Automobile consumption on the rise: Formulating appropriate policies

Opening the opportunity for adding value by capitalising on locally-available raw material, labour, innovation or capital has been the primary objective of industrial policy formulation. Recently, lowering emission and increasing safety have been added to those four objectives. Like many other developing countries, Bangladesh's automobile consumption has been increasing at a rapid pace. So far, Bangladesh has been meeting this consumption through the import of finished automobiles, mostly used ones from Japan. Over the last five years, car import to Bangladesh has basically tripled. The import of reconditioned car has been increasing at a rate of 15 to 20 per cent per year reaching over 20,000 cars worth Tk 50 billion in revenue in 2017. Such surge in import often triggers the discussion of import substitution, consequentially demanding policies offering incentives. But, what kind of policy succeeds in offering better quality automobile at lower cost, while creating jobs, new tax revenue and export opportunity is a subject of discussion and opinion formation.

Unlike some other developing countries like Malaysia or Congo, Bangladesh does not have any raw materials to add during the production of automobiles. So far the focus has been on labour. Unfortunately, the role of labour in producing automobile parts and assembling them together has been steadily declining. In automobile assembling, the role of labour in completing tasks has fallen to less than 20 per cent. The machine, automation, and robotics are now performing more than 80 per cent assembling tasks. In the 1960s, when the labour content requirement was very high, Bangladesh established an automobile assembling plant. But unfortunately, by capitalising on the low-cost labour, this plant never grew as the supplier of a cheaper alternative to imported reconditioned cars, nor did it grow as an exporter of cheaper automobiles in the international market. Similarly, there have been many attempts in the past several decades to develop export-oriented automobile parts production success stories. Unfortunately, despite the effort, low-cost labour alone could not enable Bangladesh to succeed in this mission. On the other hand, upon succeeding in making many parts, Malaysia could not make Proton a success story in a relatively far larger marker.

Over the decades, the automobile industry has been going through a series of transformations. One of the underlying forces has been incremental innovation, making successive generations more efficient, reliable, and comfortable than previous generations. Such innovation race has pushed some automobile manufacturers as the top performing patent recipients in the US patent office (UPO).  For example, as reported by the USA Today, among the top UPO 50 patent-recipient automobile companies are Toyota (08), Ford (17), Hyundai (24), General Motors (32), Denso (41) and Honda (43).  As a result, customers often find that used cars imported from Japan, often though more expensive, are better options than buying brand new cars offered by local dealers of TATA or other Indian or Chinese car companies. As a matter of fact, rapid change in underlying technology is driving innovation features, making it economically attractive to change the existing ones once the next model is out in the market. This has led to a deep discount on reconditioned vehicles. For example, energy efficiency makes it economically attractive to change previous models, just driven by gasoline engines, with a hybrid alternative. As a result, vehicles produced by technologically less advanced producers are suffering from the erosion of attractiveness; even their new vehicles are less attractive to used ones produced by top performing ones. 

Decreasing labour requirement and rapid progress of technology-driven incremental innovation have been eroding the competitive advantage of the local assembly, even parts manufacturing. For this reason, despite serious attempts, Malaysia could not succeed in making Proton a success story. To make it a success by pursuing the strategy of how to make, the Malaysian Government forced citizens to buy the inferior locally-produced product at a higher price. Due to high tax differential, Malaysians kept buying a poor quality product at a far higher price than they would have otherwise paid for imported superior ones. But by taxing citizens, Malaysia could not succeed in developing a globally competitive automobile industry. High technology content also demands an extended scale advantage to minimise cost. Often domestic market of most of the developing countries like Bangladesh is not sufficient enough to recover investment before the economic attractiveness of plant life expires, due to rapid technological advancement.

Technological discontinuity has been another emerging issue. Gasoline engines are on the verge of getting wiped out by electric vehicles, whether powered by battery or hydrogen. Does it mean that by jumping on the next wave of technology, developing countries can succeed in developing automobile industry? Unfortunately, the answer is no. Labour content in next-generation technology will be further lower than the current generation. And many of the aspiring developing countries like Bangladesh neither have access to new kind of raw material in producing electric vehicles nor have R&D (research and development) capacity to succeed in the innovation race. For example, the possession of Cobalt, a key material in making a battery, could have given an added advantage. To capitalise on this opportunity, China has gone to Africa to buy top cobalt mines of the world. In the given scenario, aspiring developing countries have neither raw material nor labour advantage. Moreover, due to high technology content and change of underlying technology core, the race of innovation and scale advantage would accelerate further. As a result, the monopolistic market power would likely increase in the global automobile industry. This will increase the risk for technologically less-advanced automobile makers, mostly from developing countries, to lose their market share.

The obvious question would be: what is the option for a developing country to enter into automobile industry? It appears that conventional labour-based approach is no longer viable. Incentives given in the form of tax or cash incentives may lead to the emergence of some local assemblers. But it is highly likely that they will fail to produce a net positive effect. On the other hand, opening the opportunity for inferior products to take over imported reconditioned ones through tax differentials will basically force consumers to buy inferior products at a higher price. In order to benefit from the growing consumption of automobiles, the focus should be on the creation of innovation-led value addition, as opposed to labour. In absence of well-thought-out strategic approach of crafting the pathway to add value through innovation, policy incentives for following conventional approach will likely lead to forcing citizens to buy poor products, depriving the government of taxes and creating a new type of non-performing bank loan portfolio.

M Rokonuzzaman Ph.D is academic and researcher on technology, innovation and policy.

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