Until the 1980s, Hindustan Motors’ (HM) Ambassador and Premier Automobiles Ltd’s (PAL) Padmini were the only two cars available in the Indian market. However in 1981, with the entry of MUL, the scenario changed drastically. MUL’s small, fuel- efficient and well-designed car, Maruti 800, became a huge success. By the late 1980s, MUL became the market leader, leaving HM way behind. In the early 1990s, when the Indian economy opened up, many multinational automobile companies entered the country. In the 1990s, Daewoo, General Motors, Daimler Benz, Hyundai and Honda entered India through joint ventures and partnerships with Indian firms. HM was badly hit after the entry of foreign players. In the face of stiff competition from foreign players, HM launched the Ambassador Nova in 1990 (with better interiors) and an improved Ambassador 1800 ISZ (with better engine performance) in 1993. The company also appointed consultants McKinsey & Co for a restructuring plan to turn around its business. HM decided to tap new segments to ease the competitive pressure. In 1995, the company collaborated with Oka Motor Co to develop a vehicle specifically targeting the rural markets. This led to the launch of the Trekker (also referred to as the Rural Transport Vehicle – RTV) in 1995. Launched in three northern states the Trekker was received well in the rural markets. However, the vehicle soon came under criticism owing to a host of technical problems. By late 1998, Trekker’s sales dropped by two-thirds of its initial volumes to around 800 a year. In 1999, HM launched the redesigned Trekker and an upgraded version of the Ambassador. Despite all the product upgradations and restructuring efforts, HM could not stem the decline in sales. Analysts opined that HM’s dismal performance was due to its lax management policies and shortsightedness. Before MUL entered the market, HM was the market leader. It was able to sell whatever it produced and therefore it did not care to upgrade the technology or production facilities. However, HM’s poor performance was not due to external factors such as competition only. The company had a host of internal problems – particularly in the human resource front at the Uttarpara (West Bengal) plant. The Uttarpara plant had workforce of 14,000 employees and the wage bill alone constituted 22% of plant’s expenditure. Against the standard output of 8-10 cars per employee per annum, the plant’s output was as low as 3 cars. In its bid to turn around the plant, HM invested around Rs 750 million to modernize the assembly line, build new body and paint shops and purchase new equipment. The company also embarked on a cost-cutting exercise and announced a Voluntary Retirement Scheme (VRS) for workers in April 1998 and again in November 1998, offering a Rs. 0.1 million package per employee. However, the VRS was not well received by the strong Center of Indian Trade Union (CITU) and the Indian National Trade Union Congress (INTUC) led employee unions. Commenting on a similar VRS offered by the Fiat management at its Kurla, (Maharashtra) plant, employees said “Workers at the Fiat factory at Mumbai have got an average of Rs.0.35 million per worker while we are fobbed off with such measly sums.” The strong political patronage to the unions made it tough for the management to convince workers about the VRS. Both the CITU and INTUC union leaders refused to accept the VRS offered by the company. The unions were confident that the West Bengal State Government would back them on the issue. As employee protests intensified, HM approached the state government with a proposal to run the plant for only three days in a week, in an attempt to save Rs. 0.32 million every week. The company also promised that it would continue to pay the workforce full wages for an entire week. However, the government rejected HM’s proposal, following which the company decided to seek legal recourse. In January 1999, HM filed a writ petition in the Calcutta High Court, claiming that its decision to run the plant for three days was not prompted by industrial relations, but by the company’s poor financial position. It also stated that the layoff in the Uttarpara plant was temporary in nature and the company would resume normal production as soon as demand picked up. The High Court then ordered the state government to reconsider the issue. In May 1999, instead of reconsidering the issue, the state government filed an appeal before the division bench of the Calcutta High Court, claiming that HM had suppressed facts and figures during its meeting with them to settle the issue. The division bench directed that the matter be referred to the Industrial Tribunal. In July 1999, the Industrial Tribunal dismissed the company’s proposal. HM again filed a writ petition against the Tribunal’s order in the division bench of Calcutta High Court and the division bench upheld the Tribunal’s order. In response to the division bench’s order, HM moved the Supreme Court in July 1999. During all this time, productivity at the plant suffered considerably, which added to company’s woes. When its attempts to reorganize its operations did not pay off, HM decided to look beyond its existing product portfolio to come out of its problems. As per McKinsey’s recommendations, the company explored the global auto components business in 2000 and established a unit at Indore to assemble engines and gearboxes. In order to use its design and engineering skills to enter new businesses, HM entered into an agreement with Mahindra & Mahindra (M&M) for developing petrol engine for M&M vehicles. The company also tied up with GM to market the entire range of transmission equipment manufactured by Allison Automatics (a company owned by GM). HM then overhauled its distribution system in order to become more market-friendly and dealer-friendly. In 1999, the company unveiled a new distribution strategy, wherein dealers were divided into three tiers – red, blue, and green depending on their location and performance records. While the red-tier catered to the metros for selling and servicing Lancers, the blue-tier catered to the semi-urban areas for Contessas and Ambassadors and the green-tier catered to the rural markets for Trekkers. HM also decided to explore the overseas markets for its products and began exporting around 150 RTVs to Bangladesh in 2001. The company also managed to secure an export order for 300 petrol engines from a UK-based company, in addition to the 1,800 engines already supplied. In February 2001, HM sold its earthmoving equipment manufacturing division to a wholly-owned Indian subsidiary of Caterpillar Inc. for Rs. 3.3 billion. The company used this money to repay debts worth Rs. 2.25 billion. This helped reduce the gross loss in 2000-01 to Rs. 152.2 million from Rs. 255.5 million in the corresponding quarter of 1999-00. The remaining sum of Rs1.05 billion after the repayment of debt from the sale was used for working capital requirements and automotive business. HM continued its customer relations enhancement initiatives with the launch of the ‘click and customize’ service for Lancer customers in September 2001. The company set up kiosks in six cities (New Delhi, Bangalore, Chennai, Hyderabad, Chandigarh and Pune) that had computed terminals displaying the features of the petrol and diesel versions of the Lancer. HM had invested Rs. 2.5 million in the software and Rs. 0.1 million on each kiosk. The company planned to install 16 such computer kiosks at its dealers’ premises across the country by the end of fiscal 2001-02. According to company sources, after the launch of the service, Lancer’s market share had gone up by 4%. In November 2001, HM announced its plans to manufacture engines for other automobile companies. The company was awaiting the outcome of its bid to make the engines for Ford’s Ikon. With the second phase of the restructuring efforts in place, HM hoped to improve its growth in the automotive division and offset the losses from the passenger car segment. The company’s moves seemed to be finally bearing fruits as it was able to narrow down the losses in the first quarter of 2001-02 by around 30%. HM was banking on the Ambassador’s niche markets (government and taxi) and hoped to retain the segment by launching new variants. The Trekker was also poised to do well after the relaunch in 1999 and HM hoped to sell 3,200 vehicles in 2001-02. Analysts however remained skeptical about HM’s future prospects and its ability to make a turnaround as a passenger carmaker. They felt that the only way out for HM was to turn itself into auto-component supplier to multi-nationals producing passenger cars in the country.

1. ‘Hindustan Motors itself is responsible for its inability to sustain leadership position in the post-liberalization era.’ Critically comment on the above statement while analyzing the factors that led to the company’s downfall. 2. In the 1990s, HM had lost its position in the passenger car market to MUL and foreign automobile companies that entered the automobile market after the opening up of the Indian economy. To face the competition, HM had undertaken many restructuring initiatives. Examine the restructuring initiatives of HM. 3. External environment has a significant influence on the functioning of an organization. Of the elements of the external environment, political environment can have a positive or negative influence on an organization. Study the effects of the political environment on the functioning of HM.