This study focuses on the vehicle manufacturing business in Sri Lanka, with specific reference to the assembly of vehicles from imported used/second hand parts. Although this activity is considered to bring benefits to the economy in terms of low cost motor vehicles available for consumer use, youth employment and increase in technological capacity in the vehicle manufacturing sector, it is argued that there are also considerable costs involved in carrying out this operation.

Cost factors that have been analysed in the study are the potential tax revenue losses that can be incurred by the government, and the environmental and health related externalities that can arise due to the operation of old and inefficient vehicles on the road that have not been tested for safety or standards. The study further explores the possibility of Intellectual Property Rights violations due to the assembly of motor vehicles from second hand vehicles that have been purchased abroad, dismantled and then imported into the country.

In conclusion it is suggested that if the costs of the motor vehicle assembly business are too high, the government take steps to stop this operation by discouraging the import of second hand parts, through reduction of the disparity in the tax rates charged on motor vehicles and spare parts. The government could also consider issuing strict regulations on the import of second hand vehicle parts, such as those found in other countries neighbouring Sri Lanka However, if the government considers the benefits of this operation to outweigh its disadvantages; it should allow its continuation, but issue new rules to ensure the safety and standards of motor vehicles running in the country.