import of re condition car effect on local car industry
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IMPORT OF RECONDITION CAR: EFFECT ON LOCALCAR INDUSTRY
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CONTENTSPage No.
ACKNOWLEDGMENT 04
ABSTRACT... 05
CHAPTER NO.1 INTRODUCTION
1.1 Introduction.1.2 Purpose of Study1.3 Research Objectives.....................................................1.4 Research Methodology..
CHAPTER NO. 2 AUTOMOBILE INDUSTRY
2.1 Growth .2.2 Installed Capacity..........................................................2.3 Capacity Utilization........................................................2.4 Contribution In GDP...2.5 The Key Players..
CHAPTER NO. 3 FINANCIAL ASSESSMENT OF AUTOMOBILEINDUSTRY
3.1 Honda Atlas cars Ltd.3.2 Pak Suzuki Motors.3.3 Indus Motors ..
CHAPTER NO. 4 ASSESSMENT OF MARKET.
4.1 Current Market Share ...
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4.2 Financial Health. 4.3 SWOT Analysis.....................
CHAPTER NO .5 PROBLEM AND CHALLANGES
5.1 Auto Financing Declining ............................5.2 Taxes Increased..5.3 Demand Decreased
5.4 High Cost Of Production5.5 Impact World Economic Recession.
CHAPTER NO. 6 CONCLUSION AND RECOMMENDATIONS
6.1 Conclusion...6.2 Recommendations..
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ACKNOWLEDGEMENT
Thanks to almighty Al lah that provide us abi l i ty to wri te this Project
eff iciently and effectively.
I a m gr ace fu l to nu me ro us in div idu al s who ma de va lu ab le
contr ibu tion to my wor k (Proj ect on IMPORT OF RECONDITION CARS:
EFFECTS ON LOCAL CAR INDUSTRY).
I w ish t o t hank our super io r D r. Noo r Ahmed Memon (Proj ec t
Supervisor) for their detai led suggest ion and inside, characterist ics
for their thought teaching style. Because of the extensive changes
made from the Projec t IMPORT OF RECONDITION CARS: EFFECTS ON
LOCAL CAR INDUSTRY, analysis of topic and depth of coverage
provided by him were crucial .
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INSTITUTE OF BUSINESS AND TECHNOLOGY
ABSTRACT SUBMITTED BY: Ahsan Shahid Sethi
DISCIPLINE: MBA(Banking & Finance)
TITLE OF PROJECT REPORT: IMPORT OF RECONDITION CARS:
EFFECTS ON LOCAL CAR INDUSTRY
MONTH OF SUBMISSION: SPRING-2010
NAME OF PROJECT SUPERVISOR: Dr. Noor Ahmed Memon
ABSTRACT
Before cou ld I dec ide what top ic to wri te for my Pro ject t o be
submit ted in partia l fu lf i llment of graduat ion requirements of the
Inst i tute of Business and Technology BIZTEK MBA Banking &
Finance program, I l i sten and read mater ia l about Import o f re-
condit ion cars effect on local car industry.
So, I decide to explore the topic and to see the effect of the topic in
Pakistan context.
The important points of my article are:
1. Definit ion of automobile industry2. Automobile industry in Pakistan
3. Financial assessment of automobile companies
On the basis of these points ill discuss my topic br ie fly .
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1. INTRODUCTION
1.1 Introduction
Import Of Re-Condition Cars Effect On Local Car Industry
The automotive industry crisis of 20082010 is a global financial crisis in the auto
industry that began during the latter half of 2008. The crisis is primarily felt in the
United States' automobile manufacturing industry and, by extension, Canada,
due to the Automotive Products Trade Agreement, but other automobile
manufacturers, particularly those in Europe and Japan, are also suffering from
the crisis. The automotive sector was first weakened by the substantially moreexpensive automobile fuels linked to the 2003-2010 oil crisis which, in particular,
caused customers to turn away from large sport utility vehicles (SUVs) and
pickup trucks, the main market of the American "Big Three" (General Motors,
Ford, and Chrysler). The US automakers also suffered from considerably higher
wages than their non-unionized counterparts, including salaries, benefits,
healthcare, and pensions. In return for labor peace, management granted
concessions to its unions that resulted in uncompetitive cost structures and
significant legacy costs. In 2008, the situation became critical because the global
financial crisis and the related credit crunch placed pressure on the prices of raw
materials. In certain countries, particularly the United States, the Big Three have
been under heavy criticism since they continuously based their respective market
attacks on fuel inefficient SUVs, despite the increase in the price of oil.
Accordingly, they suffered both from consumer perception of relatively higher
quality models available from abroad particularly from Japan and to some extent
from Europe and from transplants, foreign cars manufactured or assembled in
the United States. The Big Three had neglected development of passenger cars
and instead focused on light trucks due to better profit margins, in order to offset
the considerably higher labor costs, falling considerably behind in these market
segments to Japanese and European automakers.
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http://en.wikipedia.org/wiki/Automotive_industryhttp://en.wikipedia.org/wiki/Automotive_Products_Trade_Agreementhttp://en.wikipedia.org/wiki/Europehttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/2000s_energy_crisishttp://en.wikipedia.org/wiki/Sport_utility_vehicleshttp://en.wikipedia.org/wiki/Pickup_truckhttp://en.wikipedia.org/wiki/Big_Three_automobile_manufacturers#United_States_and_Canadahttp://en.wikipedia.org/wiki/General_Motorshttp://en.wikipedia.org/wiki/Fordhttp://en.wikipedia.org/wiki/Chryslerhttp://en.wikipedia.org/wiki/Global_financial_crisis_of_2008http://en.wikipedia.org/wiki/Global_financial_crisis_of_2008http://en.wikipedia.org/wiki/Financial_crisis_of_2007-2008http://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Automotive_industryhttp://en.wikipedia.org/wiki/Automotive_Products_Trade_Agreementhttp://en.wikipedia.org/wiki/Europehttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/2000s_energy_crisishttp://en.wikipedia.org/wiki/Sport_utility_vehicleshttp://en.wikipedia.org/wiki/Pickup_truckhttp://en.wikipedia.org/wiki/Big_Three_automobile_manufacturers#United_States_and_Canadahttp://en.wikipedia.org/wiki/General_Motorshttp://en.wikipedia.org/wiki/Fordhttp://en.wikipedia.org/wiki/Chryslerhttp://en.wikipedia.org/wiki/Global_financial_crisis_of_2008http://en.wikipedia.org/wiki/Global_financial_crisis_of_2008http://en.wikipedia.org/wiki/Financial_crisis_of_2007-2008http://en.wikipedia.org/wiki/United_States -
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As of the beginning of 2009, the vehicle companies of the world are being hit
hard by the economic slowdown across national boundaries. Car companies
from Asia, Europe, North America, and elsewhere have been forced to
implement creative marketing strategies to entice reluctant consumers to
purchase vehicles, when many firms are experiencing double digit percentage
sales declines. Major manufacturers, including the Big Three and Toyota, are
offering substantial discounts. Hyundai is even offering to allow customers to
return their new cars if they lose their jobs.
Pakistan Automobile Market
The domestic automobile industry recorded the largest ever drop in volume with
sales of locally assembled Passenger Cars (PC's) and Light Commercial
Vehicles (LCV's) declining by 49% to 23,795 units from 48,559 units for the
quarter ended September 31, 2008. This extraordinary decline in volume for the
quarter is due to the impact of political uncertainty and drastic slow down in the
economic environment of the country resulting in rising interest rates, limited
credit availability for auto financing, depreciation of the Pak Rupee against all
major currencies and unprecedented rise in prices of oil, steel and other inputs
causing high inflation and severe volatility in the market place. Post budget
measures like imposition of 5% Federal Excise Duty on cars above 850cc,
imposition of Withholding Tax at the registration stage, increase in custom duty
from 90 to 100% on imported cars above 1800cc and additional regulatory duty
of 50% on high end vehicles all added up to create a negative impact on sales in
auto industry. Automobiles are an essential part of modern living.
From light trucks to minivans to sports cars, Honda continues to transform
original ideas into unique vehicles. Delivering unrivaled driving enjoyment and
turning trips with family and friends into memorable occasions. Innovative car-
making for the world. Despite entering the Japanese automotive industry as late
as 1963, Honda quickly took the spotlight in Japan and worldwide with the
acclaimed Civic and Accord. Today, Honda makes a wide auto lineup for a world
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http://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/Europehttp://en.wikipedia.org/wiki/North_Americahttp://en.wikipedia.org/wiki/Toyotahttp://en.wikipedia.org/wiki/Hyundai_Motor_Companyhttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/Europehttp://en.wikipedia.org/wiki/North_Americahttp://en.wikipedia.org/wiki/Toyotahttp://en.wikipedia.org/wiki/Hyundai_Motor_Company -
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of diverse needs and lifestyles, bringing the joy of driving and outdoor enjoyment
to millions of satisfied customers. Mini cars, sedans, wagons, minivans, sports
cars and more all our vehicles demonstrate Honda leadership with high
performance, superior fuel economy, optimum safety, and driving pleasure.
Honda sales and product development activities are increasingly successful, not
just in the U.S. The world's largest automotive market but also in many regions
worldwide. For instance, a total of 16million Civics have been sold in 160 nations,
and in 2005, Honda designed a full-model change of this popular vehicle and
started global production of the eighth-generation Civic. Honda's unique
innovation has earned respect worldwide. That's how we now sell a yearly total of
more than 3.5 million vehicles around the globe.
1.2 Purpose of study
The purpose of this report is to analyze and understand the effect of re-condition
cars on local car industry and evaluate its magnitude through financial tools.
1.3 Research Objectives
My object ive is to aware the people that how the automobi le industry
has become the f inancial crises for our country. What are the effects
of automobi le industry crises or reasons which are behind that e.g.
market assessments, taxes increased, low demand etc.
I n l as t I have g iven some recommendat ion in the l ight o f g iven
collected information that who can e recover from this crises.
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1.5 Research Methodology
Research Design
The research will start with literature review and collection data from the available
publishing reports and information from the main companies working in Pakistan
which will serve as secondary data.
Data Collection Method
I have collect data from publishing reports, articles and Companies of Automobile
industry through internet.
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highly cost competitive due to appropriate levels of automation and low cost
automation and have achieved a high level of productivity by embracing
Japanese concepts and best practices. India is already the second largest two
wheeler manufacturer in the world, second largest tractor manufacturer in the
world, and fifth largest commercial vehicle manufacturer in the world and fourth
largest car market in Asia.57 The automobile industry in India is now gradually
evolving to replicate those of developed countries.
As regards auto trade with India, there is a lurking fear in Pakistan that free trade
with India will adversely affect our automobile sector particularly its two wheelers,
as Indians are presently marketing these items at much cheaper rates.58 Many
assemblers feel that the local industry will suffer due to opening of trade with
India in case the cost of doing business in Pakistan is not brought down in due
course of time. Pakistani auto parts industry is only interested in the procurement
of raw materials from India instead of seeking any technical collaboration or the
transfer of technology. However, Pakistan can import automotive components
and spare parts from India at a lower price as presently these items are being
imported from Far East at higher prices. On the other hand, India is expected to
benefit from free trade due to its low raw material, electric and labor costs.
The automobiles sector recorded a single digit growth of 6.8 percent during H1
FY08, which is not only lower than the strong growth of 28.6 percent in the same
period of the preceding year but also the lowest during the last five years Exhibit
2.1.1(This analysis is based on the classification and information provided by
PAMA for July- December, which is quite different from the FBS classification.) ,
While the capacity constraints restricted the growth in the production, weakening
demand.
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0
10
20
30
40
50
60
Percent
FY05 FY06 FY07 FY08 FY09
EXIBITE 2.1.1
AUTOMOBILE SECT
AUTO FINANCING
Second Quarterly import of used vehicles is responsible for a relatively muted
growth in demand for domestic automobiles. In light of continued delivery lags
and premium on domestic automobiles, the Government has announced an auto
policy to fill the demand and supply gap and overcome the problems facing by
auto sector.
The surge in the growth of automobile industry in recent years was mainly
attributed to increased income as well as easy access to auto financing. In
particular, a declining trend in auto financing is also impacting growth of the
automobile sector since more than 70 percent automobiles are financed by
commercial banks and the cash sales are relatively quite low. Within the
automobile industry, the growth in the production ofcars & jeeps decelerated to
8.4 percent in the first six months of the current fiscal year as compared with a
substantial 30.5 percent growth in H1- FY06. In particular, the production of high
capacity engine cars13 (1300cc and above) declined by 10.4 percent in H1-FY07
as against a strong growth of 36.6 percent during the same
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-20
0
20
40
60
80
Percent
FY05 FY06 FY07 FY08 FY09
Exibite 2.1.2: Growth in car industry
1300CC AND AB
Less than 1300 c
Period of the previous year (see Exhibit 2.1.2). Stiff competition from imported
used cars, poor response of customers regarding the newly introduced models,
relatively higher prices of domestic cars and higher interest rates are the main
reasons cited for the weaker performance of this category of automobiles.
Similarly, a slowdown of 3.4 percent was observed in the production of tractors
during H1-FY08, which is lower than the 14.5 percent growth seen in the same
period of preceding year. The capacity constraints and the government decision
to allow the import of tractors are the main causes of deceleration in tractor
production. However, the local manufacturers claim that since the permission ofgovernment to import tractors to help the farming community has not hit the
booking of local manufactured tractors. It is also claimed that farmers prefer to
buy from those producers who provide after-sales service in rural areas and
dealers of imported tractors have no such services.
The recovery in the output of buses was mainly due to governments institutional
buying, (about 80 percent of the total sale of buses), 15 percent fall in the prices
of local manufactured buses after the issuance of a notification ( According to
SRO.1270 (I)/2006, sales tax zero-rating would be on import and local supply of
dedicated CNG buses and all other buses meant for transportation of 40 or more
passengers, whether in CBU or CKD condition covered under the Pakistan
Customs Tariff (PCT) Heading 8702. Sales tax would also be charged at the rate
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of zero-per cent on the import and local supply. Purpose-built taxis, whether in
CBU or CKD, built on girder chassis and have following features: Attack
resistance central division along with payment tray; wheelchair compartment with
folding ramp and taximeter and two-way radio system, notification added.) By
CBR regarding zero-rated sales tax on local supply of dedicated CNG buses and
other buses meant for transportation for passengers. It is interesting to observe
from (see Exhibit 2.1.3). that the output of the buses generally has a very short
cycle due to a narrow base, impacting largely from government policies as well
as initiatives by the private sector. The major drag to automobile industry growth
was from the decline in the production of motorcycles/scooters, down by 13.5
percent during H1-FY07 compared with 34.3 percent strong growth. The
production of motorcycles declined for the first time since FY00. The production
of motorcycles in the reported sector remained depressed during H1-FY07
mainly due to rising market share of non-members of PAMA (Chinese bikes
assemblers) on the back of lower prices. Moreover, decline in cotton and rice
harvests (as well as lower realized prices for cotton) also made a direct impact
on the sale of bikes in the rural areas, where farmers used to purchase new
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increasing even at a faster rate. Motorcycles registered a phenomenal growth of
28.06 percent and are expected to grow further with the annual installed capacity
increasing to 1.9 million units (see Exibite.2.2.1)
Local tractor manufacturers produced 54,610 units during the year 2006-07
which remains by no means a mean achievement. However, during July- March
2007-08 the growth rate of tractor production dwindled to -5.1 percent. The flip
side of the coin is that the tractor industry has already got the maximum local
content and both M/s Millat Tractors and Al/Ghazi Tractors continue on the path
of further localization of components. The high volume production of tractors has
bridged the demand supply gap to some extent and has been able to standout in
the total duty tax free import regime for CBUs. The tractor industry by virtue of its
highly competitive production which is duly supported by the local vendors and
conductive government policies is expected to grow more in future to become a
part of global supply and thus rectify its growth figures as well. The government
has declared trucking an industry in the National Trade Corridor Program. This
will give added impetus to the production of trucks and prime movers through
incentives to new and bigger vehicles and restrictions on old and unfit ones. The
bus manufacturers as well have enormous potential of growth only if the urban
transport scheme long in the making is declared enforced within a given time
frame. The expansion in the installed capacity of the car/LCVs, heavy
commercial vehicles (HCVs), two/three wheelers and farm tractors plants now
exceeds the demand particularly for HCVs and two/three wheelers. Increase in
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investment (see Exhibit 2.2.2) from the present Rs. 25 billion to Rs. 53 billion
planned for the next five years will double it calling for appropriate incentives to
the industry and by banning import of new or second-hand vehicles and adopting
strict measures against their smuggling into the country.
Auto Industry Development Plan (AIDP)
Engineering Development Board (EDB), has developed an Auto Industry
Development Plan (AIDP) to facilitate and encourage investment, domestic
competition, enhance competitiveness and stimulate innovation through
technology acquisition, human resource development, capacity expansion, auto
cluster development, etc. AIDP provides the targets and goals for a clear road
map for the next five years. The Plan also envisages the establishment of an
Auto Industry Skills Development Company (AISDC). Besides providing
incentives against the newly installed productive assets to stimulate investments
in the production capacities of auto part manufacturing, AIDP provides for the
establishment of two auto clusters, one each at Lahore and Karachi, land for
which has already been acquired. AIDP also provides for Auto Industry
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Investment Policy(AIIP)framework to facilitate investors toward manufacturing of
vehicles in the country.
2.3 Capacity Utilization
Passenger Cars
1300 and Above cc Jul'08 -Mar'09
Jul'07 -Mar'08
Honda CivicProd. 4,207 4,347
Sale 3,659 4,146
Honda CityProd. 5,093 6,206
Sale 4,986 6,355
Suzuki LianaProd. 500 2,306
Sale 668 2,420
Toyota Corolla Prod. 17,823 24,396
Sale 17,260 24,223
Sub-TotalProd. 27,623 37,255
Sale 26,573 37,144
1000 cc Jul'08 -Mar'09
Jul'07 -Mar'08
Suzuki CultusProd. 7,462 19,852
Sale 7,266 19,342Suzuki Alto
Prod. 5,251 14,407Sale 13,685
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4,970
Hyundai SantroProd. 326 1,527
Sale 266 1,745
Sub-TotalProd. 13,039 35,786
Sale 12,502 34,772
800 cc & Below 1000cc Jul'08 -Mar'09
Jul'07 -Mar'08
Daihatsu CuoreProd. 4,993 8,933
Sale 4,810 8,671
Suzuki MehranProd. 9,492 26,933
Sale 10,187 26,675
Suzuki BolanProd. 8,126 13,051
Sale 7,113 12,984
Sub-TotalProd. 22,611 48,917
Sale 22,110 48,330
Jul'08 -Mar'09
Jul'07 -Mar'08
TOTAL CARSProd. 63,273 121,958
Sale 61,185 120,246
Truck
Jul'08 -Mar'09
Jul'07 -Mar'08
Hino Prod. 1,831
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1,201
Sale 1,253 1,919
NissanProd. 389 593
Sale 344 828
Dong FengProd. - -
Sale 2 -
MasterProd. 272 341
Sale 240 303
Isuzu Prod. 307 552
Sale 336 610
VolvoProd. - -
Sale - -
TOTAL TRUCKSProd. 2,169 3,317
Sale 2,175 3,660
Buses
Jul'08 -Mar'09
Jul'07 -Mar'08
HinoProd. 342 635
Sale 364 682
NissanProd. - 48
Sale 6 28
Dong FengProd. 6 10
Sale 5 18
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Hyundai ShehzoreProd. 1,365 5,015
Sale 1,280 4,794
Master Prod. 23 449
Sale 25 493
TOTAL PICK-UPsProd. 13,655 15,652
Sale 11,943 15,403
Farm Tractors
Jul'08 -Mar'09
Jul'07 -Mar'08
FiatProd. 21,246 18,195
Sale 21,247 18,342
Massey FergusonProd. 20,415 19,031
Sale 19,888 18,754
TOTAL TRACTORS
Prod. 41,661 37,226
Sale 41,135 37,096
Motorcycles & Three-Wheelers
Jul'08 -Mar'09
Jul'07 -Mar'08
HondaProd. 255,433 329,816
Sale 255,627 330,122
Yamaha Prod. 37,066 48,633
Sale 37,349 47,697
SuzukiProd. 10,808 23,712
Sale 11,609 23,184
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innovations in natural gas, hybrid, and fuel cell vehicles. The Honda commitment
to eco-friendly car-making knows no limits, because it's our responsibility to the
world.
Income Statement
Income Statement (Rs '000) FY'08 FY'09
Total Revenue 17,055,115 14,715,495
Cost of Goods Sold 16,955,181 14,088,001General & Administrative
Expenses 214,889 139,163
Selling and Distribution Expenses 147,274 209,677
Operating Profit (EBIT) -262,229 297,268
Financial Charges 305,491 233,651Net Income Before Taxes -481,649 63,617
Net Income After Taxes -264,540 75,010
-2000000
0
2000000
4000000
6000000
8000000
10000000
12000000
14000000
16000000
18000000
FY'07 FY'08
Income Statement
Total Revenue
Cost of Goods Sold
General & Administrative
Expenses
Selling and Distribution
Expenses
Operating Profit (EBIT)
Financial Charge s
Net Income Before Taxes
Net Income After Taxes
Balance Sheet
Balance Sheet (Rs.'000) FY'08 FY'09
Stores & Spares 50,316 83,101
Stock in Trade 2,704,946 1,612,696
Cash & Bank Balances 219,859 231,880
Total Current Assets 3,681,213 2,435,529
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3.2 Pak Suzuki Motors
Pak Suzuki Motor Company Ltd is a Pakistan-based automobile manufacturing
company. It is a joint venture between Suzuki Motor Corporation of Japan and
Pakistan Automobile Corporation. Since December 2003, 3, 00,000 vehicles had
been manufactured at the Company's Bin Qasim Plant. The Company's products
include Mehran, Alto, Cultus, Liana, Bolan Van, Ravi Pickup and Potohar. There
are about 154 active vendors of Pak Suzuki, which are spread from Karachi to
Lahore and Rawalpindi. The dealers of Pak Suzuki encompass all the areas of
automobile marketing, which include sales, service and Suzuki spare parts.
Pak Suzuki is built on the idea of a responsible corporate citizenship thereby
managing environmental, safety & occupational health matters as an integral part
of our business. In fulfilling this responsibility Pak Suzuki adheres to the following
principles.
We are committed to provide top quality products to the satisfaction and
requirement of our customers.
We conduct our operations in compliance with applicable environmental,
occupational health & safety laws and regulations. Even where existing
laws & regulations are not adequate, we undertake to operate in a
responsible manner by assuring the HS&E integrity of our processes and
facilities.
We recognize the interrelationship between energy and the environment,
and we promote the efficient use of energy throughout our system.
We ensure safe disposal of waste generated from our facility.
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sales record of the past. It has maintained 63 percent market share of the
industry. This has been informed in a recent convention that Pak Suzuki is not
only the top manufacturer of car industry but also tops the list in sales of the car
industry.
Income Statement
Income Statement (Rs '000) FY'08 FY'09
Total Revenue 50,844,632 39,669,730Cost of Goods Sold 46,084,400 39,079,124
General & AdministrativeExpenses 511,055 504,617
Selling and Distribution Expenses 427,041 309458
Operating Profit (EBIT) 3,822,136 -223,469
Financial Charges 143,786 53,470
Net Income Before Taxes 4,281,263 992,176
Net Income After Taxes 2,774,532 624,785
-10000000
0
10000000
20000000
30000000
40000000
50000000
60000000
FY'07 FY'08
Income Statement
Total Revenue
Cost of Goods Sold
General & Administrative
Expenses
Selling and Distribution Expenses
Operating Profit (EBIT)
Financial Charges
Net Income Before Taxes
Net Income After Taxes
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launch and gradual ramp up of new model. The Company's revenues for the
quarter ended September 30, 2008 was down 52% to Rs 5.2 billion compared to
Rs 10.8 billion for same quarter last year, while profit after tax dropped 95% to
Rs 48 million from Rs 921 million due to fall in sales volume and margin on
account of rising costs which the Company was unable to pass through to
customers. Near Term Business Outlook The business environment for the
second quarter and rest of the year is likely to become more difficult in view of
the worsening macro economic situation in the country and fears of global
economic recession emanating from major financial crises abroad. As a result,
we expect the auto sales demand in the domestic industry for the year 2008-09
to decline appreciably over last year. Raw material, energy and other input costs
together with further depreciation of the Pak Rupee and higher interest rates will
continue to exert upward pressure on costs and retail selling prices. The auto
industry and its vendors who invested heavily for growth are fighting hard to
survive in this difficult business environment of extremely low sales. We hope
that the government will take immediate measures to implement the
recommendations made by the Pakistan Automobile Manufacturers Association
to accelerate growth of the local industry including the withdrawal of the 5%
Federal Excise Duty, 1% Sales Tax and removal of LC Margin on imports. There
should also be focus on long-term sustainable steps to encourage growth of the
automobile sector which is a key driver for economic growth, technology transfer
and a creator of jobs. The 10th Generation Corolla was launched on August 19
and has been reborn as a luxurious car, with advanced features and even more
modern and stylish design while retaining the Toyota DNA of QRD (Quality,
Reliability and Durability). It has been received well by our customers and has led
to impressive order inflows. However, due to the current economic climate, our
unit margins are expected to remain under pressure and our strategy will be to
focus on improving our operational efficiencies, maintaining high quality
standards and in delivering maximum value to customers.
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Income Statement
Income Statement (Rs '000) FY'08 FY'09
Total Revenue 39,061,226 41,423,843
Cost of Goods Sold 34,620,632 37,575,356General & Administrative
Expenses 265,302 297,284
Selling and Distribution Expenses 858,416 793,566
Operating Profit (EBIT) 956,494 786,834
Financial Charges 43,889 2,760
Net Income Before Taxes 4,229,481 354,171,1
Net Income After Taxes 2,745,701 229,084,5
0
5000000
10000000
15000000
20000000
25000000
30000000
35000000
40000000
45000000
FY'07 FY'08
Income Statement
Total Revenue
Cost of Goods Sold
General & Administrative
Expenses
Selling and Distribution
Expenses
Operating Profit (EBIT)
Financial Charge s
Net Income Before Taxes
Net Income After Taxes
Balance Sheet
Balance Sheet (Rs.'000) FY'08 FY'09
Stores & Spares 227,191 232,142
Stock in Trade 2,637,629 2,859,951
Cash & Bank Balances 8,543,263 4,328,585
Total Current Assets 13,536,082 9,664,784Total Non Current Assets 2,128,968 4,083,625
Total Assets 15,665,050 13,748,109
Total Current Liabilities 7,410,629 3,779,631
Total Non Current Liabilities 210,149 532,138
Total Liabilities 7,621,075 4,311,769
Paid Up Capital 786,000 786,000
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Total Equity 8,043,975 9,436,340
0
2000000
4000000
6000000
8000000
10000000
12000000
14000000
16000000
FY'07 FY'08
Stores & Spares
Stock in Trade
Cash & Bank Balances
Total Current Asse ts
Total Non Current Assets
Total Assets
Total Current Liabilities
Total Non Current Liabilities
Total Liabilities
Paid Up Capital
Total Equity
RATIO 2009 2008 2007 2006
SORT TERM SOLVENCY
CURRENTRATIO 2.56 1.83 1.49 1.41
QUICK RATIO 1.85 1.43 1.20 1.10
LONG TERM SOLVENCY
Debt- Equity Ratio 0.45 1.05 0.75 0.90
ASSET UTILIZATION
InventoryTurnover
13.67 1.15 8.72 8.73
Fixed Asset TurnOver(Time)
13.52 20.50 25.95 29.69
PROFITABILTY
Operating profitmargin
9.29 11.37 11.77 9.80
Net Profit margin 0.05 0.07 0.06 0.4
Book ROA 0.20 0.23 0.15 0.18
Book ROE 2.91 3.43 3.36 1.88
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RATIO 2009 2008 2007 2006
SORT TERM SOLVENCY
CURRENT RATIO
0.9513159 1.032068 1.036554 1.04104
QUICKRATIO
0.603856 0.654133 0.617614 0.581095
LONG TERM SOLVENCY
Debt-EquityRatio
4.5110128 3.080393 3.466659 3.852925
TimeInterest
earned
2.0926505 0.27095 -1.94467 -4.16029
Fixed-charged
Coverage0.8173673 0.27095 -1.94467 -4.16029
ASSET UTILIZATION
AverageCollection
Period20.36798 238.5411 149.2964 60.05162
InventoryTurnover
3.8997191 3.89036 3.959244 4.028127
Fixed
Asset TurnOver 2.3818305 1.001149 2.664376 4.327603
PROFITABILTY
Operatingprofit
margin-0.052907 0.062981 0.068362 0.073743
Net Profitmargin
-0.075621 0.008444 0.021637 0.034829
Book ROA -0.047738 0.066114 0.084379 0.102644
Book ROE -0.376 0.036171 0.135714 0.235258
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4. ASSESSMENT OF MARKET
4.1 Current Market Share
The profits of auto assembling sector plunged by 7.3 percent in first half of
current financial year compared to corresponding period of last year.
The three major auto assemblers of the country (Indus Motor, Pak Suzuki &
Honda Atlas) having 58 percent of the total auto sector market capitalization and
93 percent of total cars and LCVs sales posted Rs 2.1 billion net profit in July-
December period of this fiscal compared to Rs 2.3 billion in the same period of
last year, a research report of Jahangir Siddiqui Global Capitals indicated here
on Friday. Net sales of industry stood at Rs 47.8 billion in the period under review
against Rs 49.6 billion in the previous year, depicting a negative growth of 3.8
percent. The decline in sales was a direct impact of tumbling volumetric sales
which dropped by 2.9 percent during the said period to stand at 83,500 units
(Cars + LCVs), report mentioned. In addition, gross margins went down 80 bps
from 8.3 percent to 7.5 percent amid increasing steel prices and 1.6 percent
appreciation in yen from first half of previous financial year to same period of this
year. This negatively impacted industrys gross profits during this period, as
cumulative gross profits saw a decline of a considerable 13.1 percent to land at
Rs 3.6 billion, analyst Bilal Hameed noted. Other income, which constitutes
around 25 percent of the profit before tax, also posted a decline of 11 percent in
the period under review. This has been due to the declining cash balances of the
companies and reduced deposit rates. Company wise performance showed that
out of the three leading car assemblers, Indus Motor and Honda Atlas displayed
positive growth in their profitability. Indus Motor increased its profit by 6.5 percent
in the said period while Honda Atlas reduced its net loss of Rs 247 million in first
half of last year to a loss of only Rs 20 million in same period of this fiscal year,
translating into a massive growth of 91 percent. On the contrary, volumetric sales
of Indus Motor declined by 6 percent and that of Honda Atlas by 17 percent due
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REAL ESTATE DEVELOPERS & PROJECTS 09
FERTILIZER 05
PUBLIC UTILITIES 08
MISCELLANEOUS 07
4.3 SWOT Analysis
SWOT Analysis is a strategic planning method used to evaluate the Strengths,Weaknesses, Opportunities, and Threats involved in a project or in a businessventure.
Strengths: attributes of the organization which are helpful toachieving the objective. Weaknesses: attributes of the organization that are harmfulto achieving the objective. Opportunities: external conditions that are helpful toachieving the objective.
Threats: external conditions which could do damage to thebusiness's performance.
Identification of SWOTs is essential because subsequent steps in the process ofplanning for achievement of the selected objective may be derived from theSWOTs.
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published Pakistan Automotives Report. After a mixed performance in the first
half of the financial year, during which leading manufacturers Honda Atlas Cars
and Daewoo Farooqi Motors registered declines of around 42% year-on-year (y-
o-y) each, while Indus Motor Company and Pak-Suzuki Motor Company raised
sales by 31.33% and 18.41% respectively, BMI reduced its outlook to project
growth of 5% (car sales are set to rise by just 2.8%), while we have maintained
our output growth forecast at 2.8%, with car production within that total up 3.1%.
Output in the first half of FY2006/07 was also higher than the first half of the
previous financial year at 77,452 units, up 6.09%.Indeed, production will be
supported over the coming years by the government's new Auto Industry
Development Plan (AIDP), which envisages an increase in the industry's annual
output from 200,000 units to 500,000 units by 2011. The plan is intended to
improve the domestic automotive industry, through the development of local
capacity and auto 'clusters'. However, another move by the government may act
as more of a threat to the local industry. The decision to lift certain restrictions on
the import of used vehicles under the gift scheme should result in more second-
hand vehicles entering the market, which, according to the commerce ministry,
will make up for the shortfall between demand and supply for vehicles. However,
the Pakistan Automotive Manufacturers Association (PAMA) and Pakistan
Association of Automotive Parts and Accessories Manufacturers (PAAPAM) have
voiced their concerns that the new rules will impede the growth of the domestic
industry.
Projects such as the AIDP have greatly increased Pakistan's potential in terms of
output growth, although the country still lags in 10th place in BMI's Business
Environment Ranking for the automotive industry in the Asia Pacific region. The
plunge in sales growth from 19% in FY2005/06 to a projected 5% in the current
financial year suggests that it could be hard for new entrants to gain a foothold in
a slowing market, particularly as rising inflation will need to be curbed by
monetary policies, which are likely to rein in spending. The market does score
slightly higher than the regional average for its regulatory environment, however,
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due to the government's involvement in trying to develop the industry through the
AIDP.
In terms of the industry's competitive landscape, Pak-Suzuki is the dominant
force with sales of 56,860 units for the first eight months of the financial year. The
Suzuki Mehran was the best-selling model for the period, with sales of 22,953
units, although it was closely challenged by Toyota's Corolla on 22,683 units.
Hyundai achieved modest sales of 2,380 for the Santro model, although the
South Korean firm cut back on production of the Santro, with output falling to
double digits during September, October and November, and no units at all
produced in December and January. By February, monthly output had returned
to 150 units.
According to figures released by Pakistan Automotive Manufacturing Association
(PAMA), car sales stood at 33,858 during Jul-Nov 2008 compared with 62,815 in
the same period of last year, a decline of 46 percent. Cumulative sales of cars
and LCVs also continued their slide and stood at 49,050 units for Jul-Nov 2008,
showing a decline of 38 percent year-on-year from 78,946 units during the
corresponding period of last year. On a month-on-month basis, unit sales were
down by 35 percent. "Political and economic instability, increase in car prices and
high rates of car financing remain the key issues behind the decline in sales,"
said Syed Atif Zafar, an analyst at JS Research. November 2008 saw a massive
fall in sales of Pak Suzuki, Dewan Motor and Honda Atlas by 41 percent, 53
percent and 58 percent on a month-on-month basis, respectively.
Decline in sales of Pak Suzuki can be attributed to increase in car prices by the
company at the beginning of the month in range of Rs 30,000 to Rs 70,000.
Moreover, no production by Dewan Motor was one of the reasons for their
decline in sales. Car sales declined by 46 percent on month-on-month and 54
percent year-on-year. Decline in car sales of Pak Suzuki was a major contributor
to the decline, as industry unit car sales stood at 5,193 units versus 9,599 units in
Oct 2008. The main loser in market share in Jul-Nov 2008 has been Dewan
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Motor as its share fell from 5 percent in Jul-Nov 2007 to 2 percent. The main
beneficiary of Dewan Motor loss has been Honda Atlas Cars as its market share
increased from 8 percent to 10 percent. Moreover, Pak Suzuki's market share
increased by 150 bps to 62 percent while Indus Motors market share fell by 83
bps to 24 percent. Sales of automobiles have been falling for more than one year
now owing mainly to the increased rates of interest charged on loans. Besides,
the 25 percent high inflation has pushed many potential buyers away, as they
spend a lot more money on daily-used items. Automobile manufacturing had
boomed when interest rates were low thanks to the increased liquidity available
with Pakistani banks after the 9/11 attacks. Banks and leasing companies were
liberal in giving loans to individuals and stiff competition between them was going
on to capture auto financing business, now that number of defaults is rising
because of increased interest rates, they have tightened their policies. Many
banks have even stopped auto financing. There has been hardly any
advertisement for car loans on televisions and newspapers for quite sometime.
5. PROBLEMS AND CHALLANGES
5.1 Auto Financing Declining
Car sales dropped sharply in the first five months of the current fiscal year,
indicating the worsening health of the economy and falling purchasing power of
consumers. According to figures released by Pakistan Automotive Manufacturing
Association (PAMA), car sales stood at 33,858 during Jul-Nov 2008 compared
with 62,815 in the same period of last year, a decline of 46 percent. Cumulative
sales of cars and LCVs also continued their slide and stood at 49,050 units for
Jul-Nov 2008, showing a decline of 38 percent year-on-year from 78,946 units
during the corresponding period of last year. On a month-on-month basis, unit
sales was down by 35 percent. Political and economic instability, increase in car
prices and high rates of car financing remain the key issues behind the decline in
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the prices of oil, steel (increased 51 per cent YOY) and other inputs and imports
of used cars. The rising trend in inflation and food prices as well as lost work time
due to power outages as a result of energy shortage in the country has also had
iman adverse pact on the local auto industry. These factors have had a direct
impact on the local auto industry sales, which declined by 8.2 per cent in the first
half of FY08 alone to 187,000 units. The final nail was driven in by the Budget
2008-09 implemented by the Government of Pakistan which put further pressure
on consumer oriented buying, resulting in rising inflation as well as a non-
competitive playing field which has seen a drop of over 50 per cent in sales for
the auto industry over the course of 3 months. Similarly, the global auto industry
is in recession and many of the renowned auto brands are in turmoil. Recently,
the US auto industry asked for a bailout package for the collapsing industry,
when news reports were published that facing massive job losses, the White
House and congressional Democrats are working to provide about $15 billion in
loans to prevent Detroit's weakened auto industry from collapsing. After yielding
to President George W Bush on a key point, House Speaker Nancy Pelosi said
the House would consider the legislation to provide "short-term and limited
assistance" to the US auto industry while it undergoes "major restructuring."
5.3 Low Demand
Current turmoil in the automobile industry has claimed jobs of around 150,000
workers, mostly from auto-vending industries which are now operating at around
40 per cent of their installed capacity. A survey of the auto-vending sector by The
News reveals most of the vendors increased their capacity substantially in the
wake of sustained growth of over 20 per cent in automobile production during
2001-2006. This capacity is now lying idle as instead of registering some growth
the automobile production is on the decline. Most of the auto-vendors, which
were running three shifts a day two years ago, are now meeting their orders by
operating one shift only. These small and medium industries, which have been
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forced to reduce their workforce, are in deep trouble as they earlier went for
expansion on low-interest loans when the industry was moving on a sustainable
growth path. Then the demand for automobiles started declining with increase in
mark-up rates on car finance while vendors are now forced to service their loans
on current interest rates as they had borrowed money at floating rates. At the
same time, the vendors allege the deletion policy of the government is in
doldrums. Even in vehicles with a deletion level of 70 per cent, they point out, the
cost of imported components is much higher than the price paid to vendors for
local components. In fact, for 70 per cent local parts the auto-vendors get only 30
per cent of the total cost of vehicle parts while the foreign exchange component
for 30 per cent imported parts comprises 70 percent of the total cost. The
vendors also deeply regret losing their skilled workforce due to low production as
these workers were provided in-house training at a substantial cost in various
skills. The workers, they say, would divert to other fields as currently there is no
work for them in the auto industry, adding they would have to retrain fresh
workers when the automobile industry resumes its growth in future. There are no
chances of resumption of a growth cycle in automobile in the next two years,
says Syed Mansoor Abbas, an auto vendor. By that time, most of the vending
industries would go sick, he says, adding many vendors would soon default on
their bank loans and might be liquidated by bankers. He says the cost of
production has increased enormously due to high steel and energy prices and
auto assemblers are not prepared to increase the rates of parts corresponding to
the rise in the cost of production. Even operating vendors, he fears, will close
down if prices of parts are not increased by the manufacturers in line with the
increase they have made in their cars and tractors. The News has found that
motorcycle manufacturers are also in trouble. Prices of motorcycles are going
down while cost of production is increasing. Some vendors say many assemblers
of various Chinese brands are in deep trouble as those producing 400 to 500
motorcycles a month are operating much below the economies of scale and
some might close down. The minimum survival level, according to industry
experts, is production of 2,000 bikes per month or above. However, some
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purchasing power of the customers in the west. However, the industry people
said slow down in the industrial production is only because of domestic problems,
which can be easily solved. They said current situation demands immediate
attention of the government to arrest the decline in the industrial production.
For instance, the countries, facing decrease in their industrial output are taking
various measures such as the interest rate cut. But Pakistan upheld its interest
rates despite improving economic indicators. State Bank of Pakistan (SBP) in its
last monetary policy kept the policy discount rate unchanged at 15 percent, which
business community believed is too high to be absorbed by the industry.
The sector-wise production indicated that production of jet fuel was down by 9.56
percent, kerosene oil 12.59 percent, high-speed diesel 3.53 percent, furnace oil
9.63 percent, LPG 19.09 percent etc. In food sector, the production of vegetable
ghee declined by 13.07 percent, cooking oil 4.79 percent, wheat and grain milling
10.62 percent, beverages 4.30 percent etc. In auto sector, truck production was
down by 15.74 percent, buses 45.76 percent, jeeps and cars 45.37 percent,
motorcycles 15.66 percent etc. Production of refrigerators dropped by 1.18
percent, deep-freezers 23.90 percent, air-conditioners 13.75 percent, electric
bulbs 24.44 percent, electric tubes 19.56 percent, fans 9.24 percent, motors
23.48 percent, electric meters 12.30 percent, switchgears 11.30 percent,
transformers 4.36 percent, TV sets 33.99 percent and bicycles 12.67 percent.
5.5 Impact World Economic Recession
Auto sales during the first seven months of FY09 stood at 48,886 units as
compared with 91,450 units in the same period last year, showing a substantial
decline of 46 percent. Pakistan Automotive Manufacturing Association (PAMA)
released figures for the local auto sales during first seven months FY09 on
Wednesday.
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companies were liberal in giving loans to individuals. Now, as the numbers of
defaults are rising because of increased interest rates, they have tightened their
policies. Many banks have even stopped auto financing. There has been hardly
any advertisement for car loans on televisions and newspapers for sometime.