Proposal for establishment of a bus manufacturing company in Joint Venture between Alltex

Industries Limited, Bangladesh and SC Auto, Singapore.

Introduction

This paper provides a brief summary on the Alltex Industries Limited’s proposal for establishment for a
bus manufacturing unit in Bangladesh by forming a joint venture entity with SC Auto, Singapore. Alltex
Industries Limited (Alltex) was established in 1986 as the first export oriented home textile manufacturing
unit of Bangladesh. In 1996, AIL was listed as a public limited company in Dhaka and Chittagong Stock
Exchanges of Bangladesh.

AIL is a concern of Bastu Shilpi Group which carries out business in the fields of construction, medical
services and education. The group was founded by its Chairman, Engineer Afsar Uddin Ahmad, a civil
engineer, who is known as a leading industrialist and businessmen of the country. Upon his retirement from
active business, the Group is now led by his sons, Imtiaz Uddin Ahmad Asif and Ishtiaque Uddin Ahmad
Ashik both of whom completed their education from Singapore and UK prior to joining the business in
2005 and 2012 respectively.

Project Location

Alltex proposes that the project is established in the Alltex Industrial Park where the company is able to
provide 4-5 acre land for the establishment of the project. The area is located on the Dhaka-Sylhet Highway
around 1 hour drive from the Dhaka International Airport. The project has uninterrupted power supply
through gas generators (2.5 MW) and backup power from national grid (0.5MW) as well as having
underground water supply. If this area is not found suitable, the sponsors of Alltex has other industrial land
available for the project which can also be considered. The map below provides an overview of the location
of the project:

Why Invest Bangladesh?

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Bangladesh is presently one of the most promising emerging markets in the world and have been recognized
as an attractive destination for the foreign investors. Major reasons for investing in Bangladesh as follows:

● Continuously rapid economic growth: One of the most notable indicators of Bangladesh’s rapid
economic development is its surging GDP. The GDP of Bangladesh continued to increase at 7.3%
in 2017.
● Strategic Location: Located on the border of South and South-East Asia, Bangladesh is close to
other major markets in the region. The capital Dhaka has easy access to its neighboring countries.
It is also the commercial and financial hub of Bangladesh and the largest economic centre of Eastern
South Asia. Furthermore, Bangladesh is situated on the coast of the Bay of Bengal which offers
good conditions for doing trading business within Asian and Middle Eastern markets.
● Young and skilled workforce: One of the main driving forces of Bangladesh’s economic growth
is its young workforce with its median age standing at 26.0.
● Competitive Labor costs: The average monthly wage stands at US$ 80. In fact, increasing costs
in developed countries such as China has become the main reason why main companies are moving
their manufacturing to Bangladesh.
● Openness to foreign investment: Bangladesh continues to demonstrate a welcoming attitude
towards foreign investors. The policy framework for foreign investment in Bangladesh is based on
'The Foreign Private Investment (Promotion & Protection ) Act. 1980', which ensures legal
protection to foreign investment in Bangladesh against nationalisation and expropriation. It also
guarantees non-discriminatory treatment between foreign and local investment, and repatriation of
proceeds from sales of shares and profit. Some of the facilities given to investors are as follows:
▪ Tax holiday and exemption
▪ Simplified import of raw materials and machinery
▪ Duty free import for raw materials for 100% export oriented company
▪ No restriction in repatriation of dividend or for sale of shares

The foreign direct investment has been continuously growing reaching US$ 3 billion in 2018.

● Execution of Trade Agreements: Bangladesh is also a member of the World Trade Organization.
It has also signed various international, bilateral and investment agreements. Signed memberships
and agreements include:
▪ Bay of Bengal Initiative for Multi-sectoral technical and economic cooperation
(BIMSTEC) Free Trade Area
▪ Trade Preferential System of the Organization of the Islamic Conference
▪ Asia Pacific Trade Agreement
▪ Bangladesh is the main trading partner of European Union and have been given
duty free export facilities.
▪ Bangladesh has a double taxation avoidance treaty with Singapore.

Bangladesh Bus Manufacturing Industry

Bangladesh bus manufacturing industry is quite mature and developed in terms manufacturing of the body
of the vehicle. The present practice is to import the chasis from overseas and manufacturing the body and

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other parts of the bus in Bangladesh. 90% of the country’s consumption for the body of the bus is
manufactured internally though concentration is towards the low quality market segment.

An unofficial study reveals that the market for buses is rapidly increasing with nearly 10,000 units being
registered by both the private and state run enterprises. There is 39% customs duty on foreign buses thereby
giving local bus manufacturers. As a result bus manufacturers import the chasis by paying 22% import duty
and build the body of the bus in house. The market size is estimated to be US$ 100 million.

Presently, the following companies are importing chasis and manufacturing body of the buses through their
joint venture partners or third party agents:

▪ Isuzu
▪ Ashok Leyland
▪ Tata
▪ Eicher
▪ Toyota Hino

Presently Tata and Ashok Leyland are establishing two separate plants with their respective? to produce
2500 bus and trucks annually both for the Bangladesh and export markets. Accordingly, the market both
has the requisite and technically able work force to run an operation of manufacturing of bus and/or trucks
and the demand for large-scale production.

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Joint Venture Proposals

The JV structure between Alltex and SC Auto can take several forms. The two companies may form a joint
venture special purpose vehicle (SPV) where both Alltex and SC Auto will act as shareholders and directors.
In the following paragraphs, we are pleased to put forward various alternative options for the JV. We are
of course open to other alternatives, which may be discussed to ensure the joint venture is beneficial for
both parties.

Option 1: Full fledged Manufacturing unit for local and export market

The SPV will set up a full-fledged manufacturing unit as an integral bus OEM in Bangladesh similar to that
established in Myanmar. The Bangladesh partners will provide the requisite land and building with the
Singapore partners providing machinery and technical expertise. The final product can be sold in
Bangladesh and in an overseas market where Bangladesh has a competitive advantage.

The shareholding can be set at 50:50 or pursuant to negotiations conducted between the parties.

Option 2: Import of Chasis from SC Auto and manufacturing of bus body for local and export market

If the parties wish to embark on a phased investment, initially the SPV may set up set up a manufacturing
unit to manufacture bus body with chasis and other equipments from the Singapore partners. Since the
company will only produce the body the initial investment will be reduced though the SPV will be less
competitive since the chasis will need to be exported. The Bangladesh partners will provide the requisite
land and building with the Singapore partners providing machinery and technical expertise. The final
product can be sold in Bangladesh and in an overseas market where Bangladesh has a competitive
advantage.

The shareholding can be set pursuant to negotiations conducted between the parties.

Option 3: Alltex manufacturing the body with SC Auto Chasis and selling in the market as a local
distributor in Bangladesh

Under this option, Alltex will set up its own company and become the local distributor of SC Auto in
Bangladesh. It will set up the manufacturing unit at its own cost by investing in land and building. SC Auto
may provide the machinery to Alltex on supplier’s credit thereby having guarantee of repayment, which
may be adjusted through price adjustment with import of chasis and from the sale of buses in Bangladesh.
SC Auto will also allow one or two persons to ensure the quality of the product.

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Conclusion

We are very interested to work with SC Auto to bring its products to Bangladesh. We believe that given the
market demand this will lead to a mutually beneficial venture for both companies.