Reinventing Hindustan Motors

When a startled Mr. B.K. Chaturvedi, managing director of the profitable Eicher Limited, got a call from Hindustan Motors Ltd to head its automobile division, he was confronted with a tough decision.

At 52, he had to choose between continuing as the managing director of a profitable company and retiring from there or, be adventurous in taking up the challenge of turning around one of India's well-known loss making company division.

To the surprise of many around him, Mr. Chaturvedi decided to be adventurous and signed up with Hindustan Motors (HM) as the president of its loss-making automobile division. The division comprises of three plants - Calcutta (manufacturing Ambassador, Contessa and Trekker models), Indore (engines and gearboxes and also the rural transport vehicle - RTV) and Chennai (the Lancer car).

Unfortunately, like the company's flagship Ambassador car, the manoeuvrability available for Mr.Chaturvedi to steer the division out of the woods seems very limited.

Reinventing Hindustan Motors

Among the many problems that bedevil HM, is the diverse locations at which its plants are based - all of which work below their optimum levels. Better capacity utilisation is the bedrock on which Mr. Chaturvedi has mounted HM's survival plans.

Ever since the company's Rs. 320 crore plant at Chennai began rolling out the Lancer model two years ago, the talk of launching another new car continues to be heard. Currently the plant is running at less than half its installed capacity of 24,000 units per annum. The company has, in fact, held negotiations with its technical collaborator, Mitsubishi Motor Company of Japan, and Malaysian automobile company, Proton.

But the talks did not make much headway, since choosing a new model is not an easy job. Apart from the economics, which automatically rules out small car like the 660cc Minica, one has to bear in mind Lancer's brand equity. Today in India, the Lancer is perceived as a luxury car next to Mercedes Benz and the company should be careful that another luxury car from its stable should not eat into the Lancer's market.

It is precisely for this, plans to assemble Proton's car failed. The Indian price of the Proton model would have been nearly equal to the Lancer's price. Though officials are non-committal about the Mitsubishi models that they are looking at, it could be one notch lower than Lancer or even belong to an entirely different segment, say the Verica, a slightly bigger version than Maruti Omni.

"We met Mitsubishi officials last month and will meet them again, soon", is all that Mr. Chaturvedi would say to underscore the seriousness of the current round of negotiations. Investment-wise, the company will have to make an outlay of about Rs. 10 crore in a new paint shop and for some tooling, for a new model.

Cultivating non-Hindustan Motors business

While a new model is likely to enhance the capacity utilisation at its Chennai plant, the serious issue for HM is to achieve the same in other plants. Especially, since the company's losses are mounting, thanks to this division.

HM posted a net loss of Rs. 62.28 crore last fiscal, on a turnover of Rs. 1,815 crore. During the first quarter of this fiscal the company clocked a turnover of Rs. 269 crore and a net loss of Rs. 36.2 crore.

It is only the profits from the earthmoving equipment division (EED) and the power products division that sustain the company. And even that is now clouded with uncertainty (see Hindustan Motors denies sell off rumours and plans for small cars). The Rs. 108 crore interest burden also depresses the bottom line further.

Be that as it may, the heavily manned Calcutta plant rolls out around 24,000 vehicles against an installed capacity of 35,000. Similarly the company engine plant at Indore has an idle capacity of 30 per cent after taking care of the captive usage and exporting around 1,000 engines and gearbox units.

Given this situation, one way out, as Mr. Chaturvedi says, is to cultivate non-HM business. A beginning is likely to be made in this regard with an agreement being reached with Mahindra and Mahindra for the supply of Isuzu engines to the latter. However the actual numbers are yet to be worked out.

Similarly the other interesting development is the $1.1 million order from the UK-based S.G.Wilson, to manufacture CNG fired Isuzu engines for the British company. 

Yet another revenue source the company is to beef up the spare-parts sales for the company's various models, especially the Ambassador whose population on Indian roads is sizeable. According to Mr.Chaturvedi, HM's income from the sale of spares is around Rs. 135 crore.

New models and assiduous cultivation of non-HM business aside, the company, in order to match the competition and also to have a better product portfolio, will also bring out variants of the Lancer.

The company is seeing encouraging signs with Lancer selling around 4,025 units till September and, is targeting a sales of 9,500 cars this fiscal. Sales could have been higher till date had it not been for the kit shortage during April and May this year. Further, in order to reduce forex outflow and to protect itself from price hikes by Mitsubishi on Lancer components, the automobile division is working towards increasing the localisation levels to 70 per cent from the present 57 per cent.

Swears by the Ambassador and other old models

Speaking about other models, company officials still swear by the Ambassador. They are also hoping for a good demand for its maxi-van, earlier positioned as RTV. What is true is that the Ambassador, the oldest car in the Indian automobile industry is still defying many pundits who wrote it off long back.

"The Ambassador car has a good demand," assures Mr. Chaturvedi. The company sells around 23,000 units annually and has carved out a niche in the tourist-taxi segment, due to its intrinsic worth like, fuel economy, roominess and ruggedness. Also extraneous factors like bad rural roads and the absence of service stations in the country's interiors to service competitors' models, help the Ambassador to survive.

Despite the advent of several small and zippy cars like the Santro, Matiz, Alto and Wagon R, which cater to the personal ownership segment, Mr. Chaturvedi feels the Ambassador still has a place in that segment. In order to increase its share in the personal ownership category the company is trying to meet customer expectations. Some of the measures are the introduction of bucket seats and better interiors. "No more, Ambassador buyers need to strip factory fitted seats and fix a entirely new one," claims Mr. Nalin Mehta, general manager - marketing.

"The other customer expectations like power steering and shorter gear stick will soon be implemented", promises Mr.Chaturvedi. The company is investing around Rs. 75 crore at its Calcutta plant for modernising it.

With a plant that has been fully depreciated several years ago, why does the company not cut the price of the Ambassador to capture some market in the cities? Pose this to the company's top brass, you will find them wriggling out of an answer to this. Feeble explanations like the Ambassador, or for that matter the Contessa, is made of heavy steel and costs lot of money, come pouring forth. On the other hand the company sees a potential to reduce costs by 8 per cent at its Calcutta plant.

Nevertheless, with small changes like bucket seats and new interiors sales of Ambassador has picked up in the recent times. Targeting sales of 23,000 Ambassadors this fiscal, HM has sold around 9,110 units until September, as against 8,096 units sold during the corresponding period last year.

With the Contessa and Trekker sales being insignificant, HM is now repositioning its RTV as a maxi-cab. The vehicle will come with two versions – a passenger carrier fitted with HM's own engine and a load carrier with Simpson's engine.

Has he taken the company's workers and more particularly the Calcutta plant's labour into confidence for his plans to succeed?

Speaking about the labour reaction to his proposals Mr. Chaturvedi says, "They understand the current situation pretty well. My initial appeal to them was to substantially improve quality of workmanship to make the car much more reliable to increase customer pull towards it. They agreed to cooperate wholeheartedly in this effort."

While reduction of work force at Calcutta is one option, he finds that quicker results could come if focus is on improving the top line. "Hence we are concentrating on increasing the sales," he remarks.

Adding further he says, "It does not mean that we shall not consider reducing manpower in future. But we shall do it at an appropriate time and manner that would go well with employees. We would like to do it without causing undue insecurity in the system." Around 1000 workers have opted for the company's voluntary retirement scheme during the past two years.

To expand the distribution network

One of the reasons stated for the company's stunted sales is its narrow dealer network. "The issue for us is the distribution channel. For instance Trekker is largely sold in Bengal and Orissa. And 45 per cent of Ambassador sales come from the south, as the company doesn't have much of a distribution network in north and west. Similarly, sales of RTV didn't pick up as we never had dealers in markets at which the vehicle is targeted," Mr. Chaturvedi explains.

Expanding and re-jigging the dealer network is one of the strategies that are being implemented by HM to increase sales. The company is in the process of appointing 12 new dealers to sell Lancer cars and 35 to vend other vehicles.

Part of the distribution revamp is erasing the three distinct distribution lines - red (exclusive Lancer dealers), blue (Ambassador, Contessa and Trekker) and green (Trekker and RTV). While the dealers for the company's luxury car would continue as they are, HM will allow other dealers to sell all its vehicles.

For nearly five decades the company took the customers for granted. But the times have changed, with the market flooded with plethora of models/variants for a car buyer to choose from.

Whether Hindustan Motors would survive the battle with its new strategies or not is the question that only time could answer!