JULY/AUGUST 1995 · VOLUME 16 · NUMBERS 7 & 8

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I N T E R V I E W

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Backwash:
Coke Returns From India Exile

George Fernandes is a Member of Parliament (Lok Sabha) and president of the Samata Party, one of seven national parties in India. He has held three cabinet positions between 1977 and 1990. As industry minister in the late 1970s, Fernandes kicked Coca-Cola out of the country for violating investment laws. As president of the All India Railway Men's Federation in 1973, Fernandes led India's largest railroad strike, which was brutally suppressed. Fernandes and thousands of others were imprisoned. He was elected to Parliament from prison in 1977.

Multinational Monitor: How did you earn your reputation as the man who threw Coke out of India?

George Fernandes: I was elected to Parliament while in jail in 1977 and three months later I was named minister of industry as part of the first non-Congress Party government in India.

At that time, the Foreign Exchange Regulations Act - which has since been amended under the New Economic Policy and the new GATT - stipulated that any foreign enterprise operating in India in non-priority sectors should not have more than 40 percent equity.

Coke, however, had 100 percent equity in India. Their investment was not much. They came into the country with 600,000 rupees, which at the present rate of exchange is less than $20,000. On this 600,000 rupee investment in India, they had taken out of the country, by a modest estimate, 250 million rupees [about $8 million] as profit in the 20 years they had been in the country.

The idea of getting Coke out struck me when I was the minister of communications, prior to being minister of industry. I was visiting a village in my constituency. It was summer and hot, and the first thing I did when I reached that particular village was to ask for a glass of water. Someone brought me a glass of water, but the district magistrate, who is the highest district government official, came and prevented me from taking the glass of water. He said, "No sir, this is not for you, you can't drink this water. We have Coke for you."

I was very upset and angry. I said, "Thirty years of freedom and planning and we have Coke that has reached the villages, but we do not have drinking water that the villagers can consume." That is when my mind said something is wrong.

When I entered the Ministry of Industry shortly thereafter, one of the first things I focused on was the Foreign Exchange Regulation Act stipulation limiting foreign investors to 40 percent equity in domestic enterprises.

I summoned the Coke people and told them to accept this stipulation. Their answer was that "our technology is so secret that we cannot share it." I said, "Listen, you have two options. One is to fold up and go, and the other is to have an Indian partner and to tell him what your technology is. It is not just having an Indian partner; tell him about your technology." There was supposed to be technology transfer in all joint ventures, unless the technology was one that we had no way of assimilating, or one that we needed access to for security reasons.

There wasn't any reply from Coke. Since they wouldn't share the great secret of their technology, the only option left was to get out.

But in that period, they tried their best to influence the government at various levels. Cabinet ministers were approached, as were the media. Finally, nothing worked, and the order asking them to get out of the country was signed.

Coke's establishments closed down. Their bottling plant in Delhi must have had about a thousand workers employed. Coke had them come to my house, my official residence, and surround the whole house. Then they turned violent. They stoned my car, they threatened my family and they tried to rough me up. When I went in the countryside, the Coke workers were put up against me, to shout slogans against me. At the airport, they waved flags.

I talked to them and told them I was not taking any jobs. I told them that there would be Indian companies that would take over the whole thing and there will be 10 times more jobs, because the amount of money that Coke was taking out of the country would stay here, and there would be that much more invested here.

Dealing with Coke at that time was quite an experience about how multinationals can fight back. First, how they can bribe people at the highest levels of government. Second, how they can use the media and manipulate the media. Third, how they can rough you up.

MM: That was in 1977?

Fernandes: July, August, and it went on until the end of the year.

MM: But now Coke and Pepsi are back in India. How did that happen?

Fernandes: In 1987 and 1988, rumors started circulating that Coke and Pepsi were trying to get into the country. In 1988, in my capacity as the general secretary of the Janata Dal [Party], I wrote to the president of Coke in Atlanta and the president of Pepsi in New York. To Coke, I wrote and said, "You remember that I am the one that threw you out, and if you come again, you will be thrown out again, because we are coming back to power." To Pepsi, I wrote that "I learned that you are coming here. I am the one that threw Coca-Cola out, and we are soon going to come back into the government. If you come into the country, you have to remember that the same fate awaits you as Coca-Cola."

The next thing I learned was that the senior executives of both companies were in Delhi, staying at the same hotel. Perhaps they had hired the same lawyers, and they also immediately established contact with some people in my party. They tried to fix appointments with some of the leaders of the party, to find out to what extent the things I said had meaning. I then got my party to adopt a resolution opposing the entry of Coke and Pepsi into India.

In 1989 we formed a minority government. In one of the early cabinet meetings of the minority government, I took a position against the entry of Pepsi. There was one other member of the government who had lukewarmly supported me on this. Then one day I found that his support had not just waned, but disappeared, for whatever reason.

Through the six to eight months when the Pepsi entry was being considered in the cabinet, I carried on a very vigorous campaign against it outside. I didn't get any support from my party, except from a small section that had some ideological commitment.

There was a lot of abuse heaped on me, both by the company and people inside the government. The company managing director here in Delhi issued press statements challenging me, a member of the cabinet, but the government didn't bother to respond. So it was left as though it was some sort of personal fight that I had with Pepsi. One fine day the cabinet cleared the proposal and that was the last word.

I got a message from Pepsi: "For all that, Mr. Fernandes, you succeeded in doing what? It cost us something to get into India then, and it will cost us a little more now."

And that was it. So they bribed people. But I can't blame them. I don't blame those who buy so much as I blame those who sell.

Then, when Pepsi came in, Coke found that there were possibilities. If we lost out in the case of Pepsi, then there wasn't going to be much of a problem for them.

We had a domestic soft drink industry. The man who had almost a total run of the place was a chap called Ramesh Chauhan of Parle. I think that he had about 70 percent of the market. This man fought the entry of Pepsi in his own way. But then I realized that his fight was not so much on any principle; his fight was so that he could get a good deal from Pepsi. He was prepared to become Pepsi's partner.

In any event, Pepsi had other ideas, and so Pepsi, [the Indian conglomerate] Tatas and a Punjab government-owned company joined into a three-way joint venture in which each hold one-third equity. Pepsi later got 100 percent equity. The bureaucracy and the politicians must have assured them that, once they managed to come inside, the limits on foreign ownership would be waived.

Then Coke came in with 100 percent equity, and Ramesh Chauhan sold his entire business to Coke.

When I ran into Chauhan, I asked him, "What happened, why did you make this deal?" I said, "The people of India made you. You gave them a soft drink but they bought it and made you what you are. And you sold everything for $60 million? You actually sold India for $60 million, do you realize that?"

MM: What are the economic and employment effects of Coke and Pepsi's operations in India?

Fernandes: Coke took out of the country 250 million rupees [$8 million], from 1956 to 1977.

Last year, in 1994, when Coke and Pepsi took over the soft drink industry, the total turnover from their operations was 1,800 crore rupees [$581 million]. My estimate is that on the 1,800 crore rupees total sales here, they would be taking out of the country 360 crore rupees [$116 million]. I am giving you across the board 20 percent. The money is siphoned out through profits and hundreds of other ways - promotional fees, over-priced machinery imports, etc.

After all, what is Coke and Pepsi? A glass of water, with a pinch of sugar or some chemical sweetener, and some color, whose price is minimal. So Coke and Pepsi are siphoning money out of this country by making us drink our own water with some chemical in it which is not even good for you.

In 1994, 1995 and 1996, I estimate that the total outflow from India on account of Coke and Pepsi alone will be about 1,500 crore rupees [$483 million].

But let us assume that only 1,000 crore [$323 million] go out. To build one kilometer of broad-gauge railroad track in India costs about a crore rupees [$323,000]. If you use 1,000 crore rupees in a year, you can build 1,000 kilometers of railway track. We have, as of now, 61,000 kilometers of railway track, and the railways employ almost 2 million workers, although the number may be lower with the new liberalization scheme. On average, every kilometer of railway track provides employment for 30 workers. So if you construct with 1,000 crore rupees 1,000 kilometers of railway track, you have 30,000 permanent jobs on the railways.

Now, as an infrastructure, rail has tremendous upstream, downstream and service sector potential. The 30,000 jobs I mentioned are on the railway system, those employed by the railway board. They do not include new jobs in the restaurants, tea stalls and pawn shops that start up, or the jobs created for newspaper vendors and book vendors and the porters, or the tailors who provide uniforms to rail workers. Studies from employer agencies show that for every job you create on infrastructure, you create 25 upstream and downstream jobs. So when you create 30,000 jobs on the railway, you have 750,000 jobs that you create indirectly.

And this does not include the opening up of virgin territory, where the farmers will be able to produce more, where factories will go, where all kinds of other tertiary sector growth will come about.

So we are talking about almost 800,000 jobs with 1,000 crore rupees, and that is the money Pepsi and Coke will be taking out of India in 1994, 1995 and 1996. They are taking out not just 1,000 crore rupees, not just $350 million; they are taking out 800,000 jobs in just those years.

MM: There is one advertisement for televisions which appears throughout India that says, "Buy a new television to make your first television green with envy." Surely very few Indians can afford two televisions. Who exactly are the multinationals targeting?

Fernandes: What they are doing is planning for 3 percent of India.

MM: That is who the multinationals are targeting?

Fernandes: Not only are the multinationals targeting them, but the government of India is planning for the 3 percent.

The beneficiaries through the trickle-down theory are another 7 percent. I would call them the hangers-on.

So 3 percent plus this 7 percent, you have 10 percent of India - but 10 percent of India is 91 million people, a very large market. It is more than the population of unified Germany, with its 80 million people. It is twice the size of Britain. It is a huge market, it is not at all a small market.

Is this by accident? No. I have had reports of government meetings where it is said that 50 percent of India cannot be saved. We should target the other 50 percent.

The idea is to get this 3 percent or 10 percent completely on your side because of all the booty you make available to them. That 10 percent are the green-with-envy people, and the trickle-down theory will work well enough to win the allegiance of 50 percent. This 50 percent, the 3 percent plus the 7 percent plus the remaining - that is all you need. Forget about the poor 50 percent.

MM: What is the overall effect of an economic strategy that invites in foreign business to serve just this 3 or 10 percent, or even the 50 percent?

Fernandes: First of all, we have our own industries closing down. Our small-scale industry is dying. As minister of industry, I reserved 807 items for small-scale industry. All that is now gone.

There is just no area where the multinationals cannot come in. They can now set up roadside eateries. We have hundreds of thousands of dhabas [roadside food stands] all over the place. Now you are going to have a McDonald's come and take over dhabas. You are seeing a situation where Indian companies in industry and the service sector are getting killed.

There is a lot of unemployment that is being generated as a result of these closures.

Additionally, our technological growth efforts are being wiped out. We didn't have much money to put into research and development in the first place. But whatever research and development we had is being lost, because even medium-size or large-size - by Indian standards - companies are unable to cope with the competition from the multinationals.

For instance, Tatas. Tatas is India's largest single conglomerate. It had a soap-producing unit called Tomco. They produced Hamam Soap, for a fairly large market - last year its market was about 600 crore rupees [$190 million]. But Tatas caved in before Hindustan Lever [a subsidiary of the British/Dutch Unilever], and Hindustan Lever bought them out. As far as India is concerned, there is no house bigger than Tatas.

Then you had the other large Indian soap-producing unit, which was Godrej, a huge family-owned corporate enterprise. Godrej produced a whole variety of soap, both for the upper-bracket and the lower-bracket consumer. They were also in other industries, like electronic typewriters, furniture and safes. Apart from producing these soaps, they had additional capacity, which they loaned to other companies. These other companies produced soap in the Godrej facilities and marketed it under their own brand names. This company has now sold its soap operations to Procter and Gamble. And when General Electric said it was coming in with its refrigerators, Godrej - which had 55 percent of India's market in refrigerators - surrendered to them, forming a Godrej-GE joint venture with 50-50 equity.

So we are in a situation where there isn't any hope for even the large-size or medium-size Indian companies who are confronted by these multinationals. All this talk of competition is okay, but this competition is like asking me to take on a Japanese sumo wrestler. You can say that both of us have a level playing field, but I am not built like that. I can't possibly take on a sumo wrestler. n