R. C. Bhargava - The Maruti Story : How a Public Sector Company Put India on Wheels

THE MARUTI STORY

HOW A PUBLIC SECTOR COMPANY
PUT INDIA ON WHEELS

R.C. Bhargava

with

Seetha

To Bhagwan Sri Sathya Sai Baba,
whose blessings have made me what I am,
and to my late parents for the values they inculcated in me

Table of Contents

T he decade of the 1980s has been a watershed for India in many waysputting it firmly on the path of modernization and technological advancement. At one end of the technology spectrum was the start of Indias satellite programme, with the launch of the short-lived Insat 1A in April 1982. At the other end was the colour television, which made its debut in India in time for the Ninth Asian Games that were held in Delhi in 1982. And in-between, there was Indias first modern carthe iconic Maruti 800.

The 800, as it is still known, rolled out of the factory of Maruti Udyog Limited in December 1983 and changed not just Indias automobile industry but also the way people commuted and travelled. Maruti Udyog was established as a public sector undertaking (PSU) in 1981 to manufacture cars, following the nationalization of the late Sanjay Gandhis Maruti Motors Limited in 1980. The Congress government led by Indira Gandhi decided that a foreign partner would be roped in and allowed 40 per cent equity share. It was perhaps one of the very early steps towards economic liberalizationa government committed to a socialist economic programme and swearing by self-reliance opening a window for foreign investment, that too in a PSU.

This was the first time that carsconsidered items of luxury consumption and therefore at the bottom of economic priorities for resource allocationwere being manufactured in the public sector. Cars were being made by private companies but the existing two manufacturersPremier Automobiles and Hindustan Motorswere languishing for want of better technology. There was a third manufacturer, Standard Motors, but it was hardly a player in the market and it formally closed shop years later.

Maruti Udyog established new standards of quality, productivity, industrial relations and customer care in the automobile industry and the manufacturing sector at large. It not only came to dominate the Indian car market within a short period of time but also showed that India could manufacture and export a sophisticated engineering product to the demanding markets of western Europe. Importantly, all this was done by a PSU at a time when the public sector was characterized by inefficiency and sloth. Why and how did this happen? This is a question that has often been asked, and this book will attempt an answer.

When the Maruti project was announced in 1980, there was a widely held belief that it would be stillborn. Not only did it come with a controversial political history, but it was also a PSU, which, in those days, were not expected to compete with private companies or be customer-oriented.

The record of PSUs has generally been poor, with few performing to their potential. This happened despite the tremendous advantages they enjoyed. Once the government approves a project, funding is not a problem, at least not for the approved investment. The government provides the equity as well as the loan amount at interest rates lower than what a bank would charge. It is much easier to procure land and get the required approvals from the state governments. Dealing with sundry government agencies becomes hassle-free. Where required, help or support from another ministry is usually forthcoming. Moreover, at least till the mid-1990s, PSUs attracted the countrys best talent and were the employers of choice, especially for engineers. After all, government employment offered lifetime security and a better social status than working for the private sector.

The underperformance of PSUs, then, had to do more with the stifling environment of rules, procedures, government interference and corruption and, most importantly, the complete lack of motivation and involvement of the employees in the company.

A public sector company usually has enough money, at the time of start-up, to obtain the best of technologies and establish contemporary production processes and systems. Almost without exception, the Central government PSUs have not been handicapped on this account. Yet, PSU managements have not been able to create an environment where continuous improvements in productivity and quality take place and they are able to expand output and generate reasonable profits. One reason is that it is the government, and not the management, that takes key financial, technological and commercial decisions. A PSU does not have control over how it deploys its profits or internal resources.

The governance structure and systems of a PSU are very similar to those of a proprietorship company, where the owner has virtually total control over the management. In a PSU, the government is the controlling shareholder, holding normally 100 per cent of equity, unless a minority stake has been divested, a process started after 1991. Each PSU is under the administrative control of different ministries, depending on the sector in which it operates. The minister and officials of the ministry exercise the powers of the shareholder. Effectively, the ministerassisted by his officialsfunctions like the proprietor of a company.

This is where the similarity ends. In a private proprietorship company, the owners motivation to run the company profitably is very high, since he has invested his own money. The companys professional managers also have a stake in its success, since they are assessed on the basis of its performance. On the other hand, the minister and his officers have no financial stake in a PSU; it is taxpayers money that is invested. Their careers and fortunes are not affected by the inefficient working or the losses of a PSU, though they have full control over it.

Worse, usually officers in the ministry overseeing the PSUs have no experience of industrial or commercial working. They could learn on the job, but not only is their tenure on a particular desk quite short, they are also burdened with a lot of other responsibilities. That leaves them with hardly any time to gather the expertise required to effectively discharge their role as owners. There are exceptions, where a minister or a senior civil servant is genuinely concerned about improving the performance of a PSU and respects and supports the management. The PSU then benefits enormously. Sadly, the number of such instances is too small. Invariably, the blame for the non-performance of a PSU is passed on to its management, whose authority is severely curtailed. Obviously a system of management where authority is not accompanied with accountability cannot lead to sustained performance.

Such a situation also gives immense scope for a political party in power to use PSUs for its political advantage. PSUs usually have large budgets, give jobs and contracts, and thus become tools for exercising patronage. The gross overstaffing in most PSUs is proof of this. Sometimes political funds are also raised through PSU contracts. There are numerous instances of PSU facilities being used for the personal benefit of politicians and bureaucrats. These actions hurt the performance of the PSU, but those exercising patronagethe politiciansare not accountable for its results. That responsibility rests with the PSU management, but it cannot refuse such requests unless it is willing to fall foul of the ministry. That is a risk few are ready to take.

Under the Companies Act 1956, the board of directors is fully responsible for the management of a company and has the authority to take all required decisions. Well-managed boards have competent outside directors, who bring expertise and experience from different spheres of business, and help in shaping policy and monitoring performance. In addition, if a company has diversified shareholding, the board is answerable to the shareholders at the time of the annual general meeting, when the accounts are approved. The shareholders also elect the directors. This accountability tends to check arbitrary actions and misuse of power by the management.