Challenges and prospects of Bangladesh’s main export-earning industry
By RU Mirdha
After the twin industrial disasters, the Tazreen Fashions fire and Rana Plaza building collapse, the country’s economic lifeline of Ready Made Garment (RMG) sector was struggling to revive from the image crisis.
Now, the sector is passing through a difficult period due to the political crisis. The garment makers have been facing difficulties in carrying goods from the factories to the port and from the port to the factories due to blockade and hartal.
But, the country was supposed to enjoy the benefits of three and half decades’ journey of RMG business that started in late 1980s of last century. In its long journey Bangladesh has become the second largest RMG exporter after China, grabbing 5 percent of the $450billion global RMG trade a year.
Bangladesh expects to capture 8 percent of $650 billion global RMG trade by the end of 2021 by attaining a nationally set target of exporting $50billion worth of RMG products. In the last fiscal year, the country exported garment products valued at $24.5billion.The sector employed nearly 4 million workers. The country’s banks, insurance companies and transports are heavily dependent on the RMG trade.
But, with its existing domestic challenges, some international studies are showing that Bangladesh may lose its market share to Vietnam. The East Asian country is likely to overtake Bangladesh in the global apparel export market share once the Trans-Pacific Partnership (TPP) takes shape, which is scheduled to be signed this year, according to a recent study by the British bank Standard Chartered. According to findings of a research report by Standard Chartered, the agreement is likely to benefit Vietnam’s apparel industry, while hurting South Asian competitors such as Bangladesh and Sri Lanka.
The TPP, a proposed free trade agreement, will include 12 nations, which count 40 percent of the global GDP, including Vietnam, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and the United States. The report looks at the expected impact of the TPP on Vietnam (a TPP participant), and the South Asian frontier markets of Bangladesh and Sri Lanka (non-TPP participants). In this scenario, Vietnam could overtake Bangladesh in global apparel export market share by 2024, raising its share to 11 percent from 4 percent currently. Preferential access to the US apparel market will give Vietnam an advantage over other Asian manufacturers, according to the report.
What is the change?
The beginning of the garment business in Bangladesh is very interesting. After the independence in 1971, Bangladesh had been facing a lot of challenges. One of the major challenges was the unemployment problem. People were looking after jobs but the scope for jobs was limited at that time. The government was the only major employer then.
People were also looking for opportunities. And fortunately, Bangladesh had started receiving a lot of quota of garment business. The government started distribution of quota to the entrepreneurs in an independent country. We must not forget the contribution of Noorul Quader Khan, who is called the father of the RMG trade in Bangladesh.
A retired government official, Noorul Quader Khan started a new venture of exporting garment items from Bangladesh in 1980. His first consignment was sent to a German buyer in January 1980. This was the beginning of the RMG business in Bangladesh.
Later, the sector only grew and now the country has become the second largest garment exporter after China. The sector has been contributing more than 80 percent in the national export for decades.
But, the sector’s growth was not so fine. The sector faced a lot of internal and external challenges over the years. One of the major challenges was elimination of quota system in January in 2005. Many thought that Bangladesh might not perform well after the quota elimination. But they were proved wrong as the sector has been still performing well and competing globally strongly.
Overcoming the quota system, Bangladesh has been performing quite well until the twin industrial disasters. The Tazreen Fashions fire that occurred on November 24, 2012 killed 112 workers and injured many others. Just six months later, the biggest industrial disaster of the nation took place in Savar on April 24 in 2013. The Rana Plaza collapse took the lives of 1138 workers and injured many others.
After the twin disasters, the RMG business has been facing graver challenges. The image crisis was the major problem as the western customers also started shouting against the Bangladeshi garment items in front of the stores. The Bangladesh Garment Manufacturers and Exporters Association (BGMEA), the garment makers’ platform, held the first ever The Dhaka Apparel Summit in December last year to brighten the image of the sector through disseminating a message that Bangladesh is back in the business. Only the Rana Plaza and Tazreen are not the only stories of the RMG business in Bangladesh. So many positive things are happening in Bangladesh and also in the sector that others should know them. A large number of international and national retailers, academicians, politicians, government officials, experts and researchers took place in the three day international summit.
The retailers also started coming to Bangladesh with good number of work orders after the summit. But, just after the summit the political crisis has been eating up the benefits of all struggles.
After the Rana Plaza building collapse the industry people started improving the compliance issues. The government amended the labour law in July 2013 allowing full freedom of association by the workers. The garment owners have also started allowing formation of associations by the workers at the factory level. The government formed the tripartite wage board for the garment workers. The board recommended the hike of the minimum wage to Tk 5,300 from Tk 3,000.
The garment workers’ recommendation was implemented from December of 2013. The government and the factory owners have also been working to improve the workplace safety and labour rights under the 16 Bangladesh Action Plan, provided by the US government after suspension of the GSP (Generalised System of Preferences) in June 27, 2013.
Under the Action Plan Bangladesh government amended the labour law and started appointing additional 200 factory inspectors.
So these are the major changes the sector witnessed after the Rana Plaza building collapse. Bangladesh government not only amended the labour law, but also signed the Sustainability Compact agreement with the EU committing responsible business behaviour in August in 2013.
Bangladesh has been continuing the improvement of the labour rights and workplace safety under the agreement.
Competitiveness at stake
Bangladesh’s competitiveness is really at stake now for some major internal and external challenges. Of the internal challenges, the perennial gas and power crisis have been reducing the competitiveness as the factory owners have to run the units in costly diesel run generators.
The poor infrastructures and poor port management are other two major problems. Apart from the political crisis, the sector’s competitiveness also reduced for higher cost of production.
Of the major external challenges, the allowing of GSP plus status to Pakistan by the EU is a major challenge for Bangladesh. Bangladesh started losing competitiveness in export of some particular products to the EU after the move. Bangladesh’s terry towel export to the EU declined to half since over the last two years as Pakistan started enjoying GSP plus status to the EU from January 2012.
Vietnam is really a major threat for Bangladesh. Vietnam is now in the third position in garment export to the US keeping Bangladesh at sixth. If the TPP is signed Bangladesh will be in real trouble in the US market as Vietnam will enjoy the duty benefits to the US market under the TPP agreement.
Recently, Cambodia has also been performing very well in the apparel trade globally. Still Bangladesh largely dependent on basic garment items as the products diversification is not taking place at large scale.
And the other countries, although they started recently, have been producing high-end garment products with more value addition. So, in this case also, Bangladesh has been losing its competitiveness. The suspension of the GSP by the US is a major blow to the RMG sector of Bangladesh. It has really affected the image of the country. The garment export to the US market declined by 5.18 percent during July-December period of 2014 compared with corresponding period of 2013. After the Rana Plaza building collapse, the retailer started asking questions about the improvement of compliance issues. The buyers always put pressure for squeezing prices for per unit of garment item.
Here competitiveness is losing again for appreciation of local currency against the US dollars and Euro in recent time. The exchange rate of the US dollars is now hovering around Tk 77 and Tk 78, which was nearly Tk80 even five months ago. The devaluation of currency has taken place significantly in case of Euro. The exchange rate of Euro was Tk87 last week which was Tk110 per Euro even five months ago. So, Bangladesh has been losing its competitiveness in garment trade in many ways.
National preparedness so far
The overall situation of the RMG sector needs a comprehensive effort for the improvement as the sector has been contributing the economy significantly. Since garment business is an international trade, it requires both national and external remedies to retain competitiveness in the trade. Now, the image of the sector is at stake. To overcome the crisis the government has been working hard. The government has already amended the labour law and allowed full freedom of association. The labour and employment ministry has also started recruiting additional 200 factory inspectors as per the requirement. The commerce ministry has already submitted documents of improvements to the United States Trade Representative (USTR), the chief trade negotiation body for the US government, twice for restoring the GSP to the American market.
The government also signed the Sustainability Compact Agreement with the EU. A committee comprising five diplomats and three secretaries (foreign, commerce and labour ministries) of the government has been working to monitor the improvement. The major preparedness is the completion of the preliminary inspection of the more than 2,000 garment factories via Accord and Alliance by the end of September last year. Accord is a platform of 190, mainly EU retailers and brands, and Alliance is another platform of 26 North American retailers and brands.
After the Rana Plaza building collapse, trained engineers of the both platforms started inspection of garment factories in February last year to check fire, electrical and structural faults in the factories. The engineers completed primary inspection of the factories in September last year. After inspection the engineers found that more than 98 percent factories are safe in the country. The engineers will continue the monitoring of the safety improvement for next four years, as they have suggested for corrective action plans to almost all inspected factories.
Apart from the Accord and Alliance, the government sponsored 35 teams, led by the engineers from the Bangladesh University of Engineering and Technology (BUET) to continue inspection of more than 2000 factories. The BUET engineers have been inspecting the factories espeially those which are not the members of the Accord and Alliance. The factory owners are now installing the fire doors and other safety equipments in the production units. The government has also allowed zero-duty facility on import of safety equipment in last budget so that the factory owners can install these easily to the production units.
Firms’ efficiency gains
Bangladesh improved a lot in compliance over the years, especially after the Rana Plaza building collapse for the government and factory owners’ initiatives. Now, almost all globally renowned brands and retailers have operations in Bangladesh and accept the standards of the factories. The factory owners have been diversifying the products and going to more value added items. Of the total garment exports from Bangladesh 30 percent is high-end items for upscale customers.
Implications of GSP
Although the suspension of GSP has not major impact on export of garment items to the US, it has long-term impact on export of garment from the country. Firstly, garment items did not enjoy the GSP benefit and secondly, the duty-benefit on export under the GSP from Bangladesh is for limited number of items. So, the GSP suspension is not a big issue for Bangladesh. But before suspension, Bangladesh used to export 0.54 percent or $26 million of total $5.58 billion to the US under the GSP to the US in a year.
According to a study by the commerce ministry of Bangladesh, the suspension of GSP has a major implication, for the image of the country. The other countries such as the EU where Bangladesh enjoys zero-duty benefit under the GSP scheme, might be influenced by the US decision. If it happens, Bangladesh will be in trouble. Bangladesh has been enjoying 12.50 percent duty benefit to the EU since 1971. If the EU is influenced by the US decision, Bangladesh will further lose its competitiveness in the largest trade bloc to the EU, where 60 percent or $18 billion, of the country’s total export is destined in a year. Of the amount more than $14billion included the RMG products.
However, both the garment entrepreneurs and the government have been working under the Bangladesh Action Plan to fulfill the 16 conditions provided by the US government to regain the GSP to the US markets and retain the facility to the EU markets. Bangladesh has been lobbying with the US for a long time for either reduction of duty or zero-duty on export of garment for many years, but US did not give it to Bangladesh yet. According to the BGMEA Bangladesh is required to pay 15.62 percent duty on exports to the US markets; in 2013, Bangladesh paid $828.42 million in duties to US customs to export goods worth $5.3 billion in 2013. Bangladesh is the 46th largest trading partner of the US, but in terms of duty payment, the country stands second, the BGMEA said. Although Bangladesh enjoys a zero-duty benefit from some developed economies like the EU, Canada, Japan and Australia, it needs to pay duties to the US, the BGMEA said. Bangladesh pays higher duties compared to its competitors; Vietnam pays 8.38 percent duty, Indonesia 6.3 percent and China pays 3.08 percent in duties to the US, according to the BGMEA statement.
Of the 16 conditions, the government has amended the labour law and allowed full freedom of association in the factories by the workers and signed the Sustainability Compact Agreement with the EU.
What about new destinations
When the country’s RMG products have been facing difficulties, the new destinations have been showing the rays of hopes. Export to the new destinations is on the rise due to stimulus package by the government, changes in Rules of Origin (RoO) and for other causes. Bangladesh considers all the markets as new destinations except the US, the EU and Canada. Garment exports to new destinations are increasing substantially though shipments to traditional markets have been on a downward curve.The new markets are promising mainly due to the government’s stimulus package, aggressive marketing by exporters and relaxation of the ‘rules of origin’ by some countries.
Rules of origin are the criteria that are used to define where a product was made. The origin of a product is important because it will determine how it is treated at the border of an importing country and the origin may impact the import duty payable and admissibility into the country. Apparel exports to new destinations — all markets except the EU, the US and Canada — rose 15.47 percent year-on-year to $1.87 billion in the first six months (July-December) of the current fiscal year, according to Export Promotion Bureau. The major new export destinations are Australia, Brazil, Chile, China, India, Japan, South Korea, Mexico, Russia, South Africa and Turkey. In 2008, garment exports to destinations other than the US, EU and Canada stood at $800 million; in 2013 the figure crossed $3.5 billion.
In a bid to offset any significant drop in garment export figures, the government in 2009 introduced a financial package to encourage garment manufacturers to explore new destinations. Under the scheme, the government gave 5 percent cash incentive to garment exporters in fiscal 2009-10, 4 percent in fiscal 2010-11 and 2 percent in fiscal 2011-12. The exporters are still receiving 2 percent cash incentive for exporting to the new destinations.
Transition to industry, opportunities &challenges
As China loses its competitiveness further, Bangladesh will emerge as the next RMG hot spot. With Bangladesh having developed a strong position among European and US buyers, many companies are already eager to evaluate the future potential.
However, the lure of competitive prices, available capacities, and supplier capabilities offered is being cautiously weighed against a prevailing concern for political stability, infrastructure constraints and compliance standards. If all the opportunities could be utilized properly Bangladesh will be able to achieve the target of exporting $50billion by the end of 2021. Given the track record Bangladesh has the potential to far exceed the target of $50 billion by 2021.
Though somewhat puzzling, but Bangladesh’s growth potential has been recognized by many reputed analyst across globe. Goldman Sachs included Bangladesh in the ‘Next 11’ emerging countries to watch following BRIC (Brazil, Russia, India, and China) and JP Morgan lists Bangladesh among its ‘Frontier Five’ emerging economies in which it is worth investing. Recent publication of the globally renowned consulting firm McKinsey & Company said ‘Bangladesh’s ready-made garments landscape: The challenge of growth’ eloquently sums out Bangladesh’s RMG growth formula, which builds on the country’s strong starting position and the increasing demand of international buyers. This report provides an overview of the rapid growth being seen in Bangladesh’s RMG industry and then describes the main hurdles that exist for buyers when it comes to sourcing in Bangladesh. The final section of the report details what the three core stakeholders government, suppliers, and buyers – can do to overcome the challenges of growth in Bangladesh’s sourcing market. Extracts from the case study may be summed up and recommendations made as follows.
Costs in China and other key sourcing markets have increased significantly. This is leading buyers to question their current sourcing strategies, resulting in expansion of global direct sourcing and footprint revisions being the current key strategic focus areas. According to David Hasanat, managing director of a leading garment group, Viyellatex Group, a few of the transformational changes that the industry would have to make to sustain growth and take an increasing market share of the industry has to go up the curve to:
- Move from transactional relationships with buyers to more Strategic Partnership will evolve. RMG Manufacturers increasingly will be required to take on more activities of the supply chain.
- Development and production of textiles and apparel, combined with intelligent logistic and service concepts will be a key to global leadership. It can reverse the current commoditisation trends by offering high value solutions to buyers.
- A radical move towards rapid customised manufacturing in one of the most demand-volatile sectors through flexibility and integration of cost effective and sustainable processes from fabric processing through to customer delivery. Customer ultimately is only interested in total solution.
- Overall integration and organisation of all individual processes and technologies into a highly efficient and flexible manufacturing shop floor.
- Working conditions and benefits must improve as the industry matures. In the long-run, this would be the best defense against unionized labor unrest. Investment in worker training, motivational tools and in improved work place conditions and bonus schemes would increasingly be the tools used for enhance productivity.
Bangladesh is a country of opportunity. The resilience of the entrepreneurs is laudable. If the country can overcome the political crisis, the RMG export will just double in next seven years.
