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Hindustan Motors: automotive business process outsourcing

By just-auto.com editorial team | 8 March 2004

The ubiquitous Morris Oxford-based Hindustan Ambassador is still in widespread service as a taxi in India - a living symbol of a bygone age. However, the venerable 'Amby' is experiencing declining sales in the face of more modern competition. But what about the future for the Amby's maker, Hindustan Motors? Well, the company is now offering spare plant capacity to other makers and an opportunity has been identified at HM's relatively modern Thiruvellore plant. Deepesh Rathore and Tilak Swarup report.

"Attain nirvana without the hardships", that's what 'lifestyle guru' Tobias Moss promises. And he sure has a strange vehicle of delivery - the Hindustan Motors Ambassador. Tobias is the man behind the UK-based company 'Karma Kabs', which provides specialised taxi services for those who want that special Indian experience. With names like 'Monsoon Wedding', 'Sheeshmahal (Palace of glass) Kar' and 'Bollywood Kab', Tobias offers people salvation through a journey in his cabs. The company has a fleet of HM Ambassadors customised on various Indian themes and his service offers a novelty value to people who are bored of the typical modern automobile. And the Ambassador's spacious yet basic interior, coupled with its old world exterior, make a combination that is not too hard to market as divine.

The above case, ironically, is a pretty good description of the current state of things at Hindustan Motors. The mainstay product - the ubiquitous Ambassador - is now too old to be even considered as a mainstream automobile, while the other products face similarly diminishing volumes. Many new models have entered the Indian car market and while most of the car manufacturers' portfolios are advancing towards alignment with global portfolios, Hindustan Motors appears to be a niche supplier for the local market only.

Four product lines
The company has four lines of products. The first is the Ambassador range, which used to be the mainstay of the Indian automobile industry until the early eighties, the time when Maruti Udyog - currently India's largest producer of automobiles - was about to be born. Sales of the 'Amby' were at their peak in the late 1970s and the early 1980s at about 2,500 units per month, with the Indian government and taxi operators emerging as the main customers. But individual customer sales were not at all bad either as there was hardly any choice in the Indian market at that time. In fact, owing to the popularity of the Amby during those years, there are more than 800,000 specimens on Indian roads today. India does not yet have any concrete 'old-vehicle' regulations.

But times have changed and nowadays the Amby finds customers only in the Indian government and amongst the country's taxi operators - individual sales are miniscule. The government too, now has a choice in the fleet market with the Maruti-Suzuki Baleno becoming more popular, while taxi operators have switched loyalties to the Tata Indica and the Toyota Qualis. Monthly Ambassador sales have now stabilised around the 800-1,000-unit mark, well below past peaks.

In order to attract more individual buyers the company has launched a couple of new variants (Grand and Avigo) of the Ambassador. But in spite of that effort, the Ambassador has long been relegated to the niches and even automotive enthusiast magazines have stopped considering the Ambassador line-up in their comparison tests.

Lancer made in collaboration with Mitsubishi
The company's second model line-up is the Lancer, made in collaboration with Mitsubishi. Once a strong player in the small but important C-segment in India, the last generation Lancer made by HM has seen sales decrease in the face of the entry of new models to the segment. Currently sales are in the region of 150-250 cars per month (it used to be around 1,000 units a month at peak). In spite of introducing a new engine variant recently, the company expects at least a 30 percent fall in 2004 Lancer sales. From the Mitsubishi connection also comes the Pajero, which HM imports.

Utility vehicles
The third model line-up comprises of the UVs Trekker and its variants Pushpak and Porter Plus. Very utilitarian, basic and unrefined, the HM Trekker has a moderate customer base in the Indian rural market, especially in the eastern parts of the country.

The fourth model range is the RTV range of passenger carriers, made in collaboration with Oka of Australia. What started as the Rural Transport Vehicle (RTV) has now been changed to the Road Trusted Vehicle (I am serious). The market is usually the large and medium sized cities where the RTV is used nowadays as a mini-bus and the CNG powered engine helps in meeting emission norms. As usual, HM has a number of variants on the RTV.

Apart from these, HM also used to make the Contessa - a circa 1970s Vauxhall Victor in disguise, which used to sell in small numbers until a few months back. The company is also a very small player in the CV segment with the Mascot truck.

Competition leads to rapid share erosion and financial losses
The entry of many new models in the Indian automotive market has seen HM losing marketshare rapidly. While the erosion in Amby's marketshare began two decades back with the entry of Maruti, even the Mitsubishi Lancer has seen a considerable fall in volumes over the last two years.

It is not a bright scene on the financial front either. HM had declared a net loss of INR 267.40 million in FY 2003, INR 338.60 million in FY 2002 and INR 189.70 million in FY 2001. In fact, the company has been making regular losses for the last five years for which data is available.

Precarious situation for HM; Mitsubishi no saviour
This fall in sales on all fronts coupled with the regular losses has left HM in a precarious position: it is saddled with idle plant capacity and does not have the resources to invest in new model development. HM's only hope would have been a new volume model from Mitsubishi but the beleaguered Japanese major has been the most passive participant in the Indian industry to date. Expecting a miracle now would be too much.

Hindustan Motors has three major automotive plants spread across India. The first plant in Uttarpara in the state of West Bengal in eastern India, manufactures the Ambassador in three guises (Classic, Grand and Avigo) and also the Trekker range in three bodystyles. The commercial vehicles are also assembled there. The plant has an estimated production capacity of 30,000-40,000 units (HM refuses to divulge the actual numbers) per annum. The cumulative production of Ambassador and the Trekker range combined stood a tad below 13,000 units in 2003. This leaves an idle capacity of 17,000 - 27,000 units in the Uttarpara plant.

HM makes the Mitsubishi Lancer in the Thiruvellore plant in the state of Tamil Nadu in south India. The plant has an annual capacity of 12,000 cars, which it utilised fully when Lancer sales were at their peak. However, HM could only sell about 3,000 Lancers in 2003 and the 2004 outlook is even worse - the company expects annual sales to drop to about 2,000 units. This leaves about 9,000-10,000 unit capacity spare.

HM's third major plant is in Pithampur, near Indore in the state of Madhya Pradesh in central India. This is used mainly for assembling the engines for the Ambassador and other vehicles. The plant also assembles the RTV and its variants. Idle capacity in the engine-manufacturing unit is an issue here too.

Capacity offered for others - powertrain outsourcing leads the way
Faced with these problems and armed with big, idle plants, HM has resorted to the next best thing. It has now decided to offer its idle capacity to other manufacturers. Considering that all the manufacturers already present in India have their own captive production capacities - and most are saddled with some spare capacity also - the HM offer is meaningful only for those carmakers not already present in India. Looking around the globe, some names that crop up, on the basis of any prior interest they had shown in the Indian market, are BMW, Proton, Volkswagen, Renault, MG Rover and the PSA Peugeot-Citroen Group.

HM's Pithampur engine plant has been the forerunner in outsourcing and the company has been fairly successful in marketing its spare capacity at this plant. Currently, HM assembles engines at the Pithampur plant for General Motors, Ford and Mahindra. This has ensured that the idle capacity at the Pithampur plant is nearly completely utilised.

That leaves the Uttarpara and Thiruvellore plant. HM has spare capacity of about 20,000 units at the Uttarpara plant. The plant is quite old and is in fact considered to be the white elephant in the HM stable - most of HM's losses stem from this plant. To make matters worse, the facility is situated in the state of West Bengal, not considered the best regional location by the Indian industry in view of frequent labour problems. These factors combined make the Uttarpara plant somewhat unattractive for the international industry, a fact even admitted by some HM executives.

The Thiruvellore facility is however, a paradigm shift from the Uttarpara facility. Until now making the Mitsubishi Lancer and a handful of old-generation Pajeros, the facility is only six years old. It was set up in 1997 specifically to assemble the Lancer. Since then Mitsubishi has declared it as the best Lancer plant outside Japan. The total capacity of the plant is 12,000 units with capacity utilisation currently at around 20-25%.

Hindustan Motors may launch a Mitsubishi mid-size car - to be assembled at this plant - in the near future. With the addition of a new model 2004-05 should see 50% capacity utilisation at the plant, in our view. That would leave about a 6,000 cars per annum capacity free for any carmaker interested in exploiting this potential. The benefits for the carmaker are the usual ones - the new entrant will save on the investment, effort and time needed to set up a manufacturing base of its own.

Furthermore, Thiruvellore comes with the geographical advantage of being near other big manufacturing facilities like Hyundai India and Ford India. The region has a well-developed supplier industry making it easier for anyone to start manufacturing cars in the vicinity. An available capacity of 6,000 units appears too small for a small-sized volume driven car and may only make sense for a manufacturer of higher margin cars like BMW. That said, it could make sense for Proton too as a model like the Waja may find it difficult to sell more than 6,000 units a year.

HM management is in talks with some manufacturers on this issue, but we understand that the talks are at preliminary stages and have not reached serious levels just yet.

Deepesh Rathore / Tilak Swarup

See also:

India's developing automotive markets and industry - management briefing
New models underline growth opportunity - report from India's 7th Auto Expo - feature article