New opportunities for the garments industry
It is unfortunate that Bangladesh tends to attract international attention only when it is hit by a calamity. It was no different this time. The tragic fire at the Tazreen Fashions Ltd in Savar killed more than a hundred innocent lives. It didnâ€™t have to happen. There are many to share the blame: owners who are more interested in bottom-line profit, government agencies reluctant or unable to enforce existing safety standards and building codes, multinational companies who are looking the other way when it comes to their suppliers, etc.
More manmade tragedies like this would definitely affect the long-term prospects of the garments industry in Bangladesh. This is at a time when new opportunities are opening up for the industry that earns precious foreign exchange and employs a sizeable portion of the labour force.
After years of strong growth, Chinaâ€™s textile and apparel exports are now losing market share in key markets. In 2011, 54% of total US imports of textiles and apparel came from China, compared with 56% the previous year. This year the figure has been close to half. The main reasons are rapidly rising land and labour costs in China and the steady appreciation of the Chinese currency renminbi. The wages of rural migrants in China have increased at an average of 15% per year since 2005, while the renminbi has appreciated by over 30% against the US dollar since it was de-pegged in 2005.
The migration of low-end manufacturing, such as, textile and apparel, out of China is likely to continue in the near future. Cost alone is not the only factor driving some companies to source elsewhere. An aging population and labour shortages in some regions in China are important factors for securing other sourcing destinations. Vietnam, which has been steadily increasing its market share in recent years, looks set to be the main beneficiary of this trend. Wages are approximately half the level they are in China, while the political scene is stable.
Although Vietnam may lack Chinaâ€™s sophisticated supply-chain network, as a member of the ASEAN free-trade area, it can import raw materials such as denim and cotton duty free to be stitched together and shipped abroad. Moreover, given its close proximity to China, Vietnam is still able to benefit from existing supply-chains.
However, Vietnam will not be the only beneficiary. Poor infrastructure, especially port facilities, remains a potential bottleneck on future expansion. And while labour costs in Vietnam may be half the level they are in China, they are rising rapidly too. The textile trade is notoriously footloose. Therefore, it may not be long before suppliers look for a cheaper alternative to Vietnam.
This is where Bangladesh comes into the picture.Â A recent survey by the consulting firm McKinsey found that although Western buyers are evaluating a considerable number of sourcing options in the Far East and Southeast Asia, including Cambodia, India, and Pakistan, many of them view Bangladesh as the next hotspot.
With about $15 billion in exports in 2010, readymade garments are the countryâ€™s most important industrial sector; they represent 13 percent of the GDP and more than 75 percent of total exports. Recent surveys carried out by the consulting firm McKinsey and the accounting firm KPMG identified attractive prices as the most important reason for purchasing in Bangladesh. Price levels will remain highly competitive in the future, since significant efficiency increases will offset rising wage costs.
With 5,000 factories employing about 3.6 million workers (of a total workforce of 74.0 million), Bangladesh is clearly ahead of other Southeast Asian suppliers in terms of capacity of the readymade garments industry. It also offers satisfactory levels of quality, especially in value and entry-level midmarket products.
Besides labour cost and duty advantage, raw materials and real estate costs are also cheaper in Bangladesh. There is also no doubt that Bangladesh is benefiting from various preferential trade agreements providing tax free entry into several dozen countries.
But Bangladesh has its own challenges to overcome. Impediments to investment include an unreliable power supply, high real interest rates, corruption, and weaknesses in law and order. So what can Bangladesh do to overcome these challenges and utilise its huge potential?
First, inefficient infrastructure including transportation and energy supply is the single largest bottleneck hampering our garments industry. This issue will become even more important in the future, since buyers want to source more fashionable products with shorter lead times. The government needs to prioritise improvement in this area and start to upgrade power systems. Fortunately, a number of steps have been taken in this regard.
Second, although labour and social-compliance standards have improved over the past few years, suppliers vary greatly in their degree of compliance. Environmental compliance is just beginning to get attention. The Tazreen tragedy only highlights the importance of meeting the minimum safety codes. Vigilance on the part of the government is necessary but not enough. Individual garment owners must make sure that their facility conforms to the safety standards necessary to safeguard the life of everyone who works there.
Third, the suppliersâ€™ productivity must improve not only to mitigate the impact of rising wages but also to close gaps with other sourcing countries, such as, India and Cambodia by satisfying new customer needs for more sophisticated products. Lack of investment in new machinery and technologies and the insufficient size of the skilled workforce, particularly in middle management, is also hampering growth in this industry.
Fourth, access to raw material is crucial for clothing exporters. Lack of backward linkages and Bangladeshâ€™s dependence on imports creates sourcing risks and lengthens lead times. Compounding the problem is the volatility of raw-material prices in recent years. The development of a local sector could improve lead times.
Fifth, political stability is a prerequisite for attracting foreign investors. Political unrest, strikes, and the absence of ease of doing business are major concerns of foreign investors.
The three main stakeholders â€” the government, suppliers, and buyers â€” must work together to realise the potential of Bangladeshâ€™s readymade-garments market. The government’s top priorities for investment should be infrastructure development, maintaining political stability, reducing corruption, and providing education and trade support.
Buyers should help to increase the supply chainâ€™s efficiency and transparency and increase their support for lean operations and electronic data exchange. They should also build closer relationships with suppliers and improve their own operational execution. Their long response times, the complexity of internal procedures involving the merchandising and sourcing functions, and a large number of last-minute changes slow down the overall process.
While Bangladesh has some very promising advantages in certain dimensions in the garments industry, a number of challenges remain. Only if these challenges can be overcome, will Bangladeshâ€™s garments industry continue to prosper.
A. R. Chowdhury is the Chairman of the Department of Economics at Marquette University. He also serves as the Chief Economist for the Capital Market Consultants and was recently appointed to the Academic Advisory Council of the Chicago Federal Reserve Bank.