Still a lucrative apparel sourcing hub

Bangladesh's attractiveness as an apparel-sourcing destination has remained potent despite increased competition in recent years, according to a new survey of management consulting firm McKinsey & Company.

Although the 2019 Chief Procurement Officers (CPO) survey of McKinsey pointed to Bangladesh as the top global sourcing hotspot, Vietnam was close behind and was the preferred sourcing country among US executives.

The firm came up with the survey on Bangladesh after 10 years. It first published such a report in 2011, which had painted a rosy picture. In fact, all the predictions made by the McKinsey report in 2011 came true over the last decade.

This year, McKinsey & Company has conducted its flagship CPO survey titled "What's next for Bangladesh's garment industry, after a decade of growth?" among the top 10 global apparel sourcing companies over the last two months.

"Over the last decade, the garment industry in Bangladesh has experienced an unprecedented blooming," the survey report said, adding that recently, however, pandemic pressure and shifts in global markets have brought stiff challenges.

In order to meet the challenges, the sector will need to innovate, upgrade and diversify, investing especially in flexibility, sustainability, worker welfare and infrastructure, the report said.

McKinsey & Company pointed out that comparable data for global exports in 2020 has not yet been published by the World Trade Organisation (WTO).

However, data from European and US imports indicate that Vietnam likely overtook Bangladesh in 2020—pushing Bangladesh's readymade garment industry out of its position as the second-largest garment-exporting country in the world after China, it said.

Bangladesh's RMG sector remains a strong exporter to Europe's fashion industry and has grown its market share significantly over the past decade, it said.

However, this trend may not continue because a new preferential trade agreement between the European Union and Vietnam, launched in August 2020, could lead to apparel exports from Vietnam outperforming Bangladesh's.

Among the US apparel importers, Vietnam has outpaced Bangladesh's RMG industry for some time.

In 2020, Vietnamese apparel imports into the US were worth 2.5 times those from Bangladesh. As buyers from the US move sourcing out of China, Vietnam is proving to be the biggest winner.

Bangladesh's garment sector has every prospect of remaining one of the world's largest RMG manufacturers and is continuing its impressive story of growth and improvement.

For managing the growth, Bangladesh will need to rise to the challenges to compete without preferential trade access, meeting decreased demand from traditional customer markets and making a fundamental shift toward a demand-driven and more sustainable sourcing model.

Some of the international buyers the McKinsey spoke to believe the industry is not moving fast enough in this direction.

Others are more positive. They feel that given the resilience and adaptability Bangladesh's manufacturers have shown in the past, the RMG industry will be able to navigate the necessary transformation, though structural changes will be inevitable.

As Bangladesh graduates from the grouping of the least-developed nation to a developing country in the next few years, preferential access to European and other markets is up for negotiation.

Additional tariffs would be seriously disruptive for the RMG sector, but levelling the playing field with competing markets could also trigger a much-needed focus on productivity, as well as investment in digitalisation, automation and sustainability.

Some global executives are reducing sourcing from Bangladesh, as their sourcing volume reaches a tipping point in their dependency and supply-chain risk on the country (which is further heightened by the pandemic), and owing to loss of competitiveness in some product categories.

There is also an increased focus on nearshoring for greater flexibility and speed.

That said, Bangladesh's larger and more advanced suppliers may benefit from advances in flexibility, productivity, digitalisation, environmental sustainability, worker welfare, and innovation.

One sourcing executive said, "Speed is becoming more important, but only a minority of suppliers in Bangladesh understand that."

If they are to remain competitive, many suppliers will need to invest in upskilling, vertical integration, digitalisation and automation to unlock speed and transparency.

Sustainability, too, is becoming ever more important, with increasing consumer demand for environment-friendly products, and concerns about climate change and social justice.

The report also highlighted the garment sector's transformation after the massive reforms with the inspection and remediation by the Accord and Alliance, two foreign platforms for inspection of the garment factories.

Today, Bangladesh's RMG sector is a frontrunner in transparency regarding factory safety and value-chain responsibility, thanks to initiatives launched in the aftermath of disasters.

This includes the Accord on Fire and Building Safety in Bangladesh, the Alliance for Bangladesh Worker Safety, and the RMG Sustainability Council.

These measures led to the closure of hundreds of unsafe, bottom-tier factories and the scaling-up of remediation activities in many others.

These steps helped restore Bangladesh's attractiveness in the global apparel-sourcing market, leading to a decade of rapid growth.

Ten years ago, McKinsey forecast a growth of 7-9 per cent. Indeed, RMG exports from Bangladesh more than doubled, from $14.6 billion in 2011 to $33.1 billion in 2019—a compound annual growth rate of 7 per cent.

Several sourcing executives McKinsey spoke to for the report highlighted the progress that Bangladesh's RMG sector was making in diversifying and upgrading its product offerings.

For instance, there is now greater capacity to produce garments made from synthetic fibres, manufacture more complex products such as outerwear, tailored items, and lingerie, and provide new washes, prints and laser finishing.

Entry into these new segments has been supported by the changing rules of origin for preferential trade with the EU, allowing for the use of imported fabrics.

There also has been some increase in vertical integration of the supply chain. As a result, more suppliers are now able to offer lead times below the standard 90 days.

McKinsey said it is worth noting that this growth was within the forecast range of the 2011 report, a collaboration with the Bangladesh German Chamber of Commerce and Industry (BGCCI).

Over this period, Bangladesh's RMG industry increased its share of global garment exports from 4.7 per cent to 6.7 per cent.

This is within the range forecast in the report. However, it also shows that the country has not captured the full potential foreseen 10 years ago.

The value of Bangladesh's RMG exports fell by 17 per cent in the first year of the pandemic, representing revenue losses of up to $5.6 billion.

"We appreciate the report. It indeed portrays a picture of the progress that Bangladesh's RMG industry has made over the past decade," said Rubana Huq, president of the Bangladesh Garment Manufacturers and Exporters Association.

"It's greatly appreciated that McKinsey has acknowledged the recent progress of the industry and our new initiatives regarding climate change and circularity and that we have advanced the sustainability agenda."

More than 1,500 Bangladeshi companies are certified by the Global Organic Textile Standard, the second-highest in a single country, she said.

The fact that the report also makes reference to the RMG Sustainability Council and says that this has added to Bangladesh RMG sector's credibility "is reassuring, and we remain grateful for the acknowledgement".

She also came up with a few clarifications.

The report analysed the trade data of Bangladesh vis-à-vis competitor countries, particularly with that of Vietnam.

"The pace Vietnam has maintained in terms of export growth in the past 10 years is phenomenal, and we have so much to learn from their success stories."

"Yet, probably this is not the right time to assess country performances since trade, retail and manufacturing are unprecedentedly disrupted."

This may also be noted that the resilience of the RMG industry of Bangladesh is time-tested as it had faced several crossroads in the past, including child labour elimination, quota phase-out, and global recession.

"At this moment, our focus is to deal with the Covid-19-induced crisis while keeping our progress in the area of sustainability continued, and push the agenda of innovation and up-gradation forward," Huq said.

The CPO survey report was initiated in Bangladesh by Daniel Seidl, former BGCCI executive director, and Sk Tanzer Ahmed Siddique, a former senior official of the BGCCI, in 2011.

"The study has put Bangladesh on the map worldwide and provided the recognition the RMG sector of Bangladesh deserves," Seidl told The Daily Star in a WhatsApp message.