Exporting of Bicycles: A new window for Bangladesh’s economy
Bicycle exports are the single largest product export within Bangladesh’s engineering sector, contributing to about 7.5% of our engineering exports. Exports began around 1995 and have been growing gradually since then. Bangladesh’s bicycle exports are highly concentrated in three key markets: The UK (64%), Germany (14%), and Belgium (9%). The bicycle and bicycle parts export industry has emerged relatively recently in the industrial landscape of Bangladesh.
Investment opportunities emerged for capturing shares in the EU market after the imposition of anti-dumping duties (AD) on Chinese exporters. The first AD measures were imposed in 1993 -- after continuous lobbying from the European Bicycle Manufacturers Association, the EU imposed antidumping duties of 30.8% on bicycles made in China. This duty provided an opportunity for existing producers and new investors in other countries to enter the lucrative bicycle market of the EU (estimated at $7bn in 2011). Potential linkages with the rest of the economy are potentially substantial in this sector, given the nature of the product as an assembly of a large number of parts.
The bicycle manufacturing sector in Bangladesh is split in two distinct supply chains: Modern export-oriented OEM (original equipment manufacturer) manufacturers, and the small-scale cottage bicycle and bicycle parts industry catering exclusively to the local market. These two supply chains operate independently with extremely limited interactions and linkages between the two, owing to differences in market demands. There are no suppliers in Bangladesh that occupy the middle part of the supply chain, consisting of specialised parts and component manufacturers, local suppliers cannot produce parts and components of the quality required for export-oriented OEMs.
Suppliers of bicycle parts and components in Bangladesh historically have been exclusively oriented towards the local market, where quality requirements and standards have been low. Local producers of parts and components have few incentives to make significant quality improvements to their products geared solely to export market demands.
There are strong incentives for small firms to be exclusively oriented towards the local market. Bangladesh has a cottage industry of small-scale bicycle assemblers, parts manufacturers, and retailers, with beginnings dating to the 1970s. This cottage industry remains under-studied, and statistical information is extremely limited. Nevertheless, an estimated 1,500–2,000 people work in the Bongshal market in businesses directly related to bicycle assembly, component manufacturing, and retailing. Firms are small (typically, up to 10 employees), have extremely old machinery (in many cases over 30 years old), and are limited in their ability to graduate out of the low-quality segment of the market.
Typically, many small firms combine parts manufacturing with bicycle assembly and retailing of “complete knock down” (CKD) and/or “semi knock down” (SKD) kits imported from China and India. The strong incentive for firms to focus on the domestic market comes from low tariffs on inputs and high tariffs on output (56%), creating effective protection rates that average 219% for the domestic market. Suppliers of bicycle parts and components have been exclusively oriented towards the local market, where quality requirements and standards have been low. Local producers of parts and components have few incentives to make significant quality improvements to their products geared solely to export market demands.
Alongside the local cottage bicycle industry, foreign direct investment was critical to the emergence of the bicycle export sector. Malaysian investors were the first to seize the EU market opportunity by establishing the first bicycle exporting firm in Bangladesh in 1995. A domestic trading group, Meghna, was the next firm to enter the bicycle export manufacturing industry. Meghna’s founders had been involved in bicycle and parts trading in the 1960s, manufacturing bicycle spokes in the 1970s and doing bicycle assembly for the local market in the 1980s.
After diversifying and becoming a highly successful trading conglomerate, the Meghna Group grew to become the largest bicycle and bicycle parts manufacturer in the country. It now has two factories dedicated to the export market, two factories dedicated to bicycle manufacturing for the local market, and five bicycle components factories. The third and last market entrant in the bicycle exporting industry is German Bangla Bicycles, established in 2009 as a joint venture between a German bicycle manufacturing firm (Panther) and a Bangladeshi company (Powertrade Engineering) whose major business interests are in heavy manufacturing (telecom towers, electrical grid infrastructure, and so forth). Like the other two firms, German Bangla is an OEM, but by and large only for European brands.
The share of labour costs in the production of a bicycle is quite low across all manufacturing stages in Bangladesh. The share of labour costs is about 10% at the frame assembly stage, 13% at the wheel assembly stage, and 2% at the final bicycle assembly stage. When all stages of production are included, direct labour costs associated with producing a bicycle in Bangladesh range from $3–$5 per bicycle, depending on capacity utilisation at any given time and on production location. 63 Bicycle manufacturing across all stages, including frame and wheel manufacturing and assembly, is relatively capital intensive.
As a consequence, bicycle manufacturing can be, and is, successful in countries with relatively higher labour costs than Bangladesh. In China, for example, the average monthly payroll per employee in the transport equipment industry (including bicycles) is $500. In Taiwan, the average monthly payroll in the industry is $1,300. Notwithstanding these comparatively high labor costs, producers in these countries are market leaders in the bicycle industry: China is the world leader in bicycle exports in general, and Taiwan is among the leaders in medium-to-high end bicycles.
Prospects of by-cycle export
The lack of a local base of suppliers of quality parts and components has significant implications. First, OEMs that do not have deep enough pockets for investing in additional parts and components manufacturing must source parts in foreign markets. Currently, two of the three Bangladeshi OEMs import parts worth 60-75% of their ex-works bicycles’ export value. Interviews suggest that these producers will likely increase foreign content of parts and components in the future to the maximum allowed by EU rules of origin (RoO).
Second, OEMs that are strong financially, like Meghna, have made significant investments in parts and components manufacturing. For bicycles sold locally, Meghna’s share of own parts and components is estimated at 80%, and for exported bicycles, up to 45%. This, combined with the issue of scale economies in parts’ manufacture, probably limit opportunities for independent suppliers of export-quality parts and component suppliers to emerge. In modern bicycle production, scale economies and precision engineering are clearly important, and this has allowed China and even higher wage countries to remain competitive in different segments of the bicycle market. In Bangladesh, the modern export firms have vertically integrated to partially overcome the lack of a modern parts supplying industry, but rely on imports for the bulk of their parts’ needs. This approach has meant that their export prices are 10-20% higher than China’s export prices.
The third implication stemming from foreign sourcing of export-quality parts is a negative impact on lead times. For example, Bangladeshi exporters’ lead times to the UK market are estimated to be 30–50% longer compared to Chinese exporters. It is estimated that the bulk of the lead time gap arises from the Bangladeshi firms’ need to source a large part of parts and components from abroad, which can take up to a month after all the required paperwork and shipping. Chinese exporters can rely on a vast local supplier base that enables them to source parts and components within a few days.
Finally, Bangladeshi OEMs’ competitiveness across all stages of bicycle production also often suffers from unnecessary bureaucratic practices. Giving up all our personal interest we should seize and properly utilise our opportunities so that our exporters can smoothly export their bicycle products abroad. If we can do this, certainly it will add further income to our export lead products which can further stimulate and increase a share of our economy and can make our economic performance more strong and resilient.