When new cars are cheaper, who wants a jalopy?

Brand new cars are racing past reconditioned vehicles to take a lead in market dominance in Bangladesh's growing automobile market.

Industry insiders say the share of brand new cars, sports utility vehicles (SUVs) and microbuses – in the automobile market – has increased from around 10 percent to 20 percent in a decade. 

For long, the reconditioned vehicle were the first choice of car buyers looking for affordable vehicles.

Numbers show that has changed. In the last three consecutive years, sales figures slid for reconditioned cars, while sales of brand new cars show smooth growth. 

Sale of brand new cars grew by slightly more than 58 percent in that time period. Car marketers' compiled data suggest, out of every 100 cars sold now, 19 are brand new. In 2016, the number was 12. 

A modified import policy has also help narrow down the gap in prices between brand new cars and reconditioned ones – from Japan's famous auction market for used cars. 

A shift in consumer behaviour is another factor behind the changing face of the automobile market, according to sellers. 

Reasons behind the change

Affordability is the key reason behind increasing demand for brand new cars. 

Additionally, sellers point to users' changing perceptions and attitudes plus a growing demand for hassle-free solutions as explanations for increasing demand. 

People in the market for cars now tend to look for new cars as an expanding group of people are earning more. Another strong reason is the narrowing price gap between brand new cars and reconditioned cars.

So it's an easy choice for people to prefer new ones over the older vehicles, say importers. 

"The middle class job holders, do not search for a used smart phone or computers anymore because new ones are affordable and their purchasing power has increased over the years," said Md Lutful Karim, a senior deputy manager for marketing at Navana Ltd.

Changed fiscal policy is also helping consumers to shun older cars for new ones. For the last two consecutive fiscal years, the government has lowered the allowable depreciation limit for procuring reconditioned vehicles from Japan. 

Earlier, reconditioned car importers could procure reconditioned cars at up to 45 percent depreciated value. It has now been lowered to 35 percent. 

This raised the base import value – and the persistently high duties on imports – along with value added tax, on top of the duties' added to the final price; together, this pushed up the price of reconditioned cars. 

Now the retail price of cars of up to 2,000cc is nearly a fourth higher than it was two years ago. For cars and utility vehicles with bigger engines, the hike is sharper because the duty is imposed based on engine size. 

The import duty is up to 850 percent for powerful SUVs. 

On the other hand, brand new cars are a bit cheaper now. 

The market for brand new cars has become very competitive with the official presence of more than two dozen global and regional brands in the country. 

Productions from local plants are also emerging as a factor to fuel the brand new car market. 

Mitsubishi became the market leader in SUVs, thanks to the local assembly plant of state-owned Pragati Industries. Rangs group is also locally assembling the Mitsubishi Outlander.     

The government has already exempted the imports of parts for local assembly of small cars from value added tax – which has created a difference in unit prices of Proton cars from the PHP group's assembly plant. 

Once enacted, the much-awaited national automobile policy is expected to attract a number of international brands. They are likely to join the queue to set up plants here to grab a larger share of the potential market by lowering showroom prices. 

A decade ago, government offices, some non-governmental organisations and quality-conscious corporate buyers were the main purchasers of brand-new cars and utility vehicles –mainly because of their strict procurement policy that seeks quality assurances and after-sale services. 

However, recently, an increasing number of buyers are opting for brand new cars, crossovers and SUVs. 

More than 95 percent of individual car buyers used to go to reconditioned dealerships without a second thought – around the time Navana's Lutful Karim began his career with Toyota 14 years ago. 

"Currently, a large number of individual buyers are visiting official showrooms for brand new vehicles and thus their sales are also increasing," he said. 

This is because official distributors offer guaranteed quality for the zero-mileage vehicles, a warranty and after-sale services. 

Meanwhile, in hundreds of reconditioned dealerships you have to search for a trusted importer and seller who does not hide the weaknesses of the used car.  

"You are unsure whether a seller will charge you unfairly on the curb market. Most importantly, you do not receive an official warranty for a reconditioned car," said Lutful. 

The group of buyers is now bigger than any time before. They are happy to pay a bit more to escape the pain of owning an older vehicle of unknown pedigree. 

Jannatul Khoshbu Sharmin, a senior assistant manager for sales at Valogari Limited – a new generation reconditioned car importer – has had a career in sales and marketing for both brand new and reconditioned cars. 

"Not all reconditioned cars are same though they are sold at the same price level. As a buyer, you cannot be sure that your car has not undergone too many repairs and replacements before being imported – or that there is more pending work than usual if you mean to drive the car for years," she said. 

"I know the cars we are selling and treat my customers ethically. Depending on a vehicle's condition, we charge different amounts for the same cars at our showrooms even though on paper there is no difference between them," she added.  

"That is why I used to recommend my friends and family members buy brand new cars – when I was marketing brand new Hyundai cars and SUVs, until last year. 

Lutful also said a number of his individual customers switched to brand new cars from reconditioned ones after not receiving the desired and seller-promised consistency, durability and performance. 

The car market in Bangladesh

Navana Ltd is a part of the country's legendary business house Islam Group, which brought Toyota to Bangladesh in 1964. 

The tiny market with free wide roads, until the 1960s, was solely dominated by large cars made by western automakers like Ford, General Motors, and Volkswagen. 

Toyota's entry in the market was nothing exceptional than that of the global market performance of smaller, fuel-efficient, durable Japanese cars – especially in the developing world, where customers are more cost-conscious. 

Toyota cars, sold by Navana, emerged as the top selling brand. The dominance of Toyota was strengthened in the early 1990s after the market was opened for reconditioned vehicles. 

Japan has the best sourcing ecosystem for reconditioned vehicles, and Bangladesh got enough importers and hundreds of dealerships for those reconditioned cars.  

Mainly since the early 2000s, Bangladesh began eyeing world's top brands and later imported brands from developing countries like India and Malaysia. 

Despite the entrance of over two dozen official distributors for global and regional brands in the market, Navana still dominates the market of brand-new cars, SUVs and microbuses with near one-third of the market share. 

"The market is gradually giving more of its share to brand-new cars, and the current trend suggests it will further increase," said Lutful. 

He thinks within the next five years, the local automobile market will be equally shared by brand new and reconditioned cars. 

Abdul Matlub Ahmed, chairman of Nitol-Niloy Group, told The Business Standard that manufacturing is likely to be the future of the automobile industry in Bangladesh. It will bring more changes to market dynamics. Before that, the market is growing accustomed to buying brand new cars. 

"Additionally, Bangladesh should adopt policies to welcome the emergence of electric vehicles as a futuristic solution," he said. 

His group, a long-time partner of Indian giant Tata, is also investing in assembly plants to make cars – including electric ones.