Duty breaks lure in more car brands for local assembly

Despite a slump in the car market with unit prices shooting up by over 50% in Bangladesh since the Covid pandemic, global car manufacturers are turning to local assembly encouraged by huge duty benefits and tax-VAT waivers offered by the government to reduce prices and boost sales. 

Success of the first movers since the duty benefits in mid-2022, like Korean Hyundai, in a slowing down market last year, attracted another Korean car giant Kia and Japan's Mitsubishi to grab the same opportunity by partnering up with local entrepreneurs.

Meghna Automobiles, a long-time partner of Kia Motors in Bangladesh, has set up a plant in Bormi, Gazipur, and will start assembling sport utility vehicles soon.

Rancon Group is constructing a car industrial park in Gazipur's Bhabanipur area, aiming to invest over a thousand crore taka. By the last quarter of this year, they plan to paint and assemble Mitsubishi and Proton cars there. MG cars will be added next year.

Emerging world brands like Chery, and compact car giant Suzuki are also in the pipeline. Besides, DHS Motors, the distributor of Honda cars, is in discussions with its principal for local assembling.

According to the latest automobile policy, locally assembled cars up to 2500cc capacity are subject to 25%-35% tax and duty, compared to a hefty 127% for a completely built up imported 1600cc car.

Due to their affordability and fuel efficiency, cars up to 1600cc are in high demand in the Bangladesh market, constituting around 70% of the cars on the road, according to the Bangladesh Road Transport Authority.

4 Kia SUV models coming soon

Anisuzzaman Choudhury, executive director at Meghna Automobiles, a long-time partner of Kia Motors in Bangladesh, said their plant in Bormi, Gazipur, is poised to start assembling four Kia SUV models soon.

Selling some 400 brand new imported cars last year, Kia now expects to sell over a thousand units in the first year of local assembly, he said.

"With 10-20% annual growth eyed, annual sales should surge further in line with more value addition gradually," said Anisuzzaman.

With more assembly lines being established in Bangladesh, increased competition is anticipated to drive prices down as companies may need to reduce profit margins to maintain competitiveness in the growing market, according to him.

As the local assembling and painting are done according to the global standard of principal brands, customers are loving the price benefit of localisation, Anisuzzaman said.

For example, he said, a 1600cc SUV is priced at Tk40-60 lakh, where local assembly offers savings of Tk7-12 lakh compared to imported ones.

Hyundai, another Korean carmaker, began painting and assembling cars at the Fair Technologies factory in Bangabandhu Hi-Tech City in January last year.

Their annual sales more than doubled, reaching 1,158 units in 2023, capturing one-third of the brand new car market.

Hyundai is third in market share 

Among all cars, both new and reconditioned, Hyundai secured the third-largest market share last year, trailing only Toyota and Honda.

This is largely due to the 17-18% drop in price of sport utility vehicles like Hyundai Creta, and Tucson that offered better value for money to the buyers when competitors like Toyota, Honda, Mitsubishi, Kia, Nissan, MG barely had a chance to avoid price escalation amid a stiff appreciation and scarcity of the dollar.

Impact of latest tax policy 

Mostafizur Rashid Bhuiyan, executive director of Rancon Group, a long-time distributor of various automobile brands, said their group has established local assembly plants near Dhaka to produce Mitsubishi, MG, and Proton cars.

He said Rancon has been assembling Mitsubishi Outlander SUVs, which did not help much in reducing prices before the sharp cuts in taxes and duties offered against the automobile industry localisation master plan two years back.

Previously, local assembly of car bodies, engines, and components only reduced the tax burden to around 86%, compared to 127% for fully imported units, offering insufficient cost advantages.

However, the new policy has widened the duty gap between local and imported units, potentially making cars more affordable.

Abdul Matlub Ahmad, chairman of Nitol Niloy Group and president of Bangladesh Automobile Assemblers and Manufacturers Association, noted that historically, Bangladesh has imposed high duties on cars, treating them as luxury items.

"However, the new policy could change that narrative, making cars more affordable," he added.

Matiur Rahman, chairman, and managing director of Uttara Group of Industries, said a local factory needs at least Tk500 crore investment to join the localisation trend, aiming to lower prices and increase sales.

His group is constructing a car assembly plant in Chattogram to make Suzuki cars more affordable for middle-income families and businesses as it happened in India.

Still in negotiation with the principal Suzuki for business terms and conditions, Matiur Rahman expects to start car making in Chattogram by the middle of 2025.

Abdul Matlub Ahmad from Nitol Niloy Group mentioned that their company has also prepared its factory for Tata cars, which has the third-largest share in the Indian market but previously faced limited demand in Bangladesh due to imported units not offering good value for money.

What is in the tax policy  

A 1600cc car, if imported as a completely built unit (CBU), is subject to a total taxes and duties of 127% over the import value.

However, according to the Automobile Industry Development Policy 2021, car factories established with sufficient investment and meeting certain value addition criteria may pay as low as 25% in total taxes and duties on the import value of components if they assemble unpainted parts. For assembling imported painted parts, the total tax burden stands at around 37%.

Both are significantly lower than the total taxes and duties applicable for CBU units of petrol or diesel cars. Hybrid car importers enjoy some relief as they pay nearly 90% in total taxes and duties nowadays.

Future of car industry in Bangladesh 

Pragati, a state-owned entity, pioneered vehicle assembly in Bangladesh, later joined by PHP Automobiles producing Proton cars in Chattogram.

Companies like Pacific Motors, Rancon, and Maa Enterprise also assembled Hyundai, Mitsubishi, and DFSK cars before the Automobile Industry Development Policy 2021.

During the pandemic, Bangla Cars, a venture of Hossain Group of Industries, became the first local car manufacturer by importing components for chassis, body, engine, and assembling them at its Narayanganj factory.

Despite import challenges due to the dollar crisis, it sold nearly 500 SUVs at lower prices in three years, with potential for more sales.

Last year, Bangladesh's car market shrank by 30% due to price hikes and import difficulties, with over 80% of nearly 24,000 passenger vehicles being Japanese reconditioned ones, according to the Bangladesh Road Transport Authority.

Nitol Niloy Group's Matlub Ahmad said affordability could replicate the success seen in the two-wheeler market, which tripled in five years after the government offered duty and tax cuts for locally made units attracting global giants like Honda, Yamaha, Suzuki, Bajaj, TVS, and Hero to establish local plants following Runner and Atlas.

Anisuzzaman Choudhury from Kia believes locally assembled cars will gradually gain market share from imported ones.

Arman Rashid, the general manager of DHS Motors, believes that localisation is the future.

"Unless imported cars offer something unique, they won't be able to compete with locally assembled ones," he added.

Meanwhile, the government also aims for car exports and component manufacturing as the industry matures.