The growth of e-commerce is typically followed by the emergence of logistics service providers (LSP) with the ability to cater to specific delivery needs created by e-commerce. We are living in a time where the application of emerging technologies such as drone transportation, robotic-assisted picking, AI algorithms for automated fulfillment etc. have enabled people to receive same-day e-commerce delivery in some parts of the world. Chinese e-retail behemoths Alibaba and JD.com were able to flourish in China because of the strong logistic support provided by Cainiao and JD logistics respectively.

As e-commerce matures, consumer expectation on delivery rises. Hence, Alibaba is planning to invest US$ 15.58 billion to develop a smart logistics network which can ensure 24-hour delivery across China and 72-hour delivery for the international market.[1]

In India, where the demographic profile of consumers and infrastructural challenges are similar to Bangladesh to some extent, major e-commerce players are heavily investing in their captive logistics wing, while at the same time third-party logistics (3PL) service providers such as E-com Express, Delhivery, Go Javas etc. are expanding by leaps and bounds attracting international investments. For instance, Delhivery, valued at US$ 1.6 billion has received US$ 350 million funding from SoftBank this year.[2]

A fully functional e-commerce logistics service provider usually provides value-added or fulfillment services such as packaging, warehousing, order pickup, security, online tracking and database management for their e-commerce partners. Globally, an e-commerce logistics player might provide all or some of these services.

Bangladeshi E-commerce Hits an Inflection Point

E-commerce has evolved in Bangladesh as a by-product of the digital revolution. The journey of internet commerce in Bangladesh began in the early 2000s and achieved significant momentum after 2009 when players such as ajkerdeal, rokomari, and akhoni (now bagdoom) entered the market.[3] Bangladeshi consumers, backed by increasing disposable income and improved access to technology, are rapidly adapting to online shopping. The industry is set to grow exponentially from its current estimated size of USD 70.87 million to USD 344 million by the year 2023 while the number of orders in a year is also projected to increase from 9.6 million to around 34 million.[4]

Recent entrance of online retail giant Alibaba into the Bangladesh market through the acquisition of Daraz will change the industry dynamics. E-commerce Association of Bangladesh (E-CAB) is anticipating that the proposed entrance of Walmart and Amazon will further accelerate the growth of domestic e-commerce industry. The industry growth will accelerate due to an even faster consumer adaptation rate, increase in order numbers, and entry of more international players. However, absence of an e-commerce centric logistics system is a vital factor which must be taken into account.

How Fast is Fast Enough?

Backed by the increasing availability of affordable smartphones and the rollout of faster and more reliable mobile telecommunication services, Bangladesh’s internet user base continued to grow in 2018. According to Bangladesh Telecommunication Regulatory Commission (BTRC), the total number of internet subscribers stood at 91.421 million at the end of January 2019. It is predicted that the number of smartphone users will reach 138 million resulting in a 75% penetration rate by the end of 2025.[5] All of these data indicate that the digital ecosystem needed to render a digital economy is taking its shape gradually. Bangladesh has observed the growth of its first generation of truly digital consumers who look for solutions online and purchase using digital payment methods on a regular basis. In the coming years, technology adaptation will be even faster, as flocks of millennials will start to join the digital economy. Additionally, owing to worsening traffic congestion and busy schedule of urban lives, more people will be placing orders online. Hence, the daily order size will rise significantly. The real concern here is whether the e-commerce companies can deliver the orders within the promised time frame.

In Bangladesh, if five people are asked about the reason behind their reluctance to order online, at least two will mention delivery as a prior concern. One of the major purposes of e-commerce is to truncate the hassles associated with traditional shopping, and if it fails to do that, consumers’ e-commerce adoption rate will remain low.

Success Lies in the Second-mile

At present, 500 e-commerce and 2,000 f-commerce (i.e. companies that operate through Facebook pages only) companies are registered under E-CAB and each one of these does not have the capability to run its own fleet. As a result, they have adapted to different delivery models to fit their needs based on capital expenditure requirement, control, flexibility etc. Majority of them have to make a choice from the following categories:

TABLE: Range of Service Provided by Each Type of Logistics Service Provider

Currently, no Bangladeshi e-commerce player owns a full-fledged logistics wing, which is able to provide a full range of delivery assistance. The first-mile logistics services i.e. e-commerce delivery inside major cities are offered by a number of 3PL providers such as Pathao, Bidduyt, Paperfly, E-Courier etc. The second mile means delivery from Dhaka to other districts. Except for a few traditional LSPs such as Sundarban Courier Service, S.A. Paribahan, Bangladesh Post Office, no other player has entered this segment yet. The last mile delivery indicates inter-district delivery which e-commerce companies conduct through either franchise model or own fleet.

Interviews with representatives from leading e-commerce players have revealed that majority of the orders are placed by the urban consumers and fewer orders are received from the remote and rural parts of the country presently. However, the government plans to set up 100 economic zones all over the country, which will create 10 million additional jobs by 2030.[6] Additionally, an estimated urbanization rate of 42% by 20257 indicates that in the coming years, digital consumers backed by increased buying power will be placing orders from all over the country. The geographic dispersion of orders will definitely require a seamless delivery mechanism that is not possible without focusing on the second-mile and last mile logistics.

FIGURE: E-commerce Logistics Value Chain in Bangladesh Market

Making the Logistics Ecosystem Smart

In recent years, omni-channel retailing has been gaining popularity in Bangladesh creating a demand for sound logistics system in the second and third mile. In order to thrive, the goal of both traditional and online retailers should be to make the whole logistics ecosystem smart, optimized and predictive. Traditional logistics companies have the combination of expertise, experience, and vision, but lack in tech-enabled services such as tracking of order, automated fulfilling and return management etc. E-commerce centric logistics start-ups have technology incorporated services better suited for online retailers but face shortage of expertise in labor management and do not have the capital required to build second or last mile fleet.

During the previous century, the only success mantra for the retail industry was ‘location. location. location.’ This will be replaced by ‘distribution. distribution. distribution.’ In order to leverage the true potential of the growing digital consumer class, businesses must invest in crafting a smart logistics ecosystem to ensure fast and seamless delivery of online orders.

This article was written by Silvia Rozario, a Business Consultant at LightCastle Partners. For any queries, she can be reached at silvia.rozario@lightcastlebd.com. The article was originally published on “LightCastle Insights 2019“.

The post E-commerce Logistics: The Pivotal Element in E-commerce Success appeared first on LightCastle Partners.

Consider Abdullah, an agri-entrepreneur in Northwestern Bangladesh. He wakes up in the morning to find a notification in a dedicated mobile application on his cellphone from his aggregator asking if he could supply 50 kgs of tomato from under his networked famers by next week. Through the push of a few buttons, he pulls up the expected harvest collection for next week and just as swiftly, but not before a smile lights up his countenance, lets the aggregator know that it’s a done deal. That’s how fast a simple piece of information – yet carrying powerful ramifications for everyone in the agri-value chain – flows from one end of the spectrum all the way to the other, in a matter of seconds.

That’s what data and ag-tech are doing; they are changing the game. The integration is opening up wider avenues of business opportunities, rendering greater income potential and inspiring the next generation to resurrect the image of an industry that’s slowly taking a backseat, but which nonetheless has been the growth driver of Bangladesh in its early years. A paradigm shift in agriculture is already underway.

In a world where data talks, industries and organizations need to step up and leverage data and technology for the greater good. A vast amount of data we are currently sitting on – both individually and collectively – is, at best, serving the purpose of a sleeping giant. As a nation, we are yet to recognize the full potential that data can trigger to create larger impacts for organizations, across all spheres, transcending to social benefits and into economic development.

The case for agriculture is no different. Smallholder farmers along with other stakeholders in the agricultural value chain typically lack the necessary knowledge of and foresight to apply data-driven decisions, which is absolutely critical to compete and succeed in an ever-changing business environment. This apparent problem is only a symptom of a larger problem that exists across the entire agricultural value chain. And that’s because data is not getting captured digitally – resulting in several inefficiencies.

Farmers need access to timely market information and agri inputs; agri entrepreneurs and distributors grapple with collecting cash on time and optimizing inventory; processing companies require robust customer and farmer profiling to ensure greater transparency to constantly improve the end consumer experience. So there’s a vested interest for everyone in the process.

Granted that data is a critical tool for development, what’s the first step towards building the culture? Digitizing paper-based information.

Rapid advancement in hardware and software technology is already paving the way for organizations to collect, analyze and leverage data for better business decisions than ever before. Many of them – either in the form of a rising group of ag-tech startups working towards improving crop productivity or large processing companies investing in data analytics and digital initiatives to predicting sales by region – are cases in points to demonstrate the growing importance of data digitalization. And those who will invest in building a robust data and analytics value chain will advance the furthest and fastest – increasing impact and income; those who are falling behind will risk becoming irrelevant.

What we can decipher from the above is that Bangladesh is moving towards the right direction. Having said that, at the risk of sounding pessimistic, we’re still lagging far behind. Broadly speaking, in the agri-value rung, data is currently getting digitized only between the processing companies and the large distributors. What happens from here onwards remains a mystery. Very little transactional data, if any, can be tracked from the distributor to the retailer to the micro-retailers to the farmers. The following exhibit sumps up the status quo.

FIGURE: Data Flow in the Agricultural Value Chain

Current practice entails a manual intensive process. Typically sales and purchase data is recorded on paper. But this practice is severely prone to error, cumbersome, and time consuming. Furthermore, it raises issues around reliability. Because of these reasons, companies at the top often lack the necessary insight to be able to correctly predict sales and duly optimize inventory.

Can you imagine if only companies had access to these information in digital format, how far could they have gone? Just by applying data analytics services, they would have been able to unearth several critical insights that are likely to open new doors to business models, highersales, cost & inventory optimization while simultaneously amplifying social impact.

By working with several large and small agricultural enterprises over the last few years, we have been able to garner some interesting insights that validate the above hypotheses. In doing so, we have developed and implemented a simple mobile based tool that sources data from multiple sources – including farmer profile & land information, transactional data at the point-of-sales, weather information and voice calls. By digitizing manual data, we have started to see several positive implications occurring across the entire spectrum. Remember Abdullah’s example? That’s the sort of change we have been able to witness.

It is clear that data digitalization is the way forward. It solves several pain points. First, it removes the time lag from order placement to delivery. Second, it ensures faster buyback guarantees for farmers. Third, it empowers all stakeholders to be more timely and efficient. Most important, this digital solution paves way for a sustainable way to strengthen market linkage between smallholder farmers and consumers.

Agri-tech is an essential solution for socio-economic development. With increasing support and investment on the digital front across the country, Bangladesh’s agriculture is likely to witness more digital transformation. Early results underscore the conclusion that this can be a viable business agricultural service model, facilitating the creation of new business models, product innovation, and targeted campaigns. To this end, concerted efforts between the private and the public sector will play a crucial role. And in doing so, we will be able to empower market actors – including smallholders – to become more data-driven in their day-to-day decisions.

This has been published as part of LightCastle’s 6th year anniversary publication, “LightCastle Featured Insights 2019“.

The post Envisioning A Data-driven Agriculture in Bangladesh appeared first on LightCastle Partners.

Bangladesh has positioned itself as a leading frontier market with a population of 168 million (BBS) – 8th largest in the world and 5th in terms of density. And on top of that 50% of the population is below the age of 35 with 500 thousand fresh graduates entering the market each year (Bangladesh IT/ITeS Industry Development Strategy – LICT).

It’s unfortunate, however, to note that the economics of supply and demand in regards to employment aren’t matching. According to a study of Bangladesh Bureau of Statistics (BBS), as many as 400,000 youths with university degrees are now unemployed. This has left around 4.37 percent (BBS) of the total labor workforce, roaming from one place to another looking for work. This huge untapped human capital can be converted to assets by promoting entrepreneurship and inclusive ventures.

According to Social Progress Imperative (SPI), Bangladesh in comparison to its peers produced a ‘development surprise’ in the SAARC region, ranking 99 among 132 countries — a relatively strong performance when compared with Nepal (101), India (102) and Pakistan (124). The World Bank measured Bangladesh’s GINI Coefficient at 32 percent (higher than less industrialized countries such as Albania, Niger, and Serbia) and the country was ranked 111 out of 148 countries on the Gender Inequality Index in 2012. Currently, the country has USD 30 billion+ in foreign reserves, USD 210 billion in yearly GDP value and with USD 1,350 per capita income just entered the lower ranks of a middle income nation. While social and economic indicators are moving in the right direction, the growth is far from inclusive.

Bangladesh has received over 52 billion USD in aid over the past 45 years[1] but the public system is not geared to utilize all the funds, resulting in a reduction of the annual development plan (ADP) by almost 20 percent every year[2]. While development giants like BRAC, Grameen Bank, ASA as well as over 26,000 smaller NGOs and 1000+ microfinance institutions with their unprecedented efforts is helping Bangladesh achieve equitable growth – we need sustainable business ventures to keep up the momentum.

Entrepreneurship as a gateway to sustainability: Give a man a fish, you feed him a meal; teach a man fishing, you feed the whole village. Entrepreneurship development is becoming increasingly important because it creates a lot of impact on the locality and changes the lives of the people. Previously, businesses were all about profit but now enterprises are working towards becoming inclusive, where they care about people, planet and profit.

Big economies like that of India has launched initiatives like Startup India through the Government to attract more entrepreneurs to start their own businesses, and Make in India to attract foreign companies and direct their FDIs into these heavy industries. Any business – big or small – will contribute to the society because it not only makes money for itself, but also provides jobs, creates export opportunities, distributes wealth and elevates the living standards of the whole community.

Bangladesh was lagging behind SME development only a couple of years back, but now new initiatives are trying to enable entrepreneurship through various accelerator/incubator programs and impact investments around different parts of the country. These incubator/accelerator programs and impact investments are giving local SMEs an opportunity to build inclusive ventures and create employment opportunities. The programs are helping SMEs scale by providing financial support along with gaining market linkages such as introducing them to corporate buyers, foreign investors, logistical support and educating them on how to run a sustainable business for the long run.

For a sustainable Startup/SME ecosystem, it is vital to facilitate entrepreneurs by providing business capacity building and access to finance. From the year of 2013, both public and private sector stakeholders are focusing on building the ecosystem. Government, local conglomerates and MNCs have been quite active in running such initiatives. In an effort to promote the startup scene, the government launched STARTUP BANGLADESH, which also has provisions for VC investments; Grameenphone, Bangladesh’s largest telecommunications company launched GP Accelerator focusing on corporate technology startups; SD Asia, a local start up incubator launched STARTUP DHAKA focusing on tech based startups; LightCastle Partners launched SMARTCAP & Unnoty business accelerator programs with provisions of receiving impact investments to facilitate Ag-SMEs and entrepreneurs.

Case in Point: The Momita Enterprise Story

The couple Mr. Md Delowar Hossain and Mrs. Momita Hossain have turned the tables in the flower cultivation sector by their venture “MOMITA FLOWER PRODUCTS” by participating in a business acceleration program. The accelerator program was jointly facilitated by Truvalu.enterprises and LightCastle Partners. From a small flower producer, they have now turned into a fairly large firm. Not only have they increased their production and sales by 50% but also created working opportunity for others. What’s more, they have secured Series-A Equity funding from Truvalu.Enterprises.

Currently Momita Enterprise have around 50 employees, who are directly working in the flower processing unit and a further 20-25 part time workers who are working in ancillary functions like packaging and logistics. At present, Momita Enterprise is working on developing own logistics support to ensure uninterrupted supply of flower products in the domestic market. Currently, they are focusing on signing up distributors in the divisional cities.

Can you imagine what Bangladesh would look like if we had more successful stories like Momita? And what it takes is really not complex. Just the right set of tools and capital can bring about wonders in the lives of so many small businesses all over the country. Not only will wealth be distributed more equitably, but also additional employment opportunities will get created.

By witnessing success stories like the above, alternative investment firms – alongside financial institutions – have also entered the market to capitalize on the growing opportunities. Some notable examples include: Venture Investment Partners Bangladesh (VIPB), Truvalu.enterprises, Maslin Capital and BD Ventures. There are at least 15 impact investors currently active in Bangladesh with a total of USD 955 million in deployed capital, of which USD 834 million has been deployed by DFIs. Beyond these impact investors, at least 14 impact-related investors have current investments in Bangladesh of about USD 744 million (source: GIIN).

The new era of entrepreneurial revolution has begun – fueled by entrepreneurship development programs. However, to make a sustainable business ecosystem we will need startup/SME friendly policies, easy access to funds/alternative investment ecosystem, education system which promotes entrepreneurial spirit, less bureaucratic administrative processes and finally social and cultural support to remove the stigma and fear of becoming an entrepreneur. If these challenges are overcome, SMEs and startups can make significant contributions to the growth of the economy and solve our jobless growth conundrum.

This article was written by Md. Shabbir Nowsher, a Senior Business Consultant at LightCastle Partners and co-authored by Omar Farhan Khan, Business Consultant at LightCastle Partners.

This has been published as part of LightCastle’s 6th year anniversary publication, “LightCastle Featured Insights 2019“.

References

• 1. Uddin, Shamsu (2016), “The Impact of Aid on Economic Growth of Bangladesh: A Review”,
  Thoughts on Economics, Vol. 25, Issue 3 & 4 | December 2016. Retrieved from: https://www.ierb-bd.org/thoughts-on-economics-vol-25/
• 2. Uddin, Shamsu (2016), “The Impact of Aid on Economic Growth of Bangladesh: A Review”,
  Thoughts on Economics, Vol. 25, Issue 3 & 4 | December 2016. Retrieved from: https://www.ierb-bd.org/thoughts-on-economics-vol-25/

The post Betting on Entrepreneurship to Transform Bangladesh appeared first on LightCastle Partners.

Data is to oil as value is to money, an analogy to emphasize the importance of data in the modern day era. Data has become a driving factor to success in the global economy. In its absence, we struggle to discern what competitors are up to, what the latest market trends are, and most important, what is it that customers want and are willing to pay for.

Though the analogy between data and oil may be up for debate, the value of having the right data at the right time may be just as valuable as finding oil was back in the day.

Catching Up to the Present

In 2017, Bangladesh ranked 188 out of 235 countries in terms of GDP per capita (PPP, current international dollars)[3] and 136 in the global human development index – two powerful indicators of the countries’ standing in the world. However, this isn’t to discount the fact that it is also one of the fastest growing economies, targeting double digit GDP growth in the coming years. As much as we may be guilty in comparing the country to its emerging superpower neighbor, India, their economic models for growth are very much different[4]. And if Bangladesh is to catch up with the rest of the world, it needs to understand the unique strengths and opportunities it can capitalize on in the global market. Put simply, one of the ways we can do this is by measuring the extent of automation and digitization, two inevitable developments in the world.

Automation and digitization, done correctly, can increase productivity and profitability, making best use of resources on hand. In the United States, the digital sector, which includes industries such as tech, telecom, entertainment, financial services, and professional services represents 30 percent of private sector output and 25 percent of private sector employment. On the other hand, primarily the non-digital sector, which includes industries such as manufacturing, construction, transportation, healthcare, education, and retail, represents 70 percent of private sector output and 75 percent of private sector employment. Moreover, digital sector in the US has a much higher productivity growth than the physical sector.[2] Done correctly, automation and digitization can bring Bangladesh closer to the present state of developed countries, but for those already at the forefront, the two are consolidating, with developed economies bracing themselves for a new age, the age of experience.

Opportunities Replaced with More

In spite of the concern that increasing use of technology – the Digital Revolution is bringing – will eventually lead to greater unemployment due to the effects of automation, the digital sector is creating more job opportunities in different fields. In other words, it’s transforming the traditional nature of jobs and shifting skill sets in demand in the market.

Although digitization and automation in physical sector is making some jobs irrelevant, it is also creating new positions in the market, as they both lead to greater productivity, and requiring more specialization for employees that demands better pay. An interesting example in the history of this phenomenon would be the industrial revolution that mademany labor intensive craftsmen and tradesmen irrelevant with the inflow of mass production. Automation and digitization is in comparison very similar to the events of that time, just now, it’s on a different scale.

With the number of new type of jobs that are being created, the need for a specialized skilled workforce is now becoming pressing. This brings challenges to the traditional methods of training and education, questioning its effectiveness. As the pace of innovation accelerates, it is also important to train older workers to learn new skills in order to remain productive and employable. Though specialization is the future of human workforce, this brings more time, money and resources to consider.

The problem can only be addressed when data and the digital platform will be used in tandem to provide more personalized education and make it more accessible, affordable and relevant to the custom needs of each individual with the ability to cater to the mass.

Adaptation is a Must to Stay Relevant

The diversity and complexity of today’s economy is creating new markets and making existing ones more fragmented as technology is easing up barriers. Innovation is impacting markets and constantly changing. For companies to stay competitive and relevant, the adoption of data analytics to produce consumer insights and better understand customers is no more a luxury but a necessity.

Digital platforms, with the ability to record and analyze even the smallest interactions of consumers, has made it easier, and less expensive to provide personalized experiences to customers building the perceived value of brands, and eventually driving sales of existing market offerings. Data generated from the activities can be used to further introduce new innovations and improve business models.

Leveling the Playing Field

Data and its accessibility have made it easier for new business to be introduced to the market. One of the biggest barriers blocking small and medium enterprises (SMEs) from getting into international trade is a lack of knowledge about opportunities. Cross-border data flow has opened up new opportunities for SMEs to trade overseas, enabling in locating customers easily and building supply chains across national borders.

Data is non-rival. In other words, it can be duplicated and shared at a relatively low cost. That being said, government and public research organizations who have greater access to household information of an economy, also need to open up and share their data to more analysts, so that it can be taken full advantage of.

Data Needs to be Analyzed and Understood, Not Just Stored

While data can be a powerful tool to drive the modern economy, unprocessed data by itself has little to no value. For example, governments and nonprofits often have access to large amounts of unprocessed data, but limited capabilities to analyze and utilize it. Up to 73 percent of company data goes unutilized for analytics.[6] Without the application of data that creates economic value, valuable insights for making critical decisions will remain undiscovered.

This sheds light on the need for data analytics in Bangladesh and a stable ecosystem to support it. We need systems that not only capture data, but also makes it accessible to people who can analyze it and make informed decisions for their businesses. This requires initiatives from public and private sectors and collaborative work to develop a system that is accessible, efficient, and open to drive economic growth.

Moving Ahead

With a score of 39.8 out of 100, Bangladesh has outperformed most of its South Asian neighbors in adopting ICT in the World Economic Forum’s Global Competitiveness Index 2018[7]. Number of internet users has grown rapidly over the last two decades reaching almost 65 million users in the country[8]. The government is investing highly in ICT ($205.4 million in 2016), which was only $25.6 million in 2008. To attract investors further, the government has also incentivized the sector with favorable policies such as 0% VAT on e-commerce, tax exemption for IT companies, and 100% foreign ownership profit repatriation. For further development of the ecosystem, the government has planned to launch 16 hi-tech parks, 7 software technology parks and 10 IT Training, Incubation & Business Centers.

Recognizing the growing potential in opening up public data for researchers, ICT Division of Bangladesh Government in partner with LightCastle Partners introduced the first open data platform in 2016. Based on the learning and experience from the project, we have launched a private initiative – DATABD.CO – a data platform that brings business and industry data of Bangladesh in one single platform in an effort to aid the business community of Bangladesh promote data-driven decisions.

While all this sounds promising, Bangladesh ranks 102 out 140 in ICT adoption in Global Competitiveness Index, which indicates our automation and digitization effort is still far beyond the global competition. Besides, data or digital ecosystem needs more private investments and room for improvement.

Finally, while preparing the workforce for ICT adoption, the government should focus on creating skilled labors for the modern data based jobs; putting emphasis on curriculum that facilitate in the creation of more data scientists and analysts to remain competitive in the global labor market.

This article was written by Ashraful Amin, a Senior Business Consultant at LightCastle Partners and co-authored by Mohhamed Shehab, Trainee Consultant at LightCastle Partners.

This has been published as part of LightCastle’s 6th year anniversary publication, “LightCastle Featured Insights 2019“.

References

• 1. The world’s most valuable resource is no longer oil but data, The Economist
• 2. The Coming Productivity Boom, Technology CEO Council
• 3. World Development Indicators – DataBank, The World Bank
• 4. Bangladesh and India Pursue Different Economic Models for Growth, Bloomberg
• 5. Education 4.0, Peter Fisk
• 6. Misusing data could be costing your business heres how, Inc
• 7. The Global Competitiveness Report 2018, World Economic Forum
• 8. Internet users in Bangladesh have increased 800x since 2000, Dhaka Tribune

The post Developing a Data-Driven Ecosystem to Foster Economic Growth appeared first on LightCastle Partners.

Economic growth is transforming Bangladesh, building its pathway to becoming a middle-income economy. Bangladesh is a fast growing economy, with a GDP growth of over 7 percent in fiscal year 2018 keeping up an impressive annual average growth rate of more than 6 percent over the last ten years. Bangladesh has multiple factors that favor continued strong economic growth – a steady inflation rate of 5 to 6 percent in the last five years and a record high forex reserve of USD 33.5 billion as of 2017. [1]

The Government of Bangladesh is aggressively pursuing a digital agenda to enhance the local information communication technology ecosystem by channeling large investments into the sector and undertaking large infrastructure projects. The Government’s Vision 2021 and the Seventh Five-Year Plan (2016–2021) called for a shift to a new development paradigm. As part of the vision of “Digital Bangladesh,” the government promotes information technology (IT)/IT enabled service (ITES) industry (IT industry in short) is the next growth engine, after the garment industry, as well as the means for providing better public services. [2]

The Bangladesh IT market is currently valued at USD 1 billion with an exponential growth forecast of becoming 5 times its size and reaching USD 4.8 billion by 2025. The IT industry in Bangladesh, though significantly smaller than offshoring giants such as India and the Philippines, has demonstrated one of the highest growth rates globally, indicating a huge untapped potential and has increased the interest of investors. The domestic industry is expected to generate revenues of USD 0.9 to 1.1 billion in 2017 and grow nearly fivefold to reach USD 4.6 to 4.8 billion by 2025. This is remarkably higher than the overall growth forecast for either an established peer location such as India (10 to 13 percent CAGR for 2017-2020) or an emerging peer location such as Vietnam (12 to 15 percent CAGR for 2017-2020). [3]

FIGURE: Bangladesh IT Services-ITES Industry Domestic Market Size 2017-2025F

The IT services industry within Bangladesh has been growing, serving international and domestic clients in the banking and telecom sectors. Bangladesh’s emerging IT outsourcing players already have strong credentials, and the Bangladeshi freelancer community has supplemented IT exports. Bangladesh is consistently ranked among the top freelance work locations on employment websites like oDesk, eLance and the likes. [4] There are over 1,500 registered software and IT-enabled services (ITES) companies in Bangladesh. Among these, over 1,100 companies are members of the Bangladesh Association of Software and Information Services (BASIS). Bangladesh export software and ITES to more than 60 countries around the world and the number of exporting companies – excluding freelancers – are about 400. [5]

Telecom, banking and manufacturing industries are driving the demand for digital services in Bangladesh. With companies growing at scale and rapid technology adoption among the population, digital solutions such as ERP systems, payment systems, big data analytics have become indispensable to keep up with the evolving industry dynamics and not become redundant. Certain local players have begun serving other nations in the South Asian region such as Nepal, Bhutan and Myanmar that have embarked on a similar journey towards digitization as Bangladesh. Services availed by these economies are traditional ERP, microfinance, Islamic banking for the finance and insurance industries.[6]

With more than half the population below the age of 25 years, one of the youngest Bangladesh has a high number of students graduating from its universities every year. In 2017 alone, 3.2 million students were enrolled in tertiary level education compared to 1.6 million in 2015. The total tertiary enrollment over the next decade (2016-2026) may reach 4.6 million according to an estimate made by the University Grants Commission (UGC) of Bangladesh.[7] With 38 public and 92 private universities, Bangladesh churned out 543,000 tertiary graduates in 2016-17. Of the total pool, nearly 16,000 have IT-related degrees, and 126,000 have business-related degrees. At a city-level, Dhaka has the highest concentration of talent with 63,000-67,000 tertiary graduates annually, which is higher than several competing global services destinations. Dhaka’s local talent pool is further amplified with the migration of talent from other parts of the country. Bangladesh have about 90 private universities, half of which have ICT faculties, and 70 public universities, some of which also provide ICT courses.[8]

However, lack of good talent and weak infrastructure hinder the growth of IT firms in Bangladesh. Most of the IT firms in Bangladesh are relatively new and small-sized and a small number of international IT firms operate on a limited scale. While weak IT infrastructure and branding are issues, Bangladesh lack skilled workers at different levels in quality and quantity. As the IT sector in Bangladesh is growing rapidly, there is a shortage of ready-trained talent. Most companies plateau around 300-400 full-time equivalent scale, with around 100 employees having technical knowledge and capabilities, and leverage the freelancer pool to handle overflow volumes.[9]

FIGURE: Large Young Population Indicates High Potential, But Untapped Due to Low Tertiary Enrollment / SOURCE: World Bank and BANBEIS

Only 0.3 percent of Bangladesh’s labor force are employed in the Information and Communication industry. Bangladesh’s labor force participation rate (the proportion of population aged 15 or older who were currently economically active) in 2015-16 was estimated at 58.5 percent. Of those employed, just 5.3 percent have attained tertiary level of education.[11]

Skills development, or lack thereof, therefore, turns out to be a colossal problem. One salient reason for that is the unavailability of good, quality training institutions. Many of them are currently unable to respond to the market needs. Nascent market conditions are likely to be challenging with respect to prevalence of middle-level management, experienced resources, and presence of ancillary services (e.g., recruiters and training providers). In fact, the recent Bangladesh Institute of Development Studies (BIDS) report clarified that IT sector require university graduates, and there is a huge demand for programmers, system analyst, software engineers and quality assurance specialists. Similarly, existing supply of project and product managers (mid-level professionals) and graphic designers is in shortage. IT companies also require work in collaboration. While people can make breakthroughs with Computer Science theory, application requires a team—a critical mass.

The quality of education has direct implications to employability of university graduates, as factors beyond subject knowledge such as soft skills, on-the-job training (OJT) or career guidance can determine whether a student will attain a job after graduation. 74 percent of start-up founders agree that universities are failing to provide a high-quality IT education. Many contend that university courses are based on outdated curriculums and technologies, and suffer from a dearth of qualified professors and teachers. Moreover, employers have mentioned two types of skills shortages:

(a) not enough graduates in specialized skills needed within high growth sectors, and

(b) where graduates have these skills, they are still not employable because skills in English language, computer, communication and problem-solving abilities are absent.

Furthermore, absence of quality assurance mechanism is a critical issue in Bangladesh.

Each public and private university relies on its own mechanism to ensure quality. For public universities, the mechanism includes curriculum reviews by the curriculum committee, assessment of achievement and designing future action plans by the Academic Council. There is no provision for external review of quality for the universities. The UGC carries out monitoring of private universities to a limited degree. The private universities need UGC’s permission to open and operate departments. However, many of the private universities have failed to meet the minimum requirements of physical infrastructures, fulltime qualified faculty, libraries, teaching aids and other facilities to provide proper education.[12]

To tackle the issue of skill gap in the IT sector, coordinated efforts are required from the academia, the industry and the Government. There needs to be a match between industry expectations and expectations of job seekers in the IT sector. To begin with, the industry can set standards by developing a qualifications grid, a salary range, and detailed skill requirement for positions in IT companies as they reach out to universities for recruitment, or when they advertise their posts. The required skill sets and qualifications grid would enable students and graduates to better manage expectations, while providing academia with an up-to-date list of required skill sets with which to adjust its curriculum.[13]

In this way the industry can benefit in tailoring the talent pool to suit specific needs and acquiring adequately skilled graduates as employees. Ideally, this could lead to more standardized curricula across all institutions and foster deeper collaboration between them. There should be a centralized and coordinated process to test/assess the skills set of a fresh graduate. Post graduation, candidates must have a chance to further enhance their skills, and this can only be made possible if organizations come forward and invest in their development.

The post Skills Gap in the IT Sector: Utilizing the Power of Youth appeared first on LightCastle Partners.

Munad, a PayPal engineer and a non-residential Bangladeshi, has come to visit Bangladesh after a long time and is in constant awe of the amount of transformation the country has gone through in the last decade. From technology integration to developed infrastructure, he was hard-pressed to find similarities between the Bangladesh he had lived in a decade ago and the Bangladesh of now, an evolving digital cornucopia of 165 million people.[1] With 45 million smartphone users, 35 million unique mobile internet subscribers[2] and a startling social media presence of close to 25 million users[3], the country is going through an unpreceded period of digital gentrification. In conversation with him at a renowned coffee shop in, adorned with flashy table tops from DFS providers boasting discounts on digital payments, the discussion inevitably turns to his trade, mobile money, and the investment potential in Bangladesh.

Finding the Right group of DFS Users is the Key to Scaling Up

Having had similar conversations with potential investors for Bangladesh, I wasn’t surprised by his questions about the potential of building DFS based products for millennial consumers, who make up roughly 46.9% percent of the urban population.[4]

The smartphone and internet-bred digital millennials of Bangladesh are diverse in their consumption behavior and exemplifies a penetration in Bangladesh, attributable to stringent KYC requirements and lack of credit footprints of most of the population. MFS has growing demand for more convenient lifestyle solutions. What Munad and other aspiring foreign investors in Bangladesh miss out on is the hidden market of close to 139 million people (84.24% of the population) making up the ‘Aspirant’ and ‘Bottom of the pyramid (BoP)’ segments of the population.

In the next 6 years, the aspirant population group is predicted to grow 1.5 times its size. Given the economic trajectory, the aspirant population will swell to make up 46% of the population as income level and purchasing power will increase. This population group will come from the shrinking BoP population and DFS providers that will now build products and services with inclusivity in mind stands to lock in the largest market of consumers in the coming decade.

DFS Penetration Has Been Phenomenal So Far

DFS in Bangladesh is mainly synonymous to mobile financial services (MFS) due to the emergence of bKash in 2010. bKash has managed to fill a vacuum that was previously being catered to by logistics companies transferring funds at high charges and informal networks of money mules. Currently, 18 banks and NBFIs have an MFS license and as of December 2018, there are close to 67 million users using the service with an average transaction of BDT 316 billion being conducted each month, growing at an average CAGR of 2%.[5]

FIGURE: Bangladesh Income Class Population Composition (Projected) / SOURCE: Source: Bangladesh: The Surging Consumer Market Nobody Saw Coming, BCG, 2015

Similar to bKash, DBBL’s Rocket, a mobile money app is considered to be the second largest player in the DFS market. DBBL is one of the leading local banks in Bangladesh and has the largest network of ATMs in the country that are capable of DFS transactions, which is why Rocket has been so popular among users.

DFS has become synonymous to MFS and banking services but solely mobile money transaction service is yet to take off. There are a couple of solely mobile money transaction players [Payment Service Providers (PSPs)] such as Upay, Pay360, and iPay (similar to Paytm of India) but they haven’t been able to scale up due to regulatory constraints.

Around 28% of DFS transactions are still being conducted as Over The Counter (OTC) transactions through agents and the challenge for DFS providers is moving users towards more personal account based transactions. Readiness indicators of the user group are encouraging with at least 92% of users having a National ID, a basic requirement for opening DFS accounts.

FIGURE: 2018 – Readiness Indicators by Financially / SOURCE: Bangladesh Quicksights Report, Financial Inclusion Insights (FII), 2018

DFS has been Instrumental in Driving Financial Inclusion in the Country

What has been encouraging is the ability of DFS in creating greater financial inclusion for the country. According to recent Financial Inclusion Insights (FII) data (2018), around 47% of Bangladeshi adults are financially included with 17% having a registered mobile money account, 25% with a full-service bank account and 23% with a full-service NBFI account. Only the previous year the financial inclusion of the country stood at 37%.[6] These figures show encouraging leaps in financial inclusion and technology adaptability of the population.

FIGURE: Financial Inclusion in Bangladesh – 2018 / SOURCE: Bangladesh Quicksights Report, Financial Inclusion Insights (FII) , 2018

Finding the next stream of DFS based revenue in Bangladesh is no longer about finding the right target group but about crafting the right strategy to capture the market of users that have emerged in the last decade. From blue collar workers receiving their salary for the first time digitally to SME business owners receiving their loans through MFS, there’s a lot of avenues of usage DFS that haven’t been perfected as of yet. However, progress has been encouraging so far.

Opportune Industries are Emerging for Greater DFS Integration

In one of our studies with the Bill & Melinda Gates Foundation, we saw that close to a million workers in the apparel sector were now receiving salary in a digital format and this number is increasing through combined efforts of DFS providers and apparel suppliers. In the microfinance sector, the usage of DFS has been equally inspiring, especially for women borrowers.

FIGURE: MFS Trend Projected / SOURCE: Bangladesh Bank and LightCastle Projections

Industry experts believe close to 2% of women clients are now unofficially using mobile money to make repayments and are utilizing DFS. Even if just a 15% transaction digitization is achieved this year, the industry could transform the lives of close to 4.5 million women in a matter of months.

So the final question comes down to what needs to be done to be able to successfully increase a 67.5 million user base to double its size within the next four years?

The major growth impediment to higher DFS penetration is constrictive policies. Mainly, there’s a BDT 10,000 cap on cash-out cap MFS accounts, which significantly restricts the users’ ability to access their cash. Admittedly, the industry is fairly new to regulators and AML/CFT based regulations are crucial in ensuring the long-term sustainability of the industry. However, policymakers need to take measures to facilitate further usability of DFS by increasing cash-out limits gradually in order to actually let the industry grow in controlled phases.

The reason a cash-out cap is challenging is that most users are still not being able to utilize their money digitally as frequently as needed. Cash-out charges are also a detriment as it’s an added cost to the consumer. DFS providers need to find the right strategy to deepen the ecosystem of merchants to allow higher digital transactions, which will eventually bring down the transaction costs of the user base. This would enable more users shift to a DFS faster. DFS providers have seen apparel workers withdraw 60% of their salary in cash within the first week of salary received after the first month of being digitized. However, after 9 months, the cash-out reduced to 40% of their salary. This shows that users begin to trust DFS services after being habituated with the system. This cash-out would reduce further if they had more ways to spend their money digitally.

Lastly, we have a perception that a lack of financial literacy is the major reason behind blue collar user groups not adopting DFS. In practice, a lack of tech literacy is a more pressing reason why DFS adoption is lower among this income group. Around 98% of non-users have basic numeracy skills necessary to conduct rudimentary DFS transactions but around 42% do not have the ability to send or understand text messages. DFS providers need to structure products and services with the end user in mind and they also need to build a more efficient process of teaching the average user on how to use DFS.

This article was written by Rageeb Kibria, a Senior Business Consultant at LightCastle Partners. For any queries, he can be reached at rageeb.kibria@lightcastlebd.com. This has been published as part of LightCastle’s 6th year anniversary publication, “LightCastle Featured Insights 2019“.

References

• 1. World Bank Population Data, 2017, Accessed on: 02.03.2019
• 2. Mobile industry driving growth and enabling digital inclusion, GSMA Intelligence, 2018
• 3. Facebook, 2018
• 4. BBS and LightCastle primary research
• 5. Mobile Financial Services (MFS) comparative summary statement, Bangladesh Bank, Accessed on: 02.03.2019
• 6. Bangladesh Quicksights Report, Financial Inclusion Insights (FII) , 2017

The post DFS in Bangladesh: Beyond Coffee Shops and Consumer Purchase appeared first on LightCastle Partners.

From an allegedly portrayed “bottomless basket-case” to entering the lower-rungs of middle income economy by World Bank, Bangladesh is often showcased as a success story of development. With sustained 6 percent+ GDP growth rate over a decade, strong infrastructure projects in both power and communication, technology adaptable demographic bulge, density dividend, credit line facilities from China, India, Multilateral Development Agencies and growing RMG exports – Bangladesh seems to possess all the right ingredients. Building on the economic momentum, the middle and affluent consumer (MAC) population of Bangladesh currently estimated at approximately 12 million is expected to triple over the next decade. MAC cities – currently 10 will increase to 33 in 10 years.

However, at the same time, sub-optimal private sector growth, financial sector hindered by non-performing loans (currently 10 percent+ of all banking assets), overreliance on RMG exports (~80 percent of our total exports) and worker remittance for forex earnings, rising income inequality and deteriorating doing-business index – show that Bangladesh still has a long way to go. In her path to become an advanced economy, Bangladesh must find new ways to develop, invest and grow.

Case for Prioritizing Sustainable Businesses

Home to the worlds’ largest NGO, BRAC, which is again 75 percent+ self-financed by its commercial ventures, birthplace of microfinance from Grameen Bank and fastest growing mobile financial services bKash – Bangladesh is often known as the “Silicon Valley for social innovation.” While private sector growth led the way towards economic development – social enterprises have led the way to Bangladesh’s climb out of poverty into better living standards for all. Indeed, besides the government the development organizations have done fantastic work in health, education, WASH, agriculture and energy.

However, now Bangladesh faces a unique conundrum. On one hand as Bangladesh becomes a middle income country, development funds, which have rendered a several social enterprises possible, will shift to other emerging economies and rightfully so. However, our social problems are far from over as the growth that we have achieved, especially from our private sector and government led investments, often has not been inclusive, has been highly centralized to key cities and has not created enough employment. In fact, according to HIES 2016, income inequality in urban areas has risen faster than in rural areas. This can be attributed to asymmetrical jobs growth in the services sector and concurrent drop in blue collar work. Hence at this point, to maintain the growth momentum, Bangladesh needs to prioritize sustainable growth and one way to do that is by doing what we have done so well before – prioritizing growth of social enterprises, especially the inclusive business sub-set.

Promoting Impact Capital as a Way to Promote Sustainable Businesses or Inclusive Ventures

So how do you prioritize sustainable businesses over the rest? One way would be to build market mechanisms and systems in supporting ventures that are inclusive –business cases for both financial and social returns. In fact, the world as connected it is now – consumers are willing to pay premiums for mission-driven causes and ventures. That is why fair trade organizations are being promoted and tech giants like Facebook operate zero-rated applications like internet.org. However, Bangladesh is still not there yet and one way to incentivize that is to make impact investments available.

While impact investments have become widely popular all over the world especially in African countries and even India – Bangladesh is still scratching the surface. Though there have been a few cases such as the Bill and Melinda Gates Foundation investing in bKash – which works heavily in financial inclusion and payment digitization or IFC investing in the country’s leading online grocery aggregator Chaldal.com – the financial instrument remains largely untapped.

However, if lubricated properly, impact capital can provide incentives to mainstream private organizations to build inclusive ventures. This would benefit Bangladesh in two direct ways, a) with more mission-driven/inclusive ventures, we can use business solutions and innovations to solve complex problems in health, education, financial inclusion, climate among others and b) tap into the growing impact capital that are made available all over the world by corporate foundations, philanthropic capital and social impact funds.

So how do you promote impact capital in Bangladesh? What should be the role of the government? What should be the role of the organizations? Can mainstream financial institutions have a role to play here? These are difficult questions to find answers to. However, let me try to give my thoughts of the roles we need to play.

1. Role of the Government:

SEC has already released guidelines for alternative investments back in 2015 that includes impact capital. More recently the government is experimenting with a government backed venture fund under the ICT ministry to jumpstart tech ventures. One possible way would be the government to launch a fund of funds i.e. becoming limited partners in floated impact funds in the market. By committing to provide matching funds – availability of impact capital can be increased. Additionally, government can also provide incentives to inclusive ventures; for example, providing tax benefits to green businesses.

2. Role of Financial Institutions:

Bangladesh Bank has introduced circular for banks to invest in alternative financing products outside of the capital markets. This opens up opportunities for both banks/NBFIs and alternative investment license holders in the market. Banks can become limited partners in impact funds. This would serve as a win-win – banks get to diversify their investments into a sector, where they can build a portfolio and impact funds can get access to much-need capital to kick-start operations.

3. Role of Private Sector:

The private sector has to the play the role of the crux. Without innovation and business solutions to our problems, the impact capital would be meaningless. However, Bangladesh have strong cases to build on – innovative nutritious milk products by G r a m e e n – D a n o n e , Grameenphone originally starting off as an income augmenter for village-women, Aarong creating market linkage for rural artisans are all successful business solutions to social problems. With the right incentives and now with increased technology adaptability, the private sector needs to continue to weave out future innovation.

Summing Up and Way Forward

Resilience and entrepreneurship are key cultural attributes in Bangladesh – you cannot even ride a bus in a city without meeting multiple business professionals or with the advent of digital service marketplaces like “Pathao” or “Sheba.xyz.” We are seeing how the population pick up opportunities to jump in and disrupting traditional transport or home-service models. With impact capital flowing in, innovation can become more widespread and the growth story of Bangladesh would become more inclusive.

This has been published as part of LightCastle’s 6th year anniversary publication, “LightCastle Featured Insights 2019“.

The post Impact Investing in Sustainable Business: Next Step for Growth in Bangladesh? appeared first on LightCastle Partners.

The leather industry has been developing on a large scale since the 1970s and is currently worth around $1.90 bn with 40% of the total demand being met from imports [2]. However, the leather industry has recently been facing a gradual decline in export earnings. In FY18, exports of leather, leather goods, and footwear were $1.08 bn, down from $1.23 bn in FY17[2]. Currently there are 165 footwear and leather factories in Bangladesh with an additional 161 tanneries that process the raw hide to finished leather [2]. Investments have been on the rise with a focus on factories that meet environmental compliance laws and produce high quality goods. However, the industry is currently facing sharp decline due to non-compliant factories in the recently built Savar Tannery Industrial Estate.

FIGURE: Bangladesh Leather Export Earnings

The leather industry products include leather-based garments, shoes, belts, bags, jackets, suitcases, wallets and other items with footwear at the forefront of the market. Around 85% of leather and leather products exported are in the form of crushed leather, blue wet leather, finished leather, leather garments, and footwear. Key export destinations are the EU, USA, Australia, Japan, Singapore, and South Korea.

Although China is the largest leather product sourcing country in the world, leather footwear faces a 17% import tax from the Chinese government (export tariffs in Bangladesh are at 0%). In peer countries, wages have also been on the rise leading to many manufacturers closing down due to their inability to cope with rising costs, placing Bangladesh at a cost-competitive edge.

FIGURE: Major Leather & Leather Goods Export Market for Bangladesh

Industry on the Decline

In the first 5 months of the current fiscal year, Bangladesh’s export earnings from leather and leather products went down by 16.11% to $434.7 mn from $518.15 mn in the same period last year [1]. Export earnings from crust leather fell by 5.42% to $76.24 mn and leather products fell by 49% to $94.18 mn, and leather footwear posted a 4.54% growth in export earnings of $264.28 mn [1]. Although many tanneries are also yet to complete their shift from Hazaribagh, causing delays in production, manufacturers cite non-compliance at the Savar Leather Industries Park as the major deterrence of buyers from placing work orders. The under construction Central Effluent Treatment Plant (CETP), the reason behind non-compliance, is set to be completed by June 2019. As a result of this, local manufacturers have been unable to capture the opportunity of the US-China trade war as well. Besides CETP there are also concerns of solid waste management which is causing considerable pollution in the area. Due to a lack of  proper waste management facilities, tanneries have turned to discharging their untreated waste into a nearby river in Savar.

FIGURE: Bangladesh Export Earnings from Leather

Recently, around 155 tanneries were moved to the 200 acre Tannery Industrial Estate in Savar (selected in 1994 for shifting) in efforts to save the Buriganga river which has been polluted due to industrial waste dumping from manufacturers. It was also done in efforts to raise the  standards of manufacturing by providing better production facilities. However, workers have yet to receive proper work gear to protect them from the various toxic fumes and hazardous chemicals used in leather production.Work-related sickness and death remain a common occurrence.

“Due to lack of environmental compliance at Savar Leather Industrial Park, global buyers are not placing work orders. As a result, export earnings from leather and leather products, the second largest export earner, have seen a downward trend,”

– Md Shakawat Ullah, General Secretary of Bangladesh Tanners Association

Fundamental Challenges of the Industry

Besides recent troubles, the leather and tannery industry faces a fundamental problem of a lack of developed backward linkages causing them to face regular shortages in raw hides and skins, and leather processors being dependent on importing machinery and inputs for production (chemicals). A large majority of tanners and commercial leather exporters are also heavily reliant on brokers who connect them with buyers, preventing processors from expanding their reach within the supply chain. The picture is further complicated considering that the market is dominated by a few local firms who subcontract to MSMEs.

As a result of a stagnant social, environmental, and economic conditions, many large international buyers also avoid sourcing goods directly from Bangladesh to avoid negative publicity. As a result, the market in Bangladesh has been focusing on lower-end users though efforts to move in the value chain are being taken by a few market players, particularly those in LFMEAB.

FIGURE: Bangladesh Leather Industry Value Chain / SOURCE: Research Gate [3]

Way Forward

There are 3 key areas with a strategic importance to leather processors who want to enter the global market: chemical imports, leather exports, and environmental regulation. Overall in the industry, there are an excess number of forward and backward linkages in the supply chain, preventing current market players to scale up unless they begin investing in both their production facilities and human capital. Although the many trade associations have acted as central hubs to facilitate means of knowledge sharing and production improvements, implementation of existing policies governing the industry must be strictly enforced. If Bangladesh is to make its leather industry a major thrust sector in the future and increase its weight in exports, it will have to overcome the issues of inefficient supply chains as well as increase its quality standards to provide higher value offerings to capture the global markets.

Mohammed Shehab, Junior Associate at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

Bibliography

• [1] Tanneries relocation, non-compliance at Savar Leather Park weigh on export earnings – Dhaka Tribune
• [2] An overview of Bangladesh leather industry – Textile Today
  [3] Bangladesh’s leather industry: Local production networks in the Global Economy – Research Gate
• [4] Tannery: A troubling tale – The Daily Star

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A steady supply of energy is critical considering Bangladesh’s rising development

Bangladesh’s economy has expanded by a remarkable 7.86% to USD 275.8 billion in 2018 compared to 2017, resulting from strong private consumption, public investments and remittance inflows. It is expected that the country will become the second best-performing economy in 2019, with an estimated economic growth rate of 7.9%.

However, to sustain the rising development, having a steady supply of energy is of paramount importance.  Infrastructural deficiencies remain key bottlenecks to achieving sustainable growth, compounded by the gradually depleting domestic natural gas supply. On top of that, burgeoning secondary and tertiary sectors have increased appetite for resources critical for fueling future growth. The table below shows the segmentation of energy demand projections across key sectors.

Taking into account the growing demand for energy from both industrial and residential users, the government has no option but to ration natural gas. As a short to medium term solution, the government has started importing the expensive Liquefied Natural Gas (LNG). By the end of January 2018, the country’s natural gas reserve stood at 21.17 trillion cubic feet (TCF), which can roughly meet demand till 2026. With 23 operational gas fields, the country produces about 2,700 million cubic feet of gas per day (mmcfd) against a steady demand of 3,700 mmcfd, leaving a shortage of 1,000 mmcfd as of 2018.

If Bangladesh were to advance faster, we need to look beyond traditional sources. And to that end, Liquefied Petroleum Gas (LPG) serves as a key alternative.  Through investment friendly policies – some of which are already in place – in support of this thrust sector, Bangladesh can grow faster.

LPG is upending the natural gas market

LPG, a green and clean hydrocarbon fuel, is an environment friendly vehicle fuel, which can play a pivotal role to mitigate air pollution alongside propagating other benefits. In fact, Autogas has emerged as the premier user of LPG. Public authorities have taken initiatives to gradually replace CNG with LPG in transportation in an effort to reduce dependence on natural gas.

The market for LPG took off in 2009 after the government stopped providing new piped gas connections to households. Newly developed households and enterprises in townships since 2009 have been extensively using LPG as the cooking fuel. Note how the trend has shifted significantly over the last 20 years (from 2.4% to 19.6%) in regards to the usage of LPG as a source of cooking fuel. The following diagram illustrates the changing trend.

LPG is set to grow three times from the current market size estimates

LPG sector – having a triple digit growth rate – is set to grow three times from the current estimated market size of 1 million Metric tons (MT). Decentralized economic development, absence of natural gas connectivity in some parts of the country, and emergence of LPG as a vehicle fuel will be the major demand drivers for the industry in the coming years.

Considering the potential of the LPG sector, new players are planning to enter the industry every year. As of November 2018, 13 companies have been operating in the market, while seven companies are finalizing their market entry strategies for entering the market in 2019. Although 55 companies received licenses for carrying out marketing and distribution of LPG, not all of them secured the final approval. Public and private sector players jointly supplied 600,000 MT LPG against the estimated demand of 1 MT in 2018.

The seven companies, which received preliminary licenses for entering the LPG market, with a cumulative investment of BDT 1,500 crore, are heating up the market. According to LightCastle’s primary research, at present the market is led by Bashundhara with a 24% market share, followed by Omera and Jamuna with a market share of 20% and 17% respectively. The following table illustrates further.

Investment friendly policies are paving the way for a brighter future

Tax exemption policy for LPG import has played a major role in the growth of the sector. Additionally, import tax on equipment used for assembling LPG cylinders have been set below 5% . Another favorable government tax measure for the industry is the reduction in AIT (Advance Income Tax) from 5% to 2%.

However, a company wiling to set up a LPG bottling plant has to meet a long list of regulatory requirements. The entity has to secure permission and license from a motley of ministries and relevant authorities. Moreover, adequate care needs to be taken to design the layout of the storage facility, including the arrangement and location of plant roads, walkways, doors, and other operating equipment for safety reasons.

Bangladesh’s long term view to graduate to a manufacturing-based economy will definitely create a number of new opportunities. The energy demand emanating from both households and industries will keep increasing in the coming years. In order to cater to both the segments equally, government will have to allocate subsidized LNG for power and manufacturing sector, while promoting LPG for household and business consumption. Considering the country’s growth trajectory, the prospects of the LPG sector can be assumed to be secure.

To learn more about the growth prospects of LPG in Bangladesh, download our full report here.

The post LPG White Paper – May 2019 appeared first on LightCastle Partners.

The case for higher Financial Inclusion in Bangladesh through wage digitization

The Bill and Melinda Gates Foundation has identified Bangladesh as one of the nexus countries for driving greater financial inclusion – positively affecting millions of lives. Currently, the country has a 47% financially included population according to Financial Inclusion Insights (2018) and this is gradually increasing with higher digitization of products, services and proliferation of mobile internet users. The Gates Foundation commissioned two market research studies with us to explore the possibilities and challenges associated with digitization of wages in the apparel sector and the prospects of digitization in the microfinance sector as these two sectors greatly affect the lives of people living in a low income bracket. This would give the foundation a holistic strategic path it can utilize to plan its intervention initiatives accordingly.

Tangible benefits can be achieved in the RMG industry through wage digitization

As the apparel industry of Bangladesh aims to gain higher export in an increasingly competitive global market, sustainability, quality and digitization have become crucial forms of differentiation and competency. Wage digitization in the apparel sector directly affects the lives of 3.5 million people, who are employed in the industry, living under an income bracket of less than USD 150 a month.

Wage digitization is seen to have direct positive correlation with increase in financial inclusion and currently close to a million workers in the apparel industry are now receiving their salary as digital wages.  The apparel sector is indubitably a key sector in Bangladesh and greater digitization in the industry will have compounded positive effects on the lives of a large work force. Similarly with just a 15% increase in transaction digitization would positively affect the lives of close to 4.5 million women borrowers. Currently 1 million apparel workers are receiving salaries digitally and further digitization of transactions would not only help microfinance institutions increase efficiency but potentially reduce interest rates and cost of borrowing for its underprivileged borrowers.

In order to assess the two industries effectively, we conducted 40 in-depth interviews and sat with worker rights organizations to understand the current industry dynamics. We analyzed industry parameters and developed strategies on ways to accelerate usage of digital financial services (DFS) for institutional clients. We also developed recommendations on product development to accelerate financial inclusion and DFS uptake by large institutional stakeholders. The work entailed gathering insights from a motley of stakeholders through interviews and FGDs.

According to 82.5 percent of respondents, the major benefit all DFS adopters experienced was the time saved during the wage disbursement week. Although the banking process time remained similar to the cash based system, the salary week disbursement process was much faster. Although not clear at first, the benefits of digitization were slowly materializing to worker groups as they became more habituated with the system. It saved them time and their earnings were now more secure on a digital platform. According to major DFS providers, although the cash-out rate is high in the first few months of digital wage disbursement, this cash-out frequency reduces over time as workers start to feel more secure with having their money in a digital form.

According to 90 percent of respondents, the major challenge with the transition process was that the costs associated were higher than initially expected. Most first movers did not have a clear idea about the costs associated with the transition and had not embarked on any in-depth cost-benefit analysis before digitizing.

In order for the industry to prioritize wage digitization, stakeholders of the industry need to work in tandem to create greater impact. The ecosystem of merchants who accept DFS payments needs to be deepened by the DFS providers in order to increase adoption among workers. If workers do not have enough outlets to transact digitally, they will not see the benefit with a digital system.

The wage digitization process neither falls on a continuum nor is there a one size fit all approach. Each factory has its own requirements and different time frames in which wage digitization can take effect. Suppliers must have enough options to digitize at a rate that is realistic and with a DFS partner that works best for them. Additionally, buyers and suppliers need to work in alignment in order to drive the digitization agenda among factory owners. Creating digital advocates among large suppliers and hosting platforms for knowledge sharing of buyers on digitization would greatly facilitate the process. Workers need to be trained on tech literacy by stakeholders to make the transition smoother for them. Overall, there are strong opportunities for creating social impact through wage digitization and apparel manufacturers do see the business case of being more digital.

The future needs meticulously planned strategies for adoption

At an accelerated uptake, wage digitization in the apparel sector would increase financial inclusion drastically. Just recently BGMEA has signed an MoU with the ICT ministry to create an e-wallet for RMG workers in order to create greater access to financial services. This is a tremendous achievement and a step in the right direction for the industry. However, there still exists realistic impediments to the faster adoption of wage digitization.

To learn more about the Wage Digitization landscape in Bangladesh, download our full report here.

The post Prospects of Wage Digitization In The Apparel Sector appeared first on LightCastle Partners.

Bangladesh’s affiliation with cloth has a long history. From being renowned throughout the world and even conquered by the British for its high-quality muslin, silk, and pure cotton, to becoming the second-largest ready-made garments producer in the world ^[3], the country has long depended on the textile industry for its growth. The production of RMG dominates in contribution to Bangladesh’s GDP, exports, and conversations of development. In 2017 the industry exported goods worth $30 bn, which made up 83% of exports and 12% of the GDP, higher than any other industry ^[1]. It is also the industry that has seen the most scrutiny from global markets due to past incidents like the Rana Plaza collapse, which created waves throughout the world and pushed reforms for providing safer work environments and wages for its employees ^[6].

However, as business practices, consumer expectations, and information flow change radically around the world, the industry is at a crossroads. Sustainable production – preventing the sacrifice of productivity while protecting social, environmental, and ethical interests – is gradually taking precedence. How can factories become environmentally-friendly while maintaining production levels? Can the industry handle progressive employment laws without losing its edge of cheap labor? Should it sacrifice affordability for sustainability? These are questions that need to be answered, and soon.

Shifting Patterns in the Global Market

The global apparel manufacturing industry was valued at $658 billion in 2018, growing at a rate of 4.6% over the past five years ^[2]. Bangladesh holds a 6.4% share, second to China, which dominates with 36.4% 3. However, China’s share has been falling due to a shift in manufacturing to electronic goods and tariffs due to the recent US-China trade war. To capture this share, Bangladesh will have to compete with several other developing countries, such as Cambodia, Vietnam, and Myanmar, all of whom share the advantage of cheap labor. An important step in beating these countries will be improving the ease of doing business in the country, where Bangladesh ranked 177th out of 190 countries ^[3]. Bangladesh’s main export destinations are the EU, with whom Bangladesh has duty-free trade, and North America.

As the industry is export-oriented, trends and patterns in global demand affect Bangladesh directly. The global trend of fast fashion has greatly impacted the industry. These clothes are affordable, low-quality, and easy to purchase online. The “fast” image comes from how quickly new trends are incorporated and old designs discontinued. This necessitates speedy and cheap production. Brands are increasingly shifting to digital spaces from traditional brick-and-mortar shops, impacting storage and retail processes. New business models that challenge traditional ownership, such as by leasing or resale of clothes, will also impact the demand of the industry in the future ^[9].

Growing concern for sustainable practices, however, is the greatest potential threat to Bangladesh’s RMG sector. A growing youth population means a population that is statistically more inclined to be concerned about social and environmental issues ^[9]. This need is also pushed by a growing distrust by retailers regarding costs, supply chains, and employment practices, which may necessitate radical transparency.

Market Fundamentals

The export-oriented garments industry boomed in the late 1970s. The Multi Fibre Agreement (MFA), operational between 1974 and 1994, set quotas on the textiles and garments exported from developing countries to developed countries, but Bangladesh was exempted. Daewoo, a Korean garments manufacturer, started a joint venture named Desh Garments Ltd. in 1977 to take advantage of this 1. The workers and managers trained by Desh left to open their own factories. This, followed by the privatization of the sector, lead to rapid growth.

The RMG sector is based on B2B relationships. Retailers, mainly MNCs, form contracts with factories to deliver a specific number of garments with appropriate specifications, which tend to be seasonal as retailers attempt to coincide production with spring, summer, fall, and winter collection releases. Many factories take contracts that exceed their production capacity and sub-contract to cover excess demand. Subcontracting is a controversial practice as although it allows large orders to be fulfilled, the smaller factories that take up the excess production may not meet compliance standards.

The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) is a national trade association whose duties include monitoring the safety of factories, lobbying with the government on behalf of the industry, and conducting research to improve production techniques.

Developing Workforce Practices

The Tazrin Fashion fire and Rana Plaza collapse are the two most infamous industrial disasters in Bangladeshi history. The Tazrin Fashion fire (2012) was the biggest fire the nation had seen at the time it occurred. Just a year later, the Rana Plaza disaster took over 1,100 lives ^[6]. The collapse was caused by poor building materials, failure to follow safety regulations, and negligence of the owners. These disasters brought the distressed working conditions of Bangladeshi garments workers to the attention of the world. Compensation was paid to both deceased workers’ families and those injured. Those in charge of the building were arrested or sued. Since then, multiple steps have been taken to address workplace safety and practices.

The biggest push came from outside the country, with various international programs. The Accord for Fire and Building Safety placed a 5-year legally-binding contract between major European brands and trade unions to inspect factories and workplace practices, as well as train workers on safety policies and their rights. Over 90% of the inspection and training work is complete, and it was extended until 2020. The Alliance for Bangladesh Worker Safety, a similar pact, was formed soon after by major US brands such as Walmart and H&M, who wanted a non-legally-binding contract. Over 93% of the remediation process had been completed when the Alliance ceased operations at the end of 2018 ^[6].

Multiple local NGOs also responded by forming training programs to inform workers of their legal rights. All of these organizations and programs have brought about drastic change by shutting down non-compliant factories, encouraging worker awareness, and incorporating advanced safety policies into regulatory bodies.

The sector currently employs around 3.5 million workers, of which 60% are female ^[4]. The minimum wage has been raised several times over the past decade, after strikes from workers and despite protests from the BGMEA citing an inability to remain efficient.

Protecting the Environment

The 12th UN Sustainable Development Goal aims for ‘Responsible Consumption and Production’, with targets referring to efficient usage of natural resources, environmentally sound chemical and waste management, increased technology integration, and information dissemination regarding these practices. For the RMG sector, the biggest concern is in the production of textiles, which is resource-intensive due to the processes of washing, dyeing, and finishing. An average factory in Bangladesh uses 300 liters of water daily and, given the size of the industry, this creates significant pressure on the freshwater resources of the country ^[7]. The graph below shows how the environmental impact is distributed in the various stages of the production process on average and concentrated in the raw material extraction and input production processes.

The growth of LEED-certified green factories has been commendable in the recent past. Currently, 82 factories have the certification, and 320 factories have registered for it ^[7]. The criteria for the certification include floor area specifications, water efficiency, and energy usage. To support this transition, local private banks have pledged to give loans to factories that have effluent and water treatment plants.

Transparent Business Practices

Global retailers are taking drastic steps to protect their reputation, as the Walt Disney Company did by ceasing production in Bangladesh ^[8]. Transparency is a growing concern for consumers, and as a result, for retailers as well.

In 2019, over 180 international fashion brands disclosed their suppliers in an effort to bring greater transparency to global supply chains ^[5]. This trend may become a requisite for reputation, as companies who do not disclose their information are distrusted and are seen as not taking responsibility for their practices. To ensure supply chain monitoring, some foreign brands hire agents to ensure that production capacity is sufficient, or that sub-contractors meet safety and compliance requirements. However, the effectiveness of these is yet to be seen.

Another trend since the Rana Plaza disaster has been to form partnerships with NGOs and MNCs to collaborate on programs focused on sustainability targets. Not only does this include the relevant stakeholders, but it also ensures that the program is created by those with the appropriate knowledge and skills. Both the Alliance and the Accord are examples of this. Currently, BRAC University, the C&A Foundation, and the BGMEA are working to map all factories of the country to create a digital database allowing information to be accessed by workers, clients, and other stakeholders. This will be a major step in digitizing RMG and connecting organizations and authority bodies, increasing both accountability and accessibility.

At a Crossroads

The Bangladesh government has set a target of $50 billion for RMG exports by 2021. With only 2 years and a little under $20 billion to go, this is a steep hill to climb. This is an indication of how the industry may have overestimated its ability to rely on cheap labor instead of boosting productivity.

Currently, the government, BGMEA, and MNCs conduct audits on factories, but in an unorganized manner. On top of this, the government regulatory bodies are severely understaffed to monitor the estimated 3,500+ factories. With the new international collaborations, however, the industry has become a strong example of how international partnerships, such as the Alliance and Accord, and pressure on companies can lead to organized strategic change. The government needs to foster this growth in sustainability by encouraging investment and lobby for lower export tariffs. The discourse regarding labour laws is crucial to develop an ongoing dialogue about a significant portion of the population. The BGMEA needs to establish and follow up on clear compliance guidelines and can boost its credibility by continuing international partnerships.

Many may argue that consumers will not go out of their way to buy cheap clothes ethically, or that anything that hampers Bangladesh’s low production cost advantage cannot be beneficial in any way. Although this may be true today, it may not be true in the future as digitization continues to impact purchase decisions, or when Vietnam and Cambodia provide sustainable production at costs on par with Bangladesh. In addition, unsustainable practices undoubtedly raise costs in the long run as they use more resources, incur more wastage, and require more money for disaster management. To truly carry RMG as a strategic industry into the era of being a middle-income country, Bangladesh will have to look farther into the future than current costs and export targets.

Mondrita Rashid, Part-time content writer at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

The post Bangladesh RMG Sector – Difficult Relationship with Sustainability appeared first on LightCastle Partners.

In an ocean of volatile industries, the FMCG industry represents an island of stability during times of economic uncertainty. Among the various industries that characterize the modern global economy, the Fast Moving Consumer Goods Industry is amongst the most resilient to economic shocks. Unlike other industries, the FMCG sector is not prone to mass layoffs or substantial dips in profit when the economy slows down. This is due to the nature of the goods themselves.

It is easier for people to cut back consumption on luxury products during recessions, however, this does not hold true for daily essentials like food, toiletries or medicine. In effect, buyers shift consumption to more economic-alternatives of the same product^[8]. Consequently, the demand for these goods remains relatively stable. As the middle class grows in Bangladesh and incomes continue to rise, the FMCG industry will witness an increase in their customer base locally, thus reaping the rewards of social progress and upward economic mobility.

Global Market

The global market size of the industry is expected to reach $1.54 trillion by 2025 with a CAGR of 5.4% (2018-2025)^[5]. With rising incomes, a growing middle-class and increasing rural-to-urban migration, it seems realistic to propose that companies operating within this industry will see rewarding pay-offs.

Due to the nature of the FMCG industry—characterized by low margins and high sales volumes—the industry is most likely to benefit from increasing its customer base, which will lead to greater sales. In this respect, Bangladesh represents a goldmine. Consumption expenditure clocked in at 97% of national income as of 2015^[1] and with domestic annual consumption standing at over $130 billion, the growth of the internal economy has been accelerating^[7]. As the number of people belonging to the Middle and Affluent Class (MAC) is projected to increase from 12 million–or 7% of the total population–to 34 million by 2025^[2], the strong growth of the FMCG sector will continue to sustain itself in the future.

Pillars of the Industry–Key Drivers and Trends

The rise and sustenance of the FMCG industry can be attributed to a few key drivers^[1].

Rapid Rural-to-Urban Immigration Drives Demand

As job opportunities are typically concentrated in the few urban centers of the country, the cities experience huge swathes of rural immigration. Consequently, most of the spending on FMCG products originate from these urban centers. With 35.70%^[1] of the nation’s population living in cities as of 2017, this number is only set to increase further and additionally bolster the industry in question.

Rise of the Middle Class

Being beneficiaries of strong economic growth, Bangladesh is all set to attain Lower Middle Income Country status. According to the Boston Consulting Group, 2 million Bangladeshis are joining the ranks of the MAC every year^[2]. By the year 2025, the number of people belonging to MAC is expected to nearly triple to 34 million from 12 million in 2017. As the process unfurls, the FMCG industry should be able to capitalize on the situation.

Export Processing Zones (EPZ) Create Prosperity

There are 8 EPZs in Bangladesh. Among the aims of these EPZs are the diversification of the country’s exports and the creation of employment. As Bangladesh’s exports have risen, so has the importance of EPZs. Consequently, EPZs have created many jobs for women, which helps in poverty reduction ^[11]. When incomes rise, one of the first categories of products to experience increasing demand are FMCG products. EPZs have played an important role in boosting the FMCG industry in Bangladesh.

Abundant Raw Materials and Cheap Labor

FMCG products in Bangladesh mainly include livestock, fruits, vegetables and other staples of the Bengali lifestyle. Due to its climate and geographic positioning, Bangladesh represents a gold mine of raw materials for companies in the FMCG industry^[1]. Cheap labor has additionally allowed the industry to grow further^[1].

Key Areas within the Industry

“Fast Moving Consumer Goods” is an umbrella term that encompasses a wide array of industries. Within Bangladesh, the most commercially important of these industries include food & beverages, personal care, and household care^[1].

A Cursory Snapshot of FMCG Companies by Type in Bangladesh

A Brief Consumer Profile

Bangladeshi consumers are of the optimistic variety. More than 60% believe their incomes will rise in the years to come, fueling their desire to consume more and 79% believe that living conditions have improved^[3]. However, despite believing their desire to purchase goods increases yearly, Bangladeshi consumers are wary of debt. Consequently, savings play a greater role in the life of the Bangladeshi consumer as opposed to credit. Being family-oriented people, Bangladeshi consumers prioritize the needs of the family over individual needs. This means that when important spending decisions arise, products that target the needs of families get preference. Bangladeshis are also very brand conscious consumers, with a large portion of consumers citing brand as a decision-making criterion when shopping for personal care products. As living standards improve and incomes rise, Bangladeshi consumers will prefer products of higher quality as they move into the future^[3].

Digitization in a Tech-savvy Age—A Roadmap for the Future?

Bangladesh—like most developing countries—has a population that can be visually represented in the form of a right-side-up pyramid. The following figure represents the population of Bangladesh.

Characteristic of this category of population pyramids, the vast majority of people are below the age of 35. As of 2018, 43% of the total population is below the age of 25^[6]. Young people characterize developing nations such as Bangladesh. A quintessential trait of this age demographic is tech-savviness^[4]. As incomes and living standards have risen in the country, smartphone usage has skyrocketed. Smartphone adoption stood at 31% (45 million users) as of 2017 and is projected to rise to 75% (138 million users) by 2025^[9]. To capitalize on the situation, consumer-centric digitization is slowly being introduced into the FMCG industry. Smartphone applications that cut the need to visit retailers offer a more personalized shopping experience, making it easier for players in the industry to connect themselves with their end consumers^[4].

Chaldal (established in 2013) is a big player in the local e-commerce market. A major e-grocery store, it recently raised $5.5 million to develop nano-warehouse technology. Its rise to prominence represents the growing importance of e-commerce in Bangladesh. Not only does Chaldal save time, but it also offers lower prices than the local market in an effort to get more customers used to online shopping^[10]. Following Chaldal, other e-grocers such as Khaasfood and Meena Click joined the list. E-retailers such as Daraz and Pickaboo allow consumers to purchase products as eclectic as mobile phones to clothing to perfumes, all from the comfort of home. In addition, the secular decrease in average traffic speed over the last 10 years has further encouraged and enticed more people to shop from home^[6].

The ease of shopping from home in the backdrop of Dhaka City’s dismal traffic conditions can explain–to some extent–the explosive rise of F-commerce in recent years. With a humble, but ever-increasing, internet penetration rate, the importance of e-commerce and digitization will be a major factor in determining the pay-offs of operating in the FMCG industry^[6].  As the MAC grows in size, this trend will be a key feature in determining the destiny of the FMCG industry in the years to come.

While e-commerce can be the next big thing for the FMCG industry for Bangladesh, the elephant in the room needs to be addressed: consumer trust. Even now, there is still a lot of distrust of e-commerce in the country. Frequent reports of mishandled payments, untimely delivery, lack of quality assurance have served to create a general attitude of caution towards online shopping.

If this is not addressed by the major players in e-commerce, growth of the FMCG could be crippled. Underlying the possible success of FMCG in e-commerce is a fundamental question about quality assurance and professionalism. Unless this is tackled, the success story may remain elusive.

Shahreem Ahsan, Part-time content writer at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

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Bangladesh is a bustling country with a total population of now 164 million with over 46% under the age of 25, the majority of whom are acclimatized to growing up with electronic devices in their homes. And with increasing urbanization and development of rural and suburban regions, the availability of electricity plays a crucial role in raising the living standards of the people and the development of the country.

Bangladesh’s energy demand has been increasing at an average pace of 10% over the last decade [1]. However, supply of the commodity has yet to reach the same pace. Currently, the country has a generation capacity of 20,133 MW, a large portion of which is unutilized due to scarcity of gas, unreliable old plants, and lack of development of the electricity grid and it’s estimated that unreliable power supply has been costing the country 2% of GDP annually [1]. In FY18, 2,817 MW of new capacity was added increasing the total generation capacity to 15,953 MW, an increase of 17.69% from the previous year [4]. Though there is a scarcity in the market, the power sector has been making significant strides to accommodate the goals of reaching the greater population keeping up with increased demands. At the moment, 83% of the population has access to electricity [7]. Government initiatives are being taken to increase 14,956 MW by 2021, bringing the total generation capacity to 24,000 MW [4].

At the moment the World Bank has a $2.1 bn to support the energy sector to enhance capacity, generate cleaner energy, improve generation and transmission & system operation efficiency, reduce technical losses, and increase access to grid and renewable electricity [1]. The International Development Association wing of the World Bank added 2,604 MW to the national grid and 100 MW to off grid through solar home systems [1].

Market Fundamentals

The power sector can be broken down based on three main activities, power generation, transmission and distribution.

Generation

The demand for electricity is growing beyond the pace of GDP at a rate of 10% which is forecasted to increase in the future. Currently demand varies throughout the day and peaks at 5pm – 11pm4 with variation is due to the load factor (=average demand/maximum demand, higher values indicate greater utilization of plant capacity).

The total installed capacity in Bangladesh is 15,953 MW of which 660 MW is imported from India. The maximum peak generation in FY18 was 10,958 MW, though 15.6% higher than the previous year indicates a 68.7% capacity utilization during peak hours, mainly due to aging and restructuring of plants and gas shortages. In FY18 net energy generation increase 9.43% to 62,678 GWh (31,082 Public and 26,813 Private)[4].

Transmission

Transmission line length increased by 7% in FY18 from the completion of past projects. However, the total number of faults and their respective durations more than doubled from the previous year.

Distribution

As part of FY18 improvement of the system BPDB increased the number of consumers by 9.73% and extended 247km of lines [4]. Distribution system losses has been down to 8% from 9.27% in FY17 [4].

Off-Grid Power

Bangladesh has one of the world’s largest domestic solar power systems, covering 14% of the population [3]. The International Development Association (IDA – World Bank) along with its development partners has to date installed solar home systems in more than 4 million households and shops in remote rural areas [1]. However, it’s estimated that to date solar home systems have brought electricity to more than 20 million in rural areas pushed by steep drops in prices and enhanced reliability of solar products [2].

Capacity Market Share

Bangladesh Power Development Board has been operating in the country since 1972 under the Power Division of the Ministry of Power, Energy and Mineral Resources. It is currently the sole transmission company and single buyer of power from generation entities and seller to distributors.

Bridging the Gap

Energy is directly linked to the well being and prosperity of nations due to its fundamental need in everyday life. According to an investment projection by LightCastle Partners, investments required in the power sector will see a sharp rise in 2031-40 which could potentially lead to an energy crisis in the future.

The post Bangladesh Power Sector – Filling the Gap in Demand appeared first on LightCastle Partners.

For a country in which an estimated every 2 of 5 people work in agriculture, which is a significant contributor to the country’s GDP, agro-processing is an industry that hold tremendous value which has yet to achieve its full potential. One of the reasons behind this is that the majority of raw materials required for production can be sourced locally such as grains, vegetables, and meat. According to sector insiders, post harvesting losses of annually stand at $2.38 bn per year (Tk 30,000 crores) [1], a loss that can be salvaged through agro-processing.

In 2016, the agro-processing sector in Bangladesh stood at $2.2 bn, averaging a growth rate of 7.7% from FY05 to FY11 [2]. Exports in FY18 were around $371 mn, 40.72% higher than the previous year [1]. Despite this high growth, the food processing industry in Bangladesh has remained stagnant at ~2% of GDP since 2004 [2].

Market Fundamentals

Agro-processing can be divided into two stages, primary processing and secondary processing, with the former dealing in processing of agricultural products in their basic form and the latter involving the conversion to final forms such as juice, jams, concentrates etc. The industry covers domains including crops, poultry, livestock, fisheries, and forestry.

Export earnings from agro-processed food grew 97.31% to $291.82 mn during July-September, up from $147.90 mn last year, with majority of growth from dry foods, tea, fruit juice, biscuits, and rice. Due to limited road infrastructure and electricity supply, the majority of processors are situated in the North region of the country to avoid high costs of logistics and energy, as the majority of raw materials are procured from nearby. There is a lack of trust between farmers and processors, as procurement is usually seasonal and opportunistic i.e. when there is surplus production and a large price drop. As a result weak supply chain relationships, farmers face considerable discouragement in undertaking large-scale cultivation, thus making procurement limited to availability of goods in the market. Furthering complexity of the industry is added with various middle men and agents who act to ‘facilitate procurement’ due to the absence of weak supply chain relationships between producers and processors, significantly increasing the prices of raw materials and wastage during transportation.

There are currently 479 members in Bangladesh Agro-Processing Association (BAPA) of which 241 are exporters and 235 manufacturers of agro-processing products. Collectively, members of the association export around $500 mn annually to 144 countries [3]. Besides local manufacturers, large companies such as Pran, Akij, Square, Ahmed, ACI, BD Foods, and Bombay Sweets are also operating in the industry. Foreign players have also shown considerable interests in entering the market through FDIs.

The government has also taken initiatives such as tax holidays and cash incentives to boost production capacity of agro-processors. Donor-funded projects have also been undertaken to enhance capacity, standards, skills, and networks to strengthen the industry.

Way Forward

Major challenges in the sector is include a lack of policy support to reduce the costs of doing business for SMEs  to encourage growth in rural areas where obtaining financing and ensuring quality production is crucial for growth. In essence, this means taking initiatives towards product development. Due to past cases of food adulteration there has also been a loss of confidence in certain products, making it difficult to penetrate into new markets. At the same time, a lack of lab facilities to ensure quality goods means an inability to provide a greater diversity of offerings. If the issues of policy and lab facilities, and building a positive image is tackled, stakeholders estimate that Bangladesh will be able to reach $1 bn in exports by 2021 [5].

At the micro level, agro-processing businesses must take steps to ensure a healthy supply chain, cutting out middlemen to reduce backward linkages and ensure farmers are not marginalized and encouraged to undertake large scale cultivation to reduce costs of procurement.

Mohammed Shehab, Junior Associate at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

Bibliography

• [1] Agro-processing industry: Bangladesh’s next export frontier – Dhaka Tribune
• [2] Private Sector in Agro-food Processing Industry of Bangladesh – Katalyst
• [3] Bangladesh Agro-Processor’s Association – BAPA
• [4] Promising prospects in agro-processing sector – The Independent
• [5] Export of agro-processed foods to hit $1b by 2021 – Daily Star
• [6] Agro processors demand separate ministry – The Financial Express

The post Agro-Processing Leading Agriculture to Higher Value Exports appeared first on LightCastle Partners.

The Fourth Industrial Revolution has been making its presence known throughout the world as people are more connected than ever before – to each other, devices, and networks. At the forefront of this era has been the telecommunications industry by providing increasingly cheap and accessible connectivity. In Bangladesh, the story is no different, with the industry earning $4.5 billion revenue in 2017 and contributing $12.7 billion to the GDP, including its indirect impact on productivity 1. Noticing its strategic importance, the Bangladesh government has implemented several policies affecting industry competitiveness and the operations of firms. On top of this, changes such as the Airtel-Robi merger are ushering the industry into a period of transformation.

The Global Market

The global telecommunications market was valued at $18 billion in 2017 and is expected to grow at a CAGR of 6.1% for the next decade [2]. The constant development of new technologies, such as 5G and fiber optics, will continue to expand the boundaries of this industry.

Increasingly advanced smartphones and internet-dependent consumers are demanding high-speed service and the incorporation of new technologies into the telecommunications industry. This includes 5G wireless technology, augmented and virtual reality and Internet of Things (IoT),which refers to the network of objects and devices with Internet connectivity that do not require human interaction. These technologies will increase connectivity and integrate everyday objects into the online world, increasing the scope of the telecommunications market beyond voice calls.

Bangladesh is the 9th largest mobile market in the world in terms of unique subscribers, which accounts for 51% of the country’s population 1. Many global players have invested in Bangladesh and the only locally-owned brand is the state-owned Teletalk.

Changing Industry Structure

The two key service offerings of the industry are voice call services and mobile internet. The former dominates the revenue of companies as only 1 in 5 Bangladeshis subscribes to mobile internet services 1. The number of unique subscribers is growing at a CAGR of 3%, but mobile internet subscribers are growing at 10%, indicating a large potential in the latter for growth [1]. The increased availability of low-cost smartphones and growing youth populations are the major drivers pushing the industry forward. The development of internet-dependent services, such as e-commerce, e-agriculture, and e-education, ridesharing, and other on-demand services are also contributing to the necessity of growth in the industry.

The 2016 merger of Robi and Airtel made it the second largest carrier in the market [4]. Both brands are operating but under the Axiata Group Berhad. A possible upcoming merger is that of Telenor’s Asian operations and Axiata, which would include Grameenphone and edotco Bangladesh Tower Company Limited, Axiata’s mobile tower company [6]. This is due to be a non-cash merger of infrastructure and assets, where Telenor would be the majority shareholder. Robi will continue to be managed separately by Axiata, meaning the telecommunications industry will not be impacted directly, but rather indirectly through the tower sharing market. The merged company would be called MergeCo.

Government Regulation

The government’s Digital Bangladesh initiative, under Vision 2021, has necessitated action to promote the growth of the industry while regulating the activities of the companies. Major policies include the Significant Market Power (SMP) Regulation, separation of the tower industry, and Mobile Number Portability (MNP) services.

To prevent the creation of a monopoly, the SMP Regulation was formed in late 2018, stating certain rules for companies with a market share above 40%. These rules prevent such companies from doing any activities that harm the competitiveness of the market, such as collusion or unfair prices. The only company eligible for this regulation as of 2019 is Grameenphone, which has been restricted with a number of rules. At first, the BRTC enforced a ban on exclusive goods or product deals, call drop rates higher than 2%, and nation-wide advertisement campaigns, but this was withdrawn a month later [5].

The tower industry previously was a part of telecommunications, with carriers building and using their own towers. However, the government announced that it would be separating the mobile service providers and tower sharing companies by providing licenses to organizations authorized to operate towers. Four such companies were awarded licenses in 2018, and they will take over the existing towers of carriers [7]. Carriers will be banned from building new towers and will have to rent towers for a specific amount of time. The goal of this regulation is to encourage operators to invest in technology other than simply building additional towers, and improve network quality and range.

The MNP service will allow mobile users to switch carriers without changing their phone numbers, increasing convenience and the competitiveness of the industry as consumers will be able to switch to better service or prices without logistical difficulties [4].

These policy changes are intended to guide the growth of the industry in a sustainable manner. The prevention of monopoly powers and increasing access to future technologies protects consumer interest but comes largely at the cost of the operators, who not only have to deal with new regulations, but also bureaucracy, political influence, and the cost of developing and implementing new strategies.

Challenges and Opportunities

Carriers have been shifting focus from voice call services to mobile data. Only 54.5% of mobile users use internet services on their phones as of 2017 4. This is due to the fact that smartphones are only recently becoming affordable for the mass public, and many users in Bangladesh subscribe to multiple carriers but use mobile data on one phone. MNP may change this as users will be able to keep one number and have flexibility in choosing their carrier, increasing the scope of internet penetration. On top of that, 74.2% of mobile data users use 3G internet, and only 13.7% use the newer 4G, with the remaining 12.1% still on 2G services [4].

Upgrading these customers to the faster generations has the potential to generate greater revenue, especially as 5G is on the horizon of being introduced to Bangladesh by 2021 [8]. Currently, Bangladesh has one of the lowest Average Revenues Per User (ARPU) in the world, at $2.90 compared to the global average of $14.60 1. However, the industry experts are apprehensive about the cost-effectiveness of this plan given the increasingly strict government policies. Certain policies have been termed unnecessarily restricting, such as high internet spectrum prices and a ban on operators laying fiber optic cable on their own [8].

There is a major opportunity to develop content streaming platforms, as content is the next logical step to drive up internet revenue in the face of declining call revenues. Services such as Whatsapp, Skype, and Messenger provide local and international voice call services. Adding content, such as movies, music, and games, is necessary to keep customers constantly engaged with the internet. Some operators have set up content streaming services, such as Grameenphone’s Bioscope and Banglalink’s Game On’ of Banglalink. This may extend to e-commerce sites in the future.

The transition to a separate tower industry has not been smooth. Three of the four licensed companies have not been able to start operations, meaning no towers have been built since the decision in late 2018 even as demand grows steeply [7]. There is also disagreement between the carriers and tower companies regarding terms. A lease of 15 years has been proposed, but carriers are doubtful of the success of the new system and hesitant to sign a contract for such a long period. On top of that, tower companies are refusing to ensure regular maintenance and prompt disturbance handling. If this situation is not handled in the near future, the infrastructure may not be able to support the high mobile service usage of the country.

Market Players

There are currently four players in the market: Grameenphone, Banglalink, Teletalk, and Robi (under which Airtel operates). The market had six players in 2016 before the Robi-Airtel merger and Citycell’s bankruptcy. Competition is intense due to the oligopolistic structure of the industry.

The Way Forward

Everyday life is becoming increasingly dependent on the services of the telecommunications industry. New government policies may mean the industry will thrive at the expense of the profitability of individual companies. As most of these are owned by large global players, the rising difficulty of operating in the Bangladeshi market may discourage additional investment, despite the opportunities the market has to offer. On the other hand, the government initiative to protect customers, such as by improving complaint lodging systems, will prevent these large companies from exploiting customers. Transformation will come not only by the introduction of new technologies but also by constantly developing government regulation. The very definition of the industry will be affected by changes like the separation of the tower development industry and the introduction of 5G technology.

By overcoming these growing barriers, as well as those posed by accessibility and infrastructure, the telecommunications industry may be able to carry Bangladesh into the era of the Fourth Industrial Revolution by providing cheap, reliable connectivity to the mass population.

Mondrita Rashid, Part-time content writer at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

References

• 1. Country Overview: Bangladesh  – GSMA Intelligence
• 2. Global Telecommunication Market Profile – MarketWatch
• 3. Robi to raise Tk 400cr thru’ local bonds – The Daily Star
• 4. Bangladesh Telecommunication Industry: A Comprehensive Review – EBL Securities
• 5. BTRC withdraws 4 SMP conditions on GP after 1 month – New Age
• 6. Telenor and Axiata enter discussions to merge Asian operations – Telenor Group
• 7. Telecom service quality to drop over tower row – The Daily Star
• 8. Complex regulatory regime may hinder 5G: Banglalink CEO – The Daily Star

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Transport is one of the most crucial aspects of the business world. Without it, businesses would be unable to access raw materials, markets with spare capacity, or suitable factory locations. The ability to expand operations beyond a firm’s immediate location is crucial to its growth and hence the growth of the economy.

The commercial vehicle market refers to vehicles used to transport goods and passengers or provide a service, and it includes trucks, buses, and coaches. Road transport is the most popular form of commercial transport in Bangladesh, carrying 70% of passengers and cargo [1]. It is significantly cheaper and easier to access than water, air, or rail transport. The commercial vehicle market was valued at around $500 million in 2017, with an estimated CAGR of 12.5% [2]. This high growth is likely to be sustained in the future due to rising regional trade, a booming economy that is feeding greater urbanization and industrialization, and road network expansion. While it is currently dependent on imports, steps are being taken to shift the industry to local manufacturing.

Regional Powers are Investing in Bangladesh

The global commercial vehicle market was valued at $1.32 trillion in 2017 and is forecasted to grow at a CAGR of 7.1% [3]. On average, growth has stagnated in developed economies but is higher in emerging ones. The Asia Pacific market is set to experience the highest growth rate globally due to the growth of mega-economies China and India [3]. Current trends include rising digital integration with features such as traffic data and weather reports and the development of electric vehicles. Telematics and fleet-sharing may reduce the dependence of the industry on the global economy and its growth as it moves beyond basic goods transport. This means that the market will be driven by different elements, such as innovation and technological integration.

Regional trade treaties formed by organizations such as BIMSTEC, BCIM, and SAARC increase the need for transport of goods between the countries as the removal of barriers boosts trade. As they are close in proximity, road transport tends to be the feasible option. Moreover, Bangladesh acts as an intersection point between many of these countries and international trade corridors, making its location geo-strategically significant as a transport hub. A crucial international development will be that of the Belt and Road Initiative by the Chinese government. It is an ambitious plan of road, rail, and sea routes involving 72 countries [8]. It will link Bangladesh directly to China by land, increasing its linkage to other major economies in the world.

The Bangladesh commercial vehicle industry remains dependent on imports from Asian countries –  specifically India, Japan, and China. This includes both reconditioned and new vehicles. India is the 6th largest automobile manufacturer in the world, and Bangladesh is its 5th largest automotive market [4]. Indian manufacturers are moving quickly to establish plants and contracts in the Bangladeshi market, capitalizing on their easy access to the market due to proximity.

Economic Growth is Boosting Demand

The most crucial demand driver for the commercial vehicle market is the economic growth of businesses, especially the manufacturing sector, which directly impacts business confidence and thus usage of transport by businesses. It allows businesses to have the resources and confidence to invest in a vehicle as they know it will be backed up by sales. Demand for transport is thus derived demand from the demand for goods and services.

In Bangladesh, cargo commercial vehicles are mainly used for the transport of RMG products, construction materials, and commodities [5]. The development and growth of heavy industries such as shipbuilding contribute to the growth of the commercial vehicle industry as they require more transport of heavy raw materials. E-commerce is another sector directly impacting the commercial vehicle market as goods need to be transported throughout the country from the production or storage facilities.

Another cause for the boost in the purchase of cargo vehicles has been a new axle load policy that limits the weight carried by each truck to reduce damage to roads. This has increased the number of vehicles needed by businesses.

The growing population and its rising income have also increased the demand for passenger commercial vehicles, such as buses. Upgraded services, such as night coaches and AC bus services have also increased in popularity. Public transport organizations have expanded intra-city services, resulting in a CAGR of 29.5% in the bus segment alone.

As the industry’s growth is linked directly to the global economy’s performance, fears of an upcoming recession may dampen business confidence and demand for commercial vehicles. Industry experts are predicting a recession will hit by 2021 in the US, which may impact Bangladesh’s exports and economic growth directly [7]. Moreover, as the country is due to become a middle-income country by 2021, this growth rate may decelerate. Pro-business reforms and focus on the Sustainable Development Goals will be necessary to provide the commercial vehicle market with infrastructural support.

Improving Infrastructure is a Priority for the Future

Without appropriate roads and transportation facilities, the industry’s growth is limited. Supportive infrastructure gives businesses the confidence to invest in vehicles and expand their operations as there are shorter lead times for receiving or delivering products, allowing more efficient operation. The congestion in Dhaka alone costs the country over $4 million annually [10].

The government has been developing the infrastructure of the country’s roads, ports, and bridges through regular maintenance as well as taking on new mega projects which are connecting previously isolated regions into the transport network. These increase the usage of commercial vehicles by not only increasing connectivity and ease of transport but also requiring the transport of raw materials during construction. Notable megaprojects include the Padma Multipurpose Bridge, the Payra Deep Sea Port, and the Karnaphuli River Tunnel. The Padma Bridge is expected to increase the GDP by 1.2 percentage points [6]. The Payra Port will increase demand for local road transport as regional trade will increase, and the cargo will need to be brought to Dhaka and other cities throughout the country. The Karnaphuli Tunnel will connect southeastern Bangladesh to the Asian Highway Network. These will mainly impact the demand for heavy vehicles, such as trucks.

The road network is constantly being expanded and repaired. In 2017, the government repaired highways of 1,595 kilometers in length [1]. Plans for the future include upgrading all national highways to 4/6 lanes and digitization of the Roads and Highways Department’s activities, which will increase efficiency and accountability [3].

Despite this, a major challenge for the market is the condition of roads and congestion. Only 40% of roads in Bangladesh are considered to be of ‘good’ condition [5]. On top of that, the number of metro vehicles increased 16 times between 2001 and 2013 [1]. This high congestion increases the maintenance costs of vehicles and the time taken to transport. Light commercial vehicles (LCVs), which weigh less than six tonnes, are becoming increasingly popular as they make it easier to park, access narrow roads, and evade traffic – all increasing accessibility and time and money saved [1]. Globally LCVs account for 75% of the commercial vehicle market revenue [5]. The Bangladeshi market can focus on them to deal with these issues as well.

Market Players are Expanding Production

The market for commercial vehicles is oligopolistic in nature, with high capital investment and regulation under the BRTC. The market leader is Nitol Motors Limited, with a market share of 40%, closely followed by IFAD Autos with 38%. Runner Motors Limited is also a significant player with a share of 10% and is due to open its own assembly plant later this year. The dominance of these three companies over 88% of the market limits the buying power of consumers.

Most companies have contracts as exclusive dealers for renowned Indian and Japanese brands. Distribution networks and credit facilities are crucial for the market.  Both IFAD and Nitol are investing in new plants, and IFAD’s assembly plant is due to be the largest automobile plant in Bangladesh, with the capacity to build 4,000 trucks and buses annually [5]. Both of these plants will be built in collaboration with the relative brands they distribute in Bangladesh.

Nitol offers pay-as-you-earn programs for buyers and IFAD has several medium-term credit options. Significant buyers are transportation and logistics firms. Government public transport systems float tenders which are taken up by companies.

However, the double role of the manufacturers as credit providers is also the biggest challenge facing the industry. Once the vehicle is acquired on credit terms, it is possible for the purchaser to evade payment, often by stating a lack of funds due to poor revenue. The process of communicating a customer who is evading such communication can become too costly to be profitable, resulting in bad debts. Thus a predicament is created where sales are high, but cash flow is poor.

The Way Forward

The commercial vehicle market is growing as the capacity of the Bangladeshi economy grows. The government is developing supply-side policies by improving infrastructure, which will provide support to all industries and increase the need for local transport. The development of megaprojects and the Belt and Road Initiative will allow businesses to access new markets and expand operations, putting demand pressure on companies to build assembly plants.

Like most of the Bangladeshi automobile industry, the supply of the market is limited by the lack of raw materials and backward linkage. Its dependence on imports creates an upper limit for the industry’s size. The market must shift from Complete Built-Up (CBU) to Complete Knocked-Down (CKD) vehicles, which will be more affordable in terms of import duties and will incorporate local materials for tires, windows, etc.

The growth of this sector can be accelerated if proper government initiatives are taken to increase the building of such plants, as well as support ancillary industries relying on the commercial vehicle industry, such as the spare parts industry and the tire industry. Incentives given to increase production include infrastructural changes and ease of obtaining construction permits. The placement of higher taxes on imported vehicles and the development of the Kishoreganj Economic Zone under the Nitol-Niloy Group are recent steps in the right direction [5].

References

• 1. Annual Report 2017-18 – IFAD Autos Limited
• 2. Sales pick up on economic boom – The Daily Star
• 3. Commercial Vehicles Market Research Report – Grand View Research
• 4. Indian automakers eye market expansion in Bangladesh – Prothom Alo
• 5. IDLC Monthly Business Review – IDLC Finance Limited
• 6. Mega projects and our hopes and concerns – The Daily Star
• 7. When is a recession coming? – Chicago Tribune
• 8. What is China’s Belt and Road Initiative? – The Guardian
• 9. Equity Valuation Report on IFAD Autos Limited – EBL Securities
• 10. Study: Dhaka traffic wastes 5 million work hours, costs Tk37,000 crore – Dhaka Tribune

The post High Prospects in the Commercial Vehicle Market appeared first on LightCastle Partners.

In the backdrop of Dhaka city’s fabled traffic mismanagement and congestion, motorcycles offer a more affordable alternative to its counterpart–cars. The rising middle class of Bangladesh has been a significant driving force behind the motorcycle industry’s phenomenal rise as bikes are cheaper, easier to maintain and faster to navigate with than cars. Since 2010, the number of motorcycles in Dhaka alone has more than doubled to roughly 469,888 units.[1] 

The origin of the industry’s boom is a multivariate question. The answer lies behind a series of events ranging from government tax initiatives, import policies, innovations within the tech industry such as the rise of ride-sharing apps and the growing middle class.[2]

Global Market

Across the globe, the motorcycle market is performing well. In the backdrop of emerging economies and the overall increasing purchasing power of people in developing nations, the market is projected to grow at 4.4% per year through to 2022.[7] This expected growth can primarily be attributed to a stronger and more robust global economy and the increasing availability of budget-friendly models.[7] The three main global regions in the market right now are North America, Western Europe and most importantly Asia.

North America represents a more mature market for motorbikes. However, demand is still expected to increase, partly inspired by the newfound economic confidence of the post-recessionary period.[7] People who previously put off purchasing motorbikes are now more likely to switch to newer models. Western Europe will also be friendly to motorbikes, particularly e-bikes, given their more eco-friendly nature. Asia represents the most important market for the motorcycle industry. Asia made up 80% of global motorcycle sales in 2017.[7] The rise of the Asian market is a result of improving economic and living conditions, the inability of most households to afford typical automobiles, government investment in rural areas, and ineffective and overcrowded public transportation.[7]

The rise of the motorcycle industry in Bangladesh carries all the hallmarks of the typical Asian motorcycle market boom

Market Projection

The motorcycle market size stands at approximately $476 million as of 2017 in Bangladesh.[2] The local industry has seen very healthy sales growth rates over the last few years. With an average growth rate of roughly 60% as of 2017, this trend is expected to carry through 2019 and into the foreseeable future.[3]

The standout characteristic of this rise in sales is the newfound prominence of local manufacturers/assemblers within the industry. The government has reduced supplementary duties on imported parts to 20% from 25% used in local manufacturing of motorbikes, which has greatly reduced the cost of production.[2] Given that 70% of the parts used in motorbike assembling and manufacturing are imported, these cuts in supplementary duties represent a huge financial blessing to local manufacturers.[2] Additionally, motorbikes have been included in the existing VAT exemption which has helped bolster sales.[4] Finance Minister AHM Mustafa Kamal added three new raw materials into the concessionary duty list for the fiscal year 2019-2020.[11]  At the same time, imported motorbikes are subject to a protectionist tariff regime, which raises their price and makes them less competitive in comparison to locally manufactured motorbikes.[5] The reduction of registration costs from BDT 20000 to BDT 5000 for both imported and locally manufactured/assembled bikes has also helped the market grow further.[5]

In addition, another major driver behind the boom of the motorbike industry is the rising economic status of Bangladesh–in particular, the rising economic status of the middle class.[2] According to  Mukesh Sharma, Managing Director and CEO of Runner Automobiles Ltd., the demand for motorbikes increases when GDP per capita adjusted for Purchasing Power Parity (PPP) exceeds $4000. He further mentioned that Bangladesh’s GDP per capita (adjusted for PPP) currently stands at around $4561, which explains why growth has come so quickly for the industry.[4] As the country’s middle class continues to grow in prominence, the industry will continue to experience growing sales.

The government of Bangladesh has also taken steps to empower the motorbike industry. Last year, it implemented the National Motorcycle Industry Development Policy 2018, which aims to diversify the country’s manufacturing and exports, creating jobs in the process. The policy is expected to raise the sales of motorbikes to 0.5 million by 2021 and 1 million by 2027.[6] According to Bijoy Kumar Mondol, CFO and company secretary of HMCL Niloy Bangladesh, the market is projected to grow to 1 million units within three to four years.[3]

Potential Stumbling Blocks

Despite the upward thrust the industry is experiencing right now, there still remains a few key issues that need to be dealt with if the local market expects to remain a catalyst for growth in the long run. Around 70% of the component parts used by local manufacturers/assemblers are imported, while only 30% are sourced locally.[2] Essentially, this means that the vast majority of the manufacturing process is being subjected to supplementary duties. In order to be competitive in the long run, local manufacturers need to establish local backward linkages by domestically manufacturing the majority of component parts. In addition, even though registration costs have come down, it is still high.

However, according to the National Motorcycle Industry Development Policy 2018, registration costs will be adjusted in accordance with the neighboring countries, keeping in mind the industry’s expansion.6 Additionally, financial institutions in Bangladesh do not provide adequate financing options to potential buyers of motorbikes. This lack of credit suppresses the demand to some extent, however, BRAC Bank and City Bank have recently started providing some financing options to potential motorbike buyers.[2] The biggest challenge the industry faces is competition from Indian brands, which collectively hold the lion’s share of the market.[2]

The Way Forward

The motorbike industry has great potential to become a source of growth in the country. The rise of ride-sharing apps have created a bustling market for economic means of transportation and has also generated employment for many.[8]

For the industry, becoming even more competitive than Indian brands by cutting costs and offering better value is a key step. Establishing backward linkages domestically should be a priority. Financial institutions can play a key role in this development by offering financing options that can stimulate demand and bolster sales. Perhaps the industry’s biggest scope lies in what may at first glance appear to be an unrelated area: the smartphone industry and the rise of ride-sharing apps.

As the middle class grows in Bangladesh, smartphone usage has also dramatically increased. It is the ninth-largest smartphone market by unique consumers and as of 2017, smartphone penetration reached half of the population at 51%.[9] This is expected to grow with a CAGR of 3% to 82% (107 million users) by 2025.[9] Ride-sharing apps such as Pathao and Uber have benefitted from the motorcycle industry’s growth as they have been able to reach more customers and have further increased demand for motorbikes, causing more people to purchase motorbikes in order to make money through these apps.[4][6] It makes sense to hypothesize that as smartphone penetration increases and ride-sharing apps soar in popularity, motorbike sales will continue to grow. 

As things stand now, the local motorcycle industry should grow as long as the economy stays strong. However, if the government gives in to BGMEA’s demands for the competitive devaluation of the currency, the local motorcycle industry will be hit hard.[10] As local manufacturing is greatly dependent on imported parts, a devalued currency will raise costs, making motorbikes less affordable and competitive. Concrete efforts must be made to develop quality local vendors for component parts and build strong backward linkages to maintain/encourage the growth of this industry.

References

• 1. Number of bikes now 4,69,888 in Dhaka; doubled in 8yrs – The Daily Star
• 2. Motorcycle Industry of Bangladesh: An Interview of Runner Motors – IDLC Monthly Business Review
• 3. Motorbike market to race faster in 2019 – The Daily Star
• 4. Bike makers ride into booming market – The Independent, Bangladesh
• 5.  Motorbikes: A Rise in Local Opportunities – LightCastle Partners
• 6. Motorbike sales zoom up – The Financial Express
• 7. Key Global Motorcycle Industry Statistics and Growth Regions – MarketResearch.com
• 8. Ride-Sharing in Bangladesh: Disrupting the way we commute – IDLC Monthly Business Review
• 9.  Country overview: Bangladesh–Mobile industry driving growth and enabling digital inclusion – GSMA Intelligence
• 10. BGMEA wants 3% cash incentive – The Daily Star
• 11.  Bangladesh Budget 2019-20 is positive for motorcycle makers – The Daily Star
• Exchange Rate (USD to BDT): 1 USD = 84.46 BDT]

The post Motorbike Industry in Bangladesh—The Next Big Frontier? appeared first on LightCastle Partners.

Despite massive strides in achieving admirable standards across a host of different socio-economic indicators such as infant mortality rates and gender parity in both primary and secondary education, Bangladesh still has a plethora of obstacles it needs to overcome in the tertiary education sector.[1][5] With the modern economy advancing at its current pace and automation ominously looming over the horizon, the need for quality tertiary education has never been more pronounced.

Key Issues

As a whole, the tertiary education sector in Bangladesh is failing to equip graduates with the skillsets current employers are demanding.[3] This “employer-skillset mismatch” translates itself into high levels of graduate unemployment. According to a recent study by the Bangladesh Institute of Development Studies (BIDS), graduate unemployment stood at 38.[6] percent.[2] “Credential Inflation”, a phenomenon where jobs that previously did not require graduate degrees but now do, is further fueling demand for tertiary education but does nothing to address the problem of equipping graduates with the appropriate skillsets.[6] Despite this upsurge in demand, there exist depressing disparities in tertiary education attendance between the two genders as well as people from different economic backgrounds.[1]

There are 4 major pillars upon which the current problems of Bangladesh’s tertiary education sector rests.

• Lack of Quality Education: Tertiary Education Institutes (TEIs) in Bangladesh do not encourage critical thinking and primarily utilize rote-learning which encourages passivity.[1] Consequently, employers do not get the skillsets they require from graduates.
• Low Research Output: research grants as a portion of public funds is less than 1 percent. Bangladesh’s research output is considerably lower than those of other South Asian countries such as India and Pakistan, despite a strong pool of Ph.D. holders working in the country.[1]
• Inequitable Access to Tertiary Education: Bangladesh’s gross enrollment rate (GER) of 17 percent is lower than those of its South Asian neighbors in addition to being much lower than that of other Middle-Income Countries (MIC).[1] The wealthiest are disproportionately represented in TEIs and STEM enrollment rates are considerably lower than those India and Sri Lanka.[1] In addition, female attendance at TEIs is lower than that of males.[4] 

• Inadequate Financing Options: No national student loan scheme exists to help students from poorer backgrounds access tertiary education. Scholarships and waivers are the primary means of financial assistance and borrowing from relatives is a common practice for economically challenged students.[1] The former is limited in its scope and the latter is an uncertain means of financing.

How to Fix the Situation

The problems of tertiary education will have to be tackled with a robust set of institutional reforms and policy directives. Some constructive suggestions to the problem are as follows:

• Introduce modern teaching methods to universities. Using more productive teaching methods that encourage problem-solving and critical thinking will go a long way towards making graduates employable.
• Increase collaboration with the private sector and invest in better facilities such as ICT. By providing incentives to the private sector–for example, in the form of tax exemptions–university-industry collaboration can facilitate greater knowledge output as well as compensate for a lack of public funding to universities.
• Create partnerships with foreign universities. This will facilitate knowledge transfers that will also result in local TEIs being introduced to better teaching methods.
• Increase research expenditure as a proportion of tertiary education expenditure. Increasing the amount of funding available for research will increase the output of quality research papers. Facilitating collaboration with foreign institutions can help offset the lack of public funds for research in the country.
• Create opportunities to commercialize research innovations. This will incentivize research bodies and industries to work together and profit from innovation.
• Increase merit-based scholarships for students from impoverished backgrounds. Many students cannot attend tertiary education due to a lack of sufficient funds, however, this can be rectified by allocating more public funds to scholarship programs for meritorious students from disadvantaged families.
• Create a national student loan scheme, specifically targeting female students. Student loans to meritorious female students can help to achieve a more balanced gender-parity in tertiary education.
• Create demand-side incentives to promote tertiary education amongst females. For example, families will receive a monthly stipend from the government if they enroll their daughters into TEIs.
• Take steps to address food security in the primary and secondary levels of education. There is a positive causal relationship between food security and academic performance amongst students in school. If food security is addressed, students from impoverished backgrounds will perform better and this will enable them to avail higher quality tertiary education.

Conclusion

Successfully achieving the 17 Sustainable Development Goals hinges greatly on the quality of tertiary education prevalent in the country. Goal 4 (Quality Education), Goal 5 (Gender Equality, Goal 8 (Decent Work and Economic Growth) and Goal 10 (Industry, Innovation, and Infrastructure) all directly depend on the state of tertiary education within a developing country. If the tertiary education sector fails to rise up to the challenges of the day, the projected development of the country across various sectors and industries will begin to face severe bottlenecks. Addressing the structural problems of the tertiary education sector will go a long towards creating a more knowledge-driven, skills-oriented and equitable economy.

References

• 1. Bangladesh Tertiary Education Sector Review – The World Bank
• 2. Nearly 39pc university graduates jobless – The Financial Express
• 3. National University Graduates: Lagging behind in the job market – The Daily Star
• 4. Education Scenario in Bangladesh: Gender perspective – Bangladesh Bureau of Statistics
• 5. The Growth Equity Nexus in Bangladesh: An Analysis of Recent Events – Bangladesh Development Studies, Volume XXXVIII, June 2015, No. 2
• 6. Why are university graduates failing to meet market needs – The Daily Star

The post Tackling the Problems of Bangladesh’s Tertiary Education Sector appeared first on LightCastle Partners.

Coupled with artificial intelligence and the internet of things, automation has become a key necessity in the 4th industrial revolution, automating complex processes which were once only possible through humans. And as the tides change throughout the world with the new developments in technology and remaking of global supply chains due to the US China trade war, labor intensive industries like the apparel industry are likely to be hit the hardest by new developments.

The US China Trade War in particular has been shifting global supply chains and developing countries like Bangladesh have been rushing to capture newfound opportunities in trade once provided by Chinese markets. High growth has been specifically seen in the ready made garments (RMG) sector (with China as the leading global exporter). It’s estimated that if the trade war escalates, it will produce an additional $400 mn in exports for Bangladesh (ADB report). However, the countries that have double downed on the apparel sector, taking advantage of their cheap domestic labor, may have an uncertain future up ahead due to developments in automation which is making reshoring a viable option for production in the future.

For a long time now, the extensiveness of automation in the apparel industry has been limited by a critical process of production – sewing. During the process of sewing, it not uncommon for the fabric to stretch, warp, or fold due to its flexibility [ref id=2]. Until recently, the high speed processing and feedback required to complete this task were left to the ‘more skilled’ hands of people.

However, new developments have produced a machine that can do just that. Now a denim shirt produced in Bangladesh at a labor cost of $0.22 can be made at $0.33 in the US [ref id=2]. This means in addition to saving costs and time requirements of transport, sourcers will also not have to worry about apparel industry disasters such as the Rana Plaza collapse and fires in factories due to the negligence of business owners as compliance and safety regulations are more strongly enforced in developed countries.

Unlikely Innovators, DARPA and Walmart

In 2012, the USA’s Defence Department (DARPA) provided a $1.25 mn research grant to the Walmart Foundation to automate clothing production as a result of a US military policy to only buy clothing made domestically [ref id=2]. Building on the automated sewing research process at Georgia Tech, the technology has developed to a fully automated system that includes cutting, sewing, and quality inspection. Today the technology has been made into a company called SoftWear Automation which has developed SewBot, a fully automated sewing robot which boasts higher accuracy than the human eye in addition to requiring less labor input and higher productivity.

Given time for further developments, if the technology is licensed to major buyers of garments who stand to gain the most from vertically integrating their operations, countries like Bangladesh, where over 80% of exports are in the apparel sector, may see a considerable risk of losing business in the future. The Chinese clothing manufacturing company, Tianyuan Garments, which produces clothing for Adidas and Armani, have already set up their newest plant in the USA due to the advance in technology [ref id=2]. In this case, the company had seen a 50-70% labor decrease on each of their production lines. However, besides just cutting costs, this technology has the potential to bring economies of scale to an industry that has been for a long time limited from reaching full autonomy.

Bangladesh to Bear an Impact

More than half of the world’s textile exports and around 70% of ready made apparel exports come from developing economies [ref id=3]. In Asia, where most of these apparels are made, an estimated 43 million people are employed in this sector with women accounting for 3/4th of the workforce [ref id=3]. The textiles industry has helped lift many out of poverty and empower women, but given the changing tides, countries such as Bangladesh, Pakistan, Cambodia, and Sri Lanka may gradually see a growing workforce without jobs in the future, showing the need for government to incentivize diversification of major industries.

Although adopting automation may come by as a recommendation for developing economies to retain their competitive advantage, most of the apparel exports oriented industry lack both the infrastructure and the technical expertise to cater to the new changes in technology, for instance, a reliable and quality power source for automation. According to a Centre for Policy Dialogue (CPD) study, only 21.25% of sampled enterprises in Bangladesh were found to have advanced technology levels in their factories.

Although large and medium sized factories have shown considerable adaptability to use of technology in production, the majority of small sized factories have to reach high levels of adaptation. And data from NYU Center for Business and Human Rights suggests that a good portion of the 5 million garments workers in Bangladesh may be at risk of losing their jobs if factories are not able to maintain their cost-competitiveness.

Market Situation of Bangladesh

Bangladesh’s ready made garments industry has been the main driver of growth in exports over the last decade. The industry produces woven and knit goods with a focus on shirts, trousers, jackets, t-shirts, and sweaters [ref id=4]. It’s estimated that over 4 million workers are tied to the industry. And with the country’s focus on low value apparel, it’s likely to be hit the hardest by technology developments in the apparel sector that is currently focusing on low cost apparel. The country currently has one of the lowest minimum wage structures in the Asia region making it an attractive place for low cost apparel seeking buyers.

Bangladesh has a deficit in power demand and lack of quality uninterrupted power making it an unattractive location for highly scaled automated production. The lack of a skilled workforce also makes it difficult for manufacturers to produce higher value goods to global markets. The apparel sector caters to mainly fast fashion at the moment, but if the country wants to achieve its ambitious goals of $50 bn in exports by 2021, it must move to higher value goods. Recently due to the US China trade war, work orders have significantly increased helping push the country towards it goals, but it isn’t a sustainable solution for growth in the future.

The Way Forward

To continue as a major destination for sourcing in the global apparel markets, Bangladesh needs to make a stronger move towards high fashion and greater value items. The issue of wages in the RMG sector has been a sensitive topic, with regular protests occuring for higher wages as an inflation rate of 6% raises the cost of living by the day. And although digitizing the payment process can help ensure workers receive their wages on a timely basis, it doesn’t address the high cost of living in Dhaka, where a majority of factories are located.

A holistic solution is needed to keep apparel as a major contributor to exports. This means addressing the issues of wages, raising the skill level of workers, adopting technology to a greater extent to smaller sized enterprises, and support facilities for workers to keep retention rates high in the long run. A possible solution to this may be developing an RMG zone similar to Export Processing Zones with housing facilities and shared support/training services to encourage adopting the changes to this shift in global markets.

So far general technological developments in Bangladesh and its usage in factories have not made much impact on the workforce, but fully automated processes in development definitely will be set to reduce the need of labor in the future. Bangladesh will graduate from its Least Developed Country status in 2024, and lose its duty free access to European markets which make for a majority of current exports. And to remain competitive in the global markets and retain its major cash cow, greater research and adoption of advanced technology and better practices must be taken.

The post From Labor to Automation — The Rise of Fast Fashion at the Cost of Bangladesh appeared first on LightCastle Partners.

Translated in the ‘Festival of Sacrifice’, Eid ul-Adha is a Muslim holiday celebrated throughout the world by commonly sacrificing sheeps, goats, and cows, and donating a third of the meat go to underprivileged and poor. And for a long period of time in Bangladesh, a majority of cows for the sacrifice had come from India.

In 2015, however, Bangladesh’s livestock sector was faced with a shortage crisis of cows from India for slaughter in anticipation of the upcoming Eid ul Azha. The Indian government had increased its vigilance in the trade following religious sentiments in their country as cows are viewed as sacred by the majority Hindu population. Prior to this time, an estimate of around 2 million cattle was smuggled into Bangladesh every year, which has dropped down to a little above 300,000 during the time ^[1]. During this period over the Muslim majority in Bangladesh were faced with the question, where would they be getting the cows for sacrifice in the future?

Prior to this time, the vast majority of cattle imported from India were through informal channels due to economic benefits of creating a formal market were overruled by religious, political, and humanitarian issues ^[7]. According to a 2014 study by Bhattacharjee (2014), the value of a cattle sourced from an Indian state during the time of being sold in the Bangladesh retail market could increase by at least 7 times. Traders in the downstream side of the supply chain in Bangladesh could receive as high as 77% margins, depending on a variety of factors including supply, seasonality in demand, logistics and miscellaneous expenses ^[7]. And despite Bangladesh having one of the highest densities of livestock in the world, it had not been able to meet domestic demands for meat, milk, and leather.

Despite being considered a haven for cattle, India has remained one of the largest global beef exporters tying with Brazil for the top position ^[3], with a majority of the beef sourced from buffalos ^[7]. In 2017, India’s beef exports were valued at around $4 bn, despite drives in the country by religious fundamentalists to stop cow slaughter for consumption. Following the ban, cattle trade from India to Bangladesh had shrunk from $1.5 bn to $250 mn (2017) ^[4].

In Bangladesh, livestock contribution to GDP has consistently declined from 2.06% in FY10 to 1.47% in FY19. Overall, in terms of protein availability, meat is the only source (apart from milk and eggs) which is available at a surplus in the country ^[2]. Indian cows have been, for the most part, the cheaper alternative to domestically raised cattle in the country.

Most traders in the past would receive smuggled cattle from the borders (coming in from India), months away from the annual Eid festivals, fatten the cows and then resell for profits. However, a large portion of cows brought in were those bred for other purposes such as farming/milk production, only to be sold for meat once its productivity has declined. Other industries tied to cattle such as leather and bone-crushing are directly tied to cattle, raising the importance of a steady supply of cows in the country.

So how is it that a country that was once highly reliant on its neighbor for beef, became self-reliant to the point of now looking to export beef in the next 2 years?

Cattle

Currently, there are around 24.2 million cattle in Bangladesh 2 with around 85% of them indigenous in origin such as the Red Chittagong, Pabna, North Bengal Grey and Munshiganj among the ones with greater yields ^[5]. Indigenous cows in Bangladesh fall far behind other foreign species when it comes to the production of meat, but are better adapted to the harsh tropical environment, resistant to local disease, and can maintain their health despite the poor quality of feed ^[5]. Major constraints to the development of cattle in the country have been associated with a lack of quality species for breeding, cost-effective feeds, disease outbreaks, medical care, and unregulated market prices ^[5].

Source: Department of Livestock Services

Cows have been traditionally bred more for their ability to provide draft power for agricultural purposes other than for meat, leading to a large proportion of local breeds to have developed humps over the generations ^[5]. This has led to less of a focus on meat and milk production over the ages, which in turn had led to the recent crisis of beef shortage since the majority of supply was being met from the neighboring country. Today, most farmers now rely on alternative sources of power as the availability of tractors and other mechanized farming tools has reduced the need for manual power.

Soon after the war of independence, the Directorate of Livestock Services started an artificial Insemination program to crossbreed Australian Friesian and Jersey bulls with local breeds to enhance milk production in the country, however, only recently have efforts been taken to do the same for meat production, which answers the question previously posed of how Bangladesh was able to solve the crisis of beef shortage in the span of just a few years.

The American Brahman

The American Brahman is a result of 266 bulls and 22 females imported from India to the United States between 1854 and 1926. Since then the breed has been selectively bred for meat production, making it the ideal breed for meat production. In comparison to other breeds the American Brahman is able to utilize low quality feed, withstand a wide range of temperatures, and consistently maintain a higher feed to weight ratio than most other contemporaries ^[5]. Overall this makes the breed ideal for meat production in Bangladesh when cross bred with local species.

In comparison, some of the better of indigenous cattle breeds such as the Red Chittagong, Pabna, North Bengal Grey, and Munshiganj have a maximum weight half of the Brahman Cow.

Contrary to the developments in recent years, India had yet again looked to start bringing in beef to Bangladesh, but the situation has turned around for the better. Bangladesh has become self reliant in meat production this year and is looking to export to other countries in the near future. Opening borders to readmit cows from India to Bangladesh pose a high risk of hurting the newly developed local industry, as Indian cows are priced much lower than those domestically raised.

According to a recent Ministry of Fisheries and Livestock meeting, the country will have an estimated total stock of 11.18 million cows, buffaloes, goats, and sheep for Eid Ul Adha this year. Though illegal imports of Indian cows has not completely stopped, it’s estimated that in 2018, the number stood at only 92,000 ^[8]. This year there will be 24 official cattle markets in Dhaka with 14 in Dhaka North City Corporation and 10 in the South. And given the considerable gain in meat production through the use of superior breeds, if the country continues to protect the newly thriving beef industry, the future of beef is bright.

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