Motorcycle industry faces blow just after huge investments

The country's motorcycle industry is facing a series of headwinds just after it has witnessed significant investments.

After an encouraging growth in sales in parallel with local value addition and capacity expansion that reduced prices, the pre-pandemic slowdown had flattened the industry's sales in 2019.

Now, the pandemic has pushed the industry into a territory of negative growth in sales while it was targeting a 20 percent annual growth.

In such a challenging context, the government has not extended the prevailing value added tax (VAT) waiver for local manufacturers while the industry is fighting for lowering unit prices that would offer Bangladeshi people a convenient mode of mobility, giving them a respite from "a very unfriendly" public transportation.

The industry was requesting that the government lower the motorcycle registration cost which is three to four times higher than in many peer economies.

Instead of responding to that, the government has imposed more supplementary duty on the service charges by the Bangladesh Road Transport Authority, increasing the cost of owning a motorcycle.

Industry associations in their post-budget reactions are demanding that the government rethink the adverse policy measures.

Harvesting falls short of fair expectation

The sector was expecting a significant takeoff in 2020 as all the major players have already completed their first phase of investment to set up a local plant that builds frames and assembles motorbikes.

Some, such as Runner and Hero, have set up their facilities for frame manufacturing and engine assembly – that need further investments – even earlier.

Rapidly increasing investments by reputed brands such as Honda, Suzuki, Bajaj, TVS, Yamaha and some other winning brands are also effectively contributing to more local value addition – synonymous to affordability as that help reduce duty burden here in Bangladesh.

But the Tk8,000 crore investments in the potential industry now face a series of headwinds that began in the second half of 2019.

Teenagers' movement for safe roads had triggered a crackdown on registration and driving license irregularities in October last year. At the same time, the economy also had begun to face slack in demand, especially for comparatively bigger ticket purchases.

Banks' less eagerness to lend because of their then tight liquidity situation reduced real income for many families, a market correction after a jump in previous few years' sales – everything resulted from the slowdown that ended the two-wheeler industry's calendar year 2019 with growth having been flattened, according to Biblob Kumar Roy, chief executive officer of TVS Auto Bangladesh, also general secretary of Bangladesh Motorcycle Assemblers and Manufacturers Association (BMMA).

After a 200 percent growth in four years, the industry in 2019 sold around 5 lakh units of motorcycles including a very few scooters – short of its expectation which was over 5.5 lakh units.

The industry – which have targeted sales of 6 lakh units in 2020 – now appears to see one-third fall in annual sales this year, according to the association.

The purchasing power of people is already hurt due to Covid-19. On top of that, prices and registration costs are likely to rise if the government does not drop its plan to collect VAT on the motorcycle manufacturing industry and increase the supplementary duty on registration costs.

Newly-added challenges and the industry's plea

In line with the motorcycle industry's development policy of 2018 and the national industrial policy of 2016, the government has been extending the VAT waiver on local manufacturing of motorcycles since 2017 when the five-year facility ended.

A few brands were enjoying it before all invested heavily. 

However, almost all the brands with increased investments are waiting for the facility from the next fiscal year and onwards.

Surprising the industry, the government has not extended the VAT waiver in the recently-proposed budget.

Industry associations, including the BMMA, want the incentive to continue for the next 5-7 years.

World-class brands are investing to make motorcycles affordable here, and their efforts would be discouraged if the government deviates from its supportive stance outlined in the policy papers, said BMMA Secretary General Roy while talking to The Business Standard.

"We, from the association, have written to the government pointing at various discouraging factors emerging in policy front," said Roy.

Bangladesh is not only gaining self-dependency in the two-wheeler industry, it also has a good beginning in exports to some regional markets, despite too many challenges.

Runner, the manufacturing pioneer, began it a few years back.

Runner Chairman Hafizur Rahman Khan, also the President of Motorcycle Manufacturers and Exporters Association of Bangladesh (MMEAB), told The Business Standard, "I am surprised to see that the government did not extend its support for the motorcycle industry this year. In contrast, it did for many other localising industries such as electronics and electrical appliances."

His association has written to the Tariff Commission so that the government continues its supportive policies for the development of the industry and its backward linkages.

If the VAT on manufacturers takes place it would increase unit price by Tk10,000-15,000 for commuter bikes, while it is high time to reduce prices so that people can avoid the coronavirus infection risk in public transportation, said Khan.

He also called for not increasing the supplementary duty from 10 to 15 percent on the registration cost which is already as high as one-fourth of a 100cc motorcycle.

"We understand the government's need for revenue. But it appears that total revenue collection would be very higher if the government supports the industry and enables citizens to avail a motorcycle or scooter," Khan added.

"The most significant effect of the adverse policy emerging in the tough time, I want to say, is discouraging the industry to invest more in line with the national plan for a demand for 10 lakh units a year, higher employment generation and GDP contribution within the next five-seven years," he said.

Roy said, along with the appropriate policy support, Bangladeshi customers deserve much easier access to finance while buying a two-wheeler.

The process to avail a motorcycle loan in Bangladesh is too cumbersome and costly too, compared to that in the peer economies.