Do not kill the Golden Goose

Here is a question. If there was a nuclear war what will survive the blast, the radiation and all the other nastiness? Well there is the cockroach and its various genetic allies. Beyond that it is generally acknowledged that most species including the humans will probably go the way of the dinosaur. But there are some artefacts and foods that we make will probably survive and thrive after a nuclear winter. I am, of course, talking about Twinkies, Ding Dongs, Devil Dogs and Ho Hos! All these are “food” items made by Hostess Brands and they are so full of sugar like substance, mystery creams, preservatives and other unmentionables that I will bet my last dollar on the fact that these will survive an all-out thermonuclear warfare. Why does it matter you say? Well, it matters beyond your wildest imagination. Twinkies was felled not by nuclear war but by something a lot more prosaic, um, an industrial action otherwise known in Bangladesh as a strike and not even the insane self-destructing kind known as hartal.

Here are the surface facts. Hostess Brands which makes Twinkies and other sugar laden goodies filed for bankruptcy after it could not come to an agreement with its unionized workforce. Now, some 18,600 people are unemployed and facing an uncertain future. As is my habit, I have been following the Hostess bankruptcy with some interest and out pops this little gem on the Facebook from someone I know in Bangladesh, “On the 14th, at a LIFT seminar, Shirin Akhter, the labor leader looked at me and said, “You function because we let you function in peace. That you have been able to run your factories without unions is just because we have let you do so”. Well, wondering what Shirin Akhter would do if she were at Bentonville now…” This is something Rubana Huq, the Managing Director of Mohammadi Group, wrote at around the same time Hostess Brands was filing for bankruptcy.

I know Ms. Huq and I have seen her factories and I also know a little bit about the globally competitive garment manufacturing business and the whole thing gave me a pause. I do not know Shirin Akther but I suppose I have a sense of where she is coming from. It is a sense of raw power while all around there is breakneck growth it is probably forgiveable to feel invincible. I am here to tell Ms. Akther and her friends, ‘not so fast’! I will reserve what I want to tell the factory owners for some other time. Quickly though, they could start with transparency as a very first step and share some more of the spoils.

There actually is a lot of empty hot air in Ms. Akther’s bravado. Bangladesh will probably export about US$19 billion in garments in 2013. At about 17% gross margin, it translates to about $3.23 billion for the industry and after expense the net will be closer to $1 billion if that! In the bankruptcy filing in New York, Hostess declared about $1 billion in assets and about $1.1 billion in liabilities. Its biggest unsecured creditor was its Union’s Pension fund at a whopping $944.2 million. I am not saying the Union intransigency cost 18,500 jobs but it sure contributed to the bankruptcy along with the inapt and hapless management who does not understand the competitive nature of the market and in their greed declared bonuses for themselves in the middle of the tense negotiations with the unions. What should Shirin Akther and the factory owners know? Before flexing her muscle and talking about the application of unbridled power. I think here are some lessons to be learned:

Bangladesh Garment Industry is primarily a low-end commodity business. The only reason the industry thrives is the lower labour cost component, everything else is just gloss. Vast majority of the goods made in Bangladesh are woven cut n’ sew and Jersey knit (a mass scale yarn knitting process). These are generally employed to make woven shirts, Tee shirts, sweat shirts and pants, hoodies and so on. The volume on these items can be tremendous. They sell for an average of say $20 after discount. A rule of thumb we use in the industry is that, the retail price is 8.2 times of the FOB (Free On Board price) for goods made in China mainly because of the shorter supply chain issues. From Bangladesh (this I must confess is an estimate based on unscientific research) is about 11 times the FOB. Then there is the quality premium, which remains mystically un-quantified. So, a shirt that will sell for $20 in the US will have to be made and delivered to Chittagong based shipper for about $1.80. This leaves very little margin for the factory owner to grow the business without getting loans and more loans. A highly geared (too much loan) company is just one push away from extinction. One of other things happen when you are highly geared is that you cannot say no. You end up getting business that just to keep you barely alive sans dignity and avenues to grow. A form of water-boarding torture if you will. There is no BATNA (Best Alternative To Negotiated Agreement), meaning you cannot walk away from a bad deal. We are forever tied and behave like Ghanir Bolod (Animal that turns the oil making wheel with its eyes closed), and do the same thing over and over.

Labour movement is most beneficial when it is tied to the fortune of the industry and not the politics of the country. Labour movement needs to do things to better their worker’s lives. Better security, better wages, better health care and lots of micro things as opposed to large political broadsides. In the Communist countries, I have most experience in China; there is no labour movement, period. Any sign of unrest is quashed with great vigour and ruthlessness. In places where the labour movement became a political force and king makers a la the UK, Greece, Spain and parts of old industrial US the long term costs eventually drove out the businesses to, um, places like Bangladesh. What Ms. Akther does not probably know is that garment industry is notoriously foot-loose and loyalty free. There are few middlemen in rumpled clothes who can take a whole industry down by simply finding alternate sources. They did this to North Carolina, most of Europe and now China. They are cultivating Indonesia and eyeing going back to Mexico. There is no loyalty because the buyers are short term employees (two to three years) and they want to contribute to the bottom line as best they can and move on. The buyers, however, are the guardians of all decision making data point. So, it never pays to try to bypass them. So, Ms. Akther I think you should probably talk to your factory owners and sit through the negotiations with the buyers and then evaluate your power and pull.

Then there is AFL-CIO, which is an umbrella organization of various trade unions in the US. They have launched a Solidarity program in Bangladesh. Their goal is to harmonize (read make labour costs close to parity with the US) the wages and conditions. Some of the goals are laudable and we should support them with all our might, but there is the Trojan Horse of parity. These foreign based (ah, I know I am foreigner too) organizations are superimposing themselves into the body politic and the results may very well be the demise of the industry and loss of some four million garment jobs in the country.

So, what should Bangladesh do? First of all I think there needs to be a cessation of distrust and pseudo warfare between the factory owners and the workers, organized or not. I know you are now saying, “Tsk, tsk the boy has water behind his ears”. But, I think that is the pre-condition for the mutual survival, so it is not totally farfetched. When self-interest is involved anything is possible. The way to establish trust is start to share publicly financial data, accident data and other key metrics. Also the goals of the factory owners and the workers need to be talked in manageable sessions and aligned over time. These goals cannot be and should not be divergent.

The other thing Bangladesh garment industry (factories) needs to do is create multiple BTANAs. The way to do that is to move up the quality ladder, reduce overhead (you do not need someone to hold your checkbook so can sign, or for that matter why should you yourself do that? Is it not the job of a CFO or an Accountant?), go vertical when you can by teaming up with people who are also looking for a way out of the Commodity hell.

OK, now I have done it. In one fell swoop I have managed to anger the labour movement and factory owners of Bangladesh. But, as they say, it is my opinion and I am sticking to it. There is a Golden Goose that has wandered into Bangladesh over the last 15 years, let us preserve it until we can move up the development ladder.

Unfortunately I see vested interests and no interests other than lack of knowledge sharpening their knives. Let us pull together and save the Golden Goose known as the Garment Industry in Bangladesh.

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Kayes Ahmed lives in Boulder, Colorado, USA with his three dogs. He runs a small yet global apparel and design business based in Boulder.