Doon Online - Maruti Udyog Limited: In Search of a Driver

By: Sumit Mitra

With R.C. Bhargava due to retire this month, Maruti's co-owners, Suzuki and the Union Government, are in a deadlock

Wanted: CEO for an Indo-Japanese joint venture in automobile manufacturing. Company's strength: Absolute monopoly, with 81.25 per cent market share. Weakness: The two shareholders, Government of India and Suzuki Motor Company (SMC) of Japan, are working at cross purposes. Opportunity: To build on present capacity and profitability. Threat: It may get swamped in the future by competition from the Tatas' telco, Daewoo and Hyundai of South Korea, and a few western car majors. Job requirement: To be nominated by the Indian Government yet be acceptable to Suzuki. Compensation: Nothing to write home about.

This sums up the present crisis at Maruti Udyog Limited (MUL), the Rs 8,000 crore flagship of India's car industry, on the eve of the retirement of R.C. Bhargava, the Suzuki-nominated managing director (MD). As Bhargava, the man who put the company at the pinnacle of success, rides into the sunset on August 29, the Union Government will be required to nominate his successor. Following a 1992 agreement between the government and SMC, the two 50:50 shareholders, they will appoint the MD and chairman by rotation. In MUL, the chairman's post is non-executive; the MD holds the key.

While SMC is bound by the agreement to accept a government nominee as the MD, it is resenting a recent government-sponsored decision that the company will fund its future expansion purely through internal accruals and borrowings. Osamu Suzuki, the 68-year-old boss of smc, favours the equity route of growth because it is cheaper than debt, in fact a lot cheaper for a company like mul which, by one calculation, is so profitable that it can command a premium of Rs 560 for each 10-rupee share. The company's return on investment, at 52 per cent, is way above the 4 per cent of other public-sector units (PSUs). If the India Today August 11, 1997

Government-appointed successor turns a deaf ear to SMC's viewpoint, it will add a new dimension to the ongoing cold war between the MUL partners. This, at a time when the queue for MUL's flagship model, the hatchback sub-compact Maruti-800, is shortening by the day. Against an eight-month wait period early last year, these are now available off-the-shelf.

India is the biggest production centre for SMC outside Japan, accounting for a sixth of its sales worldwide. So it will not give up its stake in mul, nor will it close the door on future negotiations. But it wants, as Bhargava says, "growth through equity". The Union Government is avoiding the equity path because that will compel it to subscribe as much as SMC to the new capital issue, or else its stake in the company will drop below the present level. Industry Minister Murasoli Maran says that the Government will accept neither of it. "We cannot use taxpayers' money to invest in business." Besides, as he says, "Maruti is a national company. Why should the Government withdraw from it?" smc representatives on the MUL board are keeping their fingers crossed for the announcement of the new MD's name. The likeliest candidate so far, Joint Managing Director R.S.S.L.N. Bhaskarudu, a former BHEL engineer, is a firm believer in the Government line of shunning the path of equity expansion. "There will be no deviation from the decision of the directors to finance the present expansion plan only through internal accruals and debt," he says. The SMC-appointed directors have kept their eyes peeled for Bhaskarudu's appointment which, they think, is a signal of the Government's thinking. "If he (Bhaskarudu) is appointed, smc may have to review its strategy," an MUL insider close to the Japanese company observes.

Maran says that the choice of the new MD is "wide open". He admits that MUL may have to "look for talents from outside", though the 1992 agreement says that SMC's concurrence is needed in such a case. His stance on smc is uncompromising. He says that though the Government's con-tribution to MUL's equity capital is half of the Rs 133 crore, "the public exchequer has already spent hundreds of crores by way of excise concessions, customs duty relief and sales tax waivers". Besides, he argues, MUL was allowed to rapidly increase its prices despite so many concessions. "It has become a monopoly company, a champion, because of the state." And Suzuki, he says, has little to complain about as it has repatriated Rs 988.87 crore in profits over the past 12 years.

However, Bhaskarudu's plan of expansion, clearly tailored to suit the ministerial view that mul is a "national" company, is based on an additional capacity expansion of one lakh cars annually, repair of the paint shop and engine shop, and some new investment on automation. Total cost: Rs 2,200 crore. The company's present capacity at the Gurgaon plant is for 2.5 lakh cars. But Bhargava has used the Japanese method of de-bottlenecking of the processes to achieve a 40 per cent enhancement of capacity, to a current production of 3.5 India Today August 11, 1997

lakh cars. Of this, Maruti-800 accounts for 1.8 lakh, Zen 80,000, Omni 57,000, Esteem 23,000 and Gypsy 10,000. Bhaskarudu says that a capacity expansion of one lakh, together with the existing production enhancement methods, will take the output to five lakh which, he claims, "is the maximum production we can achieve at Gurgaon, given the constraint of material movement, area, water supply, and such other parameters of business". He says the need for a different mode of financing for growth may be felt after 2000 AD. "We'll cross the bridge when we come to it."

Bhargava does not agree with this view. He says that, in the slanging match between SMC and the Government, the "primary issue" that is getting clouded is: how is Maruti to survive in a competitive environment? According to him, the "full impact" of the 1993 government policy of de-licensing the automobile sector is just about to be felt now, "with most global companies having set up shop in India and holding full equity". While Daewoo has nearly paid out its partner, dcm, and Mercedes is about to raise its stake to 75 per cent in its joint venture with the Tata group, Hyundai and Volvo have started up with 100 per cent equity. "In such a competitive environment," Bhargava says, "Suzuki may rightfully demand the company's control if the Government is in no position to contribute to its capital growth." Maran of course flares up at the suggestion of selling out equity. "It is like asking India to be handed back to the Queen of England," he explodes. He also feels the issue of md's selection is "not Suzuki's business". But Bhargava explains the Suzuki perspective: "In a joint venture of this type, the md should be a person mutually acceptable to both."

Bhargava himself became quite unacceptable to the government since 1995 despite his valuable leadership to the company. First he fell foul with the Congress government's industry minister K. Karunakaran who revived some old cbi files against the md, accusing him of financial malfeasance. Maran too has repeatedly expressed his displeasure with Bhargava. The tug-of-war between Bhargava and the Government has caused a lot of haemorrhage at MUL. The expansion plan, scheduled to start in 1998 earlier, may not be implemented even in 1999. That further postpones the long-awaited upgradation of Maruti-800. There is also a question mark on whether smc will provide a replacement model, or whether the vendors of smc in Japan who have collaboration with mul's vendors -- there are over a dozen of them -- will cooperate with the Indian company. Besides, with MUL executive salaries still following the PSU pattern, many Maruti executives are leaving for greener pastures with its rivals. Doubts are also being expressed about the continuity of mul's excellent labour relations. Bhargava takes pride in saying that in the company's production record of 14 years, "it lost only four man-days". The Maruti Udyog Employees' Union, unaffiliated so far, is of late showing a new militancy and is making inroads into vendor companies where MUL holds a stake. For MUL, which sources 14 per cent of the cost of its car from its joint ventures, the risk of labour unrest in these companies can be unsettling.

MUL insiders agree that the company, with its overwhelming market share, cannot die suddenly. But it is not ready either to meet the challenge to Maruti-800 from telco's proposed Indica, or to Zen -- from a Daewoo model which promises to offer the same value at a price midway between Maruti-800 and Zen. In a competitive market, mul cannot fall back only on its muscle power because its mnc and domestic rivals have pockets deep enough to cross-subsidise new car projects. But the worst risk, which Maran has left unhedged, is that of India's star car-maker gradually acquiring the character of a typical psu -- slothful, bureaucratic and profligate.

STRENGTH IN NUMBERS

Equity capital: Rs 132.29 crore
Net worth: Rs 1,516.40 crore
Vehicles produced: 3,36,811
Turnover Rs 7,956.5 crore

India Today August 11, 1997
Profit after tax: Rs 510 crore
Earning per share: Rs 38
Only debt and internal accruals to fund MUL's expansion project.
Share of the Government in MUL will not be allowed to fall below 50 per cent.
The choice of a new MD is the Government's discretion; Suzuki will have no say in it.
Expansion project to be financed by equity, which is cheap, not debt.
The Government should sell off its stake if it can't fund the growth of the company.
The Government may choose a new MD but he should be acceptable to both partners.
Successful Samurai

When Ravindra Chandra Bhargava gets down to write a book about Maruti, as he promises to do after retirement, much of its space may be claimed by his championship of the concept of a small car. The former ias officer had just done a two-year stint at bhel when the Industry Ministry parachuted him down, in 1981, on the just-born mul. In that year, as Bhargava and former mul vice-president V. Krishnamurthy visited the factory of Suzuki Motor Company at Hamamatsu, "I at once knew that our prototype search had ended, and the people's car would be a Suzuki".

As Suzuki's stake in MUL, the only joint venture between the Government and an MNC, rose from 26 per cent to 50 per cent in 1992, Bhargava's career too was on the ascent. What surprised everyone was the manic zeal with which the career bureaucrat with a middle-class background -- he had been to Doon School because his father was a paper technologist at Dehra Dun -- transplanted the ideas of Japanese business management into what could well have turned into a typical psu, notorious for overmanning and low productivity. The best embodiment of Maruti's obsession with the cardinal principle of Japanese management, jikand (time), is Bhargava himself, a man who'd eat his breakfast in the car to reach office at 9 a.m. "We can set our watch by the md's movements," says Jagdish Khattar, executive director at mul. The company's adherence to punctuality is testified by its creditors, suppliers and dealers.

Bhargava's 16-year stint at mul stands out for the quiet strength with which he resisted political pressure, and his austere habits. No CEO of a company with even a tenth of mul's profits can help shuddering at Bhargava's income or his lifestyle. He retires at a princely salary of Rs 40,000 per month, a figure that may fall short of the pay of some secretarial staff of the mncs. Till two years ago, his salary was only Rs 15,000. No commission. No perks beyond what is permissible in PSUs. His house at Noida was built with a loan which is being repaid from rent on a part of the building. Before holidays, he and wife Aruna scan newspapers for cheap hotels at places like Ramgarh or Kulu -- where stay and travel expenses are strictly within the company's lta limits.

He also showed the way in keeping a state-owned firm immune from political influence. Potential vendors with impeccable connections were shown the door. Though the 63-year-old mul chief, nicknamed 'Kaedo' by friends, quit the ias in 1982 "to cast my lot with Maruti", he carried with him the unbusinesslike sensitivity of a scrupulous civil servant. No silver-bowl gifts on Diwali, no non-business invitations to five-star restaurants. The irony is, he sought to bring the stamp of a civil servant's self-discipline in a business surrounded by a maze of vendors, distributors and financiers. Purchase decisions worth Rs 4,000 crore annually needed his approval. India Today August 11, 1997

Bhargava isn't keeping well now and will be hospitalised in the US soon after retirement, a fact which hardly shows as he briskly strides down the corridors of mul's offices in the company's uniform: light grey shirt over dark grey trousers. Unfazed, like a samurai.