Hindustan Motors' Struggle for

Survival: Troubled Waters?
In October 1998, Hindustan Motors (HM), makers of one of India's best known
cars - the Ambassador - launched a new car, the Mitsubishi Lancer (Lancer). The
launch of Lancer, a new car from the HM stable after nearly two decades, was
reported to be very important for the company, whose market share was on the
decline.

HM was reportedly banking heavily on the Lancer's success to fight competition

from other car companies. Lancer was positioned in the mid-size luxury car
segment, which was dominated by Maruti Udyog's (MUL) Maruti Esteem and
Honda's Honda City.

Lancer was received very well by automobile experts throughout the country,
largely due to its technical finesse. The car's sales reached 2,866 units by the
end of the fiscal 1998-99. Much to HM's delight, Lancer was even ranked as the
top vehicle in India for the three consecutive years (1999, 2000 and 2001) by J.
D. Powers1 for the least number of defects and high customer satisfaction in a
countrywide survey of car owners.

However, the company's euphoria was short-lived as Lancer's sales failed to pick
up as expected. While 7,621 cars were sold in 1999, HM managed to sell only
7,635 cars in 2000-01 against a forecast of 8,000 2. On the other hand, sales of
Honda City increased to 10,011 in 2001 from 9631 in 1999 (Refer Exhibit I for
the sales comparison).

Meanwhile, HM's other offerings Ambassador and Contessa were also faring
badly. In 1999, Ambassador's sales were down to 15,374 from 18,312 in 1998
and Contessa's to 285 from 575 in 1998. This poor performance took a heavy
toll on the company's bottomline and HM reported a net loss of Rs 615.8 million
for the fiscal 1999-00. (Refer Table I). The company had reportedly accumulated
losses worth Rs 1.1 billion during 1999-20013.

In late 2001, HM announced its plans to launch another car, the Mitsubishi
Pajero. The company planned to import fully assembled cars and sell them by
early 2002. Analysts remarked that the Pajero could do little to revive the
company's fortunes as despite many efforts to turn itself around, HM had failed
to regain its 4-decade long leadership in the Indian passenger car market. Its
3.3% market share in the half-year ending September 2001, proved beyond
doubt that the company was struggling to stay afloat.
Solution

HM was incorporated in 1942 by the GP-CK Birla Group of companies in

collaboration with General Motors (GM), USA. The CK Birla group was one of the
well known family-owned business houses in India, with 17 companies in
businesses such as automobiles, engineering, paper, and auto-components.
Some of them were Hyderabad Industries Ltd., Oriented Papers & Industries
Ltd., National Engineering Industries Ltd., Gujarat Instruments Ltd., Hindustan
Powerplus Ltd., India Gypsum Ltd., Malabar Building Products Ltd., Birla
Horizons International Ltd., and Birla Techneftegas Ltd.

Initially, the company concentrated on its auto components business, producing

its first car only in 1949. In 1954, HM started production of the Landmaster in
technical collaboration with UK-based Morris Motors Ltd. (Morris). The company
upgraded the Oxford model of Morris and launched it as the Ambassador in 1957
- the car went on to become the flagship brand of the company in the years to
come.

In 1963, HM commenced the production of Ambassador Mark 2, made available

in two variants - diesel and Ambassador ISZ. HM entered the earth moving
equipment business in 1971 and the power products business in 1983 (Refer
Exhibit II for the sales break up of HM from various units). Until the 1980s, HM's
Ambassador and Premier Automobiles Ltd's4 (PAL) Padmini were the only two
cars available in the Indian market.

HM's manufacturing facilities were located at Uttarpara in West Bengal,

Pithampur in Madhya Pradesh, Thiruvallur and Hosur in Tamil Nadu, and
Pondicherry. Over the years, HM built up a vast dealer network comprising 115
dealers, 50 service and parts dealers and 60 additional exclusive parts dealers.

However in 1981, with the entry of MUL, the scenario changed drastically. MUL's small,
fuel-efficient and well-designed car, Maruti 800, became a huge success. By the late
1980s, MUL became the market leader, leaving Hindustan Motors way behind in the war
for market share. During the 1980s, HM was in the news only because of its tie-ups with
GM and its subsidiary Vauxhall Motors (VM). In 1984, HM launched the Contessa, which
was labeled one of the first 'upmarket' cars in India, in technical collaboration with VM.

In 1987, the company launched the Contessa Classic considered the most powerful car
available then. The Contessa was a reasonably successful car, though it never managed
to match Ambassador's success. In 1995, HM entered into a collaboration with the
Japanese automobile major Mitsubishi Motor Corporation (Mitsubishi), wherein Mitsubishi
agreed to provide technical assistance to HM to manufacture its products in India.

HM produced a mid-size luxury car, Opel Astra in collaboration with GM in 1996. In

1997, the Contessa GXL version with power steering was launched. HM terminated the
GM joint venture in 1999, by selling off its stake to GM.

In the early 1990s, when the Indian economy was opened up for foreign players,
many multinational automobile companies entered the country. In the 1990s,
companies including Daewoo, General Motors, Daimler Benz, Hyundai and Honda
entered India through joint ventures and partnerships with Indian firms.

HM was one of the worst affected companies due to this inflow of competitors.
Forced to react due to the poor performance of its vehicles, HM launched the
Ambassador Nova in 1990 (with better interiors) and an improved Ambassador
1800 ISZ (with better engine performance) in 1993. The company also
appointed consultants McKinsey & Co for a restructuring plan to turn around its
business.

McKinsey asked HM to focus on the marketing of components, refurbish the

Ambassador model and upgrade other vehicles, speed up the delivery process
and improve productivity through reengineering on the floor shop and reduce the
workforce in its production plant at Uttarpara. The company began to implement
the recommendations.

HM decided to tap new segments to ease the competitive pressures it was facing
in the passenger car market. In 1995, the company collaborated with Oka Motor
Co5 to develop a vehicle specifically targeted at rural markets. This led to the
launch of the Trekker (also referred to as the Rural Transport Vehicle - RTV) in
1995. Launched in three northern states, the Trekker was received well in the
rural markets. However, the vehicle soon came under criticism owing to a host
of technical problems.

By late 1998, Trekker's sales dropped by two-thirds of its initial volumes to

around 800 a year. In 1999, HM launched the redesigned Trekker and an
upgraded version of the Ambassador. Despite all the product upgradations and
restructuring efforts, HM could not stem the decline in sales.