Once upon a time, people used to make a mockery out of the products from Jinjira or Dholaikhal. And now, these light engineering (LE) hubs in Dhaka, coupled with a total of 34 LE clusters spread across 18 districts in Bangladesh, are contributing nearly 3% of the country’s GDP. In FY22, Bangladesh earned USD 796 million in exports from this industry. Each year, this sector alone generates around BDT 20,000 crore as revenues, while the market is growing at 10%.
As one of the fastest-growing economies in the world, Bangladesh’s economy has not been able to diversify its export earnings. The country is still heavily reliant on the ready-made garments (RMG) sector for its export earnings, as the RMG industry contributed 9.25% of Bangladesh’s GDP in FY22. This major weakness of Bangladesh’s economy can only be solved if the country focuses on its other potential sectors. Among such potential sectors, light engineering remains at the top of the list.
Any industry that requires machinery or needs the repair and maintenance of machines is heavily reliant on light engineering. From supplying motor parts to replacing components for industries such as textile, railroads, food processing, etc., this industry provides spare parts and repair services at a cheaper cost and shorter time. That is why this industry is widely regarded as the “mother of all industries”. However, this industry has been plagued by major challenges, which are hindering Bangladesh’s ability to reach its full potential as a light engineering products exporting nation and diversify its economy.
The first major challenge lies in the lack of skill and contemporary technology. Mostly an informal sector with SMEs, this sector heavily relies on outdated technology and manual labour, which also comes with health risks. Outdated technologies necessitate more raw materials for each unit product, which leads to 30% to 40% of resource wastage. Not to mention, the widespread use of manual labour and antiquated technology significantly increases time in the entire process.
The two major players in the light engineering sector of Bangladesh, Dholaikhal and Jinjira, have almost 7,500 factories, shops and workshops where around 60,000 people are employed, producing motor parts, machines and other parts and components for different industries. In places like Dholaikhal, the people working in the sector have even developed their own terminologies that are perhaps unknown to a lot of professionally trained mechanical engineers. In my experience in building an E-Waste management business and talking to scrap dealers or bhangariwalas in different areas, including Chankharpul, I have witnessed firsthand how certain technical words and terms are exchanged among them that are only confined within their communities. For instance, the scrap dealer of Chankharpul calls our PC cases as gorda. Such ingenuity in developing their own terminologies indicates a lack of focus from the government and pertinent stakeholders to reskill and upskill individuals who are employed in the light engineering sector.
Such unavailability of skilled manpower and modern technology is jeopardizing Bangladesh’s competitiveness in this sector. According to the Bangladesh Institute of Development Studies (BIDS), the LE sector is suffering from a 33.6% skill gap.
More importantly, foreign direct investments (FDI) are coming inside the country. More FDI in the manufacturing sector means more foreign companies are likely to enter the Bangladeshi market through mergers and acquisitions (M&A) and/or joint ventures (JV). They are likely to establish their manufacturing factories or production hubs, and they will require consistent support or assistance with parts supplies and repair/servicing.
This demand from manufacturers also poses another bottleneck in this industry. This second challenge is with the existing disparity between VAT and TAX. While the manufacturers of the light engineering products enjoy tax exemption, the small repair services are subjected to a 15% VAT. While the repair services save huge expenses for manufacturers in other industries for their servicing needs, such a VAT budget makes the local repair services unattractive to them.
So, what needs to be done here? Four solutions can be explored to solve these two problems. First, basic education in Bangladesh has to be significantly improved. One of the primary reasons behind Vitenam’s success in becoming a manufacturing miracle is that the country has heavily invested in its demographic dividend by promoting basic education. Bangladesh can draw inspiration from Vietnam by leveraging its demographic dividend. Secondly, technical and vocational education and training (TVET) can play a pivotal role in skilling Bangladesh’s young population and preparing them to lead the country’s light engineering industry. Thirdly, facilitating the usage of modern technology can massively empower this growing sector. Fourthly, reducing the VAT on the service or repair shops can increase the competitiveness of this crucial part of the light engineering sector.
The third major challenge in this industry is the import tax disparity. The import tax on this industry’s raw materials is 30%-40%. However, the tax on finished goods is only 1%. This import tax disparity creates two key issues. First, it reduces the ability of Bangladesh’s LE industry to meet the local demand even further due to the surging production costs. According to Rashed Mahmud, Managing Director of Kitty Industries Limited, “The customs department sets higher values, instead of actual values in the case of raw material imports. As a result, we pay higher taxes and our production costs go up, which ultimately decreases our competitiveness.”
In the status quo, the LE industry is failing to meet the domestic demand. Currently, the LE industry fulfills around 48%-52% of the domestic demand while exports remain not even 1% of the entire global exports. Secondly, when local prices go up, it makes imported LE products from China and other nations much cheaper and significantly obstructs the competitiveness of Bangladesh’s light engineering industry. Thus, this tax disparity needs to be addressed by the government to make the LE industry more globally competitive.
Additionally, the value chain connection has to be strengthened to reduce delays in supply, and production costs and increase market access as well as competitiveness. An SME linkage policy has to be there, which will connect the country’s 5,000 micro-enterprises and 10,000 SMEs to the FDI and transform them from a neglected informal sector to an organized, formal sector.
The Government of Bangladesh (GoB) has undertaken several initiatives to revamp the light engineering industry. Prime Minister Sheikh Hasina announced the LE sector as the ‘product of the year.’ Strong political will from the government was witnessed when the Prime Minister said Bangladesh could produce more bicycles, motorcycles, automobiles, auto parts, electric and electronic items, accumulator batteries, solar PV modules and toys in Bangladesh’s LE industry. In 2022, GoB has introduced the Light Engineering Industry Development Policy 2022 to accelerate the growth of LE industry. As per the policy, the Bangladesh Industrial Technical Assistance Center (BITAC) will establish a raw material bank primarily sourced from the shipbreaking industry. The policy also mandates the National Board of Revenue (NBR) to implement buyback management and offer tax incentives for the LE industry by 2025. Also, the finance division of the country’s central bank will form a venture capital fund to foster LE production, while subsidized loans will be provided to entrepreneurs in this sector.
In 2016, Bangladesh Small and Cottage Industries Corporation (BSCIC) started building the country’s first industrial park for light engineering and electrical goods in the Tongibari Upazila of Munshiganj. Moreover, five more industrial parks in 5 districts, including Dhaka, Narayanganj, Bogura, Narshindi, and Gaziupur, are on the cards. In the FY 2022-23 budget, GoB offered a conditional 10-year tax holiday to entrepreneurs involved in manufacturing LE products in order to encourage entrepreneurship and innovation. The Ministry of Commerce has formed the Light Engineering Product Business Promotion Council (LEPBPC) to accelerate the growth of this industry.
At present, Bangladesh only contributes 0.02% (USD 56 million) to the LE market of the UK. Diplomatic initiatives such as establishing the Developing Countries Trading Scheme by replacing the past GSP scheme with the European countries would potentially enable Bangladesh to secure more market shares in the European market.
Lastly, both the public and private sectors of Bangladesh have to be proactive in developing this long-neglected industry of the country to increase its export earnings, diversify its export portfolio, and position Bangladesh as the manufacturing hub of the world.
Author: Shah Adaan Uzzaman
