MANESAR, India (Reuters) - Hiding in his office near New Delhi as workers armed with iron bars and car parts rampaged through the factory, Maruti Suzuki(MRTI.NS) supervisor Raj Kumar spent two terrified hours trying to comprehend the warzone his workplace had become.
By the end of the day, one of his colleagues had been burnt to death and dozens wounded, many with broken bones, as a long-running struggle between the shop floor and management exploded at a factory racked by mistrust.
While police investigate and the carmaker counts its mounting losses, the July 18 clash has rattled corporate India and shone a light on outdated and rigid labour laws in a country where cheap labour drives manufacturing and draws foreign investment. High inflation, a shortage of skilled labour and rising aspirations have emboldened workers' demands.
"There was always a strong sense of unease," Kumar, 43, told Reuters as he stood outside the locked factory gates more than a week after the riot in the industrial town of Manesar.
"We are living in fear... The kind of violence these guys showed was unbelievable."
Other foreign carmakers, such as Hyundai (005380.KS) and Honda (7267.T), have seen labour unrest at their Indian plants in recent years, and industry groups have renewed calls for the government to overhaul laws they say tie their hands.
"This is definitely sending a wrong message. Investors will be reluctant," P. Balendran, vice-president at General Motors' (GM.N) Indian unit, said of the Manesar violence. "The need of the hour is flexible labour reforms. In 2012 you cannot afford to have a rule which is applicable ... from 1956."
India's labour laws, some dating to the 1920s, make it difficult for large companies to fire permanent workers, forcing companies to hire large numbers of contractors - a bone of contention with many unions.
"We knew that something of this sort might happen sooner or later," said Balendran. "It happened to Suzuki today, then tomorrow it could happen to us."
GRAPHIC on Maruti's business, click link.reuters.com/jen79s
Maruti's factory, which made about 1,700 cars a day, including its top-selling Swift hatchback, is now shut, costing tens of millions of dollars, while over 2,500 workers have gone to ground, fearing punishment from Maruti or police, say residents and unions.
Maruti, already hit by rising costs on a weak rupee and falling sales, has seen its market value fall by $550 million since the riot. Shares in Japanese parent Suzuki Motor Corp (7269.T), which relied on Maruti for 28 percent of its net profit in the last fiscal year, fell as much as 10 percent after the riot, and on Friday closed 3 percent lower than on July 18.
Maruti says the violence was unprovoked and unexpected. But in a plant with a history of unrest, the union representing those on the production line said management practices made a clash inevitable.
"The workers have been provoked consciously by the management. Their plan is to provoke them so much that they commit mistakes and can be fired. Management does not want the union to run," said a worker at Suzuki Powertrain, a sister factory in the same compound.
"The management thinks if they can accuse all workers of wrongdoing, they can easily fire everyone and dismantle the union, that's their politics," said the worker, who declined to be named as he feared he would lose his job.
CHRONICLE OF A RIOT FORETOLD
Maruti's labour headache began in 2000. A standoff at another plant close to Manesar saw workers demanding better pay embark on hunger strikes, closing the factory for weeks.
That union was eventually broken by Maruti and replaced by another which also represented staff at Manesar. Last year, workers launched strikes demanding recognition of a new, independent union.
That was granted in October, but the slow formation of the Maruti Suzuki Workers Union and slow progress over fresh wage negotiations raised the temperature again.
Manesar's best-paid manufacturing workers earn 25,000 rupees a month, and 1,500 of them, on temporary contracts, earn less than half that. Maruti's employee expenses as a share of net sales are the lowest among the five biggest domestic auto makers in India, at 2.4 percent in the last fiscal year.
The union was pushing for a 15,000-rupees-per-month increase over three years when the riot flared.
"There was no normalcy even after the last year's strike ended... Workers always behaved very rudely with supervisors, and that got worse," said Kumar, who manages 30 welders.
With wage negotiations stalled, an argument broke out on the shop floor between Jiya Lal, a worker and union member, and Ramkishore Majhi, a supervisor.
Maruti says Lal attacked Majhi, while the the union says Majhi abused the worker using derogatory language. Neither was reachable for comment by Reuters. After the incident, Maruti suspended Lal and rebuffed union demands to punish the official.
At 3 p.m., around 1,200 workers whose morning shift at the factory had ended stayed on the premises awaiting news on Lal's suspension, and by 6 p.m. had blocked the gates of the factory, where around 30 policemen had gathered, police and Maruti said.
"What we were expecting was that they may put pressure... they will shout against the company or senior management," S.Y. Siddiqui, Maruti's chief operating officer, told Reuters. "What was not expected was this kind of barbaric violence."
The union said the carmaker used hired thugs to beat the union workers, provoking the violence. Maruti and police have denied this.
Union president Ram Meher, who has not spoken publicly since the riot, has been arrested alongside all the union's office-bearers. Police have detained 114 workers in the investigation.
Shouting and screaming, some managers were forced to jump out of first-floor windows to escape the fire that blazed through the factory offices, witnesses say, before the mob torched the plant's security office, damaging CCTV records.
"I saw bonfires burning by the gate, with workers tossing plastic barricades and other material into the flames," said Vikram Singh, a member of the village council in Dhana, an informal settlement near the factory.
Awanish Kumar Dev, a senior human resources manager, was found burned to death. More than 100 other management staff, including two Japanese, were taken to hospital with injuries.
None of the workers was admitted, according to police.
The factory is now guarded by 500 police as investigators try to piece together salvaged CCTV footage and statements from officials who were attacked to identify those involved.
The investigation will lay the blame on union leaders and find that at least 2,000 of the factory's workers are innocent, a senior Haryana state police officer told Reuters.
Damage to the factory is estimated at $1 million, said a surveyor employed by one of Maruti's insurers, who declined to be named as he was not permitted to speak to media.
"It was a small minority, not everybody... though we have no doubt that the workers are to blame," the police officer with direct knowledge of the case said on condition of anonymity.
That conclusion would spell the end of the union, Maruti says.
"If the union is found in the investigation process to be responsible..., law will take its own course," said Maruti's Siddiqui.
Union officials say that will only increase the anger.
"Suzuki failed to manage a large, global-scale industrial establishment ... The onus is on them to maintain industrial peace," said Gautam Mody, secretary of the New Trade Union Initiative, a national umbrella group.
Suzuki, which began production in India 29 years ago, may have to strengthen communications with staff, Executive Vice President Toshihiro Suzuki said in Tokyo.
"We have walked together with India for 30 years," he said. "We want to overcome this situation as soon as possible and continue to provide good cars for the people in India."
He said that the priority was to first secure a safe environment and declined to give a specific timeframe. Industry analysts expect the plant to remain shut for at least a month.
Groups like Mody's have criticised Maruti's use of temporary contract workers, some of whom work for a third of the wages given to permanent employees. But a Maruti spokesman said use of contract workers was standard practice to account for seasonal fluctuations in demand.
"Exploitation and inhumane working conditions were there, even for regular workers," said D.L. Sachdev, national secretary of the All India Trade Union Congress.
The plant for now is quiet. Police played cards by the locked staff entrance on a recent morning, as handymen chipped away at charred plaster on the roof of the security building. Around 150 car-carrier trucks stood empty and scores more lined the roads around the 600-acre plot.
In Dhana, the streets were deserted after hundreds vanished to avoid arrest. Much of the local economy relies on Maruti wages.
"They fled on motorbikes, stolen rickshaws, whatever they could find," said Singh, the village official.
Stepping over an open sewer that snakes between two small food shops, Amina Shervani, a member of the executive committee of the Manesar Industries Welfare Association, said the conflict at Manesar was inevitable.
"There is ill-will, there is bad feeling, there is hatred," she said. "If there is no justice and no transparency, there will be no peace... This will happen again."
(Additional reporting by Yoko Kubota in TOYKO; Editing by Tony Munroe and Nick Macfie)
Updated Date: Aug 07, 2012 06:30 AM