Date: Mon, 19 May 1997 15:57:35

Broken commitments: The case of Pepsi in India

By Kavaljit Singh, in PIRG Update,
Issue no. 1, May, 1997

Dear friends,

Public Interest Research Group (PIRG) has launched PIRG UPDATE - an occasional publication dealing with issues related to TNCs,structural adjustment,debt, world bank-IMF policies and development in India. Here is the first issue of the UPDATE.

Kavaljit Singh, Editor

No single foreign investment project has been the centre of much attention and controversy in the late 1980s and early 1990s as the PepsiCo project in India. The project, Pepsi Foods Limited, was cleared by the Indian government in September 1988 as a joint venture of PepsiCo, Punjab government-owned Punjab Agro Industrial Corporation (PAIC) and Voltas India Limited. Before this project was cleared, PepsiCo made an attempt to enter into India as early as in May 1985, when it teamed up with Agro Product Export Ltd., a company owned by R. P. Goenka group, and sought permission from the central government to import cola concentrate and to sell a PepsiCo brand soft drink in the Indian market, in return for the export of juice concentrate from Punjab. Under this proposal, the main objectives put forward by PepsiCo was 'to promote the development and export of Indian made and agro-based products and to foster the introduction and development of PepsiCo products in India'. This proposal which was submitted to the Secretary at Ministry of Industrial Development received rejections on the grounds that the import of concentrate could not be agreed to and the use of foreign brand names as domestic tariff area (DTA) was not allowed.

Nevertheless, taking advantage of the ongoing political problem in Punjab at that time, PepsiCo successfully played the 'Punjab Card' and again put forward a proposal in 1986 with stress more on diversification of Punjab agriculture and employment generation rather than on soft drinks. The proponents of project called it as a second 'Green Revolution' in Punjab and projected it as harbinger of a horticultural revolution which would end stagnation in Punjab's rural sector and would help in promoting small and middle farmers. A strong argument was put forward that this project will create ample employment opportunities for the unemployed youth who has taken the path of terrorism and thereby will help in restoration of peace in Punjab. This argument was well received in the political circles in Delhi and Punjab which finally led to PepsiCo's entry into India in the form of a joint venture with PAIC and Voltas as its partners. The equity of Pepsi Foods Limited was divided among the partners with PAIC holding 36.11 percent, Voltas 24 and PepsiCo 36.89 percent. Coupled with the 'Punjab Card', PepsiCo also made certain commitments to Indian government which also formed the basis of its entry. Some important commitments made by PepsiCo included :

The proposal concluded by stating how well the project fitted with broad objectives of the economy and how it 'specifically supported national priorities in area such as exports, agriculture, employment and technology.'

Pepsi's Commitments: 'Nothing Official About It'?

The growing evidence shows that right from the beginning, Pepsi had no intention of implementing these commitments. Various studies have also pointed out the fact that Pepsi had no intention of encouraging the diversification of Punjab agriculture as the real motive was to sell soft drinks in our domestic market.

Creation of Employment : Tall Claims

The major commitment, that the project would create 50,000 jobs nationally including 25,000 extra jobs in Punjab, stands nowhere close to reality. In 1992, Pepsi claimed in its official reports that it has created direct employment to 909 people. In 1996, the total employment figures increased to 2400 which is just 3 percent of its commitment of generating 75000 jobs. Although Pepsi has claimed that it has generated an employment for over 26000 people in India through indirect employment, its definition of indirect employment is incorrect as it includes vendors such as paanwalas and juicewalas who sell its softdrinks. By this definition, all those companies can claim to have created employment for a vendor (e.g. paanwalla) as he sells products of these companies. Does it mean that this vendor is an employee of all such companies? By adding to their items of sale and putting a large signboard on their shops, it is totally illogical for Pepsi to claim that these vendors are its employees.

Employment Generated by Pepsi Foods Limited
Source of Employment1990-911991-92
Food Processing16999031709082
Concentrate & Bottling4971511556016900
Total78325450 90926314
Source: Data taken from Balance-sheets of Pepsi Foods Ltd.

In the case of Futura Polymers Limited, a company located in Tamil Nadu with majority holding owned by PepsiCo, the emphasis is on how to reduce the workforce rather than creating new jobs. Dr. L.R. Subbaraman, senior manager of the company says that he would like to replace as many workers as possible with machines. He explained that workers cause problems, such as being lethargic. He also said "Later they will ask for more money, form organisations, may be union. We are always trying to be more machine oriented..." (Multinational Monitor, September 1994). If the strategy of the Pepsi is to have a small workforce, then why did it commit to Indian government and people of creating 75000 jobs?

Processing plant in Zahura : Uncertain Future

For processing of fruits and vegetables, Pepsi put up a plant at Zahura village in Hoshiarpur district of Punjab. The company was not satisfied with the local varieties of tomato. Therefore, germplasms of tomatoes were imported and tomatoes were grown on 1600 hectares of land, by entering into contract farming with big farmers. In 1989, Pepsi signed an agreement with the farmers under which the farmers were to supply hybrid tomatoes to the paste plant located at Zahura. However, when the crop was harvested at the end of 1990 winter, Pepsi's Zahura paste plant failed to start operations. As a result, these farmers suffered combined losses of nearly Rs 25 lakhs. The farmers are still waiting for the compensation to be paid by Pepsi. According to one estimate, only big farmers have benefitted from this plant so far while it has not contributing anything to small and medium farmers of Punjab. Already, there have been press reports indicating that the company is no longer interested in the continuation of this plant and is making attempts to sell it off. Our attempts to know the exact position from the company on this matter have not yielded any information.

Change of Brand Name

When Pepsi was allowed to begin its operation, one of the commitments made was that the company would not use its brand name, Pepsi, in India. But this commitment was also broken by the company. During the first year of operation, Pepsi used an Indian brand name, Lehar Pepsi. But, with the introduction of the new economic policy in 1991 under which the use of foreign brands was allowed, Pepsi immediately changed its soft drink brand name from Lehar Pepsi to Pepsi.

Agro-Research Centre in Punjab : Yet to Start

Pepsi agreed to set up an agro-research centre in consultation with ICAR and Punjab Agriculture University, Ludhiana in Punjab. But no such centre has been set up by the company so far.

The Reality of Export Commitments

Another major commitment made by the Pepsi was that 50 percent of the total value of the produce will be exported. A quick glance at the items exported by Pepsi reveals that export value of fruits or vegetable based products are negligible. In order to fulfill its commitment, the company resorted to exporting a variety of Indian products like 'Basmati' rice, Darjeeling tea, shrimps, glass bottles, champagne and even leather products. These traditional export products have already been exported by many companies in India. What has been Pepsi's own contribution and expertise in exporting these goods from India?

Pepsi's Exports (Rs. crore)
Source: Global, January,1997.
    *includes tomato & chilly.

The above table indicates that environmentally hazardous products such as PET bottles produced by Pepsi's other company in India, FPL, constitute nearly 70 percent of its total exports.

Plastic Business : Heavy Environmental Costs

In 1994, PepsiCo International initiated a joint venture with an Indian company called Indian Organic Chemicals Limited (IOCL) to make resins for the PET bottles in which the soft drink is sold. This joint venture called Futura Polymers Limited (FPL) is located at Manali outside Madras and is among the largest fully export-oriented companies in India. Within two years of its operation, FPL has become a global sourcing point with its products are being sold to over 14 countries. Apart from resins, FPL also makes 'Preforms' - these are PET bottles which are miniaturised for convenience in shipping and are blown upto full size in the bottling plant. FPL has a long-term supply contract with Pepsi. Recently, Pepsi has invested a further Rs 25 crore to augment capacity by 7000 tpa to 28000 tpa, taking its equity in the project from 52 percent to 70 percent. This plant imports used PET bottles and materials from US and other countries to reprocess it. The economic logic behind export of this plastic waste is very simple. For Pepsi, it is much cheaper to export this waste from US to India than to recycle it in US or transport it to US landfill sites.

Plastic production is a very hazardous process. Various studies by experts have found out that the production of a 16 ounce PET container generates over 100 times more toxic emissions than a glass bottle of the same size. With the setting up of FPL, Pepsi has managed to relocate the hazards involved in production and disposal of PET bottles from US to India. Based on US Customs Department data, Greenpeace analysts found that Pepsi exported 9,167,722 pounds or about 4,500 tons of 'Plastic Scrap' in 23 shipments during 1993 to this plant. The FPL representatives have also admitted that they have been importing plastic waste. The FPL representatives told Greenpeace researchers that a portion of the imported plastic waste cannot be processed at their site. They estimated that 60-70 percent can be processed, but the rest is either too contaminated, non-PET plastic, or other garbage. The representatives also said that they get rid of the non- usable portion. Greenpeace representatives have also documented the bad working conditions of the workers, especially women workers, in the plant. (Multinational Monitor, September 1994).

From Joint Venture to Fully-Owned Subsidiary

Pepsi is no longer a joint venture company with its Indian partners. Taking full advantage of liberalised policies, it has taken full control of Pepsi Foods. In 1994, Pepsi made a offer to both Voltas and PAIC to buy their equity at 'attractive' terms. Voltas sold all its shares to Pepsi while PAIC, being a public enterprise, was forced to pull out and now it holds less than 1 percent of the total equity in Pepsi Foods Ltd. Instead of taking strict action against Pepsi for not following its commitments, the Indian government has given more concessions to it in the post-liberalisation period. For instance, it has allowed Pepsi to increase its turnover of beverages component to beyond 25 percent, and Pepsi is also no longer restricted by its commitment to export 50 percent of its turnover. Recently the government also allowed PepsiCo to set up a new company in India called PepsiCo India Holdings Pvt.Ltd, a wholly owned subsidiary of PepsiCo International. Surprisingly, the new company is also engaged in beverage manufacturing, bottling and exports activities as Pepsi Foods Ltd. All the new investments by the PepsiCo International have been channelised through this new venture. It now handles 28 bottling plants with a sales turnover of Rs 500 crores which is higher than Pepsi Foods's turnover of Rs.375 crore in 1996. (The Financial Express, April 21, 1997). Although the financial performance of both these companies in India has not been creditable so far, with total accumulated losses close to Rs.350 crore (except small surplus in 1996), yet it has been successful in achieving significant market share and brand royality in India. The company in recent years has not only bought over bottlers in different parts of India but also bought Dukes, a popular soft-drink brand in western India to consolidate its market share. It has also shrewdly consolidated its position through agressive marketing and advertising in India. According to surveys conducted by many market research agencies, Pepsi now holds over 40 percent share in Indian soft drink market. In 1995 alone, the company's beverage business grew 50 percent, well ahead of the market which expanded by 20 percent. Another important recent shift in Pepsi's marketing strategy has been its focus on Cola over other non-Cola brands. "We have single- mindedly focused on brand Pepsi" admits Rishi, Vice-President, Marketing, Pepsi. (Business India, January 15-28, 1996). At the international level, PepsiCo International has been focussing more on India where the consumption of soft drinks is expected to increase many-fold which is only three ounces per person now as compared to 200 ounces in Europe and over 300 ounces in North America. But, at the same time it is not realised that there is a vast difference between the purchasing power of an average Indian and North American as it takes an Indian 1.5 hours of work to be able to buy a bottle of Pepsi whereas for an North American, it takes less than 5 minutes. This experience of eight years clearly shows that Pepsi, totally preoccupied with selling soft drinks in India, has broken promises. The responsibility of implementation of commitments cannot be left to Pepsi alone. One should expect the state machinery to intervene and enforce these commitments on Pepsi. Surprisingly, there is a total silence on the part of state machinery. Thus, the question is - Who will force Pepsi to implement its commitments?

Key Demands
In November 1994, PIRG issued an open letter to Christopher Sinclair, President and CEO, PepsiCo demanding:
  • Pepsi should immediately stop importing plastic wastes to India and the use of plastic bottles for its soft drinks in India;
  • Pepsi should immediately pay compensation to the Punjab farmers who suffered losses due to its indifferent attitude;
  • Pepsi should take steps to make its financial reports and other documents accessible to Indian public; and
  • Pepsi should fulfill all its commitments made by it.

This UPDATE is largely based on a research project titled, 'Pepsi's in India" carried out during 1994-95. Thanks are due to Ann Leonard,Devinder Sharma and Paramjeet Singh.

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