INTRODUCTION

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-

2004 Environment Certificate1.

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

a variety of other industries.

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

fulfilling its social responsibilities in all respects5.

4
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

to undertake the required R&D7.

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

7
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

from 120,627 in 2001 – 02 to 751,667 in 2005 – 06 8.

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

8
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

models to Afghanistan and Bangladesh9.

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

serious contender and its sales are dwindling.

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.

8
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

resultantly shall raise AHL’s sales.

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,

and outsourcing the production of other parts to vendors.

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

9
campaign was a bull’s-eye-hit wherein farmers commemorated their bonanza of agricultural harvest

through purchase of red-chrome-plated Honda.

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

undoubtedly hire HR at lesser wages, hence reducing overall cost.

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,

10
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.

CROSS FUNCTIONAL ANALYSIS

Presently, the company operates through nine functional areas namely marketing, plant, supply chain,

finance/business development, IT, quality assurance/R&D, commercial/planning, HR/Administration and

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

team and epitomized in ensuing paragraphs.

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
11
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

that creeps into the blood streams of our country’s populace.

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

12
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

appraisal. Shortage of HR in QA department due to increased demand has to be met through a

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

which need more labor hours and different vendors.

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

network has extended their reach and customer services.

13
Vendor and dealer development cannot be achieved without a cost and the AHL has been spending hefty

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

be brought to 10 %, the AHL would counter most of the competition.

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.

15
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

goods and its delivery to dealers.

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-

profitable expenses were curtailed.

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

was not able to pass on the whole impact to customers.

11
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

(finance cost has seen a reduction in FY10).

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.

18
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

12
Financial Statements
19
around 40% and equity (as percentage of asset) target of 60% as compare to current situation which is

55% debts and 45% equity.

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

decreased their trade payables, so current ratio is becoming healthier. 14

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

productivity and cost reduction, to show good results.

MINOR PROBLEMS/MAJOR PROBLEM

21
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

22
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.

23
 Cause Issue Network:

Failure to forecast demand

Space-Paucity at Karachi Plant Myopia

H.R Succession ill-Planning i.e

HR is either aged or young

Vendor/Distributer Estrangement Transferring the buck

Marketing failure in luring Lack of Dynamism

people towards other models

Vendors non development

at the pace of growth

Vendor’s slow adaption of Weak Mentoring STRATEGIC INTROVERSION

the Honda culture due to
cultural mismatch.

Inconsistencies within
Vendor-Developed-Parts
& associated high rejections

Inconsistency in Fickle Mindedness

determining No of Vendors

Inadequate R&D to develop Dearth of creativity

more models cost effectively.

Inability to lobby against tax evaders Ineffective

Persuasiveness

24
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.

25