Manufacturing was not always economical in some cases

Let me go back to how the automotive industry started in this country. It happened at a meeting in Delhi in 1947 with the then defence minister. A few of us were called and taken into confidence on the problem of not having enough spare parts for our army tanks. Imports were hard to come by and so the government told us that a tough decision had to be taken. This involved developing an indigenous automotive industry in India and they asked our opinions on the issue.

The government knew nothing about the automotive industry, and this is how it all began. Our own journey had started just two years back. My father KC Mahindra, on being asked by the British government, had traveled to Washington as chairman of the India Supply Mission. During his stay there, he met with the inventor of Jeep, Barney Roos. The US Department of Defense had given a contract to Ford Motor and Willys-Overland to develop a vehicle for the US Army. Willys was the first to come out with the model and so the Jeep belonged to them. Roos told my father that this was the ideal vehicle for developing countries and its rural hinterlands. We soon became a franchisee and started assembly of Willys Jeeps in India.

Our closed economy initially did help in the birth of a fledgling automotive industry. But I believe that those terrible industrial policies were carried over for far too long. The government pushed us into manufacturing, but it was totally uneconomical in some cases. Imagine having to produce every single component right from engines, transmissions, body and what have you for a production of 2,000 Jeeps. There was no supply chain, and we had to make every component in-house. It did not make any economic sense, but we all recognised this national need. Remember the government considered passenger cars as luxury vehicles until very recently, and so we were supplying Jeeps to the defense force for many long years.

BIZARRE POLICIES

There was no real concept of marketing or selling vehicles at the time. It all very much depended on demand-supply dynamics. Supply was linked to the availability of foreign exchange. The government gave priority to certain types of vehicles deemed necessary to serve the country’s needs, and so foreign exchange was allocated accordingly. Since there was not much of an auto ancillary industry at the time, we had to import engine blocks and transmissions which depended on the amount of foreign exchange we were given.

Only later did we gradually move into manufacturing these. Sometimes, we produced only three vehicles a day compared to something like 300 vehicles today. While we were not extensively doing research and development, we did some basic development. One example could be that we made sure there was some similarity in the rear axles of the truck and jeep. The government also artificially limited production capacities, where they would ask us not to make say more than 5,000 Jeeps. When we did exceed these fixed capacities, we would get letters from the government asking us to explain the rise in production.

##### Then there were other funny classifications. You could not make two- or three-wheelers if you were making trucks or utility vehicles, and passenger car makers could not get into truck manufacturing. In our case, we needed a licence to make passenger cars. We applied for a licence in 1956, but the government turned us down. Other manufacturers including the Tatas were also not granted a licence to make cars at that time. We first contacted Renault to make cars, and over the years, put in a dozen applications. Nothing saw the light of day. We had even considered buying out Standard Motor Products of India (SMPIL) to get a licence to make passenger cars.

The sad part is that Hindustan Motors and Premier Automobiles did not take advantage during that period. They should have had the foresight to see that, as we expanded our volumes of jeeps, nothing was stopping them from expanding their volumes of passenger cars. In spite of government controls and other problems, production was increasing, albeit slowly.

NO END TO WOES

Apart from facing stringent government controls, we also lacked finance. We could not even increase our prices without government permission, and it did not matter to them if raw material costs went up. As a result, the industry suffered since prices never caught up with manufacturing costs. Until the mid-1980s, we did not have the freedom or the control over our own business. Forget quality, consumers during that period did not have a choice. The government continued with these socialist policies although it realised it was not getting the best of both worlds – a socialist pattern with capitalist gains.

The government was trapped in its own making, and finally it was the country’s bankruptcy that forced a change. Narsimha Rao would go down in history as the architect of reforms, and not Manmohan Singh, since he only put into practice what Rao wanted. When the government decided to open the economy in the 1990s, I made it known that the way forward would be to do this over a period of time. Suddenly, if you allow corporations like General Motors or Ford Motor to bring in completely built vehicles without any investments, how would we survive? The government did not listen to me at all, and that was a good thing, because this is the best thing that happened to us. We were all shook up and did not know what would happen. After all, we had never faced competition before.

TAKING ON THE BEST

But then we realised that these multinationals were not as strong as they claimed. Many of them did not understand the nature of the culture they were going to work in. Remember, Indian consumers were not used to foreign brands. Although Mercedes-Benz cars were around in small numbers, not many had heard of a General Motors or Ford. It was at this time that we asked ourselves if we could survive by being just a niche player. We formed a joint venture with Ford, partly for our own survival and also from our motivation to make a car. A lot of companies had contacted us including Renault, but we chose to go with Ford because of its brand name and full range of vehicles.

The government’s strict regulations perhaps unknowingly made us very conscious of frugal costs and frugal engineering. We also gained a lot of confidence through our ability in making tractors. We did not have any collaboration here, and so had a 15-year experience of developing engineering products like tractors. In retrospect, I think it might have been better to liberalise the economy earlier. India opened its economy in the 1990s compared to China which did it 20-25 years ago. I don’t think any of us realised it then, but today our ability to innovate, handle harder R&D and competitive costs has put us in good stead.