On The Road: Bajaj pays employees to stay home

John Elliot

I’ve been traveling in Maharashtra this week, talking to engineering companies about how they have become internationally competitive, modernizing their manufacturing processes and turning out products that people want to buy – things that they didn’t need to worry about before the economic reforms of the 1990s, and that have begun to come good in the past few years.

Yesterday I went to Pune, which is re-emerging as a major engineering center, and met Rajiv Bajaj, the 40-year old managing director of Bajaj Auto, once a fantastically profitable scooter company and now being rebuilt as a leading and profitable motor bike business.

Rebuilding is precisely the right word to use because Bajaj has built two new factories in recent years and this week produced the surprising news that he is stopping manufacture of two-wheelers at a massive old plant adjacent to the group’s headquarters in Akurdi, outside Pune. Akurdi has been the home of the group since it started producing two-wheelers in 1960, so this is an emotional event. It will continue to house the headquarters and produce components, but it will no longer be the manufacturing and assembly base.

To achieve this with as little pain as possible, Bajaj has come up with an unusual solution. From this weekend, 2,200 employees are being told to stay at home and not report for work – on full pay, which will continue till their normal retirement. Many of them are in their 40s, so that is quite a long time to go on paying: but Rajiv Bajaj says it is no more expensive for the company, and may indeed be cheaper than a redundancy scheme that would involve lengthy and probably bitter trade union negotiations.

“This is the first time in India that someone has tried to do this - what is right for the company with no loss to the workers,” he says. Legally, if the employees find a new job, they should resign from Bajaj, but in India’s uncontrolled labor market, with many people holding more than one job, that seems unlikely to happen.

For the company, it makes sense because producing the two-wheelers at another factory saves it $25 per vehicle, which roughly covers the cost of paying the home-bound employees at the current production rate of 300,000 vehicles a year. Profits will be made when production increases – the two-year target is 500,000.

Bajaj says the plan is also better for the employees than a humiliating solution that is favored by some companies: making employees clock in each day but giving them no work to do. Bajaj’s trade unions are however threatening legal action.

The closure is tough on those involved because Bajaj admits that it is “not being done because of any failure on the part of the workmen or the management”. It is largely due to “the impact of government policies on capacity rationalization, chiefly the regional distortions created by inconsistent tax benefits and the continuing evil of octroi in the state of Maharashtra”.

Bajaj estimates that a third of his 1,000-rupee saving per vehicle will come from tax concessions elsewhere, a third from not paying octroi (an ancient form of state-level taxation collected on the borders of individual municipalities) and a third from rationalized production. The tax benefits refer to breaks available in under-developed areas, and both Bajaj’s new factories are in such locations.

Octroi has now been abolished in most Indian states and is not applied in special development areas, but it does operate for most of Maharashtra. It is levied at a rate of 4% on all goods brought into the area, and is not refundable when products leave. It causes massive traffic jams on highways, where trucks queue up at boundary collection points, delaying deliveries and leading to massive corruption.

“Octroi is nothing but an excuse to sustain corruption – lorry drivers pay bribes every day to the collectors,” says Bajaj. The problem is widespread. Jamshyd Godrej, chairman of Godrej & Boyce Manufacturing, a leading engineering products company, says his refrigerator and other appliance factories have been moved away from the headquarters site on the outskirts of Mumbai. The empty buildings have been leased to software companies such as Tata Consultancy Services, which escape octroi payments because they do not bring in hardware.

It is a pity to finish this post, which was supposed to be about modernizing engineering companies, with the perennial subject of corruption - but this is India.

(http://ridingtheelephant.blogs.fortune.com)