Although Hindustan Motor officials will probably cringe in agony, the sale of the company's earthmoving division to Caterpillar makes sense, says Arjab Basu. The sale of Hindustan Motor's earthmoving division will go a long way towards the restructuring of the company as a whole. Applying common sense and logic would see the proceeds from the proposed sale - 3375 million rupees ($US73 million) - go into the financial restructuring of HM's plant at Indore, in Western India. Borrowings would be paid off, production lines would be revamped and the whole plant would become much leaner and more efficient.

The Indore plant, which currently manufactures engines for HM's passenger car range (the 1950s Morris Oxford-based Ambassador, the 1970s Vauxhall Victor-based Contessa and the current-model Mitsubishi Lancer) will also be able to manufacture engines for other manufacturers following the infusion of fresh funds.

HM's other plant at Uttarpara in the Eastern Indian state of West Bengal would eventually stop producing Ambassadors and switch over to making components.

The Chennai car plant, located in the southern state of Tamil Nadu, currently assembles Mitsubishi Lancers from kits but would become a fully-fledged joint venture with Mitsubishi Motor Corporation (MMC) with financial participation by the Japanese company.

At present MMC sells Hindustan only the kits and assembly technology for the Lancer.

HM is already at its wit's end, trying to figure out as to how to make money on the Lancer because the Japanese company currently does not have any financial stake in its Indian customer and the profit on each Lancer assembled for sale is wafer-thin.

Thus restructuring HM and giving Mitsubishi a stake would be a much better option than selling off the Lancer plant and gaining Mitsubishi as an equity partner for that venture alone.

This is where the sale of the earthmoving division slots neatly in. It will provide the desperately needed finances to kick-start the company's future.

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Arjab Basu works for a leading Indian automotive journal.
He holds an MBA in Motor Industry Economics & Management from the Cardiff Business School.