Monday, December 25, 2006

Maruti Udyog: A godsend for Suzuki and India

As the Indian government looks to shed its final 10 per cent stake in Maruti Udyog Ltd, few will recall the fortuitous chain of events that got the automaker up and running a quarter-century ago.

Back then, India was an automobile backwater where annual car sales, mainly of British knock-offs, were below 40,000--or one car for every 14,000 of its 550 million people.

The government had just nationalised Maruti, set up in 1971 as a pet project of Sanjay Gandhi, son of then-Prime Minister Indira Gandhi, to produce an affordable, Made-in-India 'people's car'.

But Maruti needed a foreign partner.

In 1980, a search team dispatched to Europe all but settled on collaboration with Renault. The French firm had already set up in India, and plans to build the Renault 18 sedan with Maruti started to roll. Then, the following year, a handful of technocrats replaced the project team.

R C Bhargava, a core member of that group, says it was quickly decided to drop the Renault 18. Market surveys had shown that Indians wanted low cost and fuel efficiency, and the French model provided neither.

Bhargava's team set off around the globe, scouting companies from Fiat SpA to Fuji Heavy Industries Ltd. There were few takers. Japan's Suzuki Motor Corp was among those that demurred, opening the door for Maruti to start talks with Suzuki's local rival Daihatsu Motor Co.

"It was purely by chance that Suzuki again got involved in this project," recalls Bhargava, an articulate, sharply dressed ex-bureaucrat who still sits on Maruti's board.

It transpired that Suzuki had not meant to give Maruti the brush-off. In early 1982, a Suzuki director in India saw a newspaper article about Maruti's imminent deal with Daihatsu. Alarmed, he phoned headquarters and was told that Maruti's search team had been turned away.

Suzuki telexed Maruti seeking a second chance. Within weeks, Bhargava's team was back in Japan, meeting Chief Executive Osamu Suzuki. Bhargava, Suzuki and V. Krishnamurthy, another core member of the Maruti team, immediately hit it off.

Between the strong personal rapport and Suzuki's suitable product line and cost-consciousness -- Bhargava recalls being shocked at the lack of air-conditioning in Suzuki's offices in Hamamatsu, near Mount Fuji--the team concluded Suzuki was it. A letter of intent was signed in April 1982.

BEATING THE ODDS

Suzuki Motor proved a godsend for Bhargava's team.

Because Osamu Suzuki took a personal interest, decisions were made swiftly. He treated Maruti like one of his own even though the Japanese firm's equity stake was initially only 26 per cent.

"Right from the beginning, everything proceeded very, very smoothly," Bhargava, who became the first head of the reborn Maruti, said. "Mr. Suzuki was a force for that success."

Maruti's demands were far from easy.

The Indian government, which said on Thursday the cabinet had approved the sale of its remaining Maruti stake to banks and financial institutions, wanted production to start in 1983. That gave the partners 20 months to resolve legal issues, draft a licensing agreement and overhaul an idled, rudimentary plant that had been taken over by monkeys.

Suzuki balked, but the team wasted no time. Working late into the night through interpreters, a final joint venture pact was signed at a Delhi hotel on Oct 2, 1982, and the first Maruti 800--an 800cc hatchback based on Suzuki's Alto--rolled off the assembly line at the converted shed in Gurgaon, outside New Delhi shortly before the government's December 1983 deadline.

"The promise Mr Suzuki made, he fulfilled completely," Bhargava, now in his early 70s, remembers.

Suzuki didn't stop there. Insisting on equality in the workplace in a class-conscious society, he ordered open-plan offices, a single canteen and uniforms for executives and assembly-line workers alike.

A BIG BET

The venture worked for both sides.

In the early 1980s, Japanese automakers were preparing to build their first cars in the United States, the world's biggest car market. Suzuki's tiny cars had little chance of competing there, and it needed another battleground.

India was not an obvious target. Few believed demand could even reach 100,000 cars a year--a target the government had set for Maruti--and the economy was heavily regulated.

It looked a big gamble for Suzuki. Its 26 per cent stake, which has since risen to 54.2 per cent--cost nearly as much as its $22 million net unconsolidated earnings that year.

But Maruti was an instant success.

The automaker singlehandedly created a car market that is now one of the fastest-growing in the world. Maruti's production reached 100,000 cars within a few years, and order books were more than full.

Last year, Maruti accounted for half the 1 million cars sold in India, contributing handsomely to Suzuki's bottom line.

Suzuki's stake in Maruti is now worth more than $3 billion.

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