import of re condition car effect on local car industry

8/6/2019 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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Institute of Business & Technology Page 2


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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


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


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


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


Expenses

Selling and Distribution Expenses


Financial Charges



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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


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


Expenses

Selling and Distribution

Expenses


Financial Charge s



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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http://en.wikipedia.org/wiki/Strategic_planning#Elementshttp://en.wikipedia.org/wiki/Projecthttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Strategic_planning#Elementshttp://en.wikipedia.org/wiki/Projecthttp://en.wikipedia.org/wiki/Business


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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.

import of re condition car effect on local car industry

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