Posted by: John Elliott | August 30, 2007

On The Road: Bajaj pays employees to stay home

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.


Responses

  1. Indeed thought-provoking…infact an eye-opener decision…it requires lot of guts to bear the direct and indirect impact in this kind of socio-economic issue.

  2. Its really sad that Indian population believes in socialism/communism and these trade unions are a big curse to the Indian Ecomonic Growth. These unions promote nothing but mediocrity. Most of these 2200 employees will be reluctant to go out and get a new job or start their own business. They will be stagnated in their life. We cannot blame Bajaj or Govt India for this. Govt or Companies can give you only opportunity to make a decent living. Its upto you to get the skills to fit for these jobs and move up the ladder. But fortunately the younger India has entered into the good and challenging world of globalization where entreprenurial skills, creativity, accountability are rewarded where it is due. These young chaps don’t depend on Govt to get them the jobs but they find/create one.

  3. Bajaj is setting a world class example of taking care of employees and avoiding conflict. The company is on right path on progress rather than derailing the progress. We hope the company will stand behind its promise for years to come and the older employeee will be treated with respect and dignity.

  4. It is difficult for US based readers to appreciate the cultural differences abroad. Employment in the corporate sector in India is a symbol -of status, prestige and credit worthiness. It has always been considered a lifetime commitment with a high degree of loyalty, somewhat akin to the Japanese culture. Therefore,if for no fault of the employee he is asked to stop working in mid career this is a huge blow. Also, job opportunities for older people are almost non-existant, because India’s demographics are providing an inexhaustible supply of young people as freshers with lower price tags. Apart from that, unless the company pays out the accrued seperation benefits these peole do not have the access to capital or loans to start a new business. Hence the corporates, particularly in the manufacturing sector in India, have to deal with situation differently than in the USA.

  5. As an ex-pat living in India for past 3 years I have experinced much of this nonsense first hand. What I wonder is how will India ever compete globally if the game ever changes from labor cost-arbitrage to labor productivity, efficiency, innovation to make a living? It is all low-hanging fruit here right now. Some areas (like IT) though are beginning to get less competitive on cost basis alone.

  6. A very unique management pratice being adopted by Bajaj. Though the details of the salary details is missing…I feel this would be a win-win situation for both the employees and management(company).

    The employees continue get financial support and respect/diginity till they find another job/retirement and the company probably can get away with labor union issues and also help create a positive brand/company image.

  7. “For someone in the early 40s, it will be difficult to sustain the family. Not only will inflation take its toll, but major social resposibilties like expenses for weddings will be a burden. Lets not forget that the bigger pay checks come in the late forties and early fiftys, and in India, some of the retirement benefits are linked to the last salary drawn.” – Posted By Lalit Kumar, Chennai, TN

    How is this situation a bad thing? These workers may not be getting more money and raises, but getting a regular paycheck beats getting no paycheck at all. If these workers want to advance themselves, they must either find another job, get advanced traning, or start their own businesses. It is not Bajaj Auto’s job to give employees who are not working money for weddings, family expenses, and social responsibilities. These employees have to take advantage of this opportunity while it exists.

    Only the lazy and unmotivated employees will suffer from this situation. These are the same employees that would still be making a low salary in their later working years. The employees that use this opportunity to better themselves are the same types of employees that would have advanced themselves at work. If the slackers suffer, so be it. Everybody cannot be saved.

  8. >>Bajaj’s trade unions are however threatening legal action.

    The TU’s going back to old tactics to solve a new problem. Its time they grow up and mend ways with the employer. There is no denying that the employees’ morale will be down and some might even feel guilty of taking a paycheck for no work done. But if the employers feels it works for them, then its the best chance for these 40+ year olds to spend quality time with their family, and even as someone suggested, do community service. Teaching is not an option, since they would lack the patience to deal with a group of 50+ kids in one room.

  9. I agree with Victor’s comment above. Mr Elliot has not mentioned specifically that the wage paid to stay at home is the current wage. For someone in the early 40s, it will be difficult to sustain the family. Not only will inflation take its toll, but major social resposibilties like expenses for weddings will be a burden. Lets not forget that the bigger pay checks come in the late forties and early fiftys, and in India, some of the retirement benefits are linked to the last salary drawn. So, overall, the best course would be to retrain them for other jobs – or provide support and seed capital for entrepreneurship. It should be interesting to read a coverage of the people affected by the VRS(voluntary retirement schemes)wave that swept across the country at the turn of the century to understand what happens to people who are invited(ofteen forced) to exit in theirlate forties and early fifty’s.

  10. Nobody is discussing the reasons why Bajaj is having to close their Akurdi plant. The EVIL of octroi that Mr. Bajaj mentions is akin to legalised highway robbery. Mr. CM-Mah needs to respond to this by abolishing octroi or Bajaj will not be the last to move out from this famous industrial belt.

  11. “Nothing this cool will ever happen in America” – Posted By Yadgyu, Harkeyville, TX .

    Something similar does occur in the US. Its the “Jobs Bank” that the UAW has negotiated with the big 3 Auto makers in the US. Why is this such a big deal, because its been done in India? Its a simple cost benefit analysis for Bajaj. The real story ought to be the regulatory/tax/corruption environment in India.

  12. You might say that this is Kharma coming back to them. What I do not understand is if Bajaj keeps paying them, they may as well re-train them for higher skilled jobs and/or small business/entrepreneurship. This would not only benefit the worker, but it will help the area as a whole. Morally, the company has a responsibility to these people especially if they are paying for their wages o better their lives. Is this not a good reason for businesses to exist in the first place? Age and retirement should not be issues.

  13. I have been working with an NGO, which tries to build schools in rural villages. Instead of letting employees sit home and get salary, why not make them work for some social work like that?
    There are lots of village schools that can use 2200 school teachers.

  14. This tells about the urgent need for flexible labour laws. Many economists, business experts are telling the same from a decade but still nothing has been done. We won’t expect this from a Prime Minister who gave India her first generation of economic reforms. To create millions of job for less educated people we need labour laws. Companies should be free to hire and fire any person any time. Other states should learn from this.
    Manmohanji are you listening?

  15. In India, it’s almost impossible to lay people off, unless the company shuts down completely. So Bajaj is basically making the best of a bad situation.

    It’s limited options should not be confused with benevolence.

  16. It’s not quite as easy to be able to lay off people, especially considering the situation at hand. It might have had provoked resentment and a lot of trouble for the company.

    It doesn’t hurt as much if all you need to pay to a worker is around US $100 per month. Given the (flexible) laws in the country, who knows how long will the workers be actually paid!

  17. Get paid to sit at home? YES!

    I think this will be a great opportunity. Some of the workers can go and get training in another field or pursue an entrepeneurial venture. The others can “retire” and not have to worry about expenses.

    I know that some workers will be upset that they are unable to contribute any productive work to society. Some will be upset because they will not be building any skills for further advancement. But this idea is better than outright laying people off with nothing.

    Nothing this cool will ever happen in America.


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