role of automobile industry in economic development …

ROLE OF AUTOMOBILE INDUSTRY IN ECONOMIC DEVELOPMENT OF PAKISTAN- (1995 TO 2005)AUTOMOBILE INDUSTRY FROM 1995 TO 2010-A CASE
STUDY OF PAKISTAN
In Partial Fulfillment of the Requirement for the Degree of
Doctor of Philosophy (Ph. D.) in Social Sciences
Under the Supervision of
HAMDARD UNIVERSITY
July 2014
Dedicated to
Who always support me!
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Abstract
The study was primarily a quantitative and causal research. Its basic objective was to
find out the nature and degree of macroeconomic factors that influence the performance
of automobile industry in Pakistan from 1995 to 2010. The independent variables
included per capita Gross National Income, Inflation Rate, Exchange Rate, Discount
Rate, Unemployment Rate, Consumption Rate and Foreign Direct Investment. A sample
of 10 firms was selected to explore the influence of macroeconomic variables on the
performance of the firms and industry. The performance of the automobile industry was
represented by Annual Sales, Annual Profit, Return on Assets, Return on Equity and Net
Profit Margin.
The impact of selected predictors was explored on five dependent variables of the
industry. For this purpose, regression and correlation analysis was conducted to see the
impact of macroeconomic variables on the performance of entire automobile industry.
The panel data analysis revealed that Foreign Direct Investment was the most influential
factor. In addition to this, Consumption rate, Discount rate and Unemployment rate also
influenced the performance of automobile industry.
Besides the analysis of entire industry, the impact of macroeconomic variables on the
performance of individual firms was also studied. The analysis showed that the
performance of all of the selected firms was influenced by one or more variables.
Foreign Direct Investment appeared to be the most influential factor that helped improve
the performance of firms in terms of sales and profitability. Other influential elements
were Exchange rate, Consumption rate, Discount rate, Per Capita Gross National Income
and Inflation rate. However, Unemployment rate appeared to be insignificant as its effect
was almost negligible on the progress of individual firms.
Therefore, this was concluded that the selected macroeconomic variables had
significant impact on the performance of automobile industry in Pakistan from 1995 to
2010.
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Certificate of Approval
This is to certify that MR. MUHAMMD AQIL has completed his research thesis
entitled “Determinants of the performance of automobile industry-A case study of
Pakistan from 1995 to 2010” in partial fulfillment of the requirement for the degree of
Doctor of Philosophy under my supervision. I have reviewed the contents and the
methodology which is according to the prescribed standard of the Hamdard Institute of
Education and Social Sciences, Hamdard University Karachi.
This Thesis is based on his own personal research work carried under my supervision
and is not copied from any thesis, written earlier on the subject.
Signature _____________________
Dated: _______________
Karachi
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Acknowledgment
I am very thankful to Almighty Allah Who is the most beneficent and merciful. He
helped me to accomplish this difficult task. I could not jot down even a single word
without His support. Allah provided me courage, patience, energy and skills to prepare
this research document.
I am also grateful to my research supervisor Dr. Farooq Aziz who always guided and
motivated me to cope with various issues pertaining to my research. I am undoubtedly
very lucky to have such a cooperative and helpful advisor. I would also extend a vote of
thanks to my friend Dr. Saqib Rehman who offered regular assistance in understanding
different technical problems of the thesis.
I am also obliged to my parents, my wife and my children whose sacrifice and
patience enabled me to work with concentration and zeal. I have the same feelings to my
students and colleagues who encouraged me to carry on the research even in difficult
times.
Above all I am grateful to my Allah again Who is the final cause of every good work
especially in this study. He is the only one entitled to take all the credit of this study.
Muhammad Aqil
1.1.2. Evolution of automobile industry in the world .......................................... 3
1.1.3 Growth of global automobile industry................................................. 15
1.1.4 Economic significance of global automobile industry ........................ 17
1.1.5. Factors influencing the auto industry .................................................. 18
1.2 Purpose of the Study ................................................................................... 18
1.2.1. General purpose ....................................................................................... 18
1.2.2. Specific Purpose ...................................................................................... 19
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1.5 Hypothesis................................................................................................... 20
1.7. Basic Assumptions ...................................................................................... 21
2.1.3. Key financial indicators for automobile industry .................................... 26
2.2 Determinants of the Performance ............................................................... 34
2.2.1. Past studies in automobile sector ............................................................. 35
2.2.2. Contribution of this research ................................................................... 35
2.2.3. Macroeconomic determinant of the performance of the firms and industry
................................................................................................................................... 36
2.3.1. History of automobile industry in Pakistan ............................................. 45
2.4. Economic Significance Pakistan’s Automobile Industry .......................... 55
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manufacturers to GDP............................................................................................... 56
2.4.4 Development of auto parts industry .......................................................... 58
2.4.5. Automobile sector and investment .......................................................... 60
2.5 Original Equipment Manufacturers ............................................................ 61
2.5.1. Pak Suzuki Motors Company Limited. ................................................... 62
2.5.2. Indus Motors Company Ltd ..................................................................... 62
2.5.3. Honda Atlas Car Pakistan Ltd ................................................................. 63
2.5.4. Dewan Farooq Motors Ltd ....................................................................... 64
2.5.5. Hinopak Motors Limited ......................................................................... 64
2.5.6. Ghandhara Nissan Limited ...................................................................... 65
2.5.7. Ghandhara Industries Limited ................................................................. 66
2.5.8. Millat Tractors Limited............................................................................ 67
2.6. Foreign Technology in Automobile Industry ................................................. 69
2.7 Regulators and Authorities of Automobile Industry ................................... 72
2.7.1. Engineering development board (EDB................................................ 73
2.7.4. Pakistan Association of Automotive Parts and Accessories
Manufacturers (PAAPAM) 74
Chapter Three ............................................................................................................ 75
Research Methodology .............................................................................................. 75
3.1. Strategy ....................................................................................................... 75
3.2. Population ................................................................................................... 78
3.3. Sampling ..................................................................................................... 79
3.4. Hypotheses .................................................................................................. 81
3.7. Data Sources ............................................................................................... 83
3.7.3. General sources of data ............................................................................ 86
3.8. Plan for Data Analysis ................................................................................ 87
3.8.1. Organization of data ................................................................................ 87
3.8.2. Scatter plots and correlation .................................................................... 88
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Data Analysis and Findings ....................................................................................... 91
4.1 Determinants of the Performance of Pak Suzuki Company Ltd. ..................... 91
4.1.1. Macroeconomic variables and sales of Pak Suzuki Company ................ 94
4.1.2. Macroeconomic factors and profit of Pak Suzuki ................................... 97
4.1.3. Macroeconomic variables and ROA of Pak Suzuki ................................ 98
4.1.4. Macroeconomic variables and ROE of Pak Suzuki ................................. 99
4.1.5. Effect of macroeconomic factors on NPM of Pak Suzuki ..................... 101
4.1.6. Conclusions and Decision ...................................................................... 104
4.2. Determinants of the Performance of Indus Motors Company Ltd. .......... 104
4.2.1. Effects of macroeconomic variables on sales of Indus Motors ............. 106
4.2.2. Effects of macroeconomic variables on profit of Indus Motors ............ 108
4.2.3. Effects of variables on ROA of Indus Motors ....................................... 109
4.2.4. Effect of macroeconomic variables on ROE of Indus Motors .............. 110
4.2.5. Effects of variables on NPM of Indus Motors ....................................... 111
4.2.6. Conclusion and decision ........................................................................ 112
4.3. Determinants of the Performance of Honda Motors Ltd. ............................. 113
4.3.1. Effects of macroeconomic variables on sales Honda Motors ................ 115
4.3.2. Effects of macroeconomic variables on profit of Honda Motors .......... 116
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4.3.3. Effects of macroeconomic variables on ROA of Honda Motors ........... 118
4.3.4. Effects of macroeconomic variables on ROE of Honda Motors ........... 119
4.3.5. Effects of macroeconomic variables on NPM of Honda Motors ...... 120
4.3.6. Conclusion and Decision ....................................................................... 121
4.4. Determinants of the performance of Dewan Motors Ltd. ............................. 122
4.4.1. Effect of macroeconomic variables on Sales ......................................... 123
4.4.2 Effect of macroeconomic variables on Profit .................................... 124
4.4.4 Effect of macroeconomic variables on ROE ..................................... 126
4.4.5. Effect of macroeconomic variables on NPM ......................................... 127
4.5. Determinants of the performance of Hinopak Company .............................. 128
4.5.1. Effects of macroeconomic variables on sales of Hino Pak .................... 130
4.5.2. Effects of macroeconomic variables on profit of Hinopak .................... 132
4.5.3. Effect of macroeconomic variables on ROA of Hinopak ...................... 133
4.5.4. Effects of macroeconomic variables on ROE of Hinopak ..................... 133
4.5.5. Effects of macroeconomic variables on NPM of Hino Pak............... 134
4.6. Influence of Factors on the performance of Ghandhara Industries Ltd. ... 135
4.6.1. Effects of macroeconomic variables on sales of Ghandhara Industries 137
4.6.2. Effect of macroeconomic variables on profit of Ghandhara Industries . 138
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4.6.3. Effect of macroeconomic variables on ROA of Ghandhara Industries . 139
4.6.4. Effect of macroeconomic variables on ROE of Ghandhara Industries .. 140
4.6.5. Effect of macroeconomic variables on NPM of Ghandhara Industries . 140
4.7. Determinants of the performance of Ghandhara Nissan Ltd. ....................... 142
4.7.1. Impact of macroeconomic factors on sales of Ghandhara Nissan ......... 144
4.8. Determinants of the Performance of Millat Tractors Ltd. ............................ 146
4.8.1. Impact of macroeconomic factors on sales of Millat Tractors .............. 148
4.8.2. Impact of macroeconomic factors on profit of Millat Tractors ............. 150
4.8.3. Impact of macroeconomic factors on ROA of Millat Tractors .............. 151
4.8.4. Impact of macroeconomic factors on ROE of Millat Tractors .............. 152
4.8.5. Impact of macroeconomic factors on NPM of Millat Tractors ............. 152
4.9. Determinants of the Performance of Al-Ghazi Tractors Ltd. ....................... 154
4.9.1. Effects of macroeconomic factors on sales of Al-Ghazi Tractors ......... 156
4.9.2. Impact of macroeconomic factors on profit of Al-Ghazi Tractors ........ 158
4.9.3. Impact of macroeconomic factors on NPM of Al-Ghazi Tractors ........ 159
4.10. Determinants of the Performance of Honda Atlas Bikes ........................ 160
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4.10.1. Impact of macroeconomic factors on sales of Honda Atlas ................ 162
4.10.2. Impact of macroeconomic factors on profit of Honda Atlas ............... 163
4.10.3. Conclusion and decision ...................................................................... 164
4.11. Determinants of the Performance of Automobile Industry- Panel Data
Approach ..................................................................................................................... 165
4.11.1. Impact of macroeconomic factors on sales of Auto Industry .............. 166
4.11.2. Impact of macroeconomic factors on profit of Auto Industry ............. 167
4.11.3. Impact of macroeconomic factors on ROA of Auto Industry ............. 168
4.11.4. Impact of macroeconomic factors on NPM of Auto Industry ............. 169
4.11.5. Conclusion and decision. ..................................................................... 170
Chapter Five ............................................................................................................. 172
5.1.3. ROA of the industry ............................................................................... 174
5.1.4. NPM of the industry .......................................................................... 174
5.2 Influential Macroeconomic Determinants of the Industry ........................ 174
5.3. Analysis of Firms’ Performance ................................................................... 176
5.3.1. Annual sales ........................................................................................... 176
5.4. Recommendations ..................................................................................... 182
References ................................................................................................................ 184
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1 Market Share of Ford in 1913 05
2 Import Penetration of U.S. Automobile Market 1960-84 07
3 Worldwide passenger car production (1933 and 1938) 12
4 Production Trend of Vehicles 1997-2011 16
5 Country-wise output of vehicles 1970-2010 (in Units) 17
6 Performance Measurement Models 25
7 Automobiles production 1988-1995 54
8 Automobile production- 1995-2010 55
9 Vehicle industry share to GDP 56
10 Employees in OEMs 57
11 Automobile parts exports 58
12 Vehicles Exports 59
18 Progress of Dewan Farooq Motors Co 64
19 Progress of Hinopak Motors Co 65
20 Progress of Ghandhara Nissan Ltd 66
21 Progress of Ghandhara Industries Ltd 66
22 Progress of Millat Tractors Ltd 67
23 Progress of Al-Ghazi Tractors Ltd 68
24 Progress of Atlas Honda Ltd. 69
25 Automobile firms and joint ventures 70
26 Japanese and other brands’ market share 71
27 No. of foreign assemblers by vehicle 71
28 Share of Japan in automobile parts 72
29 Sample and market share 81
30 Macroeconomic variables 85
33 Model Summary for Sales Pak Suzuki 95
34 Model Summary for Profit of Pak Suzuki 97
35 Model Summary for ROA of Pak Suzuki 99
36 Models Comparison for ROE of Pak Suzuki 100
37 Model Summary for ROE for Pak Suzuki Company 101
38 Model Summary for NPM for Pak Suzuki 102
39 Variables for Indus Motors Company 105
40 Correlation Analyses for Indus Motors 106
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42 Model Summary for Annual Profit of Indus Motors 109
43 Model Summary for ROA of Indus Motors 110
44 Model Summary for ROE of Indus Motors 111
45 Model Summary for NPM of Indus Motors 112
46 Variables for Honda Motors Company 114
47 Correlation Analysis of Honda Motors 115
48 Model Summary for Annual Sales of Honda Motors 116
49 Model Summary for Annual Profit of Honda Car 117
50 Model Summary for ROA of Honda Car 118
51 Model Summary for ROE of Honda Car 119
52 Model Summary for NPM of Honda Motors 121
53 Variables for Dewan Motors Company 122
54 Correlation Analysis of Dewan Motors 123
55 Model Summary for Annual Sales of Dewan Motors 124
56 Model Summary for Annual Profit of Dewan Motors 125
57 Model Summary for ROA of Dewan Motors 126
58 Model Summary for ROE of Dewan Motors 126
59 Model Summary for NPM of Dewan Motors 127
60 Variables for Hino Pak Company 129
61 Correlation Analysis for Hino Pak 130
62 Model Summary for Sales of Hino Pak 131
63 Model Summary for Profit of Hino Pak 132
64 Model Summary for ROA of Hino Pak 133
65 Model Summary for NPM of Hino Pak 134
66 Variables for Ghandhara Industries Ltd. 136
67 Correlation Analysis of Ghandhara Industries 137
68 Model Summary for Sales of Ghandhara Industries 138
69 Model Summary for Profit of Ghandhara Industries 139
70 Model Summary for ROA of Ghandhara Industries 140
71 Model Summary for NMP of Ghandhara Industries 141
72 Variables for Ghandhara Nissan Ltd. 143
73 Correlation Analysis for Ghandhara Nissan 144
74 Model Summary for Annual Sales of Ghandhara Nissan 145
75 Variables for Millat Tractors Ltd. 147
76 Correlation Analysis for Millat Tractors 148
77 Model Summary for Sales of Millat Tractors 149
78 Model Summary for Profit of Millat Tractor 150
79 Model Summary for ROA of Millat Tractor 151
80 Model Summary for ROE of Millat Tractor 152
81 Model Summary for NMP of Millat Tractor 153
82 Variables for Al-Ghazi Tractors Ltd. 155
83 Correlation Analysis Al-Ghazi Tractors 156
84 Model Summary for Sales of Al-Ghazi Tractors 157
85 Model Summary for Profit of Millat Tractor 158
86 Model Summary for NMP of Al-Ghazi Tractors 159
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88 The Correlation Analysis for Honda Bikes 162
89 Model Summary for Sales of Honda Atlas Bikes 163
90 Model Summary for Profit of Honda Atlas 164
91 Correlation Analysis for Automobile Industry 166
92 Model Summary for Sales of Automobile Industry 167
93 Model Summary for Profit of Automobile Industry 168
94 Model Summary for ROA of Automobile Industry 169
95 Model Summary for NMO of Automobile Industry 170
96 Determinants of Annual Sales 176
97 Determinants of Annual Profit 178
98 Determinants of Return on Assets 180
99 Determinants of Return on Equity 180
100 Determinants of Net Profit Margin 181
101 Tests of Normality-Sales of Pak Suzuki 227
102 Tests of Normality-Profit of Pak Suzuki 227
103 Tests of Normality-ROA of Pak Suzuki 227
104 Tests of Normality-ROE of Pak Suzuki 227
105 Tests of Normality-NPM of Pak Suzuki 227
106 Tests of Normality-Sales of Indus Motors 228
107 Tests of Normality-Profit of Indus Motors 228
108 Tests of Normality-ROA of Indus Motors 228
109 Tests of Normality-ROE of Indus Motors 228
110 Tests of Normality-NPM of Indus Motors 228
111 Tests of Normality- Sales of Honda Car 229
112 Tests of Normality- Profit of Honda Car 229
113 Tests of Normality- ROA of Honda Car 229
114 Tests of Normality- ROE of Honda Car 229
115 Tests of Normality- NPM of Honda Car 229
116 Tests of Normality-Sales of Hino Pak 230
117 Tests of Normality-Profit of Hino Pak 230
118 Tests of Normality-ROA of Hino Pak 230
119 Tests of Normality-NPM of Hino Pak 230
120 Tests of Normality-Sales of Ghandhara Industries 230
121 Tests of Normality-Profit of Ghandhara Industries 230
122 Tests of Normality-ROA of Ghandhara Industries 231
123 Tests of Normality-ROE of Ghandhara Industries 231
124 Tests of Normality-NPM of Ghandhara Industries 231
125 Tests of Normality-Sales of Millat Tractors 231
126 Tests of Normality-Profit of Millat Tractors 231
127 Tests of Normality-ROA of Millat Tractors 232
128 Tests of Normality-ROE of Millat Tractors 232
129 Tests of Normality-NPM of Millat Tractors 232
130 Tests of Normality-Sales of Al-Ghazi Tractors 232
131 Tests of Normality-Profit of Al-Ghazi Tractors 232
132 Tests of Normality-ROA of Al-Ghazi Tractors 233
xvi
xvii
A-8 Scatter plot for sale of Pak Suzuki 201
A-9 Scatter plot for profit of Pak Suzuki 201
A-10 Scatter plot for ROA of Pak Suzuki 201
A-11 Scatter plot for ROE of Pak Suzuki 202
A-12 Scatter plot for NPM of Pak Suzuki 202
A-13 Scatter plot for sale of Indus Motors 202
A-14 Scatter plot for profit of Indus Motors 203
A-15 Scatter plot for ROA of Indus Motors 203
A-16 Scatter plot for ROE of Indus Motors 203
A-17 Scatter plot for NPM of Indus Motors 204
A-18 Scatter plot for sale of Honda Motors Car 204
A-19 Scatter plot for profit of Honda Motors Car 204
A-20 Scatter plot for ROA of Honda Motors Car 205
A-21 Scatter plot for ROE of Honda Motors Car 205
A-22 Scatter plot for NPM of Honda Motors Car 205
A-23 Scatter plot for sale of Hino Pak Company 206
A-24 Scatter plot for profit of Hino Pak Company 206
A-25 Scatter plot for ROA of Hino Pak Company 206
A-26 Scatter plot for ROE of Hino Pak Company 207
A-27 Scatter plot for NPM of Hino Pak Company 207
A-28 Scatter plot for sale of Ghandhara Industries 207
A-29 Scatter plot for profit of Ghandhara Industries 208
A-30 Scatter plot for ROA of Ghandhara Industries 208
A-31 Scatter plot for ROE of Ghandhara Industries 208
A-32 Scatter plot for NPM of Ghandhara Industries 209
A-33 Scatter plot for sale of Ghandhara Nissan 209
A-34 Scatter plot for profit of Ghandhara Nissan 209
A-35 Scatter plot for ROA of Ghandhara Nissan 210
A-36 Scatter plot for ROE of Ghandhara Nissan 210
A-37 Scatter plot for NPM of Ghandhara Nissan 210
A-38 Scatter plot for sale of Millat Tractors 211
A-39 Scatter plot for profit of Millat Tractors 211
xviii
B-9 Histogram for Residuals of Honda Car Ltd. Sales 218
B-10 Histogram for Residuals of Honda Car Ltd. Profit 219
B-11 Histogram for Residuals of Honda Car Ltd. ROA 219
B-12 Histogram for Residuals of Honda Car Ltd. ROE 220
B-13 Histogram for Residuals of Honda Car Ltd. NPM 220
B-14 Histogram for Residuals of Hino Pak Sales 220
B-15 Histogram for Residuals of Hino Pak Profit 221
B-16 Histogram for Residuals of Hino Pak ROA 221
B-17 Histogram for Residuals of Hino Pak ROE 221
B-18 Histogram for Residuals of Ghandhara Industries Sales 222
B-19 Histogram for Residuals of Ghandhara Industries Profit 222
B-20 Histogram for Residuals of Ghandhara Industries ROA 222
B-21 Histogram for Residuals of Ghandhara Industries NPM 223
B-22 Histogram for Residuals of Ghandhara Nissan Sales 223
B-23 Histogram for Residuals of Millat Tractors Sales 223
B-24 Histogram for Residuals of Millat Tractors Profit 224
B-25 Histogram for Residuals of Millat Tractors ROA 224
B-26 Histogram for Residuals of Millat Tractors ROE 224
B-27 Histogram for Residuals of Millat Tractors NPM 225
B-28 Histogram for Residuals of Al-Ghazi Tractors Sales 225
B-29 Histogram for Residuals of Al-Ghazi Tractors Profit 225
B-30 Histogram for Residuals of Al-Ghazi Tractors NPM 226
B-31 Histogram for Residuals of Honda Bikes Sales 226
B-32 Histogram for Residuals of Honda Bikes Profit 226
xix
CBU Completely built up
CKD Completely knocked down
GDP Gross Domestic Products
GNI Gross National Product
NPM Net Profit margin
OEM Original Equipment Manufacturers
PAAPAM Pakistan Association of Automotive Parts and Accessories
Manufacturers
Pvt Private
ROE Return on Equity
ROI Return on Investment
ROS Return on Sales
SKD Semi knocked down
1.1 Background of the Study
The human history is full of inventions and discoveries. In ancient times, man
invented tools for hunting, movement, sheltering and other purposes so as to fulfill the
basic needs of life. The journey of modernization continued with a view to bringing about
comforts and luxuries in the life style. However, the most significant phase of human
history was Industrial revolution that gave birth to hundreds of new products in the field
of engineering, medicines, biology, chemistry, communication and transports. As a result,
human civilization experienced a new life style that was full of comforts and luxuries.
Amongst the inventions induced by industrial revolution, development of
automobile was a tremendous achievement which affected several spheres of social and
economic life. It made the mobility of people quick and easy from one place to another; it
made the exchange of goods possible between two poles of the world; it enhanced
business and economic transactions; and it gave new styles to human life. Therefore,
automobile is considered as one of the most significant inventions in the human history.
1.1.1 History of automobile. The engineers mad several efforts in the past
to facilitate quick, comfortable and easy mobility of people and goods, but all of them
were in vain until the invention of automobile. A French army Captain, Nicolas-Joseph
Cugnot was the first person who succeeded to build the first auto vehicle. He developed
Fardier à Vapeur, a three-wheeled steam-powered artillery tractor. The vehicle was not
Introduction 2
suitable for travelling due to its technical constraints. However, some serious attempts
were made in England and America to improve the vehicle by introducing heavy steam-
powered engines in the early decade of 19 th
Century. The addition of internal combustion
engine was another advancement which was launched by a Swiss engineer Francis Isaac
De Rivaz in 1807. He used the mixture of Oxygen and Hydrogen to generate energy. It
was not a successful design either as the fuel was not safe enough for consumption. So,
extensive modifications were required to commence the commercial production of
vehicles.
In 1860, Jean Joseph Estienne Lenoir, a French man, succeeded to manufacture a
two- stroke gas driven engine. Later on he built another gas-driven car in 1862 which had
the enhanced speed of 3 kilo meter per hour. Both of his cars got popularity by 1865 and
they were frequently seen on roads. With some minor modifications in the design of
Lenoir, the first gasoline-powered car was produced by Charles and Frank Duryar in
1893. However, It is generally acknowledged that first automobile with gasoline powered
internal combustion engine was produced by Karl Benz in 1885 in Germany.
1.1.1.1 Eras of automobile. Automobiles are grouped into different eras on the basis
of modifications and innovations. The first era was Vertaran Era which started with the
innovation by Karl Benz in Germany in 1888. Most of the vehicles produced in that era
were cars and they were not appropriate for domestic consumption and needed to be
improved and modified.
The next era was the Brass Era which continued from 1905 to 1914. This is called
“Brass era” because of the mass usage of brass in the production of industrial goods.
Several measures were taken to improve the performance of vehicles. As a result, the cars
Introduction 3
were built with front engine rear wheel and sliding gear combustion. Ford Model T,
Mercer Raceabout and Bugatti Type 13 were some of the popular cars of this era. Vintage
Era (1919-1929) was the subsequent period when the front engine cars with closed bodies
and standardized control were manufactured. Austin 7, Ford Model A, Bugatti type 35
and Cadillac were some of the exemplary cars of this era.
In Pre-War Era (1930-1948), the vehicles were produced on the basis of
mechanical technology in spite of the sufferings of the Great Depression in America.
Ford V-8, Bugatti Type 57, Citreon Traction Avant and Volks Wagon Beetle were some
of the popular vehicles of this period. The Post-War Era (1949-1967) was characterized
with high speed, well integrated and artfully designed vehicles. Morris Minor, Jaguar E
type and Datsun were few exemplary automobiles in this era.
In the Modern Era (1967 to date), much emphasis was given on fuel efficiency
and engine output. Light commercial vehicles and heavy commercial vehicles were
manufactured during this period in order to facilitate the transportation of goods. Toyota
Corolla, Dodge Aries and Ford Tauru were some popular vehicles of this period.
In 2012, the most popular vehicles of the world included Toyota Corolla,
Volkswagen, Volkswagen Jetta, Hyundai Elantra and Ford Fiesta. With few exceptions,
all of the popular vehicles of this period were small, fuel-efficient and compact.
1.1.2. Evolution of automobile industry in the world. The mass level
production of vehicles gave birth to the development of automobile industry. The history
of automobile industry started in 19th Century when Duryea Motor Wagon Company of
Springfield, Massachusetts was established in 1886 in America. Later on, Daimler
Company in Germany stepped forward and developed its plant in 1886. There were only
Introduction 4
300 vehicles produced from 1886 to 1898 and the output was not sufficient to form an
industry in its real sense. At that time the automobile sector was characterized by
fragmentation, mergers, divestitures and frequent entry and exit of automobile firms. The
industry evolved in different parts of the world in different ways and the history of this
evolution is given below.
1.1.2.1 Evolution of American Automobile Industry. The United States of America
is considered as the pioneer of automobile industry as the first automobile company,
Duryea Motor Wagon, was established in USA in 1886. Later on, many other
entrepreneurs took initiatives to produce different vehicles. By the end of 1904, Michigan
became the center of car production and it captured 42% market share of the automobile
industry. The mass level production could not start until the arrival of Henry Ford who
successfully challenged the patent of Seldon and opened the doors of auto sector for other
investors. Before the establishment of Ford Company, the manufacturers were engaged in
small-scale production of “high-end” cars. Ford Company changed the horizon by
emphasizing upon increase in sale with reduced price. In this way it was capable of
enjoying the benefits of economies of scale and capturing the market share of around
46.11% in 1913. The detail of market share is depicted in table 1.
In addition to Ford’s efforts, William C. Durant stepped forward to form General
Motors Corporation (GM) in 1908. In 1923, Alfred P. Sloan, a newly appointed president
of General Motors, introduced unique marketing techniques to move the company up on
the ranking table. Since the market was saturated and it was difficult to find out new
buyers, Sloan went for launching new models of cars. His objective was to motivate the
existing car holders to replace their old cars with the latest models. By 1926, the new
Introduction 5
marketing strategies enabled General Motors to raise the market share to 28% which
restricted Ford Company to a market share of 35% only.
Table 1
1913
Market
Share
Piece-Arrow Buffalo, New York 2000 0.52%
White Cleveland, Ohio 1500 0.39%
Franklin Syracuse, New York 1400 0.36%
Winton Cleveland, Ohio 1300 0.34%
Locomobile Bridgeport, Connecticut 1100 0.28%
Oldsmobile Lansing, Michigan 1000 0.26%
Others ------------- 7900 2.05%
Medium($1500-$2500) 62,500 16.19%
Others --------- 21,500 5.57%
Moderate($600-499) 120,000 31.09%
Maxwell Terrytown, New York 4,000 1.04%
Paige-Detroit Detroit- Michigan 3,000 0.78%
Others ------ 6,000 1.55%
Inexpensive(Under$600) 185,000 47.93%
Others --------- 7,000 1.81%
Note. From The Changing Auto Industry by James M. Rubenstein, 1992, New Fetter
Lane, London, EC4P 4EE. p 43.
Introduction 6
Chrysler Corporation was another important firm that entered into the industry in
1925. The company soon became a recognized producer due to the manufacturing of
well-designed cars. The management of company took effective measures to catch the
attention of potential customers. As a result, the company emerged as an important part
of the Big Three companies of United States of America.
The automobile sector performed well in America as it was supported by good
engineers, managers and investors. However, the Great Depression of 1930s appeared to
be the first test for American automobile industry. After some hazards, the industry
managed to overcome the negative repercussions and got on the right track again. During
the first and second world wars, the production and growth of the industry were severely
affected for understandable reasons. However, the post war period engender prosperity
for the sector in form of better automatic transmissions, air conditioning, V-8 engines,
functional power steering and brakes.
The decade of 1950s proved to be very fortunate for the industry and the sale for
cars in the United States reached 4.8 million units which increased to 7.2 million by
1955. There were 13.7 million units produced during 1955. America led the industry by
contributing 9.2 million vehicles to the production of world. During the decade, many
firms such as Kaiser, Studebaker, Packard, Nash and Hudson left the market due to
bankruptcy and other internal reasons. Subsequently, there left only three large domestic
manufacturers in USA which formed a cartel. However, the subsequent decade changed
the scenario for the U.S. auto sector and the production went down to 7.9 million units
while there was a rising trend in rest of the automobile world. The primary cause for this
downward trend was the invasion of Japanese firms which were capitalizing the
Introduction 7
advantages of quality and price over American companies. The invasion of Japanese
firms is depicted in table 2 which shows the rising trend in import of vehicles in America.
Table 2
(Hundreds of thousands unless otherwise specified)
Year Total New Car Registration Imports Import Share(%)
1960 6.58 0.5 7.6
1961 5.85 0.38 6.5
1962 6.94 0.34 4.9
1963 7.56 0.39 5.16
1964 8.07 0.48 5.95
1965 9.31 0.57 6.12
1966 9.01 0.66 7.33
1967 8.36 0.78 9.33
1968 9.40 0.99 10.53
1969 9.45 1.06 11.22
1970 8.39 1.23 14.66
1971 9.83 1.29 13.12
1972 10.49 1.53 14.59
1973 11.35 1.72 15.15
1974 8.70 1.37 15.75
1975 8.26 1.50 18.16
1976 9.75 1.45 14.86
1977 10.39 1.98 18.28
1978 10.95 1.95 17.86
1979 10.36 2.35 22.68
1980 8.76 2.47 28.20
1981 8.44 2.43 28.89
1982 7.75 2.27 29.29
1983 8.92 2.46 57.58
1984 10.12 2.52 24.90
http://njkk.com/about/industry8.htm)
Hence, the big three companies of America had to struggle for their survival as
Chrysler slid into bankruptcy and Ford petitioned the government for import relief. Later
on, the big three companies got rid of the problems during 1970s. Thus America
sustained the first position in the production of automobiles by manufacturing 9 million
Introduction 8
vehicles with 27% market share. Japan stood second with 6.9 million vehicles and 21%
market share. Germany, France and Britain stood 3 rd
, 4 th
American Technology, 1998)
The oil crisis hit the American auto sector adversely and Japan got the
opportunity to enter the market with its fuel-efficient vehicles. In the early 1980s, Japan
became the world leading producer of vehicles with over 11 million units followed by
USA and Germany. The ranking remained almost same by the end of decade. The decade
of 1990 was characterized by recession due to Iraq-Kuwait war along with mergers and
joint ventures between foreign and local firms. The first decade of 21 st century started
with a negative note due to September 11, attack. There was another shock absorbed by
the industry when oil prices reached the peak in 2008. However, the most difficult period
for the industry was global financial crisis of 2008-09 that affected the entire economy
including the auto sector. As a result, a bailout plan for the rescue of industry was
approved by the government.
Despite all these issues and problems, the American automobile sector is still one
of the leading sectors of the world. In 2010, the American auto industry ranked 2 nd
in the
production of vehicles when it generated the output of 7,761,443 units.
1.1.2.2. Evolution of Japanese automobile industry. Besides the United States and
European countries, Japan also contributed substantially to the development of
automobile industry. In 1902, Mr. Komanosuke Uchiyama had the honor to produce the
first Japanese vehicle in Ginza. However, the mass level production of vehicles could not
start until the arrival of Mitsubishi Zosen Company that manufactured 22 Mitsubishi
model in 1914. By 1930, the automobile market of Japan was dominated by American
Introduction 9
manufacturers. The American firms were producing around 20,000 units against the
domestic Japanese production of 500 units per annum. Realizing the monopoly status of
American producers, the Japanese government approved Automobile Manufacturing
Industries Act in 1936 which brought two Japanese companies, Toyota and Datsun, into
the market.
The Automobile Manufacturing Industries Act could not stop the invasion of
American firms and the market was ruled by the big three companies of America. Hence,
local Japanese producers were forced to take effective measures to break the oligopoly of
foreign firms. After World War II, many firms in Japan redesigned their strategy and
went for effective innovations. During 1960s, a number of measures were taken by the
enterprises to manufacture fuel efficient and cost effective vehicles. In 1967, the Japanese
Automotive Manufacturers Association (JAMA) was established with a view to helping
the local manufacturers to deal with the challenges of General Agreement on Tariff and
Trade (GATT).
During 1970s, the oil crisis created the need for the small and fuel efficient
vehicles. Hence, Japanese auto manufacturers got the advantage over American
producers as the American producers had been focusing on the vehicles of high power
with large engines. The Japanese producers capitalized that opportunity and entered into
the American market. In the beginning of 1970s, Japan became the third largest exporter
of the world by exporting 1090,000 vehicles. By 1974, Japan took the leadership of world
exporter by exporting 2620,000 units to different parts of the world (JAMA, 2001).
Due to the wave of consumerism and high standard of living in Japan, there was a
shift in the use of vehicles from commercial purpose to personal consumption. The shift
Introduction 10
was very prominent as there were around 14% people who owned their personal cars in
Japan. During 1970s, the proportion reached up to 50.6% (JAMA, 2001).
The second oil crisis in the late 70s influenced the American economy adversely.
The logical consequence was the availability of more room for Japanese fuel efficient
small vehicles in the market. However, the invasion of Japanese exporters was not
tolerated and various protective measures were taken by American and European
regulators. In order to cope with the impact of protective measures, Japanese automobile
companies changed their strategy by forming joint ventures and establishing their plants
in United States and Europe. Honda established Honda of American Manufacturing plant
in Ohio which started its production in 1982. Similarly, Nissan Motors Manufacturing
Corporation USA commenced its operation in Tennessee during 1983; Toyota initiated
production at NUMMI plant in 1984. Besides these producers, other manufacturers
including Mitsubishi with Chrysler, Mazda with Ford, and Suzuki with GM Canada, Fuji
and Isuzu started their operation in America and Canada. In the United Kingdom Nissan,
Honda and Isuzu entered the auto industry and in Austria, Nissan and Mitsubishi were the
major Japanese manufacturers.
The period from 1987 and 1989 proved to be very prosperous for the local
automobile sector as the industry gave highest output of 13.5 million units and sales
volume of 7.78 million units (JAMA, 2001). However, in 1991, the asset-inflated
economy collapsed and the outcome was decline in production, sale and profit. Hence the
firms were forced to take extra ordinary measures to cope with the challenges of weak
economy.
Due to affordability, better reliability and increasing popularity of Japanese
vehicles, Japan became the largest car producer in 2000. In 2008, Toyota superseded
General Motors and became the biggest car manufacturer in the world. In 2010, Japan
ranked 2 nd
in the production of vehicles by producing 9,625,940 vehicles (OICA, 2008).
However in 2010, Japan stood 3 rd
with 9625940 vehicles. In spite of Chinese domination
in the automobile industry, Japan enjoyed a very good position in the world and it had the
potential to beat China and America to attain the first position again.
1.1.2.1. Evolution of European Automobile Industry. Europe is recognized as the
pioneer continent for automobile. Nicholas-Joseph Cugnot built the first steam powered
automobile in form of a tractor in France in 1769. In spite of inventing the first vehicle,
Europe could not establish automobile industry until the arrival of Karl Benz in Germany.
Benz established the plant in 1901 and enabled the country to produce around 900 cars
per annum. In 1926, Daimler-Motoren-Gesellschaft and Benz & Cie. were merged to
form Daimler-Benz AG. Due to the huge investment and mergers, Germany became the
4 th
largest producer of the world in 1933 with an output of 92,226 passenger cars which
was 4.3% of total world output. By the end of 1938, Germany took 3 rd
position in the
manufacturing of cars (Erik Eckermann, 2001).
Besides Germany, serious efforts were also made in Britain to develop the
automobile sector. The history of this industry began when Frederick Simms acquired
British rights to Daimler's engine. As a result, he established Daimler Motor Syndicate
Limited for Daimler-related products. Initially, Great Britain manufactured the vehicles
for the domestic market only. Therefore, the vehicles were designed for the narrow and
winding roads of the England and they had less attraction for foreign consumers.
Introduction 12
However, the protective measures and vast colonies of the British Empire enabled the
country to retain the 2 nd
position in the production of cars in 1938.
Table 3
Country 1933
USA 1573512 72.9 2000985 65.6
ENGLAND 220775 10.2 341082 11.2
GERMANY 92226 4.3 276804 9.1
FRANCE 163770 7.6 199750 6.6
CANADA 53849 2.5 125081 4.1
ITALY 32000 1.5 59000 1.9
USSR 10252 0.5 26800 0.9
Note: From World History of the automobile by Erik Eckermann 2001. Society of
automative engineers, Inc. 400 Commonwealth Drive Warrendale. P.A. 15096-0001
USA. p 101.
The automobile sector in France was developed very late in 1887. Various
experiments were conducted to enhance the performance of vehicles. By the end of 1933,
France became the 3 rd
largest producer of passenger cars. However the position was lost
within five years due to the financial crisis in the country.
After Second World War, the European infrastructure was destroyed along with
the structure of automobile industry. However, after the war, the continent rehabilitated
remarkably and industrial development restarted in all spheres with a faster pace. By
2011, there were three countries of this continent which were included in the top ten list
of world vehicles production and they included Germany that secured 4th position with
5905985 vehicles, Spain stood at 9th position with 2387900 vehicles and France was 10th
in the ranking with 2227742 (OICA, 2008).
Introduction 13
1.1.2.4. Development of Pakistan automobile sector. General Motors and Sales Co.
Ltd. was the first automobile company that was established in Pakistan in 1948. The plant
was established in 1949 in order to conduct the experiment for establishing automobile
plant in Pakistan. Since the experiment of General Motors Company was successful, the
base of plant was enhanced and it started to assemble Bedford truck. Due to the
successful entry of the company in Pakistan, few more U.S. producers of automobile
stepped forward to form joint ventures with Pakistani firms.
The history of automobile sector in Pakistan had four phases i.e. pre-
nationalization, nationalization, post-nationalization and privatization periods. By 2010,
the industry was producing almost all type of vehicles in the country. The major firms of
the industry included Pak Suzuki Company Limited, Indus Motors, Honda, Dewan
Farooq, Hino Pak and Ghandhara Industries, Ghandhara Nissan, Millat Tractors, Al-
Ghazi Tractors and Honda Motorcycle.
The industry had a significant position in the large scale manufacturing sector in
Pakistan. It offered direct and indirect employment to millions of people, it attracted
billions of Rupees domestic and foreign investment and it contributed substantially to the
GDP of country. Despite the problems and issues in the industry, it had the potential to
grow and contribute to the national economy in a better way.
1.1.2.5. Evolution of automobile industry in other regions. In addition to America,
Europe and Japan, the automobile industry also evolved in other regions of the world.
China is the first country that needs to be focused due to its tremendous growth in last
few years. Despite the marvelous present of Chinese automobile sector, the past is not
attractive enough. Unlike the early development of industry in Europe and America, the
Introduction 14
automobile sector came into being in China in 1949 under the regime of the Communist
Party. Due to the priorities of rulers, there was an alliance with the USSR. The USSR
provided assistance in the first automobile project for the country in 1956 by means of
First Automobile Works (FAW) and the first car Jiefang CA-30 was produced. However,
the relationship between China and the USSR deteriorated during 1960s and Russia
withdrew the assistance. As a result, China had to take measures for self reliance.
The second phase of Chinese auto sector started from 1978 and continued till 1994.
The period was characterized by centralized planning, low output of vehicles,
protectionism and establishment of new factories. The concentration phase (1995-2004)
brought about growth and prosperity when the government approved Automotive
Industrial Policy. Due to extraordinary efforts by the policy makers and manufacturers
the automobile sector performed tremendously and China became number one country in
the production of automobiles in 2008. The performance of Chinese automobile industry
was remarkable and the industry was on the top of the world automobile producers in
2010 with 18264667 vehicles.
South Korea was another significant Asian country that contributed tremendously
in the development of automobile industry. The industry began its journey in 1955 when
a Korean businessman Mu-Seong assembled the first car Sibal. The decade of 1960s was
characterized by policy making, joint ventures and investment. From 1970 to 1990, there
were development of new ventures, transfer of technology, production of spare parts
domestically and mass level production of vehicles in the country. By 2010, South Korea
became 5 th
Introduction 15
Another significant contributor to the world automobile sector is India which has
the strength of dense population and abundant resources. Till 1944, there was no
production of vehicles in the country and the cars were imported directly from United
Kingdom. Mahindra & Mahindra was the first company that assembled a utility Jeep CJ
in 1945. Due to nationalization, the auto industry could not grow rapidly in the region. In
1970, the government imposed restrictions on the import of vehicles and ultimately, the
local production of vehicles grew to an extent. Due to the transformation of closed
economy into a free trade economy, certain companies including Suzuki and Toyota of
Japan and Hyundai of South Korea were given licenses to make investment in the
country. Later on, several other foreign firms also formed joint ventures with the Indian
firms. As of 2010, India is the 6 th
largest manufacturer of vehicles with 3536783 units
(OICA, 2008)
1.1.3 Growth of global automobile industry. The automobile industry
started its journey in 1886 when Duryea Motor Wagon Company was established in the
United States of America. At that time, there were few vehicle manufactured by the
industry. However, the subsequent period brought about the success and the industry
became one of the largest sectors in the manufacturing industry. The story of the success
of this industry is depicted in the table 4.
According to the table, there was a rising trend for production of vehicles from 2002
to 2007. The industry went into negative zone in 2008 and 2009 due to global financial
crisis. However, after one year, there was a substantial rise 26% that showed the recovery
of the sector.
Year
Production
Note: Adapted from OICA
Besides the overall performance of the industry, country-wise progress is shown
in table 5. The table summarizes the performance of major countries pertaining to the
production of vehicles from 1950 to 2010. In 1970, America ranked number 1 in the
production of automobiles units. The competition continued between America and the
European countries up to 1980 and then Japan became the largest producer of vehicles. In
Introduction 17
the 21 st Century, China emerged quickly as an industrial super power and became the
largest automobile producer by 2010.
Table 5
Rank Country
03 Japan 9,625,940 10,799,659 10,140,796 10,195,536 13,486,796 11,042,884 5,289,157
04 Germany 5,905,985 5,757,710 5,526,615 4,667,364 4,976,552 3,878,553 3,842,247
05 South Korea 4,271,941 3,699,350 3,114,998 2,526,400 1,321,630 123,135 28,819
06 India 3,536,783 1,638,674 801,360 636,000 [17]
362,655 113,917 76,409
Note : From Wikipedia Retrieved January 12, 2013 from
http://en.wikipedia.org/wiki/List_of_countries_by_motor_vehicle_production#cite_note-1
1.1.4 Economic significance of global automobile industry. The
world automobile industry has a significant impact on the economic growth of world. The
automobile sector would be the sixth largest economic power of the world if it were a
country (OICA, 2008). The industry manufactures more than 60 million vehicles in a
year which require around 9 million direct employees which is around 5% of the world
total manufacturing employment. In addition to this, each direct employment results in
the creation of 5 indirect jobs in the society. Therefore, the estimated employees in the
world automobile industry are around 50 million. The sector also plays a significant role
Introduction 18
in the investment of research and development as the expenditure was over €84 billion
(OICA, 2008). The global automotive industry is also one of the biggest generators of
revenue across all economic sectors. The facts and figures reveal that the sector is very
prominent in the world economy. Due to the need of mobility, there are bright prospects
for the growth of this sector in future.
1.1.5. Factors influencing the auto industry. An industry is influenced
by internal and external environment. The external environment contains political,
economic, social and technological factors. All of them influence the performance of
industry directly or indirectly. However, the most dominant factors are macroeconomic
determinants that influence the industry substantially. These determinants include per
capita income, inflation, unemployment, interest rate, consumption rate, foreign direct
investment and rate of exchange. A high growth rate, for instance, increases the
purchasing ability of the consumers which results in rise in demand and production. A
decrease in rate of interest results in increase in supply of credit and ultimately, the
demand for vehicles goes up. The monopoly or oligopoly market structure leaves few
choices for the consumers and enables the firms to book high profit and sales. Therefore,
the effect of economic factors in the industry is vital on the progress of an industry.
1.2 Purpose of the Study
The purpose of this study is elaborated as follows:
1.2.1. General purpose. Generally, the study aims at finding out the
macroeconomic determinants of the performance of automobile industry of Pakistan over
a period of fifteen years from 1995 to 2010.
Introduction 19
1.2.2. Specific Purpose. The specific purpose of the study is to take into
consideration the effects of Gross National Income, Inflation Rate, Exchange Rate,
Unemployment Rate, Consumption Rate, Discount Rate and Foreign Direct Investment
on the Sales, Profit, Return on Assets, Return on Equity and Net Profit Margin of the
selected original equipment manufacturers.
There are following arguments for justification of the study:
a. With the help of this research, various governmental bodies will be able to design
concrete and precise policies for the automobile sector.
b. The study will benefit the entrepreneur in two ways. The first aspect is that the
owners will come to know the factors that influence the performance of industry
and firms. Further, they can make the strategies in accordance with the influence
of these factors.
c. The study will serve as a reference point for research scholars. They will use the
data and methodology for further study.
d. The non-government and social organizations will be benefited by making their
strategy pertaining to employment, consumer rights, labor laws etc. according to
the findings of this research.
e. The study is likely to help the economists and industrialists in understanding the
relationship of automobile industry with the macroeconomic factors.
Introduction 20
1.4 Scope of the Study
Automobile Industry is categorized into two large segments i.e. Assembling Unit
and Auto Parts & Accessories Unit. The contribution of Auto Parts & Accessories Unit
does not lie in the area of this study. The scope of this research will be limited to the
contribution of Assembling Units which are commonly known as Original Equipment
Manufacturers. The period covered in the study will be from 1995 to 2010. The study
takes into account the impact of seven macroeconomic factors which have been
mentioned above. Moreover, the scope of performance of the firms is also limited to
sales, profit, Return on Assets, Return on Equity and Net Profit Margin of the assembling
companies. The study takes into account the data from 1995 to 2010. Further, it is limited
to the member companies of Karachi Stock Exchange and PAMA.
1.5 Hypothesis
The topic of research is “Determinants of the Performance of Automobile Industry
from 1995 to 2005- A Case Study of Pakistan”. So, the study is based on the following
hypothesis:
Ho: The Per Capita Gross National Income, Inflation rate, Exchange rate, Discount
rate, Unemployment rate, Consumption rate or Foreign Direct Investment has no impact
on the performance of automobile industry in Pakistan.
H1: The Per Capita Gross National Income, Inflation rate, Exchange rate, Discount
rate, Unemployment rate, Consumption rate or Foreign Direct Investment has significant
impact on the performance of automobile industry in Pakistan.
Introduction 21
1.6 Definition of Key Terms
a. Automobile Industry: It means the original equipment manufacturers which are
engaged in the production of vehicles.
b. Determinants: They include the macroeconomic variables which directly or
indirectly influence the sales, profit or profitability ratios of the automobile firms
c. Performance: It means the sales, profit, Return on Assets, Return on Equity and
Net Profit Margin of the firms.
1.7. Basic Assumptions
The study is conducted on the basis of following assumptions:
a. The impact of certain macroeconomic factors on the performance of automobile
industry in Pakistan is determinable.
b. Macroeconomic factors have measurable influence on the progress of industry.
c. Performance of the industry is measurable by means of sales, profit, Return on
Assets, Return on Equity and Net Profit Margin of the original equipment manufacturers.
Review of Literature 22
Review of Literature
This section provides a comprehensive review of literature from three aspects.
The first segment presents literature on the criteria for measuring the performance of
firms. The second part describes the factors which are likely to affect the performance of
an organization. The final part enunciates the detailed literature review of automobile
industry in Pakistan.
2.1 Performance Measurement
Organizations are established to achieve specified goals. The mission may be
maximizing profit, providing welfare to the society, increasing market share, securing
monopoly in the market etc. So, the organizations create vision, formulate policies,
develop strategies and set short term objective in order to achieve the goals and mission.
If a firm fails in the accomplishment of its mission, it may face poor efficiency, waste of
resources, high labor turnover, loss of market share, poor quality of production, financial
inefficiency or dissolution of the firm. Therefore, this is inevitable for an organization to
keep an eye on the accomplishment of mission consistently so as to ensure the continuity,
growth and long run survival. The process of evaluating the progress of an organization is
called Performance Measurement. Performance can be defined as
“A state of competitiveness of the organization, reached through a level of efficiency
and productivity which ensures a sustainable market presence”(Ana-Maria, G, Florica,
B., Lina R., 2010).
. Performance is also defined as
“The accomplishment of a given task measured against preset known standards of
accuracy, completeness, cost and speed.”
Before discussing the methods of performance measurements, there should be a
complete knowledge as why an organization needs this process.
2.1.1. Rationale for performance measurement. Performance
Management is considered as a process that identifies measures and develops progress in
an organization by establishing links between individual’s objectives and organization’s
overall mission. Therefore, measurement of performance enables an organization to
accomplish the mission efficiently. Besides this major benefit, a good monitoring system
has number of other advantages such as motivation to management and employees,
facilitation of explicit and implicit control, description of job precisely, efficient use of
resources and effective decision-making. On the other hand, any shortcoming or failure in
this regard may result in a disaster for the firms.
The history of measuring performance is very old and it started in 350 BC (Niven,
2002). Sun Tzu (Niven, 2002) concludes that:
"The General who wins the battle does many calculations in his temple
before the battle is fought. The General, who loses, makes but few calculations."
As per the IT Performance Management Group (ITPMG, 2007), there are many
benefits which may be derived from measurement. It helps increase opportunities to
enhance the knowledge of managers, reduce the unknown elements of future, facilitate
accurate decision-making and finally curtail the overall risks.
However, performance measurement is not a simple process and it should be
handled with proper objectivity. So, it should be objective, clear, well integrated and
linked to the targets of the organization (Anon, 2006 a).
2.1.2. Approaches to performance measurement. There a many
modern and traditional methods to measure the performance and there is a long list of
performance measurement models developed over a period of time. The summary is
given in Table 6. However, most relevant technique is Key Performance Indicators.
Pekeliling (Kritzinger, J.A., 2009) looks at Key Performance Indicators as a tool
which may be used to measures the performance continuously. He emphasizes that Key
Performance Indicators should not be large in number and preferably should not exceed
ten. According to him, it is necessary for a company to use those factors which may
increase business with existing and prospective customers.
These measures are mainly grouped in financial and non-financial measures. The
financial measures include sales volume, profitability, cost of production, operating
expenses, market share etc. On the other hand, non-financial measures are quality control,
labour satisfaction, social responsibility, dealing with competition, management
performance etc.
Before 1980s ROCE, ROE, ROI and derivates Simons (2000)
1980 EVA- Economic Value Added Model Stewart (2007)
1988 SMART- Strategic Measurement Analysis and
Reporting Technique
ABM- Activity Based Management
1990 CVA- Customer Value Analysis Customer Value Inc.
(2007)
1991 RDF- Results and Determinants Framework Fitzgerald et al. (1991)
1992 BSC- Balanced Scorecard Kaplan and Norton
(1992)
1995 ROQ- Return on Quality Approach Rust et al. (1995)
1996 CPMS- Consistent Performance Measurement
System Flapper et al. (1996)
1996 CPMF- Cambridge Performance
1997 IPMS- Integrated Performance Measurement
System Bititci et al. (1997)
1998 IPMF-Integrated Performance
2000 DPMS-The Dynamic Performance Measurement
System Bititci et al. (2000)
2001 PP-Performance Prism Neely et al. (2001)
2001 MSDD-Manufacturing System Design
2001 APL-Action-Profit Linkage Model Epstein and Westbrook
(2001)
and Tangible Assets Model
2006 PDGBS-Performance, Development,
Growth Benchmarking System
St-Pierre and Delisle
Note: Adapted from Performance Measurement Models-Comparative Review by Lisiecka, K.;
CzyGwiazda, E. 2013. http://ebookbrowsee.net/lisiecka-pdf-d527842407
Key performance indicators are not merely an analysis of rows of data on
spreadsheets or reports. They address the key issues by making the results visible (Anon,
2009). When results and indicators are properly monitored and trended, the outcome
elaborates a true picture of the process along with the effectiveness. Subsequently, Key
performance indicators generate the intended action and improve performance. Parmenter
(2007) concludes that when Key performance indicators applied on the organization
make it possible for the members to move together in the right direction. These Indicators
serve as monitor that keeps on checking critical aspects of organizational performance
(Parmenter, 2007). Hough (2007) also endorses the idea. He states that the profile of key
performance indicators clearly specifies the desired level of performance from an
individual. Due to this significance, these indicators are critical factors to alert the
managers immediately if something goes wrong.
Pekeliling (Kritzinger, J.A., 2009) enunciates that Key Performance Indicators
should be able to measure the performance continuously. According to him, a firm must
know and understand the important factors which are necessary to increase the business
in right direction. This is also necessary that key performance indicators should be stated
in measurable and quantitative terms and they should be able to encompass the results of
entire progress. A company needs to have a clear cut understanding about its critical
success factors in order to have a good performance measurement system (Parmenter,
David, 2002).
2.1.3. Key financial indicators for automobile industry. The application
of Key Financial Indicators varies from one type of business to another. In a
manufacturing concern, production is undoubtedly a complex process. The nature and
flow of information are also complex and the application of key performance indicators
becomes difficult. Therefore, there must be an alignment in the application of KPIs and
objectives of a manufacturing concern (Anon, 2006 b). As we can see that there is a shift
in performance measurement approaches from financial to non-financial aspects.
Since all of the aspects cannot be taken into account, we consider
financial standards that are used to evaluate the performance of automobile
industry. There are many reasons to choose financial indicators as a criterion for
performance measurement. First of all, the financial standards are easy tools to
evaluate the progress of an organization as they are specific, measurable,
relevant, achievable and timely in their nature. Another edge of financial
standards over other measures is that they extensively offer testable and concrete
information (Ijiri, 1975). Further, the financial ratios are comparatively precise
performance standards as compared to other standards. Financial measures allow
a high level stability criterion. For example, profitability is a stable criterion to
measure the performance of any profit-making organization (Steers, 1975). The
performance measures based on accounting provides a wide range of historical
analyses that covers short-term, medium-term and long-term evaluation of
progress (Price et al., 1986, 132). Price and Mueller (1986), advocate that the
financial measures are easy to generalize on various forms of organizations.
They further argue that such standards facilitate a historical comparison between
the competitors over a period of time.
Despite these benefits, the financial measures are exposed to many drawbacks.
For instance, they generally focus on short term benefits; they lack strategic focus; they
encourage local optimization; and they are focused internally (Bourne, M., Mills et al,
2000). However, due to their benefits over the shortcomings, they are appropriate
measures of the performance as they fulfill the requirements of this study.
As mentioned above that there are several aspects from which the performance
may be measured. These include high sales volume, profitability, customer satisfaction,
employees’ advancement, quality of product, innovation and inventions. It is also
pertinent to note that the financial stability of firms is very significant for staff, investors,
bankers, government and regulatory authorities alike (Lin & Piesse 2004:73). Therefore,
the study is restricted to financial measure and the most significant measures are sales
volume, Annual Profit and financial ratios pertaining to profitability.
2.1.3.1. Annual Profit as a measure of performance. As mentioned above, the
primary task of a business organization is to maximize the profit or minimize loss. Every
policy of a business aims at earning more and more profit. Therefore, the success or
failure of an organization depends upon the consistent achievement of this profit. Merely
profit is not sufficient to reflect the performance of an organization and this is necessary
to combine other aspects along with profitability. However, profit is one of the significant
factors that depict the progress of a company.
Growth along with the dimension of profitability is generally interpreted with
respect to return on assets or net profit margins. If the entrepreneurship is defined as the
creation of rents by means of innovation (Stewart, 1991), assuming that rents are the
above average earnings with respect to competitors (Norton, 2002), then measures of
profitability seem to be appealing. Delmar et al (2003), in contrast, identified that profit is
undoubtedly an important indicator of success, however, the relationship between profits
and size of the firm is visible only in the aggregates of firms or over long periods for
individual firms.
The profit is computed by deducting cost of goods sold and operating expenses
from Sales Revenue. In this way, it not only displays the revenue side, but also the
expense side. Therefore, the firms achieving high profits may be called good performers.
2.1.3.2. Annual Sales as a measure of performance. Another important element
to measure the performance is Annual Sales in monetary terms. Although this measure
has limited scope as compared to profit, it reveals the progress of a company pertaining to
demand of its goods and marketing strategies. Therefore, high sales volume reflects that
the organization is successful in raising demand by means of marketing, better quality,
innovation or other means.
Delmar et al (2003) enunciated different standards of performance and he
declared sales as the best indicator for the purpose of performance evaluation. The
rationale is that the data for sales can easily be collected and this data depicts short and
long-term variations in an organization. Further, Barkham et. al (1996) also states that a
sale is chosen as one of the favorite indicators by stakeholders. There are many other
reasons for taking sales as a measure of performance. The most significant reason is the
growth in sales volume also affects number of employees and worth of assets. So, this
measure serves as a basis of overall expansion of the firm. However, Delmar et al (2003)
pointed out that sales is not always the only good measure of performance and it should
be supported by the level of employment and assets.
2.1.3.3. Financial ratios as a measure of performance. Ratio is a relationship
that is expressed in numeric terms between variables which are related with each other.
The analysis of financial ratio is one of the most important techniques for measuring the
progress in various areas. These ratios are used as yardsticks to measure the progress,
efficiency and development of an organization. They are also used to evaluate the current
financial status and historical performance of a firm over a period of time.
The history of financial statement analysis started in the last century (Horrigan,
1978). Initially, these ratios were used to analyze insolvency and bankruptcy of business
(Altman, 1968). Later on, their emphasis was shifted towards the evaluation of business
performance from various angles (Chen & Shimerada, 1981; Brand, Danos, & Brasseaux,
1989; Poston, Harmon, & Gramlich, 1994; Lawder, 1989; Kimmell, 1994; Gardiner,
1995; Kane, 1995).
Ward (2003), mentions that business managers often depend upon analysis of
ratio because it gives an opportunity to monitor the business activities. They also do so
for comparing their business with other enterprises. On the other hand, the other
stakeholders are also able to review the progress of business and make decisions
regarding their affiliation (Hingorani N.L., Ramanathan, A.R. 1986).
In addition to the measurement of performance, such analysis helps to diagnose
potential problems with a historical background (Spathis, K., and Doumpos M., 2002).
According to Howard Finch (2005), financial ratios play a vital role in managerial
decision making. These ratios provide a comparison of various figures from the financial
statement. However, they are not merely mathematical calculations; they serve as a tool
for interpretation and prediction. As a result, they give a concrete framework for the
future steps which need to be taken by the management (Chien, T., Danw, S. Z. 2004).
Financial ratios are categorized on functional basis or on the basis of financial
statement.
2.1.3.3.1. Functional classification and application of ratios. The functional
classification of ratios is based on the functions the ratios perform. This classification is
further divided into Profitability, Liquidity, Activity and Solvency ratios.
The first and most important type of ratio is profitability ratio. Profit is the primary
objective of every business organization. All the management decisions aim at ensuring
the maximization of profit. A strong profitability position safeguards the interests of all
stakeholders. The significant profitability ratios include Net profit ratio, Expense ratio,
Price earnings ratio (P/E ratio), Gross profit ratio (GP ratio), Return on capital employed
ratio, Earnings per share (EPS) ratio, Return on shareholder’s investment/Return on
equity, Dividend payout ratio, Operating ratio, Dividend yield ratio and Return on
common stockholders’ equity ratio.
Another important type of ratio is Liquidity ratio. These ratios are employed to
measure the capability of a firm to settle short term debt. This category is significant for
the lenders such as commercial banks and suppliers. Current ratio, quick ratio and
liquidity ratio are some of the major ratios in this group.
Activity ratios are employed to measure the ability of a firm in creating revenues by
means of transforming its output into cash or sales. The significant activity ratios include
Receivables turnover, Average collection period, Inventory turnover ratio, Average
payment period, Asset turnover ratio, Working capital turnover ratio, Accounts payable
turnover and fixed assets turnover ratio.
Solvency ratios are used to evaluate the capability of a firm to gain survival in long
run period. The ratios which are frequently used to identify the long-term solvency
include Debt to equity ratio, Times interest earned ratio, Proprietary ratio, Fixed assets to
equity ratio, Current assets to equity ratio and Capital gearing ratio.
2.1.3.3.2 Classification of ratios on the basis of financial statements. Another
approach is used to classify the ratios according to the financial statements. The ratios
which are calculated from the data of Income Statement called Income Statement ratios
such as net profit ratio, time interest earned ratio, operating ratio, gross profit ratio etc.
On the other hand, the second type is balance sheet ratios which are debt to equity ratio,
liquid ratio and current ratio. The third group is of composite ratio which takes data from
both the statements and they include receivables turnover, accounts payable turnover,
inventory turnover and working capital turnover.
2.1.3.3.3. Selection of appropriate ratio for measuring the performance. As we have
discussed that every ratio has a specific function and objective. Solvency and Liquidity
ratios, for instance, are important for the lenders and suppliers. They evaluate the ability
of an organization in a particular domain. Similarly, activity ratios are good measure as to
how well a company performs in its operating cycle. However, profitability ratios are
significant for almost all the stakeholders. Managerial performance is measured by
profitability. Similarly, lender, suppliers, shareholders, investors and competitors are
interested in the profitability. As a result, the progress of a firm should be measured by
means of profit ratios to a great extent. In this research, the profitability ratios have to
evaluate the performance of automobile industry and its firms. Hence the dependent
Return on Investment, Return on Sales and Return of Equity.
2.1.3.3.4. Return on Assets (ROA). Return on Assets is one of the most important
profitability ratios. It reflects the percentage earned on each unit of money invested in the
assets of a firm. It is calculated with the help of following formula (Beaver, 1966):
ROA = (Net Profit/ Total Assets) * 100
Many researchers have established that Return on Assets is an effective measure
of performance of organization. Rasiah (2010) stated that higher the ROA, better the
firm’s profit. Berger and Humphrey (1997) also measured the profitability by using this
ratio considering it to be a good standard. Rushdi and Tennant (2003) also established
that ROA is helpful in measuring the performance and profitability.
Return on Asset is one of the most significant financial ratios. Its popularity can
be highlighted by the fact that it is 3 rd
most frequently ratios in the field of business
(Mankin & Jewell, 2010). In addition to this, some aspects of Return on Assets are used
in predicting the failure of business. The original Z-Score of Altman (1968) contained
Return on Assets along with five factors which were used to predict the failure of
business. This ratio was also used by Beaver (1966) to predict the business failure along
with five other factors. Hossari and Rahman (2005) conducted a research in order to rank
the popularity of different financial ratios for predicting business failures. The study took
into consideration 53 relevant studies from 1966 to 2002 and listed 48 separate ratios in a
sequence. In this list, the ROA was found to be the only common and frequently used
ratio in all of the failure prediction studies.
2.1.3.3.5. Return on Equity (ROE). This is the second most significant ratio to
measure the profitability and performance of the firm. It is computed by dividing net
profit by stockholders’ equity with the help of following formula:
ROE = (Net Profit/ Stockholders’ Equity) * 100
It measures the profitability from shareholders point of view. It states the return
generated by a firm on investment made by shareholders. Therefore, ROE measures how
efficiently a firm is using shareholders capital to generate profit (Garg Ax et al, 2005).
ROE is deemed to be the most important ratios of profitability along with ROA to
measure the corporate financial performance (Rappaport 1986:31). Monteiro (2006:3)
presents this ratio as the most important one from investors’ view point. Ugur Z. (2006)
considers this ratio as an inevitable measure for profitability.
2.1.3.3.6. Net Profit Margin (NPM). This is another vital ratio that depicts how
much profit is generated on each unit of money invested in sales. It is computed with the
help of following formula:
Net Profit Margin Ratio = (Net Profit/ Sales) * 100
Where Sales is the sales revenue and Net Profit is the income derived after all the
costs and expenses from sales revenue. This is also an important measure to evaluate the
performance of a firm pertaining to sales and profits.
2.2 Determinants of the Performance
The purpose of this research is to explore those factors which significantly affect
the performance of automobile industry. The precise aim is to find out the determinants
of profitability and sales of automobile industry.
2.2.1. Past studies in automobile sector. There were many studies
conducted to evaluate the performance of automobile industry. The past researches,
however, emphasized upon a particular segment of the automobile industry. For example,
Smusin and Makaya (2009) conducted a research to find out the impact of short run
macroeconomic variables on the sales of cars only. Similarly, Baber et al. (1999)
attempted to explore the impact of exchange rate variations on car sale of American and
Japanese Manufacturers. Another research was conducted to observe the impact of
growth pattern, ownership structure and pattern in trade and governmental role in
automobile industry of specified Asian Countries (Nag, Benarjee and Chatterjee, 2007).
However, it did not address the core issues responsible for the growth and development
of an automobile industry. (Narayanan and Vashisht, 2008). Therefore, there was a real
need to identify the macroeconomic determinants that generally influence the
performance of automobile industry over a period of time. So, this study aims at filling in
this gap by means of empirical evidence.
2.2.2. Contribution of this research. As discussed earlier, there are many
factors which may influence the progress of a firm. These factors can be viewed and
grouped in different ways. For instance, PEST analysis can be used to identify the
influential elements which are Political, Economic, Social and Technological factors.
Each of the variables has a great impact on the progress. For example, political
uncertainty may decrease sales and profit; economic depression reduces production and
sales; social elements such as taste of consumers may also affect the profitability and
technological advancement calls for huge investment for survival.
Besides PEST Analysis, there are many other approaches to find out the
determinants of the growth of an industry. Some experts go for the analysis of industry by
means of Porter’s Model. Some experts observe the impact of micro economic variables
on the performance. However, one of the important methods is to use macro economic
variables as determinants for the measurement of firms’ performance.
2.2.3. Macroeconomic determinant of the performance of the firms
and industry. Macro economic variables influence the profitability and sales of firms
to a great extent. For instance, growth in Gross National Products may result in rise in
sale volume of a firm, inflation causes rise or fall in profits, unemployment generates
variations in sales volume, and Foreign Direct Investment may improve the returns on
investments and so on.
Kangari (1988) developed a model to predict the success and failure of business
and concluded that the macroeconomic variables had significant role in determining the
performance of firms. Further, Russell and Zhai (1996) also stated that the
macroeconomic variables were very vital in determining the failure or profitability.
Oxelheim and Wihlborg (1997) built a model called Macro Economic Uncertainty
Strategy to reveal the impact and interdependence of these factors.
Although there are many macroeconomic indicators, the most influential factors
which may be responsible for the performance of a firm include Per Capita Gross
National Products, Discount Rate, Inflation Rate, Exchange Rate, Unemployment Rate,
Consumption Rate and Foreign Direct Investment. These variables have a vital role and
significant impact in the determination of industrial growth.
2.2.3.1. Per Capita Gross National Income (GNI). The World Bank (2014) defines
Gross National Income (GNI) per capita (formerly GNP per capita) as follows:
“GNI per capita is calculated as the gross national income divided by the midyear
population, converted to U.S. dollars using the World Bank Atlas method. GNI is the sum
of value added by all resident producers plus any product taxes (less subsidies) not
included in the valuation of output plus net receipts of primary income (compensation of
employees and property income) from abroad.”
GNI growth increases the national income of a country and the rise in per capita
income may raise the purchasing power of consumers. As a result, the consumers are able
to buy more goods and services. Hence, a rising trend in GNP per capita stimulates
deman

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