Industry Overview

Textile industry in last years has grown very fast. In 1947, there were only 6 spinning

factories in Pakistan, which have now grown to the figure 503. The main factor behind

the growth was the reduction in duties. The import tariff on cotton factories was reduced

from 85% to 50% in 1985 and then to 20% in 1988. Also, in 1988 the restrictions on

renewal and expansion of spinning and weaving factories were removed.

Pakistan is now the fourth largest cotton grower in the world behind China, USA and

India. Textile has become the most important industry for earning the foreign exchange. It

accounts for 60-65% of the foreign exchange earned in a year, which is approximately

$5.5 billion.

Current situation in the textile industry is not very promising. The process of cotton has

increased in the recent period, in addition to this the electricity and sales tax have also

increased. Cotton yarn price is decreasing and other input prices are increasing.

The textile process given below describes the activities taken in the textile industry

Textile Process

Raw material (Cotton)

Ginning

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 Spinning

Weaving Processing

Processing Knitting

Garments (Stitching)

Ginning is the process in which picked cotton is cleaned and purified. The end product of

the ginning is used to make yarn.

Spinning is the process by which ginned cotton is spun into yarn. Yarn quality is

dependent on quality of cotton and spinning process.

Yarn is spun into Grey Cloth in the weaving process.

Grey cloth is printed and dyed through processing / finishing.

Fabrics are stitched into garments manufacturing process.

The slow down in economic activity in the Far east has begun to adversely effect

Pakistan’s textile industry in terms of exports to Japan, South Korea and other South

Eastern Asian nations are undergoing a recessionary period.

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Many of the problems in the products of the spinning and the downstream industries are

due to poor raw materials quality. Only about 5% of cotton crop is suitable for spinning

up to count 50. Most of thee cotton grown is of thee short staple variety. It is the inferior

quality of locally grown cotton that has led towards production of low count yarn.

The looms, spindles and rotors sector has been exposed to challenges of modernization

and sophistication of competitors in world markets. Domestic machinery is of poor

technology, scarcity of quality yarn and lack of institutional financing are also adding to

its problems.

New markets are not being discovered and the rate of growth of yarn exports is lagging

behind the rate of growth of domestic yarn consumption. Total profitability in the

spinning sector of the KSE has been declining. The number of listed textile companies

has shown decline in profits. Profitability is not likely to improve during 1998-99, as the

domestic cotton crop is likely to be significantly lower than last years.

The spinning sector is thus not facing raw material or labor constraints. Its fundamental

constrains on the supply side are technological obsolescence and financial

mismanagement. It is these constraints which \prevent it from realizing its full potential

in both the domestic and world market. Demand is major constraint. There is a glut in the

international market and as inflation soars, domestic consumption of cotton based

products will decline as people’s real income will fall.

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Now the producers and exporters will only benefit from low mark-up are on export

financing under the export financing scheme which provides loan 8% markup per annum.

This low interest provides them an edge to get profit in the international market. The

spinners are confident of earning an additional 500 million dollars from export of 30

counts of yarn.

QUALITY STANDARDS
Textile Industry is the largest Sector in Pakistan, but the export of textile has continuously

declined during last five to six years. The major problem, textile industry is facing is the

non- tariff barriers like ISO 9000 and ISO 14000. These standards lay greater emphasis

on packaging, safety, and handling etc.

OPPORTUNITIES

Although the Pakistani textile industry and subsequently spinning industry is faced with a

lots of problems, but there is a ray of hope as this year a bumber crop of around eleven

million is expected.The opportunity is the factor of low cost of production. Another

opportunity for the textile industry lies in the formation of a Commission on textile

Industry to look into problems and future planning aspects for the industry. These future

aspects include creation of an industry engineering base for textile industry that include

local availability of technical manpower, machinery and spare parts. For this reason the

strategy of joint venture with European, Japanese and Korean companies will be followed

Price Fluctuation of Cotton in Pakistan

4
Raw cotton is called “Phutti” in Pakistan. The price of Phutti remained constant from

1972 to 1992, between Rs 300 to Rs 400/ Mound. In 92, due the intervention of some big

players in the market, the price of phutti witnessed phenomenal hike, it rose to

Rs.1000/Mound. The price of the phutti remain high for few years in line, but then it

dropped to Rs. 350/Mound when governoment abolished the restrictions on its trade.

The reason for the phutti prices to remain low for all those years from 1947 to 1992 was

that the spinning sector was very strong in monetary terms and it was in the interest of

this sector that the prices of raw cotton should be kept low.

In 1992 some powerful politicians influenced the prices of phutti to rise artificially this

rendered Pakistani exports unfeasible for the foreign markets, the phutti price was again

lowered to make the export of cotton products possible.

The problem was that the government itself does not know the actual estimates of the

cotton till it reaches the market for sale. In 1998 the government committed the mistake

of relying upon the information collected through patwaries. They over estimated the

cotton crop and even allowed the export of cotton this resulted in the acute shortage of

raw cotton.

This year in addition to a bumper crop we also have last year’s imported imported cotton.

The price of the cotton is therefore quite low.

ROLE OF GOVERNMENT

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Privatization and deregulation has placed the private sector in the commanding position

in shaping the market. The government has stepped aside to play a supportive role limited

only to the provision of institutional framework to tackle market imperfection.

The Spinning Sector and The Trends of Yarn Prices in

the Market:
In the textile sector in Pakistan, most of the investment came in the last three decades. In

this sector we have the most advance machinery and thus our cotton yarn has high

demand. There are approximately 500 spinning mills working in Pakistan. Their total

yearly consumption is 8.5 million bales of cotton approximately. The prices of the cotton

yarn vary directly with the prices of cotton but the cotton prices take sometime to effect

yarn prices. This delay is dependent upon the production cycle time for cotton yarn

The brokers form a important part of yarn market, they act as middle man between the

cotton grower and spinning mill. In 1992 when the cotton prices rose considerably and

the spinning mills which were already heavily indebted lost their financial viability. It

was during this period that brokers came into scene; they bought the yarn at about 5%

less price and sold this yarn at 3% to 9% premiums to the weaving industry.

The point here to emphasis is that the spinning industry is still in the stranglehold of the

brokers and to get out the influence of the brokers the spinning industry would need

capital.

Production Export and Domestic Requirement of Cotton Yarn

(Tones)

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 Period Production Mills Export Available For Local Market

Consu

mption
1990-91 105522 40215 501072 513941
1991-92 1188270 36022 505863 646385
1992-93 1234538 35101 555282 644156
1993-94 1498948 36846 578648 882454
1994-95 1413648 29111 522091 862446
1995-96 1505244 30164 535899 939191
1996-97 1530855 46962 508188 975705
1997-98 1542695 52982 460693 1029020

Production

1800000

1600000

1400000

1200000

1000000
Quantity

Production
800000

600000

400000

200000

0
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98
Period

Production Of Yarn Count Wise

(Tonnes)
1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98
Course 351262 424727 464660 521475 688603 620691 684913 699893 687881

7
Count
Medium 412149 435278 482050 451557 424127 443762 451646 425165 414291

Count
Fine 16310 17160 31912 30081 32773 49549 60177 58165 60348

Count
S.Fine 7739 9137 14755 20949 16068 19498 22827 23043 17535

Count
Poly 123712 153100 178068 161969 241372 224868 234464 297462 343032

Viscose
Mixed & 925386 1055228 1188270 123539 1326676 1380702 1475071 1530855 1542695

Hard

Production of Yarn Count Wise

97-98
1800000
1600000
1400000
1200000
1000000
800000
600000
400000
200000
0
Cours e Medium t Fine S.Fine Poly Mixed &
Vis cos e Hard

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Market Share Position Of Yarn (Tonnes)
Countries 1996-97
HONG KONG 158298
JAPAN 108196
SOUTH KOREA 46521
OTHER ASIAN COUNTRIES 43767
ECM 35156
DUBAI 18639
USA 10797
TURKEY 9643
CANADA 6671
SINGAPORE 5858
EGYPT 3444
INDONESIA 4401
PHILIPPINES 4311
BAHRAIN 2952
MALAYSIA 2450
OTHERS 27264

Market Share Position of

Cotton Yarn

HO NG
KO NG
O THERS 32%
46%

JAPAN
22%

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General Threats faced by Spinning Mills
Spinners are contend with the export of course count of yarn to Japan and never bother to

produce fine or super fine counts of yarn. The number of spinning mills is also out of

proportion with the weaving and knitting units. This problem also has its roots in

government policies of charging higher tariff to the machinery used in the weaving and

knitting industry. Pakistan also has no textile engineering industry where these machines

can be fabricated. This problem caused glut of yarn in the local market and the country

was forced to export half of the yarn produced in Pakistan. This force Pakistan to remain

exporter of low quality intermediate products likes yarn and grey cloth.

Offering area industry specific tax incentives encourages the setting up of spinning mill

which has further pushed the investment away from the weaving and knitting industry.

The bullish trend prevailing in the capital markets in early nineties provided further

impetus and a large number of Public limited units were established. This resulted in he

phenomenal growth in the project cost. These units have large capital base and borrowed

huge amounts. The equity was raised mainly through kickback. The cost per spindle, for a

large number of the spindle worked out top be $110per spindle where as it should have

been around $65 inclusive of the modest amount of kickback

The result is that most of these units are economically nonviable. The fixed costs are very

high but the real problem is the exorbitant financial cost. These spinning mills suffer from

low productivity and low quality. The other problem is that these mills are consume one

and a half bales of cotton per spindle whereas they must consume at least two bales of

cotton per spindle, this is the gross misuse of the facility and cotton.

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Most of the mills persistently are producing course counts of yarn, which is causing two

problems glut of course count and low unit price realization. The glut causes cut throat

competition and low price realization effects the repayment ability of the mills.

Recent Surplus Cotton Crop

The question to investigate here is that how this surplus cotton crop is there, according to

experts this year the spinners are caught at a wrong foot. Although there was no shortage

of cotton last year they imported over one million bales that to at a very high price.

Traditionally, there are two pressure groups in cotton trade, these are growers and

spinners. While the growers demand the highest possible prices, the spinners are willing

to pay the lowest possible prices of the cotton. They also want the prices to continue to be

less through the year. At the time of the release of the initial estimates of the cotton crop

size the spinners and growers have a common motive that is an exaggerated output

figure.

This unified estimate serves the motive of both the groups, as the growers want to give

the high produce figure so that there will be no restriction on the export of the cotton. The

spinners on the other hand try to project the high estimate of the cotton crop to either pull

the prices of the cotton down or to hinder the upward revision of the cotton prices.

This unanimity in the estimation remains only for sometime as the governoment

announces the cotton policy and the export orders start coming in the spinners change

their stance and try to give an impression that there is shortage of cotton and there should

be ban on export of the cotton.

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This has been a regular feature from year to year. As during the last cotton season the

initial estimate was 10 million cotton bales which was subsequently reduced to 8 million

bales. The spinners also succeeded in convincing the government to urgently import

cotton, hence one million cotton bales were imported.

BENEFITS OF REGULATED COTTON TRADE

According to some textile sector experts regulated trade of cotton can ensure its smooth

availability as well as stability in its prices. The spinners also demand the regulated trade

of cotton. The spinners have to learn to live with the ban on export of yarn of less than 20

counts. These counts have negative value addition or yield marginal profit the economic

condition of the country demands high value addition. As the Yarn manufacturers are not

ready to change their attitude there is a pressing need to change it through regulatory

framework.

The reason for the persistent crisis in the textile industry is an absolute imbalance in

spinning and weaving sectors. According to some experts, textile industry in the country

is confined to spinning. It produces1.5 million tones of yarn every year. Out of this

quantity 3% is consumed by the mills consume 3% ancillary sectors of weaving and

knitting consume 64%and the 33% is exported to avoid the yarn glut inthe local market.

To a large extent the government of Pakistan is responsible for this imbalance but the

industry can also not be pardoned for continued production of the coarse counts, misuse

of superior quality of cotton for production of course counts and hardly any upward

integration. Spinners are contend with the export of course count of yarn to Japan and

never bothered to produce fine or super fine counts of yarn

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CONTRIBUTION IN EXPORTS
Textile industry is the largest industry in Pakistan and a bigest source of earning foreign

exchange, its salient features are as follows

Eport of cotton & cotton products (yarn, fabrics, Garment, & made up )

Constituted 54.91% of the total exports from Pakistan amounting to $4568.88 million of

total export of $ 8320 million in 196-97.

Pakistan’s major exports are cotton yarn , cotton fabrics, ready made garments & other

bed wear. Cotton yarn & cotton fabrics together constitute 32.3% in total annual export of

the country. The textile industry is havily export oriented .Pakistan is exporting three

types of cotton textiles to different countries of the world. Number one is cotton cloth,

second is the cotton Yarn and the third one is cotton made ups.

COMPANY PROFILE

MGM is a family organization hence the decision making is very simple. The chairman is

involved in government contracting business in Abu Dhabi and has earned a status as a

quality conscious contractor. The chairman is involved in government contracting

business in Abu Dhabi and has earned a status as a quality conscious contractor. Besides,

the family is involved in Bolan Bank Limited, having three directors on the board, the

CEO is also the vice chairman of the Bank.

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MGM (Mirza Ghulam Mustafa) Corporation is manufacturer, Dealer and Exporter of

quality yarn and Fabrics in Pakistan. It specializes in the production of COTTON YARN

ranging from 10s / 1 to 40s /1. CARDED and COMBED for weaving and knitting with

waxing facility. MGM Corporation has got the certification of ISO-9000.

Chairman’s Message
“I have learned in the last 22 years in business that there is no substitute for quality.

When the spinning mill was planned in the group, this motive was on the forefront. The

selection of the machinery was done keeping the same. All the processes from the

blowroom to cone winding to Laboratory Equipment were chosen from he best in the

field keeping in view the local conditions.

At the time of selecting the technical staff there was only one criterion – to have the best

available best available in the market, and by the grace of God, we were successful in

our research. The mill started commercial production in October, 1992, and I am pleased

to mention that it has attracted quality – conscious buyers from all over the world. I am

grateful to God and to my staff who is devoted to quality, and to our customers for

patronizing the product.”

Objective

The main objective of the MGM corporation is increase its market share. The other

important objective is to become the quality leader in the production of the cotton yarn.

It is also an objective of the corporation to remain an efficient producer of the cotton

14
yarn and to earn profits, in order to ensure the financial and economical viability of the

company.

Mission

The MGM Corporation is involved in the production of cotton yarn. It is committed to

produce quality yarn for its customers both locally and internationally and it envisions a

long-term relation with them in order to earn a strong financial health for the company.

State of the art technology shall be used to ensure the best quality for its products. It

considers the employees as an asset and will continue to be the active member of the

local spinning sector with its quality cotton yarn.

EMPLOYEES
There are around 550 employees of MGM working all over Pakistan.

TESTING EQUIPMENT
Uster Tester – 3 (Switzerland)

Fibrograph (USA)

Auto Sorter III (Switzerland)

Tensor Rapid III (Switzerland)

Twist Tester (Japan)

U.V. Meter (color variation) (Switzerland)

Classimate (Switzerland)

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Cotton

MGM Corporation is very selective in the purchase of cotton. The highest quality cotton

is used in all the production runs. To keep uniform quality, we acquire enough raw

material during the cotton season which is sufficient for the whole year. The

contamination is hand picked from the cotton before feeding it to the blow room to

provide Maximum Contamination Control Yarn. It is also checked for color variation

through Ultra Violet meter.

Yarn

MGM Corporation’s standard line of production is cotton yarn ranging from 10 s/1 to

40s/1. Carded and combed for weaving and knitting with waxing facility. Due to

excellent and consistent quality, MGM Corporation’s yarn enjoys high reputation in

foreign as well as local market.

Machinery

The following machines are involved in manufacturing process of high quality yarn.

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Blow Room Trutzchler Shoot Feed System

(Germany)

Card 24 sets Crosrol-MK4 (England0

Drawing 4 Sets Toyoda DYH 500 C (Japan)

Comber 4 Frames Hara (Japan)

Simplex 7 Sets Toyoda-FL 18 (Japan) 120

spindles each

Ring Spinning 36 Frames Toyoda-RY 5 (Japan) 480 spindles

each

No. 7-11 Machconer 7 Frames Murata (Japan) 60 winding drums

each

Humidification system LUWA (Switzerland)

Stand–by Generator 2 Units Caterpillar (USA)

CUSTOMERS

It attracts the customers from Garments Industries and Textile Mills involved mainly in

weaving and knitting. It also exports its products to foreign countries such as Korea,

Taiwan, Singapore, Hong Kong, Japan, etc. Following are some of the customers of

MGM corporation.

PAKISTAN FOREIGN COUNTRIES

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Nishat Textiles Lahore 1. Saehan Industries, Korea

2. Ishaque Textiles Lahore 2. Winni Textiles, Hong Kong

3. Gulistan Weaving Punjab 3. Sun Kook, Korea

4. Yousaf Weaving Punjab

Quality Control & Testing

Material being processed is carefully tested in a well equipped and the most modern

laboratory to monitor the production of high quality yarn. The principle that we follow is

CHECK KNOW REACT = SUCCESS

Sales
There is no commission charged at source and all prices quoted are on C&F basis against

an irrevocable letter of credit. However, company also quote through brokerage and other

firms, and the commission is negotiable.

Technical Staff
The mill is run under the supervision of a full time technical director who has qualified

from Textile Municipal College, Blackburn, UK. He has work experience of more than

45 years in the field of cotton yarn manufacturing. The mill manager is also a textile

engineering graduate from Pakistan. Besides, the CEO’s son, who is also a director, is

18
fully involved in the business. He is a graduate from Philadelphia College of Textile and

Science, Philadelphia. He resides in the Mill’s premises and is in close touch with the

successful operations of the mill. There is also a team of other qualified and highly

experienced technicians involved in the process.

Almost all the staff is provided with a family or bachelor residence and other recreational

facilities within the mills premises. Hence it has a strong assosiation with the Mill, and

most of the staff is working since the initial installation of the machinery..

Decision Making
MGM Corporation is a family business and according to company high ups the decsion

making process is simple. In depth study and interviews with the officers has revealed

that the decision making power rests solely with the chairman. Previously chairman used

to deal directly with the brokers for purchase of cotton. As chairman is mostly out of the

country he used to take these decisions from abroad. This resulted in losses as mostly the

cotton purchased was over priced. But now this process has been changed. The open

ended purchase and sale policy has been replaced with tight control policy. This has been

done by appointing a general manager at the Karachi office, who is responsible for all the

purchasing decisions. He comes under the control of Managing Director, who is the son

of the chairman, and a foreign qualified professional. General manager remains in contact

with the brokers, negotiates the price, brokers the deal and makes sure that the cotton is

tested before cotton is delivered. General Manger is highly paid and earns nearly in six

figures. Company has improved considerably since this new GM has joined the company.

19
His over all image in the company is that of a honest and caring person. Most of the

employees respect him and the directors also respect his decisions

Organizational Structure
MGM Corporation has function departments namely Accounts, Purchasing, Sales, and

Exports but the major role is played only by the accounts department and the rest are

mere restricted to the processes. There is no physical or conceptual difference between

the departments. Accounts department is headed by the Accounts Manger who comes at

number three in the head office.

OFFICES
Karachi office
The Managing director, who is also the member f board of directors and son of the

chairman, heads the Karachi office. Then comes the General Manager who is the most

important person in the organization as far as operations are concerned. He is responsible

for all the operational decisions and working of the organization. Mr. Nadeem Naz is the

accounts manger who comes under the GM and looks after the accounts department as

well as all the other major processes.

Karachi office is the head office and now a new building is under construction where this

office will be shifted. The new office will have all the modern facilities such as Internet,

e-mails and other technological advanced infrastructure. This office maintains the over all

records of the company and also controls the Lahore office.

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Lahore Office
The main function of Lahore Office is sales. As most of the Textile mills in Pakistan are

in located within the range of this office, it becomes easier to reach large number of

customers in minimum time. A Marketing Manager heads the Lahore Office and is

responsible for the operations at Lahore.

MILL
The cotton-spinning mill in Pakistan is located about 20 km from Sheikupura-Faisalabad

Road. It consists of the most modern machinery in the field. The Mill Manger, who has

50 years of experience regarding spinning and related operations, heads the Mill. He has

been the part of the organization since its inception. Fifty years of experience has made

him a “battle hardened soldier” and he knows all the tricks of the trade.

Chairman
Malik Ghulam Mustafa is the chairman of the corporation. Rather MGM means Malik

Ghulam Mustafa Corporation. He was the one who started this business in 1992. He is an

experienced entrepreneur with business stake inside the country as well as in other parts

of the world. Chairman has the construction business in Abu Dhabi and has got the status

of a quality conscious contractor. Along with that, Malik Ghulam Mustafa is also the

vice-chairman of Bolan bank and has stake in agriculture business in Australia. This

entrepreneurial experience proved to be the starting step towards this business. Although

he was inexperienced in the field of spinning or textile industry but his entrepreneurial

experience was of the much help for the infant business. Chairman has scored a

21
reasonable financial fortune for himself and as a result MGM Corporation has no

financial problems.

Decision Making Style

During the early days of MGM Corporation, chairman was directly involved in the

decision making process even at the operational level such as purchase of cotton. But

with the passage of time this approach has proved to be wrong. Reason being that

chairman has a diversified portfolio and he is usually out of the country. Whatever

decisions he used to make where from there, with little or no market information. This

resulted in financially unfeasible decisions. Now he has replaced this centralized

approach to decision making with a decentralized one.

Work Environment
As is the case with most of the Pakistani companies “Seth” culture is visible in MGM

Corporation. All the employees come under the authority of chairman and all decisions

must have his backing. This results in affecting the overall performance of the company.

There are no employee development schemes such as any training or refresher courses.

Similarly there are no performance-related incentives for the employees. Though the

appraisal system is there and yearly increments depend on these appraisals but there are

no measurable criteria such as sales etc It’s just the discretionary power of the senior or

the direct contact with the director that earns you a healthy bonus. This gives rise to

general leg pulling and back biting attitude of Pakistanis.

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As far as bureaucratic hurdles are concerned they are not present in the MGM

Corporation. Any one can walk in to the seniors’ office and tell the grievance or share his

ideas. Especially after the GM took control over the head office things have improved a

lot. He shares his ideas with the people in his office that in turn results in enhanced

employee satisfaction and motivation.

Some corrupt practices have been found at the corporation. For example recently the

manager of Lahore office was taken to task and irregularities were detected. He resigned

and left the organization.

Marketing & Sales

Sales

Local Sales
Export

Lahore Commission Indentures

Office (Direct) Agents

The sale process involves two segments one is the local sale and the other is the exports.

Local sale is carried out by two techniques namely commission agents and direct sales by

the Lahore office. Commission agents are the traditional sale agents operating in the

23
spinning industry right from the beginning. They collect the yarn from the spinning mills

and supply them to the weaving mills and in the process charge their commission. Some

of the local sales are also carried out by the Lahore office. But the percentage of direct

sales is very less. Customers within the country include all the textile and weaving mills.

Around 250 to 300 customers exist only in Karachi and approximately 500 customers are

in Punjab; this shows the potential of the market.

In case of exports the only channel used is indentures. These are again basically the

commission agents who get orders from foreign customers forward it to the company and

the company after receiving the letter of credit ships the goods to the customer. Again the

agents get their commission. International sales are far more than the local. Seventy

persent of whatever is produced is exported. The major target market for export is Far

Eastern countries such as Korea, Hong Kong, and Taiwan.

Sales Comparison

Local
Sales

Exports

Exports to other major nations of the world such as America and Europe are limited

because of quotes and other related issues. Secondly, after selling in local and traditional

foreign markets nothing is left for these non-traditional markets.

24
Marketing efforts are mainly done by the Lahore office. Company’s marketing effort falls

in the category of industrial marketing and the basic mode used for promotion is personal

selling and word of the mouth.

Production
Total average production of MGM Corporation is about 0.13 million bags per year that is

approximately ninety five percent of the total capacity. Average cotton purchased during a

year is 45000 bales/year; where as there are 160 Kilograms per bale and out of this cotton

82% is the final product (Yarn). Production is carried out in the mill under the direct

supervision of the experienced mill manger. Another achievement of the company

regarding production is the ISO 9000 certification for its production process.

Auditors
M.Yousaf Adil Saleem and Company are the auditors of the company.

Future Plans
There is no particular expansionary strategy of the company. No formal weekly or

monthly meetings are held to evaluate the performances. Continues monitoring and

review is carried out. Company is operating at approximately 100 percent capacity but

their factory in Sheikhupura does have the capacity to install a new waving unit or an

extra spinning unit.

A new office building is also under construction. The new head office has been planned

according to the state of art technology and all the modern facilities will be available

there.

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Competitors
There are approximately five hundred spinning mills operating in Pakistan along with

that the major foreign competitors include SriLanka, Bangladesh, and India. This industry

is highly competitive but the market is expansionary. Locally, there all the spinning mills

and some of the weaving and knitting units that also produce yarn are competing with the

MGM Corporation. However, the market size is large enough to provide room to all the

players to sell their products.

Financial Analysis
MGM Corporations financial year starts from October 1 and ends at September 30 th. Total

asset base of the company has been approximately constant at around 353 million rupees.

Company has been running in losses for the last many years. Cash flow position is also

not very satisfactory and these are negative for the last two years. A careful look at the

cash flow statement tells us some important facts about the liquidity. In year 1998 the

cash flows from operations has been positive but cash flows from both the investing as

well as financing activities has been negative. We can see that firm has invested in the

fixed capital expenditure to the tune of Rupee 21,117140. Similarly company has

reduced its financial burden by paying off Rupee 48,181,489 of its long term debt.

Company’s cash flows have suffered from the financial burden. If this had not been the

case the cash flow situation would have been positive.

If we look at the profit and loss statements for year 1997 and 1998 we can see that during

1997 cost of goods sold was approximately 91 percent of the sales, this percentage saw

no significant change and was 92 in year 1998 resulting in approximately the same gross

26
profit. Sales have grown by 13.54 percent which is quite a satisfactory figure but increase

in CGS by the same proportion is not encouraging. Operating expenses have been under

control and there is no dangerous increase in them. Even with such a high percentage of

cost of goods sold operating profits are there, but again the financial burden cover up

these operating profits resulting in negative net income.

Although the corporation is a family business of financially strong family the capital

structure contains large amount of bank loans and debt, which results in financial charges

of exorbitant levels washing away the operating profits.

The debt to asset ratio for the year 1998 is 92.5 percent which is highly alarming and

accounts for the huge financial burden company has to face.

SWOT Analysis

Strengths
Experienced Mill Manager
The company has its manufacturing facility at Lahore- Faisalabad road and is managed

by a very experienced manager. This manager has been associated with the textile

industry for about 50 years. And he has been with the company since its inception. He has

played a fundamental role in the design of the facility plus in he selection of the

machinery.

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Capital Base
Another strength of the company is the availability of the capital as the company is

owned by a very rich family. The proprietor of the company also has a big business

concern in UAE and has earned a reasonable financial fortune for the family.

Experienced Chairman
The chairman who is also the proprietor of the company is a very experienced person,

and has quite diversified knowledge about different businesses both locally and

internationally. The Chairman of MGM Corporation is also the vice-chairman of Bolan

Bank of Pakistan Ltd. And the managing director of a construction company in UAE.

Improved Processes
The company has recently decided to stream line its important processes, which is

evident from the fact that the process of buying raw cotton has been revamped. This

practice, till the recent past, was solely done by the chairman. With whatever little market

information chairman himself had, he used to broker the deals with the agents. Now the

chairman has appointed a General Manager at the Karachi office to evaluate the offer and

buy the cotton in response to the best offer only.

Location
The location of the mill (Sheikhupura), marketing office (Lahore) and the head office

(Karachi) add to the strengths of the company. As most of the local customers are around

the Lahore region it becomes easy for the marketing manger there to deal with the

brokers as well as the individual clients. Similarly Karachi is is the port city and MGM

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Corporation exports seventy percent of its products. This makes it easy for the export

department to look after the exports.

Managing Director
The managing director of the company who is also the son of the chairman is a textile

engineer, his qualification as a textile engineer is an added strength for the company. As

he can understand the problems at operational level and is quite capable of handling

them.

APTMA Membership
MGM Corporation is an active member of All Pakistan Textile Mills Association

(APTMA). And this accounts for a major strength of the company as they are a part the

forum that safe guards the interests of the entire textile industry. This forum provides a

unified voice to industry in negotiating with different government agencies.

Periodic Financial Statements

Another strength of the company is the periodic review of financial health. Monthly

financial statements are prepared and evaluated.. This practice enables the management to

know where the company is headed and any contingency measures can be adopted. . This

information results in the more effective control and planning of the company’s financial

resources by the management.

State of the Art Machinery

Mill of the MGM Corporation boosts excellent state of the art machinery. Most of the

testing equipment has been imported from Switzerland.

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ISO 9000 Certification
The MGM Corporation is committed to maintain high quality standards throughout its

operations. This is evident from the fact that the company has achieved the ISO 9000

certification for its production process. Which indicates the quality standards maintained

at the company’s production facility.

Weaknesses
“Seth” Culture
The very first weakness of the company is the “Seth Culture” prevalent in the

organization. As MGM Corporation is a family business thus typical Pakistani style of

management is practiced in this corporation resulting in low level of employee

satisfaction and motivation.

Employee training
There are no employee training schemes or workshops. No refresher courses are

conducted and there is no formal method of improving the employee performance levels.

No training is given to the new graduates that join the company. Even the old or

experienced employees follow the age-old practices and procedures.

Incentive or Reward Criteria

There is no performance evaluation method or reward based incentive schemes. Although

there is a yearly appraisal system but that has a very limited importance. This results in

lack of interest on part of the employees. The only criterion for increments is your

relations with the Managing Director or chairman. These things contribute to the

traditional leg-pulling attitude common in Pakistani organizations.

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Lack of Interest in the Business
Chairman of the corporation has a diversified portfolio and is usually out of the country

looking after other businesses. Income flowing from other businesses is quite hefty which

has resulted in a very indifferent attitude of the chairman towards the business. Chairman

seldom visits the company offices and the decisions he makes are often without any prior

knowledge.

Office Automation
Use of Information technology is very limited. Even in the traditional area f accounts the

use of modern technologies is restricted. Company uses the traditional techniques of book

keeping. No data bases or networking is there. Data is stored in the shelf and it usually

requires lot of effort if some old information is to be seen. Similarly it also becomes

difficult to balance its accounts between the Lahore office and the Karachi office. The

modern office equipment that can be seen at the head office are two personal computers

without any networking or sharing.

WORK FORCE

In the present business environment the human resource factor has attained most

important position than any other factor. The present business scenario is getting more

knowledge intensive but as far as the work force at MGM office is concerned they still

lack behind some of their competitors who have more educated work force. They have

very low number of business graduates looking after their functions.

STRATEGIC APPROACH
MGM Corporation is a typical Pakistani business and it shares some of the basic

shortcomings that are inherent to Pakistani businesses. MGM Corporation is totally void

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of strategic approach. Most of the decisions are done without keeping in mind the long

term objectives of the company. The company management lacks the strategic sense.

Vague Departmentation
MGM Corporation follows the functional departmentation structure. However, the

departments are so vaguely defined that there is no separation of concerns and mostly

they are interfering in one another’s work. Accounts department is the main department

and it overlooks all others. Another problem that this vague departmentation causes is

that if something goes wrong there is no one who can be blamed or even in case of an

achievement everybody claims for it. Similarly this vague departmentation has the effect

that overall performance evaluation of different concerns like accounts, export and

purchasing becomes more difficult. One man overlooking many areas, like Mr. Nadeem

Naz accounts manager also takes care of exports, further complicates the situation and

increases the burden on that person. Such arrangement even effects the performance of

that person because in above case Mr Nadeem Naz is basically an accountant by

profession and he has to look after the exports..

Threats
Declining Exports
Company faces another threat of declining exports. Pakistan’s share in the world export

of textile is declining. Pakistan’s share in world export of cotton yarn was 34.9% in 1992

that came down to 28.3% in 1995.

The seven-month period that is July 1998 to Jan 1999, witnessed a 13 % decline in export

s of textile products as compared to the export performance in the corresponding period

last year. The export of textile products included cotton yarn, fabrics and made ups

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constitute 60% of the country’s exports. According to available information, the textile

exports registered a steep decline of Rs 8 billion during the month of Jan 1999.

The monthly export figures reveal that exports of cotton related products dropped from to

Rs 12836 billion from Rs 20.60 billion by the end of the last year. All Pakistan Textile

Manufacturers Association (APTMA) sources while expressing their concern, revealed

that exported of cotton dropped from 25percent value and 15 percent in quality and cloth

fell in 16 percent in value and 6 percent in quality.

Weakening Asian Economies

The decline is being attributed to market recession for our cotton yarn due to persistent

financial crisis, confronted by the Asian Economies. Although despite the crisis these

countries have not slashed their quota for cotton based textile imports. This is a clear

indication that these countries have reduced importing cotton related products from

Pakistan and are fulfilling their needs from other sources.

Use of PSF
In order to meet the short fall in the cotton yarn the textile industry has started using PSF

a substitute for cotton Yarn in its production . Which is available to the textile industry at

25 percent more than international price due to the duty on the import of polyester.

Under Utilization of Resources

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The considerable portion of the machinery used by the local industry is under utilized this

is evident from the fact that out of 8.298 million spindles only 6.46 million were in

operating condition. This shows under utilization of 22.3%. Similarly looms were

unutilized by 62%. This under utilization is mainly due to the worse kind of machinery.

Globalization and Free Trade

The globalization and free trade are the upcoming problems the textile industry is facing

WTO has an explicit plan for gradual phase cut of Multifibre agreement, by the year

2000. Pakistan felt jubilant that their exports to the developed world would increase as a

result. Under a meticulously maintained scheme tariff barriers are to be replaced by non

tariff ones in shape of free trade. The textile industry of Pakistan has to make itself

competitive even under prevailing resource constrains & out dated machinery. After the

implementation of free trade company will have to face fierce competition not in the run

to capture foreign markets but to make it viable in the local market Serious attention has

to be paid to the aspects of balancing, modernization and replacement (BMR) of the

projects. The need is to invest in these aspects of balancing, modernization and

replacement (BMR) of the projects instead of investing available funds in the associate

companies, thus neglecting (BMR).

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Government Regulations
All the spinning mills, including the one under study, are extremely vulnerable to the

government regulations and face serious threat of non-consistent government rules and

regulations. The government earlier provided cotton at 30% of the prices prevailing

internationally , but with the new policies implemented this subsidy has been withdrawn.

There has been a mixed response to this policy, the APTMA is bitterly opposing this

policy. Their argument is that it will take away the share and would made the local textile

industry most vulnerable to the threat of competition. The subsidy provided by the

government shields the local market from the high international prices, this also provide a

cost advantage to the local industry. The Karachi Cotton association has favored this

move as it will help growers to fetch high international prices for their raw cotton

although the spinners have been complaining about the short fall of cotton & increased

prices , but the KCA has rejected such claim. The demand of the KCA in support of free

trade carries weight, especially when the export is not harming the local industry as only

the surplus is allowed for export.

Labor Laws & Quota Restrictions

Third world countries like Pakistan have been under constant pressure from world

agencies to improve their labor laws. These laws along with the quota restrictions have

hindered the growth of various industries. In our case too, the quota restrictions in the

countries like America have deprived the company to exploit these otherwise potential

markets. These restrictions can get even tougher and can pose threat to the company.

Antidumping duties are also the part of this propaganda and they also pose threat to the

company’s exports.

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Cut Throat Competition
There are around five hundred spinning mills operating in Pakistan. Along with that there

are other units that are in weaving and knitting business but are also producing Yarn. This

has resulted in cut throat competition in the market.

Market Glut
The severe competition in the market has give rise to a phenomenon called Market Glut.

It is the phenomenon that Pakistan produces a lot of cotton and along with that a lot of

cotton is imported which results in over production of cotton Yarn. However there is not

enough demand and as a result company needs to export its product. Here the

antidumping duties and quota system comes into play and company is not able to get the

maximum price of its products.

Role of the brokers

Company follows the age-old practices of dependency on third party for its purchases as

well as sales. This makes it vulnerable to the role of brokers. Like in 1992 brokers

profited or exploited the liquidity crunch faced by the spinning mills, most of theses mills

as well as MGM corporation is under constant threat of exploitation by these brokers or

commission agents.

Non proportionate number of spinning and knitting mills

The number of spinning mills is also out of proportion with the weaving and knitting

units. This problem also has its roots in government policies of charging higher tariff to

the machinery used in the weaving and knitting industry. Pakistan also has no textile

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engineering industry where these machines can be fabricated. This again forces the

company to export most of its products to foreign markets.

Dependency on Cotton Production

Cotton is the basic raw material of MGM Corporation and Yarn production depends

solely on the cotton production. In a given year if the cotton production is healthy prices

go down and in turn effect the yarn prices. Like this year because of the expectation of a

bumper cotton crop cotton prices are very low as compared to the previous year.

OPPORTUNITIES

WTO
The General Agreement on Tariff and Trade (GATT) under aegis of World Trade

Organization (WTO) has provided Pakistani spinning industry to explore the new

markets. It has also made it possible to reach the markets that were previously protected

by duties.

TAX SUBSIDIARY

Textile industry in Pakistan is provided with some tax incentives. Specially in case of

spinning mills these incentives have caused the spinning units to outnumber weaving and

knitting mills. There is a gap available and this gap can be filled by increasing the

production of value added goods to the desired level. These incentive provide a good

opportunity of the industry to control its expense and to invest in the value addition

activities. This will help industry to grow and come out of the stagnation.

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RECORD COTTON PRODUCTION

According to expectation cotton crop will surpass twelve million bales this year. This

year the crop has not been attacked by viruses and timely rains and conducive climate has

given us the hope that we can expect a bumper cotton crop. This will help the local

spinning industry to get good quality cotton at a low price. This also assures the

availability of quality cotton.

LOW COTTON PRICE

The bumper cotton crop of around 12 million bales produced this year and the cotton

imported last year has caused the cotton prices to be lower in the market. Cotton price has

hit the record lows this time. This again provides an opportunity for the spinning industry

to buy cotton a low price and provide quality yarn to its customers..

Recommendations
The MGM Corporation has paid no attention in the field of automation so, by automating

that is by introducing the information technology the company can save a lot of valuable

resources, for example the company can reduce paper cost. Also the use of technology

can help increase the efficiency of the office staff. The information technology can also

provide a communication link between the two main offices of the company, one of

which is situated in Lahore and the other one in Karachi.

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The company management must try to work out a mechanism to hold formal company

meetings on the periodic basis to review and analyze the company as well as the market

condition. This will help management to better understand the current market forces at

work. It can also help management to get the feed back from the employees and can also

act as a medium for communicating company’s goal to the employees.

MGM Corporations capital structure is too much burdened by the debt and this debt

results in exorbitant amount of financial charges resulting in losses. As the company is

operated by a financially strong family it is recommended that equity base should be

increased which in turn will lower the financial charges thus turning the company

profitable ( keeping other factors at present level). MGM corporation has a debt to asset

ratio of 92.5 percent which is very high by any standards.

The employees of the company are basically of two types the technical work force that

works at the manufacturing facility and the office workers that work at both the offices in

Karachi and Lahore. This workforce totals to five hundred approximately. As MGM

Corporation has a quite large number of employees both technical and non-technical it

can also start a training program for employees. This training can help employees to

increase their knowledge about the company’s operations and develop work habits that

can be used to the company’s advantage.

The MGM Corporation is structured on the basis of functional departmentalization but

the ambit of activities for different departments is not clearly defined. The MGM

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Corporation can thus define the activities related to each department. This will help in

fixing the responsibility for each employee to do a specific task.

The company’s mainline of business is manufacturing of cotton yarn. As the cotton yarn

is the raw material for the knitting and weaving industry the company can also set up

either a weaving or knitting plant. The production facility has enough space to install

either a weaving or a knitting plant.

The company must have a research and development department in order to further

develop the product quality. This function can help the company to develop and market a

better product and penetrate into the market. The research and development function can

also impart training to the technical staff to train them how efficiently they can use plant

machinery.

The management at the manufacturing facility must confirm the production of fine or

super fine counts of yarn. The production of the course count yarn will add no value to

the stature of the company.

The most import party involved in the buying of the raw cotton and the sale of cotton

yarn is the middleman that is the broker. All the brokers all basically the exploiters. They

cash their contacts and earn the commission. The influence of the brokers in the industry

increased during 92, when cash starved spinning industry agreed to sell cotton yarn at

cheaper prices. The brokers at that time made cash payments and bought the cotton yarn

at cheaper rates. They then sold this yarn at higher rates to the weaving and knitting

industry. Thus they fully exploited the liquidity crunch, and as a result their influence in

the industry increased considerably. Thus keeping the characteristics of brokers in mind

the company must try to rely as less as possible on these brokers. It is therefore

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recommended that there must be a team that can perform the function of brokers. This

team can contact the growers and can directly buy raw cotton for the company thus

bypassing the brokers.

Comments
MGM or Malik Ghulam Mustafa Corporation is a family owned typical Pakistani

business. Whether its the style of management or the capital structure everything

represents the typical characteristics of a Pakistani business. No strategic thinking is

employed and the decisions are taken in a typical “seth” culture. Inspite of the strong

financial position of the family company has a very high asset to debt ratio and strong

long-term debt in its capital structure. This can be a way to keep their own money out of

the risk and play safe. It’s again astonishing that company has not earned profits for many

years but is still in the business and management does not even seem to be bothered about

that. This gives the scent of some kind of window dressing of financial statements to keep

the tax authorities at bay.

As far as opportunities are concerned there is a lot of room for improvement. Given the

strong financial position and corporate relations of the family, company can perform a lot

better than its performance right now.

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