Daewoo

International Islamic
University Islamabad

Analysis of Daewoo Subsidiary in

Afghanistan
Subject:
International financial management

Submitted To:
Ch. Mazhar Hussian
Submitted By:
Muhammad Badar Ud Duja (6230/FMS/MBA/F13)
Muhammad Waseem
(62
/FMS/MBA/F13)

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Waseem Aslam
/FMS/MBA/F13)

(62

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Contents
CHAPTER NO 1.................................................................................. 4
INTRODUCTION.................................................................................4
Company Profile.............................................................................6
Vision............................................................................................. 7
Mission........................................................................................... 7
Objective Of The Study.................................................................7
Need for Study...............................................................................7
CHAPTER NO 2.................................................................................. 8
Motives of DFI................................................................................8
Benefits of DFI................................................................................ 9
Subsequent Decisions of Direct Foreign Investment....................10
Chapter No 3...................................................................................11
ROLE OF HOST GOVERNMENT......................................................11
Chapter No 4...................................................................................13
Technical Analysis........................................................................13
Financial Analysis.........................................................................16
Calculations.................................................................................18
Calculations of Cash flows, NPV.................................................20
CHAPTER NO 4................................................................................ 22
Conclusion................................................................................... 22

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Executive Summary
This report covers different aspects of International Diversification. It reflects
our humble efforts to capture the core process of International Diversification.
The Structure consists of 4 different chapters which includes the introduction
about the project, theoretical framework, Analysis of the project and at the end
the Conclusion summarizes the whole project.
In the first Section of Introduction we discuss that why the international
diversification is necessary and then we look about the feasibility of our
project with the scenarios that is prevailing in Afghanistan. The policies and
the intentions of the Daewoo in the Pakistan is discussed that encourages the
company to diversify in Afghanistan.
In the Second section we see about the theoretical framework. That what the
Theories, Articles say about the Multinational Company to diversify in
different regions and in what basis to diversify. It also helps to secure the
exchange rate fluctuations. How a company take subsequent decisions while
making a foreign direct investment.
In the Third section we analyses the International Diversification of the
Daewoo Company. We see about the management, future activities, problems
of down play, calculated risk, cost of the investment and the expected profit
and loss.we use tool s & techniques of multinational capital budgeting & then
apply these techniques partially and evaluate the project on the basis of these
techniques.
In the Fourth section we conclude the whole project that what we have done in
the analysis, what is the theories and the introduction. We link all the sections
and come to the final acknowledgment that whether the project is feasible or
not, profitable or not with context to the Daewoo subsidiary in Afghanistan.

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CHAPTER NO 1
INTRODUCTION
International diversification is basically to reduce the risk of an organization
by expanding in other nations. By diversifying we mean that to invest in that
country which is inversely related to each other by means that if an
organization is not performing well due to any reason like political, cultural
issues in one nation, the other nation that is not affected by these situations, an
organization can earn a reasonable revenue from that nation to overcomes the
negative impact of the conflict nation losses. So in this way companies can
reduce the losses and minimize the risk on a long term basis.
We are opening a Subsidiary in Afghanistan, for this purpose we have to see
the feasibility of the project. We have concerned with many things which have
a direct impact on our investment. After the attack on world trade centre on 11
September 2001, the Aliened forces comes in Afghanistan to fight against
Taliban and Al-Qaida which have ultimate no end. Today after 13 years the
situation is still not satisfactory but we hope and we foresee that the situation
is now progressing better which forces us to invest in Afghanistan.
We foresee that the project is feasible because now the NATO and the Allied
Forces is trying to exit from the war, so if we invest today we have to incurred
a cheaper cost, the cheap labour is also available, as the currency will grow up
in near future so the return will boost.
The project is also feasible because there is a relationship between people of
Pakistan and Afghanistan. So there is huge number of people who want to
travel in between two countries, as there is no other comfortable transport
service provider so it gives us an edge or a plus point. When we start working
in the Afghanistan people would love to travel in a more comfortable way.

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In our project we have decided that the company that we select would operate
in a different phases. In the first phase company would operate its operations
from Kabul City to Quetta City.
The significance of our project is that when the company enters in Afghanistan
which results in the improvement of the life style of the residences and also
the road transport improves. The local entrepreneurs should show interest in it
which results in increase in the trading or Business. People would travel from
one place to another place in a short time. They value the time and their
money. Different expansion in industries and there is more comfortable
transport facilities with luxury.
We see that the project is very much suitable as you that there is no other
standardized Service provider and there is another concerned that links a direct
connection with our project success that is the policies of their present
government. Whether the present government of Afghanistan protects the
investor or not. But we see that the government is very much co-operative
with the direct foreign investment because it brings prosperity to their country
and removes the uncertainty from the country.
The major goal of the Afghan government is to bring sustainability with
productive infrastructure that helps in private sector expansion. As we know
that the risk is high the return will also high. The main risk that we face is the
client , the ministry and the public that is unwilling to accept the private sector
entity, and the terrorism. The right policy is very much important for the
financial growth of the country. The plus point is that the government and the
donors are willing to promote private sector that reduces the uncertainty in the
country.

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Company Profile
Daewoo Pakistan Limited Is one of the best Motorway Service provider in
Pakistan. Its motive is to provide best Transport along with luxurious
memories that create certain value in the mind of its customers. We focus on
the best Service that results in becoming the best. We value for your money
and pay back to you according to your expectations.
Daewoo Pakistan Limited was established on Sep 10, 1997 after signing a
significant agreement with the National Highway Authority on a Concession
Basis. Daewoo itself established its Motorway Service areas on the motorway
to provide or facilitate its commuters while travelling up to the mark, on built
operate and transfer basis(BOTB) while travelling to Lahore-Islamabad. The
purpose of establishing BOTB is to provide best possible service to the
Customers at a one place. Different Public Spots includes parking lots,
Mosques for praying, 24 hours Vehicle break down facilities.( Workshops/
Tyre Shops). Clean and Attractive Washrooms and also the services of CNG
and Fuel Stations.
The different business facilities include continentals and fast food
internationals chains, small tuck shops and large shopping marts flowers and
horticultures along with some more. As we mentioned that we believe in the
satisfaction of the consumer so we put stress or focus in proving full
satisfaction to the valued customers which will help us in achieving
completive advantage over its competitors and also important to remain the
market.
We believe customer is our best asset. We are basically a MNC (Korean
company) with aim to achieve high organizational goals. We make no
Compromise on the customer satisfaction and quality of our products and
services. We are very much concerned with the quality and we are very stick
to the policy that what we are proving today still remains with the passage of
time but even more improvement in our quality. By this means we are

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operating with superior quality excellence, and to make improvements in the

existing operations which also helps up in making good relations with the
local entrepreneurs who are very much interested in dealing through
motorway, so for that we are very much updated to establish long term
relations

Vision
Our vision is to become the super leading institution in Pakistan and achieve
high market share by valued commuters by quality service along with the
quality product offerings in the modern era of motorway service areas.

Mission
Our mission is to achieve
An organizational environment that foster towards professionalism, motivation
and quality by inhaling core values and services. An introducing High quality
brand with best performance at all Motorway service areas

Objective Of The Study

Purpose of Subsidiary (D.F.I)

Nature of Risk and Uncertainty
Capital Budgeting about Company
Value of currency with comparison Dollar Afghanistan.

Need for Study

We want to Study of Management Plan

We want to Study of future activities
We want to study the expected Profit/ Loss .
We want to study about Calculative Risk
We want to study the Cost of the investment
We want to study the Agency problem (Down Play) anti sentiments.

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CHAPTER NO 2
Motives of DFI
The first objective of Multinational Company is to have international
diversification, by adding more and more projects in their portfolio. With it
risk is lessen as majority of the MNC have their subsidiaries with negative corelations with each other. As if there is worst situation in one Era Company
can compensate it from the other era.
The basic purpose of Diversification is to improve profitability in term of
increase in Revenue or decrease in cost. One of the basic compulsion of MNC
is to maximize the shareholders wealth due to which it has to move towards
those countries where they may find cheap labour, land, capital and building
I.e., cheap factor of production.
The major motive of foreign direct investment is.

attract new sources of demand

enter-market where superior profits are possible
Exploit monopolistic advantages
Reaction to trade restrictions, and
Diversify internationally.

The international project reduces the firms cost and overall risk of the
company .the major aspect of international diversification is selecting foreign
projects whose performance levels are not highly co-related with the help of it
various international projects do not experience poor performance all in one
time. The major motive of cost related direct foreign investment is.

Fully benefit from economies of scale

Using foreign factor of productions
Using foreign raw materials
Exchange rate movement

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Benefits of DFI
International diversification gives the benefit to the company of securing
exchange rate fluctuation. They choose such type of countries where they may
find cheap cost of investment and less risk of loss. Companies take such type
of decisions after analysing and thinking a lot about, whether the company
should expand their operations, should company moves towards that specific
country should all the earnings should be remitted to the parent company or
subsidiary should use it by itself.
Here the company also looks towards the rules of the host government related
to the direct foreign investment related to their sector in which they are going
to invest.
Corporation often reaches to a stage where the companys growth reaches at
its maximum limit in its home country due to multiple factors such as intense
competition or its market share reached at its potential peak. So company tries
to move out of the Country where they see potential demand in which the list
of less developing countries comes first of all in front of their eyes. Such as
Afghanistan. Although in the beginning MNC may faces multiple barriers in
term of its progress in that country. But with a passage of time by giving best
quality services or products company easily makes its place in the market of
that specific country.
One of the biggest problems that multinational faces are control of their cost.
For this purpose they tried to obtain economies of scale. The potential benefit
from DFI very with the countries such as region of Asia v/s region of Europe
as problem in one region may affect their earnings, on the other hand the
earning of the other region will support that company and risk will be
minimized.

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Subsequent Decisions of Direct Foreign Investment

Once DFI takes place few decisions are necessary to determine about the
further expansion in the given location. When the project earns the MNC must
decide whether funds should be remitted to the parent company or should
remain to the subsidiary. If subsidiary is in need of money the funds should be
more beneficial for subsidiary and it should be used by it, not to the parent.
Of-Course certain percentage of the funds will be needed to maintain
operations but the remaining funds should be send to the parent or sent to any
other subsidiary or re-invest for expansion purposes. The appropriate decision
depends on the economic conditions in the subsidiaries country and the
parents country and restrictions imposed by the host government.

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Chapter No 3
ROLE OF HOST GOVERNMENT
Government can play an important role related to the DFI through the
following tools.

Incentives to encourage DFI

Barriers to DFI
Protective Barrier
Industry Barrier
Red Tape Barrier
Environmental barriers
Political Instability
Ethical differences, and
Regulatory Barriers

Some governments allow international acquisition but imposed special

requirements such as acquiring local firm or does not threaten the local market
share of the local companies. The MNC may even be required to retain all the
employees of the target firm so that unemployment and general economic
conditions should not be disturbed or adversely affected.
The purpose of this section is to identify the role of theories in direct foreign
investment
1. Monopoly Theory of Advantage
According to it MNC possess Monopolistic Advantage over the local
firms of Host Country. The firm Enjoys Monopolistic Advantage due
to Superior Knowledge and Advance technology.( intangible skills ,
technologic processes unique product differentiation ).

3. Product Life Cycle Theory

According to it first of all company operates in home country then
export its products after that it itself moves to that specific country and
then have competition there.

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4. Eclectic Theory
It deals with the following factors country specific, companies specific
relating to trade and foreign direct investment.
Country specific deals with geographical environment,
Government

regulatory

framework,

production

and

transportation cost, research and development advantages,

political environment, taxes and fiscal policy and cultural

environment.
Company Specific deals with managerial effectiveness and
technological advantages.

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Chapter No 4
Technical Analysis
In this we basically analyse the feasibility of our project weather the
diversification of the Daewoo service is feasible or not so; at first we want to
know that how the management team that would works for a Daewoo
organization in Afghanistan. Managers hold an ample importance while
managing and taking decisions. The management plan of the transport
program is designed in such a way that can reduce the traffic on roads (private
owned vehicles). Managers have certain responsibilities and duties as a tool
for management plan coordinator.
The certain responsibilities of the management team that we have observed are
the following.
1. To ensure the participation in the transport management plan for the
progress of an organization.
2. To ensure that to provide the proper addresses and the contact
information of the coordinators, business relations that is essential for
the company to achieve long term objectives.
3. Ensuring the soundness of the information regarding coordination that
is regulated from the town to the related or desired terminal sites.
4. To conduct different surveys within or outside the organization to
measure the employee performance
5. Basically to analyse the situation and prepare annual report that is
necessary to achieve an organizational goals.
6. Daewoo regularly arranging different workshops for the soundness of
the operations.
7. They are very much concerned with the risk that is prevailing in
Afghanistan.
Firstly the top managers are involved in the management. Top managers are
likely to be from Korea or from Pakistan as well and with the passage of time
they hire the educated employees from the Afghanistan residences and trained

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them according to the needs of an organization which helps in ensuring good

response from that country. We also observed that they are very keen to make
different strategies that are essentially necessary for the organization that if the
certain plan fails then in that situation how the company will react and respond
to the alternative plan. Direct foreign investment basically means the same
because the ultimate objective is to earn profit and to minimize the uncertain
risk. Managers are well aware of the motive of an organization and they are
making policies according to their desired motives. They are thinking the
different routes to operate in Afghanistan on a step expansion basis. They also
focus to give authority to the branch level managers to handle their issues but
under the monitoring of a centralized management.
Now we are analysing the future activities of a Daewoo company. Daewoo
must have to focus the improved and forthcoming technology that is essential
for the satisfaction of the customers or to fulfil the needs of a customer. They
are very keen to improve its products and services with the changing
requirements. They have to improve its operations in near future according to
the forecasting. They have to designed different policies that are essential for
the success in Afghanistan. To open a subsidiary in Afghanistan is generally a
future activity for the Daewoo. As it is an new era they have to be very much
updated to build an good will in Afghanistan by making a standard service and
to deliver them as well.
To attract the new era they are decided that first the operation should be on a
testing basis that the bus would go in Afghanistan on a day time from Pakistan
and then comes back in a day as well and take rest here due to their political
conditions. As soon the company Progresses they then decide to open a big
terminal in Afghanistan with the passage of time.
As the progress continues Daewoo would expand in overall Afghanistan to
occupy the whole market as there is no other alternative transport service
provider so it is an opportunity for an organization. Daewoo is taking high risk

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to earn high from that sector so it is trying to achieve monopolistic advantage

there with the cooperation of the Local Government.
As we know that now it is only interested in proving travelling services in
Afghanistan but after sometime they are looking forward to provide the
luggage/goods, personnel belongings transfer service from one place to
another. With the co-operation with the Local Government they are also
thinking to build roads in Afghanistan to ensure the safety travelling and avoid
accidents that also helps in precious time saving of the valued customers.
There is always a chance of conflict arises between the management and the
shareholders because the shareholders were always love to get benefit or
concerned with increasing the wealth. They always want that the management
should act according to their desires when this doesnt happen the conflict may
arise between management and the shareholders. Sometimes the managers act
intentionally against the shareholders which will be reduced through by
providing different performance based incentives to the management. Daewoo
is very much keen and up to date with the market information and would
provide different incentives to the managers with the passage of time.
Another important sentiment is to face with the problem of down play. As the
people are mostly believe on the rumours and the liking and disliking of the
community also matters a lot on the outcome of the Company and it is the
hurdle as well in the progress of the company.
If the people start believing that the Muslims should not be used the nonMuslim items products and services and if such scenario arises then it is very
difficult for the company to continue its operations. Different policies and
strategies were needed to be established to overcome such a factors. Daewoo
have to build and established a good reputation that would exit the evil
rumours from the minds of the travellers which would help them to travel
freely. By making good reputation in the market people would know about the

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truth and disbelieving the evil rumours that if someone tried to create isconception regarding the company.

Financial Analysis
Profit and loss is the main element the Daewoo is concerned with. As the
market is new and it is a great opportunity for the firm to get a monopolistic
advantage there. Profit and loss statement is basically an income statement that
shows the profitability of an organization. It shows that what an expected
profit is for a given period. The period may be monthly, quarterly or yearly as
well. The profit and loss would be splinted in two sections the revenue and the
expenses. As it is an expected profit and is totally based on assumptions so we
foresee that the people of the Afghanistan are consistently searching for a
comfortable transport service provider which is a plus sign that the customers
are always there and by providing those services they can get high revenues
because the buses were loaded fully according to their maximum capacity. The
investors are always concerned with the return when the return is high they
can show intent to invest more in the Daewoo. As the expenses were estimated
to be low because of cheap labour, land, capital the cost they bear as an
exchange rate is also low which helps ultimately reducing the expenses of an
organization and increases the revenues.
It is very difficult to compare Pakistan against the Afghanistan because both
the countries have the utmost same culture values and beliefs. Yes it is true
that geographic boundaries make a huge difference. In Pakistan the project is
started likely to be same in Afghanistan. As the operation started the Daewoo
service earns a profit on a regular basis due to its standard operations and
services and now Daewoo holds a good Goodwill in the Pakistan, the same
strategy with certain changes is going to be implemented in Afghanistan.
Daewoo organization is an Korean company and is blessed with very
specialized people, when the company is expended globally the risk and the
uncertainty involved with it also increases significantly. However company is

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dealt with various risks in a daily routine manner it is not easy to handle or to
calculate or to identify the corporate level risks. Various calculated risks can
be done through risk management control plan. The purpose of calculated risk
is to maximize the firms value under the changing global environment. It is
due to that the vehicle entering in Afghanistan should easily be escape from
the Threat of Uncertain environment.
Some Calculated Risks involved the following
1. Firstly we are opening in that city which is safe and the Capital of
Afghanistan.
2. Different Scanners were used while entering into the bus.
3. Terminal would be established in near to the cant areas.
4. Some protection from the Government to the certain areas. Mobility of
security along with the Bus.
There are certain risks some are systematic and some are unsystematic risks.
Systemic risks are those which are basically uncontrollable and unavoidable
like natural disasters, political instability and terrorism while on the other hand
unsystematic risks are those which are controllable and the return is higher for
the organization if the Daewoo is taking high Unsystematic risk. Cash flows
are important to build the risk of a project.
Now we would also like to analyse the cost of investment that a firm has to
bear while investing in Afghanistan. 1 US $ is equal to 56.10 Afghan Afghani
currency so as the figure shows that if the Daewoo is invested now in
Afghanistan the cost that the company should have to bear is less now because
at the current scenario the currency is weak but have very much expectations
that the currency would appreciate in near future very soon because of the
allied forces.
They are investing now because when the subsidiary remits the money back to
the parent company it will be in a greater value. They will invest in a lessor
amount of dollars but will get huge returns. The government of Afghanistan

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provides different incentives to us according to their policy that they would

provide tax free land and the there are no electricity charges for the new
administrations. It will ultimately reduce the Cost of investment.

Calculations
1 Afghani = 0.056 US Dollars
1 US Dollar = 56.1 AFG

Description

Estimated Cost
(Million)

Cost USD
(Million)

Operational Land

05

0.0505

Operational Building

12

0.1212

Work Shops

50

0.505

Equipment

05

0.0505

Working Capital

15

0.1515

Misc. Cost

03

0.0303

AFG90

$ 1.818

Total

Equity = 0.70

Description
Amount
Weight
Cost

Debt = 0.30

Debt

Equity
0.5454
0.3
0.12

1.2726
0.7
0.15

Total Investment = 0.5454 + 1.2726 = 1.818 (M)

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WACC = WeKe+WdKd
WACC = (0.70*0.15) + (0.30*0.12)
WACC = 0.140
WACC = 14.1%

Calculations of Cash flows, NPV

Initial Investment is $ 1.818 (M) or AFG 90 (M).

Year

2015

2016

2017

2018

2019

Revenue

3200000

4000000

5000000

6200000

7200000

(Variable Cost)

1600000

2000000

2500000

3100000

3600000

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(Other Variable Cost)

256000

320000

400000

496000

576000

(Fixed Cost)

300000

300000

300000

300000

300000

(Depreciation) @ 10 %

550000

550000

550000

550000

550000

EBIT

494000

830000

1250000

1754000

2174000

(Interest) @ 12 %

65448

65448

65448

65448

65448

EBT

428552

764552

1184552

1688552

2108552

(Tax) @ 35 %

149993.2

267593.2

414593.2

590993.2

737993.2

Earning After Tax

278558.8

496958.8

769958.8

1097559

1370558.8

550000

550000

550000

550000

550000

Net Cash Flow

828558.8

1046959

1319959

1647559

1920558.8

(Withholding Tax) @ 30
%

248567.6

314087.6

395987.6

494267.6

576167.64

Depreciation

Salvage Value

1636200

NCF Transfer to Parent

579991.2

732871.2

923971.2

1153291

2980591.2

NPV

508318.3

562932.5

622015.9

680450.3

1541253.9

Cumulative NPV

-1309682

-746749

-124733

555717

2096970.9

Exchange Rate @ 98.90

Description
Exchange Rate
Change in Remittance

207390418

Current

Appreciation

Depreciation

98.90

105.53

92.05

207390418

221296627

193026168

At first we consider the current exchange rate and calculate remittance

to parent company then we compare the effect of change in exchange

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rate. Results shows appreciation in exchange rate leads to increase in

remittance to parent company. On the other hand depreciation in home
country currency decreases the remittances to parent.

CHAPTER NO 4
Conclusion
In a nut shell, we have decided to open a subsidiary in Afghanistan just due to
the reasons that we have found Afghanistan as a profitable place for us in
order to generate profit, for the parent company. As it is crystal clear that there

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is no other service provider like us who is working there at the moment. We

will be considered as the pioneer there in this field and we will take the full
benefit of the first mover strategy. Government will also support us as by
watching us different other multinational companies will also get confidence
to invest in Afghanistan.
We will be in a position for a long time to create monopoly and to get full
advantage in terms of revenue as well as good will be created which will help
us in long term, once confidence will be created of the costumers it will prove
to be very much help full for us. Furthermore on the other side we will get
benefit of other opportunities as well such as construction of some basic
infrastructure such as roads etc.
With the passage of time we will increase our operations to other cities as well
due to us there poverty will decrease people will become loyal to us. As our
corporate social responsibility will try to set up health care unit as well. Due to
the international diversification and the addition of one more project in our
portfolio our risk will be minimized and revenue will get a boost. Company
will also get benefit in such a way that the renitences what the parent would
receive would be more as compared to the amount of investment.
The project is feasible because we have seen many factors that can affect our
project like the instable conditions of the Afghanistan. But of course there are
certain elements and incentives that encourage us to invest in Afghanistan.
When we have discussed about the management in our project the
management team and the policies of the management are very enthusiastic
and energetic. They planned their future activities and are very stick to their
policies and monitor consistently about the performance.
They consistently monitor the actual performance with the planned
performance. As there is no other current such a god service provider in
Afghanistan it is expected to be that the market is very attractive and the

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people would definitely like to show interest which helps us to progress

affectively and also increase the revenues , profit of the organization. As they
are very professional peoples they do not take risk blindly but take risk by
calculating different factors and then take which best suits the organization
with maximum return.
They always up to date with the factors and take multiple decisions for the
benefit of an organization. As in the present situation the exchange rate is
comparatively low and is expected to be increased with the passage of time so
the cost of investment is low and also because of the cheap labour available.
One of the major problem that the company would face is the factor of
downplay and the anti-sentiments that would prevail in Afghanistan due to the
War on terror. But company have made different policies to overcome such a
situation as well. It is dealing in other nations as well so if the project fails the
company would minimize risk from the other profitable nations.

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