03-856-2015-1

MTL: HAS THE TIME COME TO SAY GOODBYE TO MF?

On a sunny 5 January 2015, S.M. Irfan Aqueel, the CEO of Millat Tractors Limited (MTL), went through
MTL’s fiftieth annual report. The report showed a further dip in the annual sales after hitting record high sales
of 42,011 tractors in 2011. Demand for MTL’s tractors was slashed to 50% in three years thus leaving half
of MTL and its vendors’ capacity unutilized. This trend in the local market was not expected to change.

On the other hand, Massey Ferguson (MF), MTL’s branding and technology partner that had been
instrumental in building MTL’s in house as well as supply base manufacturing capabilities over a period of
50 years, was putting pressure on MTL to restrain third party1 exports of MF tractors from Pakistan. The
only arrangement for exporting tractors was through MF and it was not working well for MTL because they
(MTL) wanted to export more than the demand created by MF. In 2014, MTL exported only about 100
tractors.

Aqueel was tasked by Millat Group’s top management to present his action plan about the long standing
challenge of exporting tractors. The situation boiled down to providing two options to MTL: (a) MTL should
keep selling tractors under the MF brand, which did not really let MTL’s manufactured tractors enter the
international market, (b) MTL should end the partnership agreement with MF and start selling MTL
manufactured tractors under its own brand in both local and international markets. Both options had
perplexing implications. Aqueel had to present his decision and plan of action at the board meeting on 9
January 2015.

MILLAT TRACTORS LIMITED

Roots

Rana Tractors Limited (RTL) established in 1964 started by introducing and marketing Massey Ferguson
(MF) Tractors in Pakistan. RTL imported tractors from MF in completely built unit (CBU) 2 form. By the
end of 1967, RTL had set up an assembly plant for assembling tractors imported from MF in semi knocked
down (SKD) 3condition. The completely assembled tractor used more space when transported from UK than
a tractor in an SKD condition. Moreover, labour and other operational costs of assembling tractors in Pakistan
were less than in the UK.

Nationalization

In 1972, the government of Pakistan began nationalization of the industry and took charge of thirty two
industrial units, including eight automobile units and renamed them afterwards. After nationalization, RTL
was renamed to Millat Tractors Limited (MTL). Subsequently MTL was handed over to Pakistan Tractor
Corporation (PTC) responsible for importing tractors in semi knock down condition. PTC used MTL and
other tractor plants for assembling imported SKD tractors. In the early 1970s, MTL developed the capability
to assemble a tractor from a completely knocked down (CKD) condition.

In 1982, MTL developed the first engine assembly line in Pakistan. However, the company was facing issues
in supply of casted 4 and machined 5 parts. Casting facilities were developed at the vendors’ sites. In 1984,

1
Traders bought MTL tractors from Pakistan’s open market and exported them without MTL’s involvement in the exporting process.
2
CBU are products received in final form and ready for selling.
3
SKD means a partial (semi) kit for assembling a product, which in this case is a tractor.
4
Casting is a manufacturing process in which molten metal is poured in a designed cavity and solidified to achieve the desired shape.
Parts manufactured by casting are called casted parts.
5
Machining is the combination of material removing methods used for achieving desired geometry and surface finish. Parts which go
through machining process are called machined parts.

This case was written by Dr Muhammad Shakeel Sadiq Jajja and Dr Syed Zahoor Hsaan at the Lahore University of Management
Sciences to serve as basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
This material may not be quoted, photocopied or reproduced in any form without the prior written consent of the Lahore University of
Management Sciences.

© 2015 Suleman Dawood School of Business, Lahore University of Management Sciences

MTL: Has The Time Come to Say Goodbye to MF? 03-856-2015-1

MTL developed an in-house machining facility which could machine parts such as engine blocks, lube oil
sumps, and axle housings.

In 1992, after almost twenty years of nationalization, MTL was de-nationalized. Employees of MTL bought
more than 51% shares of the company. In 1992, MTL set up a tractor assembly plant which could produce
15,000 tractors per year in a single shift. The tractor assembly plant stepped up production including the
quality of the tractors.

Growth in Millat Group

During 1992-2002, Millat Group added three more companies to its portfolio and two more product lines
(generator sets in 1994 and fork lift trucks in 2002). In 1993, MTL bought 51% shares of Bolan Casting
Limited (BCL), a major vendor for casted parts. BCL had expertise in casting of intricate automotive parts.
In 1994, Millat Equipment Limited (MEL) was incorporated as a wholly owned subsidiary company of MTL.
MEL was established for producing gears and shafts for tractors and other industrial applications. In 1999,
Millat Industrial Products Limited (MIPL) was established to manufacture batteries and cells for the
automobiles and industrial parts market in Pakistan.

In 2015, MTL was manufacturing and marketing seven models of tractors, industrial products (such as
generating sets, and fork lift trucks), and 25 types of agricultural implements (see Exhibit 1 on MTL’s
products ). MTL’s performance over its life span and its current status were usually attributed to MTL’s
commitment with indigenization of technology through strict adherence to the deletion program.

MTL’S DELETION PROGRAM

Role of the Government

MTL’s deletion program dated back to 1980 when the government launched a policy that any company that
marketed tractors in Pakistan had to put satisfactory efforts in indigenizing their manufacturing. The objective
of the deletion program was to gradually develop in-house capabilities of local vendors to manufacture tractor
parts cheaper than the imported ones. Yearly deletion plans were made by MTL and vetted by the government.
These plans targeted reducing import of tractor parts by a certain percentage every year. Local vendors were
selected and trained to manufacture tractor parts mentioned in yearly plans and import of such parts was
stopped. At that time MTL’s vendors did not have the technical competency to understand technical language,
such as design drawings of tractor parts, etc.

If the yearly deletion target was not met on account of some justificable circumstances, MTL had the option
of deleting some other part of equal value to meet the deletion target. However, if MTL failed to achieve the
deletion target (and deletion of another equally valuable part) the government would, as a penalty, impose
high import duty on the import of such parts in the coming years. The import duty and taxes generally varied
for various parts up to 70% of the part’s actual price.

As part of the indigenization efforts the government signed agreements with large international auto
companies operating in Pakistan. The government also paid a fee to the foreign companies for localizing the
manufacturing technology in Pakistan. MF (tractor manufacturer) and Perkins UK (engine manufacturer)
were amongst them. The idea was to help local auto firms in indigenizing the technology. In the early years
many local auto companies in Pakistan did not contact these international organizations in order to benefit
from the agreements made by the government. However, Ehsan Ullah Khan, MTL’s managing director,
initiated indigenization efforts at MTL and therefore, MF and Perkins were contacted. The foreign
organziations were attracted by the prospect of domination in the Pakistani tractor market in the future and
revenue from selling equipment and technical services to MTL (see Exhibit 2 on vendor selection).

Role of MF and Perkins

MF and Perkins collaborated with MTL in the deletion process in several ways. For example, MF and Perkins
shared their design drawings with MTL with relevant technology and process for manufacturing, testing
specifications, and test rigs at different stages of the deletion project. Engineers of MF and Perkins visited
MTL and its vendors for technical assistance whenever needed. Moreover, MTL and its vendors sent their
engineers and technical staff for training (up to 2 weeks) MF and Perkins’ facilities in the UK. During 1980-
2006, MF and Perkins, both deployed a full time engineer at MTL’s plant who provided immediate technical
assistance to MTL and its local vendors.

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Technology Journey

In the 1970’s MTL’s management decided to start the deletion process through the vendor by first developing
the most technologically simplest parts (see Exhibit 3 on technology journey). MTL’s engineers trained the
vendor so that it could meet MTL’s requirements of manufactured parts. MTL also gave them advance
payments for buying material and equipment necessary for manufacturing MTL’s consignments. After
receiving the appropriate training and financial assistance, vendors were able to produce small volume but
could not produce large numbers economically (mass production). Mass production required proper tooling,
standardization of all sub-processes, and in-stage inspections. MTL further trained and developed its vendors
so that they could shift from small production to mass production of parts.

Initial MTL vendors for sheet metal body parts were Yousaf Industries and Sheikh Industries who later on
also manufactured parts for Suzuki cars. Ravi Autos, Stahlco, and Ciba Industries, United Industries, Agro
Crafts replaced Yousaf Industries and Sheikh Industries in the late 1970s.

In early 1980, MTL shifted its focus on deleting the import of foundry parts, which required more advanced
technical knowledge than sheet metal work. MTL’s vendors had some knowledge of foundry technology but
could not achieve mass production in this area. MTL selected more than one vendor for one part to maintain
consistent supply. MTL with assistance from MF trained its vendors in casting technology and also gave
advance payments for buying raw material such as pig iron and steel/cast iron scrap. Main vendors for foundry
parts were Bolan Casting Limited, Ravi Autos, Rastgar Engineering, Atlas Engineering, and Balochistan
Foundry. Vendors for die-casted parts were Zahoor Die Castings, Takbeer Die Casting, Power Tools,
Bismillah Industries, and M. Usman & Sons.

During the mid 1980s, MTL started training vendors to develop forged6 parts, such as gears, connecting rods,
and shafts & couplings. Forged parts were technologically superior and required heavy hammering, an
expensive operation at that time. SPEL made its first steering wheel for MTL in 1982. Manan Shahid Forging,
the largest forging facility of the time in Pakistan, was the first vendor who imported forging machinery from
UK. Casted and forged parts also required machining7, which was an expensive and technologically complex
process. MTL established an in-house machining facility in 1984 for machining vendor casted parts. Some
of the machinery was purchased from the UK and the remaining was developed locally with technical
assistance of MF. Indigenization of machining drastically reduced the cost of tractor manufacturing.

During 1985-1990, MTL urged its vendors to collaborate with foreign companies to locally manufacture
proprietary items, such as clutch assembly, starter motor, lube oil pump and steering box assembly. These
collaborations involved many foreign players, such as Concentric Pumps Birmingham, UK for lube oil
pumps, Lay Cock UK for clutches, TVA Spain for ball joints, and Burman & Sons UK for steering boxes.
Local vendors such as Agri Autos, Allied Precision, Ravi Autos, and Choudhry Automotive purchased
drawings, technology and processes, and testing procedures from these foreign companies. The local vendors
used the brand names of the foreign companies in the early years but later on marketed these components
with their own names.

In the early 1990s, MTL developed vendors for aluminum pressure die casting (PDC), rubber and plastic
components. PDC was required for more sophisticated, and higher price-to-weight ratio parts such as timing
case and cover, response plate, and housing rings. PDC machines were expensive and could not be developed
in Pakistan. MTL’s engineers helped vendors identify suitable machines which could perform the required
function. The vendors imported PDC machines from UK.

From early 1990s MTL’s deletion progress had been improving steadily until 2000 when MF closed its
manufacturing facility in UK and shifted to Germany. MTL had two options to source imported vendor parts
- either to import them from Germany or to indigenize. Transporting imported components to Pakistan from
Germany was significantly more expensive than from UK. In the meantime, cost pressure was exacerbating
because of the government’s policy of removing duty on import of foreign tractors in the early 2000s. Thus,
MTL paced up the indigenization activity. This time the automotive vendor industry had matured and did not
need assistance. As a result MTL’s deletion index improved by more than 5% on average in the post 2000
years.

In 2006, the government discontinued the deletion plans and replaced them with a tariff based system.
According to the tariff based system, the government could not restrict the tractor manufacturers in Pakistan
to buy from local sources. However, the government imposed heavy import duties on auto parts in the country.

6
Forging is the process of shaping metallic parts using compressive forces under proper temperature.

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In 2008, the government rescheduled import duties, and import duty on auto parts was decreased by 10% to
25% to encourage production of more tractors at existing plants. Import duties on tractor parts/components
could increase MTL’s tractor cost if MTL was unable to indigenize the remaining parts/components.

MTL continued the deletion efforts and the development of its vendors (see Exhibit 4 for deletion
performance). The vendors who worked with MTL later on vended to other technologically more advanced
industries such as automobiles, motorcycles, and international markets (see Exhibit 5).

MTL’s MAIN DIVISIONS

Marketing, Sales and Service Department

The marketing department was the core strength of MTL with three main zones of operations; south, central
and north. These three zones had their own marketing, field, and service staff spread out throughout the
country. The marketing department was equipped with agricultural knowledge and technical expertise.
Combination of these two key strengths made them unbeatable and an intimate part of MTL and its customers.
MTL had to its credit the establishment of an unmatched, elaborate and extensive network of dealers, spread
throughout the country. This network comprised 72 main dealerships, 60 parts dealers and more than 500
workshops where MTL trained technicians provided after sales services to its customers. These arrangements
also ensured ready availability of spares at very economical prices throughout the country

Manufacturing/Machining Division

The machining division machined8parts other than engine parts which required high quality manufacturing.
During the peak demand of 2011, the production lines were sometimes not available for preventive
maintenance 9 and therefore, breakdown maintenance 10 could often be seen.

The machining division could not produce more than the 2010 production rate unless further modifications
were carried out. These modifications could remove the bottlenecks and enhance the production capacity by
a maximum of 35%. Other options for increasing the division’s capacity were to either make new manual
machining lines or buy computer numeric controlled (CNC) machines. MTL opted for CNC machines and
installed a new machining line.

The machining division did not have major quality challenges if MTL opted to break out into the international
market. However, improvement in quality of machining was a long term need if the company wanted to
compete with international brands.

(See Appendix A to see the historical development of machining division at MTL.)

Engine Assembly Division

Engines for all tractors and for other industrial and agri-machinery of MTL were assembled at the engine
assembly division (see Exhibit 6 for process flow). These engines were installed in different tractor models,
and other products of MTL in later stages of production at MTL’s plant, such as engine D3.1524 was installed
on MF 240, MF350 Plus, 50hp prime mover and both 15KVA and 25KVA Gen-sets. According to the
scheduled demand, the assembled engines were sent to the assembly units of the respective products. During
the peak production period of 2011, the engine assembly was working in double shifts (24 hours) seven days
a week throughout the year.

The engine assembly unit had three main sources of parts and components; local vendors, foreign suppliers
and MTL’s own manufacturing/machining division. The unit received 250 parts and components from these
sources. Vendors provided parts and components, such as gaskets, water pumps, and hardware parts. The
machining/manufacturing division supplied machined components such as lube oil sumps 11, cylinder blocks,
and cylinder heads.

If MTL wanted to export, it had to further improve the quality of the engines to match those of international
competitors. MTL’s engines were cheaper than most international competitors, however quality and
reliability were areas that needed to be addressed. For example, according to a senior engineer at MTL, if he

9
Preventive maintenance is systematic inspection, detection, and fixation of expected failures before they occur.
10
Fixation or replacements performed after a machine/equipment has failed to perform its intended function.
11
Lube oil sump is the lower part of an engine. It carries the lubrication oil.
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gave 99 out of 100 points to Perkins’ engines on quality and reliability. he would give 90 out 100 to MTL’s
engines.

(See Appendix A to see the historical development of engine assembly division at MTL.)

Tractor Assembly

The tractor assembly unit had three main sources of supplies; local vendors, MTL’s machining/manufacturing
division, and foreign vendors (see Exhibit 6). Local vendors, which included Sazgar Engineering, Mian
Tyres, General Tyres, Stahlco, PECS, Loads Limited, and MEL, supplied parts and equipment to MTL’s
tractor assembly line. MTL’s machining/manufacturing division supplied machined parts including centre
housing transmission base, transmission case, and centre housing to MTL’s tractor assembly line. Foreign
vendors including Agco, AHS Turkey and Hana International Dubai supplied steering cylinders, steering
pumps, and hydraulic pumps to MTL’s assembly line.

The tractor assembly unit and its suppliers were increasing their capacities to meet the market demand.
Although, MTL’s management was comfortable with increasing the yearly production rate, issues like
adherence to quality standards in the tractor assembly line, training and retention of trained manpower, and
production bottlenecks were worrying them. Scarcity of skilled manpower for the tractor assembly line was
another challenge for MTL’s management during peak production of 2011.

Initiatives like installation of testing rigs after sub-assemblies for inspection before installation, use of latest
torque control guns, and similar projects, which could potentially increase the assembly line’s quality index
from 80 to 95, were taken.

(See Appendix A to see the historical development of tractor assembly division at MTL.)

Quality Control Department

The role of the quality control department was to improve quality and productivity of the in-house and vendor
facilities. Engineers from the quality control department designed latest tooling and gauges for increasing the
productivity of the vendors and the in-house departments. Training and development of new vendors was a
gradual and time consuming (1-3 years long) activity. The option to buy tooling and inspection gauges at a
subsidized price continued for MTL’s vendors. In order to meet the rising production load, which demanded
accurate, quick, and large scale inspection, a latest Carl Zeiss Coordinate Measuring Machine (CMM) was
purchased.

(See Appendix A to see the historical development of quality control department at MTL.)

MTL’S FUTURE OUTLOOK

Recent Ups and Downs in MTL’s Sales

During 2002-10, tractor demand grew at an average rate of 14.3% (see Exhibit 7 on year wise tractor sales).
Even during the recent hike in the prices of auto products and financing costs, tractor production rates and its
sales increased consistently. According to the Economic Survey of Pakistan 2009-10 (Chapter on
Manufacturing):

“Its [tractor industry’s] resilience essentially emanates from high degree of localization (indigenization) and
bringing out a product which is competitive in terms of both quality and price.”

MTL’s tractor sales had risen from 30,677 units in 2009 to 42,011 units (About 60% of Pakistan market
share) in 2011, the highest in MTL’s history (see Exhibit 7). During 2010, MTL had increased its supply
chain capacity to meet the rising demand. However, there had been on average an annual decline of 22.1% in
the local demand for tractors after 2011 (see Exhibit 7). At MTL, in the last three years, the sales had declined
to 21,111 units in 2014 thus leading to underutilization of the production capacity of MTL and its suppliers.

MTL’s top management believed the rise in the demand of tractors in 2010 and 2011was mainly due to the
government’s policies. Provincial governments of Punjab and Sindh had given subsidies of about Rs. 200,000
per tractor for more than 10,000 tractors. As a result, during that period, the overall tractor market went up to
more than 71,000 tractors in Pakistan. MTL’s assessment, on the other hand was that that Pakistani market
did not essentially require more than 55,000 tractors a year because the area under cultivation was not

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increasing and was stagnant at 22.2 Million Ha due to water scarcity. Infact, about 8.2 Million Ha of land
was yet uncultivated due to water and other land quality issues.

MTL’s CEO S M Irfan Aqueel joined Millat Equipment Limited in 2005 after 24 years at ICI, Pakistan. He
became the chief executive officer of Millat Trators Limited in 2012.According to him:

Our ten year research on Pakistan’s tractor market tell us that the market would not exceed
what it has achieved by touching 71,000. That was mainly because of three simultaneous
government interventions. Now MTL is touching the dangerous zone of 64 5 % market
share. The market share of 64 5 % is so high that the effort and cost of increasing its share
beyond this point might be more than the advantages. Hence, we have to grow our market
and there is no other way than exporting to grow the market.

MTL expanded its own capacity and pushed its 250 vendors to increase their production from 30,677 tractors
in 2009 to 42,011 in 2011 because MTL did not want to lose the opportunity. The rapid growth caused
challenges in the supply of parts from the vendors. MTL’s competitors also increased their production. As a
result, there was a sudden glut of subsidized tractors in the market. Thus, farmers who did not really need to
replace or buy tractors also bought them. The result of these impulsive tractor purchases was the subsequent
reduction in demand of tractors in the following years. In addition, the government later on imposed a 16%
sales tax that negatively affected local tractor demand because earlier the tractors were tax-exempted. Also,
rumors that the government would remove or reduce the sales tax soon encouraged potential buyers to hold
their purchase decision. As a result of these impulse purchases, imposition of sales tax, and rumors regarding
the removal of this tax, the tractor sales of MTL fell to 21,600 tractors in 2014.

MTL’s management strongly realized that MTL could not go forward with the overheads of 40,000 tractors
and actual production of 20,000 tractors. MTL started initiatives to cut down its costs to the level that it made
sense to produce 20,000 tractors. For example, the organization cut down manpower by moving from double
shift to single shift plant operations and also reduced its energy costs. MTL also pushed its vendors to cut
down costs by improving quality. During the recent increase in demand, the vendors were able to produce
parts for 42,011 tractors, however, the rejections also increased, thereby resulting in higher costs. Thus, MTL
pushed its vendors to improve quality which would in turn reduce rejections and also the costs.

Allied Products

Tractors contributed to 90-95% of MTL’s revenues. The rest came from supporting products including forklift
trucks, generators, and implements. MTL used only the spare capacity from tractors to manufacture these
allied products.

MTL had not considered the business being generated from allied products as their core business. The
organization started producing generators only because MTL had indigenized the engine manufacturing
capability. MTL’s top management realized that MTL could have excelled more in this field if they
considered this as a separate business and invested significant efforts into this area.

From tractors, MTL had entered the manufacturing/importing and sales of agricultural implements industry.
Recently MTL had started tests and trials and possible indigeniziation of a small combine harvester from
AGCO China.It took MTL two years to launch the harvester in the local market because the harvester and
the products were not suitable for the Pakistani market. Similarly, MTL developed a fodder harvester.
However, the challenge with these products was that the farmers purchased them either from 2nd hand markets
in a reconditioned/used form, mostly imported, (e.g. combine harvesters, balers, etc.) or from small
manufacturers who made these products for small farmers. These manufacturers were more approachable and
less costly though their quality was less than that of MTL’s implements. MTL found it hard to compete with
these craft shops because of its overheads like research and development and decided to stick to items that
the small manufacturers could not produce. Sikandar Mustafa Khan, Chairman Millat Group recalled:

You see the problem is that it is very difficult to shift focus from the main business [tractors]
to allied products. Since this is a full time business, at one stage we were even thinking of
taking the allied products business to a separate company but we did not.

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Green Engines Development

Recently, MTL had converted its 3 cylinder engine to conform to tier 1 12 emission standard. The organization
was actively working on achieving tier 2 which was a must have for the international tractor market. MTL
had collaborated with National University of Science and Technology, Islamabad to (NUST) to establish an
in house laboratory to test green engines and to perform research and development activities. This unique lab
was equipped with computer controlled systems to measure engine performance in a controlled environment.
The potential market for this type of engine was international particularly Africa, and India and Europe. The
entry requirements for European and Indian markets were tier 3 and tier 2 green engines, respectively.
Refinement of the engine to tier 2 required more investment and a year’s time. Though the production of tier
2 engines at MTL would require some changes in MTL’s equipment, the production of tier 3 could make a
number of MTL’s machines and equipment redundant. Additionally, MTL had developed this engine keeping
in view the possibility of open trade borders with India.

However, MTL had so far not introduced the green engine in the local market due to non availability of the
required diesel fuel in Pakistan and also its impact on the price of the tractor. The average farmer would be
reluctant to pay for environmental protection, an idea he would find difficult to comprehend.In terms of
emissions, a green engine did not perform differently from a regular engine on regular fuel available in
Pakistan. Hence MTL’s primary market base, which was local market, was not ready for buying green engine
tractors. According to Aqueel:

Pakistan’s market, which is not ready for green engines, is our base market and we cannot
base ourselves for the international market only. MTL wants to develop, test, and evolve
its capability of manufacturing green engines in the local market before entering into the
international market. We cannot compete with John Deer, Massey Ferguson, and New
Holland with our current capabilities. The local market would be ready for green engine
tractors when the whole ecosystem is there, i.e. when the right quality fuel is available and
our competitors are also making green engines.

Conclusion and Decision

From the beginning, MTL’s tractors were sold mainly using Massey Ferguson brand. However, since 1980,
MTL had gradually been increasing the MTL logo size and decreasing the size of Messy Ferguson’s logo on
their tractors to create MTL’s own brand’s recognition in the Pakistani market. Also, over years MTL tractor’s
had become a familiar brand due to its distinctive colour. As a result, in 2014 MTL’s brand recognition had
increased far more than it used to be in the 1980s.

The initial contract with MF covered the technology transfer agreement and branding agreement. Under the
technology transfer agreement, MTL was bound to buy parts from MF unless MTL made them locally. Under
the initial branding agreement, neither MTL nor its dealers could export tractors.

Since the late 1980s, MTL had been thinking of ending the technology partnership contract with Massey
Ferguson and begin selling tractors bearing only MTL’s brand name. However, it had to either modify or
terminate the partnership contract with Massey Ferguson before MTL could start exporting tractors on its
own. Sikander Mustafa Khan, the Chairman of Millat Group, recalled:

If we had parted ways with Massey Ferguson in the late 80s we would have developed our
own brand by now. However, the problem at that time was that we needed technology from
Massey Ferguson - now we don’t. We have a lot of cost margin to export. For example,
independent exporters have been buying tractors from the local market and selling them in
Afghanistan and African countries. Against these independent exporters, Indian and Iranian
companies have tried to compete but did not succeed. MF has also tried to compete with
these independent exporters using Turkish manufactured MF tractors but failed.

MTL’s tractor prices were competitive in the international market, so much so that traders who were not
MTL’s official dealers bought MTL tractors from the Pakistani open market in small quantities and exported
them to theAfrican markets without MTL’s involvement. These tractors were priced lower than what MF was
offering through its official distributors. Thus, to benefit from export opportunities, a new agreement for the
export of parts and CBUs was signed between MTL and AGCO (owner of Massey Ferguson brand) in 2013.
Under the new contract, AGCO would buy basic models from MTL for export to selected markets under its

12
Tier number indicates the quality of engine’s emissions such as nitrogen oxides and carbon monoxide. Tier number increases as the
environmental impact of engine emissions decreases. Tier 1, tier 2, tier 3, and tier 4 phased in time periods 1996-2000, 2001-206,
2006-2008, and 2008-2015 respectively. Tier 4 follows the most stringent environmental standards.
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own brand. Aqueel was not excited about the provision of exporting through MF as mentioned in his
comment:

Our efforts of exporting with MF have not been successful. We have exported only about
100 tractors in the year 2014 through MF. The problem is that there is no incentive for MF
to export MTL’s tractors. MTL tractors are 30 to 40% cheaper than MF manufactured
tractors being sent to African countries. If MF takes MTL tractors in the international
market, MTL’s tractors would simply replace MF manufactured tractors. Our tractors are
very competitive on cost. Hence the question is should we break ties with MF and go with
our own brand or not?

Aqueel’s views about the possible local and international market mix were like this:

If we can export 10,000 tractors and make 35,000 tractors for the local market, we are all
set! Also, we tend to save on royalty per tractor that we have to pay AGCO for using the
MF brand.

According to Aqueel:

Our local competitors also have similar contracts with their technology partners and despite
localization of the technology and ability to produce high quality tractors at an
internationally competitive price; we are all stuck in the local market.

If MTL broke with MF, MTL could choose several routes to break into the international markets. Recently,
MTL was approached by some Sri Lankan and Turkish companies to supply main tractor parts excluding
green engines. MTL was also approached by a couple of good Japanese tractor brands to manufacture and
export tractors under their Japanese brand name. In addition, MTL was approached by an African company
which asked MTL to setup MTL’s assembly line in Africa and source parts from Pakistan. This plant in Africa
could get an initial launching order of 10,000 tractors from a foreign donor. Finally, MTL could go solo with
MTL’s own brand in the international market.

If MTL broke with MF, MF could partner with someone else in Pakistan and sell MF tractors in Pakistan
against MTL’s brand. In 2014, other than MTL, there were two companies in Pakistan that made farm tractors;
Al Ghazi Tractors(incorporated 1983) in collaboration with Fiat New Holland and Orient Automotive Limited
(incorporated 2012) which did not have a technology partnership 13. In 2014 Al-Ghazi and Orient produced
11,920 and 1,001 tractors, respectively. The tractors of these Pakistani companies matched the
design/specifications of MF, considerably. MTL feared that MF could give direct licenses to one or more of
these companies to use the MF brand and compete against MTL, if MTL parted ways with MF.

13
Source: Pakistan Automobile Manufacturing Association website
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Exhibit 1: MTL’s Product Range (p1 of 3)

MF 240 Tractor MF 260 Tractor MF 375 Tractor MF 385 Tractor

(2wd, 50 hp, Manual Steering, (2wd, 60 hp, Turbo engine, Manual Steering, (2wd, 75 hp, Hydrostatic (2wd & 4wd Versions,
Mechanical Brakes) Oil Immersed Disk Brakes) Steering, Oil immersed Disk 85 hp, Hydrostatic
Brakes) Steering)

MF 350 plus Tractor (2wd, 50 hp, MF 360 Tractor (2wd, Generating sets Prime mover (50hp, 75hp) Fork Lift Trucks
Hydrostatic Steering, Oil 50 HP, Hydrostatic Steering, (15kVA, 25kVA, 45kVA)
Immersed Disk Brakes) Oil Immersed Disc Brake)

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MTL: Has The Time Come to Say Goodbye to MF? 03-856-2015-1

Exhibit 1: MTL’s Product Range (p2 of 3)

25 Types of Agricultural Implements - some of them are shown below:

Post Hole Digger M-815 Tine Tillers MT-38 Swinging Drawbar MT-15 Ridger Mt-05 Multi-Purpose
Rear Blade

Maschio Lawn Mower Disc Plough MT-765 Jib Crane MT-16 Hydraulic Tipping Trail

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MTL: Has The Time Come to Say Goodbye to MF? 03-856-2015-1

Exhibit 1: MTL’s Product Range (p3 of 3)

Farm Trailer MT-12 Chisel Plough MT-01 Agriculture Loader MT-11

Disc Plough MT-765 Front Blade MT-08 Off set Disc Harrow MT-03

Source: Millat Tractors Limited

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MTL: Has The Time Come to Say Goodbye to MF? 03-856-2015-1

Exhibit 2: MTL’s Vendor Evaluation Process

IN 1973

Usual process for selecting the vendors was as follows: (1) MTL would find two to three vendors by advertising
in national newspapers and from random visits of engineers to potential vendors’ sites. (2) MTL’s engineers would
evaluate each of the vendors and negotiate price. (3) The shortlisted vendor was asked to manufacture four to five
samples for assessing vendor’s manufacturing capability. (4) The samples were evaluated by relevant engineers
followed by a decision to use or not to use the vendor.

IN 2015

Source: Millat Tractors Limited

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MTL: Has The Time Come to Say Goodbye to MF? 03-856-2015-1

Exhibit 3: Deletion Technology Journey (p1 of 3)

Sheet Metal Body Parts (1973)

Bonnet Hood Tool Box

Foundry - Casted Parts (Early 1980s)

Exhaust Elbow Exhaust Manifold Front Wheel Hub

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MTL: Has The Time Come to Say Goodbye to MF? 03-856-2015-1

Exhibit 3: Deletion Technology Journey (p2 of 3)

Forging - Forged Parts (Mid 1980s)

Gears Connecting Rods Shaft & Coupler

Proprietary Items (Late 1980s and Early 1990s)

Clutch Plate Starter Motor Steering Box Assy.

Die Casted Parts (Early 1990s)

Timing Case & Cover Pressure Die Casted Plates

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MTL: Has The Time Come to Say Goodbye to MF? 03-856-2015-1

Exhibit 3: Deletion Technology Journey (p3 of 3)

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MTL: Has The Time Come to Say Goodbye to MF? 03-856-2015-1

Exhibit 4: Deletion Progress

Note: Other models of MTL’s tractors had followed similar trend.

Source: Millat Tractors Limited

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MTL: Has The Time Come to Say Goodbye to MF? 03-856-2015-1

Exhibit 5: MTL’s Tractor Parts and Vendors (p1 of 2)

Product-Customer History of ATLAS Engineering (a vendor of MTL)

Year Product Customer Nature of customer

Spring Leaves and Flat Finn
1981
Radiators for buses
Exhaust manifold, break
1984
drum, and disc break
1986 Motorcycle cylinder
Open market of auto parts
Open market of auto parts
Car manufacturer
Pak Suzuki Motors
Motor cycle manufacturer
Atlas Honda Ltd.

1987 Radiator Millat Tractors Ltd. Tractor manufacturer

Manufacturer of trucks and
1987 Liner Bed Ford, Belarus
buses
Motor cycle manufacturer
1997 Motorcycle Pistons Atlas Honda Ltd.

Car Flywheel, Manifold Car manufacturer

2003 Pak Suzuki Motors
Exhaust, and Radiators

Product-Customer History of Manan Shahid Forgings (a vendor of MTL)

Year Product Customer Nature of customer

Cam shaft, connecting rod, and Millat Tractors Lt. and Alghazi Tractor manufacturer
1985
rear axle shaft etc. Tractors Ltd.
Connecting rods, flanges, wheel Car industry
1994 IFA Germany
hub etc.
Connecting rods, crank shaft, Motorcycle manufacturer
1995 Atlas Honda Pvt. Ltd.
and gears etc.
General engineering -
Standard bracket, spring seat, Industrial Conveyor
1996 Cinetic France
and double wheel bracket etc. Systems / Fifth Wheels

Bushing assembly, rocker arm, International market

1999 Export of Engine Valve Train
bridge valves etc.
Axle shaft, ring gear support, Off Highway Axles
1999 CAPI SRL Italy
and stub axle etc.

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 MTL: Has The Time Come to Say Goodbye to MF? 03-856-2015-1

Exhibit 5: MTL’s Tractor Parts and Vendors (p2 of 2)

Product-Customer History of Infinity Engg. Pvt. Ltd. (a vendor of MTL)

Year Product Customer Nature of Customer

Arm steering, axle shaft, lever gear, Tractor manufacturer
1988 Alghazi Tractors Ltd.
and so on
Counter shafts, arm steering, Tractor manufacturer
1998 Millat Tractors Ltd.
camshaft, pinion gear and so on
Pump Camshaft, flange, and lever International market
1999 Export
etc.
Bracket engine mounting, exhaust Car manufacturer
2002 Indus Motors
manifold, and hub front wheel etc.
Car manufacturer
Bracket engine mounting, exhaust
2002 Suzuki Motors
manifold, and hub front wheel etc.

Lever Anchor, shackles, and drop Local and Foreign International market
2003
drums etc. Commercial Market

Product-Customer History of Bolan Casting Ltd. (a vendor of MTL)

Year Product Customer Nature of Customer

Cylinder blocks, cylinder head,
1986
transmission case etc.
Early Break drums, exhaust manifolds,
1990s pads, and fan pulleys etc.
Millat Tractors Ltd. and
Alghazi Tractors Ltd.
Hino Pak Motors Ltd. And
Ghandara Nissan Ltd.
Tractor manufacturer
Manufacturers of trucks
and buses

Early Pump heads, pump bases, pump General engineering

HMA Stainless Steel Pumps
1990s housings, and seal covers etc.
Defence organizations
Alson Industries Pvt. Ltd.
2000 Bomb shells
and Export to France

2000 Labyrinth seals Textile Industry Textile industry

2000- Brake drums and hubs, brackets, and Trucks and buses
Dong Feng Trucks and Buses
02 shackles manufacturer
Honda Atlas, Pak Suzuki, Car manufacturers
2001 Pulleys, brake drums, and brake discs
Adam

Source: Interviews

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MTL: Has The Time Come to Say Goodbye to MF? 03-856-2015-1

Exhibit 6: Flow of Material at MTL

Vendor
Machining Tractor
Parts Market
Division Assembly
(local & import)

Engine
Assembly

Source: Millat Tractors Limited

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MTL: Has The Time Come to Say Goodbye to MF? 03-856-2015-1

Exhibit 7: Yearly Sales of Tractors in Pakistan 2001-2014

MF Industry
80000
71601
69207
70000
61013
60000 54325 53257
49462 49745 50579
50000 44231
42011
40140
40000 36243
30677 32006 32023 32724
30000 27052 27127 27260
24494 24150
22417 21111
19007
20000
14630 14215

10000

0
01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14

Source: Pakistan Automobile Manufacturers Association

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MTL: Has The Time Come to Say Goodbye to MF? 03-856-2015-1

APPENDIX A
Machining Division

Before 1984, casted parts such as oil sumps, engine blocks, and transmission cases were purchased from the
UK in machined condition. These parts were costly and weighted up to 100kg. Transporting these parts from
UK was expensive.

MTL with technical assistance from MF and Perkins helped MTL’s vendors BCL and KSB in casting these
parts. Also MTL gave low interest and easy installments loans to its vendors for developing technical
capabilities in casting. In addition MTL bought patterns 14 from MF gave to BCL and KSB for production.
Also, MF and MTL trained employees of BCL and KSB in quality management.

The next step was to develop machining facilities. Team of engineers from MTL, MF, and Pakistan Machine
Tool Factory identified the required machinery for the machining facility. Establishment of machining facility
needed both large capital investment and initial technical capability thus MTL’s local vendors did not show
interest in developing machining facility on their sites. MTL’s management decided to develop in-house
machining facility. The first machining line, which machined lube oil sumps, was built by Auto Machine
Tool Factory (AMTF) Pakistan in 1984.

Over time MTL added more casted parts’ vendors. Most of these parts were casted by local vendors and
machined at MTL’s machining division. Bolan Casting Limited, Chenab Engineering Works, Matchless
Engineering and Excel Engineering were the major vendors of MTL supplying the above casted parts.

Engine Assembly

Planned efforts on indigenization of Perkins’ engines at MTL were started in 1980. These efforts were
directed at: (1) coordinating with and training and development of vendors for ensuring continuous supply of
engine parts to MTL’s engine assembly line; and (2) developing a division for assembling engines at MTL.

In 1980, MTL’s vendors were not able to cast, forge, and machine engine parts. In 1980-82, Perkins trained
and developed MTL’s vendors. Perkins and MTL identified needs of MTL’s major vendors and guided them
to build infrastructure required for casting and forging tractor engine parts. BCL was the most significant
among those who sought assistance in casting cylinder blocks. KSB, which had basic know-how, was trained
by Perkins for customizing its products for MTL.

Engine assembly plant started its operations in 1982. Engine testing pad15 was set up with the help of Perkins
before engine assembly line started operation. Engineers from Perkins made assembling line for three cylinder
engines at MTL. From 1982-90 Perkins trained eight to ten engineers of MTL every year in Perkins UK.
Perkins’ engineers visited MTL for training workers in machining and assembling engine parts. One
representative engineer of Perkins stayed at MTL from 1984 to 2007 for providing technical assistance to
MTL’s engineers. MTL bought engine testing equipment, which included 12 test pads each worth
approximately Rs. 3 million from Perkins according to MTL’s production requirements at three different
times (1982, 1992, and 1999).

MTL’s engine assembly division started assembling four cylinder engines in 1990. Issues in 1990s were
different than in 1980s. Engines demand had increased from approximately 2500 per year in 1984 to 10000
per year in 1992. Vendors had crossed mass production hurdle but their quality was an immediate issue.
Engineers from MTL and Perkins trained the MTL’s vendors in controlling quality issues. MTL provided
free of cost access to its quality control laboratory where vendors could calibrate instruments, improve jigs
and fixture 16 and seek technical assistance from MTL’s quality control engineers.

Perkins’ quality approval was required for producing important engine parts locally. Perkins provided
drawings, technical specifications, and procedures for testing, validation 17 and calibration 18 to MTL for
developing capability for local production. Engineers from MTL’s major vendors were also sent to Perkins
site in UK by MTL. MTL had developed its vendors in manufacturing more complex engine parts such as
cylinder head, and lube oil sump by 1995.

14
Pattern is a duplicate of a metal part to be casted. Patterns are used for making cavity in which molten metal is poured for casting.
15
Engine testing pads are used for testing quality and performance of assembled engines before delivery to customer.
16
Jigs and fixtures are machine tools used for producing large number of duplicates from a sample part efficiently and accurately.
17
Validation is confirming whether a machine is doing what it expected to do.
18
Calibration is the process of standardizing the measuring tools.
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Tractor Assembly

Since 1967, when tractors were assembled from SKD condition, to CKD in 1972 which continued until 1992,
MTL did not have a systematic tractor assembly line manufacturing system19. First feasibility report of the
tractor assembly plant was drafted in 1988; four years after machining division and six years after engine
assembly had become operational. It took one and a half year in approval of the feasibility plan and
approximately two years in setting up the assembly line. MTL’s engineers with technical assistance from
MF and National Engineering Services Pakistan Limited (NESPAK) setup the tractor assembly line. Two
engineers of MF were directly involved in designing and installation of conveyer belt20 and paint shop.

While the assembly line was being installed, MTL’s vendors were developing their capability with assistance
of engineers from MTL and MF for working in coordination with assembly manufacturing system of MTL.
Assembly manufacturing system at MTL required continuous supply with consistent quality of vendor parts.
If quality of vendor parts was poor it would increase inspection and rework cost. If supply from vendors was
discontinuous it would stop assembly line.

Until 1990 car industry had also grown and MTL’s vendors had learnt from their experience with car
manufacturers. Vendors who had been working with car manufacturers needed minor assistance from MTL
for customizing their operations for MTL. However, vendors who were not aware of assembly operations
were a challenge for MTL. MTL had to train and develop its vendors up to a newer level of performance.
MTL’s engineers redesigned processes and trained workers of its vendors on modern manufacturing
techniques for attaining higher productivity with consistent quality.

As demand of farm tractors had grown in Pakistan from 16,093 in 1995 to 71,607 in 2010, MTL and its
vendors had also increased their yearly tractor production capacity from 9590 in 1995 to 40,178 in 2010. The
assembly line along with some suppliers (internal and external) had been working on double shifts from 2006
onwards and twenty 24 hours a days since 2009 for meeting the demand. During January 2011, using 150
workers, 14 sub-assemblies and same number of sub-stages, the tractor assembly line was producing at one
tractor per six minutes. Work in process of the assembly line was 54 tractors. In an 8 hours long working
shift, the assembly line was producing 56 tractors per shift.

Quality Control Division

After initiation of the indigenization project, MTL’s management had felt need of a department for inspecting
quality of vendor parts and providing technical assistance to the vendors on quality issues. As a result, Quality
Control Department (QCD) was laid down in 1980.

In early 1980s, since vendors had basic technical skills, therefore QC’s major role was to transfer knowledge
about in-process inspection, manufacturing techniques, process improvement, properties of materials, and
use of gauges and fixtures. Role of QC department was extended inside MTL in mid-1980’s when MTL’s
own machining and engine division had become operational. During early stages of development of engine
assembly lines and machining division, QCD conducted frequent patrol inspections 21 . As production of
vendors, machining division, and engine assembly grew, QCD also expanded its laboratory equipment and
manpower. A used manual coordinate measuring machine (CMM) from UK was purchased in mid-1980’s by
QCD for three dimensional inspections of critical parts such as center housing.

In late1980s, QCD’s new objective was to provide quality control services in achieving mass production both
at in-house and to vendors. Changes were brought in QCD for realizing the new objectives.

Firstly, technological capabilities of QCD were enhanced with establishment of metallographic laboratory
worth Rs. 5 million. The lab enabled MTL to perform in-house heat treatment inspection and casting
inspection. Paint inspection equipment was purchased which could inspect quality of vendor painted parts,
in-house painted parts, and corrosion resistance of paint. A separate lubricant testing facility was set up which
could test characteristics of lubricants received from vendors, such as flash points, and viscosity. Second hand
universal testing machine for calibration was bought from the UK for QCD. For the first time in MTL, in-
house manufacturing gauges were developed in QCD. In term of manpower almost all engineers at QCD

19
It is an arrangement of workers, machines, and equipment in which the product being assembled passes consecutively from operation
to operation until completed.
20
A conveyor belt (or belt conveyor) consists of two or more pulleys, with a continuous loop of material - the conveyor belt - that rotates
about them.
21
Patrol inspection is a random inspection, usually by quality control personnel, after any operation of assembly line for controlling
quality of the product being assembled.

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MTL: Has The Time Come to Say Goodbye to MF? 03-856-2015-1

were sent abroad for training for approximately one month on relevant QC expertise. Local trainings were
also arranged for QC engineers in Pakistan.

Secondly, MTL went for ISO9000:1994 certification in 1997. Before ISO9000-1994 organizational
procedures were not present in written form, organizational system lacked transparency, internal and external
audits were not conducted, and written work instructions were absent or wrongly written in some cases.

Finally, vendors were urged to take free of cost benefit from knowledge of QC engineers and laboratory
facilities at MTL. In mid and late 1990’s QCD allowed vendors to access expensive gauges not available in
Pakistan except at MTL’s QCD. MTL sold expensive gauges which could not be manufactured in Pakistan
on subsidized rate to its vendors. Fixtures and gauges that could be manufactured in Pakistan were designed
by QC engineers for MTL’s vendors. QCD engineers were streamlined line processes of MTL's vendors.
QCD provided free of cost technical expertise and rarely available lab facilities in heat treatment, metallurgy
and calibration to MTL’s vendors.

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