacture seats (Bharat Seats), glass (Indian Auto Safety Glass),16 sheet metal parts (Mark Auto),17 plastic mouldings (Machino Plastics) and steering components (Sona Steering Systems)18 and accounted for 24 per cent of the value of the car. Three of the joint ventures—Bharat Seats, Machino Plastics and Mark Auto—were located within the Maruti factory complex, while Asahi Glass and Sona Steering took land nearby. Their close proximity to the Maruti factory was necessitated by the need for supervision of parts relating to safety (steering systems) and to cut down the cost of transporting bulky or fragile parts like seats, plastic mouldings and glass. Later, to bring in an element of competition and as a fallback arrangement, three more joint ventures were set up—Sona Car Seats (renamed Krishna Maruti) for seats in 1993, and Jay Bharat Maruti and Caparo Maruti for sheet metal components in 1988 and 1994 respectively.19
Sona Steering had Koyo Seiko of Japan as a partner, in addition to Maruti and Suzuki. Getting Koyo to invest wasn’t easy. Kapur, who was then managing Bharat Gears (a company owned by his father-in-law and Apollo Tyres chairman, the late Raunaq Singh) had been talking to Koyo Seiko even as he was seeking a partnership with Maruti. Mitsubishi, Nissan, Mazda and Toyota were all geared up to enter the Indian light commercial vehicle market and he knew business opportunities were set to boom. However, Koyo Seiko had earlier burnt its fingers in India, with a failed joint venture with the Andhra Pradesh government, and it took a great deal of persuasion on Kapur’s part to get them to agree to partner with him. Perhaps the fact that Maruti and SMC would also be equity partners helped to create the necessary confidence in Koyo.
Asahi India was promoted by B.M. Labroo, who was then working with United Breweries. He had found a collaborator for manufacturing windshields from Europe and negotiations with that company were at a fairly advanced stage. Meanwhile, Asahi Glass of Japan had also shown interest in coming to India and SMC discussed with me how this could be facilitated. One option was that Labroo should partner them and not the European company. I suggested to Labroo that he should consider this option also as there would be an advantage in having a partner who had the confidence of SMC. At that point having two makers of windshields would probably have made both projects unviable. Labroo also realized that if Asahi Glass came into India with another Indian partner he would be at a disadvantage and he opted to partner with them.
The equity stake that Maruti took in these companies varied. In Sona Steering, Maruti had only 10 per cent equity. On the other hand, Mark Auto was a 50-50 joint venture. The others fell in-between these limits. A shareholders agreement was signed in each case, which defined the roles and responsibilities of both parties. The management control was with Maruti’s partner, as the company did not want to get involved in the dayto-day management of so many companies. If Maruti had assumed control over the joint ventures, there would soon have been demands from the employees that they should have the same terms and conditions as Maruti employees. In addition, Maruti would have had to find human and other resources for managing each one of these companies. All this would have diverted attention from the main task of building Maruti, and the objective of having vendors would have got defeated.
On the other hand, since Maruti was represented on the boards of these companies, it could effectively influence management decisions and policies. In the initial period, Maruti engineers were very closely involved in all decisions relating to establishment of the projects. To give comfort to the partner, it was provided that for the first seven years or so, pricing would be on a cost plus basis, with an assured return on equity. Maruti had the right to go into the details of all costs of manufacture and procurement of materials.
Many years later, we realized that in forming these joint ventures, Maruti actually violated the Government of India Rules of Business, since public sector companies could not subscribe to the equity of private companies without Cabinet approval. Nobody—not even the government representatives on the board of Maruti—was apparently aware of this requirement, as it was never raised by anyone at any stage of the establishment of these joint ventures. It is hard to predict how much time would have been taken to procure government approval for establishing each of these companies, if the correct position of the rules was known at that time and formal proposals for forming so many joint venture had been moved. Whether the proposals would even have found favour also remains a matter of conjecture. In this case, at least, ignorance helped in localization of 24 per cent of the car, and development of some very good automobile component-manufacturing companies.
Since Maruti was determined to play an active role in ensuring that these projects were successful, and met all the schedules prescribed for them, it was necessary to have an organization to ensure effective implementation. A separate department was formed and Dr Krishan Kumar was brought in from the Indian Railways to head it. He was a very experienced engineer, and took to his task with great sincerity. Like Mathur and Deshpande, he, too, had a tough time persuading the joint venture partners to work in a professional manner. Though the administrative control of the companies was with the respective promoters, Kumar, with the help of three or four assistants, was acting as a facilitator for everything—from helping them with the technical agreements and equipment to finding contractors and architects and finalizing the layout of the factories, ordering raw materials and monitoring supplies. Kumar also had to accompany the promoters to Hamamatsu in Japan to meet SMC executives to discuss project details.
The companies had to take approvals from DGTD for all imports of capital goods and other materials. Import licences were issued only after the DGTD made a positive recommendation. Kumar had to visit Udyog Bhavan with the partners to get these clearances. That led to DGTD officials asking him why he was accompanying them, since he was a public sector employee, and helping a private entrepreneur was not the role of a public servant. Kumar had to point out that it was Maruti’s commitment to DGTD on localization that would be jeopardized if these companies faced any problems, leading to delays in localizing components. Moreover, penalties would be imposed on Maruti, and not the vendors, if localization targets were not met. This was a new viewpoint for these government employees, because normally public sector employees are more concerned about ensuring that correct procedures are followed rather than getting involved in achieving results, if it meant adopting practices which were unconventional and also risky for the individuals concerned.
Joint ventures, in the initial years, sometimes ran into financial difficulties. The procedures followed by the public sector banks for approving applications for long-term loans as well as working capital limits were both slow and rigid. A delay in getting approvals could hold up project implementation, and consequently Maruti’s production plans. Thus Kumar, though a senior deputy general manager, would personally visit banks and persuade officials there to expedite decisions. The intervention of a senior public sector manager helped in giving bank officials the confidence to cut some red tape. In other cases, Maruti itself would give short-term loans to joint ventures to help them.
Barring Kapur, who was familiar with the auto components industry, given his stewardship of Mumbai-based Bharat Gears, the other joint venture partners had no experience of this sector. However, they were people with good business experience, but in the way traditional proprietorship companies functioned. This meant that decision making was centralized in the owner, who rarely trusted any professional. Not only did he alone take financial decisions, but usually all cheques were also personally signed by him. Decisions were based more on gut feel than on any analysis of data. Account keeping was usually designed to minimize payment of income tax, and generation of some cash for meeting various expenses of the owner.
One of the tasks that Maruti faced was to bring about an attitudinal change among the joint venture partners. Maruti required them to follow systems and work in a totally professional manner, delegating power to professional managers and adopting transparent accounting practices. While some learnt very fast, others took time. At that time, in line with other industrialists and businessmen, whose attitudes had been shaped by the licence and control raj, most of the partners had a very short time horizon while taking business decisions. Few businessmen then thought of long-term sustained growth, or how to build companies which could be internationally competitive.
For example, most manufacturers used tools and moulds made in India. Not only were they cheaper, but there was no need to obtain an import licence. The desire to avoid the process of getting an import licence was understandable. However, these toolings were almost invariably of low quality, and it was not possible to get consistent quality of production from them. Till Maruti came on the scene this did not matter, as quality was not something which anyone insisted upon. At the same time, investment levels were kept low, and profits were high. SMC insisted that all tooling for critical parts should first come from Japan so that quality could be high. Later, when production was established, and engineers understood technology, cheaper sources could be explored.
Many of the joint venture partners argued that if they could not use Indian-made tooling, they should be allowed to get cheaper tooling from Taiwan and South Korea. They found it hard to understand that buying tooling from Japan was essential to save time and ensure that components were made available according to the localization schedule. They did not realize that because they themselves did not have the expertise to check the tooling quality, Maruti and SMC engineers would need to go to the manufacturer’s works in these countries to inspect the tooling. The checking process would involve the tooling manufacturer producing a pilot lot of components on their machines and shipping the components back to India, for testing in the laboratory and on the assembly lines. Clearance for shipping the tools could be given only when these checks were successful. Manpower resources with SMC and Maruti were limited and delays would be inevitable if this process was followed, and particularly if some defects were found. In addition, the die manufacturer could blame the raw material for quality defects and even question the checking process in India, and this could cause further delays. However, if the first tools came from SMC’s vendor in Japan, there would be no need to carry out any detailed checks as the tool would be a replica of what was being used successfully. Experience showed that this policy worked well and in such matters trying to save money on tools would really have been penny wise and pound foolish.
Kumar had to point out to many vendors (other than the joint venture partners) who wanted to persist with the traditional way of using Indian-made tools that they were ignoring the fact that if the components produced were rejected, they would lose all Maruti business, and suffer a total loss of their investment. Further, since the Maruti pricing policy took into account the tooling cost, buying tooling from Japan would not adversely impact on their profitability. In fact, one of the reasons for initially adopting a cost-based pricing system was precisely to ensure that vendors did not cut corners in using raw materials, or the correct equipment and tools for production. This could never have been ensured in a system which required tenders to be floated and parts bought from the lowest bidder. Those who were then involved with policy making in government, and framing policies for public sector buying, perhaps did not fully understand the importance of the various inputs going into the production system in order to achieve high productivity and quality.
But old habits of making a quick buck do not always die out easily. One joint venture partner was found to be asking the supplier of raw materials to inflate prices and give him a cut in cash. He told the supplier that senior management in Maruti wanted this money. Mathur was told this reason for the higher prices for the raw material when he went for price negotiations with the supplier and insisted on a lower price. The same vendor was also found to be using the dies provided by Maruti to supply components to another automobile manufacturer, through a subsidiary company. The profit margin was naturally very high. On being confronted, the vendor apologized profusely, and promised to mend his ways. Maruti had no real option but to let the vendor continue, as there was no other source for that component. But, it should be said to the credit of this vendor that over time he did change and has continued to work well.
Kumar was racing against time to ensure that each joint venture company established manufacturing capabilities as scheduled and also expanded production to keep pace with Maruti. Mathur and Deshpande had to do the same task with other vendors. They, and the teams under them, worked long hours, without any overtime, only because each one of them was very strongly motivated to ensure that Maruti met all the production schedules which had been announced. Their efforts belied the general belief about the lack of result orientation among public sector employees.
The deletion of components manufactured by the joint venture vendors from the CKD list had to go through the same process as components from other vendors, with the same kind of risks. The parts also had to go through the same rigorous testing procedures. Often, there were three to four iterations or rejections before a component was finally accepted. At times this could mean that a part had to be ‘reborn’, or included in the CKD list again, and sometimes such parts had to be air freighted to keep the production going. The top management did not look kindly at such an event and vendors as well as executives in Maruti made all possible efforts to prevent these occurrences. This acceptance process did add to the cost of the vendors. Usually the bulk of the investment required to manufacture the part would have been made when the sample part was supplied. However, the commercial production of the part could only start after all testing was complete and the part had been deleted from the CKD list. This took a few months. The manufacturing capacity would, on many occasions, not be fully utilized till the imported part inventory with Maruti had been used up.
One of the most difficult areas of developing vendors to meet Maruti requirements was in the area of quality. In 1983, when Maruti talked about the need for better quality, the general response was that it would mean higher prices, and it would not be possible to meet the price targets. This was largely because people generally, and most vendors in particular, confused quality with specifications. It was widely assumed, even amongst persons who should have known better, that the higher the specifications the better the quality. Quality was not understood to mean consistent conformity to the laid-down specifications, with variations being within prescribed tolerance limits. High quality also meant that out-of-specification components would be very few, perhaps less than 50 per million. Specifications could vary widely. A tap could be chromium plated or gold plated. The latter would not necessarily be of higher quality if it was not made exactly as per specifications, and did not perform its function of regulating water flow as efficiently as the chromium-plated tap. Also, the more exotic the specification the higher would be the cost. It took time before the difference between quality and specifications began to be understood. Maruti had to repeatedly tell vendors that what the company wanted was very strict and consistent adherence to all the specifications laid down.
All manufacturing companies in India, had—and still have—quality inspection (QI) departments. The idea was that after products had been manufactured, the QI inspectors should ensure that they met with the consumer specifications. If a customer was very strict about quality, 100 per cent of the products would be inspected before shipment. In addition, inspection would also be done for all the components that went into the assembly of the final product. Parts that were rejected during inspection would be sent back for reworking and inspected again. If rectification was not possible, the part would be scrapped.
The Japanese, who were always looking for reduction of costs, had long ago realized that supplying good quality products by inspecting the components at each stage, and also inspecting the finished product, was extremely costly as the parts inspection department had to employ a large number of inspectors. The production process slowed down, leading to lower productivity. Even then, experience showed that it was not possible to ensure that bad products did not slip through the inspection process. There was the additional high cost of rejections and reworking and repairing of the defective parts and products. The whole process of inspection was non-value adding and was required because the production processes did not ensure that defects were not created and workers got the product right the first time. The real answer to producing good quality, therefore, lay in improving the production process to such an extent that inspections would become redundant. Quality had to be built into the processes, and workers trained to implement those processes exactly as prescribed. Each worker had to ensure that he got it right the first time.
This was one of the first lessons learnt from SMC when the production processes were being planned and manpower requirements were being worked out. In turn, Maruti passed on the same message to the vendors. They were told that quality had to be built into the manufacturing process and not sought to be attained through inspections. The prescribed processes had to be followed with total consistency. This required a high degree of discipline. The manufacturing equipment, including the tooling, had to be capable of consistent adherence to the specifications. The system of maintenance had to be adequate to ensure that any deviations due to usage and wear and tear were detected and rectified in time. The procurement of raw materials and bought-outs had to be from sources who would follow the laid-down processes and systems, thereby ensuring consistent quality, and no change in the source of procurement should be made without first getting Maruti approval. To enable vendors to develop the appropriate systems, Maruti insisted that all vendors get ISO certification. Maruti helped the small vendors in doing this by bringing in the cluster concept, under which a group of vendors were taken through the steps required to get certified. Later, the CII and others adopted this system of improving the quality levels of small and medium industries.
It was also explained to vendors that producing good quality components the first time resulted in a reduction of costs. To the extent that rejections or rework could be reduced, production volumes would go up, with no additional cost. This meant higher productivity. There would be consequent savings in costs. To the extent scrap could be reduced or eliminated, there would be a saving of materials and manufacturing costs. The cost of inspection would also come down. It was shown to vendors that under the existing system the cost of quality was really quite high. Many vendors were quick to learn the importance of following processes to improve quality. Undoubtedly, the rapid development of the automobile component industry, and its ability to access the international markets, was a result of the efforts made by Maruti to educate manufacturers on the concept of quality, and the profit which they would generate for themselves if quality levels were improved.
Despite a majority of vendors trying to adhere to the system of rigidly following all the laid-down processes, Maruti kept on experiencing problems because a vendor would change his source of an input, or substitute one material with another, or make some other variation in his process, without first informing Maruti and following the processes laid down for making such changes. Inevitably, quality problems would crop up. Usually such situations arose with vendors who did not themselves learn the manufacturing processes and were also undisciplined in their functioning, as a result of which they were unable to enforce manufacturing discipline in their organizations. While there has been considerable improvement in this respect over the years, much more needs to be done.
Perhaps in 1983, the component manufacturers were not entirely to blame for the attitude towards quality and training workers. A large part of their management time in those highly regulated times was devoted to managing government inspectors and sundry bureaucrats. One supplier, on whom Maruti was putting a lot of pressure to improve since his performance was not up to the mark, agreed to send his works manager to Japan for training. On his return, Mathur asked the man what he had learnt. His answer was a telling comment on the business environment of India in the 1980s. He said there was no correlation between what a works manager did in Japan and what he did in India. ‘There they are only concerned with productivity and quality. Here I am caught up with labour inspector, electricity, sales tax. Where do I have the time to go to the shop floor and look at quality?’ The explanation certainly had an element of truth in it, but it was not the full truth. Maruti, and many of its vendors, showed that in the same environment, much more could be done to improve quality and productivity.
Maruti had an extremely rigorous checking procedure for accepting vendor parts. Checking was done on a sample basis, and 100 per cent inspection was required if there were defective parts found in the sample. The vendor had to come and segregate the defective parts and take them back for rectification, if that was possible. Keeping production going often became a problem when such segregation was required. The received parts had also to be counted and often errors were detected.
At each vendor conference, vendors were told that the task of inspecting and counting incoming parts by Maruti was really non-value adding, and thus led to higher production costs. This was primarily the responsibility of the vendor and they should do it right the first time. Why could Maruti not trust them to at least count correctly? In Japan, components moved to the lines without any counting or checking. Why could Maruti not emulate the Japanese in this comparatively low technology work? Packing systems were modified to ensure that counting of the parts was easy and virtually automatic. Over time, a large number of vendors have moved to the stage where their certificate of quality and numbers is accepted as they have proven their capability and reliability.
When any vendor’s part was rejected due to quality reasons, the system required that the root cause of the problem be correctly identified and correctives applied. The issue was treated as closed only when it was reported that the corrective action was effective. The need to identify the root cause was again a departure from conventional practice. Normally, defective parts, or faults in a product, were rectified and rarely did anyone bother to find the root cause of the problem and amend the system to ensure that the defect did not recur. This practice was not confined only to the vendors. Even within Maruti, engineers drawn largely from public sector companies had the same system of dealing with defects. The Japanese taught them that to get at the real cause it was necessary to ask ‘why’ anywhere between three to five times. I myself had to frequently ask ‘why’ many times when any problem was reported, and this helped to inculcate this habit in more employees. I would also periodically ask how many of the ISO or QS systems had been modified in the previous six months. Unless systems were being modified and improved, defects would continue to crop up and continuous improvements in quality could not be made.
In spite of this obsession with quality, the no-tolerance culture took a long time to seep in. Mathur and Deshpande, for example, were frequently fielding ‘adjust kar lijiye’ (let it pass) requests. Vendors would admit that their product had a slight problem but promised to set it right the next time round. What the Maruti materials team had to do was to see why a supplier was not being able to stick to the tolerance levels—was the basic process under control, making this a random occurrence and, therefore, meriting a waiver, or was there some serious flaw in the manufacturing process? Maruti engineers working in the purchase and vendor development departments would spend at least half a day every day on the shop floors of suppliers.
Some of the vendors, especially among the joint ventures (there were one or two that had come in using political clout), even complained to the government that the Maruti management was being very rigid on quality. But the government refused to interfere. Senior executives in charge of vendor development often never came to know about these incidents and hence functioned with supreme confidence.
Others decided to seize the opportunity to change themselves. Kapur sent workers to Japan, in groups of ten or twelve, for six months’ training in Koyo Seiko. Sona Steering would invite engineers from Koyo Seiko and also get help from Maruti so that quality levels could improve. Bharat Forge was another group that took full advantage of the exposure to Japanese manufacturing practices. Krishna Maruti invited top-level Japanese experts to help improve systems and educate its employees on how to produce consistent quality.
The biggest difficulty the Maruti management faced was that the vendors would not reveal the real nature of any problem being faced by them but would resort to delaying tactics or plead with Maruti to agree to something that was not acceptable. This happened despite the fact that vendor conferences were organized at regular intervals where Maruti encouraged the suppliers to talk about their problems in an open manner. It took some time for vendors to believe that criticism of Maruti systems would not result in adverse consequences for them. Traditionally, vendors in such conferences just listened and certainly did not say anything remotely critical of the customer. I encouraged vendors to change and become active participants in the meetings. The idea was to jointly look for changes which would bring down the total costs and improve quality and productivity As a result, many good ideas emerged and Maruti made improvements.
At one such conference, vendors said their trucks got held up at the factory for long hours. This was analysed and it was found that the number of unloading points were too few for the number of trucks which were coming to deliver components. Hence they had to queue up for unloading. Maruti then changed the system of loading/unloading components. Many more unloading points were created. Each was designated for identified components. The attempt was to also ensure that the distance moved by the components after unloading, either for storing or going to the assembly line, could be minimized. The results were excellent, and truck turnaround time was substantially reduced as also the internal movement of components.
Once, one of the vendors in Chennai was delaying supplies, giving one excuse or the other. When it continued for a month, a very angry Mathur went down to meet him and demanded an explanation. It was only then that the man confessed that he was waiting for funds from the bank. This was a common problem. Maruti was growing at upwards of 30 per cent a year and working capital flows were not able to keep pace, as the banking sector, not used to this rate of growth, just could not cope. Their processes were far too cumbersome and slow.
Mathur then called up the supplier’s bank manager, who said the proposal had been sent from the local branch office to the regional office only two days earlier. It would then have to go to the head office and be considered at a meeting of the board of directors. The board meeting was the following month. Mathur, thanks to Maruti’s immense clout, directly called the managing director of the bank and told him that Maruti was buying 80 per cent of the supplier’s offtake and that the delay in clearing the loan was disrupting car production schedules. The supplier got his working capital in two days flat.
Maruti also developed a vendor rating system. Vendor performance was evaluated on a number of parameters, the main ones being rejection levels, meeting committed schedules, and price of components. Points were allotted on the basis of performance each month in accordance with a predetermined scheme which was also known to the vendors. The rating of vendors was used to decide the share of business between the suppliers of a particular part. When a new model was introduced, the vendor with a higher rating was given preference for developing parts for that car. If a vendor was unable to improve his performance, Maruti also looked to develop another source and the non-performing vendor was dropped. The transparency of the system ensured virtually no complaints from vendors when Maruti decided share of business or who should develop a new component.
Though Kalyani and Kapur insist that Maruti brought a sea change in the way component manufacturers operated or viewed quality, Maruti encountered problems even in 1993 when the Zen was about to be launched. The Zen was to be exported to Europe under the SMC brand as the new Alto, and SMC was anxious that its reputation for quality in Europe should not suffer. This required that local components had to meet stringent quality standards. The car could not use too many imported components as cars imported from India attracted a lower custom duty than those from developed countries, but to be eligible, there had to be at least 56 per cent value added in India.
One of the reasons why a high level of local content became difficult was that the cars sent to Europe were left-hand drive. Thus, all components specific to such cars had to be imported, as local manufacture in small numbers would not have been economical. In addition, there were some specific components required to meet the higher emission norms prevailing in Europe. The 56 per cent value added had to come from the remaining components. This was not an easy task considering the state of the component industry in 1993. Maruti engineers had to work really hard and the local content norms were met. The hard work paid off because the Zen, when it was exported, was considered one of the best cars in Europe.
The dogged perseverance of Maruti and the patience of its team in dealing with the component manufacturers, and the introduction of many new concepts based on the Japanese experience, all had a positive fallout in the long run. When the car industry was opened to the world in 1993, most major car manufacturers decided to come to India because of the strong component industry. India is now recognized as an automobile component manufacturing hub. In the early 1980s, component exports from India were $6 million. Today exports are nearing $4 billion and growing. India is also becoming the small car manufacturer for the world markets because of the low cost and high quality of production here. More importantly, the component industry has gained a reputation for quality, with thirteen Deming Prize winners and forty TPM Excellence awardees.
Despite this, component manufactures still have a long way to go. Quality levels are not consistent across the industry. The practice of excellence has to permeate all the suppliers, including the Tier II and Tier III vendors. The Tier I vendors have to take on this responsibility, with assistance from the car manufacturers. Vendors have also to transition to the next level where, given specifications and performance requirements, they could design and produce components of international quality without seeking help from outside. The industry has not yet been able to build strong design and engineering capacities. However, many companies are appreciating the need for investing in design capabilities. Many foreign companies have also come to the conclusion that having an R&D base in India is likely to be of great benefit. It seems that in the next few years India would be able to design and build cars without seeking any large help from foreign companies. The task of modernizing the automobile industry, given to Maruti in 1981, would then be complete.