Handset production drops for first time amid currency surprises

The local production of handsets dropped in 2023, the first decline since domestic manufacturing began in Bangladesh in 2017, owing to the higher US dollar rate, an increase in taxes, and lower sales amid an erosion of purchasing power of consumers.

Domestic firms produced 2.33 crore mobile phones in the January-December period last year, down 26.35 percent from the 3.17 crore units manufactured in the same period a year earlier, according to the Bangladesh Telecommunication Regulatory Commission (BTRC).

Industry insiders attribute the unprecedented decline to a sharp rise in the value of the US dollar and an increase in taxes.

Consumer spending has also tightened significantly owing to persistently higher inflation for the past two years while the expanding grey market poses another significant threat to the industry.

Industry people say external and internal crises have combined to hurt the local mobile manufacturing industry. Besides, the restriction in opening letters of credit (LCs) has impacted the entire supply chain.

They say the price of handsets has increased by about 40 percent in some cases. So, unless people's purchasing power is restored to previous levels, the industry will face difficulties in staging a turnaround and achieving growth.

The slump is so significant that the number of locally manufactured phones in 2023 was even lower than that in 2020. Over 2.40 crore handsets were made in 2020.

Despite acute global supply chain disruptions to the mobile device component market due to the Covid-19 pandemic, 2.95 crore handsets were produced in 2021.

In 2022, 3.16 crore handsets were produced locally, which accounted for 99 percent of the local demand through official channels.

But over the last year, mobile phone sales plunged over 33 percent, according to the Mobile Phone Industry Owners' Association of Bangladesh (MPIOAB).

Md Jewel, a sales representative of Phone Zone BD, a handset seller in Jamuna Future Park in Dhaka, said sales at his shop had dropped by over 50 percent.

"If we could sell 10 phones earlier, it has now come down to 4," he said, opining that the decline in people's purchasing power was a key reason for dwindling sales.

Another significant contributing factor is the expansion of the grey market, according to Rizwanul Haque, vice-president of the MPIOAB.

"It's true that the market suffered due to economic impacts and the hike in price of dollars, but the expansion of the grey market is also a major reason," he said, forecasting that the situation may persist as the economy will take time to improve.

"But since the election is over, the fear of instability has disappeared. So, I hope the economy will bounce back," he added.

He said the revival of local mobile manufacturing companies depends on curbing the grey market and mitigating the dollar crisis.

According to him, illegal and informal channels currently capture about 40 percent of the overall handset market in Bangladesh.

Industry stakeholders have called on the government to explore alternative measures to address the grey market if reducing taxes proves impractical.

One proposed solution involves the adoption of a National Equipment Identity Register (NEIR) to safeguard the local mobile phone manufacturing sector.

Introduced by the BTRC in 2021, NEIR aims to ensure the use of legitimate mobile devices in the country by linking their IMEI number with the customer's national identification and SIM numbers.

But although Bangladesh took the lead in introducing NEIR, other countries managed to implement it first.

For instance, Pakistan and Nepal utilise NEIR to curb illegal trade and support local manufacturers.

But in Bangladesh, crucial functions like blocking fake, unauthorised, or cloned handsets are not yet operational. The government has also not initiated the blocking of illegally imported mobile phones.

Further exacerbating the woes of local manufacturers was the introduction of VAT in the sales and production stages over the past two years, according to industry players.

The production of handsets in Bangladesh made impressive strides in recent years, aided by huge tax benefits unveiled by the government in fiscal year 2017-18.

Since then, 17 factories have been set up, creating jobs for around 15,000 people.

Before 2020-21, there was around 58 percent tax on mobile phone imports, whereas the tax on locally assembled and manufactured handsets was 15 percent to 20 percent.

Afterwards, it increased to 30 percent to 35 percent because of the imposition of a 5 percent VAT on each of the three stages of sales -- from the factory to distributors to retailers.

In a further blow to manufacturers, the revenue authority has imposed more VAT in the production stage since the beginning of the current fiscal year.

An additional 2 percent VAT was slapped for the first time on products that make use of wholly locally-made components.

Moreover, the VAT applicable on handsets produced with at least two locally made components has been increased from 3 percent to 5 percent.

Similarly, the VAT on handsets assembled wholly with imported components has been increased from 5 percent to 7.5 percent.

The government has set a $5 billion export target for ICT services and digital devices by 2025, with a major contribution coming from laptop and mobile phone exports.

But industry insiders say although Symphony and Walton exported some handsets to the US and Nepal, the volume and value were meagre, so it might not be possible to meet the export target.