General Tyre & Rubber Company of Pakistan Limited – An Academic Study

General Tyre & Rubber Company of Pakistan Limited – An Academic Study

The Race Is On

On August 11, 2002 while sitting in his office Mr.Haroon A.Zubairi a new CEO was working on the feasibility report for shifting the Head office of General Tyre Pakistan from its current location to its Plant location in Landhi industrial area of Karachi. This shifting was first step towards his major cost reduction assignment given to him yesterday in the meeting of Board of Directors in order to revive GTR’s declining market share and eroding profitability since last two years due to bashing at hands of imported and smuggled tyres. He was thinking about measures he will take because he believed that there was a lot of room for improvement in his company.

He was also reflecting on the circumstances in which former CEO had quit stating the reason of his resignation was internal strife. Also how this Internal conflict between shareholders of GTR brought to a standstill the nomination of the CEO and the position remained vacant from Aug 2001 to Feb 2002 till his appointment as its new leader. As a result of this clash, the complexion of the Board of Directors had changed. Bibojee, which once had 7 directors on the board of 12 directors, now has only 5 and majority positions were in the hands of Pak Kuwait Investment, NIT and Continental AG.

Major shareholders Bibojee Group opposed the continental AG who decided to invest  $ 85 million that the market watchers say would have made General tyre Pakistan a largest tyre company in Asia out side Japan. It would have generated export potential of $100 million a year.

 

GENERAL TYRE – OVER THE YEARS

General Tyre & Rubber Company was incorporated on March 7, 1963 as a private Limited Company having a production capacity of 150,000 tons/year with a paid up capital of Rs.7.125 million.  The original sponsors of the company were General Tyre International of Akron USA.  G.T. International, USA was established in 1915 in Akron Ohio. It is not a parent company to General Tyre & Rubber Company Pakistan in the traditional senses but has links via equity participation of provision of technical cooperation.

The production started in 1964 in the regime of Field Marshall Ayub Khan.  At that time, due to Marshal Law, the Generals had a lot of influence on many industries.    Lt. Gen. Habibullah Khan Khattak took as the Chairman of GTR in 1969 and by 1977 major share holdings went to Bibojee Group (Lt. Gen. Habibullah Khan and his heirs).  In 1982, General Tyre & Rubber Company was converted to Public limited firm and the major share holdings were with the Bibojee Group.

The company entered into a Royalty Technical Service Agreement (the ‘TSA’) dated September 1, 1984, with General Tire International Company (GTIC), USA whereby the company was allowed to use the GTIC’s trademarks such as ‘General’ and ‘General Tyre’. There are only few international companies providing technology to affiliates and licensees. Technical cooperation of GTIC with General Tyre, Pakistan has provided them the opportunity to utilize the results of GTIC’s R&D activities for the improvement of their product since GTR, Pakistan cannot afford big investments required for proper R&D necessary to meet the growing market requirements. As in the words of Mr. Jilani Baig (Senior Manager Tyre Engineering) that  ‘We don’t have to reinvent the wheel.’

In 1985, after 22 years of its establishment, first enhancement was done in the plant. The capacity of the plant was increased to 600,000 tyres per annum at a cost of Rs. 520 million.

In 1987, continental AG of Germany acquired General Tire International, USA. Continental has operations in several countries of the world. As far as General Tyre, Pakistan is concerned there was no effect on them only that they had to pay the royalties for the brand name, they were using.

In 1988, General Tyre & Rubber Company Pakistan produced tyres for Formula-3 Racing Cars and exported them to United Kingdom under technical agreement with M/s. FAST Performance Tyres Ltd, UK.  Radial tyres were also exported to Kuwait and Dubai in small quantities. Nepal and Bangladesh were also the countries to which truck & bus tyres were exported. The production of racing car tyres could not be continued due to plant limitations and decrease in plant efficiency due to racing tyres.

In 1992, capacity of plant was further enhanced from 600,000 to 800,000 tyres per annum. Until 1993, the company was producing Bias tyres only. From 1994, regular production of radial tyres for passenger cars started.  The total capacity of the plant remained same but the production of Bias tyres was reduced. Farm tyres capacity was also increased in 1997 due to high demands in agriculture sector in which General Tyre, Pakistan achieved the top most ranking in Pakistan.

In the same year, a Banbury Mixer (It blends the rubbers, oil, carbon & chemicals to obtain the rubber sheet) burnt and was destroyed.  Since then, the process of mixing had been sourced out.  Due to unavailability of funds, a new banbury mixer had not been installed yet. According to one company official, Mr. Ali Husain (Manager, Production Planning & Control), that mixing should remain sourced out, as this was cost effective.

The TSA (Royalty Technical Service Agreement) which started in September 1984, was last extended by mutual consent of the company and Continental General Tyre International Company, USA (CGTIC) up to October 31, 1999. The compliance period after termination of ‘TSA’, was 3 months.  It was further extended up to August 31, 2000.

The Company received a letter from the Trade Marks Registry (TMR), Government of Pakistan on July 24, 2001 which stated that GTIC had applied for cancellation of the company’s status as a user of ‘General Tyre’ trademarks. The Company approached Conti (Continental AG of Germany) and requested it to allow the company to continue to use their trademarks and to enter a fresh TSA. But, Conti advised the company that it wanted to complete the process of cancellation of registration of the trademarks first.

Since that time, General Tyre, Pakistan has become a battleground of conflicting interests of its foreign (Continental AG) and local (Bibojee Services Ltd.) partners which eventually led to the resignation of its Chief Executive officer and one of the senior most corporate leaders in Pakistan, Dr. A. S. Mufti, in early days of August 2001.

Continental had decided two years ago to invest 85 million dollars in General Tyre, Pakistan. “Without this investment, Continental felt that their brand General cannot regain consumer preference and gain acceptability of major automakers”. A senior executive pointed out. Continental tried to increase its shareholding from 10% to 51% after acquiring them from Bibojee and others but it did not work.  According to this executive, the Continental felt aggrieved over the attitude of the Pakistani shareholders, and have now decided to withdraw their brand ‘General’ from General Tyre, Pakistan. The proposed expansion from 800,000 tyres to 4,000,000 tyres per annum would have enabled it to meet substantial part of domestic demand and earned about 100 million dollars a year from export.

Corporate Management: A Battleground of Conflicting Interests

On August 27, 2001, Security & Exchange Commission of Pakistan appointed Muhammad Tariq, a senior chartered accountant, as its inspector to investigate into the gory affairs of GTR and determine the role of two leading financial institutions Pak Kuwait Investment Company Limited (PKICL) and National Investment Trust in the GTR’s management mess within a 14-point term of reference. Simultaneously the management of GTR had sought a month-long extension from the Registrar of Trade marks on an application of Continental General Tire Inc., which sought termination of technology transfer and deletion of trademark ‘General”. This investigation appointment came in the wake of almost two years long dispute between the major shareholders of GTR. These shareholders are the original sponsors of the company in Pakistan i.e. Bibojee services of Chief of Staff late LT. General Habibullah Khan Khattak, now being run by his heirs; Continental Business Unit USA which is the technology, expertise and trademark supplier and has technical collaboration with GTR Pakistan and has 10% stake; Pak Kuwait Investment company and National Investment Trust. Bibojee Services complained of PKICL and NIT’s high-handedness and ganging up to constitute majority shareholding and eventually complete takeover control of the Board of Directors. They got majority of their directors elected in the annual general meeting of shareholder of GTR in 1999 and subsequently took over the management from the original sponsors. Bibojee Service’s contention is that according to 1976’s established policy of Government of Pakistan, financial institutions should not take over the management of companies. On the basis of their majority in the Board, the NIT and PKICL elected their nominees as chairman and deputy managing director in the company in 1999. At the same time, on the other hand, there’s Continental AG of Germany vying to get over 50% control of the GTR, for their viewpoint is that after taking over the management they plan to invest around Rs 85 billion in GTR’s production facilities and thus improve their brand name and the resulting goodwill. If all goes well, this will make GTR Pakistan the largest tyre manufacturer in Asia outside Japan. But the foreign partner has failed to get the Boards consensus a number of times due to the Boards own vested interests. This unending conflict of ongoing tussle between the majority shareholders now threatens the very existence and survival of one of the oldest and good corporate names in the country that once had a turnover of Rs. 2500 million annually and got the standing of a reputed MNC under the outgoing CEO’s leadership.

Market analyst see this in-house dispute of shareholders in the GTR growing into a major international issue fraught with consequences that are not desirable for Pakistan’s foreign investment environment which needs such investments. As quoted by one insider, “This brewing controversy is expected to reach the offices of European Union in Brussels, WTO in Geneva and World Bank in Washington because major German financial institutions like Deutsche Bank and Allianz Insurance Company are the shareholders of Continental AG, parent of Continental General tire Inc. USA. This controversy will give a severe jolt to the foreign investment climate in our country.”

Though the incoming new CEO, a chartered accountant hailing from the auto industry, joins at the time when the trouble is rife, he still brings with him new ideas and comes as a breath of fresh air and provides a much-awaited respite to the 1100 tensed employees of this pioneer tyre manufacturer in Pakistan. He promises to get the house in order through cost cuttings and wants to put the organization back on the track of being a leader and regain its former glory. But how far he will be successful in achieving all these goals, only time will tell.

ECONOMIC FACTORS

GTR is extremely vulnerable to economic forces such as inflation, exchange rates & earning potential of the consumers. Inflation rose by 4.7% in the year 2000-01as against 3.4% of the comparable period of last year.1 The inflation has been on an upward trend since the last five years. With this as the purchasing power of consumers erodes they look for cheaper alternative tyres. Import of passenger car tyres and consumer car tyres has increased significantly since 1997 & 1998.The growth rate for import of passenger car tyres was 50% in 1999-2000.In light truck tyres it was 436% during the same period. No of truck/bus tyres imported was 25433 in 1991-92 and .in the year 2000-01, 501555 tyres were imported that is a growth of 1872.06% over a ten-year period. Exhibit 1 shows last ten years imports statistics for all major categories of tyres.

Exhibit-1   TYRE IMPORT STATISTICS (Summary)
CATEGORY 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-2001
PASSENGER
CAR
273,460 173,443 222,597 412,761 414,334 232,986 318,753 364,608 548,478 489,979
% 21 12 17 26 26 12 15 19 30 30
LIGHT
TRUCK
7,609 10,008 3,012 23,918 19,297 29,853 29,944 35,281 160,621 123,977
% 1 1 0 2 1 2 1 2 9 7
TRUCK
/ BUS
25,433 21,338 22,158 130,722 188,921 238,924 397,768 306,173 352,009 501,555
% 2 2 2 9 12 13 19 16 20 30
FARM
TYRES
150,406 257,598 152,757 143,416 114,713 181,665 75,801 88,116 82,055 79,305
% 12 18 12 9 7 10 4 5 5 5
NON
SPECIFIED
832,691 952,645 916,225 808,065 886,465 1,209,788 1,243,796 1,157,157 658,010 460,990
% 65 67 70 53 55 64 60 59 37 28
TOTAL 1,289,599 1,415,032 1,316,749 1,518,882 1,623,730 1,893,216 2,066,062 1,951,335 1,801,173 1,655,806

 

For Farm tractor tyres imports are on a declining trend. Compared to 150406 tyres imported in 1991-92 only 79305 tyres were imported in 2000-2001 . The gap has been filled by GTR as there is no doubt that market for farm tyres has been growing by each passing year. Sales of farm tyres are directly proportional to increase in growth rate of agricultural sector and availability of finances to farmers to purchase tractors. Till the year 2000 ADBP remained very active in arrangement of loans for tractors consequently tractor tyre sales were registering an impressive growth since 1997 till 2000.In year 1999-00 Agriculture sector showed a growth of about.6.1%. In the year 2001 the growth dropped down by 2.5% as the agriculture sector was badly hit by long drought and shortage of irrigation water 3.

There has been a rising preference to travel by road, which is indicated by the increase in no of roads. The annual growth in roads has been quite impressive. In 1990-91the total roads were 170823Km which were increased to 249959Km in 2000-01 that is a growth of 46.3% over the last 10-year- period .The passenger traffic on roads has been increasing an average of 6.2% since 1994& 95,where as the rail usage has been declining even though road freight charges have increased almost by 6.5% since 1994-95 4. Automobiles Industry has also recorded a higher growth particularly in production of light commercial vehicles, jeeps and motorcycles but that was however offset by the fall in the output of tractors as the ADBP curtailed its loans. Production of small cars 800 to 1000 CC also increased   with the output of Hyundai and Daihatsu coming in to the market and proving popular.5  The demand for passenger car tyres has also been stimulated by an upsurge of leasing companies becoming extremely active during the last 3-4 years. Currently car leasing is contributing up to 40% of all car sales in the country. 6 Leasing is further likely to support auto industry as down payments are being reduced.

As raw material used in production is imported from countries such as Malaysia, Singapore Korea, Taiwan, Indonesia, Japan, Thailand, Malaysia, Egypt, Iran, and currency exchange rates play a vital role in cost competitiveness. PAK rupee has always been demonstrating a declining trend. In the fiscal year2000-01 Pak rupee fell against $ by 18.5% .The reasons were bleak economic conditions Pakistan’s rising external debt, mounted pressures from lending authorities. Rupee further jerked down when in March 2001 nationalized bank and State Bank purchased $400 to $500mn for oil and debt payments. Rupee was further undermined when ADB announced that inflation rate would rise to 6% in fiscal year 2001-02 7.

Competitive Scenario

In 1998-99, the customs duty on car and truck tyres was reduced from 70% to 35%. Sales tax on all categories was 15%. Since 1998 the customs duty on bus tyre has been 15% in addition to sales tax. Ever since the government replaced the Import trade Price with the world trade organization’s evaluation system in January 1999,there has been an increase in import of tyres from East Asian countries. In June 2001 Finance Minister Mr.Shaukat Aziz admitted that industry had been facing stiff and unfair competition against cheaper imports and smuggling of tyres. He reduced duties on raw materials such as synthetic rubber, tyre cord fabrics and bead wire from 10% to 5%. He also reduced the duty on import of truck tyre from 15% to10% to reduce smuggling8.

This scenario has given rise to the increase in imports from 15.19 lacs to 19.89 lacs in 98-99. Among the imported brands GTR is having tough competition from Goodyear, Yokohama, Bridgestone, Michelin, Silverstone, JKF, Dunlop, Slime, Kumho, Siam and many other brands of Indian, Chinese, Japanese, Korean, and Far Eastern countries. Some imported brands such as Michelin and Bridgestone are offering excellent after sales service through their local network. Exhibit-2 below shows percentage split of imports by country during last three years.

Exhibit-2  Tyre Imports (Category wise major contributors)        
CATEGORY COUNTRY 1998-99 1999-00 2000-01
PASSENGER CAR KOREA 26% 31% 26%
JAPAN 33% 17% 22%
CHINA 9% 29% 23%
LIGHT TRUCK CHINA 13% 45% 56%
THAI 17% 17% 16%
JAPAN 0% 13% 15%
TRUCK/BUS CHINA 18% 29% 38%
INDIA 33% 20% 16%
THAI 15% 19% 13%
FARM TYRES CHINA 29% 33% 35%
TURKEY 27% 18% 25%
RUSSIA 9% 12% 19%

According to (APTIDA)9 report of 2000 tyres of Indian and Japanese origin have taken the local market by storm and around 770,000 tyres are being smuggled annually causing an estimated loss of Rs. 2100 million annually. The dealers state that Japanese tyres are cheaper by Rs. 1000 compared to locally made and imported tyres  while Chinese tyre are cheaper by Rs 2000 additionally the quality of these is far better compared to local tyres.

Smuggling is being facilitated by lax enforcement and detection, tax anomalies, lack of patronization by the government agencies etc. Due to the prevailing adverse circumstances in which the local industry operates three out of the five tyre manufacturing  factories including Atlas tyrs, King Tyres and Delta tyres have ceased to exist. See exhibit-3 for local manufacturers

 

Exhibit-3   Local Tyre Manufacturers.

Name of manufacturer Status Tech.Affliation Range Capacity per year
General Tyre Operational GTIC All categories 800000
Delta Tyre Closed Avon PC/LT 120000
Atlas Tyre Closed None PC/LT/FF/MC 180000
Service Industres Operational None PC/LT 120000
King tyres Closed None PC/LT 60000
United Rubber Industries Operational None PC/LT 100000

On the contrary, the import duties in the Iran were raised in 2000 from 7%-38% to protect the local tyre industry whereas the tariff rates in India are 30 % on the imports and excise duty is 30%.

Among the problems besetting the industry in Pakistan is high tariff levied on imported raw material of tyres and tubes. This has raised the cost of production of the finished product which has rendered the local industry uncompetitive compared to the imported ones. As regards the  local raw material, the industry has also complained, it is far below the required quality and , more over, it does not fill the technical specifications. The local manufacturers of tyres and tubes, therefore prefer imported raw material. These factors have posed serious challenge to the survival of tyre  industry in Pakistan.

In order to increase the deletion level of OEM Government has made it mandatory for OEM to buy tyres from Pakistani manufacturers (see exhibit-5 for OEM and their total demand).  In passenger car segments OEM are major customers of GTR. Under WTO `s regulation there will be no restriction in any area after 2005.OEM will be free to buy from where ever they like. Exhibit-4 shows major OEM purchasing from GTR.

Exhibit-4    ORIGINAL EQUIPMENT MANUFACTURERS

CARS HONDA/TOYOTA/SUZUKI/NISSAN/HUANDAI/KIA
LCV`S MAZDA/TOYOTA/SUZUKI/HYUNDAI.
TRUCK/BUS HINO/NISSAN/ISUZU/VOLVO
TRACTORS ALGHAZI Tractors/ MILLAT Tractors

 

5% of total GTR`s sales are to government organizations such as Army& Defense Services, Oil and Gas development company, Pakistan Petroleum Limited, Karachi Port Trust and a few more. Government contracts are mostly acquired through bidding or  are awarded to GTR  on the basis of going market rates.

Exhibit-5    GTR sales and Market demand

SEGMENT GTR`s sales units Market share % Market size  units
Passenger car 340000 36.4 933000
Truck and Bus 40000 4 950000
Light truck 150000 18.75 800000
Farm tyre front 150000 50 300000
Farm tyre rear 100000 50 200000

The company’s average sales in terms of tyre units has been near production that is 785000 of which   55% is sold in the replacement market, where as total demand of replacement market is approximately 2.9 million a year. (Company’s Internal Sources)

 

Paradise For Smugglers

In 1985 General tyre did the most desirable expansion after since it started working 21 years back and its production capacity increased from 800 tyres to 2500 tyres per day. This expansion was still not catering to the local market demand and there was a clear invitation for the smugglers and importers to push their brands into the replacement market.

According to the report written by APDITA in 2001, smuggling of tyres is causing an annual loss of Rs.2100 million to the country.

Dumping was commonly practiced by foreign manufacturers and for a long time this was done mainly through smugglers who took advantage of high tariffs imposed on tyres & tubes. China also took advantage of the situation and dump low priced and moderate quality tyres into Pakistani markets. Importers blamed the Govt for being lenient towards China.

In 2000 in neighboring countries import duties on importing tyres were increased, like in Iran the duty was raised from 7 % to 38% in order to protect the local industry. Same was practiced by Indian Govt. the tariff rates were 30% on imported tyres with 30% excise duty. Where as in Pakistan in 2001 the import duty was reduced on imported tyres from 15% to 10%.

 

Culture of Agriculture:

Pakistan as a developing country has a weak agricultural base with traditional methods of cultivation. Scope for improvement through gradual shift in this sector was highlighted through the Green tractor scheme launched by Nawaz Sharif’s Government.  This had increased the production of farm tyre manufacturing of GTR.

Due to political reasons the next Govt. closeddown the Green tractor scheme. This turned into the reason for halt in agricultural progress along with the unavailability of easy loan facility to farmers from Agricultural Development Bank. These inconsistent policies due to the changes in political scenarios resulted into decrease in demand of tyres in local market and finally into surplus of farm tyres inventory for GTR. Later on in march 2002, GTR exported 500 farm tyres to Syria.

 

Be Pakistani Don’t Buy Pakistani:

Social culture in the Pakistan is exactly reverse of “Be Pakistani and Buy Pakistani thinking”. It is though that imported goods are of high value and the people are willing to pay high prices for imported products. A Tyre dealer on M. A. Jinnah road stated that People ask imported tyres regardless of the Brands. Besides that the over all culture of Pakistanis is they do not follow load limits and other standards for driving despite of bad road conditions that result into wear and tear for vehicle tyres. In this scenario, GTR was using the slogan of ‘Proud to be Pakistani’ in its print media ads.

Suppliers

Foreign approved suppliers of raw material to GTR were exporting 98% raw material of its total requirement. In this international environment the speculation of prices was done frequently by procurement department due to uncertainties, which were seasonal output  trends of natural rubber production, fluctuation in international oil prices and currency devaluation. GTR was practicing the contingency production planning to cop up these ambiguities through receiving the order of raw material three months before production time. Procurement manager GTR in an interview said that they were trying to develop new local suppliers from Pakistan The first initiative taken in this regard to develop a supplier for valve of tubes.

 

OPERATIONS

Presently, General Tyre & Rubber Company is a broad based Public Limited Company engaged in the manufacturing and marketing of a complete range of tyres and tubes for cars, LCV jeeps, trucks, buses and tractors.

The paid-up capital of General Tyre & Rubber Company is presently Rs. 170.7 million. The major shareholders of the company are Bibojee Services Ltd 34%, Pak Kuwait Investment Company 27%, NIT 12%, and Continental AG of Germany 10%.

All the major car manufacturers, Suzuki, Toyota, Honda, Nissan, Hyundai, Kia and Fiat, buy tyres from General Tyre & Rubber Company, Pakistan. There is an embargo on car manufacturers from Government of Pakistan that they have to buy tyres from some local manufacturers of tyres in Pakistan.

Mr. Haroon A. Zuberi is the new Managing Director after Dr. A. S. Mufti. He has come from Gandhara Nissan Group, which is  headed by the Bibojee Group as well.

MANUFACTURING

Tyre manufacturing became an important industry in the first half of the 20th century as motor vehicles increasingly became the dominant mode of transportation.  The demand for original equipment tyres was directly related to the number of new motor vehicles currently produced, while the demand for replacement tyres depended on such factors as the number of vehicles in service, the average number of miles driven per vehicle, and tyre tread durability.

In bias ply tyres the tyre casing consisted of many thin sheets of rubberized fabric, called plies, which were alternately layered crisscross with their grains diagonal or on a bias.

Radial tyres emerged as the fastest growing segment of the industry. Radials appealed to consumers because of their improved safety and puncture resistance, better skid and traction performance, contribution to better gas mileage (due to less friction with road surfaces), and longer service life.

Tyres consisted of four basic components 1) the casing or carcass that formed the skeleton of the tyre; (2) the tread – made of compounded rubber, (3) the sidewall, also made of compounded rubber, that sheathed the casing and protected it from damage, and (4) high tensile steel bead wire that was formed into stiff loops and then embedded in parts of the sidewall and casing to give the tyre added strength and to prevent the edges of the tyre from stretching. Tyre manufacturing was a three-stage process that included materials processing, fabrication of the component tyre parts, and tyre assembly.

Material Processing

Over 200 different raw materials were used in manufacturing tyres, the most important of which were natural rubber, synthetic rubber, fabric and fabric cord (nylon, rayon, polyester, and/or fiberglass), polyvinyl alcohol, sulfur, crude oil, carbon black, and high carbon steel bead wire.

Virtually all of the raw materials were commodities available in bulk form from a variety of sources.

The principal functions during materials processing involved cutting the rubber, mixing the needed rubber compounds and making sheet rubber, and putting adhesive on the cord and then heat setting the fabric.

Fabrication of Components

During this phase several activities took place. The bead wire was rubber coated and formed into loops. Rolls of cord fabric were treated to facilitate bonding, then cut on an angle and spliced into a continuous sheet in preparation for making the casing. Some sheet rubber stock was milled to the desired width and thickness, forced through an extruder to form tread slabs of exact dimensions and design, cooled, and the “green” treads stored until time for assembly.

Tyre Assembly

This multistage process first involved assembling tyre casing and sidewall components on a rotating collapsible drum called a building drum. At the next step several workers using a tyre building machine added belts and the tread to produce a green tyre. Green tyres were sprayed with mold release lubricants, painted, inspected, and moved to the curing press. Tyres assumed their final shape through the use of high pressure and high temperature in the molding press (referred to as the vulcanization process). Cured on vulcanized ties were next moved to the buffing and trimming areas where excess molding material was trimmed off and white raised letters or whitewall stripes buffed out. The completed tyre was electronically tested, visually inspected, and stacked for shipment.

A tyre builder could only build 100 radials in the time required to build 150 bias ply ties. In addition, quality control and inspection of radials was more labor intensive than for bias ply tyres.

Curing press is expensive equipment. GTR runs these presses in all three shifts to achieve their production targets. The presses, which were installed in 1960s, are not used now because their operating cost has risen.

Besides production / manufacturing, there are other departments which work under factory management. These departments include Production planning and control, Quality assurance, Industrial engineering, Tyre engineering and Compounding.

 

PRODUCTION PLANNING & CONTROL (PP&C)

The department of PP&C organizes and coordinates the entire range of manufacturing activities. It gives the overall plan of production and ensures the availability of material, equipment and manpower, in the right place at the right time.  FIFO is used as the inventory valuation method to control raw material, work in process and finished good inventories. They ensure that the production is achieved as per plan and no machine down time because of PP&C department.

 

 

QUALITY ASSURANCE

Quality Assurance Department deals with implementation of procedures and standards given by GTIC for consistent quality. OEM’s also give their requirements, which are more stringent. Quality Assurance has six sections:

  1. Quality Assurance Lab deals with the inspection of the raw material.
  2. The quality auditors from QA-In-process Section work in different shifts and do the in-process sampling.
  3. Quality Engineering Section generates different quality investigation reports. It also develops quality procedures and specifications for all areas of production. Some key functions like Tyre Uniformity Evaluation and Static and Dynamic Balancing are also the responsibility of this department.
  4. Reliability Testing is another section, which has the responsibility for different tests like Tyre Endurance Test and Tyre High Speed Test.
  5. Tyre X-ray Unit, which was installed specially for radial tyres.
  6. Claim Section checks the claimed tyres that whether the claim is true or not.

Most of the inspection processes are labour intensive, which increases the probability of defective units passing unnoticed.

 

INDUSTRIAL ENGINEERING

Main functions of Industrial Engineering are :

  1. Man power Planning: On the basis of no. of tyres to be produced given by Production Planning Department, the man power requirement is calculated on monthly basis.
  2. For the improvement of plant, different work-studies and feasibilities are made.
  3. Arrangement of overall plant layout to facilitate the overall operations and keeping the safety aspect in view.
  4. Time and motion study: Calculation of production time for completing a particular job and using it in man power planning and other estimates.
  5. Job Analysis: The department is also responsible for making categories of labour for job assignments on the basis of their experience, age, health etc. The majority of the laborers are illiterate and therefore it is difficult to explain standards and procedures in order to run the operation efficiently and effectively.

 

TYRE ENGINEERING

The main responsibility of tyre engineering department is to enforce the standards, procedures and specifications given by CGTIC regarding tyre design in the production process. The department has also taken initiative to modify the design according to the local road conditions after approval from CGTIC. They have also started development of patterns and drawings of tyres in-house, which used to come from CGTIC. They also do the failure analysis of the tyres returned as claimed tyres. Tyre Engineering Department has the capability to develop designs locally.

 

COMPOUNDING

The job of compounding is to describe proper allocation of various raw materials in all types of tyres and their models. Very minute errors result in compounding in serious defects at production stage, which may reject the whole batch of tyres.

FINANCIAL PERFORMANCE

Corporate revenue in 2001 (as shown in exhibit) amounted to over 1.96 billion.  Over the years the sales have shown a positive growth  but at a declining rate.  Last year profit before taxation was 2.8 mn down by 0.4 mn as compared to 3.26 mn in year 99-2000.Net profit margin   of 17.16 % befor taxation  was the highest in 2000 then it went down to 14.57% of sales in 2001. Exhibit-6 shows  five year financial summary and common size and selected trend analysis.

Gross profit margin on the average has been 21% of sales, except 2000 when it went to 26.53% of sales.  The company has reduced its usage of debts over the years. Debt to assets ratio that stood at 64.64% in 1997 in the year 2000 has been brought down to 56.25% of total assets. Long-term debt in proportion to equity has also been declining. Currently operating assets stand at a net worth of 3.69 mn. Compared to 2.4 mn in 1997.

Exibit-6     Five Years at a Glance
figs ‘Rs in million” 2001 2000 1999 1998 1997
Operating Results
Gross Sales        2,348        2,282        2,105        1,666        1,355
Net Sales        1,967        1,902        1,788        1,404        1,089
Gross Profit           448           505           390           286           137
Profit before tax           287           326           179           115               2
Profit after tax           189           200           102             75               3
Dividend 60% 60% 35% 20% 0%
Financial Position
Fixed Assets           369           352           362           283           287
Share Capital           171           171           171           171           171
Reserves & Unappropriated profit           497           410           312           270           229
Shareholder’s equity           667           581           483           441           400
Long-term Loans             14             49             84             86           123
Breakup value per share (Rs)             39             34             28             26             23
Number of Employes        1,002        1,011        1,045        1,024        1,128

 

Exibit-7

Exibit-8

Average collection period over the five-year period has been 30 days on the average, except for 2001 when it was 42 days. Current ratio also shows an improving trend over the period. Working capital also improved because of the declining payment of over all liabilities over the years. Book value per share has been rising steadily and currently stands Rs 39.08 per share. The book value is quite close to the market price of Rs 40 in 2001. (See exhibit-9 for the five year high and low market price). Since 1998 company has paid cash dividend .It was 20 % of par in 1998 and was increased to 60 % in 2001.

The company has a separate finance department that is involved in maintaining books of accounts preparing budgets reporting variances, managing taxation, providing timely management information and carrying out feasibility studies of major projects. The sales forecasting is the starting point of the planning process in the finance department

 

Exibit-9     Five Years high and low market price
YEAR YEAR HIGH YEAR LOW
1997 34 14
1998 39 15
1999 60 21.25
2000 73.15 40
2001 49.50 38
2002 40 38

 

SALES & MARKETING

The company possesses a full range of tyres. The segments included; Passenger Cars (Bias & Radial), Light Trucks & Vans, Trucks & Buses and Tractors (front & rear).

The brand awareness of GTR’s tyre is very high. The brand is strong in car radials and farm tyres. The company enjoys the monopoly being the lone supplier to OEMs in Pakistan. These OEMs are; Toyota, Honda, Suzuki and others. The company also provides credit to its customers. Credit terms are reviewed from time to time considering market situation. Offering discounts encourages cash transactions. The credit limit is 15 days for replacement market. This limit is of 30 days for OEMs and government institutions. They also supply tyres to arm forces and other government organizations.  The biggest sales are in replacement market i.e. 55%, whereas 40% sales come from OEMs and the rest (5% ) from government organizations.

Sales force is divided in 3 regions and within these regions in 8 zones countrywide. The regions are Karachi, Lahore and Rawalpindi/Islamabad. The zones in these regions are:

Karachi zone – Karachi, Hyderabad and Sukkur

Lahore zone – Lahore, Multan, and Faisalabad

Rawalpindi zone – Rawalpindi/Islamabad and Peshawar

There are 11 people to look after the replacement market and 4 to manage relationships with OEMs. Marketing and Sales people have an orientation at factory to better understand the products manufactured by GTR.

The major market share is in PC (passenger car segment) 36.4%, TB (truck & bus segment) is 4%, LT (light truck segment) is 18.75%, Farm tyres enjoy the highest market share, in a market that is flooded with imported world famous brands i.e. 50% (both rear and front tyres). The company runs sales promotion for dealers. The average expense on sales promotion as a percentage of sales is only 0.23% (during 1997-2001). (see Exhibit 10)

Exibit 10 – Sales Promotion as a % of Sales
figs ‘Rs 000″ 2001 2000 1999 1998 1997
Net Sales 1,966,983 1,902,260 1,787,891 1,403,635 1,089,312
Advertising Expense 8,988 7,950 847 1,480 1,261
Adv Exp as % of Net Sales 0.46% 0.42% 0.05% 0.11% 0.12%
Avg 0.23%

The GTR tyre is competitively priced in PC (passenger car) segment. Whereas in TB (truck & bus) segment their tyre is competitively priced against Indian brands but Chinese tyres are the cheapest in this segment. GTR’s tyre is not highly priced in any segment. The price image it carries is affordable in the market. . (see Eexhibit-11)

Exibit 11 – GTR’s Price Ranges  
  (For Registered Customers)  
Price
Type Range (Rs)
Min Max
PC – Bias 875 1,200
PC – Radials 1,160 2,400
LTV 1,325 3,450
T&B 5,350 12,785
Tractors (Front) 1,550 2,840
Tractors (Rear) 8,200 17,000

 

The customer’s taste keeps changing in tyre’s market. OEMs usually introduce new designs and sizes of tyres, this creates a demand of the same type of product in the replacement market. GTR tries to keep pace with the changing customer needs, but currently do not have highly flexible plant, which results in a delayed response.

The company faces strong competition in replacement market with the imported as well as smuggled tyres. The manufacturing countries are India, China, Korea, Japan, Indonesia, Thailand, Turkey, and Russia.  The competition in replacement market is becoming intense day by day. The overall tyre market in the country is approximately of 3.2 million tyres per annum, whereas the maximum capacity of GTR is about 800,000 tyres. This shows a big gap between demand and supply. This gap is filled through imports and smuggling. The percentage split is approximately, 50% import, 30% local manufacturing and 20% smuggling (source: GTR’s marketing department and replacement market).

The company traditionally does not believe in advertising. Mostly print media and POS are used, TV commercials are on aired for farm tyres during April to June every year to attract farmers. The print media used by the company is all leading local magazines and newspapers. The trend is changing in the company. Usually, advertisements are prepared in national language (Urdu). The company is now more committed to penetrate existing markets through frequent advertising. The print advertisements are mostly given in the local language (Urdu). The actual advertising expense as a percentage of sales on average is only 0.38% (during 1997-2001) (see Exhibit 12). The latest ad campaign created by the company is for tractor tyres market with the slogan in urdu “ moti guddi wala tyre…. General tyre”. The company has rolled out a program under which major tractor workshop owners have been contacted to convince tractor owners to use only General tyre, so that using “word of mouth” strategy can influence farmers’ choice.

Exibit 12 – Advertising Expense as a % of Sales

figs ‘Rs 000″ 2001 2000 1999 1998 1997
Net Sales 1,966,983 1,902,260 1,787,891 1,403,635 1,089,312
Advertising Expense 2,843 7,886 6,926 7,627 4,738
Adv Exp as % of Net Sales 0.14% 0.41% 0.39% 0.54% 0.43%
Avg 0.38%

 

The company has 159 dealers at present. The dealership network covers the entyre country. The evaluation of distribution needs and dealer network is a continuous process and adjusted according the latest prevailing market requirements. Dealers compensation is around 7%, whereas other brands are offering a relatively higher compensation. The company runs a point system for its dealers to reward good performers. The points accumulated on the basis of sales, and dealers get a refund of a particular amount as per their sales breakup during a period. The company has three warehouses, in Karachi, Lahore and Rawalpindi.  Trucks are used as the transportation medium. (see Eexhibit 13)

Exibit 13 – Sales Commissions
Imports Retailers
Brands Commissions Commissions
Min max Min Max
Chinese 2% 8% 5% 8%
Korean 10% 15% 8% 8%
Japanese 15% 18% 15% 20%
Malaysian 15% 18% 10% 12%
Thailand 15% 25% 10% 12%
France/Italy above 30% 15%

 

There used to be no formal market intelligence/ information system. Mr. Asad Usmani of marketing department has just started this process. They are in a process of setting up a regular management information system (MIS) which will help in decision making and developing plans and tactics as per the changing market requirements. In the initial stage, they have started gathering data on formal imports of all related tyre segments. In the next phase they are planning to start the same exercise for smuggled tyres in the  country.

The company has an edge over its competitors by offering full replacement guarantee for all types of tyres if the purchased product did not perform up to the mark. This offer makes company’s products more reliable than others. However, there are delays at times in settling claims to dealers.  The company personnel also conduct spot checks at dealer’s locations, to solve their problems at their place and providing full guidance and assistance for smooth distribution of their products.

Human Resources and Personnel

According to A. F. Ferguson’s, an HR consulting agency, in their MNC Executive Salary Survey 2001; GTR stands 10th among top 10 best-paying corporation in Pakistan. That same survey also rates GTR’s post-retirement and gratuity schemes among the bests in Pakistan. Also due to strong influences of labor unions, employees get around 7-9 bonuses a year. This shows enough about the pay structure and that employees take pride in remaining associated with this organization for as long as they live and show a high level of satisfaction with their emoluments. They only leave after reaching superannuation. Therefore there’s a very low turnover of employees, which is around 3%.

Strategic planning and organizational development unit of HR is responsible for devising policies and rules and regulations of GTR relating to all areas of corporation’s business and ethical practices and employees’ behavior, conduct and activities and GTR’s social obligations. The performance evaluation system is not well structured. Salary review is done annually and is performance based.

The training and development of employees from all ranks is done on ad hoc basis and is both in-house and out-sourced. Among the outside training agencies are Pakistan Institute of Management, Employees Federation of Pakistan, Petroman, LUMS, NCR to name a few. Of late the training and development unit has been merged with industrial engineering unit to reduce cost under the orders of the current CEO.

Most jobs at GTR are internally filled through employee’s and customer’s references.  Normally employees are rotated to fill up a position, but if no match exists then the job advertisements are placed in the classified sections of newspapers. There are total 54 paid leaves for an employee to avail in a year.

Majority of the labor force is illiterate even though the minimum qualification requirement for the labor class is secondary school certificate as per company’s policy. These workers doing the tough manual jobs on the machines are hired through 3rd party contract agencies and are paid on the average in the range of Rs. 5000 to Rs. 6000 plus various fringe benefits. For them the pay structure is commission based on piece rate system.

GTR had always been a constant target of environmental watchdogs over its irregularities of waste disposal and non-compliance of environmental laws. According to an Industrial Relations official, “As far as the standards set by the government regarding labor safety are, they are being strictly followed. But the standards regarding the environment are not possible for GTR to be followed due to no pollution abatement equipment.” In 1998 there was a brief labor unrest when laborers were demanding a rise of bonuses but at that moment GTR stood its ground and soon the issue was resolved through negotiation with CBA officials to maintain industrial peace. In 1999 the company had to pay Employees Old-Age Benefit Institution Rs. 60 million in compensation as the company had failed to comply with EOBI directives as per law of 1984.

The average age of employees is high for their jobs from any standards. Since there’s no other tyre manufacturer in a non-existing tyre industry in Pakistan, the employees with specific technical skills related to tyre manufacturing have no other option but to say in the organization and this is further complemented by major attraction of premium salaries.

Decision-making at GTR is rather the prime affair of top management team of strategists consisting of MD, DMD, CFO, GM Marketing, Divisional Manager and Factory Manager. Management Team Members are qualified people and have been in the organization for a long period of time.

Future outlook & Conclusion

An analyst in the wall street transcript predicted on November 19, 1984 that all  not the then companies will survive:

I believe that you will see Goodyear ,Michelin and Bridgestone increase their dominations of the world wide tyre markets by improving their respective domestic market share in the United states ,Europe and Japan. These market share gains will result from successfully competing against the smaller tyre manufactures on a tyre versus tyre basis rater on a consumer brand name perception basis. Such an approach will enable them to showcase their technological superiority, rather than just showcase their names. you will still see the “ second tier” tyre manufacturers remaining competitive in certain market segment simply because allowing their tyre operations to deteriorate would be economically unjustifiable to them.

 

Today in 2002 a lot of it has come true the survival of GTR is directly dependent on its ability to remain competitive in the face of stiff foreign competition. To do so the company has taken some tough measures like; increasing its advertising budget, improving its promotional efforts, improve production efficiency, retain OEMs even after deletion program is over and increase sales of farm tyres.  The company is also committed to enhance relationship with dealers. They also have plans to manufacture small parts and equipment locally to reduce their dependence on imports and thus, saving foreign exchange for the company. To cut cost and improve coordination the new C.E.O has decided to move the head office in factory premises where a lot of space remains unutilized. A new building is to be build for the head office.

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