Supporting a fledgling  automobile industry

It is a piece of welcome news that Fair Group, a local company, is setting up a US$100 million plant in Gazipur's Bangabandhu Hi-Tech Park to assemble vehicles of a globally reputed automobile company. The plant will assemble two popular brands of Hyundai, Creta and Alcazer, for the Bangladesh market. A number of local companies are now involved in automobile assembling, the state-owned Pragati Industries being the oldest one. Pragati has been assembling the highly popular Mitsubishi SUVs. Some other local groups are assembling Malaysian and Chinese cars. Two more companies reportedly are in the process of setting up plants to assemble Japanese Suzuki and Indian Tata cars.

The market for new cars and SUVs has grown from 7.0 per cent market share in 2016 to 16 per cent in 2022. Sales jumped from 250 to 500 units. Fair group officials have informed that while initially the company will assemble 200 units, the plant will have the capacity to make 4,000 vehicles annually. The vehicles meant for assembling are brought into the country in CKD (completely knocked down) need to pay lower duty rates than the new cars. This leads to some price advantage in the case of locally assembled automobiles. Looking at the data, some 20,093 vehicles were registered in 2020, the bulk of which are reconditioned vehicles. There is a very long way to go before the new car segment is in a position to replace reconditioned or old cars on the market. Locally assembled vehicles already have a cost advantage over new cars. For instance the new Hyundai Creta imported from Korea has a price tag of Tk 4.7 million while a locally assembled one would cost around Tk 4.0 million. Such cost reduction might lure many reconditioned car users to opt for locally assembled new cars. 

The fact that the sale of new vehicles has registered a 100 per cent growth over six years points to the change in consumer preferences to go for new as opposed to old vehicles. At present the locally assembled vehicles are paying a maximum of 45 per cent tax. The government has a progressive manufacturing policy for local automobile industry and if companies make more components of the vehicle locally, their tax burden will go down significantly. If welding and painting car bodies are introduced, the tax burden will reduce to 30 per cent. Indeed, the target for local assemblers should be to bring down the price of a sedan car (that constitutes 55 per cent of the total vehicles registered) to Tk 700, 000 - Tk 800,000 to make it affordable by the middle class. With right kind of initiatives in place this may not be a distant dream. But before companies invest hundreds of millions of dollars in component manufacturing and other production processes, they have to be given some level of protection by the government. Furthermore, the tax regime for the fledgling industry should be kept unchanged for a period of at least 5 years to raise investors' confidence.

It is time for Bangladesh to change its status as a net importing nation of automobiles and create a manufacturing base that will not only help save millions in forex, but also generate thousands of skilled jobs. Besides, many linkage industries would come up to feed a burgeoning automobile industry.