- Some Incentives Regarding on FDI:
- Tax holiday 5-10 years depending on location of Industries;
- 15 years tax holiday for private power generation companies;
- Facilities for repatriation of invested capital, profit & dividend;
- Exemption of tax on interest on foreign loan;
- Tax exemption on royalties, technical know how & technical assistance fees;
- Avoidance of double taxation on the basis of bilateral agreements;
- Six month multiple.
- Import Policy of Bangladesh:
There are some restrictions regarding source of procurement of goods:
- Goods from Israel or goods originating from that country shall not be importable.
- Goods shall also not be importable in the flag vessels of that country.
- All kinds of import from and export to Serbia and Montenegro, fragments of former Socialist Republic of Yugoslavia, shall be banned.
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Concessionary duty on imported capital machinery: An import duty, at the rate of 5 percent is payable on capital machinery and spares imported for initial installation. For 100 percent export oriented industries, no import duty is charged in the case of capital machinery and spares. Duties and taxes on the import of goods that are produced locally are higher than those applicable to imports of raw materials for the production of such goods.
2.1.3 Political Stability
- Political environment in Bangladesh is somewhat unstable that might affect Industry operation.
- There are complexities related to law and regulations in Bangladesh. Few years back when army was in charge in ‘Operation Clean heart’ of eliminating crime, it was reported that they broke students’ cell phones because they thought it was not required by them. This type of situation might have negative impact on parents and this might protect them to buy cell phones of their children.
2.2 Economic Analysis
Bangladesh has a very insignificant GDP and GNP. Per capita income for the people of Bangladesh is also low. But what is impressive is that it is improving over time. The current inflation rate (more than 6%) is higher than what it was in the past years. High tax imposition by the government will reduce the buying power of the consumers. Worldwide negative economic impact after September 11, 2001 is affecting Bangladesh too. Recent Iraq war is another reason for potential future sluggish situation of the economy.
2.2.1 Economic Indicators:
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GDP Growth: According to the Asian Development Bank (ADB) Bangladesh’ GDP has grown by 6.5% during 2006. Growth rate was 5.4% on an average per year from 2001 to 2005 period
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Comparison of Sectoral Growth of GDP:
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FDI Inflow and Outflow: Bangladesh's booming mobile phone industry has made a significant contribution to economic development, the current FDI inflow by this industry is $650 million to gross domestic product (GDP) and creating nearly 240,000 jobs, a recent study said. "The mobile phone industry in Bangladesh employs 237,900 people directly and indirectly. These are well-paid jobs with salaries many times the national average," said the study by the international consultancy firm Ovum. This also includes as a FDI inflow in Bangladesh.
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Inflation Rate: Annual average CPI inflation which peaked at 7.16 percent in June 06 (breaching the targeted 7.00 percent ceiling) has declined to 6.85 percent by November 06. The expected easing of global commodity prices attendant to the projected slight slowdown of the global economy in 2007 should help further easing of domestic inflation in Bangladesh. On the other hand, the political unrests, if prolonged, will significantly disrupt output, distribution and export activities; creating shortages and new inflationary pressures. On balance, annual average CPI inflation is projected to be in the 6.85- 6.95.
- Country Position in World Competitiveness Ranking:
In world’s economy perspective Bangladesh is in 110th position with a score of -1.11. Based on this report Bangladesh is in a poor position compare to other neighbor countries India, Sri Lanka and Pakistan.
In Bangladesh opening a business or an investment in several cases which are given in the following table:
Region: South Asia
Income category: Low income
Population: 141,822,276
GNI Per Capita (US$): 470.00
2.2.2 Purchasing Parity:
- Per Capita Income of Bangladesh is $250 which is very low compare to the neighboring countries. This low per capita income has an adverse impact on the purchasing power of the people.
- Since Per Capita Income & GDP growth is very low in our country therefore living cost is also lower than other developing countries.
2.2.3 Human Development:
- Employment Rate: Unemployment rate in Bangladesh quite high and it is stable in 40% for the last couple of years. The reason behind this high unemployment rate is that the governments failed to create enough job opportunities for the people.
- Life expectancy rate at birth and other health facilities was 61.5 in year 2000 and 63.5 in 2004. Other health facilities are given at the below:
2.3 Social Analysis
2.3.1 Language:
The national language of Bangladesh is Bengali. Bengali is spoken in every part of the country and among all the races of people of the country. Although there are some other languages of the native tribes of the country, but those languages are spoken only among the members of those native tribes. English is the official language of the country. It is used in the courts and other bureaucratic institutions. Nowadays English is becoming the only medium of getting higher education. English is given quite a very good importance in the primary and secondary school level too. The foreign companies which are operating in this country are not facing any difficulty in communicating with the people of this country.
2.3.2 Religion:
Around 90% people of this country are Muslims. And the rest of the population is composed of Hindus, Buddhists, Christians and some native people of other religions. As most of the people are the followers of Islam, so there is a strong Islamic sentiment. Although, the Islamic Shariyaa Law is not implemented here, though government does not allow to, invest in some of the prohibited things in Islam because of the strong Islamic sentiment of the people of this country. The investors of this country also should do anything which will attach the sentiment of the people.
2.3.3 Education:
The literacy rate of Bangladesh is not satisfactory. However, the total number of young graduates coming out of the universities every year is quite impressive. There are a good number of public and private universities in Bangladesh. And some of the universities are of the international standard. However, there are some allegations about some private universities about selling their certificates to the students for money. But the government has taken some good steps to shut those corrupted universities. The government has emphasized to create IT professionals. Moreover, Microsoft has just established their corporate office here in Bangladesh and wants to closely monitor the development of IT professionals and software experts, the technological environment might improve in the near future. So there is a scope to get cheap highly trained IT professionals.
2.3.4 Social Strata:
In Bangladesh, society is clearly clustered in to different categories along different dimensions, for example, higher middle class and lower class population in the society. The income gap is increasing among the total population. And as a result money is being concentrated into a few amounts of people. So the big domestic investments are increasing. The average per capita income is increasing.
2.4 Technological Analysis
2.4.1 Infrastructure:
As we have already discussed that the universities are providing a good number of highly trained IT professionals. The government also is emphasizing in the technical subjects by providing subsidies to the science and technology related educational institutions. Moreover, Microsoft has just established their corporate office here in Bangladesh and wants to closely monitor the development of IT professionals and software experts. So if any cell phone company invests here they will get all their IT professionals and software experts and engineers from the country at a cheap rate than many other countries. Bangladesh has a low-cost and rapidly growing IT workforce, and is keen on creating IT-related infrastructure. The availability of a substantial number of qualified and experienced young people in various branches of engineering, science and technology has opened up the scope of profitable investment in these sectors. In recent years, European and Asian electronics firms have established technical collaborations with Bangladeshi firms to produce electronics goods at highly competitive prices. This has tremendous potential for expansion. To meet the country's telecom requirements, the government has been developing and expanding the Bangladesh Telegraph and Telephone Board's systems and services. Private sector operations in rural telecommunication, paging, cellular telephones and reverie radio trucking have already been allowed.
3. PORTERS DIAMOND ANALYSIS
The competitive position of the cell phone industry is weak. Most of the firms believe the industry will continue to be successful in the future. This strong belief was based solely on one factor - the high need for communication among people. Foreign manufacturers admit problems exist and that issues such as infrastructure development, government support, raw material availability, new product development and marketing seriously need to be tackled. Manufacturers seem to accept the environment as it is. The key sources of competitive advantage and disadvantages can be seen in the following figure:
FIGURE: THE CELL PHONE INDUSTRY”S DIAMOND
Before analyzing the competitive environment we have to first realize that Bangladesh doesn’t have any production base within the country. Moreover, no domestic firm is engaged in cell phone manufacturing business. So, here, we will try to see whether Bangladesh has any competitive advantage to go for cell phone manufacturing.
The contribution of the various elements of Porter's Diamond to explaining this competitiveness is considered. The impact of future policy and industry changes on competitiveness is also evaluated and the needs of the sector identified.
3.1 Factors Endowment
3.1.1 Raw Materials:
The main raw materials needed for cell phone manufacturing are machineries, plastics, petroleum, silicon, electricity, chip, software’s, and skilled labor. Bangladesh has to buy petroleum, plastics, and chips from outside manufacturers. Although there is a possibility of petroleum extraction, the search is still continuing. As per chips are concerned, currently there is no large-scale production of computer hardware or peripherals.
Machineries are something that the manufacturers are producing for themselves according to their own needs, in their own factories. For example, Siemens AG has a city called Siemens City in Germany and Nokia has Nokia Land in Finland. They send the machineries to different production plants around the world from these factories. So, machineries are not a variable that will affect the competitive advantage as long as no domestic firm engages in cell phone manufacturing.
3.1.2 Electricity:
Electricity production in Bangladesh is very limited. Bangladeshi electricity power plants just only meet 30% of the demands of the entire country. But, for industrial production Bangladesh Govt. gives preferential treatments in the form of low charge and full time electricity facility. As FDI by the cell phone manufacturers will definitely play an important role in increasing GDP and poverty level, I believe if cell phone manufacturers establish plant in Bangladesh they will get this preferential treatment through bargaining with the government.
3.1.3 Labor Costs:
Bangladeshi labor costs have been among the lowest in the world. However, lack of skilled human resources was an important factor, which will foster new product development that is necessary for survival. Companies require highly skilled, experienced and trained people at all levels of the business. Furthermore, the success of the Bangladesh economy in banking, and garments sector has made employment unattractive in other manufacturing sectors. But, Human resources for the IT industry have been growing rapidly since the govt. declared this industry as a thrust sector. The vital statistics for this sector are:
- More than 300,000 IT professionals are engaged in the industry.
- A large number of private universities offer undergraduate and graduate degrees in computer science and engineering.
- More than 1000 private and public sector computer training institutes offer IT skill development of various levels.
3.1.4 Capital:
The availability and cost of capital are critical components of competitiveness. I found the lack of capital as an impediment to the development of the cell phone sector. If we see the profitability level of the Grameen, Aktel and Banglalink we will see that the industry average is higher than the other manufacturing sectors. If they are willing to invest in cell phone manufacturing or assembling through joint venture, merger or self-investment from the current profitability, we believe they have the chance to secure their position in the industry through acquiring a competitive edge. Moreover all major hardware and software manufacturers such as Acer, Compaq, Dell, HP, IBM, ICL-Fujitsu, Microsoft, Oracle, Sun Microsystems, Unisys and others are represented for long in Bangladesh. The cell phone manufacturers jointly with the hardware and software manufacturers can invest for assembling sets. This will help them to get access to chips, software’s and ring tones needed for cell phone production.
3.2 Demand Conditions
On the demand side, there has been a significant shift towards colorful sets in the urban areas. Here colorful means unique design plus cameras and voice recording facility. The rise in female participation rates in the labor force, the rise in dual-income families, and growth in disposable incomes are all factors that have resulted in an increased number of consumers and contributed to the rise of cell phone growth. In particular, increased numbers of younger consumers with higher disposable income in the urban areas has brought about a change in lifestyle.
Moreover, use of mobile for both individual and corporate segment is rising because of extreme price erosion and disruptive changes in technology. In recent times service providers are selling SIM cards at a throw away prices in order to increase their market share. Therefore most of the subscribers have a stock of 3 to 4 company’s SIM card. So there is a huge demand for handset is expected in the upcoming years.
3.3 Firms Strategy, Structure and Rivalry
3.3.1 Scale:
The cell phone sector is dominated by a small number of large firms, which operates over a wide range of product sectors and geographical markets. In Bangladesh Siemens have around 100 people in their corporate office. As they don’t have any manufacturing base, it is comparatively high than most other non-manufacturing companies. But, as Bangladesh does not have any production base, economies of scale should not be a concern. However, as the companies that exist have operations in almost every country in the world we can assume that economies of scale are prevailing. This is mostly true for Nokia, Motorola, Siemens, and Samsung because of the geographical areas of the world covered by these companies.
The intensity of centralization in decision making is very high for the big players in the industry, for example, Nokia, Siemens and Samsung. They have to rely on the parent company for approval for any major decisions. In terms of rivalry, the competition doesn’t seem to be that high. The companies seem to be very happy with how they are and what they got. Moreover, the main indicator of rivalry, advertisement and promotional campaigns are very low for these firms.
3.3.2 Innovation:
Innovation, in terms of product development, is the most important source of competitiveness in the cell phone industry, because of the short product life cycles and the changing taste of consumers. Siemens, for example, claims that they are coming up with 5 new technologies in each day. The expenditure in R&D is also very high by Nokia, Samsung and Motorola.
3.3.3 Gray Market Activities:
In Bangladesh cell phone smuggling has been a big threat for the industry. The Chinese sets are mainly smuggled through the Myanmar border and enters through Tachnaff region. Also some sets enter through the Indian borders to Bangladesh. Moreover, some of the retailers are also frequently visiting these countries to collect sets for their business and are successful in avoiding the taxes associated with cell phone importing. This is a big threat for the industry as the importers sets are taxed and have higher prices in the marketplace; whereas, the sets that enters through gray market activities can be sold at lower prices.
3.4 Related & Supported Industry
Related and supported industries (GrameenPhone, Aktel and various software companies etc) have a strong impact in Bangladesh and as the growth rate is very high the manufacturers can assemble their products in Bangladesh. Beside this various value added services are services are being invented and offered by the service providers in collaboration with the content providers. Most of these value added services are handset depended for example, EDGE/GPRS, Welcome Tune etc. Moreover a huge market of mobile accessories producer is developing to support the rapidly growing cell phone industry.
4. SWOT ANALYSIS
Based on the above competitive analysis we have analyzed Strengths, Weaknesses, Opportunities and Threats of the industry in the following table:
5. DECISION
Based on the overall industry analysis, we have decided to go for Greenfield investment. There are several reasons behind this decision. Firstly, there is still tremendous potential in the mobile phone sector considering the fact that less than 16 percent of the total population of 140 million uses mobile phones and the it is expected to reach around 30 to 40 million by 2007. Secondly, Bangladesh is not a country where technology is readily accessible to the population, particularly in rural areas. According to World Bank statistics, over 60% of rural Bangladeshi residents are poor, and almost half live in extreme poverty. Because of GrameenPhone’s Village Phone program majority of these poor Bangladeshis have access to the cell phone. Therefore we believe that it has become a huge market for the mobile phone manufacturers and will continue to do so as GrameenPhone is expanding. Thirdly, Bangladesh does not have any competitive advantage in cell phone manufacturing, as the factors are not competitive. Though, the quality and low cost of human resources in IT have positively influenced the country's competitiveness, it is not feasible to manufacture cell phones in Bangladesh. But, for assembling cell phones Bangladesh can be a good option, as Bangladesh government has imposed zero percent tax for all computers and chip imports. Moreover, the supporting industry of mobile phone such as service providers (GrameenPhone, Banglalink), accessories manufacturers (Anik Telecom) are very strong in Bangladesh. Finally, since there are no existing manufacturers in the market, so if we go for Greenfield investment then we can gain the first mover’s advantage.
The major reason behind not choosing export as our entry mode in the industry is the high import tax on the mobile handsets. Beside this the political instability of the country results in frequent strike in the port. Moreover the demand for mobile phone sets is so high that it might not possible to fulfill the demand through exporting handsets.
6. RECOMMENDATION
✍ Industry should be concerned about continuous product quality improvement once it has entered Bangladesh’s market.
✍ Foreign Industry should provide technological know how to the local employees.
✍ They should be quickly able to learn the local culture and local demand.
✍ Industry should be concerned about continuous product quality improvement once it has entered Bangladesh’s market.
✍ Foreign Industry should provide technological know how to the local employees.
✍ They should be quickly able to learn the local culture and local demand.
✍ Political situation should be closely observed.
✍ Locally hired employees should be provided proper training.
7. CONCLUSION
Handsets are crucial in determining the outcome of the cell phone industry and most of the handsets in our country come from the foreign sources. Therefore handset importers have to pay a huge amount of duties to the government which ultimately raise the overall price of handset. On the other hand the demand for mobile set is relatively price-elastic and the changing lifestyles of the people indicated an increase in demand for mobile phones in the mid price segment. Considering all these factors we believe that our decision for Greenfield investment in this sector is quite rational and we will be able to offer handset in the Bangladeshi market at a much lower price than the existing importers.
8. BIBLIOGRAPHY
1. http://tata.com/0_tata_worldwide/across_asia/articles/20060306_bangladesh
2. http://www.southasiabiz.com/2006/03/bangladesh_booming_cellular_ph.html
3. http://www.bangladeshinfo.com/business/features06.php
4. http://www.doingbusiness.org/EconomyRankings
5. http://www.unctad.org/templates
6. http://www.cia.gov/cia/publications/factbook/geos/in.html
7. http://www.unctad.org/en/docs/wir2005_en.pdf
8. http://web.worldbank.org/wbsite/external/datastatistics
9. http://www.weforum.org/pdf/Global_Competitiveness_Reports
10. http://www.bangladesh-bank.org/
11. http://www.boibd.org/publications.htm
12. http://www.boibd.org/bgd_invguide.pdf
13. Competing in the Global Marketplace, 4th Edition, Charles W.L. Hill
