Hindustan Motors' Struggle for Survival

THE TURNAROUND EFFORTS - PHASE I

In the early 1990s, when the Indian economy was opened up for foreign players, many multinational automobile companies entered the country. In the 1990s, companies including Daewoo, General Motors, Daimler Benz, Hyundai and Honda entered India through joint ventures and partnerships with Indian firms.

HM was one of the worst affected companies due to this inflow of competitors. Forced to react due to the poor performance of its vehicles, 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.

McKinsey asked HM to focus on the marketing of components, refurbish the Ambassador model and upgrade other vehicles, speed up the delivery process and improve productivity through reengineering on the floor shop and reduce the workforce in its production plant at Uttarpara. The company began to implement the recommendations.

HM decided to tap new segments to ease the competitive pressures it was facing in the passenger car market. In 1995, the company collaborated with Oka Motor Co^[6] to develop a vehicle specifically targeted at 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. (Refer Table II).

TABLE II
HINDUSTAN MOTORS – PASSENGER CAR SALES

Year	1994	1995	1996	1997	1998
Sales	25,150	27,517	25,942	24,711	20,109

Source: www.indiainfoline.com

Analysts opined that HM's dismal condition was a result of 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, pressure from competition was just one aspect of HM's problems. The company had a host of internal problems – particularly human resource troubles at the Uttarpara 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. Analysts claimed that with the 1999 production level of 2500 cars, the plant should have been staffed with no more than 3,000 personnel. Annual production at the plant declined from 30,822 cars in 1995-96 to 26,684 cars in 1996-97. In November 1997, 2835 Ambassadors and 146 Contessas were produced. The numbers came down to 1385 and 33 respectively by October 1998.

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.

However, the VRS was not received well by the strong Center of Indian Trade Union (CITU) and the Indian National Trade Union Congress (INTUC)^[7] 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 employee 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 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^[8]. During all this time, productivity at the plant suffered considerably, which added to company's woes.

THE TURNAROUND EFFORTS - PHASE II

THE ROAD AHEAD

EXHIBIT II - HINDUSTAN MOTORS - SALES BREAK-UP

^[6]A West Australian automotive company specializing in designing and building four-wheel drive vehicles.

^[7]Two of the biggest trade unions in the country, the CITU was affiliated to the CPI-M party, while the INTUC was an affiliate of the Congress party.

^[8] After another VRS, which closed in July 2001, the Uttarpara plan workforce had come down to 9,200. The plant, suffering a loss of Rs. 70 million per month had stopped functioning on two weekdays. In August 2001, HM was asked by the State Government to submit a comprehensive plan for reviving the plant. The situation at the plant continued to be grim even in late 2001.