Draft Automobile Industry Development Policy: Address Issues to Reap Full Benefits

LightCastle Analytics Wing
November 25, 2020
Draft Automobile Industry Development Policy: Address Issues to Reap Full Benefits

With the growth of the economy and rising purchasing power of people, sales of automobiles have been increasing in Bangladesh. However, the country still needs to depend on imports of foreign vehicles to meet its ever-growing demand. Inspired by the success of the domestic two-wheeler motorbike industry, the government has developed the draft “Automobile Industry Development Policy” for creating a local automobile industry.

The draft policy details out plans to develop an industry that will reduce the country’s dependence on imports and become a leading exporter. Though well-planned, there are issues that need to be addressed should the draft be materialized. In this article, LightCastle Partners offers its take on the draft policy and provides recommendations for the policy to allow the domestic automobile industry to gain maximum benefits. 

The Policy: Developing a local automobile industry 

The draft “Automobile Industry Development Policy 2020” was drawn up in March 2020 by the Industries Ministry. The policy has taken a ten-year horizon (extendable to 12-15 years) that will develop an automobile manufacturing industry inside the country. The development will take place in four stages:

Draft Automobile Industry
Figure: Stages in the automobile industry development as envisioned by the draft policy (market size in brackets)/Source: Ministry of Industries

Along the stages, the policy foresees a shift from Completely Build-up units (CBU) imports to starting Semi-knocked down (SKD) assembly and then to Completely Knocked Down (CKD) assembly. Finally, the draft policy aims to develop auto-makers who have their own production networks at the end.[1]

How effective is the Automobile Policy?

It is commendable that the government has planned to progressively create a local automobile industry. However, there are issues that need to be addressed or otherwise will impede progress. 

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Developing a local auto parts market for backward linkage

In order to shift from Semi-knocked down (SKD) to local Completely Knocked Down (CKD) car production, there needs to be a presence of sufficient skill and technology. Therefore, there needs to be a supply of required raw materials for CKD units available domestically. Currently, most raw materials for auto parts such as engine, alternator, radiator, air conditioner, suspension, brake pads, spoiler, rim, and tire are imported.[2] So policymakers need to put emphasis on the establishment of a local auto part market so that the industry has an ample supply of raw materials of the industry. The draft policy mentions placing local content requirements (LCR) for manufacturers and providing financial incentives (like banking facilities and tax holidays) for meeting the requirements. 

Type of VehicleYear in Operation
1st Year3rd Year5th Year8th Year10th Year
Table: Local content contribution guidelines for CKD unit production in Bangladesh/Source: Ministry of Industry

The imposition of LCR can force automakers to invest in Bangladesh so that a local auto part market can be developed. When Thailand placed similar LCR back in the 1970s, Japanese auto parts subcontractors started to invest there and Thai firms also became involved in parts production.[3] Pakistan has also been able to develop a local suppliers market with the help of its Mandatory Deletion Policy- a policy similar to LCR.[4] Bangladesh can also expect similar benefits from the LCR.  

But policymakers need to ensure both the quantity and quality of locally produced auto parts. At present, locally manufactured parts are known for low quality.[2] Due to this and other factors, many local motorbike manufacturers refuse to source from local suppliers. If such a trend persists in the automobile sector, demand for domestically produced CKD units will be low. This situation can be averted if local auto part makers are aware of the quality and skill in the required technology. The government can provide financial incentives for those foreign manufacturers who provide technical assistance or enter joint ventures with the local suppliers. In this way, the latter will gain the required knowledge and be skilled in producing quality auto components. The government can also host trade fairs and exhibitions for local suppliers in order to improve the brand and quality image of the latter.

Banning of imports will harm competitiveness of the local industry

The draft policy planned out a complete ban on imports of reconditioned vehicles within 5 years starting from 2024. This strategy has drawn opposition from reconditioned car importers. Although the opposition from the importers can be thought of as self-serving, there is still merit to their argument: the government earned BDT 1,026.33 crore in revenue from import duties of reconditioned vehicles from July to March of FY 2019-20.[5] Thus, the government will lose out on a huge amount of revenue if a complete ban on reconditioned vehicle import takes place. 

It is feared that the complete ban on imports of reconditioned vehicles may lead to excess protection of the local manufacturing industry. It will allow them to form syndicates and charge higher prices as they will not have any competition. As observed in the case of Thailand, the country banned the imports of foreign CBU vehicles till the 1990s and yet local manufacturers were not able to make sales due to higher prices charged. It was only after that when the government allowed the imports of CBUs did the presence of cheaper South Korean models force the existing companies to produce lower-priced cars and the market took off.[3] As the example of Thailand shows, Bangladesh might consider allowing the imports of CBU and SKD units while continuing CKD production for competitiveness.

Setting of environmental and safety Standards Critical

Currently, Bangladesh’s regulations on vehicle safety and environmental standards are very lax. The country has not set any standards for seat belts, child restraints, frontal impacts, side impacts, electronic stability control, and pedestrian protection for automobiles.[6] Bangladesh’s environmental policy only requires cars to follow up to Euro 3 standards whereas developed countries follow the Euro 5 emission standards.[5] 

Draft Automobile Industry
Figure: Vehicle Safety Standards in Bangladesh and neighboring countries/Source: World Bank

While it is true that the draft Automobile Policy outlines steps to bring Bangladesh’s environmental and safety standards on par with global standards, the country may be lenient to follow them at the beginning. The government may find it tempting to provide exemptions at the beginning to lure manufacturers. But once the country plans to export, the government will intend to place emphasis on the strict standards. So Bangladesh should implement the strictest of global environmental and safety standards from the beginning. The testing center, as planned by the policy, should also adhere to the highest standards.

To implement safety and environmental standards, the country needs to develop its manpower as well. Bangladesh Road & Transport Authority (BRTA), the organization responsible for providing vehicle fitness and safety certificate, currently suffers from staff shortages and skill deficiencies: only 41 inspectors examine the fitness of more than two million vehicles in the country.[6] Once domestic vehicle manufacturing commences, BRTA may not be able to provide appropriate safety and environmental certifications to the produced cars as well. To prevent such a situation from happening, the government can recruit additional manpower at BRTA and train them. It can also outsource testing to technical service firms who will witness testing, issue reports, and send testing documents to BRTA. 

R&D Capabilities important for Global Competitiveness

For Bangladesh’s automobile industry to be competitive and export-worthy as envisioned by the draft policy, the country needs to have its own innovation capability. The need for innovation capability will be more important as the demand for alternative fuel vehicles like hybrids and electric cars are rising worldwide. Innovation will need people having a strong technology background: people who know how to make the product, develop efficient ways to improve production, and design products to suit customer needs. To enable innovation within the local automobile industry, Bangladesh will thus need to create policies that will strengthen local producers’ capability by increasing the technology transfers from major automotive assemblers to the local producers.[7]

The draft policy has a provision for setting up a National Automobile Council (NAC) so that R&D activities can take place to enable innovation capabilities among domestic manufacturers. It also recommends providing tax rebate facilities for assemblers and component producers for engaging in R&D activities. The government can improve R&D facilities for the automobile sector by strengthening links between the proposed NAC, firms, polytechnic and vocational institutions, and universities. The government can also provide grants for universities or private organizations to set up technology incubator centers for developing the technological capability of workers in the automotive industry.

In addition to the above issues, the government should also take steps for creating a well-developed forward linkage for the automobile industry. This includes setting up of after sales and auto repair services with adequate and skilled manpower.

The Way Forward: Thinking long-term while moving step-by-step

While it is good that the government has devised a step-by-step plan for developing the automobile sector, it needs to always keep in mind the future developments. Without it, the government may resort to short termism which will harm the industry in the long run. Therefore, the government needs to ensure they follow the highest standards when it comes to safety and environment, not compromising quality among suppliers, and allow competition in the domestic market. The government also needs to balance the interest of the private sector and the valid concerns of consumers. 

As part of thinking about the long-term, the government can also place special emphasis on automobiles running on low carbon and alternate fuels. Many countries including China, Japan, and the United Kingdom have laid down plans on reducing carbon emissions, which also includes switching to electric vehicles. More developed countries may also follow. Bangladesh can use this opportunity to develop an electric vehicle market as part of its automobile policy. The draft does include provisions of providing tax incentives to producers of electric cars and other energy-efficient vehicles. If Bangladesh can institute strict environmental regulations along with attractive tax incentives, like the Eco Car Program of Thailand, Bangladesh can become a hub and lead exporter of electric vehicles to the developed economies.

Farhan Uddin, Content Writer, and Saif Nazrul, Senior Business Consultant at LightCastle Partners, have prepared the write-up. For further clarifications, contact here: [email protected]


WRITTEN BY: LightCastle Analytics Wing

At LightCastle, we take a data-driven approach to create opportunities for growth and impact. We consult and collaborate with development partners, the public sector, and private organizations to promote inclusive economic growth that positively changes the lives of people at scale. Being a data-driven and transparent organization, we believe in democratizing knowledge and information among the stakeholders of the economy to drive inclusive growth.

For further clarifications, contact here: [email protected]

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