Cases in ManagementMAN Diesel & Turbo launches MAN Truck in Pakistan

Submitted byGroup #A4Submitted to Mr. Talha Salam

Dated: 05/05/2014

MAN Diesel & Turbo Launches MAN Truck in PakistanMachinenfavrikAuvsburg-Nurnberg (MAN) SE is a German mechanical engineering company and parent company of the MAN group. MAN Diesel & Turbo Pakistan primarily deals in engines (marine applications) & gas turbines (Power plants). The company recently launched its Truck business in Pakistani market. With significant shift from agriculture to service base, the country direly requires vibrant transportation system (vehicles as well as road infrastructures). The strategic geopolitical location of Pakistan and a significant number of development projects in the pipeline coupled with the potential for becoming a transit point for trade between the central Asian, South East Asian and Chinese economies makes the truck industry of Pakistan ripe with opportunities. The company was faced with stiff competition from local players in the truck industry, who are backed by the government and the NHA (National Highway Authority).PakistanGeographyPakistan is the 36th largest nation having a total area of 796,095square kilometers(307,374 square miles). In the South it has a 1,064 kilometer coastline along the Arabian Sea. Between the latitudes 23o-37oN and longitudes 61o-78oE it shares borders with Iran and Afghanistan in the West, India in the East and China in the Northeast, while Tajikistan is separated by a mere 18 kilometer strip of land called the Wakhan corridor. In a nutshell it occupies a strategic position in the region and has the potential to connect the important regions of South Asia, Central Asia and Middle East. The history of the land area falling within the territorial boundaries of present day Pakistan substantiates this assertion as it is replete with foreign incursions from the North, the West and even the South. Its road links with all the surrounding neighboring countries, the land locked Afghanistan, the Central Asian Republics, and a preferred sea link to Western China makes this distinction even in a purely business perspective, both unique and formidable. The ongoing disturbed political situation in Afghanistan and the presence of a large number of US and NATO troops under the legal cover of International Security Assistance Force (ISAF) has accentuated the centrality of Pakistans location and its indispensability in regional trade and support activity.EconomyPakistan has a semi-industrialized economy with discernable shift from agriculture to service base where former contributes only 20% and latter 53% of the GDP. An effective and vibrant transport system contributes directly in economic well being of a country. Today, road transport is the backbone of Pakistans transport system. It accounts for 90 percent of national passenger traffic and 95 percent of freight transport. The passenger and freight demand has been growing at a steady pace. On one hand where it assists in enhancement of supply chain, on the other it generates revenues for the government exchequer in direct/indirect taxes on vehicles and related industry. Efficacy of a sound transport system is heavily contingent upon quality and size of a countrys road network. Successive governments have invested in construction of the countrys only motorway. So far four sections have come up on ground (M-1, M-2, M-3 and M-9). It is envisioned to eventually stretch from Peshawar in the North to the Gwadar port in the South. While Peshawar via Torkhum provides a gateway to Afghanistan, in the West another road joins Grand Trunk or GT Road (N-5) at Hasanabdal, near historic city of Taxila. This road meanders through Abbottabad to eventually transform into the Karakoram Highway (KKH) and provides a vital strategic route on the foot prints of fabled Silk route to China, in the North East. The government of Pakistan under a phased but continuous plan is upgrading and widening this, one of the countrys only three, strategic road(s). Once a link up is complete this could well be the only ground link between Western China and an all weather sea port tremendously truncating a circuitous and far lengthier sea route via Chinese ports in its Eastern provinces. Similarly, the recently completed Makran Coastal Highway (N-10) links Karachi to Gwadar and beyond. In total, Pakistan has 17 federalized highways, 4 completed sections of motorway and three strategic roads (KKH: S-1; Kohala-Muzafarabad: S-2; Muzafarabad-Chakothi: S-3). Today total length of the existing road network is about 259,618 Km of which 179,290 Km is classified as high type roads and 80,328 Km as low type roads. At present, the national highways constitute just 4% of the total road network they get 80% of all the commercial traffic. Pakistan is the worlds 6th most populous country with population estimated at 196 million (2014), whereas the neighboring Afghanistans population stands at 31.8 million, Chinas at 1.35 billion, Irans at 80.8 billion and Indias at1.23 billion.[footnoteRef:2] But the whole region is not connected properly. As reported in the Economic Survey of Pakistan - 2010 more than 40% of Pakistans horticultural produce go waste due to inadequate transportation system. Afghanistan has a national trucking fleet of 100,000 vehicles whereas Pakistan has only 250,000 vehicles. When compared on a geographic and population based level, this number is dismally low and indicates the potential this sector has in Pakistan. [2: The World: Population (2014)- http://www.geoba.se/population.php?pc=world&type=28]

Company BackgroundHistoryMAN Group is a multinational based in Germany with a rich history that goes back 250 years; see Exhibit 1-2 for company history (twin roots and company timeline). MAN Group has been engineering the future since 1758[footnoteRef:3] and has succeeded in powering the world. (See Exhibit 3 for technology timeline) [3: "MAN Group | MAN SE."MAN Group | MAN SE. http://www.corporate.man.eu/en/ (accessed April 19, 2014).]

MAN GroupMAN Group is one of Europes leading commercial vehicle, engine and mechanical engineering companies, generating annual revenues of around 15.7 billion euro, employing a workforce of approximately 53,500 in 120 countries. It offers a range of innovative products such as trucks, buses, diesel engines, turbo machinery, special gear units and complete power plant solutions with all its corporate divisions at leading market positions; see Exhibit 4 for MANs leading business areas. MANs strategy focuses on creating sustainable enhanced value in its fast growing business areas of Commercial Vehicles and Power Engineering.[footnoteRef:4] [4: "Company structure of MAN | MAN SE."Company structure of MAN | MAN SE. http://www.corporate.man.eu/en/company/man-at-a-glance/structure/Overview.html (accessed April 19, 2014).]

It has two main divisions. MAN SE and MAN AG while MAN Latin America is considered a separate unit. MAN SE has subgroup; MAN Diesel & Turbo SE and the subgroup of MAN AG is MAN Truck & Bus AG. (See Figure 1 for Company Divisions)MAN Diesel & Turbo (MD&T)Initially MAN Diesel and MAN Turbo were two separate subgroups with MAN Diesel focusing on diesel engines while MAN Turbo focused on gas and steam turbines and compressors. In 2010, both the divisions were combined to form one single subgroup; MAN Diesel & Turbo SE. This subgroup is the worlds leading supplier of large diesel engines and turbo machinery for maritime and stationary applications, including a wide range of products with varying specifications. The MAN PrimeServ brand provides their customers across the globe with after sale services with the company operating in more than 100 international locations.[footnoteRef:5] [5: Footnote 3]

MAN Latin AmericaThis subgroup is actually the largest truck manufacturer in Brazil and a leading supplier of commercial vehicles and bus chassis with one of the most advanced production facilities throughout the world that are marketed under both Volkswagen and MAN brands.MAN Truck & Bus AGIts the largest company under MAN Group and leading provider of commercial vehicles and transport solutions. Its product range is wide including specialized, heavy duty commercial vehicles. MAN Truck and Bus tends to provide customers with extensive range of services and that too from a single source.

Figure 1: MANs Company Divisions

MAN Latin AmericaMAN Truck & Bus AGMAN Diesel & Turbo SEMAN GroupMAN AGMAN SE

MAN Diesel & Turbo PakistanMAN Diesel & Turbo Pakistan (Pvt.) Ltd. is a 100% subsidiary of MAN Diesel & Turbo SE that was established in 2008 to serve its customers base in Pakistan. Their aim was to offer their customers the best products and technology with principal objective of serving customer needs of best after sales service and technical support.[footnoteRef:6]Under the PrimeServ brand, the company provides after sales services and support for the entire range of engines and turbo machinery. [6: "MAN Diesel & Turbo SE - MAN DIESEL & TURBO PAKISTAN." MAN Diesel & Turbo SE - MAN DIESEL & TURBO PAKISTAN. http://www.mandieselturbo.com/pakistan (accessed April 21, 2014)]

As they are the manufacturers of all these products (engines and turbo machinery), they also supply genuine parts, field services, technical support, over haul and training to their customers to help keep their equipment and business run flawlessly.[footnoteRef:7] [7: Company data]

In 2008, the company in Pakistan operated under MAN SEs subgroup MAN Turbo (at that point in time there were two separate subgroups MAN Diesel and MAN Turbo); see Exhibit 5 for MANs Divisional Structure in 2008 and in 2010. The company in Pakistan focused on engines; low speed (80-200 RMP) and medium speed engines (600-900 RPM) that were typically used in Marine engines (50% share worldwide making MAN global market leader) and power plants (thermal energy i.e. gas turbines). In Pakistan, 80% of the market share was held between two companies, General Electric and SIEMENS while from the remaining 20%, 15% was held by WARTSILA (an aggressive competitor of MAN Group in Pakistan and around the globe) and 5% by MAN Pakistan.[footnoteRef:8] [8: Company data]

Before coming to Pakistan, MAN already had installed base, providing furnace oil solutions at Atlas Power Plantwith eleven MAN 18V48/60 engines and a ten-year operation and maintenance contract, HUBCO Power Plant in Narowal with same number of engines and a six-year long term service agreement[footnoteRef:9], SEPCOL and Gaddoon of around 700-800 RPM (total of 30-35 machines installed in Pakistan on Turbo division). Hence, establishing themselves here was a move to satisfy their customer base in Pakistans market. [9: "MAN Diesel, Turbo Pakistan expands services" The Daily Mail. http://dailymailnews.com/0313/30/Business/index.php?id=3 (accessed April 20, 2014).]

Government Policy StatementIn 2011-2012, the government policy changed. The policy statement being Not to invest in furnace oil solutions; this affected what MD&T was anticipating in the Pakistani market and the company faced problem in terms of growth. MD&T now had to come up with a plan to facilitate its growth in Pakistan and the option decided was to introduce MAN Truck into the Pakistani Market. See Figure 2 for MAN Truck & Buss product offerings.

Figure 2: MAN Truck & Buss Product Offering Types

MAN Truck & Bus

Diesel Based SolutionsGas Based SolutionsMarine Based SolutionsMAN TruckHigh Speed EnginesRigidTractorMAN Bus

See Exhibit 6 for details on types of trucks (Rigid and Tractor)The LaunchMAN Truck was successfully launched on March 28, 2013 in Pakistan with its latest product, TGS WW. At the launch,David van Graan, Head of MAN Center Middle East and Vice President Sales and Marketing said:MAN Diesel & Turbo Pakistans exceptional performance and impeccable credentials were key factors when MAN Truck & Bus decided to choose itsrepresentative in Pakistan. We see Pakistan as an important market with a lot of potential and I am confident that we can deliver a world class value proposition through MAN Diesel & Turbo Pakistan backed by a MAN trained service team, customer oriented mind-set, and our innovative brand heritage to emerge as the leading player in Pakistans commercial vehicle industry.[footnoteRef:10] [10: "MAN Diesel, Turbo Pakistan expands services" The Daily Mail. http://dailymailnews.com/0313/30/Business/index.php?id=3 (accessed April 20, 2014).]

Dr. Stephan Timmermann, responsible for the Strategic Business Units Marine Systems and the After Sales Division PrimeServ in the MAN Diesel & Turbo Executive Board added, Pakistan is an important market for all our business areas and opportunities arise from the infrastructure projects starting in the near future coupled with the trade corridor opening from India to Central Asian countries.[footnoteRef:11] [11: Footnote 8]

Imran Ghani, Managing Director of MAN Pakistan also reflected that, Pakistan is among the D-8 countries with an annual growth rate of 7.5% GDP for 2000-2007. This led to high demand of power in the country and MAN Diesel & Turbo decided to have its representation in Pakistan which has proved to be the right decision reflected by profitable growth in the last four years and In context of this growth, MAN Diesel & Turbo Pakistan finds it the right combination to grow the business in the field of commercial vehicles.[footnoteRef:12] [12: Footnote 8]

Truck Market of PakistanThe Trucking Policy by the Engineering Design Bureau declares this sector to be an Industry. The Freight Forwarding has already been declared to be an industry by the Government in the year 2005 which covers the soft portion of trucking operations. Pakistans truck manufacturing sector consists of 12 manufacturers, out of which six plants are operational, four are producing mini trucks and two are closed. The six production plants that are operational are all located in Karachi. These manufacturers manufacture 16 various models of trucks and 11 models of prime movers. There is no manufacturer who manufactures any variant bigger than the 360HP/PS prime movers. Most of prime movers either comply with Euro-1 or up to Euro-II, whereas modern countries have reached up to Euro-VI. These are the European emission standards that define the acceptable limits for exhaust emissions of new vehicles sold in EU member states. Historically, the overall annual plant utilization has varied between 15.9% and 31.4% over the last eight years. Problems Faced by Prime Movers in Pakistans Truck MarketThe issues and barriers that prime movers face in the Pakistans truck market are:Fleet Composition & TechnologyCurrently there is a population of around 173,300 trucks plying on the roads. The poor state of technology, presence of old & obsolete fleet and rigid trucks dominantly 2 & 3 axle suspensions, the sector cannot be expected to get integrated to international trade routes. The present state of affairs prevailing in this sector is largely due to the absence of requisite polices and non-existence of an intelligent transport system.Trucking Sector's Non-Recognition as an 'Industry'Until recently, in spite of the repeated demands from the stakeholders to formalize this sector, the trucking sector was not declared as an Industry due to its weak overall structure. Ownership of trucks is limited which hinders profitability and acquisition of modern trucks. This also results in overloading. The trucking Sector has been marginalized in Pakistan and is in almost fragmented state, with no concept of corporatization that can bring about related benefits.Financing / Leasing IssuesPresently, the sector obtains financing through informal practices which are largely controlled by a few investors who are responsible for obsolete and old truck fleets in the country. Low cost financing by the banks and leasing companies, as available for cars and the light vehicles segment, is not available to this sector. The main source of financing for small operators is private financiers who charge very high interest and demand short repayment periods.Insurance ProblemsThe insurance companies are not ready to provide insurance cover to truck operators. There are three main types of insurance relevant to the sector, namely; (a) Cargo insurance(b) Vehicle insurance(c) Personal insurance. Insurance companies are not providing any type of cover to the transport sector because of the fact that individual truckers do not fulfill the legal requirements for insurance. The sector is therefore not being encouraged by the Insurance Companies.Freight Charges An unhealthy and intense internal competition prevails in the sector, which compels it to operate at very low profits. The increase in the fuel prices during the last few years has depressed revenue per loaded km of an articulated truck which in real terms has declined by an average of 1.4% per annum. This is because of the unbalanced land freight demand in Pakistan, largely due to dependence on seasonal transportation of agricultural goods. High Truck Operating Cost and Low ProfitsA large population of trucks is old and structurally weak, with the drivers having a tendency of overloading these trucks which are in bad shape already. The freight rates are low, due to which the profitability is low. Therefore no re-investment is possible with such low profitability levels.ServiceabilityLow quality of service is seriously impeding Pakistans trade competitiveness both at internal and cross-border levels. With only two ports in the South of country, the delivery times are longer as compared to other countries. The up-country movement of a Pakistani truck from the Karachi Port takes 3-4 days which is twice the time taken in Europe or East Asia for a similar journey.Motor Vehicle Examination (MVE)Motor Vehicle Examination is a provincial function and is being governed through Provincial Motor Vehicle Ordinance 1965 Section-39, Provincial Motor Vehicle Rules 1969 Section-35 and National Highway Safety Ordinance (NHSO-2000). Weak regulations and poor enforcement of Motor Vehicle Laws is a great setback to our system. MVE has no proper testing workshops and skilled human resource to examine the vehicles and their offices are located in congested areas in most of the cities. As such, no physical inspection of vehicles is conducted and the MVE is reduced to being merely a rubber stamp function.Axle Load ManagementThe illegal modification of trucks by non- qualified road side fabricators, low freight rates due to unhealthy competition and prevalence of ineffective vehicle examination system in the country results in overloading of vehicles which damages the roads and causes accidents. According to an estimate, 70% of the 2, 3 axle trucks and 40% of 4, 5 and 6 axle trucks are overloaded.Road DeteriorationRoads deterioration and damages due to overloading are imposing huge infrastructure maintenance cost as well as slow travel times and high fuel costs.Poor Registration SystemFurther, due to non-existence of a uniform, standardized and regulated registration system, it has become difficult to assess the number and categories of rigid, articulated and multi-axle trucks plying on the road.Logistics Planning and Trans-Freight StationsNational Highway Authority (NHA) and Urban Planning Departments have failed to develop proper transport planning in urban areas. There is no concept of Trans Freight Stations (TFS) in Pakistan that could make multiple facilities available at one place. Large trucks are allowed to travel within the cities and are a cause of unchecked congestion. World over, the concept of TFS, or dedicated facilities, has helped develop and streamline the logistics planning systems. So far no such system has been introduced in Pakistan which could provide facilities at dedicated sites to support operations in the trade distribution chain along with providing facilities to the truck drivers, such as rest areas etc. Other support facilities at TFS like Workshops, Outlets of MVE's and E&T Department (E&TD) functions, etc. could counter the problems associated with large vehicles entering into the main cities for obtaining various services.

Drivers Training, Licensing & Other IssuesCurrently there are no training institutes for the proper training of drivers in accordance with international standards and best practices applicable to driving a truck. 80% drivers are trained on old trucks, and are not aware of the modern systems, requirements and rules & regulations for trans-border trade. Although truck drivers play an important role in freight movement and the overall trade activity, they are one of the most neglected segments of our society, with no access to medical and other support facilities. Their working hours are stretched and there are no proper rest and re-creational facilities for them. This leads to inefficiency, high accident rates and low productivity.Absence of National Standards for Trucks and TrailersThere are no standards for trucks and trailers plying on the roads. The Motor Vehicle Examiners have no yardsticks against which to match the specifications and performance of the vehicle being examined. Illegal and unauthorized modifications that use sub-standard materials and technically flawed practices are being carried out by road side fabricators. These practices damage OEMs specifications and are a major safety hazard and cause of road accidents.

Anti-Aerodynamic DesignOwing to the prevailing non-scientific culture and absence of National Standards &Specifications for Trucks/ Trailers, trucks plying on Pakistani roads have bodies which do not conform to any rule of aerodynamics. According to an estimate, resistance to air flow created by such truck bodies increases fuel consumption by at least 15 to 20 percent.Border ClearanceThe border clearance procedures are non-standardized, cumbersome and time consuming adding to the cost and time of operations.Import of Used PartsThe serious flaws in the system need to be corrected in relation to import of parts and components in scrap form / sub-standard condition. In spite of regulations and checking by almost five government agencies, such parts and components are being released and supplied to the open market in large quantities.Environmental ProtectionMost of the trucks do not comply with Euro Specifications, which are the most widely accepted standards. The world has moved to Euro 4 & 5 environment friendly engines, while in Pakistan, compliance with even Euro- 1 standard has not been introduced. Similarly availability of sulphur free diesel is another challenge that requires to be addressed.Price and spare parts issueLocal transporter is totally biased towards low initial purchase price, free and cheap availability of spares and after sales support. Their overriding consideration is that their truck should be such that could be repaired on road side between Karachi to Peshawar virtually anywhere in Pakistan.Price set by older players of marketPrice based strategy followed by the older players in the market, and vulnerable mindsets falling to it, is a considerable threat once viewed in the backdrop of MAN high end product and its price.The Truck Market Segmentation and Existing Players in PakistanSegmentation The truck market primarily consists of three basic segments; light duty, medium duty and heavy duty segments, within which further are divided into the following: Long Haulage (Transport): Construction (Dump trucks) Municipality (Fire engines, Cranes) Distribution (Light duty-beverages, FMCGs) MilitaryMAN Trucks are European trucks, that are typically medium and heavy duty trucks offered in Pakistan.Existing PlayersPakistans Truck market consists of following players: Volvo (Swedish) Daewoo (Korean) Afzal Motors manufactures truck (previously acquired by TATA Motors) Hino (Japanese)-manufactures trucks as well as buses- Hino Pak Karachi FAW (Chinese)-manufactures Alhaaj motors in Karachi Kamaz (Russian) Howo (Chinese) ISUZU (Japanese)-assembled in Pakistan Master Motor Corporation- manufactures and assembles automobiles having ISO certificationVolvoIt is Swedish brand operating in Pakistan for about 30 years. It had previously set up a manufacturing plant in Pakistan in 1996, but had to withdraw from manufacturing activities from Pakistan due to the slump in the demand for trucks in the wake of the economic sanctions imposed upon the country as a result of the atomic tests of 1998.Now Volvo operates as a dealer of Nissan UDtrucks as it has acquired Nissan UD worldwide and is importing Nissan from Japan. It has an agreement with Gandhara Nissan to assemble Nissan trucks in Pakistan in Pakistan. Volvo has made this move in order to compete with the cost effective solutions provided by Hino and FAW by bringing in a low end truck instead of importing Volvos own trucks that are too expensive for the Pakistani market.Daewoo Trucks PakistanIn Pakistan, Daewoo Trucks are being exclusively, distributed and manufactured by Afzal Motors Pvt. Ltd., Karachi, Pakistan.[footnoteRef:13] [13: "Afzal Motors. http://afzalmotors.com.pk/ (accessed April 22, 2014).]

HINO Pak Motors LimitedIt is engaged in assembling, manufacturing and marketing of world renowned HINO trucks and buses in Pakistan. Toyota Tsusho Corporation and Hino Motors Japan with the collaboration of Al Futtaim group U.A.E and P.A.C.O Pakistan created Hino Pak Motors Limited in the year 1986. The company is having top positions in domestic market for heavy transport vehicles and strictly adheres to quality control and standards in manufacturing superior vehicles.[footnoteRef:14] [14: Hino Pak Motors Limited. http://hinopak.com/ (accessed April 21, 2014).]

FAW Motors ChinaFAW produces commercial vehicles in Pakistan that include light, medium, and heavy duty trucks, passenger cars, SUVs, and luxury tourist coaches with its head office situated at Karachi.ISUZUIt is a Japanese company that assembles its vehicles in Pakistan which are then distributed by Gandhara Industries Ltd. who are the sole distributors of ISUZU in the market. Its customer base includes Sind Police, Pakistan Air Force, FC Quetta and Peshawar.[footnoteRef:15] [15: "Gandhara Industries Ltd. http://www.gil.com.pk/ (accessed April 27, 2014).]

Master Motor Corporation Limited:MMCL plant is situated in N.W.I Zone, Port Qasim Karachi, and the company is engaged in manufacturing and assembling of automobiles having an ISO certification. MMCL is a subsidiary of Master Group of Companies; The Company is an authorized manufacturer and assembler of Japanese and Chinese commercial vehicles including Mitsubishi Fuso, Yuejin, and Foton. Master Motor produces commercial vehicle from 1.5 tons of loading capacity to 60 tons, other than that company is also offers mobile workshop facility.[footnoteRef:16] [16: Master Motor Corporation. http://www.mmcl.com.pk/ (accessed April 22, 2014)]

MAN Truck in Pakistans Truck IndustryThe Pakistani market presents a unique opportunity for European truck manufacturers. They produce state of the art trucks that have a longer life, greater resistance to wear and tear, more load carrying capacity and greater compliance to quality, safety and emission standards. The presence of MANs Prime Serve facility for turbo chargers is an added advantage as it can serve as platform to launch new initiatives and act as its support base. Another point worth noting is the presence of Asian routes in Pakistan; see Exhibit 7. These routes link Southeast Asian countries to Central Asian countries, provide many land locked countries in the region access to an all year deep sea port, and as a consequence turn the country into a strategic transit point for all sorts of trade and transport between the emerging economic powerhouses of the region. This factor is playing an important role in uplifting the economy of Pakistan by generating economic activity and employment. The routes create potential for truck market to grow and opportunities for the companies like MAN to enter with quality products. As of now there is no significant quantity of prime movers being exported from Pakistan and all the locally produced (assembled) trucks are sold locally.According to AnsMahmood, sales manager of MAN Trucks:Truck sales serve as an important indicator of contraction or expansion of an economy as trucks move commodities, which are dependent on the well being of the economy and in developing countries there is a huge growth and development potential and where there is development, there exists a need for transportation, not only of people but of commodities as well; thus making Pakistan an attractive truck market.However, MAN Truck serves a niche segment which requires trucks to be imported. The production time is 60 days and the delivery time is 30 days as the order goes into queue. The reason for such a long period for delivery is that there is only one production facility (one of many) that serves the needs of this region.[footnoteRef:17] [17: Interview with AnsMahmood, Sales Manager, MAN Truck (April 21,2014)]

MAN Trucks target segment, Competitors and Government RegulationsIn terms of broader segments, there are two main segments: transport (60% of the market) and distribution (40%). MAN Truck cannot technically target distribution because it consists of light duty trucks; the largest player in this segment being the Japanese truck company, ISUZU which is locally assembled in Pakistan. These distribution trucks typically move within the cities or at the maximum between adjoining cities and deliver goods typically from the distribution points to the retail outlets. The ISUZU MPR sells for Rs. 2 million to Rs. 2.2 million, whereas MANs CBU (complete built unit) is worth 40,000 that translates to Rs. 5.43 million. The MAN truck is further subjected to a 60% duty, making it cost 5 times the competition. Of the 60% of transport segment, 40% consists of long haulage trucks. This is the heavy duty segment, having completely different dynamics. It consists of local players having their own assemblies and sales and distribution channels. These trucks are priced at Rs. 6 million to Rs. 8 million whereas Mans truck is priced at Rs. 13 million to Rs. 14 million, which affects the sales. Furthermore the NHA regulations prevent MANs trucks, which have lower life cycle cost (in terms of fuel consumption, load carrying capacity, wear and tear, lube oil consumption, operating cost, payback period, etc.) from attaining their full potential in this segment, as they do not allow them to carry at full capacity; see Exhibit 8 for Allowable Load Limits Enforced by NHSO-2000. Also, there exists a clout of vested interests by the local players on the Regulatory authority (NHA), which has the genuine concern in them because they generate employment and provide cash circulation in the economy. Thus that 40% too, is difficult to capture. The remaining 20% is where MANs trucks compete. This 20% is where the market requires specialized trucks like those used for construction purposes. Such trucks have to deal with extreme loads, wear and tear threat, and uneven/uncertain terrain. In addition to the trucks needed during construction, MAN provides other specialized trucks like required in firefighting, mining, and oil & gas applications. Apart from these categories, one of the oldest and the biggest client of MAN in terms of truck purchase is the military.Arriving at the decisionMAN Pakistan was primarily dealing in diesel and turbo related products prior to the launch of its truck and bus business. In order for the firm to stay competitive and generate sustainable growth in the long run, it was imperative to keep offering continuous new product offering to the market from time to time. An important source of revenues was the after sales services that were required by customers some time after the sale. The setting up and upgradation of power plants in the country during the 1990s and in 2007-2008 revealed the unpredictable cyclic nature of this business, which was completely dependent on government policy and actions regarding development. Additionally, the company was selling products on the diesel and turbo front that were as much as 25 years old (in terms of their initial introduction globally). Revenues from this business were steadily flowing in at the time, but the company foresaw reduction in the volume of this business in the next 4-5 years, thus posing a threat to the sustainable growth of the company. The company converted this threat into an opportunity. As a group, MAN was operating across many product categories globally. Additionally, the government of Pakistan in 2009, began promoting CNG buses due to advantages of lowered fuel costs and near harmless emissions, reducing the import duty on such vehicles to 0%. MAN started out with buses and then began focusing on the trucks. The company employed the surplus cash at hand in the form of profits from the diesel and turbo business in order to establish the truck and bus division that was expected to break even within three years. Once they were done capitalizing on their strengths, they looked towards the market to find a considerable gap that they could fill using their competitive prowess in truck manufacturing. The most important factor that customers looked for when purchasing trucks was after sales support being offered by the manufacturer. MAN did not favor selling distribution and long haulage trucks in Pakistan partly due to the fact that such vehicles required workshops within cities and on highways respectively. Specialized trucks on the other hand (e.g. fire trucks and construction trucks) required the customer to build support and service points at the place where these are employed (e.g. fire station and construction sites respectively). This was one of the reasons why MAN targeted this niche segment, as it freed MAN from providing service workshops and thus reduced their costs.Pricing was another factor on which the decision to enter the market depended. Price was the main reason why MAN did not venture into the distribution truck and the long haulage truck market segment. The locally assembled trucks being offered in this segment by the various players were of significantly lower prices compared to trucks having similar specifications that could be offered by MAN (due to differences in quality and imposition of import duties on European trucks). But in the case of specialized trucks, price was not an issue as the customers in this segment required high quality, reliable trucks and value products having lesser lifetime costs (due to greater load carrying capacity, resistance to wear and tear and durability). Here is where the European imported trucks come into play. Among the European truck manufacturers, MAN has the added advantage of itself being present in the market, thus eliminating the need to have other members in the supply chain (such as dealers, agents and distributers) and therefore have greater profit margins as well as lower prices with respect to the competition.The Big Question:Was MAN Diesel and Turbo justified in entering the already crowded and highly competitive truck industry? Should they forgo the 80% of the market share they have conceded due to reasons mentioned above or should they go for a bigger piece of the pie? What if anything can be done to consolidate in the current market segment and increase MANs share?

Exhibit 1: Twin Roots of MAN

1921: GHH acquires majority share of M.A.N.1840:SanderscheMaschinen-Fabrik, Augsburg1758 : St. Ankthonyironworks, Oberhausen1873:Gutehoffnungshtte(GHH) go public1908:M.A.N Maschinenfabrik Augsburg-Nrnberg2006: Concentration on the four business areas; Commercial Vehicles, Diesel Engines, Turbo machinery and Industrial Services1986: M.A.N. merges with GHH, renamed MAN AG, based in Munich, Germany; individual divisions restructured as public limited companies

Exhibit 2: Company Timeline1750-18241758"St. Antony ironworks commences operation in Oberhausen as the first heavy-industry enterprise in the Ruhr region

1782The "GuteHoffnung" (Good Hope) ironworks starts up in Oberhausen

1805Establishment of "Sulzer-Escher Wyss" works in Zurich

1808Merger of the three ironworks St. Antony, GuteHoffnung and Neue Essen to form Httengewerkschaft und Handlung Jacobi (Iron Mining and Trading Company), Oberhausen

1825-18491840-1844Sander'scheMaschinenfabrik established in Augsburg, Klett& Comp. established in Nuremberg and Sander'sche changes its name to C. Reichenbach'scheMaschinenfabrik, Augsburg

1900-19241908VereinigteMaschinenfabrik Augsburg und MaschinenbaugesellschaftNrnberg A.-G., Augsburg renamed Maschinenfabrik Augsburg-Nrnberg AG, Augsburg (M.A.N.)

1914-1918 (First World War)Loss of key foreign branches and patent rights, production facilities reduced

1915Foundation of Lastwagenwerke M.A.N.-Saurer (LWW) truck plant. Start of commercial vehicle production in Lindau

1920M.A.N. joins up with GHH

1925-19491939-1945 (Second World War)Loss of all foreign operations, heavy war damage, the Allied Forces take control of all GHH companies

1950-19741955-1971M.A.N. truck plant opened in Munich, Takeover of Automobilwerke AG Bssing, Braunschweig

1985-19941988Acquisition of a 50% interest in the French diesel-engine manufacturer S.E.M.T. Pielstick (currently: 100%)

2000-20042000Takeover of the brands NEOPLAN (bus), ERF and Star (truck); acquisition of Alstom Engines diesel activities in Great Britain; takeover of Sulzer Turbo, Switzerland

2001Redemption of the companys own preference shares; formation of the "NEOMAN" Bus Group and the "MAN TURBO" Group

2005-20092006Conversion of MAN B&W Diesel AG into a European Company renamed "MAN Diesel SE

2008In 2008, MAN celebrated its 250th anniversary, making it one of the world's oldest industrial companies. The St. Antony iron and steel works in Oberhausen started operations on October 18, 1758. Since then MAN has played a major role in German industrial history

2009The new subgroup MAN Latin America is formed following acquisition of VWs Brazilian truck and bus activities; MAN becomes a European Company (SE)

2010-20122010MAN Diesel and MAN Turbo merge to become MAN Diesel & Turbo

2011-2012MAN Nutzfahrzeuge changes its name to MAN Truck & Bus AG; Volkswagen AG becomes MAN's majority shareholder and later Volkswagen increases its share of voting rights in MAN SE to 75.03 percent

Source: "MAN Timeline | MAN SE." MAN Timeline | MAN SE. http://www.corporate.man.eu/en/company/history/man-timeline/MAN-Timeline.html(accessed April 20, 2014).Exhibit 3: Technology Timeline1750-18241787-1814Rails supplied for the Rauendahl coal track, Germanys first horse-powered railway and Delivery of the first steam engine

1825-18491839-1845Delivery of the first locomotive and First high-speed book-printing press

1850-19241893-1900Together with Maschinenfabrik Augsburg Aktiengesellschaft, Rudolf Diesel builds the worlds first diesel engine; construction of the Mngsten Railway Bridge and Production of steam turbines begins

1904-1924First GHH steam turbine, First "Roland" sheetfed offset printing press and First diesel engine truck with direct fuel injection plus the first low-frame omnibus

1925-19491926-1937Construction of the first three-axle truck: S1H6 model, Back then the world's most powerful heavy-duty truck with 140/150 hp, Development work begins on exhaust-gas turbochargers for diesel engines and Development of the all-wheel drive for utility vehicles

1950-19741950-1952First supercharged diesel engine, 46% efficiency ratio, First German diesel truck with exhaust-gas turbocharger and First German diesel truck with exhaust gas turbocharger

1970-1971The worlds largest metal extruder; first sheetfed offset printing press to be constructed in series; production of tube reactors for chemical plants begins, The worlds largest planetary marine transmission and The New Technology Division becomes involved in the European Launcher/ ARIANE space project

1985-19941982First heavy, two-stroke diesel engine with an efficiency ratio of over 50%, Delivery of nine four-stroke diesel engines for the "Queen Elizabeth II, the worlds largest diesel-electric drive for a civilian liner, First low-floor articulated bus with continuous low-level platform and Market launch of the MAN Lion's Star (Coach of the Year 1994)

1995-19991997-1998he worlds first 10-stage geared compressor; 100th ARIANE flight; first CSP plant in Europe and Delivery of the first component for the X-38 orbital glider; NL 263 chosen as Bus of the Year; construction of a supermagnet for CERN

2000-20042000The one millionth MAN commercial vehicle rolls off the line; presentation of the new Trucknology Generation TG-A (Truck of the Year 2001); presentation of the first plateless digital printing system "DICOweb" at the drupa trade fair

2004MAN Nutzfahrzeuge launches its new engine generation D20 Common Rail

2005-20092005Bus of the Year Award for the MAN Lion's City

2007Market launch of the TGS and TGX in the heavy-duty series (Truck of the Year 2008)

2010-20122010"Concept S" design study presented at the IAA Commercial Vehicles trade fair

2011-2012MAN and Sinotruk launch joint truck brand SITRAK; the MAN TGX is nominated Green Truck 2011.Premiere of the new generation of Euro 6 trucks and of buses

Source: "MAN Timeline | MAN SE." MAN Timeline | MAN SE. http://www.corporate.man.eu/en/company/history/man-timeline/MAN-Timeline.html(accessed April 20, 2014).Exhibit 4: MANs Leading Business AreasCommercial Vehicles

Trucks Buses Engines Services

Diesel Engines

2-stroke 4-stroke CP-propellers Turbochargers Service

Turbomachinery

Compressors Turbines Reactors Services

Industrial Services

Contracting Logistics Service platform

Source: Company DataExhibit 5: MANs Divisional Structure in 2008 and in 2010a) 2008

MAN GroupMAN SE

MAN AG

MAN Truck & Bus AGMAN Latin America

MAN Turbo (Gas turbines, steam turbines and compressors)MAN Diesel (Engines)

MAN Pakistan (Pvt.) Ltd.

b) 2010

MAN Latin AmericaMAN Truck & Bus AGMAN Diesel & Turbo SEMAN GroupMAN AGMAN SE

MAN Diesel & Turbo Pakistan (Pvt.) Ltd.

Source: Company DataExhibit 6: Types of trucks (Rigid and Tractor)Rigid:

A rigid is what is known as a "straight truck". It does not pull a trailer, rather carries the load (containers) on itself.

Tractor:A variant of truck that drags a load (trailer/container on wheels) by means of a hook mechanism. The truck as a whole has two or more twisting (articulated) parts. Load carrying capacity increases when the load is towed rather than carried.

Source: Company DataExhibit 7: Asian Highway Routes

Source: Company dataAH-1 : TorkhamPeshawarRawalpindiLahore Wagah Border (India-520 Km)AH-2 : LahoreSahiwalMultanRohriSukkur(Quetta) Sariab-LakpassNokundiTaftan (Iran-1763 Km)AH-4 : KarachiHyderabadRohriLahoreRawalpindiHasanabdalAbbottabadKhunjrab (China-1391 Km)AH-7 : KarachiKalatQuettaChaman (Afghanistan-816 Km)AH-51 : QuettaD.I. KhanPeshawar (862 Km)

Exhibit 8: Allowable Load Limits Enforced by NHSO-2000.

Source: Company data

Instructors ManualCase Overview/Synopsis:MachinenfavrikAuvsburg-Nurnberg (MAN) SE is a German mechanical engineering company and parent company of the MAN group. MAN diesel & Turbo Pakistan primarily deals in engines (marine applications) & gas turbines (Power plants). The company recently launched its Truck business in Pakistani market. With significant shift from agriculture to service base, the country direly requires vibrant transportation system (vehicles as well as road infrastructures). The strategic geopolitical location of Pakistan and a significant number of development projects in the pipeline coupled with the potential for becoming a transit point for trade between the central Asian, South East Asian and Chinese economies makes the truck industry of Pakistan ripe with opportunities. The developmental projects would require large fleets of trucks for transportation of material. Additionally, these would contribute to uplifting the economy by generating employment and economic activity. This would lead to greater flow of commodities within the country, which would place great stress on the existing logistics infrastructures (trucks & roads), thus creating the need for more and better quality trucks. The industry is faced with severe impediments (technological, financing/leasing, insurance, low margins, serviceability, road quality and registration issues), is highly underdeveloped and unexploited, with local players having a major chunk of the market share (due to their local assembly options and thus no import duty). As the company has no assembly operations in the country, it basically imports trucks from Europe. These trucks are not ideally suitable for distribution and long haulage purposes due to high price (with added import duty) and high load carrying capacity (as opposed to lower limits set by the NHA). The segment that it can compete in is that of specialized trucks, which constitutes approximately 20% of the total industry.In this segment, MAN truck has a unique advantage of having an existing company (MAN Diesel & Turbo) prior to the launch of MAN truck. This frees the company from dealing with other additional members in the supply chain (e.g. dealers, agents and distributors), thus reducing their costs, making MANs trucks the cheapest among the European trucks being imported into Pakistan. MAN Diesel &Turbos venture into the truck market was a very risky one which required strategic planning, analysis and decision-making. They had to compete with players having local assembly in the company, strong distribution channels, and well established reputations in the minds of the consumers. One of the major hurdles was the consumer mindset of preferring low cost over quality. But the company found a strong foothold in a niche segment (specialized trucks), due to the specific quality and reliability requirements of the customers. Learning Objectives: Nature ofmanagement related complexities real life organizations face during the diversification of their business. Application of managerial tools and models for the purpose of analyzing, evaluating and exploiting opportunities to achieve sustainable growth and competitiveness. Problems and issues faced by foreign companies with no production or assembly operations in the local markets and how they can turn this disadvantage into sustainable competitive advantage. (Suggestions from the readers are required) The strategic implications of long-term risky ventures in highly competitive market settings.Topics, subject areas, level for which the case is suited:Topics & Subject areas: Management Strategic Decision Making Process Sustainable Growth Sustainable Competitive Advantage Application of analytical tools such as : SWOT analysis Porters Five Forces Model Ansoffs Matrix TOWS Analysis Strategic Management Process Competitive Profile Matrix PESTEL Analysis VRIO IE Matrix BCG Matrix RBVLevels: Undergraduate Graduate Post-GraduateNote for instructor:1. Most of the contextual data presented in the case was based on a narrative directly quoted by company personnel.