Chapter # 1 INTRODUCTION TO THE COMPANY INTRODUCTION: Honda Atlas Cars Pakistan Limited is a joint venture between Honda Motor Company Limited Japan, and the Atlas Group of Companies, Pakistan. The company was incorporated on November, 1992 and joint venture agreement was signed on August, 1993. The ground breaking ceremony was held on April 17, 1993 and with within in a reco record rd time time of 11 mont months hs,, const constru ruct ctio ion n and and erect erectio ion n of mach machine inery ry was comp comple lete ted. d. The The firs firstt car car roll rolled ed off off the the assem assembl bly y line line on May May 26, 26, 1994 1994.. Offi Offici cial al inauguration was done by President of Pakistan, Sardar Farooq Ahmad Khan Leghari. Mr. Kawamoto, President of Honda Motor Company Limited Japan was also present to grace the occasion. The company is listed on Karachi, Lahore and Islamabad Stock Exchanges. On July 14, 1994, car bookings started at six dealerships in Karachi, Lahore, and Islamabad. Since then the Dealerships Network has expanded and now the company has sixteen 3S (Sales, Service and Spare Parts) and thirty 2S (Service and Spare Parts) Pitstops network in all major cities of Pakistan. Since the commencement of production in 1994, the company has produced and sold more than 150,000 cars till Oct, 2008.All dealerships dealerships are constructed constructed in accordance accordance with the standards standards defined by Honda World over. Percent Percentage age of local local parts parts conform conforms s to the governm government ent's 's policy policy.. Local Local vendors vendors are continuously patronized to develop parts locally. The quality of local parts is thoroughly checked to meet stringent international standards. We always strive to give outstanding service to our valued customers. In addition to providing regular service to customers, the company also regularly conducts Service Campaigns, to facilitate customer's need for service. This has given our customers absolute confidence in our cars, clearly evident from the ever increasing sale volumes. It is the constant endeavor of Honda Atlas Cars (Pakistan) Limited to achieve No .1 Custom Customer er satisf satisfact action. ion. Honda Honda Atlas Atlas Cars Cars (Pakist (Pakistan) an) Limite Limited d is commit committed ted to meet meet customer expectations, and to provide good value for money. Currently we are offering 8 different models of Honda CIVIC and CITY cars in wide range of colors with unique technological and other features.
Slogan: “THE POWER OF DREAMS”
COMSATS Institute of Information Technology, Lahore Campus. 1
Products:
“VISION” “To be the first preference at every level of car lovers, and be the market leader”
“MISSION” A dynamic growth oriented company through excellence in quality, dedication to provide greater fuel efficiency at competitive prices, and service ensuring attractive returns to equit equity y hold holders ers,, reward rewardin ing g asso associ ciat ates es accord accordin ing g to thei theirr abil abilit ity y and and perf perfor orma mance nce,, fostering a network of engineers and researchers ensuing unique contribution to the devel developm opment ent of the the indus industr try y, custo custome merr safet safety y, satis satisfa fact ction ion and prot protect ection ion of the the environment by producing emission friendly green products as a good corporate citizen fulfilling its social responsibilities in all respects.
COMPETITORS 1. PAK SUZUKI In pursuance of the terms and conditions of the Joint Venture Agreement executed betw betwee een n Suzu Suzuki ki Moto Motorr Corp Corpor orat atio ion n of Japa Japan n (SMC (SMC)) and and Paki Pakist stan an Auto Automo mobi bile le Corporation (PACO), Pak Suzuki Motor Company Limited (PSMCL) was incorporated as a public limited company in August 1983.The new company took over the assets which included production facilities of Awami Autos Limited. PSMCL started commercial operations in January 1984 with the primary objective of passenger cars, pickups, vans and 4x4 vehicles. The foundation stone laying ceremony of the company’s green field automobile plant at Bin Qasim was performed by the then prime Minister of Pakistan in early 1989.On completion of first phase of this plant in early 1990, in-house assembly of all types of Suzuki engines started. The new plant was completed in 1992, on its completion all COMSATS Institute of Information Technology, Lahore Campus. 2
Suzuki products were transferred to new plant and three box 1300cc Margalla car was also added to its range of production. In September 1992 the company was privatized and placed directly under the Japanese Management. Management. At the time of privatization privatization SMC increased its equity from 25% to 40% subsequently; SMC progressively increased its equity to 73.09% by December 31, 2001. The Bin Qasim Plant further expanded its production production capacity to 50,000 vehicles vehicles per year in July 1994 and 300,000 300,000 vehicles had been been manufa manufactu ctured red at this this plant plant by Decemb December er 2003.T 2003.The he most most modern modern automo automobil bile e manufa manufactu cturin ring g plant plant in the countr country y distin distingui guishe shes s Pak Suzuki Suzuki from from other other automo automobil bile e plants. Pak Suzuki always endeavors to go aggressively for the sound development of the society society by increas increasing ing motori motorizat zation ion indust industria rializ lizati ation, on, creati creating ng job opportu opportunit nities ies thus thus improving the people’s living standards with the combined efforts of all the dealers, vendors and Pak Suzuki employees.
2. INDUS MOTOR COMPANY (IMC) Indus Motor Company (IMC) is a joint venture between the House of Habib , Toyota Motor Motor Corporat Corporation ion Japan Japan (TMC) (TMC),, and Toyota Toyota Tsusho Tsusho Corporat Corporation ion Japan Japan (TTC) (TTC) for assembling, progressive manufacturing and marketing of Toyota vehicles in Pakistan since July 01, 1990. IMC is engaged in sole distributorship of Toyota and Daihatsu Motor Company Ltd. Ltd. Vehicles in Pakistan through its dealership network. The company was incorporated in Pakistan as a public limited company in December 1989 and started commercial production in May 1993. The shares of company are quoted on the stock exchanges of Pakistan. Toyota Motor Corporation and Toyota Tsusho Corporation Corporation have 25 % stake in the company equity. The majority shareholder shareholder is the the House House of Habi Habib. b. IMC' IMC's s produ product ctio ion n facil facilit itie ies s are are locat located ed at Port Port Bin Bin Qasi Qasim m Industrial Zone near Karachi in an area measuring over 105 acres. Indus Motor Company’s plant is the only manufacturing site in the world where both Toyota and Daihatsu brands are being manufactured. Heavy investment was made to build its production facilities based on state of art technologies. To ensure highest level of productivity productivity world-renowned world-renowned Toyota Production Production Systems Systems are implemented. implemented. IMC's Product line includes 6 variants of the newly introduced Toyota Corolla, Toyota Hilux Single Cabin 4x2 and 4 versions of Daihatsu Cuore. We also have a wide range of imported vehicles.
COMSATS Institute of Information Technology, Lahore Campus. 3
Chapter # 2 EXTERNAL AUDIT OF THE COMPANY The External Assessment: The external audit is to develop a finite lists of opportunities that could benefit a firm and threats that should be avoided. External forces can be divided into five broad categories;
Economic forces Social, cultural, demographic and environmental forces Political forces Technological forces Competitive forces
Economic forces :
Overall economic conditions are not very sound. The country risk of Pakistan goes to 3 which is alarming situation for Pakistan. Due to mistrust in the Pakistan environment the foreign direct investment has been declined. Pakistan, an impoverished and underdeveloped country, has suffered from decades of internal political disputes and low levels of foreign investment. Between 2001-07, however, poverty levels decreased by 10%, as Islamabad steadily raised development spending. Between 200407, GDP growth in the 5-8% range was spurred by gains in the industrial and service sectors despite severe electricity shortfalls - but growth slowed in 2008-09 and unemployment rose.
Global crisis and Pakistan:
a) Pakistan Pakistan did not face face a major major setback setback from from the global global crisis. b) The economi economic c hardship hardship by the country country has mostly mostly been the result result of domestic domestic issues - internal strife, political instability and poor governance has slowed down an otherwise a viable economy. c) Overall Overall economic economic activity activity weakened despite despite growth growth in agriculture, agriculture, while while declining declining imports and slowing domestic demand resulted in lower tax revenue. Pakistan's Economic growth:
The The ongo ongoing ing glob global al econ econom omic ic crisi crisis, s, nega negati tive ve secur securit ity y deve develop lopme ment nts s and and continued power shortages slowed Pakistan’s real GDP growth to 2% for 200809 compared to 5.8% achieved in the prior year . The Unemployment rate is going up and up from 13.6% in 2008 to 15.2% in 2009 with the increase of level of poverty that is reducing the buying power of the COMSATS Institute of Information Technology, Lahore Campus. •
•
4
•
• •
•
•
people that is threat for Honda cars The GDP growth rate for the year 2008-09 initially projected at 5.5 percent has now been revised downward to 2.5 percent compared to 5.8 percent of last year. The major pressure in the economy has stemmed from inflation. The SBP has projected inflation to slow down in the final quarter of FY08-09. Controlled inflation may usher in lower interest rate and improved liquidity, so necessary for growth of industry. Inflation remains the top concern among the public, jumping from 7.7% in 2007 to 20.8% in 2008, and 14.2% in 2009. The performance of the car assemblers remained lackluster during 2009 owing to the the econo economi mic c melt meltdo down wn in the the count country. ry. In the the wake wake of rising rising stee steell price prices, s, appreciation of yen against rupee and imposition of 5% FED in the budget of 2009, the car assemblers passed on the increase in cost to the consumers. This brought the decrease in demand of the automobiles.
The role of IMF (International Monetary Fund): •
•
The government agreed to an International Monetary Fund Standby Arrangement in November 2008 in response to a balance of payments crisis. IMF has disbursed the first two tranches of $ 3.1 billion. The World Bank and ADB have pledged support and an independent overseas support group, Friends of democratic Pakistan have decided a support of $ 5.28 billion. Eased out poli politi tical cal situat situatio ion n in the the count country ry will will help help in an impro improve veme ment nt in busin busines ess s environment.
Financial position of Pakistan: •
•
•
•
The stock market has exhibited a growth of 36 percent post March 16. Foreign exchange reserves have crossed US $11 billion. The commodity prices are reflective reflective of an inherent demand in the economy. economy. A bumper wheat crop is being projected and it will provide a boost to demand. The market value of stocks decreased from 70.26 billion in 2008 to $23.49 billion 2008 $70.26 billion. The Pakistani rupee has depreciated since 2008 as a result of political and economic instability from Rs. 70.64 in 2008 to Rs. 81.21 in 2009. The government agreed to an International Monetary Fund Standby Arrangement in November 2008 in response to a balance of payments crisis.
Political forces
a) The governm government ent plays plays an import important ant role in the operation operation and manufact manufacturi uring ng products and services in terms of regulations. Following are some of the factors that could cause Honda Cars to differ materially from the expected COMSATS Institute of Information Technology, Lahore Campus. 5
results. Instability and political clashes: b) Now a day’s Pakistani Pakistani environm environment ent is instable instable due to politic political al clashes among among political political parties. Inside country war and drown attacks in north frontier frontier areas. This political instability has led to uncertain environment in the country, which is a threat for any business including Honda Depreciation Allowance: c) The The gove govern rnm ment ent redu reduce ced d the the depr deprec eciiatio ation n all allowan owance ce on used sed impor mportted vehicles from 2% to 1% per month during the year. This positive step by the government government provided a much needed relief to the industry industry and used car imports slowed to 6,524 units for the year compared 13,145 units for 2007-08. This acted as a huge opportunity opportunity for the overall overall domestic automobile automobile sector. However, due to the inability of the of car manufacturers to reduce the sale price of the cars, the government has given an ultimatum to the automobile manufacturers that they will increase the depreciation allowance on the used imported vehicles in the near future. d) The government has made an attempt to create a competitive enviro environm nmen entt in the the autom automob obilile e indu indust stry, ry, but but this this comp compet etit itio ion n gives gives rise rise to declining of sales that the local industry has suffered before and is a great threat for Honda. Liberal Policies:
e) Acco Accord rdin ing g to the the ana analy lyst sts, s, the the cur curre rent nt pol polic icie ies s on used used car cars s in Pak Pakis ista tan n are still extremely liberal when compared to India, Thailand and other countries and are often misused by importers under transfer of baggage scheme. Tax imposition and duties: f) The The impo imposi siti tion on of of addi additi tion onal al lev levie ies s and and taxe taxes s in the the Fed Feder eral al Bud Budge gett 2008 2008-09 which included the 5% Federal Excise Duty on cars with engine capacity in exce excess ss of 850c 850cc c and and appl applic icat atio ion n of fixe fixed d slab slabs s of wit withhol hholdi ding ng tax tax at the the registration stage. g) This This comp compou ound nded ed the the sit situa uati tion on res resul ulti ting ng in in a shar sharp p incr increas ease e in in auto automo mobi bile le prices and dampening of demand. Post budget imposition of 35% cash margin on letters of credit further aggravated the liquidity situation for the auto sector before it was withdrawn several months later. Tightened monetary policies:
High interest rates and reduction in car financing facility facility offered by banks further depressed the demand for cars. Thus, the industry car sales went down by 50% from 147,441 units sold in FY08 to 74,180 units in FY09. Sales Sales went went down down main mainly ly in the the 800cc 800cc and and 1000c 1000cc c categ categori ories es,, whic which h contribute contribute 60% to the total auto sales. The car sales of Honda Atlas slumped by COMSATS Institute of Information Technology, Lahore Campus. 6
28% from 15,487 units sold in FY08 to 11,144 units in FY09. The tight tightene ened d mone moneta tary ry poli polici cies es not not only only hamp hamper ered ed the the sale sales s of the the company, but also increased the cost of debt that it had taken for the expansion purpose. Technological Forces : • •
•
•
•
•
•
Advances in technology can have a major impact on business success. Honda cars has always followed the tradition tradition of introducing introducing new technology technology and providing global cars of international quality to its customers, since the launch of its first model in 1994. During the short span of 15 years, your company has introduced 4 new models of Honda Civic and 4 new models of Honda City –the highest among the other car makers in Pakistan. Many features and specifications were introduced first time in Pakistan. Your company introduced introduced the 3rd Generation Generation Honda City on January 31, 2009. It has V-tech Engine, Anti Lock Braking System (ABS) and Euro- 4 emission systems, which are considered to be the strictest emission standard worldwide. The new City has Drive-By-Wire (DBW) control technology for fuel efficiency. It has also also enha enhanc nced ed G-CON G-CON coll collisi ision on safet safety y which which reduc reduces es the the impac impactt on passenger cabin. To maintain the global quality standards, the Company has invested Rs 2.1 billion on development of local parts, dies and fixtures of Honda City. However, the new features increased its cost and so the selling price. Honda produces cars of highest quality with high specifications of Honda to its global customers. Honda has the pride of providing the environment - friendly, Euro IV compliant cars to its customers, which no other maker has in Pakistan. On the strength of our confidence in our products, the company with new City launch effective February 2009, increased warranty of new City to 70,000 Km or 3 years from the date of purchase, whichever comes earlier, increasing Joy of Buying of new Honda City.
Social, cultural, demographic and environmental forces: •
Effects of the automobiles on societies: Over the course of the 20th century, century, the automobile rapidly developed from an expen expensi sive ve toy toy for for the the rich rich into into the the stan standar dard d for for pass passen enger ger trans transpo port. rt. The The development of the automobile built upon the transport revolution started by railways, railways, and like the railways, introduced sweeping changes in infrastructure, infrastructure, manufacturing and legislation. legislation. The The wide wide reach reachin ing g effe effect cts s of auto automo mobi biles les on everyday life have been a subject of much controversy. Proponents on one end of the spectrum claim the car is a marvel of technology that has brought about unprecedented prosperity, while opponents on the other end claim it lead to a mode of urban and suburban planning that discourages walking and human interaction, uses large amounts of polluting fuel.
COMSATS Institute of Information Technology, Lahore Campus. 7
•
Economic changes
City Planning: Planning: The development of the automobile has caused changes in city
planning, planning, as well as changing the roles of horses of horses and railroads. railroads. Industrial infrastructure: Huge industries devoted only to the automobile were
created created.. Others Others were expande expanded d from from once once trivia triviall insign insignifi ificanc cance e to eminent eminent importance. Before the internal-combustion engine was developed, gasoline was a waste product, often discarded. Once the automobile became common, the production of gasoline blossomed into a matter of such importance that the governments took action to secure a steady flow of oil. oil. The steel industry was already established, but the coming of the automobile created huge amounts of business for it. The chemical, chemical, rubber , and petroleum industries industries were remade to suit the needs of the automobile and industries sprang up, such as service stations, stations, motels, motels, and automobile insurance, insurance, that were completely reliant upon the automobile for their livelihood. Infrastructure: Aside from industries, one of the most visible visible effects the automobile automobile has had on the world is the huge increase in the amount of surfaced roads. roads. Changes to urban society Traffic Jam: Another change brought about by the automobile is that modern urban urban pedes pedestr tria ians ns must must be more more alert alert than than thei theirr ance ancest stors ors.. In the the past, past, a pedestrian had to worry about relatively slow-moving streetcars, or getting kicked in the face by horses, or stepping in horse dung. With the introduction of the automobile, a pedestrian has to worry about being hit by automobiles at high speeds, and breathing noxious exhaust fumes. •
Social status The The autom utomob obiile sign signif ifiies much much more more to many many than than sim simply ply a mode ode of transportation. Henr Henrii Lefe Lefebv bvre re calle alled d the the autom utomob obil ile e "the "the epit epitom ome e of possessions". In the early years, the car served as a mark of distinction above all others. The automobile rapidly became a symbol of social status, status, and in some cases cases,, a fash fashio ion n item item.. The The auto automo mobi bile le,, more more than than any any othe otherr posse possess ssio ions, ns, allowed people to show off wealth. Not only was the ownership of an automobile demonstrative demonstrative of a certain level of income and prestige prestige (and still is, especially especially in poorer nations), it is also highly visible. •
Safety Auto Automo mobi bile le accide accident nts s cause caused d many many deat deaths hs and and inju injuri ries es,, espe especi cial ally ly befo before re automobile safety laws were implemented. To this date, automobiles remain a major cause of accidental death and injury, injury, not to mention emotional stress. stress. •
•
Vehicle Air Pollution:
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Air pollution is viewed as a serious problem in many cities in South Asia. Many city governments say that transport is mainly responsible for air pollution and have adopted, or are considering adopting technological measures to reduce vehicle emission. This situation demands selection of appropriate measures in the sector. The impact of outdoor air pollution on public health and lost productivity should be seriously taken as toxicity and ambient concentrations are the most damaging health impacts. The particulate matter causing serious respiratory illnesses and prematu premature re deaths deaths througho throughout ut South South Asia, Asia, and airbor airborne ne lead, lead, which which retards retards intellectual development of children in Pakistan and Sri Lanka is a common phenomenon, where leaded gasoline is still used.
Competitive forces Honda faces competition in the international markets from a number of brands such as • • • •
Toyota Mitsubishi Mercedes BMW
However, Honda cars in Pakistan that had started its operations in Pakistan 1994 under a joint venture with Atlas has been is enjoying the key position in 1300 c.c and above. The main competitors of Atlas Honda in Pakistan are:
Indus Motors:
Indus Motor Company (IMC) is a joint venture between the House of Habib, Toyota Motor Motor Corpora Corporati tion on Japan Japan (TMC) (TMC) and Toyota Toyota Tsusho Tsusho Corpora Corporatio tion n Japan Japan (TTC) (TTC) for assembling, progressive manufacturing and marketing of Toyota vehicles in Pakistan since July 01, 1990. IMC is engaged in sole distributorship of Toyota and Daihatsu Motor Company Ltd. Vehicles in Pakistan through its dealership network. The company was incorporated in Pakistan as a public limited company in December 1989 and started commercial production in May 1993. The shares of company are quoted on the stock exchanges of Pakistan. Toyota Motor Corporation and Toyota Tsusho Corporation Corporation have 25 % stake in the company equity. The majority shareholder shareholder is the House of Habib. IMC's production facilities are located at Port Bin Qasim Industrial Zone near Karachi in an area measuring over 105 acres. Indus Motor Company’s plant is the only manufacturing site in the world where both Toyota and Daihatsu brands are being manufactured. COMSATS Institute of Information Technology, Lahore Campus. 9
Suzuki:
Suzuki is the leading name in small commercial vehicles and passenger cars. Suzuki commenced its operation by assembling small 800 cc cars. Suzuki has so far a sole leader in 800cc and 1000cc passenger cars as well as 1000cc jeep Potohar. But the emergence emergence of so many competitors in the market will definitely definitely trigger a very hard time to Pak Suzuki. Suzuki has launched Mehran 800cc, Cultus 1000cc, Baleno 1.3 & 1.6 Eli and Gxi, Bolan van & Ravi pickup 800cc and Potohar jeep. The total production capacity of Suzuki Motors is about 50000 units and the total actual production in 1999 is 32,805. The sales volume of Suzuki is highest among the competitors with 31,296 cars as per June 30, 2000. According to Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) , Suzuki has achieved the 60 per cent deletion status in 800cc Mehran car. Localization in other products like 1000cc Khyber 42 per cent, 1300cc Margalla/Baleno 32 per cent, 800cc pickup 50 per cent 10 passenger pickup 47 per cent and 1000cc Potohar jeep 40 percent. Dewan Farooque Motors: It is the major competitor which has commenced its operation with a wide range of products in domestic automobile market. Dewan Motors is basically a collaboration with Hyundai and Kia, two Korean auto manufacturers. The initial response to Dewan's offering in the market with record company booking of its Santro Plus. It has launched its Kia classic 1300 cc car with sophisticated features. In future wide range of models like Kia Shuma 1500-1800cc car, Kia Sportage 2000 cc sports utility are expected to launch in the market. Dewan has also launched launched its 1.5 tons Shehzore, the assembly assembly of Hyundai light commercial commercial vehicle has already started at the Sindh Engineering Engineering Plant in Karachi under contractual agreement. Daihatsu:
Daih Daihat atsu, su, anot another her new new play player er in the the marke markett with with its its Cuore Cuore 850 850 cc, cc, incr increa eased sed the the competition in the market. Daihatsu and Indus Motor signed an agreement to launch the Coure in market. The project worth Rs 750 million was developed at Port Qasim between Daihatsu and Indus Motor to produce Coure. Daihatsu also heated up the competition in small car segments.
Porter's Five Forces Model: Michael Porter identified five forces that influence an industry. These forces are: (1) degree of rivalry; (2) threat of substitutes; (3) barriers to entry; (4) buyer power; and (5) supplier supplier power. Like other industries industries operating under free market, capitalistic systems, viewing viewing the automotive automotive industry industry through through the lens of Porter’s Porter’s Five Forces can be helpful in understanding the forces at play. THREAT OF NEW ENTRANT:
Although Pakistani Market is dominated by protectionism but because of financial crisis a lot of Automobile companies have their eyes on South –East Asia as a dumping site COMSATS Institute of Information Technology, Lahore Campus. 10
Honda motors company must gear up for fierce competition. competition. These new Entrants have sufficient capital and guts to start a price war among the local industry. Economies of scale:
Econo Economi mies es of scal scale e no doubt doubt reduc reduces es the the cost cost of manu manufa fact cturi uring ng but but now now days days Customers are Saving Oriented Rather Consumption Oriented low price in this period of recession will not attract customer the best way is to go for fuel efficient cars. First Mover Advantage:
Honda motors have the First Mover advantage in case of Fuel efficient Cars. Honda R&D Department already achieved so much in this field depleting oil sources is a major problem for every country now Toyota is looking for different options such as: Bio Fuels, Hydro Electric power Cars, Electric powered cars & Cow Dung. Access to Channel of Distribution and Relationships:
Honda motor has the advantage of customer satisfaction and distribution channels. Honda motor conducts workshops and seminar for Dealer Staff so that the interaction with the customers shall be a pleasant one. This Customer care leads to Customer Loyalty.
THREAT OF SUBSITUTE PRODUCTS
America America is the biggest biggest victim of economic economic Rescission and the biggest car consumption consumption country is America. American People has taken a Saving Stance now the American car manufactures have their eyes on India, China, and Pakistan as a dumping sites so COMSATS Institute of Information Technology, Lahore Campus. 11
some time in upcoming years Honda motor can face fierce Competition and have to step up for the competition because Pakistani people have a lot of options.
BARGANINIG POWER OF BUYERS:
Buyers are price sensitive because products are little differentiated and switching cost is lower. The buyers hence have greater power to bargain on the finished good, i.e. vehicle. The switching cost is very low for the customers. However the automobile industry remains marginally strong due to the large buyers to producer ratio BARGAINIG POWER OF SUPPLIERS:
Honda motors almost produces produces 98% of car in Pakistan but Most of the Raw material is impo import rted ed throu through gh Toyot Toyota a Japan Japan so Supp Suppliliers ers is the the paren parentt comp compan any y that that is why why importing material is not a big issue for Honda. The automotive industry is a dynamic place. With the forces above at play, and with history as a guide, it is safe to say that the automotive industry will continue to change, evolve, and adapt.
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External Factor Evaluation Matrix: An exte extern rnal al fact factor or eval evalua uati tion on matr matrix ix allo allows ws the the strat strateg egis ists ts to summ summar ariz ize e and and eval evalua uate te econom economica ical, l, social social,, cultur cultural, al, demogr demograph aphic, ic, enviro environme nmenta ntal, l, politi political cal,, govern governmen mental tal,, legal, legal, technological, and competitive information. The threats and opportunities of Honda Company have been identified identified in the PEST analysis and the ratings ratings of the factors (1-4) have been done from the brain storming and the facts and figures that have affected the company. Following is the EFE matrix: External factors
Wght
Opportunities
Honda Atlas Rating
Wgtd.Score
1. People’s awareness about Global Warming
0.05
2
0.10
2. Customer desire for hybrid and fuel efficient vehicles
0.08
3
0.24
3. Increase Increase in in technolog technology y in automo automobiles biles forces forces customers customers to return to dealer for service 4. Introduction of ethanol fuel in Pakistan
0.1
4
0.40
0.02
1
0.02
5. Increase in demand of small vehicles
0.05
3
0.15
1. Recession in the economy
0.05
1
0.05
2. WTO (World (World trade trade Order) Order) openin opening g local local markets markets for for global global competition 3. Entry of reconditions cars
0.02
1
0.02
0.13
2
0.26
4.
0.05
1
0.05
5. Tightening monitoring Policy
0.06
2
0.12
6. Energy crises
0.1
3
0.30
7. Depreciation of rupee against dollar
0.1
4
0.40
8. Increase in Petroleum and steel prices.
0.09
2
0.18
9. Inflation
0.07
2
0.14
10. Declining quality of the infrastructure in the country.
0.03
2
0.06
Threats
Po Political instability
Total
1
2.49
From the above matrix calculation, we can see that the total weighted score for Honda Motors is 2.49 which is 0.01 points lower than 2.50 i.e. the midpoint a and is below the average. This
COMSATS Institute of Information Technology, Lahore Campus. 13
shows that the company is not performing that well due to the bad economic and political conditions of the country.
Competitive Profile Matrix (CPM): The competitive profile matrix (CPM) identifies a firm’s major competitors and its particular strengths and weaknesses in relation to the sample firm’s strategic position Honda Atlas
Indus Motors
Pak Suzuki
Critical success factor
Weight
Rating
Score
Rating
Score
Rating
Score
Product Quality
.14
4
0.56
4
0.56
2
0.28
After Sale Services
.10
4
0.40
4
0.40
3
0.30
Pric Price e Comp Compet etit itiv iven enes ess s
.13 .13
4
0.52
4
0.52
4
0.52
Technology
.10
4
0.40
4
0.40
3
0.30
Dealership Network
.12
2
0.48
4
0.24
4
0.48
Market Share
.10
2
0.20
3
0.30
4
0.40
Spare Parts
.12
2
0.36
3
0.24
4
0.48
Environment Fri Friendly
.09
4
0.27
3
0.36
2
0.18
Customer Loyalty
.10
4
0.40
4
0.40
2
0.2
Total
01
3.32
3.69
3.94
From the above matrix we can observe that the most important factor for the automobile indus industr try y is the the produc productt qual qualit ity, y, foll follow owed ed by price price comp compet etit itive ivenes ness s and and then then the the dealership networks and the availability of the spare parts. Suzuki is the strongest of all the three companies as it is proven from the matrix and also from its market share in COMSATS Institute of Information Technology, Lahore Campus. 14
Chapter # 3 INTERNAL AUDIT OF THE COMPANY Pakistan that is the highest among all. Honda is the lowest and the weakest of the companies.
MARKETING OF HONDA: Honda Atlas Marketing Objective: Honda Atlas Pakistan Limited as well established automobile companies in Pakistan they always keep focus on that mission and vision in the same direction HACPL does target of goal achievement. achievement. The standard of the HACPL according to marketing marketing is very high. HAPL existence existence and central point point of Honda Atlas to sell dream Car because because in Honda point point of view view “Power of Dreams” Dreams” itself itself attracting attracting the customer customer for for that need to to build unique product. HACPL marketing objective has been targeting in terms of provide satisfied customer service, make possible to keep in reach the product, and strive to give outstanding service to valued customers. In addition to providing regular service to customers, the company also regularly conducts Service Campaigns, to facilitate customer's need for service. This has given company customers’ absolute confidence in their cars. In the the const constant ant ende endeav avor or of Honda Honda Atlas Atlas comp compan any y to achi achieve eve No .1 Cust Custom omer er sati satisf sfact actio ions ns with with respe respect ct to loyal loyalty ty of brand brand.. Honda Honda Atla Atlas s Comp Company any has has been been committed to meet customer expectations, and to provide good value for money.
Honda Atlas Marketing Mix: Marketing mix elements or 4p’s strategy of marketing is the essence of any business same like this strategy of marketing mix apply in top listed automobile company overall the the worl world d Hond Honda a atla atlas s thes these e key eleme element nts s of marke marketi ting ng mix mix make make the the diff differe erenc nce e between Honda atlas and other automobile companies, Honda atlas also comes up with a strategy to figure out which strategy is best for them given the objectives and resources. They must also consider the strengths and weaknesses of the company as well well as opport opportuni uniti ties es and and threa threats ts.. To enha enhance nce the the apti aptitu tude de of the the comp compan anie ies, s, a market marketing ing mix strate strategy gy is introdu introduced ced.. The market marketing ing strate strategy gy will will create create lucrat lucrative ive marketing mixes for defined target markets. Honda atlas has been enhancing their outcomes and marketing value by implementing the right combination of the four P’s. Product: Honda Atlas has competitive edge to other automobile Companies in term of product quality. Accord: Witness the debut of the astonishing new Honda Accord: the outcome of our all-out pursuit of sedan excellence, successfully uniting all contradictory elements. A bold exterior presence with a luxury air, yet a sporty youthful feeling. An expansive upperclass cabin with comfortable travel space for five adults and panoramic visibility. A larger body with sportier performance than ever before and powerful I-VTEC engines COMSATS Institute of Information Technology, Lahore Campus. 15
designed for high fuel economy. A renowned global car with all advanced Honda technologies for driving command, plus eco-performance for increased recyclability. And, Honda's world-leading safety protection, which even extends to pedestrians and those in other vehicles. Experience its overall quality, riding comfort, and details for yourself, and you'll know why the new Accord represents a distinct "status upgrade" for the sedan. Civic: What moves you? What drives you? What excites you? Honda seeks the pinnacle of technology in pursuit of answers. Now, we present a bold way to stir the body and soul, designed designed to quicken the pulse at first glimpse, and stimulate stimulate the senses with each and every encounter. The sporty new Honda Civic possesses rare spirit, and so do you. See, touch, feel, drive and discover. City: See it coming, coming, like an arrow. Striking Striking good looks, cutting-edge cutting-edge design, design, sharply sharply focused tens tensio ion. n. See See it shoo shoott stra straig ight ht ahea ahead. d. What What is it? it? Disc Discov over er the the comp compac actt seda sedan n breakthrough breakthrough with strength to open a new era and outlast fleeting fleeting trends. Sleek styling and strong performance, with swift, gutsy response to the driver's pedal action. Classleading* spaciousness and relaxing ride for outstanding comfort. Imagine the pride of driving and owning this distinctive new-generation standard. Get ahead in the new City. People will be watching. CR-V: Dynamic styling appeal. Elevated SUV outlook. Premium driving refinement. And an exhilarating yet stable feeling. The new Honda CR-V has all you want, and more. A spacious cabin and utilities, due to packaging innovation. Plus superb i-VTEC response, quietness, and safety. Discover delightful CR-V driving. Now, all roads are exciting. Price: BRAND MODEL PRICES CR-V 2.4 Litre Rs: 5,299,000 CIVIC I-VETIC MANUAL Rs: 1,619,000 I-VETIC AUTOMATIC Rs: 1,739,000 VTI-ORIAL MANUAL Rs: 1,794,000 VTIVTI-OR ORIA IAL L AUTO AUTOMA MATI TIC C Rs: Rs: 1,86 1,869, 9,00 000 0 ACCORD I-VTEC Rs: 5,699,000 CITY MANUAL Rs: 1,249,000 AUTOMATIC Rs: 1,379,000 Promotion: Honda Atlas (Pakistan) always strives to give outstanding service to valued customers. In addition to providing regular service to customers, HONDA also regularly conducts Servi Service ce Camp Campai aigns gns,, to faci facililita tate te cust custom omer' er's s need need for for servi service ce.. This This has give given n to customers’ absolute confidence in Honda cars. Honda also participates in promotion of COMSATS Institute of Information Technology, Lahore Campus. 16
that product. Honda Atlas has a rapidly and quickly promote products more than its competitors. Place / Physical Distribution: Honda Atlas Network of dealership has expanded and now company has twenty one 3S (Sales, Service and Spare Parts) and thirty 2S (Service and Spare Parts) Pit shops network in all major cities of Pakistan. LOCATION 3S DEALERS 2S DEALERS KARACHI 6 4 HYDERABAD 1 LAHORE 4 7 ISLAMABAD 1 1 RAWALPINDI 1 2 MULTAN 1 1 FAISALABAD 2 2 SARGODHA 1 1 GUJRANWALA 1 SIALKOT 1 MIRPUR 1 PESHAWAR 1 ABBOTTABAD 1 BAHAWALPUR 1 BUREWALA 1 AZAD KASHMIR 1 GUJRAT 1 MARDAN 1 OKARA 1 RAHIM YAR KHAN 1 SAHIWAL 1 SUKKUR 1 VEHARI 1 Total 21 30 Marketing Operations/ Function of Marketing Department: Marketing operation functions is the very essential tool and it is excellent essence of any business same as this strategy imply by Honda Atlas Company to its authorized Dealer. It is dealing with brand loyalty of Honda products my concern exists between dealers and customers. Honda Atlas also depends on 3S but also facilitating with separately 2S as well (Service and Spare Parts). This offer of facilities Honda Atlas Motor compares to the Total Quality Management style of Honda Atlas Itself. These 3S and 2S always monitor by Honda Atlas itself that what’s going on in which Direction? These 3S and 2s has been facilitating through Dealers. Let we discuss these three elements simultaneously: Sales: COMSATS Institute of Information Technology, Lahore Campus. 17
The HACPL’s Sales Deals by its authorized Dealers. The dealers engaged in providing facil facilit itie ies s the the cust custom omer er to buy buy Honda Honda Brand( Brand(s). s). Honda Honda Atla Atlas s Compa Company ny has has give given n dealership authority approximately sixteen Dealers (cars) all over Pakistan. All of the sales strategies followed by Honda Atlas Itself and it are directly involve and time by time Honda Atlas keep attached with each sector, do analysis the sales, performance of the dealers most importantly after sales, customer satisfaction report. Sales facilities part part of Hond Honda a Atlas Atlas is to facil facilit itat ate e its its loyal loyal custo custome merr and overc overcom ome e custo custome mer’s r’s ambiguity, buying conflict and provide them maximum information before purchase. Honda Atlas is also very conscious in sales as well as Customers Satisfaction. All the authorized dealerships in Pakistan are a source of customer satisfaction. The after sales are supported by the immaculate service and the availability of spares at competitive prices for every car sold. To facilitate the customers for any assistance they require, Honda Atlas has a separate department, called Customer Relations, at the head head office office.. This This depart department ment is support supported ed by the subsequ subsequent ent Custom Customer er Relati Relations ons Offi Office cers rs at all all deale dealersh rship ips. s. The The purpo purpose se of Cust Custom omer er Rela Relati tion ons s Depar Departm tment ent and and Customer Relations Officers is to enable our customers in getting any sort of help required by them. Services The product sold is not means that close the window for customer now, it is beyond that further after sales customer has largely engaged to deal in service and Spare parts aspect. HACPL is a customer service conscious company, for which it is always looking for for avenue avenues s to devel develop op furt further her rela relati tion ons s with with the the cust custom omers ers who who have have alrea already dy purch purchas ased ed the the Produ Product ct.. Hond Honda a Atla Atlas s consi consider ders s purch purchas ase e of any any produ product ct as the the beginning of relations with customers. To prolong this relationship and encourage the customers to keeps on coming to the dealers, providing customer service the reason for this this faci facilility ty is to stre stress ss on the the impo import rtan ance ce of peri period odic ic main mainte tena nanc nce. e. Peri Period odic ic maintenance is essential for every existing if this is performed regularly as per the maintenance schedule the car is trouble free and life of car increases by many years. For these free services the labor is not charged, where as the customer has to pay for only the consumable like engine oil, oil filter, etc. HACPL is providing regular trainings to the dealers' technicians. The trainings cover all aspe aspect cts s of the the cars cars and and rela relate ted d Prod Produc ucts ts incl includ udin ing g the the peri period odic ic main mainte tena nanc nce, e, diagnostics, trouble shooting and repairs according to HONDA standards. From this we want to facilitate the customers in maintaining their cars in top-most condition and enjo enjoyi ying ng the the comfo comfort rt and and perf perform orman ance ce of the the luxury luxury vehi vehicl cles es they they own. own. It is our our endeavo endeavorr to have have unifor uniform m servic service e standar standards ds made made availa available ble at all dealers dealership hips s in accor accorda dance nce with with the the inte interna rnati tion onal al Hond Honda a stan standar dards ds.. We consi conside derr the the proper properly ly maintained vehicles not only to be a source of satisfaction to our customers; they also increase the sale value of their car. Spare Parts: COMSATS Institute of Information Technology, Lahore Campus. 18
The Spare parts element is heavily concern and involved with brand loyalty of Honda cars because cost of spare parts also consider when customer want to buy the car, customers customers are also price conscious, conscious, availability availability of spare parts and as well as quality of spare parts. Honda spare parts are expensive expensive because they have to import those form Malaysia. Honda Atlas always follow those strategies which they can gain customer most attention to its brands. Honda Atlas always make possible to be genuine and look genuine. Honda attract its customer in under the statement that “Buy Honda genuine parts from Honda dealers and enjoy 6 month's Honda Warranty, the Honda warranty can vary product to product and contribute to the country’s economy and enjoy the satisfaction of using 100% genuine Honda Parts. But if customers buy the parts from open market; most probably is that customer may be buying smuggled parts and thus committing a moral crime and robbing your country from precious revenue, customer may unable to claim but if customer buy from Honda authorized Dealer so the part will be 100% genuine, customer has no need to buy from open market, the trust between customer and Honda Dealers become long lasting etc. It is the Honda Atlas’ aim to be No.1 in customer satisfaction in all three S, Sales, Service and Spare Parts and two S in the same time.
PRODUCTIONS/ OPERATIONS: Process Design: Honda Atlas Cars (Pakistan Ltd. has a separate production department which is headed by Vice President (Production). A Japanese person is currently working on this seat. The production department has a number of sections such as: Vendor Section Engine Section Welding Section Maintenance Section Paint Vehicle quality control.
These along with some other sections are arranged in four groups, each one headed by a Gm. For Example, there is one GM for welding, paint and maintenance.
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Plant Capacity Currently the plant has the capacity of 35 vehicles per day which is lower than that of Toyota. Toyota. As for as the production production level level is concerned, concerned, it varies varies from time time to time. time. It was 15 cars cars per per day day when when I visi visite ted d the the fact factor ory. y. This This show shows s that that the the plan plantt is being being underutilized. There may be several reasons for this under-utilization such as: Weak economic condition of the country. Problems with cotton crop. High price of Honda Cars. Decrease in purchase of cars by large companies. Presence of Toyota Decrease in the purchasing power of potential customers.
Machinery: A brief list of machinery used in HACPL is given below: Boilers Compressors Water treatment plant Ovens (for backing the body of cars) Spot welding guns. Two-post lifts
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G-SWAT/ B-S / S Side Slip / Shower testers
Important Parts: Various parts of engine Brakes Seats Lights Cooling System Tyres Rims Fuel tank
Production Process: In order to fulfill requirements of widely diversified needs of the market, HACPL has developed its production facilities from a dedicated engineering set up to a highly flexible and wide range production system comprising of following activities Shown in chart. Production Procedure 1.
The production procedure starts from welding. This is done with the help of special machines. In this way the basic frame is manufactured and is is transferred to panting section.
2. The paint painting ing secti section on is equipp equipped ed with with modern modern machin machinery. ery. Here, Here, the the process process star starts ts with with wipi wiping ng,, clean cleaning ing and and degr degrea easi sing ng of fram frame e whic which h is foll follow owed ed by Phosphating Phosphating and ED coating. coating. Now the frame frame is backed backed in special special ovens. ovens. After After backing, following coat are applied: Base coat Final coat Clear coat (for shining)
3. Aft After pai paint ntin ing, g, the the fra frame me is is shif shifte ted d to asse assemb mbly ly liline. ne. Here ere orna ornam ment ental parts such as lights are fixed followed by heavy parts like engine, tyres seats, wind shield, etc. The procedures at assembly line can be understood by figures mentioned earlier. 4. Aft After pass passiing thro throug ugh h asse assemb mbly ly line line,, the car car move moves s to "veh "vehic iclle qual qualit ity y department". Here, different tests are applied. Currently, HACPL HACPL is is using three three QAEs (Quality Assurance Equipment) which are mentioned below: COMSATS Institute of Information Technology, Lahore Campus. 21
"G-SWAT" ( Geometrical Static Wheel Alignment tester) for alignment. "B-S testor" for testing breaking force and speed meter. "S-S testor" for testing side slip: After applying these test, the car is driven and a 1-km 1-km "test course". Here the noise and performance performance of car a different road condition conditions s are tested. Finally, Finally, a "shower test" is applied to find leakages if any. 5. In thi this s fina finall stag stage, e, pre pre del deliv iver ery y insp inspec ecti tion on (PD (PDI) I) is is made made and and a stic sticke kerr is attached. Now, the car is ready for shipment. Quality Control A lot of importance importance is given to “quality “quality control" control" in HACPL. The personal of HACPL HACPL is highly qualified in this regard. When purchase purchase material arrives, arrives, thorough thorough checking of that material material is made. If any deficiency deficiency is found then it is reported. reported. If the deficiencies deficiencies are beyond beyond the acceptable acceptable level then the material is returned to supplier according to terms & conditions of the contract. However, the chances of such happenings are very less because because HACPL has very tight purchasing policy and it has no compromise on quality. Similarly, Similarly, the finished product is tested tested before delivering delivering it to the customers in order to assure assure the qualit quality y standar standards. ds. On the whole, whole, the quality quality control control / quality quality assuranc assurance e personnel are continuously engaged in improving quality to need the requirements of each customer individually and the market as a whole. HACPL HACPL is success successful fully ly using "Kaizen" "Kaizen" system system for quality quality control. control. Employe Employees es are encouraged encouraged to improve quality quality and reduce cost. cost. Every month, month, about 20-25 prizes prizes are given on showing good performance. HACPL HACPL is ISO 9002 certifie certified. d. It was the winner winner of "Best Quality Quality Award Award for Asia" in 1996, 1997 & 1998. PLANNING A ND DEVELOPMENT : Currently, Honda Atlas Cars (Pakistan) Limited is not in a position to make major changes in its cars. Only minor changes can be made here and decisions about these changes are made at the top level. Marketing & Production people play an important role in this regard. Research & Development Department: The role of research and development is to introduce innovative ways to achieve the objectives especially through production facilities. Unfortunately, there is no research and development department in HACPL. This function is performed by Honda Motor Company, Japan. All major changes in models of Honda cars are introduced there. Employees of HACPL are sent to Japan, where they are trained according to new conditions. Later on, these changes are introduced in the models offered in Pakistan. Deletion Program:
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“Deletion is to replace the imported parts of vehicles with the parts either manufactured in house or purchased through local vender industries.” Honda Atlas Cars (Pakistan) Limited is perusing a realistic and progressive deletion program program for indige indigeniz nizati ation on of assembl assemblies ies,, parts parts and compon component ents. s. This This dynami dynamics cs progr program am is bein being g impl implem emen ente ted d throu through gh in-h in-hous ouse e assem assembl blie ies s and and manu manufa fact ctur urin ing g operations, and is being supplemented by vendor development. HACPL is almost same as that of its major competitor, i.e. the manufacturer of Toyota Cars. Efforts are being made by top management to increase this percentage. Achievement of Objectives through Operations: The production department of HACPL is playing a vital role in achieving the overall objectives of the company through efficient utilization of resources. •
HACPL is achieving production efficiency through: Evaluation & improvement of quality control. Training of production employees. Modernization of plant and machinery.
•
Similarly cost minimization objective is being achieved through: Deletion program Avoi Avoidi ding ng poor poor qual qualit ity y produ product cts, s, whic which h are a loss loss for for the the compa company. ny. As
mentioned earlier, HACPL is achieving excellent quality levels through giving training to personal plus proper use of technology. Inventory: Inventory is a stock of any things held to meet future demand. Inventory is created when the the rate rate of rece receip ipts ts exce exceed eds s the the rate rate of disb disbur urse seme ment nts. s. It is depl deplet eted ed when when disbursement exceeds receipts.
There are three types of inventory: Raw material inventory W.I.P. inventory Finished goods inventory
The basic objective of any firm is to minimize minimize total inventory cost (ordering & carrying). carrying). The same is the case in Honda Atlas Cars (Pakistan) Limited. In HACPL, the whole inventory system is computerized. Following are the advantages of this computerized system. Updating records. Providing management reports.
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Automating the recording process. Re-computing decision parameters.
In HACPL, the inventory basis and audit reports are prepared. Reason for P-System: 1. Administration of the system is convenient because replenishments are made at fixed intervals; Employees can set aside a day or part of a day regularly to concentrate on this particular task. 2. Order for multiple items from the same supplier may be combined into a single purchase order. This approach may result in a price break from the supplier and saves the buyer some paperwork, thereby reducing ordering costs, suppliers also may prefer combined orders because all items in the order may be shipped at the same time, reducing transportation costs and increasing vehicle utilization. 3. The inventory position, IP, needs to be known only when a service is made. Safety Stock HACPL maintains a safety stock of 2 to 3 months. The reason for maintaining a safety stock is as follow: To protect against shortage that occur due to suppliers. To protect smooth and continuous operations.
In HACPL, the inventory is held in the following forms: Inventory of imported parts. Inventory of local parts.
In order to avoid stock out, they have more safety stock of imported parts as compared to that of local parts. Shortage of Inputs There are special warehouse for the purpose. Both imported and local parts are stored here. The boxes of parts are placed at approximate distance and forklifts can easily move move with within in the the wareh warehou ouse se.. The resu result lts s in conve conveni nien entt move moveme ment nt of part parts s from from warehouse to assembly line etc. Storage of Output (Cars) There is no proper warehouse warehouse for parking of cars moving out of assembly assembly line. A place has been assigned for this purpose but there is no roof over it. Actually these can are serviced when they arrive at the showrooms of dealers so management of HACPL does not feel any need of having a covered place for these cars. Aggregate Planning Aggregate planning is a statement of production rates, work force level and inventory holding based on estimates of customer requirements and capacity limitation. COMSATS Institute of Information Technology, Lahore Campus. 24
Production Plans The production plans are prepared for three months based on the customer’s orders and uncertainty in demand, Work Force Level In HACPL, work force schedules are arranged on the basis of production plan. If demand is high, then extra workers can be hired on contract basis or the existing permanent employees can be employed in extra work to meet the targets. When I visited the factory of HACPL, the daily production was 15 cars. For this reason, there was a single shift except for maintenance department. Material Management Materia Materiall manage managemen mentt concern concerns s short-r short-range ange decisio decisions ns about about suppli supplies, es, invent inventorie ories, s, production level, staffing patterns, schedules & distribution is as follows: Purchasing: Purchasing in the management of the acquisition process, which includes deciding which supplies to use, negotiating contract and deciding whether to buy locally or central centrally ly.. Purchasi Purchasing ng must must satisf satisfy y the firm’ firm’s s supply supply needs needs and support support the firm’ firm’s s production capabilities. In HACPL, the whole action can be described under following headings. HACPL imports materials from the parent Honda Motor Co, Japan in the CKD (complete Knocked Disk) form. HACPL also purchases materials from the Local Vendors Supplier Selection: HACPL prefer those suppliers who fulfill the following requirements:
Provide best quality material at low cost. Shorter Lead Times Provi Provide de mate materi rial al to produ product ctio ion n plant plant of HACP HACPL. L. (I.e (I.e.. provi provide de mate materi rial al at destination). On time delivery These are the reasons which forces HACPL to go for local contracting. Procedure for Returning Of Low Quality Material: HACPL has its own quality standards regarding materials. HACPL has not any habit of accepti accepting ng Low Qualit Quality y Raw Materi Material al at low rates. rates. HACPL HACPL returns returns the low qualit quality y materials to the supplier according to the terms and conditions of the contract. Supplier Relations: HACPL, Vendor Development is mainly entitled with the responsibility of establishing working relationship with all the agencies (Vendors) involved in Supply if materials. Similarly HACPL has formal relationships with the local vendors. Distributors: To store store the the fini finish shed ed produ product cts, s, (Hond (Honda a Civi Civic c & Honda Honda City City), ), HACP HACPL L uses uses both both COMSATS Institute of Information Technology, Lahore Campus. 25
FORWARD, FORWARD, BACKWARD placement. HACPL has a country-wise network of Sales Dealers who are actively engaged in promoting the image of HACPL and its cars. The details of HACPL’s dealers have been mentioned earlier. Transportation Mode: HACPL has a habit of using only one mode if transportation transportation (i.e. Highway) for the both inputs and outputs. The logic behind this mode is low cast and flexibility of shipping to almost any location in Pakistan. Current Currently ly,, HACPL HACPL has no transp transporta ortatio tion n fleet fleet of its own. own. Nearly Nearly five five transpo transporta rtatio tion n companies are performing this function on contract basis. NLC is also included in these companies. Total Quality Management: (T ( T.Q.M.) T.Q.M. stresses three principles: Customer Satisfaction Employee Involvement Continuous Improvement
Attaining quality in all areas of a business is a difficult task. It is necessary for an organization to provide its customers with best or even consistent quality products in order to survive in the environment. The success of any business depends upon how accurately the company perceives the expectations of Customers plus its ability to bridge the gap between consumer expectations & operating capabilities. In HACPL the concept of T.Q.M. is more common. This can be explained as follow: Customer Satisfaction: HACPL’s employees try at their level best in satisfying the customers & hence stepping forwards the objective of the company. The contribution of Marketing & Production department is very important in this regard. These departments continuously go for the ways to improve the features of existing HACPL’s products and hence satisfying the customers. Employee Involvement: HACPL’s management considers its employees a great asset. The employees along with sales dealers are part of the large “Honda Family” and they form an integral part of policies and decisions that help shape the future of the company. The management of HACPL considers the proposals/Suggestions of its employees up to a great extent. extent. It appreciates appreciates the employees in this regard through Monetary Monetary or Non Monet Monetary ary benef benefit its. s. Manag Managem emen entt of HACP HACPL L put great great emph emphas asis is on creat creatin ing g and and maintaining an enterprise environment in the company that maximizes the interest and motivat motivation ions s of its employees employees which which is very vital to enhance enhance labor product productivi ivity ty and efficiency. Training of Personnel: COMSATS Institute of Information Technology, Lahore Campus. 26
HACPL puts great emphasis on training and development of employees to help them realize realize their full potential. potential. Employees from all departments especially especially form production; finance and marketing attend training courses in their respective fields. This has greatly contributed in improving employee’s performance and efficiency at all level. Continuous Improvement: The Management of HACPL has a view of continuous improvement in order for the better Utilization of resources and improving Honda brand image in the market. HACPL is trying at its level best to introduce and implement better quality control procedures, redesig redesignin ning g the product production ion process process,, automa automatin ting g the whole whole plant plant etc. etc. Employ Employee’s ee’s involvement is playing vital role in this regard. RESEARCH & DEVELOPMENT DEPARTMENT: The role of research and development is to introduce innovative ways to achieve the objectives especially through production facilities. Unfortunately, there is no research and development department in HACPL. This function is performed by Honda Motor Company, Japan. All major changes in models of Honda cars are introduced there. Employees of HACPL are sent to Japan, where they are trained according to new conditions. Later on, these changes are introduced in the models offered in Pakistan.
IFE Matrix: Key internal factors STRENGHTS Brand Image Advance Technology Customer Loyalty Strong R&D Greater Fuel Efficiency Environment Friendly Cars Safety Smoother Drive TQM Global Models WEAKNESS Dealership Network Costly Spare Parts Limited Product Line Lack Of Utilization Of Capacity Shortage Of Trained Technicians Due To Complex Sensor Technology High Cost Of Production
Weight Rating Weighted score 0.05 .1 0.06 0.08 0.08 0.05 0.03 0.02 0.06 0.03
4 4 4 4 4 4 4 4 4 3
0.2 0.4 0.24 0.32 0.32 0.20 0.12 0.08 0.24 0.09
0.1 0.07 0.04 0.06 0.03
1 1 2 1 2
0.1 0.07 0.08 0.06 0.06
0.04
1
0.04
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Maintenance Cost Resale Value TOTAL
0.05 0.05 1
1 2
0.05 0.10 2.77
Stage 2 The Matching Stage The strategy strategy is define defined d as the match an organiz organizati ation on makes makes betwee between n its internal internal resources and skills and the opportunities created by its external factors. The matching strat strategy egy form formula ulati tion on fram framewo ework rk cons consis ists ts of five five tech techni niqu ques es that that be used used in any sequence:
The SWOT matrix The SPACE matrix The BCG matrix The IE matrix Grand strategy matrix. These These tools tools rely rely upon upon inform informati ation on derive derived d from from input input stage stage to match match the extern external al opportunities and threats with internal strengths and weaknesses. In this project, we will be using only the SWOT matrix for the determination of the alternative strategies.
The SWOT matrix A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis . The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. The following diagram shows how a SWOT analysis fits into an environmental scan:
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STRENGHTS
WEAKNESS
1. Brand image 2. Offe Offeri ring ng Glob Global al model models s 3. Smoo Smooth ther er driv drive e as comp compar are e to its competitors 4. Time Timely ly new new mode models ls 5. Dece Decent ntra ralilized zed envir environ onme ment nt 6. Advan dvance ce Tec Techn hnol olog ogy y 7. Safety 8. Envi Enviro ronm nmen entt Frie Friend ndly ly 9. Cust Custom omer er loya loyalt lty y 10. 10. High Highly ly loya loyal, l, comm commit itte ted d and and motivated employees 11. Greater Greater fuel fuel efficien efficiency cy 12. TQM 13. Friendly Friendly working working environmen environmentt 14. Advert Advertise isemen mentt 15. Strong Strong human human resource resource 16. Reliab Reliabili ility ty 17. CSR 18. Stron Strong g R &D
1. 2. 3. 4. 5. 6.
Deal Dealer ersh ship ip Net Netwo work rk Resale va value Main Mainte tena nanc nce e cost cost Cost Costly ly Spar Spare e par parts ts Limi Limite ted d prod produc uctt line line Shor Shorta tage ge of of trai traine ned d technicians due to Complex sensor technology 7. Lack Lack of util utiliz izat atio ion n of of capacity 8. Marke arkett sha share re and and profitability 9. High High cost cost prod produc ucti tion on..
OPPURTUNITY
SO STRATEGY
WO STRATEGY
6.
1. Prom Promot otio ion n of prod produc ucts ts on on the the bases of environmental friendliness and fuel efficiency. (S1, O1), (S2, O2, O4) 2. Great Greater er focus focus on on the the prod product uction ion of eco - friendly cars. (S6,S8, O2) 3. Avail Availabi abilility ty of of train trained ed tech technic nical al staff at 2 S and 3 S dealers. ( S15, O3 )
1. Incr Increa ease se the the deal dealer ersh ship ip networks all over the country. (W1,W6, O3) 2. Avai Availa labi bilility ty of of trai traine ned d technical staff at 2 S and 3 S dealers. (W6, O3). 3. Introd Introduct uction ion of flexi flexible ble fuel fuel vehicle and going for product diversification(W5, diversification(W5, O4, O5)
THREATS
ST STRATEGY
WT STRATEGY
11. Recession Recession in the the economy economy 12. WTO (Worl (World d trade trade Order) Order) opening local markets for global competition 13. Entry Entry of reconditi reconditions ons cars 14. Political Political instabili instability ty 15. Tightenin Tightening g monitor monitoring ing Policy 16. Energy Energy cris crises es 17. Depreciat Depreciation ion of of rupee rupee against dollar 18. Increase Increase in Petro Petroleum leum and and steel prices. 19. Inflat Inflation ion 20. Declining Declining qualit quality y of the the infrastructure in the country.
1. Util Utiliz ize e rese resear arch ch and and development to minimize spare parts price.(S18, T1)
1. Loca Localiliza zati tion on of sup suppl plie ies s and raw material (W9, W4, T1, T7). 2. Down Downsi sizi zing ng ( W9, W9, W8, W8, T1) T1) 3. Stri Strict ct emplo employe yee e poli polici cies es to contain overh erhead ead and unfa unfav vorab orable le eco econom nomic conditions 4. Mass Mass Prod Produc ucti tion on 5. Influ nflue ence nce and and coor coordi dina nate te gove govern rnme ment nt inst instit itut utes es to ensu ensure re cons consis iste tent nt powe power r supply supply and minimum minimum break down time. (T6,W7)
SWOT Analysis of HONDA Atlas Cars
7. 8.
9. 10.
Peop People le’s ’s awa aware rene ness ss abo about ut Global Warming Cust Custom omer er des desir ire e for for hybr hybrid id and fuel efficient vehicles Incr Increas ease e in tech techno nolo logy gy in in automobiles forces customers to return to dealer for service Intr Introd oduc ucti tion on of eth ethan anol ol fuel fuel in Pakistan Increase Increase in demand demand of of small small vehicles
COMSATS Institute of Information Technology, Lahore Campus. 30
Stage 3
The Decision Stage
QSPM (Quantitative Strategic Planning Matrix): In order to reach a decision based on objectivity and priority based analysis, one of the most frequently used techniques is the QSPM. This technique enables us to measure the attractivenes attractiveness s of feasible alternative alternative actions. actions. QSPM objectively objectively indicates indicates which alternative strategies are the best QSPM uses input from stage 1 and matching results from stage 2 analyses to decide among alternative strategies. Like other strategy formulation analytical tools, QSMP requires good intuitive judgment. In the stage 3 of Honda Atlas Cars, there were three alternative strategies that we found very attractive. The data collected from the external and internal audit, and the matching done done from from the the oppor opportu tuni niti ties, es, threa threats ts,, weakn weaknes esses ses and stre strengt ngths hs brou brought ght us to consensus of selecting these alternative strategies. We selected three strategies in total; 1. Increas Increase e in the number number of Dealers Dealership hip networ network k 2. Produc Productt Dive Diversi rsifi ficat catio ion n 3. Attain Attaining ing econom economies ies of scale scale The increase in the number of dealership network was chosen because; Honda had a smallest dealership network against his competitors Indus motors and Pak Suzuki. Honda is unable to access a number of potential customers due to a small dealer ship network. The The next next alte alterna rnati tive ve strat strategy egy that that was was buil builtt with with a cons consens ensus us was was to do produ product ct diversificati diversification. on. Honda has a small market share as compared to Indus motors and Pak Suzuki. One of the major reasons was the product diversification by its competitors. If Honda is able to do product diversification, it can increase its sales; capture the market share on the bases of strong brand image and customer loyalty. Attaining the economies of scales was another highly preferred alternative strategy that could help the company to increase its income and improve its performance. Honda has done expansion of its company, but it has not been using its plants up to its required optimal capacity. Due to this the company is facing high cost as well. So if the company mass produces the cars and use the plants to its maximum capacity, it will be able to COMSATS Institute of Information Technology, Lahore Campus. 31
decre decreas ase e the the cost cost.. The The only only varia variabl bles es affe affect ctin ing g this this strat strategy egy are the the marke marketi ting ng promotions done by the company, and sale of the manufactured cars.
COMSATS Institute of Information Technology, Lahore Campus. 32
Alternative strategies
Increase in the number of Dealership network AS TAS
Product Economy diversificat of scale ion
Wght AS External factors Opportunities 11.People’s awareness about Global 0.05 1 0.05 4 Warming 12.Customer desire for hybrid and fuel 0.08 3 0.24 4 efficient vehicles 13.Increa 13. Increase se in technology technology in 0.1 4 0.40 3 automobiles forces customers to return to dealer for service 14.Introduction of ethanol fuel in 0.02 3 0.06 4 Pakistan 15.Increase in demand of small 0.05 3 0.15 4 vehicles Threats 21. Recession in the economy 0.05 2 0.10 3 22.WTO (World trade Order) opening 0.02 2 0.04 4 local markets for global competition 23. Entry of reconditions cars 0.13 --24. Political instability 0.05 --25. Tightening monitoring Policy 0.06 4 0.24 3 26. Energy crises 0.1 4 0.40 2 27. Depreciation of rupee against dollar 0.1 3 0.30 4 28.Increase in Petroleum and steel 0.09 1 0.09 3 prices. 29. Inflation 0.07 2 0.14 4 30.Declining quality of the 0.03 ---infrastructure in the country. Total 1 STRENGHTS 1. Brand image 0.1 4 0.40 3 2. Advance technology 0.1 2 0.20 4 3. Safety 0.08 1 0.08 4 4. Environmental friendly 0.07 1 0.07 4 5. Cu C ustomer loyalty 0.06 4 0.24 3 6. Strong R&D 0.1 1 0.10 4 7. Fu Fuel efficiency 0.09 1 0.09 4 8. Total quality management 0.05 3 0.15 4 9. Timely new models 0.06 4 0.24 3 WEAKNESS 1. Dealership network 0.08 4 0.32 2 2. Costly spare parts 0.05 1 0.05 3 COMSATS 3 . Market shInstitute are and profof itabInformation ility 0.0Technology, 8 3 0.2Lahore 4 4 33 4 . Limited product line 0.03 1 0.03 4 5. Shorta Shortage ge of trai trained ned techn technici icians ans due due 0.05 3 0.15 2 to Complex sensor technology TOTAL 1 4 57
TAS
AS
TAS
0.20
2
0.10
0.32
2
0.16
0.30
1
0.10
0.08
2
0.04
0.20
2
0.10
0.15 0.08
1 3
0.05 0.06
--0.18 0.20 0.40 0.27
--2 1 2 4
--0.12 0.10 0.20 0.36
0.28 --
3 --
0.21 --
0.30 0.40 0.32 0.28 0.18 0.40 0.36 0.20 0.24
2 3 2 2 2 3 2 2 1
0.20 0.30 0.16 0.14 0.12 0.30 0.18 0.10 0.06
0.16 3 0.15 4 Campus 0.32 2. 0.12 2 0.10 1 6 19
0.24 0.20 0.16 0.06 0.05 3 87
Conclusion: The weights taken for the following factors were taken from the EFE matrix and IFE matrix. The rating was done on the bases of intuition, brainstorming and consensus at the end among the group members. After the comparison of above mentioned strategies and their total attractiveness score it is more appropriate and feasible for an organization to follow the product diversification strategy. In this context, the company will ha to put new production plants in order to produ produce ce new cars. cars. This This will will incl include ude the the arran arrangem gemen entt of heavy heavy budg budget et and and extensive marketing of the new products. Since the monetary policies of the country are tight at present, the company should arrange the capital in form of equity by floating the shares in the market or wait for the interest rates to fall down as the economic and inflationary situation of the country stables. The products will contain product line of small cars i.e. 800 c.c. and below.
Ratio Analysis: Gross Profit Margin Ratio: Company Year 2004 2005 2006 2007 2008
Honda
Indus motors
Suzuki
Industrial average
8.1 1.7 4.6 1.0 4.3
11.96 9.80 11.77 11.37 9.29
9.9 10.1 11.8 9.4 1.5
9.98 7.2 9.39 7.25 5.03
Analysis:
COMSATS Institute of Information Technology, Lahore Campus. 34
The gross profit margin measures the gross profit relative to sales. From the above calculations we see that there is a decline in the gross profits of the entire industry. In the years 2004 and 2005 the automotive industry showed double digit growth. This trend was accelerating for the last four continuous years. However, in the 2005 the growths begin to show momentum after the announcement of further decrease in the reduction of the import duties on different vehicles. More than five years old cars were now finding their way into the country on the bases of transfer of residence and gift schemes. This resulted in the slowdown of growth of the automobile industry from 23% to just 9% in the year 2007. Then unfortunately, there occurred a series of events in Pakistan that was a bad news for all the industries including the automobile industry. There There was was poli politi tica call unres unrestt in the the count country ry alon along g with with the the nati nationa onall secu securit rity y issue issues. s. Furthermore the in the economic environment resulting from the rising interest rate, limited credit availability for auto financing, depreciation of the Pak Rupee against all the major currencies, currencies, unprecedented unprecedented rise in the prices of oil, steel and other inputs caused severe volatility in the market place, leading to high inflation and loss of consumer confidence. Furthermore in the budget 2007-08 the government had imposed higher levies and taxes which resulted in further increase in automobile prices to the customers and dampened the demand. From the above table we can see that Indus motors and Suzuki motors were above the industrial average in 2004. The reason for this is the large sale units of both the companies as compared to Honda atlas cars. However in 2005, Honda Atlas motors substantial decrease in the gross profit margin ratio by 79%. Although the company’s sales increased by 77 % as compared to the previous year, but the decrease in gross profit was mainly due to provision for custom duty on certain CKD components, which were subject to increase in salaries and wages, by Rs 34.7 million due to increase in manpower for starting double shift, and increased royalty by Rs 134.2 million. These were the developmental costs that the company had to bear. On the other hand Indus motors and Suzuki were able to increase their sales maintaining the proportion of cost of goods sold. In 2006, the company however showed an improved gross profit margin of 4.6% against 1.7 % of last year, but still the gross profit margin of the company was relatively lower than its competitors. The Indus motors and the Suzuki motors had sales turnover turnover of 35,236 of 35,236,535 ,535 and 47,187 47,187,945 ,945 respectively respectively as compare compared d to just 25,638,698 of Honda. In the year 2007 the company again showed a decrease by 78 % in its gross prof profit it marg margin in.. The The reas reason on for for this this decr decrea ease se was was the the libe libera ralilize zed d poli polici cies es of the the government to import cars. This caused the sales to decrease by 72 % as compared to 2006. The reason for this decrease was that Honda had to increase its products market price in order to cover the cost of production; however Indus motors and Suzuki had decreased their prices in order to compete with the imported cars. Moreover Indus motors and Suzuki had a large range of different products to offer to their customers. Honda was adversely affected by the increase in the interest rates, and high inflation in the country. In year 2008, in spite of the expansion plan completed and the increase in capacity, the company was able to increase its gross profit margin ratio just by 4.3%. The reason for this was the economic instability in the country. High inflation rates and COMSATS Institute of Information Technology, Lahore Campus. 35
tight auto leasing policies affected affected the sales of the company. However, this increase in inflation made the consumers move towards the small vehicles such as Mehran of Suzuki and Cuore of Indus motors. However Indus motors was the only company that was able to keep its gross profit margin ratio above the industrial average. Operating profit margin ratio: Company Year 2004 2005 2006 2007 2008
Honda
6.4 .5 3.5 -1.1 2
Indus motors
10.06 8.34 11.56 10.83 8.5
Suzuki
8.7 9.9 10.7 8.4 2.5
Industrial average
8.38 6.24 8.59 6.04 4.33
Analysis The operating profit ratio tells us about the about the performance of the company, that how much it has earned before the payment of taxes. In fig we can see that there has been a downward trend in the automobile industry after 2006. This downward trend in the industry was due to the imposition of the liberal government policies for the import of new and used cars in the budget of 2005 -06. The growth of the automobile industry further decreased from 23% to just 9% in the year 2007. Then unfortunately, there occurred a series of events in Pakistan that was a bad news for all the industries including the automobile industry. There was political unrest in the country along with the nation national al securi security ty issues issues.. Furthe Furthermor rmore e the instab instabili ility ty the economi economic c environ environmen mentt resulti resulting ng from from the rising rising intere interest st rate, rate, limite limited d credit credit availab availabili ility ty for auto auto financi financing, ng, depreciation of the Pak Rupee against all the major currencies, unprecedented rise in the the pric prices es of oil, oil, steel steel and other other inputs inputs caused caused severe severe volati volatilit lity y in the market place, leading to high inf inflat lation ion and and loss loss of cons consum umer er conf confid iden ence. ce. Furt Further her more more in the the budget budget 20082008-09 09 the the gover governm nmen entt had had impo impose sed d high higher er levi levies es and and taxe taxes s whic which h resu result lted ed in furt furthe her r increase in automobile prices to the cust custom omer ers s and and damp dampen ened ed the demand. From the above calculated ratios we see that Honda has been always falling behind its major market competitors in the operating profit margin ratio. In 2004 the operating margin ratio of Honda atlas cars was quite low then its two competitors. This was due to the increase in cost of goods sold by 188 % as compared to the previous year. The ratio further declined to just 0.5 % in year 2005. This substantial decline was due to the expansion of the paint shop which was considered as bottle neck for the company.
COMSATS Institute of Information Technology, Lahore Campus. 36
Although, the sales of the company increased by 77 % as compared to the previous year but, along with it there was an increase in the cost of goods sold by 90 %. In 2006 the the opera operati ting ng profi profitt marg margin in show showed ed a tren trend d towar towards ds impr improv ovem ement ent by bring bringin ing g its its operating profit margin ratio to 3.5 %. Although this ratio was substantially low as comp compar ared ed to the the compet competit itors ors,, but but the the Hond Honda a was was under under going going furt furthe herr expa expans nsio ion n processes which made it cost of goods sold to increase by 50% as compared to the previous year. Unfortunately, in 2007 there were changes in the government policies to further reduce the import rates and allow the entry of cars older than 5 years. This caused a bump for the local automotive industries which caused the reduction in the growth of automobile sector. Although Indus motors and Suzuki motors showed a decrease in the operating ratio but they were able to manage to maintain their sales volume. However Honda atlas cars faced the challenges of increase in depreciation due to capa capaci city ty expa expansi nsion on proj project ect alon along g with with the the decre decrease ase in the the sales sales reduc reducin ing g the the operating profit to negative digits. In 2008 the worsening economic situation of Pakistan and the lost confidence of the consumers caused further decline in the automobile sector. Indus motors, managed to further increase its sales by 6% even in these conditions by lowering its price of the automobiles. Suzuki motors was unable to further lower its price causing to lose sales by 21%. Honda that was already in financial hiccup, paying loans to the lenders, the economic and political instability brought the sales down by 13% putting Honda motors almost into the position as same as Suzuki motors according to their operating margin ratios. Net profit margin: Company Year 2004 2005 2006 2007 2008
Honda
4.4 1 2.8 -1.6 .5
Indus motors
6.54 5.38 7.52 7.03 5.53
Suzuki
5.7 6.3 7 5.5 1.6
Industrial average
5.55 4.23 5.77 3.64 2.54
Analysis: The net profit margin tells us about the about the performance of the company, that how much it has earned before the payment payment of taxes. The profit margin margin tells you how much profit a company makes for every Rs. 1 it generates in revenue or sales or sales.. In fig we can see that there has been a downward trend in the automobile industry after 2006. This downward trend in the industry was due to the imposition of the liberal government policies for the import of new and used cars in the budget of 2005 -06. The growth of the automobile industry further decreased from 23% to just 9% in the year 2007. Then unfortunately, there occurred a series of events in Pakistan that was a bad news for all the industries including the automobile industry. There was political unrest in the country along along with with the nation national al securit security y issues. issues. Furtherm Furthermore ore the instab instabili ility ty the economi economic c environment resulting from the rising interest rate, limited credit availability for auto COMSATS Institute of Information Technology, Lahore Campus. 37
finan inanci cing ng,, depr deprec ecia iattion ion of the the Pak Pak Rupe Rupee e aga against inst all all the the maj major curr curren enci cies es,, unprecedented rise in the prices of oil, steel and other inputs caused severe volatility in the market place, leading to high inflation and loss of consumer confidence. Further more in the budget 2008-09 the government had imposed higher levies and taxes which resulted in further increase in automobile prices to the customers and dampened the demand. From the above calculated ratios we see that Honda atlas cars as compared to its competitors have always been lagging behind in the net profit margin. Its net profit margin ratio for all the years has been below the industrial average as well. In the year 2005 the company’s net profit margin showed a decline decline of 3.4% and its figure reached to just 1%. This decrease was due to the expansion of the paint shop that made the cost of goods sold increase by 90%, Administration and distribution expenses increased by 24 %, and the finance charges increased by 160 % as compared to previous year. Indus motors on the other showed a decline of 1.2 % as compared to the previous year due to the increase in finance costs by 58%. Suzuki showed higher net profit margin ratio as compared to previous years with only a minor increase in the finance charges by 7 % as compared compared to Honda and Indus motors. In 2006 Honda managed to move its profit margins up by 1.8 %. However, Indus motors and Suzuki increased their net profit margins by 2.14% and 0.7% respectively. In 2007 however Honda atlas cars showed net loss loss of 1.7%, 1.7%, wher wherea eas s its its compe competi tito tors rs showed showed a smal smalll decli decline ne in thei theirr ratio ratios s comparatively. In 2007 there were changes in the government policies to further reduce the import rates and allow the entry of cars older than 5 years. This caused a bump for the local automotive industries which caused the reduction in the growth of automobile sect sector. or. Honda Honda atla atlas s cars cars face faced d the the chal challe lenge nges s of incre increase ase in depre deprecia ciati tion on due due to capacity capacity expansion project along with the decrease in the sales reducing the operating operating profit to negative negative digits. There was an increase increase in financial financial cost as well due to the long term borrowing to support capacity expansion in all Rs. 755.7 million against Rs. 185.7 million in the same period last year. In the year 2008, Honda Atlas Motors was able to decrease its other expenses by 92 %, and finance cost decreased by 23%. The sales of the company went down due to the economic and political instability of the country. This unrest brought down the profit margins of the competitor companies as well. Return on equity: Company Year 2004 2005 2006 2007 2008
Honda
22.5 8.1 30 -10.3 2.6
Indus motors
39.1 33.2 42.3 34.1 24.3
Suzuki
28.96 33.63 35.27 22.04 4.4
Industrial average
30.18 24.98 35.86 15.28 10.43
COMSATS Institute of Information Technology, Lahore Campus. 38
Analysis: A business that has a high return on equity is more likely to be one that is capable of generating cash internally. For the most part, the higher a company's return on equity compared to its industry, the better. In the fig 3.4 we can see the upward trend of the industry up till the year 2006. However it begins to fall after that due to the liberalized policies of the government to import cars resulting in the slowdown of growth. Moreover the economic and political conditions of Pakistan made the automobile industry growth reduce to 3.9 %. From the above calculated ratios ratios we see that Honda atlas cars have always been below the industrial average. In the year 2004 we see that Honda atlas cars earned 22 % on the inve invest stme ment nt made made by the the shar share e hold holder ers. s. But But Indu Indus s moto motors rs and and Suzu Suzuki ki moto motors rs in comparison earned 39 % and 29 % against the investment made by the equity holders respectively. respectively. Although Although the share holder equity of both the competitors competitors was higher higher (87% and 17%; Indus motors and Suzuki motors respectively) as compared to the Honda atlas cars, but still the net income earned by Indus and Suzuki motors was up by 260 % and 243 % respectively. Similar was the case in the year 2005 as well in which Honda’s net profit decreased by 60%, which brought decrease in the returns of share holders to 8%. In 2006, Honda cars managed to boost its sales by 55% which brought net income of 705,294,000, which was 330 % higher than previous year income. In 2007, the company suffered loss in the business, hence showing the negative return in equity. But in 2008 the company again managed to show positive returns, but the return on equity was lower than its competitors because of the equity injected by it in 2007 to carry on the expansion plans plans.. More Moreov over er the the sale sales s of the the comp compan any y were were also also lower lowered ed by 14% 14% due due to the the economi economic c and politi political cal instab instabili ility ty of the country country,, bringi bringing ng the decreas decrease e in the profit profit margins as well. Honda in 2004 had a net profit margin of rupees 408,500,000, hence giving the return on equit uity of 22 %. This ret return urn declined by 14% due to the increase in the cost cost of good goods s sold sold which hich affe affect cted ed the the net net profi profitt as well well.. In 2006 2006,, the the comp compan any y mana manage ged d to incr increa ease se the the retu return rn on equi equity ty by 22%, by increasing its sales by 55% and and decr decrea easi sing ng its its cost cost of good goods s sold by 3 %. In 2007 the company showed a negative return on equity. This was due to the loss that the comp compan any y had had to bear bear due due to the the reduction in sales due to the high price of the automobile, bringing the decrease in its demand. Moreover, the company had equity of worth PKR 294,000,000 as well. The
COMSATS Institute of Information Technology, Lahore Campus. 39
company showed net profit PKR 75,010,000, hence putting the return on equity back to positive digits. Dividend payout ratio: Company Year 2004 2005 2006 2007 2008
Honda
43.7 ---41.7 -------
Indus motors 48.02
52.94 35.61 37.21 36.03
Suzuki
4 12 8 15 13
Industrial average
31.9 21.65 28.44 17.4 16.34
Analysis: It is the percentage of earnings paid to shareholders in dividends. In the fig 3.7 we can see the upward trend of the industry up till the year 2006. However it begins to fall after that due to the liberalized policies of the government to import cars resulting in the slowdown slowdown of growth. Moreover the economic economic and political conditions conditions of Pakistan Pakistan made the automobile industry growth reduce to 3.9 %. From the above calculated ratios we see that in contrast to Honda atlas motors Indus and Suzuki motors gave out dividends to the share holders every year, even during the economi economic c and politi political cal instab instabili ility. ty. Howeve Howeverr Honda Honda atlas atlas motors motors have have to retain retain its earnings during the years 2005, 2007 and 2008 due to the financial setbacks the comp compan any y had had to bear bear.. This This was was because the company was und undergo ergoin ing g expa expans nsio ion n and the same time the automobile industry was faci acing harsh rsh gove overnm rnment polici policies es along along with with the econom economic ic and political instability.
Return on Assets Company Year 2004 2005 2006 2007 2008
Honda
8.19 1.72 6.72 -3.03 .99
Indus motors
13.02 12.08 18.36 17.44 15.58
Suzuki
12.14 13.9 15.96 12.48 3.27
Industrial average
11.12 9.23 13.68 8.96 6.61
Analysis:
COMSATS Institute of Information Technology, Lahore Campus. 40
An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. In fig 3.3 we can see that there has been a downward trend in the automobile industry after 2006. This downward trend in the industry industry was due to the imposition imposition of the liberal liberal government government policies for the import of new and used cars in the budget of 2005-06. The growth of the automobile industry further decreased from 23% to just 9% in the year 2007. Then unfortunately, unfortunately, there occurred a series of events events in Pakistan Pakistan that was a bad news for all the industries including the automobile industry. There was political unre unrest st in the the coun countr try y alon along g with with the the national security issues. Furthermore the inst instab abililit ity y the the econo economi mic c envi environ ronme ment nt resul resulti ting ng from from the the risi rising ng inte intere rest st rate, rate, limited credi reditt ava availabi ability for auto financing, depreciation of the Pak Rupee agai gainst all the majo ajor curre urren ncies, unprecedented rise in the prices of oil, steel steel and and othe otherr inpu inputs ts caus caused ed sever severe e volatility in the market place, leading to high high infl inflat atio ion n and and loss loss of cons consum umer er confidence. Further more in the budget 2008-09 the government had imposed higher levies and taxes which resulted in further increase in automobile prices to the customers and dampened the demand. From the above calculations we can see that Honda atlas motors has been facing difficulties to manage its assets to generate earnings as compared to its competitors. Indus and Suzuki motors have high returns on assets because they have higher sales and lower costs and expenses as compared to Honda motors, hence letting them enjoy higher returns. Honda on the other hand has lower sales than its competitors along with higher costs and expenses. The only years that has lead to higher return on assets is 2004 and 2006. It was not only because of higher sales but also due to the lower cost and expenses in the respective years. In 2005 the company had undergone expansion plans that raised its costs and financial expenses. In 2007 the growth of the economy had slowed down due to which the sales of the company fell. In 2008 the country’s condition was very unstable that had affected the over all growth of the industry. Debt to Equity Ratio Company Honda Year 2004 2.62
Toyota
Suzuki
Industrial
2.06
1.45
2.04
COMSATS Institute of Information Technology, Lahore Campus. 41
2005 4.63 1.73 1.40 2.58 2006 2.39 1.53 1.08 1.67 2007 2.40 0.95 .52 1.29 2008 1.11 0.46 .20 .59 The above tables shows that from 2004-2008 we see a zig zag trend that some times the ratio increased extraordinary and then suddenly decreased this will confused the investor that what will happen next but while analyzing the we came to know that why there is zig zag in the graph graph of Honda motors motors while its competit competitors ors are going toward toward a decreasing trend which creates a cousin for the company to get debt on easy terms, but in case of Honda where it is increased in 2005 is due to the expansion so they have done their expansion from debt and open the doors for outsiders to financed there assets. The company started capacity expansion in 2005, when the demand for our cars among others was 2008 growing. But soon after our kick-off of Rs 3.5 billion capa capaci city ty expa expans nsio ion n proj projec ectt, the the gove govern rnme ment nt 2007 liber liberal aliz ized ed the the car car impo import rt poli policy cy and stal stalled led the the Honda growth momentum resulting in a gradual decline of 2006 Indus the industry. The drop in sales and pressure on suzuki Industry cash-flow forced the company to borrow from the 2005 banks. The Board of Directors decided to inject fresh equity 2004 to finance capacity expansion project and approved the issue of 100% right shares at par value of Rs 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 10/- each in July 2007. The process was completed in early December 2007 and the proceeds were used for repayment of long term loans. The paid up capital of the company has now increased to Rs 1,428 million against Rs 714 million a year earlier. Now the company has injects some equity which make the debtor little bit comfortable that there debt is little bit more secure. This will make the company as well as its debtors happy. Earnings per Share: Company Year 2004 2005 2006 2007 2008
Honda
9.7 3.9 16.8 -2.1 0.6
Indus motors
29.15 34.93 33.7 18.89 18.74
Suzuki
28.6 41.4 41.4 33.7 7.6
Industrial average
22.48 26.74 30.63 16.83 8.98
COMSATS Institute of Information Technology, Lahore Campus. 42
Analysis: Earnings per share are generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-toearnings valuation ratio. In the fig 3.5 we can see the upward trend of the industry up till the year 2006. However it begins to fall after that due to the liberalized policies of the government to import cars resulting in the slowdown of growth. Moreover the economic and political conditions conditions of Pakistan Pakistan made the automobile automobile industry growth reduce to 3.9 %. From the above calculated ratios we see that Honda atlas cars have always been below the industrial average. The reason for its low earnings per ratio was the low net income during the fiscal years as compared to its its comp compet etit itor ors, s, Indu Indus s and and Suzu Suzuk ki motors. In 2005, Honda atlas showed decline in the earning per share by 60%. It was due to the decline in the net profit margin by 3.4 %. However, earning per share ratio increased to 16.8, since its net profit increased by 1.8%. The year 2007, the company showed a loss of PKR 264,450,000. In 2008 the company made a profit, hence showing a positive EPS of 0.6.
Bird’s eye view of Financial Analysis: The The auto auto indust industry ry is goin going g throu through gh a phase phase of cons consoli olida dati tion on.. Afte Afterr regis registe teri ring ng an average growth rate of 40 percent from 2003 to 2006, the industry growth decelerated to 9 percent in 2007 and a marginal growth of 2.8 percent in 2008. Over the last couple of years, the auto policy has experienced many twists. The liberal policy to import reconditioned cars affected the growth rate. However, the terms of imports were tightened last year. COMSATS Institute of Information Technology, Lahore Campus. 43
The company sales were Rs 14,715 million during the year under review against Rs.17,055 million achieved last year. The cost of goods sold was 14,088 million against Rs.16,882 million in the last year. The gross profit has improved to Rs. 627.5 million compared to a gross profit of Rs. 172.9 million last year. The gross profit margin has improved substantially to 4.3 percent of sales against 1.0 percent of sales for last year. Last Last coupl couple e of mont months hs have have seen seen rupee rupee under under extr extrem eme e pres pressur sure e agai agains nstt majo major r currencies of the world. In the above ratios we can see that company has not performed well as compare to its compet competito itors rs and indust industry. ry. There There was politi political cal unrest unrest in the country country along along with with the national security issues. Furthermore the in the economic environment resulting from the rising interest rate, limited credit availability for auto financing, depreciation of the Pak Rupee against all the major currencies, unprecedented rise in the prices of oil, steel and other inputs caused severe volatility in the market place, leading to high inflation and loss of consumer confidence. Furthermore in the budget 2007-08 the government had imposed higher levies and taxes which resulted in further increase in automobile prices to the customers and dampened the demand. These all are the factors that’s affects the company performance very badly. When we see that its competitors are not affected badly as HACL. The basic reasons are that HACL is basically dependant on impo import rts s that that’s ’s its its 70% 70% of raw mate materia riall is impor importe ted d from from Mala Malays ysia ia so when when doll dollar ar appreciates against rupees it will hurt the company operations, while it competitor Suzuki is getting its whole parts from local vendors. The company has limited limited numbers of product where as Indus Motors (Toyota), and Pak Suzuki has greater product line. The Honda position is not so much good so they have to take some corrective actions by changing their strategies.
Recommendations Recommendations & Corrective Actions: •
HACL has to increase its 3S Dealership network, in order to increase its sale points.
•
HACL should go for related diversification, that they have to launch different type of models in contrast with Pakistani economy, they have to produce 1000cc and below cars, Introduction Introduction of flexible fuel vehicle. In order to increase increase their market share and profitability.
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HACL should go for local vendors and reduce the size of imports as imports are major burden on the company as Pakistani rupee is continuously depreciating against Dollar and other major currencies.
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•
HACL should have to utilize their assets properly as their half of the assets were not utilizing and they became a burden for the company so they have to utilize those assets in order to increase efficiency.
•
The company has to change its capital structure, in order to reduce its cost of capital as cost of debt is more as compare to cost of equity so they have to inject fresh new equity in order to gain the lender trust.
•
Influe Influence nce and coordin coordinate ate governm government ent instit institute utes s to ensure ensure consist consistent ent power power supply and minimum break down time.
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Availability of trained technical staff at 2 S and 3 S dealers. In order to increase efficiency and effectiveness, and make customer more satisfied.
•
To increase increase operati operating ng effici efficienc ency y the HACL HACL should should have to Strict Strict employee employee policies to contain overhead and unfavorable economic conditions
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APPENDIX
Interview analysis
According to research, brand loyalty of Toyota Corolla and Honda City are existing between custom customers ers’’ percept perception ion and fulfil fulfillme lment nt of percep perceptio tion, n, the fulfil fulfillme lment nt of percep perceptio tion n is the
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responsibi responsibility lity or obligation obligation of associative associative companies. companies. Regarding Regarding this I have taken an interview interview session session with Mr. Syed Nadeem Ahmed, Manager Sales marketing marketing of Indus Motors’ Motors’ authorized authorized deal dealer er (Toy (Toyot otaa Sout Southe hern rn Moto Motors rs). ). And secon second d inte interv rvie iew w was was take taken n from from Honda Honda Atla Atlass Company’s Dealer Tariq Mohi-ud-din Butt, General Manager of Hond a City sales motors. Interview from IMC Dealer Q1. Tell something about yourself? A. My name Mr. Syed Nadeem Ahmed Manager Manag er Sales marketing of Southern Motors (IMC). Q2. Tell me about your organization? A. We have dealership of Indus Motors Company which we have been dealing Toyota vehicles
range comprises of TOYOTA COROLLA, CAMRY, COURE and HILUX They are having capacity capacity of 225,000 units. We have good growth growth since last 5 to6 years now there is a decline decline in sales. There are some reasons behind it, the main reason is the increase of interest rate, control of SBP monetary policy. Now the sales are stagnant after so many years of good growth. Anyways the highest level of sales in 1300cc cars is Toyota Corolla and in 850cc car is Coure is top of the list.
Q3. What most of buyers require or demand to you about Toyota Corolla? A. According to requirements of customers they perceive that money in term of benefits like
superior quality, reliability, performance and its cost. We assure to provide them Toyota Corolla in customers point of view because Indus Motors Company is very conscious to provide its product at the level of brand loyalty for its customers. Q4. How much of you spent your time on customer to briefing about the Toyota Corolla?
Regarding Toyota Corolla, this 1300cc brand has well worth and well known overall in Pakistan. Mostly we do not need to briefing about Toyota Corolla, customers just came to dealer and purchase purchase its loyal loyal Toyota Toyota Corolla Corolla car in either cases they have word-of-mo word-of-mouth uth information information and perso personal nal experie experience nce.. Off course, course, we just just provid providee inform informati ation on regard regarding ing new additi addition on or technological enhancement in the car.
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Q5. From year 2005, the ban was lifted from imported cars. So the sales of Suzuki cars got affected? A. Not changed because the main reason was that we cannot produce more as well as we
continued our other imported car i.e. PRADO. Q6. There is a concern about the quality of Toyota Corolla cars. What do you say about it? A. I’ll not accept it with as far as any car is concern of Toyota. The reason is that our customers
are very sensitive. Our customers are middle and upper class persons who are very conscious about that vehicle. So for our vehicle segment they are very much focused and mostly customers are well known about the Toyota Corolla related concern. If you talk about quality our record is world over. But sometimes something happens .We have market share of around 62% so lots of people are talking obviously! The car comes to the dealer and is being repaired there and customer doesn’t know what happens with it. Q7. How do you maintain Brand loyalty of Toyota Corolla?
This is really critical part of our customers because if any customer get clue regarding its satisfaction so the result will go opponent to us for that we have to very careful to deal and maintain our Brand (Toyota Corolla) positioning in customers mind. For that instance, we provide them 3S (Sales, Service and Spare Parts) very effectively and efficiently. Our aim is to get close more and more to customer. Q8. How do you compare that Toyota Corolla is better than Honda City?
Usually customers are not well aware regarding identify difference between Toyota Corolla and Honda City for that instance, we also provide them technical specification information which customer may come to understand easily.
Q9. For improve/maintain brand loyalty of Toyota Corolla, what does Indus Motors Company?
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Indus Motors Company has a mission to provide quality brand and customer satisfaction. For that IMC directly involved in every aspect and monitor all activities that engaged with the custom customer, er, the monit monitori oring ng syste system m is very very straig straightf htforw orward ard and fair fair in which which they they does not compromise in any situation. We periodically asked to our customers and encourage them to feel free complaint, and appreciating those suggestion sugg estion and comments. Interview from HACPL Dealer Q1. Tell something about yourself? A. My name is Tariq Mohi-ud-din Butt and I am General Manager of Honda City sales motors. Q2. About HACPL? A. The Honda Atlas Company Pakistan limited (HACPL) is third largest automobile company in
Pakistan and we are authorized dealer of it. Which we are dealing wide range of Honda brands that comprises of HONDA CITY, CIVIC, ACCORD and CR-V. They are having capacity of 150000 units. HACPL deal in other wide range of product line which we have good growth since last last 25 years years and in car categor category y 8 to 10 years, years, in automob automobil ilee market market we also affecte affected d in recession to go through decline in sales where there are some reasons behind it, the main reason is the increase of interest rate, control of SBP monetary policy. Anyways the highest level of sales of Indus Motors Company in 1300cc cars is Honda City and Honda Civic are top of the list. Q3. What most of buyers require or demand to you about Honda City? A. our customers are economically very curious, majority of customers perceived about Honda
City is reliability, performance quality and they are highly demanding economically affordable with respect to fuel consumption consumption so Honda City fulfilling fulfilling those need in term of our customers’ customers’ expect expectati ation. on. We have an honor honor that that Honda Honda City City is succes successfu sfully lly perceived perceived our custom customers ers’’ requirement and assure to provide them Honda City in customers point of view. Q4. How much of you spent your time on customer to briefing about the Honda City?
Our customers are very sensible about Honda City, this 1300cc brand has provide them briefing and information itself and we makes it possible to provide them information with presence of
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Honda City because our perception is that, the customers’ believed at eye witness so we do not need to give much briefing as customers’ perceive themselves. Q5. From year 2005, the ban was lifted from imported cars. So the sales of Honda City cars got affected? A. it is not much affected by ban’s lifted from imported cars because we also imported cars in
which our most famous brand introduced i.e. Honda Accord, CR-V. Q6. There is a concern about the quality of Honda City cars. What do you say about it? A. I will not accept it because some time something or anything could be happen but for
instance, most of the time we surveyed about Honda City’s reputation in the market and our surveyed report tell us that those customers’ who do not have experience about Honda City they just go through word of mouth but bu t our experienced customers are much loyal to quality of Honda City. Our customers are middle and upper class persons who are very conscious about that vehicle. Q7. How do you maintain Brand loyalty of Honda City?
One of the issues about brand loyalty is maintain brand position in customers’ mind in which we provide them more and more satisfaction. We follow just in time strategy and provide 3S and 2S services to facilitate our customers. Because before buying, customers may think about sales location, appropriate location of service and availability of Spare Parts. For our customers we facilitate them with additional Service and spare parts which our customers may easily reach those target requirement. Q8. How do you compare that Honda City is better than Toyota Corolla?
As I told you in last question that our customer are highly appreciated Honda City because of its fuel consumption consumption and more over this, some of technical technical specificat specification ion are makes difference difference that which factors Honda City is better than Toyota Corolla. in technical aspect, usually customers are not well aware aware and they do not have sufficient sufficient technical technical information information about Honda City which they identify difference and betterment of Honda City.
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Q9. For improvement/ maintain brand loyalty of Honda City, what does Indus Motors Company do?
HACPL is very conscious about its customer, in brand loyalty aspect, company makes it possible as those slogan “Power of Dreams” for achievement brand loyalty (Honda City). In this instance, Honda Atlas Company directly involved and all its authorized dealers follow its standard. We maintain our brand loyalty through given more importance to our customer because we are not selling the Honda car, instead that, we focused on develop and maintain long term customer relationship. Analysis:
Mr. Mazhar Ghauri of Indus Motors Company and Mr. Jamil of Honda Atlas Company are very experienced candidates and they have over 15 years experience in respective companies. They provided very handful information for me. Although they did not speak against associated companies, but they tried to prove those point. According to associated persons, the sale actually has gone up mainly due to the fact of brand positioning in customers’ mind as they perceived if any of factor that incurred in affected sales that reason surely economy has been shattered and the de valuation of currency had increased the prices of cars. They inclined that the quality of the cars are going up as he told us that the vendor’ are the same and the quality of parts are been standardized and maintained. They said more about associated 1300cc cars (Toyota Corolla and Honda City) that it is having the expected result as they still have achieved the goals of it. Due to time constrained they might have provided a great knowledge more. But still, those interviews provided good information regarding brand loyalty.
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