Hindustan Motors' Struggle for

Survival: Troubled Waters?

In October 1998, Hindustan Motors (HM), makers of one of India's best known cars - the
Ambassador - launched a new car, the Mitsubishi Lancer (Lancer). The launch of Lancer, a
new car from the HM stable after nearly two decades, was reported to be very important for
the company, whose market share was on the decline.

HM was reportedly banking heavily on the Lancer's success to fight competition from other
car companies. Lancer was positioned in the mid-size luxury car segment, which was
dominated by Maruti Udyog's (MUL) Maruti Esteem and Honda's Honda City.

Lancer was received very well by automobile experts throughout the country, largely due to
its technical finesse. The car's sales reached 2,866 units by the end of the fiscal 1998-99.
Much to HM's delight, Lancer was even ranked as the top vehicle in India for the three
consecutive years (1999, 2000 and 2001) by J. D. Powers1 for the least number of defects
and high customer satisfaction in a countrywide survey of car owners

However, the company's euphoria was short-lived as Lancer's sales failed to pick up as
expected.HM managed to sell only 7,635 cars in 2000-01 against a forecast of 8,000 2. On
the other hand, sales of Honda City increased to 10,011 in 2001 from 9631 in 1999

Meanwhile, HM's other offerings Ambassador and Contessa were also faring badly. In 1999,
Ambassador's sales were down to 15,374 from 18,312 in 1998 and Contessa's to 285 from
575 in 1998. This poor performance took a heavy toll on the company's bottomline and HM
reported a net loss of Rs 615.8 million for the fiscal 1999-00. (Refer Table I). The company
had reportedly accumulated losses worth Rs 1.1 billion during 1999-2001 3.

Initiatives in 2001:

In late 2001, HM announced its plans to launch another car, the Mitsubishi Pajero. The
company planned to import fully assembled cars and sell them by early 2002. Analysts
remarked that the Pajero could do little to revive the company's fortunes as despite many
efforts to turn itself around, HM had failed to regain its 4-decade long leadership in the
Indian passenger car market. Its 3.3% market share in the half-year ending September
2001, proved beyond doubt that the company was struggling to stay afloat.

1] J. D. Power and Associates is a global marketing information services firm established in 1968. The firm provides clients
with relevant and actionable market research, forecasting, consulting and training services.
2] A portion of the lost sales was accounted for by supply related problems in April and May 2001.
3] In September 2002, Rs 48 equaled 1 US $.
Background Note
HM was incorporated in 1942 by the GP-CK Birla Group of companies in collaboration with
General Motors (GM)4, USA. The CK Birla group was one of the well known family-owned
business houses in India, with 17 companies in businesses such as automobiles,
engineering, paper, and auto-components. Some of them were Hyderabad Industries Ltd.,
Oriented Papers & Industries Ltd., National Engineering Industries Ltd., Gujarat Instruments
Ltd., Hindustan Powerplus Ltd., India Gypsum Ltd., Malabar Building Products Ltd., Birla
Horizons International Ltd., and Birla Techneftegas Ltd.

HM's manufacturing facilities were located at Uttarpara in West Bengal, Pithampur in

Madhya Pradesh, Thiruvallur and Hosur in Tamil Nadu, and Pondicherry. Over the years, HM
built up a vast dealer network comprising 115 dealers, 50 service and parts dealers and 60
additional exclusive parts dealers.

Initially, the company concentrated on its auto components business, producing its first car
only in 1949. In 1954, HM started production of the Landmaster in technical collaboration
with UK-based Morris Motors Ltd. (Morris). The company upgraded the Oxford model of
Morris and launched it as the Ambassador in 1957 - the car went on to become the flagship
brand of the company in the years to come.

In 1963, HM commenced the production of Ambassador Mark 2, made available in two

variants - diesel and Ambassador ISZ. HM entered the earth moving equipment business in
1971 and the power products business in 1983 (Refer Exhibit II for the sales break up of HM
from various units). Until the 1980s, HM's Ambassador and Premier Automobiles
Ltd's4 (PAL) Padmini were the only two cars available in the Indian market.
Ambassador was the vehicle of choice, Government of India, and the official car for almost
every Indian Prime Minister after independence. Though there was no executive order that
said that the government departments have to buy only Ambassador cars HM derived a
major part of its sales from senior politicians, top civil servants, bank managers and defence
personnel.

Ambassador was very popular in the taxi segment as well. Even in 2001, the segment
accounted for almost 65% of Ambassador's sales. This was because of the perception that
the Ambassador was better suited for the rough Indian roads and its strong structure was
believed to be able to withstand the impact of accidents much better than any other car.
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 Hindustan Motors way behind in the war for market
share. During the 1980s, HM was in the news only because of its tie-ups with GM and its
subsidiary Vauxhall Motors (VM). In 1984, HM launched the Contessa, which was labeled
one of the first 'upmarket' cars in India, in technical collaboration with VM.

In 1987, the company launched the Contessa Classic considered the most powerful car
available then. The Contessa was a reasonably successful car, though it never managed to
match Ambassador's success. In 1995, HM entered into a collaboration with the Japanese
automobile major Mitsubishi Motor Corporation (Mitsubishi), wherein Mitsubishi agreed to
provide technical assistance to HM to manufacture its products in India.
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4] GM was the world's largest car manufacturer with a host of successful popular brands
and facilities in over 100 countries across the world.
4] PAL was established in 1944 by the Watlichand Hirachand family in technical
collaboration with the Italian automobile major Fiat
HM produced a mid-size luxury car, Opel Astra in collaboration with GM in 1996. In 1997,
the Contessa GXL version with power steering was launched. HM terminated the GM joint
venture in 1999, by selling off its stake to GM.

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 5 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).
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.
5] A West Australian automotive company specializing in designing and building four-wheel drive vehicles.

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. But 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)6 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 19997. During all this time, productivity at the plant
suffered considerably, which added to company's woes.

The Turnaround Efforts - Phase II

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.
6] 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

Analysts said that this was a wise move because HM with its expertise, could easily become
a component supplier for both domestic and global car majors. HM's executive director
Sarker Narayanan said, "We are open to such opportunities. It brings in extra cash and it's
an inexpensive way to upgrade our skills by working with different customers."

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 (HM was
accused of offering very few dealer incentives and poor after-sales services). 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 by 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. After the deal, HM was able to
bring down its high interest debts from Rs 255.5 million in the first quarter of the 1999-00
to Rs 156.9 million in the corresponding quarter of the 2000-01 fiscal. The company used
this money to repay debts worth Rs 2.25 billion from its long-term borrowings of Rs 6.2
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.

Customers could pick and choose the car color, the interior, accessories and the wheels, and
take delivery within three weeks. HM made this facility available on the Internet also,
becoming the first carmaker to offer such a service to its customers in India.
The company planned to install 16 such computer kiosks at its dealers' premises across the
country by the end of fiscal 2001-02.

7] 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.
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 emerge as a major player in
the engine manufacturing business for other 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 Road Ahead

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 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 of HM was to turn
itself into auto-component supplier to multi-nationals producing passenger cars in the
country. HM on the other hand, seemed confident that with Pajero's launch in early 2002, it
would regain its position in the Indian car market.

Issues:

a. Analyze the competitive environment of HM

b. Analyze and explain the corporate and business strategy adopted by HM

c. Analyse the turnaround efforts phase I and Phase II

d. What type of competency they have built by 2001 ?

e. Do you think HM can come back in passenger car segment once again ? What additional
suggestions would you like to give in terms of functional strategy or any tactics to come to car
segment .