8/20/2019 Honeywell and Pakistan Internati

1/2

Honeywell

and

Pakistan

nternational

Airways

The

Space

and

Avionics

Control

Group

(SAC)

of

Honeywell,

Incorporated

(U.S.)

was

quite

frustrated

in

June

of 1997.The

cockpit

retrofit

proposal

with

pakistan

International

Airlines

had

been under

negotiation for

seven

monthg

and

over

the past

weekend

a

new

request

had

been

thrown

in-to

accept

payment

in

pakistan

rupee.This

was

against

corporate

policy

at

Honeywell,but

if an

exception

was

not

made,

he deal-worth

$23.7

mil-

lion-was

most

ikely

dead.

Pakistan

nternational

irlines

plA)

Pakistan

International

Airlines

Corporation

(pIA)

was

the

national

carrier

of

the

Islamic

Republic

of

pakistan.

Founded

n

L954,

PIA

operated

scheduledpassenger

nd

cargo

services.

he

firm

was 57o/o

tate owned, with the

rcnaintng 43To held by private investors internal to

Pakistan.

PIA's

fleet

was

aging.Although

he

airline

had

planned

a

significant

modernization

program,

recent

restrictions

placed

on government

spending

by

the International

Monetary

Fund

(IMF)

had

kitled

the

program.

With the

cancellation

of the

fleet

modernization

program,

pIA

now

had

to

move

fast

to

ensure

compliance

with

US. Federal

Aviation

Administration

(FAA)

safety

mandates. f

it did

not

comply

with

the

FAA

mandates

or

quieter

engines

and

upgraded

avionics

by

June 30,

1998,

pIA

would

be

locked

out

of

its

very profitable

US.

gates.

IA

would first

retrofit

the

aircraft

utilized

on

the long-haul

lights

to the

United Stateqprimarily the Boeing 747 classics.Due to

SAC's

extensive

experience

with a

variety of control sys-

tems

or

Boeing

and

ts

recent

work

on cockpit retrofit

for

McDonnell

Douglas

aircraft,

SAC felt

it was he

preferred

supplier

for

PIA.

Ilowever,

SAC had

not undertaken

Boeing

cockpit

retrofits

o

date

(no

one

had),and ooked

to

the

PIA

deal

as

an

opportunity

to

build

a new compet-

itive

base.

PIAs

insistence

on

payment

in

local

currency

terms

was

now

thought

to

be a

tactic o extract

better con-

cessions

rom

SAC

and

their

agent,

Makran.

lbrahim

Makran

ut.

td.

In countries

ike

Pakistan,

he

useof

an agent

s often

con-

sidereda necessary vil.The agentcanoften help to bridge

two

business

ultures

and provide

invaluable

nformation,

but

at some

cost.

Honeywell's

agent,Ibrahim

Makran Pvt.

Ltd.,

based

n

Hyderabad,

was considered

one of the most

reliable

and

well connected

n

Pakistan.

Makran traced

ts

roots

back

o a ong

association

with

the

SperryAerospace

and

Marine

Group,

he

precursor

o

Honeywell'sSAC unit

(Sp rry

was

acquired

n

1986).

Makran

was

also one of the

largest

mport/export

trading

houses

n Pakistan.

t was

t00%

family

owned

and

managed.

Standardpractice

n

the

avionics

business

was to

pro-

vide

the agent

with

a

L0%

commission,

although

this was

negotiable.

The

L0%

was

based

on the

final

salesand was

paid

after

all

payments

were

received.

Typically,

t was he

agent

who

spotted

the

business

opportunity

and submit-

ted

a

proposal

o

SAC

Marketing.

When

PIA contacted

Makran

regarding

their latest

demand,

Makran

knew

that

SAC

would

want

to maintain

the deal n

U.S.

dollars.

Makran

had therefore

nquired

as

to the availability of dollar funds for a deal of this size

from its own

finance

department.The

inance

department

confirmed

hat

they

had

the

necessary

U.S.

doltar

funds to

pay

SAC, but

warned

that policy

was

to

charge

5o/o or

services

endered

and

currency

risks.

Makran

advised

SAC

that

it would

be willing

to

pur-

chase

he

receivable

or an

additional5o/o in

addition to

the

L}o/o

commission).

Makran's

U.S.

subsidiary

in Los

Angeles

would credit

SAC

within

30

days of

SAC invoic-

ing

Makran.

PIA advised

Makran

that

if SAC accepted

payment

in Pakistan

rupees,

hen

local

(Pakistan)

pay-

ment

terms

would

apply.This

meant

180

days n

principle,

but

often was

much

longer

in practice.

The

agent also

advisedSAC that the Pakistan upeewas duefor another

devaluation.When

pressed

or

more

information,

Makran

simply

replied that

the

company

president,

the

elder

Ibrahim

Makran,

had

good

connections.',

Pakistan

upee

A

central part

of the

IMF's

austerityprogram

was a deval-

uation

of the

Pakistan

rupee

by

7.86 /

against

the U.S.

dollar

on

Octpber22,l996.Now,

oughly

six months ater,

there

was renewed

speculation

hat

another

devaluation

was

imminent

in

order

to

limit

imports

and

help

the

export

sector earn

badly

needed

hard

currency.

Another

recent

economic

setback

had

been

the ruling

by

the

EuropeanUnion that Pakistanwasguilty

of dumping

cot-

ton,

and had

mposed

anti-dumping

ines-on

Pakistani

cot-

ton.

This was

a

painful

blow

to the

export sector. The

current exchange

ate of

40.4795

akistan

upee

(Rp) per

8/20/2019 Honeywell and Pakistan Internati

2/2

SAG

Gontrol

Ystems'Average

aYs

Sales

Receivables

YRegion

Region

Actual

dollar

was

maintained

y

the Pakistani

Central

Bank'The

parallel

market

rate-the

black

market

rate-was

approaching

RpSO/US$'

t

present,

here

was

no

forward

market

for

the

Pakistan

uPee.

Honeywell's

orking

apital

Honeywell's

finance

department

was

attempting

to

reduce

net

working

capital

and

had

ust

concluded

a

thor-

ough

review

of

existing

payment

terms

and

worldwide

dayssales eceivable

DSn)

rates'

The

department's

oal

was o

reduce

worldwide

DSR

rates

rom

55

to

45 days n

the

current

fiscal

year.The

pay

for

performance

arget

tot

the

current

year

(the annual

performance

bonus

system

at

Honeywell)

included

net

working

capital

goals'There

was

concern

n

the

otganization

hat

the

net

working

capital

goal could

prove tLe

obstacle

o

achieving

a

bonus

despite

ixcellent

sales

rowth.The

atest

DSR

report

follows:

customers.

For

example,

neither

contracts

nor

rnvolces

stated

any

penalties

or

late

payment'

Many

airlines

did

pay

on

time,

but

others

availed

hemselves

f

Honeywell's

cheap

inancing.

A

review

of

PIA

s account

eceivable

history

indicated

thattheyconsistentlypaidtheirinvoiceslate.Thecurrent

average

DSR

was

264

days.PIA

had

been

epeatedly

put

on

hoid

by

the

collections

department,

orcing

marketing

staff

repiesentatives

to

press

the

agent

who

in

turn

pressed

PIA

for

payment.

Honeywell

was

very

concerned

about this deal. It had in fact asked or guarantees hat

PIA

would

pay

promptly.

Honeywell's

concern

was

also

reflectedinthe20o/oadvancepaymentclauseinthecon-

tract.

Although

marketing

ook

the

high

DSR

rate

up

with

PIA

and

the

agent,

the

current

proposed

deal

was

expected

o

be

the

same

f

not

worse'

One

positive

attribute

of

the

proposed

contract

was

that

delivery

would

not

occur

until

one

year

after

the

con-

tract

was

signed.

The

invoice

for

the

full

amount

out-

standing

*onta

be

issued

at

that

time'

If

the

expected

improvements

o

the

DSR

were

made

in

the

meantime'

mayUe

he

high

DSR

rate

on

the

PIA

deal

could

be

aver-

aged

with

the

rest

of

Asia.

Ttre

20o/

advance

payment

would be used o fund the front-end engineeringwork'

Global

treasury

at

Honeywell

was

headquartered

along

with

corporate

in

Minneapolis,

Minnesota'

Corporate

treasury

was

a

profit

center

and

charged

/o

commission

on

all

sales.

ieasury,

however,

passed

on

the

currency

risk

to

the

business

unit'

If

a

local

subsidiary

required

ocal

currency,

reasury

would

try

to

match

hose

requirements

by

accepting

he

A/R

in the

local

currency'

fnly

had

advised

SAC

that

for

many

developing

coun-

tries

where

Honeywell

had

little

or

no

activitieq

such

as

Pakistan,

his

was

done

only

on

an

exception

basis'

Global

treasury

also

evaluated

all

deals

in

present

value

terms

given

the

extended

payment

periods,

and

the

corporate

cost

of

caPital

wasset atL2 / .

lrlegotiations

Honeywell

now

speculated

hat

the

local

currency

equest

was

a result

of

thi

20o/o

dvance

ayment

clause.The

roj-

ect

was

considered

one

bf

the

riskiest

SAC

had

under-

taken,

and

the

20l/o

advance

ayment

would

help

reach

the

group's

DSR

goals. he

DSR

was

being

watched

on

a

daily

basis

by

division

management'

This

project

had

already

been

forced

to

secure

group-level

approval

because

t

fell

below

the

minimum

return-on-sales

arget'

SAC's

management

had

counted

on

the

deal

to

make

ts

annualsales argets, nd that now seemedn jeopardy' t

wouldneedtoactsooni f i twastoreachi tstargets.

3.

What

would

you

do

if

you were

heading

the

Honeywell

SAC

group

negotiating

he deal?

Target

Amount

North

America

South

America

Europe

Middle

East

Asia

PIA

Boeing

McDonnell

Douglas

Airlcus

ndustries

44

129

55

93

75

264

39

35

70

40

7n

45

OU

180

30

30

A R

$gt.o

mil l ion

$z.t

miltion

$s.7

mittion

$3.2

mittion

$t

.o

mil l ion

$0.7

million

$+t,o

mil l ion

$18.0

mil l ion

$13.0

mil l ion

Notes:

A.

U.S.-based

irline

rading

companies

istort

he

actual

ocal

payment

erms.

B.Thespreadbetweenindividua|customerswithinregionscan

be extremelY

arge.

C.

Some

collection

ctivity

s

assumed'

Specific

ustomers

re

periodically

argeted.

D.

Disputed

nvoices

re

ncluded'

Amount

s

for

all

products'

services,

nd

exchanges.

E.

One

of

the

criteria

or

granting

preferred

ricing s

a

3-0-day

DSR.ThelO%reductioncanbesubstantia|buttypica||yon|y

motivates

he

larger

customers,

Honeywell

payment

terms

were

net

30

from

date

of

invoice.

However,

payment

terms

and

practices

varied

dramatically

across

country

and

region'

Payment-terms

were generally not

published,

with

the

exception

of

some

private

reports

by

credit

rating

agencies'

Honeywell

had

not

in

the

past

enforced

stringent

credit

terms

on

many

Gase

Questions

'

1. Estimate'what

cash

lows

n whiCh

currencies

he

pro'

posal would

probably

yield.What

is

the

expected

U'S'

dollar

value

that would,

in

the

end,

be

received?

2. Doyou

think

the services

hat

Makran

is

offering

are

:worth

the

costs?