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    Local Manufacturing of Smartphones on the Rise

    LightCastle Analytics Wing
    LightCastle Analytics Wing

    Bangladesh will be one of the emerging economies to keep an eye on in the coming years, given its remarkable track record over the last decade in economic and social progress. What makes the economic growth in Bangladesh even more exciting is the young population the median age is 27 years. Majority of the population will be composed of young individuals, who will enjoy rising disposable incomes and higher standards of living as the economy grows.

    The digital ecosystem in Bangladesh is booming due to the rising income of the millennial population and implementation of state policies that are designed to bolster growth in the ICT sector. Internet-enabled devices such as smartphones and laptops have gone from being luxury consumer durables to necessities for a high percentage of the population. Young tech-savvy individuals are integrating the internet into all aspects of their lives, from commuting to purchasing items on e-commerce platforms. As a result, there is a surge in demand for high-quality and affordable internet-enabled devices, especially smartphones.

    A surge in demand for affordable smartphones has unveiled local manufacturing of such products as a lucrative business opportunity in Bangladesh. Both government policy makers and manufacturers have realized the attractiveness of locally manufacturing and assembling smartphones. Trade regulations have been revised to encourage local assembling and highly incentivize manufacturing.

    Local and foreign mobile phone manufacturers are setting up or eager to set up onshore manufacturing. The boom in onshore manufacturing and assembling will be crucial in transforming Bangladesh into a gadget-making hub.

    As incomes rise and poverty rates drop across rural and urban areas, the smartphone penetration rate will more than double to 75% by 2025. 40 million phones have been imported into the country in 2018, with 30 million imported legally and the rest through grey channels. About 8.1 million smartphones were shipped in the same year, and one third of these smartphones was 4-G enabled. Local manufacturing and assembling of phones will further bolster replacement of feature phones by smartphones. Many of the locally manufactured and assembled phones are much cheaper compared to the imported counterparts, and therefore accessible by low-income individuals.

    The rise of local manufacturing and assembling of smartphones and subsequent availability of cheaper alternatives is reducing Bangladesh’s dependency on imports. Imports of smartphones fell for the first time in 2018. According to members from Bangladesh Mobile Phone Importers Association (BMPIA), the import of low-end smartphones (below $80) declined the most in 2018. Imports of high-end smartphones (costing more than $120) increased but were not enough to compensate for the loss in total imports. This suggests that imposition of high taxes on imported smartphones causes a decline in the low-end segment. Consumers of low-end smartphones can either purchase smartphones through informal markets or switch to locally manufactured sets once high taxes are imposed. Consumers of high-end smartphones might choose to spend an extra amount to buy an original product imported through a formal channel. This is an interesting phenomenon because while the imposition of high taxes on imported handsets have led to a fall in imports, the effect might subside in the future once incomes rise. Trade policies must therefore be adjusted accordingly to stimulate local manufacturing without having too much of an adverse effect on the smartphone market.

    In order to leverage the rising demand for high-quality consumer durables, the government has revised tax structures to encourage local manufacturing and assembling of smartphones. The cumulative taxes on imported handsets stand at 34%. Local assemblers, who follow a Semi-Knock Down (SKD) Process, can take advantage of a 17% cumulative tax. Cumulative tax for phones which are locally manufactured using a Complete Knock-Down (CKD) process is the lowest at a rate of 1%. The duty structure for local manufacturing and assembling is therefore very conducive.

    Given the economic and digital ecosystem and favorable government policy, it is not surprising that both foreign and local electronics manufacturers have rolled out local manufacturing of mobile phones. In 2018, 23,00,000 mobile phones were manufactured in Bangladesh by five local and foreign manufacturers. More foreign manufacturers have plans to set up plants in the coming years.1 Some like Samsung assemble the phones in Bangladesh, while others like Walton claim to manufacture every single component of the mobile phones. Local manufacturing and assembling success stories of brands like Walton, Symphony and Samsung have inspired others to follow.

    Local Phone Manufacturing in Bangladesh

    SOURCE: Bangladesh Mobile Phone Importers Association (BMPIA)
    Manufacturer Capacity 2018 Smartphone (%) Feature Phones (%) Assembly/Manufactured in Bangladesh
    Walton 1,100,000 30 70 Manufactured (Phones and Chargers)
    Samsung 600,000 100 (all 4G enabled) 0 Assembly (Components manufactured in China)
    Symphony 350,000 N/A N/A Assembly
    Itel 300,000 33 66 Assembly
    5Star Mobile 35,000 0 100 Assembly

    However, potential manufacturers and assemblers must carefully design market entry and pricing strategy. A few local brands face stiff competition from both affordable Chinese brands and high-value brands. A common obstacle to growth in local manufacturing/assembling is also the absence of a robust backward linkage.

    For most local manufacturers and assemblers in Bangladesh, the backward linkage starts with importing different components of the smartphone from China, and the method of sourcing differs by manufacturer. Fair Distribution Ltd. assembles the Samsung phones in Bangladesh, and the different components are selected and supplied by Samsung. Aamra imports finished smartphones from China. Walton, which follows a CKD process for manufacturing smartphones, imports some raw materials from China. For most manufacturers and assemblers, the backward linkage begins in China and is susceptible to currency volatility.

    A dynamic backward linkage which commences in Bangladesh would easily reduce dependency on imports and vulnerability to political and currency instability. However, unlike China and Taiwan, Bangladesh lacks the necessary technical skills for innovation in the technology sector. As a result, manufacturing parts of the phone, such as the processor, might be too taxing in terms of skills required.

    An alternative to manufacturing high-technology components of a smartphone might be producing low-technology parts like chargers and batteries. Walton, for example, imports lithium-cells for batteries from China. A local lithium-ion battery producer could supply to Walton and consumers of smartphones. Since the market for smartphones is expanding at a robust pace, the demand for chargers and batteries will also grow at a fast pace. Our economic forecasts suggest that the demand for smartphone batteries will be more than 3X of that in 2018.

    Therefore, while Bangladesh might not have the infrastructure and technical skills to manufacture high-technology component parts, it has a lucrative landscape to produce low-technology components such as chargers and batteries. The smartphone manufacturing and assembling industry is making its mark as a rewarding line of business in Bangladesh. The country should derive inspiration from the manufacturing practices of countries such as Vietnam and Malaysia to support onshore manufacturing. According to many local manufacturers, improvements in infrastructure, such as construction of separate lanes from the airport to economic zones, would be highly desirable. Key players in the industry should also closely monitor the US-China trade war. As the relationship between the two countries continue to stay tense, companies such as Foxconn will consider opening factories in countries such as Vietnam.2 Manufacturers and policy makers in Bangladesh should attempt to take advantage of this situation and attract companies to Bangladesh. The smartphone market in Bangladesh will grow in both volume and value, and the government needs to carefully implement policy to utilize the growth in consumption and leverage opportunities in the international trade.

    This article was written by Farah Hamud Khan, a Business Consultant at LightCastle Partners. For any queries, she can be reached at [email protected] This has been published as part of LightCastle’s 6th year anniversary publication, “LightCastle Featured Insights 2019“.

    LightCastle Analytics Wing

    LightCastle Analytics Wing is the research division of LightCastle Partners. It is tasked with producing periodic reports on the different sectors of the economy, analyzing trends in markets and making methodical, thorough and intelligent analysis to improve strategy and drive business growth.