Light Engineering Sector: Can It Be Taken Lightly?

Bangladesh, having the apparel sector as the largest source of its export earnings, is in desperate need of diversification for its export basket. One such industry, that has been recognized as the thrust sector, and currently contributing about 2.2% of the GDP, is the light engineering industry.^[11] Light Engineering refers to the production of less capital intensive products compared to heavy engineering, and that which is catered to the needs of end consumers or other manufacturing businesses.

Market Fundamentals

The Light Engineering sector, serving as the cornerstone of many other manufacturing industries like Textile, Paper, Cement, Jute, Sugar, Railway and Food Processing,  has been termed as the “mother of all sectors” in Bangladesh. Therefore, this functions as a sub-sector supplying the basic elements (capital machinery, spare parts, accessories) to the major sectors. In addition to this, the sector also supplies import substitute products that amounts to an  annual turnover of USD 200 million. ^[5]  Almost 90% of the raw materials of this industry, are sourced from ship scrap from the ship breaking industry.^[3]

There are about 50,000 micro, 10,000 small and medium  light engineering businesses mostly self-financed, operating in clusters across the country with active participation of about 8 million people.^[4]  The local market size, conforming to one third of the domestic demand, amounted to USD 3.125 billion in the year 2017-18 with a 30 percent annual growth rate.^[4]  Besides the SMEs, large enterprises such as Walton, RFL, Alim Industries Ltd. ACI motors and Meghna Group are also contributing to this sector by producing nuts, bolts, molds, bicycles, agro-machinery etc.

Figure: Table showing major hubs of the industry, Source: USAID

Hub	Focus
Rangpur-Dinajpur-Sylhet	Spare parts for automobiles, railways, mills, factories
Bogra-Natore	Foundry, agro-machinery, cylinders,
Dhaka-Gazipur-Narayanganj	Capital machinery, bicycles, construction equipment
Khulna-Barisal	Spare parts for mills and factories
Chattogram	Ship-breaking linked factories

Opportunities

Bangladesh, being the third largest non-EU exporter of bicycles, has contributed 12 percent to light engineering exports in the year 2017-18. Then again, the agro-machinery sector is flourishing rapidly with 32% demand being met by the light engineering industry. The agro-machinery industry size is USD 1.2 billion and growing at a rate of 12 percent CAGR. The level of mechanization in the agro-industry is yet to reach its full potential, as only 5 out of 11 core agri-processes have adopted mechanization. This leaves ample area for growth and therefore light engineering implications. The spare parts sector is also progressing rapidly with a market of USD 309 million with 80% products locally produced. The automotive sector is no less, having grown three times in the last 10 years to USD 175 million with a CAGR of 10.8%. ^[4]

The core industry of Bangladesh, RMG industry, is a major buyer of light engineering machinery. Local manufacturers can supply these products with a huge cost-reduction advantage of 25 percent compared to imported ones. One such product example is the DLPG film blowing machine that costs USD 50,000 if locally acquired, but USD 700,000 if imported.^[4] The same is true for many other products manufactured by LEI enterprises that can serve as import substitutes. In addition, these enterprises have the repair expertise of all kinds of textile machinery.

Exports Outlook

Exports of light engineering products have reflected a spiraling growth momentum until 2017. The products are mainly exported to  European Union, Japan, China, India, Australia, Africa etc. Light engineering products earned USD 688 million in the year 2016-2017, but this number radically dialed down to USD 355.96 million in 2017-18 which is 55 percent less than the predicted earnings. ^[4]

Leading Impediments To Progress

The huge disparity between the expected and actual exports figure can be attributed to some of the key constraints pertaining to this industry.

Old methods slow down processes

Backdated, substandard traditional processes have set quality and overall productivity on the wane. The enterprises lack the minimum technology, for example: Computer-Aided Numerically Controlled (CNC) machines, Computer-Aided Design (CAD), heat treatment and testing which are generally used to make similar products globally. Consequently, these enterprises are bombarded with stringent competition in the export market. ^[3]

Below standards raw material with no testing facility

The sector’s raw material source is driven by ship scraps. These inputs are of low grade quality and often the workers have no formal education in materials science and engineering. In addition, the low penetration of advanced technologies and quality assurance mechanisms has led to low-precision products that impede access to international supply chains.

High Interest Rates

Manufacturers having the minimum production capacity but maximum production costs, require consistent financial assistance for maintaining or expanding operations. However, the informal nature of the self-financed SMEs translates to their low acceptability to financial institutions making the process convoluted. Also, the fact that interest rates are substantially high further adds to the hindrances.

Government Policy Support

Government has declared light engineering products as “the product of the year 2020”. ^[1]  The fact that the product has been in the limelight for quite a period of time, has been mirrored in the activities and policies of our government.

Fiscal incentives

• Various cash incentives are provided, for example 15% cash incentives are enjoyed by bicycle exporters.

Non-fiscal incentives

• Government has recognized light engineering products as one of the thrust sectors and has developed appropriate policies. Over the years, 2015-2018 and 2018-2020, these policies have been formulated so as to aid the industry through:

1. Lower rates of interest
2. Temporary Prohibition of income tax

Ease on export credits

• National Farm Mechanization Policy,  that has been approved this year, is expected to drive growth of agro mechanization. The policy will provide 50-70 percent incentives to farmers for buying agro-machinery. Even though this policy is not aimed at the light engineering industry directly, increased agro-mechanization brought about by this policy will have a ripple effect on the light engineering sector growth.^[12]
• A plan to develop “Light Engineering Cluster Village” in the outskirts of Dhaka city has been devised to further drive industry growth.
• In the 7 th – Five-Year Plan, the government has focused on attracting FDI to facilitate investment in this sector with a view to ease market access and technology pervasion. To do so, special economic zones have been planned to be established so that they can be handed over to the global investors. The Light Engineering sector has been allocated 36 percent of the industrial area of Mirershorai Economic Zone.

The Future Ahead

Even though the majority of the  deterrents of this industry are being addressed by the government through the policies discussed; there are some salient steps yet to be taken in order to secure a better future.

Extending policy support

Government and financial institutions should further extend their support, to help the industry realize its full potential. For example, capital machinery imports have only one percent import duty and no value added tax; whereas the local production of an identical capital machinery will have fifteen percent value added tax starting from this July. Such barriers should be entirely eradicated for sustained industry growth.

Establishment of common facility centers

Common facility centers should be introduced in large clustered areas, so that any sort of assistance like marketing centers, testing laboratory centers, quality measuring centers can be provided to a group of industries in the same area. This could help alleviate operational costs, investment at the same time boost technology, time management and research and development. This means existing products will be upgraded and new product innovations will be facilitated.

Facilitate collaboration and technology transfer with foreign counterparts

This would help solve the scarcity of technical know-how issues by helping the industry revitalize traditional processes with appropriate knowledge and technology.

Better quality control

BSTI, Bangladesh Industrial and Technical Assistance Center (BITAC) and other certification bodies should strengthen the industry with technical assistance and support them in incorporating sophisticated technology for improved quality control in order to develop products of  international standard.

All these aforementioned steps coupled with increased university-industry collaborations , can help light engineering products live up to the notion of being the product of the year 2020 and therefore emerge as one of the prominent sectors of Bangladesh.

Afiya Tahsin, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: [email protected]