Most business family disputes are between brothers. But some sons have ousted their fathers (Parvinder Singh ousted Bhai Mohan Singh in Ranbaxy, Omkar Kanwar ousted Raunaq Singh in Apollo Tyres). Such companies typically fared very well after the youngsters took over. In happier cases, the transition from father to son has been harmonious despite strong initial differences of opinion. Bajaj Auto offers a fascinating case history.
Nobody who knows Rahul Bajaj will accuse him of modesty. Brash and assertive, he thinks he created one of India’s best companies in the difficult days of the licence-permit raj. By 1980 Bajaj Auto was top scooter producer by far, and its Chetak brand had a 10-year waiting list.Critics said Rahul’s success flowed from the quasi-monopoly status he got as an early entrant at a time when foreign collaborations and licences were difficult to obtain. However, in the 1980s capacity licensing and foreign collaboration for two-wheelers was liberalised. All the world’s top players (Honda, Suzuki, Yamaha, Piaggio, Garelli, Peugot) entered through collaborations or joint ventures. Bajaj Auto met the challenge squarely, and beat the newcomers hands down in scooters. Hero Honda went ahead in motor-cycles, but scooters were far more popular in the 1980s. Unsurprisingly, Rahul saw himself as the creme de la creme of Indian manufacturing. His ambition was to overtake Honda as the world’s largest scooter producer.Then came economic liberalisation in the 1990s. Initially, this seemed very good for Bajaj Auto, since traditional constraints ended. But Indians began to prefer motor-cycles to scooters, and Bajaj Auto could not touch Hero Honda in this field.
Moreover, liberalisation brought the threat of cheap imports and FDI from top companies like Honda. Rahul Bajaj at this juncture became famous as head of the Bombay Club, opposing liberalisation till there was a level playing field for Indians and foreigners. He claimed he had a top-class plant that could compete on even terms, but not with foreigners enjoying better infrastructure, cheaper finance, and flexible labour laws.
The Bombay Club managed to slow liberalisation but could not stop it. Scooter sales continued to plummet, the recession and stock market collapse of 2001 hit the company hard, and some stock market analysts thought it was doomed.
Meanwhile, in the early 1990s, Rajiv Bajaj, Rahul’s eldest son, came back to India from business school in the US. He took a hard look at the company and came to very different conclusions. He saw that Rahul’s ambition of becoming world No. 1 in scooters was irrelevant in a global economy where motor-cycles ruled supreme, and that the company needed to change its strategy accordingly.
Rahul was proud of the factories he had created at Akurdi and Waluj. But Rajiv saw them as grossly overmanned and inefficient, with such a flawed work culture that reforming it was almost impossible. Instead, he proposed a third factory at Chakan with a totally new workforce and work culture that could compete with the world’s best. Unlike Rahul, Rajiv did not focus on the disadvantages Indian businessmen faced. Instead, he focused on two huge advantages: diploma engineers and R&D scientists were available at one-tenth of the comparable wage in the West.
The Akurdi factory had 20 per cent daily wage earners, 80 per cent skilled workers and no engineers at all on the shop floor. At Chakan, Rajiv Bajaj created a workforce with 80 per cent diploma engineers and 20 per cent skilled workers. Wages averaged just Rs 12,000 per month for engineers at Chakan against Rs 11,500 for workers at Akurdi.
But the productivity of the engineers was several times higher, lowering costs. The R&D focus of the company yielded new designs that finally enabled it to compete with and beat Hero Honda, and even Honda. To his credit, Rahul backed Rajiv’s new approach.
Enormous VRS payments enabled the company to halve the workforce. In 2000, Bajaj Auto made one million vehicles with 22,000 workers. In 2004-05, it made 1.8 million vehicles with just 11,000 workers. At Chakan productivity levels, it could have made as many vehicles with 7,000 workers.
All Bombay Club rhetoric has ended. Instead of opposing multinationals, Bajaj Auto aims to become one itself, with factories in Indonesia, Brazil and Nigeria. Its share price has risen from Rs 200 in 2001 to Rs 1,300.
The main lessons seem to be as follows:
Youngsters with global experience know better than senior managers whether a factory is good or bad.
No CEO will heed a 30-year-old manager who says the factory is terrible, but may heed his 30-year-old son. This is why family businesses sometimes beat professionally managed ones.
A champion in one set of conditions can collapse when conditions change. Owners should beware of delusions of grandeur.
India’s big advantage lies not in cheap labour but in cheap design and engineering skills.