Mehedi Hasan Manager Credit Risk Management IDLC Finance Limited

Light Engineering Industry (LEI) is considered as one of the key industries which is going to contribute significantly in the economy of Bangladesh. It has also enormous scope to add value to the economic parameters of this country. It is very obvious that technological advancement has logical power to shift the demand from one product to another and Light Engineering Industry has potential to create value to this technological advancement and participate positively to the economic development of Bangladesh along with reduction of poverty by creating employment opportunities. Our economy is largely concentrated on RMG export. Experts have agreed on a point that concentration of our export of more than 80% on a single sector is not sustainable in the long run and it should be diversified by a long term policy. Light Engineering Industry is considered as a thrust sector which has current contribution in GDP of around 2% and has the potential to become one of the major sources of export earning along with fulfilling the domestic demand. Light engineering mainly deals with manufacturing light (less capital intensive) products which satisfy the demand of end user and other manufacturing entities. It is one of the major sources of spare parts for several industries including agriculture (rice, jute, flour, lentil, sugar, spices, feed & bakery), gas transmission & distribution, construction machineries, kitchenware & bathroom fittings, metal products, mold & dies, transport (road & water), pharmaceutical, paper & pulp, printing & packaging, RMG & textile and others.

This industry started its journey to support the large industrial units in 1950s in East Pakistan. After 1985 the industry got accelerated due to industrialization of other industries. During that time LEI evolved mainly in Dholaikhal, Jinjira, Mirpur, Syedpur, Bogura and other areas. Bangladesh Small and Cottage Industries Corporation (BSCIC) had significant contribution to support the small entrepreneurs during that time. BSCIC provided low interest rate loan to support the LE businesses. It was observed that many prominent players in this industry got BDT 0.1 million/ BDT 0.2 million loan from BSCIC which enabled them to kick-start started their journey during 90s.

LEIs are located mainly on the industrialized areas of Bangladesh. Light Engineering clusters are based on the districts which consist of Dhaka, Chattogram, Narayangonj, Gazipur, Bogura, Natore, Pabna, and Jashore.

Industry Overview

Around 40,000 light engineering workshops/ enterprises are operating in Bangladesh where 10 million people are actively employed. Lion portion of the LE enterprises fall on cottage & micro segment. Market size of this industry is around 25,000 crore per year and before pandemic the growth rate was 20 to 25% per year. Most of the light engineering enterprises support the local need of indigenous industries. Around 90% raw material of this industry is procured from ship breaking industry. It’s been observed that the export performance of LE products has decreased by 14% during the FY 2019-20 which needs to be taken into consideration by policy makers. There are some major steps takens by the Government which will surely boost up the performance of this industry. Government has decided to establish 10 dedicated light engineering industrial parks in Dhaka, Narayanganj, Jashore, Bogura, Narsingdi, Munshiganj, Mymensingh and Madaripur. The major export destinations of LE products are India, UK & Japan, Germany. The industry currently meets up the demand for around 50% substitutes of imported items in the country which positively contributes our BoP (Balance of Payment). As per the estimation of The Business Promotion Council, operating under the commerce ministry, the industry is producing around 3,815 types of machineries, spares and accessories.

Prospects

Light Engineering Industry is considered as ‘the mother of all industries’ since it facilitates backup support of spare parts and repair to almost all industrial sectors including plastic, cement, paper, jute, textile, sugar, food processing, railway, shipping, and garments. On the other hand single sector dependency on export is a challenge for the economy. Moreover, as developing nation, duty free excess will be restricted for RMG after 2025 as it is wise to concentrate on other sectors that could participate in the export as alternative sources and light engineering industry would be one them attractive sources to our export fleet. The backward linkage is very important in an economy and light engineering industry can develop a strong backward and forward linkages between LEI and other sectors. Currently, around 10 million people are working in this industry but it has huge potential to create much more employment opportunity that will help our country reduce poverty and make labor market more efficient. Needless to say that more employment opportunity will directly push our socio-economic development on higher side. LEI can become one of the major contributors in GDP which is now only around 2%. A study showed in 2018 that Bangladesh’s total investment in LE sector is only USD 15 billion against the demand of USD 7 trillion LEI products in the global market. Encouraging this industry will lead to reduce the import of LE products which will have positive impact of our foreign currency exposure. The study also conveyed that most of the developed countries have been focusing to develop LEI that plays as catalyst role for the development of countries’ industrial base. With proper financial, technical, infrastructural, distribution support, it could play a great role in export next to RMG and Agriculture.

 Business Dynamics

Raw materials used in this industry are metal scrap, pig iron, hard coke, limestone and ferroalloys such as ferrosilicon, ferromanganese and others. The price of raw material has been increased significantly which affects the bottom line profitability of this industry. The current prices of raw materials are given below:

Light engineering products are made in several phases in LE enterprises. A composite factory is fully equipped with machineries including furnace, induction furnace, different types of dice, lathe machine and others. Big players in this industry have full set up from melting raw materials in furnace to finish products. Very few of them are also using CNC (Computer numerical control) machine for perfect finishing. There are many participants in this industry those do not have factory set up with furnace and dices. They normally source unfinished products from the factories and finish in their workshop mainly equipped with several lathe & grinding machines. Production capacity is mainly depended on furnace capacity. The melting capacity of furnace is normally found starting from 5 MT to 20 MT. Based on the melting capacity of furnace, the factory is equipped with dices and other finishing lathe machines.

The production process includes sand molding, charging raw materials, melting, pouring, knocking out & finishing

Challenges

Light Engineering industry is facing many obstacles to grow. These challenges need to be identified properly and proper actions should be taken by the policymakers in order to add more value to the economic indicators of Bangladesh. Major challenges of this industry are discussed below:

Lack of Modern Technology is one the major challenges of LEI. Most of our LE enterprises are using old and backdated machineries from those the quality & competitive product cannot be produced. The leading countries of LE like China, Japan, and India are using modern technologies. They have been using CNC (Computerized and Numeric Controlled) technology since long. Whereas in Bangladesh use of CNC is rare. Normally, LE enterprises of Bangladesh applies trial & error method to develop a product which requires more time and cost as well as preciousness remains a concern.

 Price fluctuation of raw materials is another concern. The current price of scrap is around BDT 47/Kg which was normally 32 to 35 before pandemic. Again, the price of imported raw materials like pig iron, hard coke, limestone and ferroalloys has also increased significantly which makes this industry difficult to maintain expected bottom line profitability.

 Lack of skilled work force is also a challenge for this industry. The industry is labor intensive and manual process driven as skilled work force is very important for accurate finished products. Proper training and use of advanced technology may reduce this gap.

Price of imported LE products is comparatively lower than the products produced in country. Chinese cheap spares are available in the local market which is another obstacle to grow our indigenous LE enterprises.

Lack of capital and Finance is also a major concern of this industry. Most of the workshops can be categorized as “Small” in terms of initial capital. There are many workshops those have only one or two lathe. Due to lack of access to finance, they do not get the proper opportunity to grow even though Government has arranged some lending program for light engineering enterprises at lower interest rate.

Recent Initiatives

 In 2020, Bangladesh Prime Minister Sheikh Hasina announced the LEPs as the “product of the year” during the inauguration program of Dhaka Trade Fair-2020. A 10 year tax holiday will be enjoyed by the LE product manufacturers if they cater to factories with nonfinished products or parts. Bangladesh Automobile Manufacturers and Assemblers Association (BAAMA) is trying to go for joint ventures in components and parts manufacturing and it will certainly mitigate the existing technology issues. Several pre-finance program is going on to create access to finance for LE enterprises. Government has recently decided to establish 10 dedicated light engineering industrial parks in Dhaka, Narayanganj, Jashore, Bogura, Narsingdi, Munshiganj, Mymensingh and Madaripur.

 It is obvious that light engineering industry has immense scope to add value to the major economic indicators of Bangladesh. The major goal of an economy is to create employment and LEI is highly labor intensive which can create more employment opportunity and accelerate our expected growth. This industry is already acclaimed as the important sector for the future development considering the backward linkages of almost every industries. There are some challenges ahead to make this industry take off and reach the expected level. However, there are many adroit businessmen operating in this industry whose hard work and business acumen will lead this industry to desired level. Proper policy support, guidance from authority & leading businessmen, access to finance and use of advanced technology can mitigate the limitations and lead this industry to the optimum growth.