The Hindu Business Line : CAG flays HMT move to outsource appearance parts from foreign firm

It is not known as to how the company would monitor that the vendor would not use HMT logo in further manufacturing activity and would not sell spurious HMT brand watches in the market.

New Delhi , March 9

EVEN as outsourcing of services job in software by the firms in the US to India has assumed critical overtones in recent months, the decision of HMT to outsource watch appearance parts and watches to a Taiwanese firm has drawn flak from the Comptroller and Auditor General of India (CAG).

Reviewing the performance of select public sector undertakings, a recent CAG report rapped HMT Ltd for its decision to outsource watch appearance parts and watches from a foreign firm in spite of having in-house capacity was "injudicious".

While reviewing the marketing activities of the company during the period from 1997-98 to 2001-02, the report said the organised sector in India produces/sells about 12 million watches and a demand of around 23 million watches is presumed to be met by the unorganised and grey markets.

The organised sector is currently dominated by four major players, Titan, Timex, Maxima and HMT, with HMT's overall share in organised domestic market having plunged from 26 per cent in 1997-98 to 14 per cent in 2001-02. But, HMT could still retain major market share in respect of mechanical watches, which varied between 70 per cent in 1999-2000 and 94 per cent in 2000-01. On the other hand, the market share of the company in respect of quartz watches was around 8 per cent during the five years ending 2001-02, except in 1998-99 when it was 14 per cent, the CAG said.

Even as HMT failed to increase its share in quartz watches market despite having a wide marketing network, CAG said Jayan Mefa India Ltd (vendor) had suo-motu approached HMT offering to supply quartz analogue watches as the vendor is one of the leading watches and watch components manufacturers with a technical collaboration of Meihua, Taiwan for dial manufacturing.

Approval for outsourcing was given by the Group General Manager (Watches) on a proposal of Assistant General Manager (Product Management) on June1998. After four months of signing of MoU (July 1998) with the vendor and three months after the commencement of procurement (August 1998), outsourcing was discussed in general terms in the meeting of the Unit Board of Watch Marketing Division held in November 1998, i.e., without specifically indicating the name of the vendor, the manner in which selection was made and the resultant idle capacity, the CAG observed.

CAG asked how the HMT management considered that a vendor, who had commenced commercial production only seven months prior to the selection, could satisfy the criteria of "the paid-up capital, technology, foreign collaboration, installed capacity and infrastructure available".

CAG said the reply of the management does not specify as to how it satisfied itself about the general reputation of the vendor for fair trade practices. This omission was significant in the light of subsequent cancellation of orders on the vendor based on the report of the taskforce on grey market that outsourcing led to further growth of spurious watches in India, the CAG contended.

What is perplexing is that despite inference by the taskforce that outsourcing was one of the reasons for further growth of spurious watches in the market, HMT failed to act immediately and took 15 months to take follow-up action in July 2002. As the company failed to take closing stocks of watches on hand with vendor before foreclosure of purchase orders, CAG said in the absence of the same, the vendor is under no obligation to retain the watches without selling them in the open market.

Besides, it is not known as to how the company would monitor that the vendor would not use HMT logo in further manufacturing activity and would not sell spurious HMT brand watches in the market. All this, CAG said, demonstrates "the injudicious and questionable manner in which the management dealt with the matter of outsourcing from the vendor right from initiating outsourcing to suspension of dealings."

In yet another case of outsourcing, the company procured various appearance parts during May 1998 to March 2002 relating to quartz and mechanical watches from Tennmax Industrial Ltd (foreign firm) for assembly and sale in the domestic market, even as HMT has in-house capacity to manufacture more than 60 lakh dials and 26 lakh cases for quartz and mechanical watches.

The capacity utilisation was around 34 per cent and 47 per cent for dials and cases respectively. CAG noted that the foreign firm also supplied completely assembled watches to overseas customers either under the HMT brand name/co-branded name.

"Large volumes of these watches have been smuggled into the Indian market and were sold at prices lower than the company's price (the export price of HMT watch was only Rs 200 against maximum retail price of Rs 495 in India and sales were effected in retail grey market at Rs 350," the CAG said.