With the reference of

And

Pak Suzuki Motor Co.

 2

By:
Zarah Ali MBA (Finance)

Acknowledgement

Corporate Finance is resulting to improve the circumstances that help the company to
grow further. I have gone through in detail the nature, causes and consequences of the
problem these companies facing and tell the future and predict steps to grow it.

In writing this exhaustive thesis my thanks are due to the ----Mr.Asim (my teacher) --
who guided and cooperated with me at every step and Syed Fabhaa Ali -- who provided
me with all necessary information regarding companies.

Zarah Abid Ali

New Ports Institute
 3

TABLE OF CONTENTS

S/No. PARTICULARS

Cha
INTRODUCTION TO CORPORATE
pter
FINANCE
1
1.1 Introduction
1.2 Background
1.3 Scope & Objective of Corporate Finance
1.4 Problems of Corporate Finance
1.5 Overview of Auto Industry
1.6 Comparative study

Cha
THEORETICAL LITERATURE REVIEW
pter
REGARDING AUTO INDUSTRY
2
2.1 Introduction of Auto industry in Pakistan
 4

History of Auto industry in Pakistan

(a) Production
(b) Fuel and propulsion technologies

(c) Petroleum fuels & Diesel

(d) Gasoline:
(e) Bio fuels:
I. Steam
II. Electric:
III. Air Car:
IV. Gas turbine
V. Rotary engines
VI. Rocket and jet cars
VII. Automotive vehicles in Pakistan
VIII. Production figures of automobiles
(f) Market share of:
2.2 1. Cars
2. Motorcycles
3. Light commercial vehicles (LCV’S)
4. Product characteristics
5. Joint ventures for automotive
vehicles
6. Technical collaboration in
automobile industry
7. Auto imports and export
8. Diagnosis of production elements
 5

Types \ Major Producers

2.3

2.4 Leading \ Classification Auto industries

Marketplace of Cars
2.5
Marketing (show rooms)

Campaigns

Chapte
FRAMEWORK OF ANALYSIS
r3
3.1 Hypothesis Analysis
3.2 Definition of Variables
3.2.1 Data Collection
3.2.2 Data Processing
3.2.3 Hypothesis Testing
3.2.4 Analysis of Data
3.3 Expected Problem of Analysis
Contribution of Corporate Finance
3.4
in Auto industry
 6

Chapte IMPLICATION AND CONCEPTUAL

r4 FRAMEWORK

Comparison of Corporate Finance

4.1
and its Measurement
4.1.1 Tools corporate finance
Development & Future of Auto
4.2
Industry

Chapte
CONCLUSION
r5
5.1 Conclusion of Research
5.2 References
 7

Introduction to Corporate Finance

Chapter 1
 8

Finance Overview
Finance is a functional area of business and economics that deals with raising, allocating,
and managing funds by firms, households and individuals. Important sub-areas of finance
include corporate finance, investment, international finance, and derivative securities.

What is Corporate Finance?

Corporate finance is concerned with optimally raising and allocating funds among
competing investment projects, formulating dividend policy, and managing working
capital for the purpose of maximizing the firm value. Investment is concerned with

 How to optimally allocate savings across different financial securities with

different risk/return characteristics to maximize the investor’s expected utility,
and

 How securities are priced in equilibrium. International finance, on the other

hand, is concerned with financial management in a global context where
economic agents are exposed to political and foreign exchange risk and well
as to a variety of market imperfections.

 Derivative securities, which are extensively used as a tool for financial

engineering, are contingent claims whose values are derived from the
underlying securities. Finance is, in part, concerned with how to design and
use these securities for speculation, hedging and arbitrage.

Every decision made in a business has financial implications,

and any decision that involves the use of money is a corporate

financial decision.

Defined broadly, everything that business does fit under the rubric of corporate finance. It

is, in fact, unfortunate that we even call the subject corporate finance; because it suggests
 9

to many observers a focus on how large corporations make financial decisions and seem

to exclude small and private businesses from its purview. A more appropriate title for this

discipline would be Business Finance, because the basic principles remain the same,

whether one looks at large, publicly traded firms or small, privately run businesses.

All businesses have to invest their resources wisely, find the right kind and mix of

financing to fund these investments, and return cash to the owners if there are not enough

good investments.

Back ground of Corporate Finance:

In the 19th century, state corporation enhanced the rights of corporate boards to govern
without unanimous consent of shareholders in exchange for statutory benefits like
appraisal rights, to make corporate governance more efficient. Since that time, and
because most large publicly traded corporations in the US are incorporated under
corporate administration friendly law, and because the wealth has been increasingly
securitized into various corporate entities and institutions, the rights of individual owners
and shareholders have become increasingly derivative and dissipated. The concerns of
shareholders over administration pay and stock losses periodically has led to more
frequent calls for corporate governance reforms.

Since the late 1970’s, corporate governance has been the subject of significant debate in
the U.S. and around the globe. Bold, broad efforts to reform corporate governance have
been driven, in part, by the needs and desires of shareowners to exercise their rights of
corporate ownership and to increase the value of their shares and, therefore, wealth. Over
the past three decades, corporate directors’ duties have expanded greatly beyond their
traditional legal responsibility of duty of loyalty to the corporation and its shareowners.

In the first half of the 1990s, the issue of corporate governance received considerable
press attention. The California Public Employees' Retirement System (CalPERS) led a
wave of institutional shareholder activism (something only very rarely seen before), as a
way of ensuring that corporate value would not be destroyed by the now traditionally
cozy relationships between the CEO and the board of directors (e.g., by the unrestrained
issuance of stock options, not infrequently.
 10

In the early 2000s, the massive bankruptcies (and criminal malfeasance), as well as lesser
corporate debacles,led to increased shareholder and governmental interest in corporate
governance. .

Scope of Corporate Finance:

Corporate finance is an area of finance dealing with the financial decisions corporations

make and the tools and analysis used to make these decisions.

The primary goal of corporate finance is to maximize corporate value while managing

the firm's financial risks.

Although it is in principle different from managerial finance which studies the financial
decisions of all firms, rather than corporations alone, the main concepts in the study of
corporate finance are applicable to the financial problems of all kinds of firms.
In traditional corporate finance, the objective in decision making is to maximize the value
of the firm’s A narrower objective is to maximize stockholder wealth. When the
stock is traded and markets are viewed to be efficient, the objective is to maximize the
stock price’s All other goals of the firm are intermediate ones leading to firm value
maximization, or operate as constraints on firm value maximize

Objective Function:
 It is clear and unambiguous

 It comes with a clear and timely measure that can be used to evaluate
the success or failure of decisions.

 It does not create costs for other entities or groups that erase firm specific
benefits and leave society worse off overall.
(As an example, assume that a tobacco company defines its objective to be revenue
growth.

 Traditional corporate financial theory often focuses on maximizing stock

prices as
opposed to firm value.

 Maximize stock prices as the only objective Function n For stock price
maximization to be the only objective in decision
 11

The Classical Objective Function

STOCKHOLDERS:
Maximize stockholder wealth

Hire & fire managers:

- Board
- Annual Meeting

BONDHOLDERS:
• Lend Money
• Protect
• Bond holder
• Interests

FINANCIAL MARKETS:
Managers: Accounting or financial managers are the people responsible for overseeing
and maintaining the financial strategy and history of a company. The accounting manager
is focused more on financial reporting, while the financial manager is focused on strategy
and money management.

o Reveal information honestly and on time

o Markets are efficient and assess effect on value
o No Social Costs can be traced to firm

The Objective of the Firm

No discipline can develop cohesively over time without a unifying objective. The growth

of corporate financial theory can be traced to its choice of a single objective and the

development of models built around this objective. The objective in conventional

corporate financial theory when making decisions is to maximize the value of the

business or firm. Consequently, any decision (investment, financial, or dividend) that

increases the value of a business is considered a good one, whereas one that reduces firm

value is considered a poor one. Although the choice of a singular objective has provided
 12

corporate finance with a unifying theme and internal consistency, it comes at a cost. To

the degree that one buys into this objective, much of what corporate financial theory

suggests makes sense. To the degree that this objective is flawed, however, it can be

argued that the theory built on it is flawed as well.

Many of the disagreements between corporate financial theorists and others (academic as

well as practitioners) can be traced to fundamentally different views about the correct

objective for a business.

For instance, there are some critics of corporate finance who argue that firms should have

multiple objectives where a variety of interests (stockholders, labor, customers) are met,

and there are others who would have firms focus on what they view as simpler and more

direct objectives, such as market shares or profitability.

Given the significance of this objective for both the development and the applicability of

corporate financial theory, it is important that we examine it much more carefully and

address some of the very real concerns and criticisms it has garnered: It assumes that

what stockholders do in their own self-interest is also in the best interests of the firm, it is

sometimes dependent on the existence of efficient markets, and it is often blind to the

social costs associated with value maximization.

Problems of Corporate Finance:

 13

• Financial constraints
• High Interest Rate
• Production Cost High
• Non- Availability of Working Capital
• Government increasing Taxes
• Bad Infrastructure
• Political instability in the country
• Less foreign investment

Over-view of Auto Industry

Slump, slowdown, downturn, and recession: these are some of the most commonly used
words when talking about economic conditions in the world.

What else could it have been—with the United States, the planet’s economic powerhouse,
diverting huge funds to its war chest? Closures, bankruptcies, and massive job cuts are
the order of the day in the US and elsewhere.

On the whole, the situation in Pakistan is not much different. Rather, Afghanistan’s
eastern neighbor has been hit harder than many other countries. However the up-coming
automobile industry has defied the dreary scheme of things. It came out of about a decade
of stagnation last year posting a growth of over 20 per cent— which is the highest growth
achieved in any manufacturing sector of the country. This year, domestic demand for new
cars has skyrocketed by 50 per cent.

As would be expected, given the limited market size, production volumes have been low.
But there are clear indications that the industry has finally come of age, producing cars of
eight international brands in scores of models, — all fully approved by the original
manufacturers for quality and endurance.

Beside passenger cars, the Pakistani plants are turning out tractors, pick-ups, minibuses,
buses and motorcycles, although deletion levels attained for each category of vehicle
differ. While it is around 90 per cent for motorcycles and more than 87 per cent for
tractors, motorcars lag much behind. The proportion of domestically manufactured is 65
per cent for 800 cc; 55 per cent for 1000 cc cars and just over 50 per cent for 1300 cc
cars.

The deletion programmed, however, has led to the development of a vibrant, hi-tech
vendor base in the country. This recent upsurge has further led vending industries to grow
 14

—as fast as 30 per cent annually.

Another healthy trend witnessed in recent years has been diversification origins. As
recently as five years ago, Pakistani automakers were manufacturing only Japanese
brands. Not anymore; Korean and European brands have arrived in style. Besides, a
domestic entrepreneur has also unveiled plans to produce a Chinese pick-up by the
middle of this year.

All these factors together have boosted confidence of the consumers in the domestically-
manufactured cars. Moreover, how the Pakistani auto industry has managed to outdo its
Indian counterpart in efficiency makes for a separate study. Notwithstanding the low
production volumes and higher cost base, most Pakistani automakers have been able to
offer prices roughly equal in dollar terms to those offered by Indian manufacturers for
comparable models.

The annual production volume of 800 ccs Suzuki Mehran cars in Pakistan averages
around 10,000 units. In contrast, the Indian industry turns out 300,000 units annually of
Maruti. In dollar terms, both retail at roughly the same price.

Suzuki and Maruti are both “basic” motorcars. But manufacturing activity in Pakistan is
not confined to this category of vehicles—or to “stripped off” models of the cars
available in the international market—anymore. The domestic assembly lines are now
delivering fully featured, brawny cars in a variety of chic designs. Honda, who
accentuated styling, comfort, and safety features in its marketing campaigns, which in
time led other manufacturer’s to pay more attention to these areas, brought the trend to
these shores.

This competition has worked to the advantage of the consumers. The flow of newer
engine technologies, braking and transmission systems, safety features, design elements,
etc has been fast-tracked to a point where Pakistani automobiles are fast catching up with
First World markets. One leading manufacturer actually ensures its Pakistani models are
the same as those on sale in Europe and North America, though another synchronizes
with the less exacting South East Asian standards.

Perhaps the most important impact the domestic automobile industry has made on the
domestic vendor base is making it export-oriented. Before domestically manufactured
parts are used by domestic automakers, they are tested and approved by the original
manufacturers at their R&D facilities abroad, something of a certification of their quality.
This, together with competitive pricing, has fostered exports. Already in 2000-2001, auto
parts exports had more than doubled to $25 million from $12 million in 1999-00. This
year, $35 million worth in forex are expected to flow in under this head.

And it can be argued that the efficiency achieved by the car manufacturers in Pakistan
with very low production efficient domestic vendor base. This in turn has helped vendors
to compete internationally in the sales of auto parts for the after-sales market.
 15

Pakistan ventured into auto-parts exports about four years ago. Domestic vendors have
established limited production units due to low production volumes. Even this low
production capacity is double that of domestic consumption. This was why vendors were
bound to turn to export markets. Many Pakistani vendors are now supplying parts to
foreign car-makers.

The slow growth in domestic car production has been attributed, among other things, to a
flawed regulatory framework and short-sighted policies. Pakistan is perhaps one of the
very few countries in the world where the smuggling not only of car parts but also of
finished cars continued for a long time.

Besides, the authorities have from time to time also allowed imports of used and
reconditioned cars. This directly impinged upon the demand for the domestic car, because
reconditioned models were available at lower prices. Last but not the least, the import of
used auto parts was freely allowed through special arrangements until 1998.

Post-September 11, international border vigilance has been stepped up world-wide,

providing for improved checks on smuggling. Besides, black money is not as free to flow
about as it used to be, as hundi and hawala networks are being closely watched by the
developed world and the Gulf States.

This aspect of the situation offers prospects of rapid growth for Pakistan’s auto industry,
possibly leading to export of finished autos.

One hopes the domestic car-makers are awake to this opportunity.

Comparative study:
Comparative literature, the combined study of similar literary works written in different
languages, which stresses the points of connection between literary products of two or
more cultures, as distinct from the sometimes narrow and exclusive perspective of Eng.
Lit. or similar approaches based on one national canon. Advocates of comparative
literature maintain that there is, despite the obvious disadvantages, much to be gained
from studying literary works in translation.

Comparative literature (sometimes abbreviated "Comp. lit.") is critical scholarship

dealing with the literature of two or more different linguistic, cultural or national groups.
While most frequently practiced with works of different languages, it may also be
performed on works of the same language if the works originate from different nations or
cultures among which that language is spoken. Also included in the range of inquiry are
comparisons of different types of art; for example, a corporatist might investigate the
relationship of film to literature.
 16

Overview

Students and instructors in the field, usually called "comparatists," have traditionally been
proficient in several languages and acquainted with the literary traditions and major
literary texts of those languages. Some of the newer sub-fields, however, stress
theoretical acumen and the ability to consider different types of art concurrently, over
high linguistic competence.

The interdisciplinary nature of the field means that corporatists typically exhibit some
acquaintance with translation studies, sociology, critical theory, cultural studies, religious
studies, and history. As a result, comparative literature programs within universities may
be designed by scholars drawn from several such departments. This eclecticism has led
critics (from within and without) to charge that Comparative Literature is insufficiently
well-defined, or that corporatists too easily fall into dilettantism, because the scope of
their work is, of necessity, broad.

Some question whether this breadth affects the ability of Ph.D.s to find employment in
the highly specialized environment of academia and the career market at large, although
such concerns do not seem to be borne out by placement data that shows comparative
literature graduates to be hired at similar or higher rates than their compeers in English.

Since World War II, there have been four major international conferences in Comparative
Literature: in 1965, 1975, 1993, and 2004. The published notes from each conference
reveal the contested nature of the field, and deal largely with disputes over theoretic rigor,
linguistic incompatibility and the fundamental goals of the field.

French School

In the early part of the 20th century until WWII, the field was characterised by a notably
empiricist and positivist approach, termed the "French School", in which scholars
examined works forensically, looking for evidence of "origins" and "influences" between
works from different nations. Thus a scholar might attempt to trace how a particular
literary idea or motif traveled between nations over time.

American School

Reacting to the French School, postwar scholars, collectively termed the "American
School", sought to return the field to matters more directly concerned with literary
criticism, de-emphasising the detective work and detailed historical research that the
French School had demanded. The American School was more closely aligned with the
original internationalist visions of Goethe and Posnett (arguably reflecting the postwar
desire for international co-operation), looking for examples of universal human "truths"
based on the literary archetypes that appeared throughout literatures from all times and
places.
 17

Prior to the advent of the American School, the scope of comparative literature in the
West was typically limited to the literature of Western Europe and North America,
predominantly literature in English, German and French literature, with occasional forays
into Italian literature (primarily for Dante) and Spanish literature (primarily for
Cervantes). One monument to the approach of this period is Erich Auerbach's book
Mimesis, a survey of techniques of realism in texts whose origins span several continents
and three thousand years.

The approach of the American School would be familiar to current practitioners of

Cultural Studies and is even claimed by some to be the forerunner of the Cultural Studies
boom in universities during the 1970s and 1980s. The field today is highly diverse: for
example, comparatists routinely study Chinese literature, Arabic literature and the
literatures of most other major world languages and regions as well as English and
continental European literatures.

Current developments

Indeed, there is a movement amongst some corporatists to re-focus the field entirely away
from the nation-based approach with which it has previously been associated.

The scholars advocate a cross-cultural approach that pays no heed to national borders. It
remains to be seen whether this approach will be successful, given that the field had its
roots in nation-based thinking and that much of the literature under study was (and is)
inspired by issues relating directly to the nation-state.
 18

Theoretical Literature Review Regarding

Auto Industry
Chapter 2

Introduction of Auto Industry in Pakistan

 19

Pakistan at the time of partition in 1947 had negligible industrial base. Since the division
of the subcontinent the government of Pakistan has been utilizing all available resources
domestic as well as external for rapid development of the manufacturing sector. Pakistan
has now attained a fairly diversified base in manufacturing ranging from essential
consumer goods. Domestic production has helped in import substitution and has saved
substantial amount of foreign exchange.

The auto market is one of the largest segments in world trade. The annual size of
automotive export trade in the world has grown to a massive level of over US$ 600
billion, which accounts for about 10 per cent of the world export. Changing models,
improving fuel efficiency, cutting costs and enhancing user comfort without
compromising quality are the most important challenges of the auto industry in a fast
globalizing world. Hence there is a need for exploring the industrial complementarities in
the region for better quality, favorable costs, fuel efficiency and attractive designs.
Therefore, the requirement of information exchange in the region is much more
pronounced now than ever before for keeping the auto industry afloat and competitive.

The objective should not be only to understand each other’s comparative advantage but
also to explore mutual complementarities as well as to build an early warning system on
the trends in industry and changes in user preference to brace for the challenges
confronting the auto industry. Mutual consultation among the countries of the region
therefore assumes the proportion of an abiding imperative for regional capacity-building
and preparing the countries to meet the requirements of the new economy through
research, advisory services, information dissemination and exchange of country
experiences, besides joint ventures and technology tie-ups.

At present there are 18 automobile manufacturing units which are involved in the
assuming and manufacturing business in Pakistan. The composition of auto demand is
dominated by motorcycles 60% with cars at 22%.

Country profile:
Geography
The land mass constituting Pakistan has always been in the limelight of history because
of its distinguished geography. Linked to the mighty Indian Ocean through the Arabian
Sea and situated in close proximity to the Persian Gulf, the country provides a strategic
link to the Middle East in the west, Central Asia in the north, China in the east and India
in the south-east. With the ninth largest population in the world, the country has a
sizeable market of 140 million people. Its hard core workforce consists of over 40 million
people, both men and women. The literacy rate is 52 per cent with 68 universities and
1,164 colleges.
 20

Climate
The country comprises a land mass of 796,095 sq km, with one of the world’s highest
mountains, such as K-2, in the north, to vast deserts in the south, with arable plains in the
middle irrigated by five famous river systems of the great Indus Valley. Four seasons,
namely winter, summer, spring and autumn, are among the greatest natural endowments
of the country. The climate of the country therefore offers an interesting diversity of
temperatures ranging from subzero levels on the mountains in the winter to scorching
heat in the plains in the summer.

Infrastructure

The country’s infrastructure is fairly well developed, comprising an elaborate cross

country railways network, extensive road linkages reinforced by motorways and
highways seaports, airports and dry ports. A fully developed export processing zone has
been operating in Karachi since the early 1980s. Three new export processing zones are
being established in Sialkot, Risalpur and Saindak. There are 72 industrial estates and
three special industrial zones in the country.

Infrastructure availability

Railways 7 791 km
Roads 249 959 km
Motorways M-I, Islamabad – Peshawar Motorway
M-2 Islamabad – Lahore Motorway 365 km
long
Seaports Karachi Port and Port Qasi
International Airports Karachi, Lahore, Islamabad, Peshawar, Quetta
and Faisalabad.
Dry ports Lahore, Sialkot, Rawalpindi, Multan, Peshawar,
Quetta, Hyderabad Faisalabad and Larkana.
 21

Pakistan’s communication system is also reliable. This has now fully graduated into the
e-mail, Internet and IT culture parse. The country is fast exploring the brave new world
of information technology and keenly assimilating the requirements of e-government and
ecommerce.

Information technology has opened a new business frontier for Pakistan. The
Government is assigning high priority to information technology both in terms of policy
limelight and resource allocation.

Development performance

Since its independence in 1947, Pakistan has been able to transform itself to a large
extent, from a completely agrarian economy to a fairly developed techno-industrial base.
Besides textiles, Pakistan’s exports are largely manufactured items such as consumer
durables and engineering products. However, it is also a fact that Pakistan has not been
able to realize its potential due to internal and external compulsions and thus it lags
behind many developing countries of the world.

The following economic indicators constitute the tell-tale of Pakistan’s development

performance:

Pakistan’s economy at a glance

Description 1998-1999 1999-2000 2000-2001

GDP (Billion US$) 58 64 66
GDP growth 4.2% 3. 9% 2.6%
National savings (% GDP) 11.4% 13.7% 12.7%
National investment (% GDP) 15.6% 15.6% 14.7%
Inflation 5.7% 3.6% 4.4%
Exports (million US$) 7 779 8 569 9 202
Imports (million US$) 9 432 10 309 1 729
Trade balance - 1 653 -1 740 -1 527
(Million )
Foreign direct investment 376 470 322
(Million )
Per capita income 438 446 429

History of Auto Industry

Industries are the backbone of national economy. Industrialization and mechanization go
hand in hand .In fact the two are indispensable foe civilization. The industrialization
nations of the world are also strong economically and politically. They also enjoy high
standard of living.
 22

Both the progress and prosperity of a country depend on industrial

development.

Although Nicolas-Joseph Cugnot is often credited with building the first self-propelled
mechanical vehicle or automobile in about 1769 by adapting an existing horse-drawn
vehicle, this claim is disputed by some, who doubt Cugnot's three-wheeler ever ran or
was stable.

Ferdinand Verbiest, a member of a Jesuit mission in China, built the first steam-powered
vehicle around 1672 which was of small scale and designed as a toy for the Chinese
Emperor that was unable to carry a driver or a passenger, but quite possibly, was the first
working steam-powered vehicle ('auto-mobile'). Russia, in the 1780s, Ivan Kulibin
developed a human-pedalled, three-wheeled carriage with modern features such as a
flywheel, brake, gear box, and bearings; however, it was not developed further

François Isaac de Rivaz, a Swiss inventor, designed the first internal combustion engine,
in 1806, which was fueled by a mixture of hydrogen and oxygen and used it to develop
the world's first vehicle, albeit rudimentary, to be powered by such an engine. On June
28, 1926, Benz & Cie. and DMG finally merged as the Daimler-Benz company, baptizing
all of its automobiles Mercedes Benz as a brand honoring the most important model of
the DMG automobiles, the Maybach design later referred to as the 1902 Mercedes-35hp,
along with the Benz name. Karl Benz remained a member of the board of directors of
Daimler-Benz until his death in 1929 and at times, his two sons participated in the
management of the company as well.

In 1890, Emile Levassor and Armand Peugeot of France began producing vehicles with
Daimler engines and so laid the foundation of the automobile industry in France.

The first design for an American automobile with a gasoline internal combustion engine
was drawn in 1877 by George Selden of Rochester, New York, who applied for a patent
for an automobile in 1879, but the patent application expired because the vehicle was
never built.

Production:

The large-scale, production-line manufacturing of affordable automobiles was debuted by

Ransom Olds at his Oldsmobile factory in 1902. This concept was greatly expanded by
Henry Ford, beginning in 1914. As a result, Ford's cars came off the line in fifteen minute
intervals, much faster than previous methods, increasing productivity eight fold
(requiring 12.5 man-hours before, 1 hour 33 minutes after), while using less manpower. It
was so successful, paint became a bottleneck. Only Japan black would dry fast enough,
forcing the company to drop the variety of colors available before 1914, until fast-drying
Duco lacquer was developed in 1926. In the automotive industry, its success was
dominating, and quickly spread worldwide seeing the founding of Ford France and Ford
Britain in 1911, Ford Denmark 1923, Ford Germany 1925; in 1921, Citroen was the first
 23

native European manufacturer to adopt the production method. Soon, companies had to
have assembly lines, or risk going broke; by 1930, 250 companies which did not, had
disappeared. Development of automotive technology was rapid, due in part to the
hundreds of small manufacturers competing to gain the world's attention. Key
developments included electric ignition and the electric self-starter (both by Charles
Kettering, for the Cadillac Motor Company in 1910-1911), independent suspension, and
four-wheel brakes.

Ford Model T, 1927, regarded as the first affordable American automobile Since the
1920s, nearly all cars have been mass-produced to meet market needs, so marketing plans
often have heavily influenced automobile design. It was Alfred P. Sloan who established
the idea of different makes of cars produced by one company, so buyers could "move up"
as their fortunes improved.

Reflecting the rapid pace of change, makes shared parts with one another so larger
production volume resulted in lower costs for each price range. For example, in the
1930s, LaSalles, sold by Cadillac, used cheaper mechanical parts made by Oldsmobile; in
the 1950s, Chevrolet shared hood, doors, roof, and windows with Pontiac; by the 1990s,
corporate drivetrains and shared platforms (with interchangeable brakes, suspension, and
other parts) were common. Even so, only major makers could afford high costs, and even
companies with decades of production,

Fuel and propulsion technologies:

Most automobiles in use today are propelled by gasoline (also known as petrol) or diesel
internal combustion engines, which are known to cause air pollution and are also blamed
for contributing to climate change and global warming . Increasing costs of oil-based
fuels, tightening environmental laws and restrictions on greenhouse gas emissions are
propelling work on alternative power systems for automobiles.

Efforts to improve or replace existing technologies include the development of hybrid

vehicles, and electric and hydrogen vehicles which do not release pollution into the air.
 24

Petroleum fuels & Diesel:

Diesel-engine cars have long been popular in Europe with the first models being
introduced as early as 1922 by Peugeot and the first production car, Mercedes-
Benz 260 D in 1936 by Mercedes-Benz. The main benefit of diesel engines is a
50% fuel burn efficiency compared with 27% in the best gasoline engines. A
down-side of the Diesel engine is that better filters are required to reduce the
presence in the exhaust gases of fine soot particulates called diesel particulate
matter. Manufacturers are now starting to fit.Diesel particulate filters to remove
the soot. Many diesel-powered cars can run with little or no modifications on
100% bio diesel and combinations of other organic oils.

Gasoline:

Gasoline engines have the advantage over diesel in being lighter and able to work at
higher rotational speeds and they are the usual choice for fitting in high-performance
sports cars. Continuous development of gasoline engines for over a hundred years has
produced improvements in efficiency and reduced pollution. The carburetor was used on
nearly all road car engines until the 1980s but it was long realised better control of the
fuel/air mixture could be achieved with fuel injection. Indirect fuel injection was first
used in aircraft engines from 1909, in racing car engines from the 1930s, and road cars
from the late 1950s. Gasoline Direct Injection (GDI) is now starting to appear in
production vehicles such as the 2007 (Mark II) BMW Mini. Exhaust gases are also
cleaned up by fitting a catalytic converter into the exhaust system. Clean air legislation in
many of the car industries most important markets has made both catalysts and fuel
injection virtually universal fittings. Most modern gasoline engines also are capable of
running with up to 15% ethanol mixed into the gasoline - older vehicles may have seals
and hoses that can be harmed by ethanol. With a small amount of redesign, gasoline-
powered vehicles can run on ethanol concentrations as high as 85%. 100% ethanol is
used in some parts of the world (such as Brazil), but vehicles must be started on pure
gasoline and switched over to ethanol once the engine is running. Most gasoline engined
cars can also run on LPG with the addition of an LPG tank for fuel storage and
carburettor modifications to add an LPG mixer. LPG produces fewer toxic emissions and
is a popular fuel for fork-lift trucks that have to operate inside buildings.

Bio fuels:

Alcohol fuels (bio butanol) and bio gasoline have widespread use an automotive fuel.
Most alcohols have less energy per liter than gasoline and are usually blended with
gasoline. Alcohols are used for a variety of reasons - to increase octane, to improve
emissions, and as an alternative to petroleum based fuel, since they can be made from
agricultural crops. Brazil's ethanol program provides about 20% of the nation's
automotive fuel needs, as a result of the mandatory use of E25 blend of gasoline
throughout the country, 3 million cars that operate on pure ethanol, and 6 million dual or
 25

flexible-fuel vehicles sold since 2003. That runs on any mix of ethanol and gasoline. The
commercial success of "flex" vehicles, as they are popularly known, have allowed
sugarcane based ethanol fuel to achieve a 50% market share of the gasoline market by
April 2008.

Electric:

First electric cars were built around 1832, well before internal combustion powered cars
appeared. For a period of time electrics were considered superior due to the silent nature
of electric motors compared to the very loud noise of the gasoline engine. This advantage
was removed with Hiram Percy Maxim's invention of the muffler in 1897.

Thereafter internal combustion powered cars had two critical advantages: 1) long range
and 2) high specific energy (far lower weight of petrol fuel versus weight of batteries).
The building of battery electric vehicles that could rival internal combustion models had
to wait for the introduction of modern semiconductor controls and improved batteries.
Because they can deliver a high torque at low revolutions electric cars do not require such
a complex drive train and transmission as internal combustion powered cars. Some post-
2000 electric car designs such as the Venturi Fétish are able to accelerate from 0-60 mph
(96 km/h) in 4.0 seconds with a top speed around 130 mph (210 km/h). Others have a
range of 250 miles (400 km) on the United States Environmental Protection Agency
(EPA) highway cycle requiring 3-1/2 hours to completely charge Equivalent fuel
efficiency to internal combustion is not well defined but some press reports give it at
around 135 miles per US gallon

Steam

Steam power, usually using an oil- or gas-heated boiler, was also in use until the 1930s
but had the major disadvantage of being unable to power the car until boiler pressure was
available (although the newer models could achieve this in well under a minute). It has
the advantage of being able to produce very low emissions as the combustion process can
be carefully controlled. Its disadvantages include poor heat efficiency and extensive
requirements for electric auxiliaries.

Air Car:

A compressed air car is an alternative fuel car that uses a motor powered by compressed
air. The car can be powered solely by air, or by air combined (as in a hybrid electric
vehicle) with gasoline/diesel/ethanol or electric plant and regenerative braking. Instead of
mixing fuel with air and burning it to drive pistons with hot expanding gases; compressed
 26

air cars use the expansion of compressed air to drive their pistons. Several prototypes are
available already and scheduled for worldwide sale by the end of 2008, though this has
not happened as of January 2009.

Companies releasing this type of car include Tata Motors and Motor Development
International (MDI).

Gas turbine

In the 1950s there was a brief interest in using gas turbine engines and several makers
including Rover and Chrysler produced prototypes. In spite of the power units being very
compact, high fuel consumption, severe delay in throttle response, and lack of engine
braking meant no cars reached production.

Rotary engines

Rotary engines were introduced into road cars by NSU with the Ro 80 and later were
seen in the Citroën GS Birotor and several Mazda models. In spite of their impressive
smoothness, poor reliability and fuel economy led to them largely disappearing. Mazda,
beginning with the R100 then RX-2, has continued research on these engines,
overcoming most of the earlier problems with the RX-7 and RX-8.

Rocket and jet cars

A rocket car holds the record in drag racing. However, the fastest of those cars are used
to set the Land Speed Record, and are propelled by propulsive jets emitted from rocket,
turbojet, or more recently and most successfully turbofan engines. The Thrust SSC car
using two Rolls-Royce Spey turbofans with reheat was able to exceed the speed of sound
at ground level in 1997.

Automotive vehicles in Pakistan:

At present there are 18 automobile manufacturing units which are involved in the
assuming and manufacturing business. The composition of auto demand is dominated by
motorcycles 60% with cars at 22%.

The existing population of automotive vehicles in Pakistan is 3.9 million. The annual
demand is estimated at 300,000, two thirds of which is being met from local sources and
imports and the remaining one third is left unmet. The market value of automotive
vehicles in dollar terms is estimated at more than 1 billion, out of which import
 27

constitutes around US$ 200 million. The after market of auto parts is estimated at US$
500 million, imports and local production taken together.

Production figures of automobiles are given in the following tables:

Installed Production Production Production

Description capacity 1998-1999 1999-2000 2000-2001
(per annum)
Motorcycles 340 000 87 504 97 624 108 500
Cars 106 000 47 383 31 514 39 573
LCVs 28 000 8 701 7 394 7 424
Trucks 12 500 1 131 1 313 912
Buses 1900 1220 1159 1326

The demand in the auto sector in Pakistan is skewed towards small cars. Due to this trend
Pak Suzuki Motors enjoys a monopoly in the small-car market.

Market share of cars

Cars:

Suzuki Toyota Honda Kia – Hyundai Nissan

(Pak Suzuki Co.) (Indus Motors) (Honda Atlas) (Dewan Farooq Motors) Ghandhara

40.2% 29.8% 14.7% 14.5% 0.8%

In the motorcycle market Atlas Honda has a major share of approximately 66 per cent.
The company has an installed capacity of 100,000 motorcycles per annum. Yamaha
Motorcycle falls behind with the second largest share of 19 per cent.

Market share of motorcycles

Motorcycles:

Honda (Atlas Honda) 65.7%

Rustam & Sohrab (Chinese brands) 2.9%

Chinese brand (Saigol Qingqi) 3.7%
Yamaha (Dawood Yahama) 19.3%
 28

Suzuki (Suzuki Motorcycle) 6.2%

Hero (Fateh Motors) 2.2%
(Chinese brands)

The market share of LCVs of Pak Suzuki Company (Bolan & Ravi) is about 43 per cent,
Followed by Dewan Farooq Motors (Shazore) with a share of 38 per cent.

Market share of LCVs

LCVs:

Suzuki Pick-up/Van Kia Pick-up Toyota Hilux

(Pak Suzuki) (Dewan Farooq Motors) (Indus Motors Co.)
50% 37.5% 12.5%

Product characteristics
The major automobile companies in Pakistan have been set up as joint ventures with
foreign multinational companies.

Joint ventures for automotive vehicles

Company Joint venture Product

Indus Motor Company Toyota, Japan & Daihatsu, Japan Toyota & Daihatsu Cuore cars
Atlas Honda Ltd. Honda, Japan Honda cars, Honda motorcycles
Pak Suzuki. Suzuki, Japan Suzuki cars
Suzuki Motorcycle Pak. Suzuki, Japan Suzuki motorcycles
Ltd.
Ghandara Nissan Nissan, Japan Cars and truck
Dewan Farooq Motors Kia and Hyundai, Republic of Cars and LCVs
Ltd. Korea
Raja Motor Co. Fiat, Italy Cars

Technical collaboration in automobile industry

The technical collaboration for auto-part manufacturing with foreign vendors is as under:
 29

Number of
Category Manufacturers/assemblers Technical collaborations
status

Japan 2
LCVs 3 Republic of Korea 1

Jeeps 1 Japan 1

Trucks and buses 4 Japan 3

Sweden 1

United Kingdom 1
Tractors 3 Italy 1
Romania 1

Japan 3
2-/3-wheelers 8 Italy 1
China 3
Pakistan (local brand) 2

Auto imports and exports:

Export of automotive vehicles has been sporadic. Export of some tractors and a few
 30

Thousand motorcycles now and then does not qualify the country as an exporter of
automotive vehicles. But export of auto parts is registering a continuous growth over the
years.

The local manufacture of original equipment manufacture (OEM) parts has encouraged
Pakistani vendors to enter the export market. The export destinations being Europe, the
United States and Japan has enhanced the credibility of Pakistan’s auto parts manufacturers.

Diagnosis of production elements

Pakistan’s strength of production elements lies in its vast reservoir of land, labor and
even capital. But technology and purchasing power of the consumers are its major
weaknesses. Technology requirements are being met by joint ventures and technology tie-ups
with foreign players in automotive sector. Japanese, Korean and European entrepreneurs
have invested almost US$ 1.5 billion in Pakistan’s automotive sector. The local investment in
the automotive sector is approximately US$ 1 billion.

Major Producers
SUZUKI MOTORS:

Suzuki is the leading name in small commercial vehicles and passenger cars. Suzuki
commenced its operation by assembling small 800 cc cars. Suzuki has so far a sole leader
in 800cc and 1000cc passenger cars as well as 1000cc jeep Potohar. But the emergence of
so many competitors in the market will definitely trigger a very hard time to Pak Suzuki.
Suzuki has launched Mehran 800cc, Cultus 1000cc, Baleno 1.3 & 1.6 Eli and Gxi, Bolan
van & Ravi pickup 800cc and Potohar jeep. The total production capacity of Suzuki
Motors is about 50000 units and the total actual production in 1999 is 32,805. The sales
volume of Suzuki is highest among the competitors with 31,296 cars as per June 30,
2000. According to Pakistan Association of Automotive Parts and Accessories
Manufacturers (PAAPAM), Suzuki has achieved the 60 per cent deletion status in 800cc
Mehran car. Localization in other products like 1000cc Khyber 42 per cent, 1300cc
Margalla/Baleno 32 per cent, 800cc pickup 50 per cent 10 passenger pickup 47 per cent
and 1000cc Potohar jeep 40 percent.
 31

Honda:

Honda started its operation in Pakistan in 1994. Honda is enjoying its

key position in the segment of 1300 cc and above. Honda has launched
many models like Civic 1.5 cc, City 1.3 cc to 1.5 cc etc. VTI brand
continued to be popular among customers. The company has been
consistently following the Industry Specific Deletion programmed setup
by the Government. It has already achieved the proposed localization
target of 42 per cent until June, 1999 which saved about Rs. 120
million in financial year. To achieve the deletion target company is
continuously assisting the local vendors in cost, quality and inventory
management. The actual plant capacity at Honda Motors is about 5000
units in 1999 and the actual production during the same year is 4070
units. There are 348 employees working in Honda.

Toyota:

The company was incorporated in Pakistan as a public limited

company in December 1989 and started commercial production in May
1993. So far, it has launched models like Corolla XE 1.3cc, GL 1.3cc,
Hilux 4X2 S/C and 4x4 S/C. The total installed capacity of Toyota
Motors is 20000 units and actual production in 1999 was 1069 units.
Corolla has also fast pace towards localization of 30 per cent on all its
models which range 1300 to 2000 cc. The company is trying to get
high deletion level in all its product line.

Dewan Farooque Motors:

It is the major competitor which has commenced its operation with a

wide range of products in domestic automobile market. Dewan Motors
is basically collaboration with Hyundai and Kia, two Korean auto
manufacturers. The initial response to Dewan's offering in the market
with record company booking of its Santro Plus. It has launched its Kia
classic 1300 cc car with sophisticated features. In future wide range of
models like Kia Shuma 1500-1800cc car, Kia Sportage 2000 cc sports
utility are expected to launch in the market. Dewan has also launched
its 1.5 tons Shehzore, the assembly of Hyundai light commercial
vehicle has already started at the Sindh Engineering Plant in Karachi
under contractual agreement.

Dewan's presence in the market will give the major move to the auto
industry in Pakistan. The intense competition will give the benefit to
the potential buyer in the market.
 32

Daihatsu:

Daihatsu, another new player in the market with its Cuore 850 cc,
increased the competition in the market. Daihatsu and Indus Motor
signed an agreement to launch the Coure in market. The project worth
Rs 750 million was developed at Port Qasim between Daihatsu and
Indus Motor to produce Coure. Daihatsu also heated up the
competition in small car segments.

Suzuki for the first time faces competition in small car business. It is for
the first time that Daihatsu will produce its car in Toyota Plant in
Karachi. The assembly plant of Daihatsu has the capacity to produce
10,000 Cuore cars in the year. But the expected level of output in
future will be some about 5000 cars in the starting year of its
operation.

VENDING INDUSTRY:

With the process of localization, vending industry is also contributing

its share in the revenue and creating employment. Although the
vending industry in Pakistan is also in transition and need to be further
modify to meet the challenges of competition but the importance of
automobile component industry can not be denied. Indus Motor has 61
vendors with 13 technical collaborations, Pak Suzuki has 180 vendors
with 15 technical collaborations, and Honda Atlas cars have 59 vendors
with 17 technical collaborations. The auto part industry comprises
number of different size vendors industries which are providing jobs to
some about more than 13500. The total contribution of this industry to
the GDP is about Rs 23 billion. The total Federal levies of Rs 5 billion
are received by the Government from this industry.

The Association of Pakistan Automotive Parts and Accessories

Manufacturers (PAAPAM) were established in 1988. The main purpose
of this association is to safeguard the vendors industry and provide
financial and technical assistance to its members. The vending
industry has the potential to increase its contribution to the Auto
Industry as well as the economy of the country but it is imperative that
Government should encourage the investment in this sector and
should protect vendors. Another important thing is that assemblers
should not be allowed to have more than two vendors for a component
or part to help abolish the rampant practice.

REVENUE AND GDP:

 33

Auto Industry is contributing big proportions of revenue and GDP to the

Government. Last year the industry has contributed revenue of Rs 7
billion and if the vendors are also included the amount will be over Rs
10 billion. Contribution of auto industry to the GDP is Rs 38 billion and
savings in foreign exchange by import substitution would amount to $
500 million.

The revenue contribution of Indus Motor Company in the year 1998-99

is Rs 2.5 billion, Pak Suzuki has the largest contribution in this regard
with Rs 3.2 billion and Honda Atlas Cars has contributed with Rs 900
million. So the contribution of auto Industry in revenue and GDP is
great which is expected to be increased in future.

Auto Industry is a sector with lucrative investment opportunities. It has

been attracting the investment since its inception and has strong
potential to attract investors in future. The total investment by Toyota,
Suzuki, Honda, Nissan and Hyundai is over eight billion and with the
introduction of Fiat will amount to Rs 10 billion approx. Dewan
Farooque and other big names in future will extend the investment
size. Indus Motor Company has the investment of Rs 2000 million, Pak
Suzuki has its share with Rs 2700 million and Honda group has
invested Rs 1000 million in the sector. The investment level is
expected to increase in future.

The Auto Industry is providing number of employment opportunities in

country and in future industry has capacity to generate more
employment. The total employments including OEMs & vendors are
125000 persons including technicians, engineers and management
staff. The Indus Motor Company provided jobs to some about 625
persons till 1998-99, Pak Suzuki with 619 persons and Honda Atlas
Cars with 348 persons in 1998-99. Total numbers of jobs in vending
industry is about 135,000. If the Auto Industry is supported by
Government then it can generate more employment in the country.

LOCALIZATION:

Although the volume of Auto Industry in Pakistan is not big enough to

create economies of scale. So far the level of localization of parts is
majority confined to small parts and the localization of high tech and
major engineering parts is not so much developed. In spite of low
volumes the industry's local content in the small car is over 60 per cent
and 40 per cent in larger vehicles has been achieved. The industry is
paying huge amount to the local vendors for manufacturing of parts.
The contribution of vending industry in this regard is worthwhile. So far
 34

Indus Motors is producing about 740 parts locally with deletion level of
42.10 per cent, Pak Suzuki is producing approximately 1794 parts with
highest deletion level of 66 per cent and Honda Atlas Cars has
localized about 699 parts with 42.40 percent of deletion level. Product
wise deletion level is already discussed with organization.

The pace of higher deletion in the country should be increased in order

to reduce the prices of vehicles by manufacturing them locally in order
to boost up the auto industry in Pakistan and provide consumer with
reasonable prices.

Although the production volume of Pakistan is very small but the prices
of locally manufactured cars are competitive and in some cases even
lower than India. The revenue contributed to the Government of
Pakistan comprises of 25% to 35 per cent of the car price.

Inconsistent government policies and uncertain decisions not only

discourage the foreign investment but also create insecurity among
local manufacturers. The uncertain policies also affect the
development of local industry in many ways. In last 10 years the auto
industry has experienced 26 policy changes and duty tariff have taken
place. The industry got due support due to the establishment of
Engineering Development Board but the volume of production is still
very low due to the political and economic reasons.

Leading Auto industries:

Indus Motor Company:

Indus Motor Company is the local producer of Toyota Corolla cars and Hilux trucks in
Pakistan. The Company's assembly plant at Port Qasim near Karachi became the first
Toyota plant anywhere in the world to produce 850 cc Daihatsu Cuore compact car which
is also being marketed through Toyota's dealership network nationwide.

Pakistan's large, and ever-increasing, population needs to promote the

auto industry as it creates employment for skilled engineers and
technicians. Currently, over 125,000 persons are employed by the local
auto industry, either directly or indirectly. It is mainly due to this
reason that even the developed world protects the auto industry
through quotas. In Pakistan, the industry is also a big revenue
contributor — it contributed revenue of Rs 7 billion last year while the
auto vending industry contributed another Rs 3 billion. Besides the
significant revenue contribution, the industry also assists in the
transfer of technology and the local engineering industry to produce
substitute parts and components to save $ 500 million annually. By
 35

and large the government policies have been supportive — the primary
being discouraging the import of new and used cars into the country
through tariff measures. This has not only encouraged investment in
the industry but has also attracted additional investment.

Today Korean car manufacturers are competing with major Japanese

manufacturers like us, Suzuki, and Honda. The industry, however, has
all along been requesting for a long-term 5-7 year policy, the
finalization of which will give a big boost.

The government is discussing with the auto and vending industry for a
long-term policy about the WTO Agreements. The policy is expected to
be finalized at the end this year while the industry has been assured
that the government will continue to support the local industry through
tariff measures discouraging imports. Today Pakistani car buyers enjoy
a choice of products and prices in all segments of the car market, be it
small or large size cars. There are Suzuki, Daihatsu and Hyundai to lure
the small car buyers while a wide range of Toyota, Suzuki, Honda, and
Kia products compete for the 1300 cc and above segment of the
market. There are locally produced cars to cater to every taste and all
budgets. The competition has the potential to reduce the massive
under-utilisation capacity of individual car producers as it has
prompted them to better the sales and marketing efforts to offer
competitive prices, improve the quality of their products as well as
after-service facilities.

The emergence of the competition today allows the customers to not

only select a car of his choice but also to maintain it in a condition
which ensures a higher resale value than any other time in the past.
Cuore was launched on May 25 this year. Cuore, the first real compact
car introduced here is very popular not only in Japan but also in
Malaysia. The initial response to Cuore here in Pakistan has been
excellent — the productions for first three months are already fully
booked. This will help our company to increase the overall utilisation of
our production capacity which for Cuore is 10,000 units per annum.
However, we also understand that the car market in Pakistan has not
been expanding as expected primarily due to political uncertainty and
economic environment in last number of years. Thailand with half the
population produces ten times cars than that produced in Pakistan
annually.

This indicates the true and the future potential of the Pakistani auto
market. On an average 25-30 per cent of the retail prices of locally
produced cars comprise governmental revenues in the form of import
duty, sales tax, etc. Reduction in taxes would help reduce prices of the
cars and to assist in creating volumes and better capacity utilization. If
 36

the government introduces stable policies throughout the auto industry

like the one it has initiated in the Textile industry it would increase the
pace of investment in the auto sector which in turn could accelerate
the GDP growth.

However, it is not true that car prices in Pakistan is higher than in the
neighboring countries like India, in fact they are competitive if input
costs are compared. Potential will have to come at a much later stage
with local contents and volumes made more effective for international
competition.

However, parts exports are in process expected to expand further

within next few years. For the time being the replacement part
industry is immensely threatened by massive entrance of parts under
scrap valued at negligible import duty. Such widely used items as oil
and air filter, brake pads, shock absorbers, lighting assembly, spark
plugs, wind screen threatens the very survival of the local vending
industry. Only 5 per cent of the replacement parts market is fed by the
local industry the rest is fed by the parts getting into the country
unscrupulously through the connivance of everyone involved causing
loss of billions in revenue to the government.

Honda Motor Company, Ltd.

The company manufactures automobiles, motorcycles, trucks, scooters, robots, jets and
jet engines, ATV, water craft, electrical generators, marine engines, lawn and garden
equipment, and aeronautical and other mobile technologies. Honda's line of luxury cars is
branded Acura in North America, Hondura in the Honduras and Ben Tian in China. More
recently they have ventured into mountain bikes.

Honda is the 6th largest automobile manufacturer in the world as well as the largest
engine-maker in the world, producing more than 14 million internal combustion engines
each year. In August 2008, Honda surpassed Chrysler as the 4th largest automobile
manufacturer in the United States. Currently, Honda is the second largest manufacturer in
Japan behind Toyota and ahead of Nissan .

The 2006 Ridgeline was a reintroduction of the concept of a Uni-Body truck.

Earlier examples of this concept are the Subaru Brat and Baja, Volkswagen Rabbit pick-
up, and Dodge Rampage/Plymouth Scamp.

Honda increased global production in September 2008 to meet demand for small cars in
the U.S. and emerging markets. The company is shuffling U.S. production to keep
factories busy and boost car output, while building fewer minivans and sport utility
vehicles as light truck sales fall.
 37

Pak Suzuki Motor Co.

Pak Suzuki Motor Company Limited (PSMC) a subsidiary of Suzuki
Motor Corporation Japan has the distinction of being the first overseas
Suzuki Plant to produce Suzuki vehicles outside Japan. Pakistan was
the first country selected by Suzuki Motor Corporation Japan for
production of 4x4 vehicles that started in 1975.

Pak Suzuki Motor Company Limited is a public limited company with its
shares quoted on Stock Exchanges in Pakistan. The Company was
formed in August 1983 in accordance with the terms of joint venture
agreement concluded between Pakistan Automobile Corporation
Limited (PACO), representing Government of Pakistan and Suzuki
Motor Corporation (SMC) — Japan. The company started commercial
operations in January 1984 with the primary objective of
manufacturing, assembling and marketing of Cars, Pickups, Vans and
4x4 vehicles in Pakistan.

By early 1990, on the completion of the first phase of this plant, in-
house assembly of all Suzuki engines started. In 1992 the plant was
completed and production of the Margalla car commenced. Presently
the entire range of Suzuki products currently marketed in Pakistan are
being produced at this plant.

At the time of privatization, Suzuki Motor Corporation (SMC) increased

its equity from 25% to 40%. Subsequently, SMC progressively
increased its equity to 72.8% by purchasing remaining shares from
PACO. The total foreign investment brought in by SMC-Japan since
inception stands at Rs. 1026.36 million.

The Suzuki management, immediately after privatization, started

expansion of the Bin Qasim Plant to increase its installed capacity to
50,000 vehicles per year. The expansion was completed in July 1994.
Keeping in view the company's long term plans which also include
tapping of export markets, the company has acquired additional land
measuring about 30 acres from Pakistan Steel Mills Corporation in
proximity to its Bin Qasim Plant to setup production facilities for the
manufacture of some local components.

The Company continues to be in the forefront of the automobile

industry of Pakistan. Over a period time, the company has developed
an effective and comprehensive network of sales service and spare
 38

parts dealers who cater to the needs of customers and render effective
after sales service country wide, PSMC is serviced by over 180 active
vendors who are engaged in the local manufacture and supply of
automotive parts to the Company.

The Company is strictly adhering to the deletion targets set by the

Engineering Development Board/Ministry of Industries, Company's
resolve and commitment of localization is evidenced with the
achievement of high deletion levels in the Mehran Car, Ravi Pickup,
Bolan Van and Khyber car. Industry level deletion has been achieved in
the recently introduced Baleno Car. The Company's contribution to the
public exchequer has been very substantial.

Government’s investment policies:

The Government has liberalized the investment policy environment for domestic as well
as foreign private investment in the industrial sector. There is no upper limit on foreign
equity and foreign ownership of industrial projects. There is also no restriction on remittance
of profit, dividends, payment of royalty and technical fee. The Government is also
encouraging joint ventures, technology tie-ups, co-manufacturing and co-exporting
arrangements with foreign investors. Even relocation of projects is being encouraged in view
of the transformation of developed economies into hi-tech areas.
Major advantages for investment in Pakistan are as follows:

• Abundant land and natural resources

• Vast human resources
• Growing domestic market
• Well established infrastructure
• Strategic geographical location

Fundamental problems in the automotive sector are as follows:

• Low volumes / under utilization of capacity

• High prices
• Slow transfer of technology

In view of the above the government policy not only seeks to protect foreign investment
but it is also looking for a break through in the export market in order to increase volumes to
lower costs for achieving economies of scale.

Recommendation on actions to be taken at the national level

• Good governance has to be ensured and sustained to upgrade the administrative, corporate
and financial structure of the country.
• Policy paradigm has to be characterized by continuity, consistency and connectivity.
• Tariff structure on auto motive sector will have to be rationalized in tandem with the
requirement of phasing out local content policy under WTO Agreement on TRIMS.
 39

• Vendor industry in Pakistan should be supported to upgrade its technologies through joint
ventures and technology tie-ups.
• The annual target of automobile assembly needs to be enhanced to half a million vehicles.

Annual production target of cars needs to be increased to hundred thousand vehicles. The
Government and the automotive sector in Pakistan must cooperate with each other to devise
ways to achieve these targets.

• There is a need to set up a specialized technical training centre to serve as a common

facility for capacity-building of the automotive sector in Pakistan.

Local content scheme

Pakistan has been pursuing a useful local content scheme which has done some good to
the technological base of the automotive sector and improved its design development
capabilities. The methodology adopted is that the manufacturers are offered tariff incentives
for progressive local manufacture of automobiles and other engineering goods.

Maximum local content levels achieved

Automobile Percentage
Cars 68
Tractors 85
Motorcycles 82
LCVs 43
Buses/Trucks 50

Recommendation on actions to be taken at the regional level

• A specialized framework has to be set up for promoting cooperation in the

automotive
sector at the regional as well as the sub regional level.
• The intra-regional exchange should be instituted at all levels, social, cultural,
technological, commercial, industrial and educational;
• Industrial and business exhibitions, expositions and fairs should be made more
interactive by making the investors, entrepreneurs, and exporters more effectively
participative in
these events;
• Pakistan holds an annual Pakistan Automotive Parts Show to showcase its achievements
in the field of auto part manufacturing. The regional key players may visit the fair to have a
good look at Pakistan’s potential.

Marketplace of Cars:
 40

Show rooms:

The word showroom has two distinct meanings including:

Marketing location

A showroom is a large space used to display products for sale, such as automobiles,
furniture, carpet or apparel.

Entertainment venue
A showroom is a permanent enclosed space used to present an entertainment show.
Sometimes it will be customized for a particular show

Some showrooms are used daily, while others are only used when a performer is booked
to perform. In some cases, a showroom is leased to a performer, who then retains all
income rather than being paid by the showroom owner.

A car dealership or vehicle local distribution is a business that sells new cars and/or
used cars at the retail level, based on a dealership contract with an automaker or its sales
subsidiary. It employs automobile salespeople to do the selling. It may also provide
maintenance services for cars, thus employing automobile
Car dealership mechanics, stock and sell spare automobile parts, and process
warranty claims.

Toyota Motors:

To best serve its customers, Indus Motors Corporation has established a network of
twenty-seven dealer’s nation wide, fully equipped to meet customer needs in sales,
service and spare parts. Toyota and Daihatsu vehicles are marketed through one
dealership network.

COROLLA Diesel campaign:

1.3 2.0D D Saloon Altis

Promotions 5,000 5,000 7,500 7,500

 41

Sales person 3,000 3,000 5,000 5,000

Incentive dealers

EVAC (per year) 1,015 1,015 1,015 1,015

Bluetooth ready - - 16,000 16,000

Value Added - - 20,000 -

promotions

TOTAL 9,500 9,500 50,000 30,000

Honda Motors:
Honda's official slogan is "The Power of Dreams". They have never used this slogan to
sell their products. Mr. Honda's belief that well built products will sell them. Many of
Honda's most remarkable advertising campaigns have been released. At the beginning of
2008, Honda releases its latest advert - the Problem Playground. The advert outlines
Honda's environmental responsibility, demonstrating a hybrid engine, more efficient solar
panels and the FCX Clarity, a hydrogen powered car.
 42

City’s teaser ad launched

City’s official launch = 27th Jan ‘09

 43

Framework of Analysis
Chapter 3

Hypothesis Analysis:
A supposition; a proposition or principle which is supposed or taken for granted, in
order to draw a conclusion or inference for proof of the point in question; something
not proved, but assumed for the purpose of argument, or to account for a fact or an
occurrence; as, the hypothesis that head winds detain an overdue steamer.

A hypothesis being a mere supposition, there are no other limits to

hypotheses than those of the human imagination.
 44

Definition of Variables:
The objective of maximizing stock prices is a relevant objective only for firms which are
publicly traded. How, then, can corporate finance principles be adapted for private firms?
For firms which are not publicly traded, the objective in decision making is the
maximization of firm value.
The investment, financing and dividend principles we will develop in the chapters to
come apply for both publicly traded firms, which focus on stock prices, and private
businesses, that maximize firm value. Since firm value is not observable and has to be
estimated, what private businesses will lack is the feedback, sometimes unwelcome, that
publicly traded firms get when they make major decisions.

The discipline can be divided into long-term and short-term decisions and techniques.
Capital investment decisions are long-term choices about which projects receive
investment, whether to finance that investment with equity or debt, and when or whether
to pay dividends to shareholders.

On the other hand, the short term decisions can be grouped under the heading:

"Working capital management".

This subject deals with the short-term balance of current assets and current liabilities; the
focus here is on managing cash, inventories, and short-term borrowing and lending (such
as the terms on credit extended to customers).

The terms corporate finance and corporate financier are also associated with
investment banking. The typical role of an investment banker is to evaluate company's
financial needs and raise the appropriate type of capital that best fits those needs.

Capital investment decisions

Capital investment decisions are long-term corporate finance decisions relating to fixed
assets and capital structure. Decisions are based on several inter-related criteria.
Corporate management seeks to maximize the value of the firm by investing in projects
which yield a positive net present value when valued using an appropriate discount rate.
These projects must also be financed appropriately. If no such opportunities exist,
maximizing shareholder value dictates that management returns excess cash to
shareholders. Capital investment decisions thus comprise an investment decision, a
financing decision, and a dividend decision.
 45

The investment decision:

Management must allocate limited resources between competing opportunities

("projects") in a process known as capital budgeting. Making this capital allocation
decision requires estimating the value of each opportunity or project: a function of the
size, timing and predictability of future cash flows.

Project valuation

In general, each project's value will be estimated using a discounted cash flow (DCF)
valuation, and the opportunity with the highest value, as measured by the resultant net
present value (NPV). This requires estimating the size and timing of all of the
incremental cash flows resulting from the project.

These future cash flows are then discounted to determine their present value. These
present values are then summed, and this sum net of the initial investment outlay is the
NPV.

The NPV is greatly influenced by the discount rate. Thus selecting the proper discount
rate—the project "hurdle rate"—is critical to making the right decision. The hurdle rate is
the minimum acceptable return on an investment—i.e. the project appropriate discount
rate. The hurdle rate should reflect the risky ness of the investment, typically measured
by volatility of cash flows, and must take into account the financing mix. Managers use
models such as the CAPM or the APT to estimate a discount rate appropriate for a
particular project, and use the weighted average cost of capital (WACC) to reflect the
financing mix selected. (A common error in choosing a discount rate for a project is to
apply a WACC that applies to the entire firm. Such an approach may not be appropriate
where the risk of a particular project differs markedly from that of the firm's existing
portfolio of assets.)

In conjunction with NPV, there are several other measures used as (secondary) selection
criteria in corporate finance. These are visible from the DCF and include discounted
payback period, IRR, Modified IRR, equivalent annuity, capital efficiency, and ROI; see
list of valuation topics.

The financing decision

Achieving the goals of corporate finance requires that any corporate investment be
financed appropriately. As above, since both hurdle rate and cash flows (and hence the
riskiness of the firm) will be affected, the financing mix can impact the valuation.
Management must therefore identify the "optimal mix" of financing—the capital
structures those results in maximum value.
 46

The sources of financing will, generically, comprise some combination of debt and
equity. Financing a project through debt results in a liability that must be serviced—and
hence there are cash flow implications regardless of the project's success. Equity
financing is less risky in the sense of cash flow commitments, but results in a dilution of
ownership and earnings. The cost of equity is also typically higher than the cost of debt
and so equity financing may result in an increased hurdle rate which may offset any
reduction in cash flow risk.

Management must also attempt to match the financing mix to the asset being financed as
closely as possible, in terms of both timing and cash flows.

One of the main theories of how firms make their financing decisions is the Pecking
Order Theory, which suggests that firms avoid external financing while they have
internal financing available and avoid new equity financing while they can engage in new
debt financing at reasonably low interest rates. Another major theory is the Trade-Off
Theory in which firms are assumed to trade-off the tax benefits of debt with the
bankruptcy costs of debt when making their decisions. An emerging area in finance
theory is right-financing whereby investment banks and corporations can enhance
investment return and company value over time by determining the right investment
objectives, policy framework, institutional structure, source of financing (debt or equity)
and expenditure framework within a given economy and under given market conditions.
One last theory about this decision is the Market timing hypothesis which states that
firms look for the cheaper type of financing regardless of their current levels of internal
resources, debt and equity.

The dividend decision

The dividend is calculated mainly on the basis of the company's inappropriate profit and
its business prospects for the coming year. If there are no NPV positive opportunities, i.e.
where returns exceed the hurdle rate, then management must return excess cash to

investors. These free cash flows comprise cash remaining after all business expenses have
been met.

This is the general case, however there are exceptions. For example, investors in a
"Growth stock", expect that the company will, almost by definition, retain earnings so as
to fund growth internally. In other cases, even though an opportunity is currently NPV
negative, management may consider “investment flexibility” / potential payoffs and
decide to retain cash flows;

Management must also decide on the form of the distribution, generally as cash dividends
or via a share buyback. There are various considerations: where shareholders pay tax on
dividends, companies may elect to retain earnings, or to perform a stock buyback, in both
cases increasing the value of shares outstanding; some companies will pay "dividends"
from stock rather than in cash; today, it is generally accepted that dividend policy is value
neutral
 47

Working capital management

Decisions relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between a firm's short-
term assets and its short-term liabilities.

As above, the goal of Corporate Finance is the maximization of firm value. In the context
of long term, capital investment decisions, firm value is enhanced through appropriately
selecting and funding NPV positive investments. These investments, in turn, have
implications in terms of cash flow and cost of capital.

The goal of Working capital management is therefore to ensure that the firm is able to
operate, and that it has sufficient cash flow to service long term debt, and to satisfy both
maturing short-term debt and upcoming operational expenses. In so doing, firm value is
enhanced when, and if, the return on capital exceeds the cost of capital;

Decision criteria

Working capital is the amount of capital which is readily available to an organization.

That is, working capital is the difference between resources in cash or readily convertible
into cash (Current Assets), and cash requirements (Current Liabilities). As a result, the
decisions relating to working capital are always current, i.e. short term, decisions.

In addition to time horizon, working capital decisions differ from capital investment
decisions in terms of discounting and profitability considerations; they are also
"reversible" to some extent. (Considerations as to Risk appetite and return targets remain
identical, although some constraints - such as those imposed by loan covenants - may be
more relevant here).

Working capital management decisions are therefore not taken on the same basis as long
term decisions, and different criteria are applied here: the main considerations are cash
flow and liquidity - cashflow is probably the more important of the two.

• The most widely used measure of cash flow is the net operating cycle, or cash
conversion cycle. This represents the time difference between cash payment for
raw materials and cash collection for sales. The cash conversion cycle indicates
the firm's ability to convert its resources into cash. Because this number
effectively corresponds to the time that the firm's cash is tied up in operations and
unavailable for other activities, management generally aims at a low net count.
(Another measure is gross operating cycle which is the same as net operating
cycle except that it does not take into account the creditors deferral period.)

• In this context, the most useful measure of profitability is Return on capital

(ROC). The result is shown as a percentage, determined by dividing relevant
income for the 12 months by capital employed; Return on equity (ROE) shows
this result for the firm's shareholders.
 48

• As above, firm value is enhanced when, and if, the return on capital, exceeds the
cost of capital. ROC measures are therefore useful as a management tool, in that
they link short-term policy with long-term decision making.

Management of working capital:

Guided by the above criteria, management will use a combination of policies and
techniques for the management of working capital. These policies aim at managing the
current assets (generally cash and cash equivalents, inventories and debtors) and the
short term financing, such that cash flows and returns are acceptable.

• Cash management. Identify the cash balance which allows for the business to
meet day to day expenses, but reduces cash holding costs.

• Inventory management. Identify the level of inventory which allows for

uninterrupted production but reduces the investment in raw materials - and
minimizes reordering costs - and hence increases cash flow;

• Debtor’s management. Identify the appropriate credit policy, i.e. credit terms
which will attract customers, such that any impact on cash flows and the cash
conversion cycle will be offset by increased revenue and hence Return on Capital
(or vice versa)

• Short term financing. Identify the appropriate source of financing, given the
cash conversion cycle: the inventory is ideally financed by credit granted by the
supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to
"convert debtors to cash" through "factoring".

Financial risk management

Risk management is the process of measuring risk and then developing and implementing
strategies to manage that risk. Financial risk management focuses on risks that can be
managed ("hedged") using traded financial instruments (typically changes in commodity
prices, interest rates, foreign exchange rates and stock prices). Financial risk management
will also play an important role in cash management.

This area is related to corporate finance in two ways. Firstly, firm exposure to business
risk is a direct result of previous Investment and Financing decisions. Secondly, both
disciplines share the goal of creating, or enhancing, firm value. All large corporations
have risk management teams, and small firms practice informal, if not formal, risk
management.

Derivatives are the instruments most commonly used in financial risk management.
Because unique derivative contracts tend to be costly to create and monitor, the most
 49

cost-effective financial risk management methods usually involve derivatives that trade
on well-established financial markets. These standard derivative instruments

Data Collection:

Primary data:
Primary objective is to extending term finance for investment in the manufacturing
sector of economy. After analyzing the primary data is concluded that the major problems
arising for finance is the infrastructure of the country, the high rates that government
takes of taxes due to which people use their saving for running out their business. They
using their saving and credits for do so.

If we looking at the present situation of industries they having problems of not only in
sales but also material wise. The main example we have here is SUZUKI Company
Limited. They have the major share in the market and since last six months they have
increase the prize of cars for which Toyota Indus Motors have taken the advantage of it.

During the last sic months TOYOTA INDUS MOTORS have sold 33000 cars and last it
sold 25000 cars, this 8000 deficit I sun predicable for the country because the major share
of the company or it is the makers for sound standard people of the country but Suzuki
has raised its prized the people has moved to the another brand. Although the standard of
living of the people is average but the banks scheme which is provided by the company
really helps the company in sales.

Secondary Data:

The major advantage of corporate finance is that it regulates our money formally. It is the
life blood of our business. Its objectives are to tell how can we invest and use our money
more productively. After analyzing the secondary data it can be concluded that the
country can boost up more efficiently if the running investment take place. Our future is
based on this factor. The more invest, the more we have the opportunity of developing up
new industries in the country which increases again not only chances of employment but
also the saving factor which is the main problem we are facing.

The main principle of corporate finance is to give or make opportunity for the business
man or helps to create the money for the business. A good business man surely knows
from where I get it. But the main problem is for small scale enterprisers. Due to
frequently changes in government policies and high interest rates create problems for
small entrepreneurs.

Hypothesis Testing:
 50

“Corporate Finance has played a crucial role in development of

national economy of a country.”

Corporate finance is one of the major factors in economic development. It is increase in

the stock of the both material and human capital by making available a part of society’s
currently available resources. Finance results when some proportion of society’s present
income is saved and invested in order to increase material as well as human capital.
In the words of Prof. Ragner Nurkse,

The meaning of capital formation is that societies doesn’t apply to the needs and desires
of the immediate consumption and directs a part of it to the making of capital goods,
tools and instruments, machines and transport facilities, plants and equipment all the
various forms of real capital that can so greatly increase the efficiency of productive
effort.

The importance or significance of corporate finance in the process of economic

development of a country is for:

 Building up the Infrastructure: The building up the infrastructure like

communication system, power etc… is an important significance of capital
formation. It greatly helps in breaking the vicious circle of poverty in the country.

 Saving Drives: Saving device like high rates profits & Tax exemptions etc…
creating awareness of the importance of savings can greatly help in mobilizing
savings.

 Setting up the Financial Institutions: The small or large amount of savings so

collected helps in raising funds for development.

 Fiscal Measures: in low income countries like Pakistan, the voluntary savings are
not sufficient for productive investment. The government therefore realizes the
funds through fiscal and monetary measures.

 Reducing High Rates or Rationalization of tax structure

 Availability of Working Capital

 Utilization of disguised un employed workers:

 Technological Progress in the country
 Control of Inflation
 Curtailment of luxury items
 51

The main causes of shortest of financers in the current market in Pakistan are the high
rates and the low savings. The poor rate savings is responsible for low rate of
investment. Our government should take the necessary steps to resolve this issue
because the strength of a country is relay on this factor corporate finance.

Analysis of Data:
In financial accounting, a balance sheet or statement of financial position is a summary
of a person's or organization's balances. Assets, liabilities and ownership equity are listed
as of a specific date, such as the end of its financial year. A balance sheet is often
described as a snapshot of a company's financial condition. Of the four basic financial
statements, the balance sheet is the only statement which applies to a single point in time.

A company balance sheet has three parts: assets, liabilities and ownership equity. The
main categories of assets are usually listed first and are followed by the liabilities. The
difference between the assets and the liabilities is known as equity or the net assets or the
net worth of the company and according to the accounting equation, net worth must equal
assets minus liabilities.

Another way to look at the same equation is that assets equals liabilities plus owner's
equity. Looking at the equation in this way shows how assets were financed: either by
borrowing money (liability) or by using the owner's money (owner's equity). Balance
sheets are usually presented with assets in one section and liabilities and net worth in the
other section with the two sections "balancing."

Records of the values of each account or line in the balance sheet are usually maintained
using a system of accounting known as the double-entry bookkeeping system.

Cash Flow Statements:

In financial accounting, a cash flow statement or statement of cash flows is a financial

statement that shows how changes in balance sheet and income accounts affect cash and
cash equivalents, and breaks the analysis down to operating, investing, and financing
activities. As an analytical tool, the statement of cash flows is useful in determining the
short-term viability of a company, particularly its ability to pay bills. International
Accounting Standard 7 (IAS 7) is the International Accounting Standard that deals with
cash flow statements.

The cash flow statement is partitioned into three segments, namely: cash flow resulting
from operating activities, cash flow resulting from investing activities, and cash flow
resulting from financing activities.

The money coming into the business is called cash inflow, and money going out from the
business is called cash outflow.
 52

Toyota Indus Motors:

Financial Balance Sheet:
As at June 30, 2008
2008
2007
ASSETS:
(Rupees in '000)
Non-current assets:
Fixed assets 3
4,033,762 2,093,852
Long-term loans and advances 4
42,341 28,487
Long-term deposits 5
7,222 6,629
4,083,3
25 2,128,968
Current assets:
Stores and spares 6
232,142 227,191
Stock-in-trade 7
2,637,629 2,859,951
Trade debts 8
1,332,832 665,647
Finance under musharika arrangements 9 -
3,710
Loans and advances 10
737,372 401,918
Short-term prepayments and trade deposits 11
23,148 47,523
Accrued return on bank deposits
35,012 132,634
Other receivables 12
74,360 605,725
Investments - at fair value through profit or loss 13
54,171 -
Taxation - net 14
209,533 48,520
Cash and bank balances 15
4,328,585 8,543,263
9,6
64,784 13,536,082
TOTAL ASSETS
13,748,109 15,665,050

EQUITY:

Share capital
Authorized capital
 53

100,000,000 (2007: 100,000,000) Ordinary shares of Rs 10 each

1,000,000 1,000,000
Issued, subscribed and paid-up capital 16
786,000 786,000
Reserves 17
8,650,340 7,257,975
9,4
36,340 8,043,975
LIABILITIES:
Non-current liabilities
Deferred taxation 18
532,138 210,149
5
32,138 210,149
Current liabilities
Trade and other payables 19
2,793,554 2,892,017
Advances from customers and dealers 20
985,972 4,514,480
Accrued mark-up 21
105 715
Short-term running finance 22 - -
Liabilities against assets subject to finance lease 23
- 3,714
3,
779,631 7,410,926
CONTINGENCIES AND COMMITMENTS
TOTAL EQUITY AND LIABILITIES 24
13,748,109 15,665,050

The annexed notes 1 to 43 form an integral part of these financial statement

Cash Flow Statement of the Company:

For the year ended June 30, 2008
2008
2007

CASH FLOWS FROM OPERATING ACTIVITIES:

( Rupees in '000)
Cash (used in) / generated from operations 34
(125,517) 4,045,040
Interest paid
(3,427) (43,411)
Workers’ Profit Participation Fund paid
(201,390) (227,390)
Workers’ Welfare Fund paid
(78,562) (67,655)
Interest received
702,156 780,163
 54

Income tax paid

(1,089,890) (1,634,104)
Movement in long-term loans and advances
(13,854) (27,468)
Movement in long-term deposits
(593) (1,448)

Net cash (used in) / generated from operating activities

(811,077) 2,823,727

CASH FLOWS FROM INVESTING ACTIVITIES:

Fixed capital expenditure
(2,422,406) (805,259)
Proceeds from disposal of fixed assets
8,952 46,989
Investment made in listed mutual funds
(50,000) (25,000)
Proceeds from redemption of investment in listed mutual fund
- 26,313
Receipts from finance under musharika arrangements
3,849 6,570
Net cash used in investing activities
(2,459,605) (750,387)

CASH FLOWS FROM FINANCING ACTIVITIES :

Repayments of obligation against assets subject to finance lease
(3,878) (6,413)
Dividend paid
(940,118) (939,844)

Net cash used in financing activities

(943,996) (946,257)
Net (decrease) / increase in cash and cash equivalents
(4,214,678) 1,127,083
Cash and cash equivalents at beginning of the year
8,543,263 7,416,180
Cash and cash equivalents at end of the year 35
4,328,585 8,543,263

The annexed notes 1 to 43 form an integral part of these financial statements.

Investors Information:
For the year ended June 30, 2008

Gross profit ratio % age 9.29

11.37
Earnings per share Rs.
29.15 34.93
Inventory turnover Times 13.67
10.15
 55

Debt collection period Days 9

6
Average fixed assets turnover Times
13.52 20.50
Breakup value per share Rs.
120.06 102.34

Market price per share as on June 30 Rs.

200.05 305.50
- High value during the period Rs.
419.00 321.00
- Low value during the period Rs.
171.96 183.35
Price earning ratio Times
6.86 8.75
Dividend per share Rs.
10.50 13.00
Dividend yield %age
5.25 4.26
Dividend payout % age
36.03 37.21
Return on capital employed % age
24.28 34.13
Debt to equity Ratio 0:
1 0: 1
Current ratio Ratio
2.56: 1 1.83: 1

Analysis of Toyota Company:

Investment: If we look at the investment side of this company we got to know that
during 2008 it increases its investment perspective. It increases up till 1709218 which is
good amount as far as investments concerned. Investment shows how company is self
sufficient in cash to invest.

Finance: the finance sector of this company is also well performed during 2007 and
2008, if we gone through the cash flow activities we van compare the difference of 2535
which is also a good sign of performance.

Dividend: Dividend shows that how company is sound to pay its shareholders. Toyota
Indus motors are also performed well during 2007 and 2008. If we analysis the balance
sheet and the activities this company performed during 2007 and 2008 we come to know
that its shareholders increases because of its good payment of dividend.

Ratios: After analyzing the CURRENT RATIO which is related to the current
assets and current Liabilities that shows their ratio in which company performed excellent
performance 2.56: 1, that shows company increases only 1% of its liability it’s again
sound enough to meet their fixed cost. PRIZE EARNING RATIO and
 56

INVENTORY TURN OVER also give good effects on the company balance sheet.
Last time is 10.15 which are turns 13.67 times which boost the company. DEBT
COLLECTION RATIO is also excellent collection period with increase 3 %.

If we conclude the whole year 2008 we come to know company is performed well in all
areas in finance sector and dividend sector. Their balance shows their good performance,
the problem the company faces is its product category which is main source of its sales
increases. The Toyota cars are basically for the elate class and Toyota captured the good
market share in that class. Now they have introduced new models of cars in the market
and enjoy tremendous response from their customers, which also helped this company to
increase their assets, decrease their liabilities and improve their finance performance.
They have also introduced the loan facility for their customers who help them to buy their
new model and Toyota can confine the major share in the market.

Honda Motors Limited:

Financial Summary:
March 31, 2007 and 2008

Assets: ¥ 2007* ¥
2008 $2008
Current assets:
Cash and cash equivalents ¥ 945,546 ¥
1,050,902 $ 10,489
Trade accounts and notes receivable, net of allowance
for doubtful accounts of ¥8,199 million in 2007 and
¥8,181 million ($82 million) in 2008 1,055,470
1,021,743 10,198
Finance subsidiaries—receivables, net 1,426,224 1 ,
340,728 13,382
Inventories 1,183,116 1,
199,260 1 1,970
Deferred income taxes 155,390
158,825 1,585
Other current assets 426,863
460,110 4,592

Total current assets 5,192,609

5,231,568 52,216

Finance subsidiaries—receivables, net 3,039,826

2,707,820 27,027
Investments and advances:
Investments in and advances to affiliates 497,337
549,812 5,488
Other, including marketable equity securities 254,610
222,110 2,217
Total investments and advances 751,947
771,922 7,705

Property on operating leases :

 57

Vehicles 345,909
1,014,412 10,125
Less accumulated depreciation 9,700
95,440 953
Net property on operating leases 336,209
918,972 9,172

Property, plant and equipment, at cost :

Land 429,373
457,352 4,565
Buildings 1,322,394
1,396,934 13,943
Machinery and equipment 2,988,064
3,135,513 31,296
Construction in progress 204,318
227,479 2,270
4,944,149
5,217,278 52,074
Less accumulated depreciation and amortization 2,865,421
3,015,979 30,103
Net property, plant and equipment 2,078,728
2,201,299 21,971
Other assets 637,181
783,962 7,825

Total assets ¥12,036,500

¥12,615,543 $125,916

Liabilities, Minority Interests and Stockholders’ Equity 2007* 2008

2008
Current liabilities:

Short-term debt ¥ 1,265,868 ¥

1,687,115 $ 16,839
Current portion of long-term debt 775,409
871,050 8,694

Trade payables:

Accounts 1,133,280
1,015,130 10,132
Accrued expenses 807,341
730,615 7,292
Income taxes payable 76,031
71,354 712
Other current liabilities 196,322
264,280 2,638
Total current liabilities 4,287,527
4,678,550 46,696

Long-term debt, excluding current portion 1,905,743

1,836,652 18,332
Other liabilities 1,237,712
1,414,270 14,116

Total liabilities 7,430,982

7,929,472 79,144
 58

Minority interests in consolidated subsidiaries 122,907

141,806 1,416
Stockholders’ equity:

Common stock, authorized 7,086,000,000 shares

in 2007 and in 2008;

Issued 1,834,828,430 shares in 2007 and in 2008 86,067

86,067 859
Capital surplus 172,529
172,529 1,722

Legal reserves
37,730 39,811 397
Retained earnings 4,654,890
5,099,983 50,903
Accumulated other comprehensive income (loss), net (427,166)
(782,198) (7,807)

Treasury stock, at cost 12,835,522 shares in 2007 and

20,290,531 shares in 2008 (41,439) (71,927) (718)

Total stockholders’ equity 4,482,611

4,544,265 45,356

Commitments and contingent liabilities

Total liabilities, minority interests and stockholders’ equity ¥12,036,500 ¥
12,615,543 $125,916

Cash Flows of the company:

Years ended March 31, 2007 and 2008

2007
2008
Cash flows from operating activities
Net income
592,322 $ 5,989

Adjustments to reconcile net income to net cash provided

By operating activities:

Depreciation excluding property on operating leases

361,747 393 4,166
Depreciation of property on operating leases —
101,032 1,008
Deferred income taxes (2,756)
(16,448) 31,341 313
Minority interest in income 15,287
20,117 27,308 272
Equity in income of affiliates (103,417) (118,942)
(1,187)
Dividends from affiliates 64,055 54,849
67,764 676

Provision for credit and lease residual losses on finance

 59

Subsidiaries—receivables 36,153
44,128 58,011 579
Loss (gain) on derivative instruments, net 10,351
56,836 70,251 701
Gain on transfer of the substitution portion of
the Employees’ Pension Funds
(138,016) — — —

Decrease (increase) in assets:

Trade accounts and notes receivable (49,529) (67,696)

(676)
Inventories (96,839) (100,622)
(1,004)
Other current assets (15,206) (2,609)
(26)
Other assets (5,523) (130,666)
(1,304)

Increase (decrease) in liabilities:

Trade accounts and notes payable 21,420

38,186 32,327 323
Accrued expenses 41,898 (24,768)
(247)
Income taxes payable 39,900 (37,282)
20 0
Other current liabilities 6,126
1,103 2,301 23
Other liabilities 14,274 179,537
1,792
Other, net (6,432)
(15,103) (150)

Net cash provided by operating activities 904,525 1,126,918

11,248

Cash flows from investing activities:

Increase in investments and advances (9,874) (6,417)

(64)
Decrease in investments and advances 3,711 3,829
1,270 13
Payments for purchases of available-for-sale securities (141,902) (158,426)
(1,581)
Proceeds from sales of available-for-sale securities 172,806 179,911
1,796
Payments for purchases of held-to-maturity securities (13,614) (39,482)
(394)
Proceeds from redemptions of held-to-maturity securities 55,990 41,109
32,557 325
Capital expenditures (597,958) (668,228)
(6,670)
Proceeds from sales of property, plant and equipment 39,951 20,641
26,868 268
Acquisitions of finance subsidiaries—receivables (2,857,024) (2,712,775) (27,076)
Collections of finance subsidiaries—receivables 2,138,875 2,312,311 23,079
Proceeds from sales of finance subsidiaries—receivables 477,927 158,497 1,582
 60

Purchases of operating lease assets — (366,795) (839,261)

(8,377)
Proceeds from sales of operating lease assets — 1,276 26,776
267

Net cash used in investing activities 130,704) (1,686,399)

(16,832)
Cash flows from financing activities:

Increase (decrease) in short-term debt, net 306,063 601,957

6,008
Proceeds from long-term debt 969,491 1,061,792
10,598
Repayments of long-term debt (677,539) (782,749)
(7,813)
Cash dividends paid (140,482) (152,590)
(1,523)
Cash dividends paid to minority interests (7,434) (9,663)
(96)
Payments for purchases of treasury stock, net (26,689) (30,746)
(307)
Net cash provided by financing activities 423,410 688,001
6,867
Effect of exchange rate changes on cash and cash equivalents 31,527 (23,164)
(231)

Net change in cash and cash equivalents 228,758 105,356

1,052

Cash and cash equivalents at beginning of year 716,788 945,546

9,437

Cash and cash equivalents at end of year ¥ 945,546 ¥ 1,050,902 $

10,489

Analysis of Honda’s Company:

Investment: Honda financial statement shows a better show in their in their financial
sector. If we compare the last year data with this year we come to know that company
performed very well as compare to the other auto industries. Their investment sector is
enough to introduce new or captured good market share in the existing market. It has
been increases with the amount 52475 which boost up the company financial
performance.

Finance: During 2007 and compare it with 2008 we know Honda have taken good
finance act. Their cash flows shows over all activities performed in 2008 regarding
finance. Long term debt and repayment of debt shows goodwill oh the company.
Repayment decreases and increase in advances and payment collection.
 61

Dividend: it is also performed well in payment of dividend which helps to increases

their shareholders category. Honda has manufacturing operations throughout the world,
including Japan, and exports products and components to various
Countries. Honda purchases materials and sells its products in foreign currencies.
Therefore, currency fluctuations may affect Honda’s pricing of products sold and
materials purchased.

Accordingly, currency fluctuations have an effect on Honda’s results of operations and

financial condition, as well as Honda’s competitiveness, which will over time affect its
results. Since Honda exports many products and components from Japan and generates a
substantial portion of its revenues in currencies other than the Japanese yen, Honda’s
results of operations would be adversely affected by an appreciation of the Japanese yen
against other currencies, in particular the U.S. dollars.

Although it is impossible to hedge against all currency or interest rate risk, Honda uses
derivative financial instruments in order to reduce the substantial effects of currency
fluctuations and interest rate exposure on our cash flow and financial condition. These
instruments include foreign currency forward contracts, currency swap agreements and
currency option contracts, as well as interest rate swap agreements. Honda has entered
into, and expects to continue to enter into, such hedging arrangements. As with all
hedging instruments, there are risks associated with the use of such instruments. While
limiting to some degree our risk fluctuations in currency exchange and interest rates by
utilizing such hedging instruments, Honda potentially forgoes benefits that might result
from other fluctuations in currency exchange and interest rates. Honda is also exposed to
the risk that its counterparties to hedging contracts will default on their obligations.
Honda manages exposure to counterparty credit risk by limiting the counter parties to
major international banks and financial institutions meeting established credit guidelines.
However, any default by such counterparties might have an adverse effect on Honda?

Honda conducts its businesses worldwide, and in several countries, Honda conducts
businesses through joint ventures with local entities, in part due to the legal and other
requirements of those countries. These businesses are subject to various regulations,
including the legal and other requirements of each country. If these regulations or the
business conditions or policies of these local entities change, it may have an adverse
affect on Honda’s business, financial condition or results of operations.

Pak Suzuki Motors Ltd:

Pak Suzuki Motors Ltd. is a company assembling and distributing Suzuki Japan's cars
in Pakistan. Currently they are one of the most successful motor companies in Pakistan.
 62

The firm was founded in 1983 as a joint venture between PAK and Suzuki, formalizing
the arrangement by which Awami Auto Ltd. had produced the Suzuki SS80 from 1982.
Suzuki originally owned 25% of the stock, and has gradually increased their holding;
they now own 73.09%. The company now assembles a wide range of Suzuki vehicles and
aims to produce 150,000 vehicles per year. (2005 production was 100,000).

Expected Problems of Analysis:

Causes of Industrial Backwardness:

 Controversial Industrial development Strategies

 Lack of Capital
 Narrow ness of the Market
 Poor quality if industrial Labor
 Lack of Infrastructure facilities
 Lack of technical Know- how
 Lack of industrial consultancy firms
 Racial disturbance
 Unfavorable industrial structure
 Frequent Breakdown of Electricity
 Political Instability

Causes of Low Rate Company Finance:

 Low rate of national income and per capita income

 The propensity to consume of the people is high and as a
result therefore the propensity of saving is low which gives
adversely affects.
 International demonstration effect and conspicuous
consumption reduces the urge and ability of people to save and
invest.
 The infrastructure facilities
 High rates of interest in banks
 Direct or indirect financial Burden
 Inflation problem
 63

 Non- availability of Working Capital

 Financial constraints
 High Interest Rate
 Production Cost High
 Government increasing Taxes
 Bad Infrastructure
 Political instability in the country
 Less foreign investment

Implication and Conceptual

Framework

Chapter 4
 64

Comparison of corporate Finance and its Measurement:

Tools of Corporate Finance:

Corporate performance is important to the performance of the economy as a whole. It

affects the level and stability of employment and retirement incomes, as well as

government budgets that depend on revenues from taxes related to corporate activities .
We will lay the foundation for this discussion by listing the three fundamental tools that

underlie corporate finance:—the investment, financing, and dividend —and the objective

of firm value maximization (that is at the heart of corporate financial theory).

The Firm: Structural Set-Up:

In corporate finance, we will use firm generically to refer to any business, large or small,

manufacturing or service, private or public. Thus, a corner grocery store and Microsoft

are both firms. The firm investments are generically termed assets. Although assets are
 65

often categorized by accountants into fixed assets, which are long-lived, and current

assets, which are short-term, we prefer a different categorization. The assets that the firm

has already invested in are called assets in place, whereas those assets that the firm is

expected to invest in the future are called growth assets. Though it may seem strange

that a firm can get value from investments it has not made yet, high-growth firms get the

bulk of their value from these yet-to-be-made investments. To finance these assets, the

firm can raise money from two sources. It can raise funds from investors or financial

institutions by promising investors a fixed claim (interest payments) on the cash flows

generated by the assets, with a limited or no role in the day-to-day running of the

business. We categorize this type of financing to be debt. Alternatively, it can offer a

residual claim on the cash flows (i.e., investors can get what is left over after the interest

payments have been made) and a much greater role in the operation of the business. We

call this equity. Note that these definitions are general enough to cover both private

firms, where debt may take the form of bank loans and equity is the owner own money,

as well as publicly traded companies, where the firm may issue bonds (to raise debt) and

common stock (to raise equity).

Thus, at this stage, we can lay out the financial balance sheet of a firm as follows:
 66

Note the contrast between this balance sheet and a conventional accounting balance

sheet.

An accounting balance sheet is primarily a listing of assets in place, though there are

some circumstances where growth assets may find their place in it; in an acquisition,

what gets recorded as goodwill is a conglomeration of growth assets in the target firm,

synergies and overpayment.

 67

First:
Every discipline has first principles that govern and guide everything that gets done

within it. All of corporate finance is built on three principles, which we will call, rather

unimaginatively, the investment principle, the financing principle, and the dividend

principle. The investment principle determines where businesses invest their resources,

the financing principle governs the mix of funding used to fund these investments, and

the dividend principle answers the question of how much earnings should be reinvested

back into the business and how much returned to the owners of the business. These core

corporate finance principles can be stated as follows:

The Investment:
Invest in assets and projects that yield a return greater than the minimum acceptable

hurdle rate. The hurdle rate should be higher for riskier projects and should reflect the

financing mix used—owners funds (equity) or borrowed money (debt). Returns on

projects should be measured based on cash flows generated and the timing of these cash

flows; they should also consider both positive and negative side effects of these projects.

• The Financing :
 68

Choose a financing mix (debt and equity) that maximizes the value of the investments

made and match the financing to nature of the assets being financed.

• The Dividend

If there are not enough investments that earn the hurdle rate, return the cash to the owners

of the business.

In the case of a publicly traded firm, the form of the return—dividends or stock buybacks

—will depend on what stockholders prefer.

When making investment, financing and dividend decisions, corporate finance is single-

minded about the ultimate objective, which is assumed to be maximizing the value of the

business.

These first principles provide the basis from which we will extract the numerous models

and theories that comprise modern corporate finance, but they are also common sense

principles. It is incredible conceit on our part to assume that until corporate finance was

developed as a coherent discipline starting just a few decades ago, people who ran

businesses made decisions randomly with no principles to govern their thinking. Good

businesspeople through the ages have always recognized the importance of these first

principles and adhered to them, albeit in intuitive ways. In fact, one of the ironies of

recent times is that many managers at large and presumably sophisticated firms with

access to the latest corporate finance technology have lost sight of these basic principles.
 69

The Investment

Firms have scarce resources that must be allocated among competing needs. The first and

foremost function of corporate financial theory is to provide a framework for firms to

make this decision wisely.

Accordingly, we define investment decisions to include not only those that create

revenues and profits (such as introducing a new product line or expanding into a new

market) but also those that save money (such as building a new and more efficient

distribution system). Furthermore, we argue that decisions about how much and what

inventory to maintain and whether and how much credit to grant to customers that are

traditionally categorized as working capital decisions, are ultimately investment decisions

as well. At the other end of the spectrum, broad strategic decisions regarding which

markets to enter and the acquisitions of other companies can also be considered

investment decisions.

Corporate finance attempts to measure the return on a proposed investment decision and

compare it to a minimum acceptable hurdle rate to decide whether the project is

acceptable. The hurdle rate has to be set higher for riskier projects and has to reflect the

financing mix used, i.e., the owner funds (equity) or borrowed money (debt). In the

discussion of risk and return, we begin this process by defining risk and developing a

procedure for measuring risk. In risk and return models, we go about converting this risk

measure into a hurdle rate, i.e., a minimum acceptable rate of return, both for entire

businesses and for individual investments.

 70

Having established the hurdle rate, we turn our attention to measuring the returns on an

investment. In analyzing projects, we evaluate three alternative ways of measuring

returns—conventional accounting earnings, cash flows,

and time-weighted cash flows (where we consider both how large the cash flows are and

when they are anticipated to come in). In extensions of this analysis, we consider some of

the potential side costs that might not be captured in any of these measures, including

costs that may be created for existing investments by taking a new investment, and side

benefits, such as options to enter new markets and to expand product lines that may be

embedded in new investments, and synergies, especially when the new investment is the

acquisition of another firm.

The Financing

Every business, no matter how large and complex, is ultimately funded with a mix of

borrowed money (debt) and owner funds (equity). With a publicly trade firm, debt may

take the form of bonds and equity is usually common stock. In a private business, debt is

more likely to be bank loans and an owner savings represent equity. Though we consider

the existing mix of debt and equity and its implications for the minimum acceptable

hurdle rate as part of the investment principle, we throw open the question of whether the

existing mix is the right one in the financing principle section. There might be regulatory

and other real-world constraints on the financing mix that a business can use, but there is

ample room for flexibility within these constraints. We begin the discussion of financing

methods, by looking at the range of choices that exist for both private businesses and

publicly traded firms between debt and equity. We then turn to the question of whether

the existing mix of financing used by a business is optimal, given the objective function
 71

of maximizing firm value. Although the trade-off between the benefits and costs of

borrowing are established in qualitative terms first, we also look at two quantitative

approaches to arriving at the optimal mix. In the first approach, we examine the specific

conditions under which the optimal financing mix is the one that minimizes the minimum

acceptable hurdle rate. In the second approach, we look at the effects on firm value of

changing the financing mix.

When the optimal financing mix is different from the existing one, we map out the best

ways of getting from where we are (the current mix) to where we would like to be (the

optimal), keeping in mind the investment opportunities that the firm has and the need for

timely responses, either because the firm is a takeover target or under threat of

bankruptcy. Having outlined the optimal financing mix, we turn our attention to the type

of financing a business should use, such as whether it should be long-term or short-term,

whether the payments on the financing should be fixed or variable, and if variable, what

it should be a function of. Using a basic proposition that a firm will minimize its risk

from financing and maximize its capacity to use borrowed funds if it can match up the

cash flows on the debt to the cash flows on the assets being financed, we design the

perfect financing instrument for a firm. We then add additional considerations relating to

taxes and external monitors (equity research analysts and ratings agencies) and arrive at

strong conclusions about the design of the financing.

The Dividend

Most businesses would undoubtedly like to have unlimited investment opportunities that

yield returns exceeding their hurdle rates, but all businesses grow and mature. As a

consequence, every business that thrives reaches a stage in its life when the cash flows
 72

generated by existing investments is greater than the funds needed to take on good

investments. At that point, this business has to figure out ways to return the excess cash

to owners. In private businesses, this may just involve the owner withdrawing a portion

of his or her funds from the business. In a publicly traded corporation, this will involve

either paying dividends or buying back stock. The discussion of dividend policy, we

introduce the basic trade-off that determines whether cash should be left in a business or

taken out of it. For stockholders in publicly traded firms, we note that this decision is

fundamentally one of whether they trust the managers of the firms with their cash, and

much of this trust is based on how well these managers have invested funds in the past.

Finally, we consider the options available to a firm to return assets to its owners—

dividends, stock buybacks and spin-offs—and investigate how to pick between these

options.

Corporate Financial Decisions, Firm Value, and Equity Value

 73

If the objective function in corporate finance is to maximize firm value, it follow that

firm value must be linked to the three corporate finance decisions outlined—investment,

financing, and dividend decisions.

The link between these decisions and firm value can be made by recognizing that the

value of a firm is the present value of its expected cash flows, discounted back at a rate

that reflects both the risky ness of the projects of the firm and the financing mix used to

finance them. Investors form expectations about future cash flows based on observed

current cash flows and expected future growth, which in turn depend on the quality of the

firm projects (its investment decisions) and the amount reinvested back into the business

(its dividend decisions). The financing decisions affect the value of a firm through both

the discount rate and potentially through the expected cash flow.

This neat formulation of value is put to the test by the interactions among the investment,

financing, and dividend decisions and the conflicts of interest that arise between

stockholders and lenders to the firm, on one hand, and stockholders and managers, on the

other. We introduce the basic models available to value a firm and its equity, and relate

them back to management decisions on investment, financial, and dividend policy. In the

process, we examine the determinants of value and how firms can increase their value.
 74

Some Fundamental Propositions about Corporate Finance

There are several fundamental arguments we will make in this discussion:

Corporate finance has an internal consistency:

That flows from its choice of maximizing firm value as the only objective function and

its dependence on a few bedrock principles: Risk has to be rewarded, cash flows matter

more than accounting income, markets are not easily fooled, and every decision a firm

make has an effect on its value.

Corporate finance must be viewed as an integrated

As whole, rather than a collection of decisions. Investment decisions generally affect

financing decisions and vice versa; financing decisions often influence dividend decisions

and vice versa. Although there are circumstances under which these decisions may be

independent of each other, this is seldom the case in practice.

Accordingly, it is unlikely that firms that deal with their problems on a piecemeal basis

will ever resolve these problems. For instance, a firm that takes poor investments may

soon find itself with a dividend problem (with insufficient funds to pay dividends) and a

financing problem (because the drop in earnings may make it difficult for them to meet

interest expenses).
 75

Corporate finance matters to everybody.

There is a corporate financial aspect to almost every decision made by a business; though

not everyone will find a use for all the components of corporate finance, everyone will

find a use for at least some part of it. Marketing managers, corporate strategists, human

resource managers, and information technology managers all make corporate finance

decisions every day and often don realize it. An understanding of corporate finance will

help them make better decisions.

Corporate finance is fun.

This may seem to be the tallest claim of all. After all, most people associate corporate

finance with numbers, accounting statements, and hardheaded analyses. Although

corporate finance is quantitative in its focus, there is a significant component of creative

thinking involved in coming up with solutions to the financial problems businesses do

encounter. It is no coincidence that financial markets remain breeding grounds for

innovation and change.

The best way to learn corporate finance is by applying its

models and theories to real-world problems

Although the theory that has been developed over the past few decades is impressive, the

ultimate test of any theory is application. As we will argue, much (if not all) of the theory

can be applied to real companies and not just too abstract examples, though we have to

compromise and make assumptions in the process.

 76

The discipline can be divided into long-term and short-term decisions and techniques.
Capital investment decisions are long-term choices about which projects receive
investment, whether to finance that investment with equity or debt, and when or whether
to pay dividends to shareholders.

On the other hand, the short term decisions can be grouped under the heading "Working
capital management". This subject deals with the short-term balance of current assets and
current liabilities; the focus here is on managing cash, inventories, and short-term
borrowing and lending (such as the terms on credit extended to customers).

Capital investment decisions are long-term corporate finance decisions relating to fixed
assets and capital structure. Decisions are based on several inter-related criteria.
Corporate management seeks to maximize the value of the firm by investing in projects
which yield a positive net present value when valued using an appropriate discount rate.
These projects must also be financed appropriately. If no such opportunities exist,
maximizing shareholder value dictates that management returns excess cash to
shareholders. Capital investment decisions thus comprise an investment decision, a
financing decision, and a dividend decision.

Development Auto Industry:

As computer and robot technology has become more advanced, robots are
increasingly able to perform more complicated tasks.

Industry that produces automobiles and other gasoline-powered vehicles, such as

buses, trucks, and motorcycles. The automobile industry is one of the most
important industries in the world, affecting not only the economy but also the
cultures of the world. It provides jobs for millions of people, generates billions of
dollars in worldwide revenues, and provides the basis for a multitude of related
service and support industries. Automobiles revolutionized transportation in the 20th
century, changing forever the way people live, travel, and do business.

The first practical car, built by German engineer Karl Benz in 1885, initiated the era
of automobile manufacturing. Benz made improvements to the internal combustion
engine and invented the differential drive and other automotive components. The
company Benz founded grew into one of the largest automobile manufacturers in
Germany.

The automobile has enabled people to travel and transport goods farther and faster,
and has opened wider market areas for business and commerce. The auto industry
has also reduced the overall cost of transportation by using methods such as mass
production (making several products at once, rather than one at a time), mass
marketing (selling products nationally rather than locally), and globalization of
production (assembling products with parts made worldwide). Between 1886 and
1898, about 300 automobiles were built, but there was no real established industry.
A century later, with automakers and auto buyers expanding globally, auto making
became the world's largest manufacturing activity, with nearly 58 million new
 77

vehicles built each year worldwide.

An automated nozzle applies a coat of paint to a section of automobile chassis on an

assembly line. In automobile production, paints and varnishes are commonly sprayed
as electrically charged powders that adhere by electrostatic attraction; heat causes
the powder to become a film. This process is called electrophoresis.

As a result of easier and faster transportation, the world economies have become
dependent on the mobility that automobiles, trucks, and buses provide. This mobility
allowed remote populations to interact with one another, which increased commerce.
The transportation of goods to consumers and consumers to goods has become an
industry in itself. The automobile has also brought related problems, such as air
pollution, congested traffic, and highway fatalities. Nevertheless, the automobile
industry continues to be an important source of employment and transportation for
millions of people worldwide.

Future of Auto Technologies:

Automobile propulsion technology under development include gasoline/electric and plug-

in hybrids, battery electric vehicles, hydrogen cars, biofuels, and various alternative fuels.

Research into future alternative forms of power include the development of fuel cells,
Homogeneous Charge Compression Ignition (HCCI), stirling engines, and even using the
stored energy of compressed air or liquid nitrogen.

New materials which may replace steel car bodies include duraluminum, fiberglass,
carbon fiber, and carbon nanotubes.

Telematics technology is allowing more and more people to share cars, on a pay-as-you-
go basis, through such schemes as City Car Club in the UK, Mobility in mainland
Europe, and Zipcar in the US.

At the start of the 21st century, the trends of global trade and manufacturing
flexibility continue. Computerization continues to be a major part of auto design and
manufacture, as do the search for alternative fuels and more efficient automobile
designs.
 78

Conclusion of Research

Chapter 5

Conclusion:
 79

Pakistan auto industry has started to come out of shadow with the introduction of new
producers beginning this year. Since its inception Suzuki has been enjoying the position
as market leader in small car segment. While Honda and Toyota compete for the high
price segment of the market. Suzuki commenced production in 1983 eyeing the small and
LCV car segment, 800cc- 1000cc. The industry continued to be regulated until early
1990's, after deregularization, major Japanese manufacturer entered the Pakistani market
to produce locally.

So far, Pak Suzuki, Honda Atlas and Indus Motor have been dominating the market,
emergence of competition this year was experienced by the entrance of Dewan Farooque,
Daihatsu and Hyundai Motors in the market with a number of new product line. This
intense competition has totally changed the paradigm of Auto Industry in Pakistan. Pak
Suzuki has been a sole market leader in assembling 800cc and 1000cc small passenger
cars as well as 1000cc jeeps, Potohar. In 1993, Toyota started its operation and in the
proceeding year 1994 Honda Atlas has commenced its operation in Pakistan as the main
competitors in 1300-2000cc segment but the Suzuki has an edge over the market with
1300cc (Margalla) Baleno.

Automobile market has become more competitive in recent months as new players are
going to introduce their products in the market like Daihatsu has launched its 850cc
Daihatsu Coure, Dewan Farooque has launched its Kia classic 1300cc and Hyundai
Santro Plus 1000cc car. There are a number of new products like Kia Shuma 1500-
1800cc car by Dewan Farooque Motors.

The sudden competition in small car segment is expected to pose challenge for Pak
Suzuki, the former lone player in the market and other leading name in the market. In
near future, Dewan Farooque will offer the widest range of products in the domestic
automobile market. The trend of localization is experienced at large in the industry.
Toyota is also following the trend of localization with 3o per cent on its all models of
1300-2000 cc Corolla. Toyota has also achieved an 18 percent deletion on its 24 cc Hilux
trucks, the deletion status in 1500 cc and 1600 cc models of its Civic cars is about 30 per
cent and 28 per cent on its 1300 City cars.

Increased deletion level and entrance of local manufacturers in Auto industry is the
healthy sign for the future progress of auto industry in Pakistan. It has been attracting
investments and has the potential to attract future investment. It is imperative to
completely utilize the production capacity in order to get the lucrative benefits for the
country as well as organization.

The most striking issue in today's auto industry is the emergence of new competitors in
the market which is definitely a major cause to change the auto industry scenario in
Pakistan.
 80

Self-reliance instead of self-sufficiency is the bottom line of Pakistan’s industrial policy.

Its direction is defined by the twin considerations of import-substitution and export-
orientation. Value-addition is a national priority to improve our position on the value chain.
That is why more investment is required in technology transfer.

Pakistan’s investment space is vast. Imperatives of the investment continuum e.g.

economic interest of the country and the financial interest of the individual investors are the
key considerations. There is a kind of an organic link between the national economic interest
on the one hand and the individual’s financial interest on the other. Sustainability of this
linkage is the key to a win-win situation. This is being achieved by completely freeing the
Government from the upfront controls and regulatory overhang which it had instituted on
investment over the years. Trade and industry is no more being controlled by the
Government. The private sector is now in the drivers’ seat. The Government is trying to put it
on the high road of development.

Approach is fast-track. The policy focus is shifting to the provision of the following
requirements; namely:

• Adequate policy framework

• Simplified operating procedures
• Strong support mechanisms
• Easy access to capital
• Upgrading technologies
• Enhanced productivity
• Reliable quality control
• Enhanced management skills
• Well-trained manpower
• Improved marketing skills.

Thus a reliable investment environment is being developed. The strategic preference is

massive change instead of marginal one. Value-addition is our national priority for increasing
national wealth.

This requires upgrading of technology and capacity-building in design

development for improving our position on the value chain. There is therefore an
immense scope of cooperation and technology tie-ups for cost-effective co-
manufacturing of automotive vehicles in Pakistan for domestic and export requirements.
The Asian and Pacific region’s support to Pakistan’s volume-starved automotive sector
and nascent vendor industry manufacturing auto parts for OEM and export markets is
therefore a felt need of Pakistan

References:
 81

Websites:
www.toyota –indus.com
www.hondamotors.com
Www.Wikikipedis.com

Books:
Economics of Pakistan by Saeed Nasir

Articles:
By Dawn news paper.
Given in different websites.

Financial Reports:
Honda Motors Limited 2007 & 2008
Toyota Indus Motors 2007 & 2008
82