HM's C.K. Birla: betting that the whole is greater

Everything about Chandra Kant Birla, 47, one of the scions of the Birla clan and the Chairman of Hindustan Motors, exudes an old world charm that comes naturally to a person who has enjoyed old money all his life. The only discordant note is struck when you see him sidling into a car. Look for a three-pointed star on the bonnet and you will be disappointed. Birla won't be seen in anything on four-wheels apart from Ambassador, the 'elephant' rolling out of HM's Uttarpara factory since 1949, or a Lancer, which HM has been manufacturing and marketing in India since 1998 under a technical tie-up with Mitsubishi Motors of Japan.

Now, CK (that is how he is known in business circles) is steering HM on the way to acquiring a second identity-that of an aggregate provider to the rest of the automobile industry-to go with its old one of a vehicle manufacturer. And that creates a half-chance of his being spotted in cars other than an Ambassador or a Lancer.

The first option that has come CK's way is Ford Ikon. In the middle of January this year, the two companies closed a deal under which Ford India will source engines and transmissions for its mid-size car, Ikon, from HM's plant in Pithampur, Madhya Pradesh. Beginning January 2003, HM will supply 20,000 engines and transmissions a year to Ford-a number that is projected to go up to 50,000, subject to market vagaries.

A WIN-WIN DEAL

Ford India's CEO David Friedman with Ford's new car, Mondeo

I HM will make engines and transmissions for Ford Ikon at its Pithampur plant, which will be fitted in Ikons sold in India II It will make 20,000 of these in the first year, going up to 50,000 as volumes rise. The delivery begins in 12 months III Of the Rs 70-crore investment needed, Ford brings in 30 per cent, which is Ikon-specific. HM arranges the general investments. IV The deal, which adds Rs 150 crore to HM's top line in the first year, will help dilute the prevalence of red in its balance sheet V Ford cuts production cost of Ikon as local content rises to 90 per cent. A greenfield facility would cost Rs 300-500 crore.

This is just the first step. ''If anyone else wants us to make engines or transmissions for them, we will do it,'' says CK. The approach, says HM's Executive Director B.K. Chaturvedi, is a result of ''a change in the strategic direction from being a pure automobile manufacturer to one that is also an aggregate provider to the rest of the industry''.

The biggest challenge in realising this strategic direction will be to win the trust of others, many of whom are HM's rivals in the market place. The Ford deal will come in handy here. A number of tangible benefits accrue to both the parties as a result of the deal (See A Win-Win Deal). But the biggest benefit that accrues to HM is one of perception.

First, it is perhaps the strongest certification of quality HM could hope to get. David Friedman, CEO, Ford India, is quick to point out that the decision to source engines and transmissions from HM was preceded by an assessment of its facilities by a team from Germany armed with a fine toothcomb. (Germany is where Ford has housed its global powertrain expertise.)

Gushes Friedman: ''HM has top-class facilities in Pithampur. The people there are capable and knowledgeable.'' Incidentally, the HM deal is the first of its kind for Ford anywhere in the world. In other places, the company outsources only to joint ventures.

The Road Ahead

It could be seen as a dampener of sorts that HM-made engines and transmissions will be fitted into only those Ikons that will be sold in India. But it couldn't be any other way. Ford's German facility supplies directly to the export markets serviced by Ford India. Chaturvedi remains unfazed: ''This is a breakthrough deal. The second and third business development will be easier. We will become a big aggregate provider.''

In course of getting there, HM is looking at all those companies that make and market cars in India, but not their engines and transmissions. Technically, that makes every multinational car maker in the country a potential customer for HM. They have all chosen to cross the threshold of 70 per cent local content-beyond which government norms become a lot less stringent-by localising non-critical parts.

It makes sound business sense for both HM and the customer. HM gets money and enhances capacity utilisation. The MNCs get to cut costs in an increasingly competitive market. For HM, which has incurred losses in six of the last 11 years including the last three, it could be the last flicker of hope.

BACK TO BEING RETRO

Ambassador Classic: the journey continues

The ambassador was born in 1949 at hindustan motors' Uttarpara plant in collaboration with Nuffield Organisation of the UK. First christened the Hindustan 10, it soon had two siblings in the market: Hindustan 14 and Baby Hindustan. Hindustan 10 came to be known as Hindustan Ambassador in 1957. The upgradation started in 1963 with Ambassador Mark II and continued with Mark III 12 years later. A diesel option debuted in 1978 and Mark IV in 1979. The car soon became a favourite with large families and the government. The first took to it for space and the second for its regality. The government still accounts for 15 per cent of Ambassador sales. Meanwhile, HM continues with the same look even as sweeping changes were made to its internals, especially with the 1993 transplant of an 1800-cc petrol engine from Isuzu. Now, the Ambassador begins a journey in reverse gear with the retro, a throwback to the 1950s. The everyday struggle of an Ambassador buyer with doors, steering wheel, and gears abated somewhat in 1999 when HM pumped Rs 70 crore in modernising the plant. It says something about HM that the modernisation happened a full 15 years after the advent of Maruti 800. It also says something about the Ambassador. That despite being in the portfolio of a company so lacking in aggression, it manages to sell 17,000-18,000 units every year.

According to CK's estimates, Ford would have to invest anything between Rs 300 and Rs 500 crore to set up a greenfield facility of the kind it will be using at Pithampur.

However, not all MNCs are falling over each other to use HM's facilities. General Motors India, with which HM had an equity partnership when it entered India, isn't thinking on these lines. ''Localisation is important to reduce the cost of ownership. But we have our own programme of localising part-by-part,'' says Aditya Vij, CEO, gm India.

More MNCs may be willing to come aboard as HM's credibility rises with the local content in Ikon's engines and transmissions. Initially, HM will be merely assembling imported kits. But the local content is expected to rise sharply and is expected to cross the 90 per cent-mark in a year-and-a-half.

To ward off a possible conflict of interest, HM will set up dedicated assembly and testing facilities for each customer, though parts manufactured could be common to a large extent. It already seems to have scored a point. Mitsubishi, say HM executives, hasn't objected to the tie-up with Ford India.

HM: The Lone Rider

Ask CK about the revenue break-up that he foresees between the two businesses and he turns coy. But he does talk about HM as a vehicle-maker with the same interest that he shows when talking aggregates. He talks at length about launching four-to-five new/upgraded vehicles in 2002-03.

The most high-profile name among these is Pajero, the sports utility vehicle already popular with the smart set in India. Pajero will come in as a completely built unit under HM's alliance with Mitsubishi. Then there is the retro-looking Ambassador, displayed at the Auto Expo, whose name hasn't been finalised yet. Besides, there will be variants of the Trekker and the RTV.

Sounds fine. But CK is quick to agree when told that HM's biggest problem is one of perception. Despite rolling out a modern car like Lancer, which has consistently bagged the top honours in JD Power surveys, HM is associated with Ambassador, and Ambassador is associated with a time-warp even though it has improved dramatically in terms of the interiors and engine.

Unfortunately for HM, Ambassador is no longer looked upon as a vehicle of choice for personal use. CK is hoping the retro variant will change that. ''There are a lot of people who are still in love with Ambassador, especially in Tamil Nadu, Karnataka, and Kolkata,'' says CK, adding that the retro one could succeed like the new Beetle by Volkswagen did. However, he chooses not to mention Zen Classic, the universally castigated retro-looking lemon rolled out by Maruti in 1999, and phased out in no time.

"Business development will be easier after the breakthrough deal with Ford" B.K. Chaturvedi, Executive Director, Hindustan Motors

CK: The Entrepreneur

Birla seems pretty much comfortable with the future as it appears now. But HM has been making losses over the years. Even the sales of its earth-moving equipment division to Caterpillar Inc. of the United States in November 2000 for Rs 337.50 crore didn't help much.

This year will be operationally better. And next year will look much better as the Ford deal adds about Rs 150 crore to HM's top-line. The RTV has been doing well, especially after the CNG option rolled into the market, and Ambassador is a steady, though never phenomenal contributor to the company's revenue. Things will, however, become better if HM is successful in its endeavour to cut the size of the labour force at Uttarpara, where Ambassador is manufactured. The target is to bring the labour component in the cost of an Ambassador down from the current 20 per cent to between 5 and 10 per cent. It is already 5 per cent for Lancer, which has been notching up steady sales.

But, is being a businessman only about numbers? Didn't CK ever think of making his own car? After all, he was making and selling cars eons before Ratan Tata thought of Indica. ''I never thought of making my own car,'' he says, without a trace of unease, ''I give credit to Tata for what he has done. But car making is a difficult business. We have to compete with the world's best.''

Unambitious as it may sound, Birla is right. It is difficult for an Indian company to match the research and development might of MNCs. Not that HM hasn't done work of its own. It has made significant changes to RTV, even though Australian company Oka designed it. All the current work on Ambassador is being done in-house. The Isuzu technology came as a one-time transfer with limited follow-up support. HM is also limited by the fact that the Ambassador platform, which alone can provide it with some economies of scale, is so archaic that it is not suitable for rolling out any other models.

HM's limitations as a vehicle manufacturer haven't gone unnoticed by the market. A bellwether stock till the mid-1980s, HM plunged to insignificant levels of market capitalisation. Its stock price has remained bound in a narrow band between Rs 3 and Rs 9 in the last 52 weeks. "It is such a small cap stock that no research house tracks it," says a Mumbai-based analyst.

Things are unlikely to change dramatically in HM's forked future. In fact, one cannot ward off the feeling that the new identity of HM may go on to dominate the old one. If that happens, CK will be having a large number of cars to choose from as his preferred mode of transportation.

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