DETERMINANTS OF THE PERFORMANCE OF AUTOMOBILE INDUSTRY FROM 1995 TO 2010-A CASE STUDY OF PAKISTAN Thesis By MUHAMMAD AQIL In Partial Fulfillment of the Requirement for the Degree of Doctor of Philosophy (Ph. D.) in Social Sciences Under the Supervision of DR. FAROOQ AZIZ Presented to Hamdard Institute of Education and Social Sciences HAMDARD UNIVERSITY July 2014 Dedicated to My Parents, Wife and Children Who always support me! i Abstract The study was primarily a quantitative and causal research. Its basic objective was to find out the nature and degree of macroeconomic factors that influence the performance of automobile industry in Pakistan from 1995 to 2010. The independent variables included per capita Gross National Income, Inflation Rate, Exchange Rate, Discount Rate, Unemployment Rate, Consumption Rate and Foreign Direct Investment. A sample of 10 firms was selected to explore the influence of macroeconomic variables on the performance of the firms and industry. The performance of the automobile industry was represented by Annual Sales, Annual Profit, Return on Assets, Return on Equity and Net Profit Margin. The impact of selected predictors was explored on five dependent variables of the industry. For this purpose, regression and correlation analysis was conducted to see the impact of macroeconomic variables on the performance of entire automobile industry. The panel data analysis revealed that Foreign Direct Investment was the most influential factor. In addition to this, Consumption rate, Discount rate and Unemployment rate also influenced the performance of automobile industry. Besides the analysis of entire industry, the impact of macroeconomic variables on the performance of individual firms was also studied. The analysis showed that the performance of all of the selected firms was influenced by one or more variables. Foreign Direct Investment appeared to be the most influential factor that helped improve the performance of firms in terms of sales and profitability. Other influential elements were Exchange rate, Consumption rate, Discount rate, Per Capita Gross National Income and Inflation rate. However, Unemployment rate appeared to be insignificant as its effect was almost negligible on the progress of individual firms. Therefore, this was concluded that the selected macroeconomic variables had significant impact on the performance of automobile industry in Pakistan from 1995 to 2010. ii Certificate of Approval This is to certify that MR. MUHAMMD AQIL has completed his research thesis entitled “Determinants of the performance of automobile industry-A case study of Pakistan from 1995 to 2010” in partial fulfillment of the requirement for the degree of Doctor of Philosophy under my supervision. I have reviewed the contents and the methodology which is according to the prescribed standard of the Hamdard Institute of Education and Social Sciences, Hamdard University Karachi. This Thesis is based on his own personal research work carried under my supervision and is not copied from any thesis, written earlier on the subject. Signature _____________________ Dr. Farooq Aziz (Supervisor) Dated: _______________ Karachi iii Acknowledgment I am very thankful to Almighty Allah Who is the most beneficent and merciful. He helped me to accomplish this difficult task. I could not jot down even a single word without His support. Allah provided me courage, patience, energy and skills to prepare this research document. I am also grateful to my research supervisor Dr. Farooq Aziz who always guided and motivated me to cope with various issues pertaining to my research. I am undoubtedly very lucky to have such a cooperative and helpful advisor. I would also extend a vote of thanks to my friend Dr. Saqib Rehman who offered regular assistance in understanding different technical problems of the thesis. I am also obliged to my parents, my wife and my children whose sacrifice and patience enabled me to work with concentration and zeal. I have the same feelings to my students and colleagues who encouraged me to carry on the research even in difficult times. Above all I am grateful to my Allah again Who is the final cause of every good work especially in this study. He is the only one entitled to take all the credit of this study. Muhammad Aqil iv Contents Abstract ......................................................................................................................... i Certificate of Approval ................................................................................................ ii Acknowledgment ........................................................................................................ iii Contents ...................................................................................................................... iv List of Table .............................................................................................................. xiii List of Figures .......................................................................................................... xvii List of Abbreviation .................................................................................................. xix Chapter One ................................................................................................................. 1 Introduction .................................................................................................................. 1 1.1 Background of the Study .............................................................................. 1 1.1.2. Evolution of automobile industry in the world .......................................... 3 1.1.3 Growth of global automobile industry................................................. 15 1.1.4 Economic significance of global automobile industry ........................ 17 1.1.5. Factors influencing the auto industry .................................................. 18 1.2 Purpose of the Study ................................................................................... 18 1.2.1. General purpose ....................................................................................... 18 1.2.2. Specific Purpose ...................................................................................... 19 1.3 Justification of the Study ............................................................................ 19 v 1.4 Scope of the Study ...................................................................................... 20 1.5 Hypothesis................................................................................................... 20 1.6 Definition of Key Terms ............................................................................ 21 1.7. Basic Assumptions ...................................................................................... 21 Chapter 2 .................................................................................................................... 22 Review of Literature .................................................................................................. 22 2.1 Performance Measurement ......................................................................... 22 2.1.1. Rationale for performance measurement ................................................. 23 2.1.2. Approaches to performance measurement ......................................... 24 2.1.3. Key financial indicators for automobile industry .................................... 26 2.2 Determinants of the Performance ............................................................... 34 2.2.1. Past studies in automobile sector ............................................................. 35 2.2.2. Contribution of this research ................................................................... 35 2.2.3. Macroeconomic determinant of the performance of the firms and industry ................................................................................................................................... 36 2.2.4. Review of statistical tools. ....................................................................... 44 2.3. Automobile Industry in Pakistan ................................................................ 45 2.3.1. History of automobile industry in Pakistan ............................................. 45 2.4. Economic Significance Pakistan’s Automobile Industry .......................... 55 vi 2.4.1. Contribution of auto parts suppliers and original equipment manufacturers to GDP............................................................................................... 56 2.4.2 Contribution to employment ..................................................................... 56 2.4.3 Contribution to export ............................................................................... 57 2.4.4 Development of auto parts industry .......................................................... 58 2.4.5. Automobile sector and investment .......................................................... 60 2.5 Original Equipment Manufacturers ............................................................ 61 2.5.1. Pak Suzuki Motors Company Limited. ................................................... 62 2.5.2. Indus Motors Company Ltd ..................................................................... 62 2.5.3. Honda Atlas Car Pakistan Ltd ................................................................. 63 2.5.4. Dewan Farooq Motors Ltd ....................................................................... 64 2.5.5. Hinopak Motors Limited ........................................................................