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Atlas Honda Limited is a joint venture between the Atlas Group and Honda Motor Co Japan. The
company was created by the merger of Panjdarya Limited and Atlas Autos Ltd in 1988. Both these
motorcycle manufacturing concerns were established by the Atlas Group. In addition, a third concern,
Atlas Epak Ltd was taken over by the Government of Bangladesh. Atlas Honda Limited manufactures and
markets Honda motorcycles in collaboration with Honda Motor Company. The Company also
manufactures various hi-tech components in-house in collaboration with leading parts manufacturers
like Showa Atsumitech, Nippon Denso and Toyo Denso. Honda motorcycles are by far the largest selling
motorcycles in the country with an unmatched reputation for high quality, reliability and after-sales-
service. Atlas has undertaken to develop local manufacturing capabilities to the highest, economically
feasible level. While a major role in localization has been assigned to vendor industries, Atlas has the
country’s largest in-house manufacturing capability at its Karachi and Sheikhupura plants. To support the
production facilities, the company has established an R&D wing and tool making facilities through CDA &
CAM which are growing rapidly in size and function as the company expands. Atlas has managed to
execute 14 Joint Venture/Technical Assistance Agreements between local vendors and foreign
manufacturers for transfer of technology. Besides, Atlas has directly executed 5 Joint Venture/Technical
Assistance Agreements other than Honda. In addition, the company also launched a new model of CD
100 Euro-2 in the year 2009, launched a new model of CG 125 Deluxe Euro-2 and acquired ISO 14001-
1
Annual Report AHL.
1
Over all, the motorcycle industry sold 1.2 million bikes in 2010 as opposed to 850,000 units the year
before2. After witnessing a deceleration in motorcycles sales growth last year, the year under review
witnesses growth in motorcycle sales. Most of it attributed to a hike in petrol and prices of 4 wheelers
which made motorcycles more attractive for the common man. In addition, water shortages and
escalating steel prices are putting the present momentum very challenging to operate in. Especially
those players who are indulging in sales tax evasion, smuggling and under invoicing are making it very
hard for the formal sector to achieve its target and hit economies of scale which are critical for exports.
The motorcycle sector however, experienced an overall growth in sales of 44 percent over the last year.
The financial year 2010 witnessed an unprecedented increase in material process internationally coupled
with an unfavorable exchange rate and jump in the commodity process locally. Atlas Honda, however,
was able to absorb most of the cost impact by focusing on improved efficiency and process optimization.
Due to this Atlas Honda sold 483,028 units this year as against 359,525 units last year 3.
The motorcycle industry has got deep backward (metals such as steel, aluminum. Copper, rubber,
chrome, nickel, plastic, paint, glass, textiles, electrical, capital equipment, rucking, warehousing) and
forward (dealerships, retailers, banking, credit and financing, insurance, logistics, advertising, repair and
maintenance, petroleum products, services, parts) linkages as such any major shifts in demand are felt in
2
Industry figures from PAMA
3
Figures from AHL website
2
Vision
Market leader in the motorcycle industry, emerging as a globally competitive centre of production and
exports4.
Mission
A dynamic, profitable and growth oriented company through market leadership, maximizing export and
excellence in quality and service; to ensure attractive returns to equity holders; reward employees
according to their ability and performance; to foster a network of researchers and engineers ensuing
unique contributions to the development of the industry; customer satisfaction and protection of the
environment by producing emission friendly green products and to remain a good corporate citizen
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Annual Report 2010
5
Annual Report 2010
3
EXTERNAL ANALYSIS
There are currently 43 Original Equipment Manufacturers (OEMs) in the Industry. These include 6 OEMs
who are members of the Pakistan Automotive manufacturers Association (PAMA) and 37 OEMs who are
not PAMA members. These OEMs are supported by nearly 2,000 parts and component manufacturing
units employing close to 50,000 persons. The industry is volume driven and needs a critical mass before
costs and hence prices can start coming down. This critical mass has been reached and the prices in
Pakistan have on the average come down by 30% in the past 5 years 6.
The development of China as the major player in the global motorcycle industry has been achieved by
linking its strong domestic demand to the abundance of low technology dependent manufacturing or
cloning. Pakistan faces a similar situation with its current suppressed demand.
As compared to other industries in which competitiveness can only be achieved with high levels of
human capital, the motorcycle industry is more concerned with better management of human resources
and high levels of productivity at all levels, i.e. OEMs as well as parts and component manufacturers.
Global motorcycle production increased from 30 million units in 2004 to 40 million units in 2005 with
China alone producing 17 million units. The second largest producer was India with 7.7 million units
while Pakistan came at number seven with a production of 751,000 motorcycles or about 2% of the
global total. The World market for motorcycles is dominated by the Japanese brands, namely Honda,
Suzuki, Yamaha and Kawasaki. Although Japan itself produced only 700,000 motorcycles, its brands with
strong presence in the Low Cost Countries (LCC) like China, India, Indonesia, Thailand etc., control 50% of
the world market. Even in China where the local Chinese brands control more than two thirds of the
market, the basic designs are still modeled round the popular Japanese models. Indian companies like
Hero Honda and TVS rely heavily on their Japanese partners for basic designs and model innovations.
6
A study sponsored by the competitiveness support fund. Available at www.competitiveness.org.pk
4
This is perhaps because of the fact that R&D for the industry is both expensive and time consuming. The
Japanese manufacturers named above have both the financial muscle as well as the technical capability
In Pakistan, motorcycle assembly started in 1964 when the local Atlas Group started assembling Honda
motorcycles in Karachi. Currently in addition to Honda, the other Japanese brands being manufactured in
Pakistan include Yamaha and Suzuki. The most successful design among the Japanese brands has been
the Honda 70CC which enjoys tremendous popularity on account of its fuel economy, resale and low
maintenance features. The Pakistan Automotive Manufacturers Association (PAMA) was formed in 1984.
Initially three motorcycle OEMs namely Atlas Honda, Dawood Yamaha and Suzuki Motorcycles Pakistan
became PAMA members. The other founding members of PAMA were OEMs manufacturing Passenger
Cars, Tractors, Light Commercial Vehicles Motorcycle Industry in Pakistan; Problems & Prospects 13
(LCV’s), Truck & Bus manufacturers etc. In the 1990’s, three more OEMs joined PAMA, these were, Fateh
Motors, Pakistan Cycle Industrial Cooperative Society Limited and Siagol Qingqi Motors Ltd (subsequently
renamed Qingqi Motors Ltd.). The Non-Japanese OEMs entered the Pakistani market in the late 1990’s by
introducing clones of the popular Honda 70CC motorcycle using critical parts and components imported
from China. For the basic frame and other low tech parts they used the local vendors (part suppliers)
whose development had been facilitated by the Government of Pakistan’s indigenization / localization
programs for the motorcycle industry. Other than the original 3 Non-Japanese OEMs who became PAMA
members, the new entrants preferred to form their own trade bodies and as such are referred to in this
study as Non-PAMA members. Presently there are 43 OEMs producing various brands of motorcycles.
Out of these 6 are PAMA members and the remaining 37 Non-PAMA members. The Engineering
Development Board (EDB) issues licenses to the OEMs for undertaking assembly operations. The Pakistan
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study sponsored by the competitiveness support fund
5
Standards & Quality Control Authority (PSQCA) is responsible for monitoring the production of quality
products by the OEMs. As such both the EDB and the PSQCA play an important role in the establishment,
licensing and monitoring of the technical operations of the motorcycle assemblers. The entry of the Non-
PAMA OEM’s with a competitive price difference of approximately 25% (Rs.52,000 Vs. Rs.68,000 for the
Honda 70CC in 1999) and continuous price reductions (2006 price for average Non-PAMA OEM 70CC
clone is Rs.40,000 Vs. Rs.54,000 for a Honda 70CC). This has seen the total motorcycle market increase
The political conditions of the country have been a big factor in affecting AHL’s performance primarily in
two ways; firstly, too frequent & mostly incoherent change of government systems i.e. from military rule
to local government, then to provincial system; secondly, the weak governmental control especially in
law and order situations, and a situation that encourages opportunistic political actors to fish in troubled
waters through stirring political unrest in metropolis like Karachi. Hence AHL’s plans have frequently been
thwarted by political unrest in Karachi wherein the factory workers could seldom reach the plant
premises and meet the scheduled requirements. This factor has been debilitating the entire supply chain
efforts and inducing added uncertainty in strategic planning. Therefore, AHL maintains a three day safety
stock to ward off such pesky social factors. But despite deteriorating economic conditions, post 2007, the
company marshaled its abilities and undertook in-house process optimization and vendor development.
The economic conditions swayed the company away from its intended targets and the company re-
architected its strategy to accomplish more modest goals in comparison to the initially envisaged
ambitious goals. The recent recovery of the automotive sector has been more out of the development of
two wheelers and tractors, and the support price increase by government of wheat has benefited the
agriculture incomes and consequently the demand for the two wheelers that has more demand in the
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study sponsored by the competitiveness support fund
6
rural areas. Furthermore, the floods have affected more in southern Punjab particularly Rajanpur,
Muzaffar garh; which is market of the Chinese companies, whereas the AHL remained less vulnerable to
floods as their prime customers are from rural areas of central and northern Punjab. The dominant social
factor of this market segmentation in Punjab is income and education of populace; wherein, the Chinese
customers belong to a relatively poor and uneducated segment in southern Punjab. Moreover, a social
factor known as customer’s self image, when associated with the brand, comes into play once a farmer
reaps a bumper crop and wants to flaunt it through purchase of Honda motorcycle. The customer
preference in Punjab also has a geographical connotation wherein the red colored bikes are more
preferred in Punjab and black colored are preferred in Sindh. Furthermore, the geography also
necessitates technical modification i.e. the much attractive chrome plating on the fenders in Punjab is
replaced through rust resistant paint in Karachi. The central Punjab is also most developed rural area of
the country therefore, AHL has particularly targeted its product to Punjabi-speaking people through their
brand jingle i.e. “Mai tay Honda he laisaan”. The most dominant socially debilitating factor for AHL in
Karachi is the snatching factor; wherein, its bike are the hot targets for onward cannibalization and ready
resale out of its highly sought-after parts. Hence the technical edge of Honda motorcycle parts are acting
as a double-edged sword i.e. the investment in plants and joint ventures with Japanese, has resulted in
products of superior quality, coveted by customers and miscreants alike. And as a result of technical
ascendency, AHL has been granted a global CD-70 export license and limited export license for other
COMPETITIVE ANALYSIS
9
Based on the interviews with AHL Executives.
7
PRICE
AHL
Yamaha Japan
2014
DYL
Chinese SUZUKI
QUALITY
As depicted in the strategic map above, the AHL is at top with highest quality product at premium price.
The follower is Yamaha, which is envisaged to commence its operations in Pakistan by 2014, under 95%
Japanese ownership. Moreover, the formerly known entity Dawood Yamaha Limited had its license
repealed by Yamaha Japan, as DYL utilized Chinese parts and offered their products at lower prices,
hence misleading the public into buying an impersonated product. As a result, customers were deceived,
there were temporary increase in their sales but due to low quality the conviction couldn’t stand.
Presently, the DYL is totally utilizing Chinese technology in making the motorcycles. Suzuki is not a
Chinese, on the other hand, changed the landscape of competition a lot wherein all competitors had to
reduce their product prices. Moreover, a lot many people from less privileged segments of society could
meet their transportation needs through cheaper product especially in rural areas. This in turn expanded
the market and created different customers for Chinese bikes not expropriating the share of AHL.
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Chinese low cost motorcycles diverted the cost sensitive segment of market towards itself. Chinese
company also copied Hondas motorcycle design, so that spare parts of Honda could be affixed in Chinese
bikes, as Honda had strong distribution network of spare parts. Therefore, the Chinese could reduce the
set-up, manufacturing, marketing and distribution cost for spare parts. But the Honda converted this
threat into opportunity by capitalizing upon increase in demand for their spare parts. The Honda sales
team also educated & motivated the mechanics & spare-parts-dealers in the local market that they
should persuade the client owning a Chinese bike & requiring a spare part, to not only change a single
spare, but the whole assembly, so that the bike functions well and looks good aesthetically; that
The Honda subsequently started free ride and free service campaigns, so that the customers could feel
the difference between the performances of both motorcycles. Another threat for the Honda
motorcycles exists out of high resale that its parts offer and hence it remains a hot snatching target for
the miscreants in Karachi who can also enjoy ease in cannibalization of its parts. The same snatching
factor renders the bike more susceptible to high insurance prices that further discourage the buyer.
A Honda bike comprises of approximately 750 parts and the company with its relentless pursuit of
indigenization has been able to localize all the parts except for 10% of engine parts. The localization
efforts ensued in year 2000 as a response to WTO legislations & Chinese competition. Hence, the
company in year 2002 started a blended strategy of starting both an in-house production of some parts,
In 2002-03 the AHL started a marketing campaign namely “Mai te Honda he laisaan” to counter the
Yamaha’s primacy in the rural Punjab; whereby the farmers and milkman, being the linchpin of Yamaha’s
sales, were persuaded to own a bike that raises their pride and offers unique riding experience. The
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campaign was a bull’s-eye-hit wherein farmers commemorated their bonanza of agricultural harvest
The company decided to retain 5 critical components including frame, engine, fender, and fuel tank for
in-house production to maintain ascendency through product differentiation and outsourced the rest.
The new strategy spawned its own peculiar set of troubles, where-in the individual parts posed the
problem of fitment once assembled in totality; as the individual parts were made through different
vendors. The company hence responded by outsourcing the entire subassembly to a single vendor. The
company, after gaining ascendency in rural Punjab through successful advertisement campaign diverted
the advertising funds towards dealer & vendor development. The vendor development was aimed at
reducing the overall cost through outsourcing and conferring the onus of rejected part and warranty
claims to vendor. Furthermore, an outsourcing firm being generally of lesser brand name, would
AHL’s nature of competitiveness in motorcycle industry can be viewed as a composite of different forces.
Firstly, the potential development of substitute product in urban areas is unlikely in near future however,
our project team gauges mass transit system to be big threat in this area. Secondly, the bargaining
power of suppliers increases with the amount of expertise and technology transfer. Thirdly, rivalry among
competing firms is cut throat as price cutting is a herculean task to perform. Fourthly, the bargaining
power of customers in switching the brand is also an ineluctable trade-off. Fifth, the new potential
entrant i.e. Yamaha Japan, in 2014, would compete both on price and quality. The five areas highlighted
above if not heeded wholesomely shall mire the future development prospects of AHL.
Vendor evaluation and induction Performa, evaluation sheet is filled each year, facilitated by SAP.
Vendor’s contract varies from 1 year to 5 year depending on the exposure and nature of work. Moreover,
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the AHL has a strict policy of rejecting a vendor that doesn’t meet the required targets. To assimilate into
Honda’s culture, some suppliers also send their employees to AHL for training.
Presently, the company operates through nine functional areas namely marketing, plant, supply chain,
Engineering/projects. The functional division was intended to generate synergy in achieving the
competitive advantage, but incremental changes in business & functional level strategies were
necessitated overtime, out of strategic incongruities, that has been learnt & recorded by our project
The management style post year 2000 was inevitably required to be changed out of exponential increase
in volume of sales i.e. number & working of departments had to be adapted accordingly. Four in number;
new departments, namely supply chain, IT, commercial/ planning and engineering/projects were
introduced to facilitate and manage expansion. Furthermore, business development department was
added to finance department for reasons that shall be unfolded in upcoming paragraphs. In 2004 the
company was given a daunting task of increasing production to 500,000 units and increasing the figure to
a million by 2015. In 2004 the Supply Chain, owing to its importance and catapulting sales, was
separated from GM plant. Previously, IT with its compartmentalized structure was debilitating the
individual organization departments, as all the departments had to perform individual purchases that
largely were a duplication of efforts. IT was then centralized in 2007, through SAP, to give it a
companywide view, and was interlinked with all other departments. In 2008 the market crunch, an
offshoot of poor military to civil transition period, necessitated Honda to introduce the Business
Development function in conjunction with Finance. The prime objective of Business Development was to
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localize the manufacturing of tools and refurbishing of Dies/Moulds for longevity of their operations.
Local import of machining tools was achieved through by-passing Honda Trading, and alternate
resourcing was developed & increased subsequently. Another management response was cost cutting
through inventory management at vendor end and making vendor responsible for Forex fluctuation.
Hence, the otherwise idle vendors got the business to survive the downturn of the economy in 2008, and
the AHL could reduce its inventory cost. This pilot project of making vendor more responsible was
extremely successful and was hence replicated throughout Pakistan by appointing National Manager
Business Development on 4th November 2010. The commercial & planning department functions
separately from Supply Chain; for the lead time involved in importing from Japan & Forex fluctuations,
necessitates planning. Project & Engineering is separate from Supply Chain Department because search
for the vendors first require gauging capabilities of vendors and then providing data to the vendor.
Supply chain department also helps in ascertaining the technical & manufacturing ability of aspiring
vendors; the vendors that qualify the test are supported by project & engineering department that
provides vendors with technical drawings and requisite data. AHL involves all the departments in
warranty claim meetings to make it cross-functional and the penalty of defect should be directed to the
concern dept. e.g. the scratches on body if inflicted during transportation shall be attributed to logistics
department. The JIT inventory system, although a dream of AHL, cannot currently be implemented out of
non timely compliance of especially the vendors- a behavior whose genesis can be traced into the apathy
The key factors that our project team found during research at AHL across functions were differing
department wise. In marketing department, their demand forecast was biggest contributor to other
department’s planning and performance. An accurate or otherwise demand forecasting could direly
facilitate or frustrate the efforts of individual departments respectively. The production delays out of
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political or social issues also have a tendency to disturb schedules pertaining other departments. The age
difference amongst HR has now risen to a notable state wherein the personnel pertaining to a middle
age are scarce and majority of HR is either too young or too old – a strategic folly attributable to HR
department that is evident across all departments owing to uncertainty in growth vis a vis external
environment. Sudden surge in demand troubles vendor’s own planning thus resulting in delay in meeting
deadlines or including lower quality parts to the consignment. The QA department, as a response to this
unforeseen surge, has to expend an unplanned increased time which may affect the quality of their
specialized intake mostly from production or Engineering/projects department. This ad-hoc arrangement
is a tradeoff and increases the likely hood of low quality product reaching a customer and hence causing
trouble in both marketing and sales. The surge can also be a product of institutional bulk-demand, like
one coming from army, rangers, police etc. in which case the imported products can offer planning
dilemma due to lead time, as importing from Japan necessitates 3-6 months delay coupled with mostly
unfavorable Forex fluctuations. Furthermore, institutionally tailored bikes require specially made parts
SWOT ANALYSIS
The AHL has its strength in brand name, dealer network, vendor development, market leadership, high
resale, low maintenance costs, technical expertise, developed HR, TQM/ Kaizen principles and State of
art plants. Being a top of the mind brand, it delivers biggest customer loyalty. Its vendor development
offers economies of scale that in turn can deter the entry of new competitors in an industry where margins
are very low. The Vendors also prefer to ally with Honda that can offer more business to make the vendor
reach the breakeven earlier – a reason that ensued the fall of Yamaha and Suzuki. The sprawling dealer
amounts in this area that in turn raises overhead costs which has been the foremost stumbling block for
AHL’s growth. Chinese competitors that have their forte in offering low prices offer a formidable challenge
to sustain growth despite higher rejection rate of AHL’s vendors. The current rejection rate of 20 % if could
Recent global license for the CD-70 to AHL from Honda Japan is a big opportunity to capitalize, and the
Pakistan-success-strategy if duplicated, first regionally, and then globally, the monopoly would yield profits
so far un-thought of. One of the foremost threats that this project team could exhume is the sustainable
growth at AHL across the entire supply chain. For example, development of vendor and dealer at the
growth pace of the company is yet a pipe-dream. Moreover, the dependence solely upon CD-70 that
comprises of 80% of the company’s sales is risky. The driver brand if rendered toothless by the competitors
somehow, shall tantamount to nearly complete liquidation of AHL. The threat could be turned into
opportunity if R&D could make a more superior product at a far lesser price and the marketing department
could attract more customers towards the CD-80, CD-100 and CD-125 motorcycles; hence, reaping the
gains of risk diversification. Furthermore, the AHL being one of the largest tax paying units (LTU) faces an
unfair competition whereby the Chinese competitors evades taxes and do under invoicing. The AHL can
turn the uneven ground into its favor if it could put more efforts in successfully lobbying against Chinese
competition and hence rendering them more vulnerable to higher costs. The vendor development is also a
double-edged sword wherein consolidating them, despite its loyalty advantages, gives arm twisting powers
to the vendors who in turn can dictate their terms. The other big threat facing AHL is the import of parts
and raw materials from Japan. If one takes into account the imported raw materials, the localization
14
content falls to a partly 40% from a stated high of 87% for CD-70. The recent appreciation in the Yen is
making matters worse by increasing the cost of the imported raw materials and also the price increase is
not passed onto the customers. As a result, margins have been squeezed and the competition has been
made even harder with the Chinese. This can be converted into an opportunity if the local facilities or
sources can be invested in and the motor cycle industry can provide the economies of scale needed to
support such an effort. This can be realized through forming of buyer cooperatives and effective lobbying
against malpractices.
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FINANCIAL ANALYSIS
Atlas Honda maintained its market leadership position in this challenging scenario. In spite of a
challenging environment prevailing currently (FY 2010), automotive sector, on the whole, maintained
positive outlook. There was an overall increase in production and sales of motorcycles throughout the
country for all motorcycle assemblers and makers. In 2009, production and sales stood at (prod: 509,054
and sale: 507,924) and in 2010 we have seen these numbers increase by 44% (prod: 736,861 and sale:
737,759)10. The financial year 2010 witnessed an unprecedented increase in material process
internationally coupled with an unfavorable exchange rate and jump in the commodity process locally.
Atlas Honda, however, was able to absorb most of the cost impact by focusing on improved efficiency
and process optimization. Atlas Honda sold 483,028 units in 2010 as against 359,525 units in 2009. The
major tool to fight the price escalation effect has been to improve efficiency in serving the customer
through an all encompassing approach of sales, service and spare parts. The company has continued to
establish smart sales point which will improve accessibility, efficient service and ready sales of parts.
Cost reduction has been their prime objective to compete against unfair competition in the past 6 years.
This has been done through number of initiatives such as SAP. SAP has been implemented successfully to
integrate all core functions of the organization, which has allowed them to manage safety stocks,
working cycle has been reduced by good supply chain management, inventory control and quality
control. Furthermore material smart buying, process improvement, efficient allocation of human
resource, localization and cheaper alternatives for outsourced parts contributed towards cost reduction.
ATLAS HONDA is attempting to take SAP to the next level by connecting vendors through SAP. AHL
introduced DCC (Delivery Control Center) with SAP for warehouse management of inventory of finish
10
Business Recorder Review
16
Continuous improvement through Quality Circles is the corporate culture of AHL. In 2008, due to market
recession, the strategy was to do lean manufacturing and control average spending. Simultaneously non-
In FY10 witnessed record sales revenue. Post flood era has proved to be exceptionally well for ATLAS
HONDA because of commodity price rise and wheat support price, which improved rural incomes in
major HONDA markets. Their strong Dealer network manage to cater for the market where their
competitors could not reach and they also provided lease financing with assured quality. The company
has now expanded its dealership network from only 300 dealers in FY09 to 330 dealers in FY10 to
improve accessibility and efficient service. This has also increased their administrative expense by 155%
in the FY10.11
Atlas Honda has witnessed the highest revenue for FY10, but at the same time the cost of goods sold has
shown a stark increase of 84% in FY10. That is why we see that gross profit as a percentage of sales has
increase but the increase is not that significant. Looking at the trend of five years we see that gross profit
has declined constantly since 2007-2009 and then the company has seen a turnaround in 2010. As we
can see that the highest dip has occurred in 2009. This is because the global recession deepened in 2008
and a deteriorating political climate and worsening supply side indicators had an impact on the Pakistan
economy as well which in turn also affected the motorcycle industry on the whole. Other reasons include
depreciation of Pak Rupee, high steel prices and high cost of production which increased the cost of
goods sold. Although in 2009 the company increased the selling price to counter the cost pressures, it
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Interview with AHL Executive
17
The net profit margin indicates that how well a company manages its costs. With factors like
deteriorating parity of Pak Rupee against major world currencies, higher interest rates forcing
manufacturers to increase the price of their products, comparatively higher material prices and local
inflation, and tighter liquidity condition reducing purchasing power has contributed to this downward
trend seen in previous years particularly in the year 2009, where the company’s demand for products
was most hit. At that same time the financial charges also increased to Rs. 251.77 million due to higher
borrowings to meet the higher working requirements for FY09. But this was just the temporary
reduction, as we see that once again profit after taxes have increased in FY10 which shows that the
company saw huge increase in gross profits as compared to increases in expenses and finance cost
ROE is a basic test of how effectively a company's management uses investors' money. It shows whether
management is growing the company's value at an acceptable rate or not whereas ROA reveals that how
much profit a company earns for every rupee of its assets. As we can see from the graph that both ROA
and ROE was highest in 2006 and since then it has started decreasing, and then turnaround is again seen
in 2010. We see from the balance sheet that the share holder’s equity has gradually increased over the
years but at the same time ROE is declining which shows that the company is not managing investor’s
money effectively. Similarly the asset base has increased but ROA has been experiencing many ups and
downs. This is because in year 2007, the company has done great deal of effort to restructure itself by re-
aligning its supplier base, further localizing its components and optimizing internal manufacturing
process, but all these results are not that very immediate and the setbacks in ratios were only temporary
and the company has proved to improve its ratios in 2010, after successful restructuring.
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The total asset turnover has increased significantly over the previous year (from 1.8 to 3.0) which is also
the highest in the last 5 years indicating that assets were managed and utilized in a more productive
manner in the year 2010. From 2006 to 2008 the Asset Utilization ratio has shown growing trend
because assets are depreciating and sales have increased but in 2009 the industry has been hit by
recession, there is drop in sales which has brought the assets utilization ratios down but same has shown
a drastic rise in 2010 due to record increase in sales. Inventory margins were improved from 2006 to
2007 when the stock in trade reduced from 1.9B to 1.5B. The inventory turnover days has dropped from
48 in 2009 to 31 in 2010.12
Both the ratios that is, total debt to total assets and total debt to total equity has reduced. Since 2006,
Atlas Honda has reduced its leverage from 65% to 54% in 2010, whereas the equity base has increased
from 35% in 2006 to 46% in 2010. This implies an efficient debt management by the company. The debt
reduction over the years was a deliberate attempt by the company to bring the gearing ratio on optimum
level which demands debt to be around 40% and equity to be on 60%. The equity base was increased by
issuing bonus shares and increase in the reserves. And the long term loans were set off.
Overall the performance of the company with respect to debt management has improved in the last 2
year. In the last 5-6 years, sales have drastically increased due to growing market, hence giving increase
to AHL profits. Furthermore the AHL has also increased their capacity by commissioning the new plant in
Sheikhupura in 2006. The expansion strategy has also brought about increase in fixed cost.
In the FY06 and FY07 the increased debt structure is due to investment in lucrative financial instruments.
The AHL is working on their debt-to-equity ratio. They have debt (as percentage of asset) targets of
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Financial Statements
19
around 40% and equity (as percentage of asset) target of 60% as compare to current situation which is
TIE ratio has improved in 2010 (12X) as compared to 2009 (2.4X). In FY10 increased sales has brought the
company significant cash surplus which allows them to pay off the long term debt hence reducing the
interest payments, which shows that it has become easier for the company to make its future payments
in 2010 because company’s increased earnings has exceeded its interest obligations as compared to
FY09.13
The liquidity of the company improved this year as the current ratio increased from being 1.25 in 2009 to
1.49 in 2010. The quick ratio of the company also increased from 0.56 in FY09 to 0.93 in FY10. In order to
increase its current and quick ratio further, the company needs to use its resources in more efficient
manner to produce more cost-effectively. Overall, the low ratios indicate proficient use of debt by the
company and signal a better solvency picture. The increased sales of FY10 along with efficient conversion
of inventory into sales and collection of receivables has helped the company to improve its cash position
and have increased assets with the increase in cash surpluses from 132M in 2009 to 1.005B in 2010 and
provide the needed cash to retire its debt and pay it interest charges. Simultaneously AHL has also
The EPS shows a remarkable improvement as compared to the last financial year. The basic and diluted
earnings per share after tax has been Rs. 3.59 in June FY10 as compare to Rs. 2.11 in June FY09. The AHL
has always been a market leader in the industry. In order to maintain goodwill with the investors they
have given dividends even in the downturn of 2008 and 2009 although during this period employees
13
Financial Statements
14
Financial Statements
20
were faced with pay-cuts. This has been also reflected in their balance sheet; in 2010 there is no change
in the reserves because the company has given the dividends in the crisis.
The company believes in seeing a sustained growth in agriculture, manufacturing and service sector,
which will all indirectly bode well for the motorcycle industry. If foreign exchange reserves increase on
the back of imports contraction coupled with continue strong remittances, the company for sees another
year packed with growth and unprecedented sales revenue. Honda is no doubt the market leader with
respect to motorcycle sales with 65% of production and sales belonging to Atlas Honda. However, with
continued electricity shortages, water disruption, deteriorating law and order situation, rising inflation
and depreciating Pakistan Rupee the motorcycle industry is in desperate need to revamp its focus and try
to achieve economies of scale for exports. With respect to increased efficiency and cost reduction,
Honda atlas has introduced in house and local manufacturing of high tech machine accessories and
fixtures. Tool regrinding shop has been initiated to utilize dead stock and utilize unused items. The
company also aims to continue with process automation at the Frame Assembly Line. Steps such as
modification of outdated dies, refurbishment of old dies local manufacturing of local dies and high
pressure die casting are all aiding in alleviating cost and improve manufacturing timeline. The company is
viciously eyeing on re-fixing safety levels, reducing lot sizes and decreasing lead-time to improve
inventory management. Given the current economic fundamentals marked by high domestic inflation,
weakening rupee, rising interest rates, the overall politico-economic situation, the next year will be a
challenging one. Historically the company has come through such critical situations successfully. Since
the margins will remain under pressure, the emphasis would be on improving the manpower
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The project team has identified a host of symptoms and minor problems that all lead to the major
problem identified as “Strategic Introversion”. The introversion literally means ‘bending inwards’- a word
that cogently embodies AHL’s core major problem. The firm, as assessed by this project team, is more
introvert i.e. inward-looking; and largely the firm’s strengths lie in areas that are either internal to
organization or relate to the present. Concurrently, the exhumed minor problems, without exception,
indicate extrovert (outward bending) weaknesses, in areas either external to organization or areas that
relate to the future. For instance, the firm’s inability to forecast demand correctly indicates its poor
insight into the future. This poor forecasting, along with firm’s lack of future planning for space at Karachi
and the firm’s inability to orchestrate succession planning give a clue to a common minor problem
namely ‘myopia’. The firm has also, through its poor insight into building future relation with vendors,
has transferred the onus of defective parts and inventory fluctuations to the vendors; hence causing
vendor estrangement by considering them somebody external to organization not an integral part. The
firm also could establish only CD70 as their driver brand and could not replicate their success. Flourishing
on one brand alone shows threatened future out of a minor problem namely ‘lack of dynamism’. AHL
also could not train the vendors properly – a training that involved people outside their organization.
Vendors were not developed at the pace of AHL’s growth, they were insufficiently assimilated into
Honda’s culture, and lastly, they had high parts-rejection-rate that AHL could not reduce through quality
coaching. These three training related symptoms were an offshoot of a minor problem i.e. ‘weak
mentoring’. Historically, AHL has also displayed its confusion while determining number of required
vendors. They have a poor strategy in building future relations with vendors i.e. at first place, they try
vendor consolidation through giving them high volumes and then they dilute their arm-twisting power
through increasing number of vendors. This inconsistency in determining number of vendors is result of
a minor problem known as ‘fickle mindednesses. They also have not been able to produce new cost
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effective models through RND that depicts inability to think out of the box and consequently unfolds a
minor problem i.e. ‘lack of creativity’. Lastly, their inability to lobby effectively against tax evader shows
their lesser influence on externalities and resultantly unearths a minor problem of ‘ineffective
persuasiveness’. These seven punctuated minor problems, that relate a weak outward focus of
organization, are result of too stronger a focus on internal issues. This eventual internal bend in paradigm
is what this project team calls ‘Strategic Introversion’ and deems this inward flexion to be the major
problem of AHL.
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Cause Issue Network:
Inconsistencies within
Vendor-Developed-Parts
& associated high rejections
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STRATEGIC ALTERNATIVES
After performing a comprehensive cross functional, SWOT and PEST analysis, and three strategic
alternatives have been sought in order for AHL to mitigate the root cause i.e. the problem of sustainable
growth for achieving their long term goal of producing a million bikes per year:
Firstly AHL can counter their massive overhead cost through process optimization by implementing
kaizen, 6 Sigma quality control. Also AHL can take advantage of economies of scale especially through
their state of the art Sheikhupura plant. Furthermore, the plant’s depreciation cost being almost zero;
will help AHL in price reduction while competing against Chinese competitors or new entrants who
would be incurring high depreciation cost. Secondly, AHL can also work with the design of their bikes to
reduce cost, e.g. utilizing less expensive paints, instead of chrome plating. But the strategy would
necessitate changing customer’s mindset towards new design, and presenting it as an innovated
improvement. Thirdly, AHL can capitalize upon the export license through selling more CD-70s, especially
in Bangladesh and Afghanistan; thereby, increasing the share of revenues from exports. At the same time
AHL should be focusing more on producing high domestic demand for CD -100 and CD-125 bikes.
Of all the above options mentioned alternatives, the best strategic move right now for AHL would be the
first one, as achieving it would help them competing against low cost Chinese bikes without reducing
their prices, thereby maintaining the customer loyalty so that customers would not be misled into
assuming that Honda might be compromising on quality. Also by incremental process improvements and
reducing costs on a small scale can result in a multiple effect on the profit margins when applied on half
a million bikes.
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