Sitting in a factory in Guangzhou trying to order fire doors for the factories is no fun. I can assure you it's as challenging as sitting in front of the television trying to figure out the taxes being announced in the budget. The picture painted is one of vision, resilience, and courage. Our honourable Finance Minister on June 4, 2015 announced a budget that houses dreams of a 7 percent growth, a total revenue of Taka 2,087,70 crore with 37.38 percent coming from income tax, 36.32 percent from VAT and 26.3 percent from import duty and others. The budget this time is bigger by 21 percent and has five percent of GDP projected as deficit, which amounts to Tk. 8,6330 crore.
What is being urged through this column has nothing to do with the regular reader of the daily, but it has everything to do with more than the four million workers employed in the readymade garment sector in Bangladesh. Moreover, it has everything to do with the business that gives birth to potential and prosperity on a daily basis, places Bangladesh in the global map.
The Honourable Finance Minister's vision is refreshing when it comes to hope, while this time he had no qualms admitting that till April 2015, growth in export registered a meagre 2.6 percent owing to the “sluggish growth in Euro zone, appreciation of Taka against Euro, and the ongoing process of improving labour conditions as well as of protecting labour rights in the apparel industry.” In the same breath, he has once again battled his own fears and has renewed his dream. He believes that “with prospects of positive growth in the trading partner countries and ongoing reforms in the garment industry, export will soon gather momentum.” And therefore, fuelled by his prosperity vision, he has proposed a one percent source tax on the export proceeds of the readymade garment sector along with imposing a one percent duty on import of capital machinery for the apparel industry, and a five percent duty on the fire safety equipment.
While the Minister is hopeful about the readymade garments sector, he needs to be advised on why growth won't happen this time. The sector is farthest from being a success story at this point. Instead of the $50 billion at 50 vision, the sector may need to say goodbye to growth and exporters may just need to adjust their export basket and think of intensely diversifying overnight.
So if we are to grow readymade garment industry in this country, and not trash it in the bin of failures, then a few myths will have to be challenged. They are listed below with the request of being scrutinised to justify its veracity:
1) Myth 1:
China is over:
While brands and retailers have started to source intensely from Myanmar and while Cambodia, Vietnam and India still remain as strong competitors, garment manufacturing is not moving out of China. Garment manufacturing is consolidating rather than declining. In reality, the number of garment enterprises above an annual sales turnover of $3.2 million decreased by 11.5 percent in 2014 but their combined profits climbed by 6.1 percent to $58.1 billion. The same group of manufacturers consisting of 10, 916 companies churned out 29.6 billion pieces in 2014, up 1.6 percent year on year.
2) Myth 2:
Bangladesh is the only preferred destination:
Your columnist just lost an order to Turkey, just for 10 cents a piece. Major European retailers are increasingly relying on dual sourcing policy that allows them to fast track sourcing from Turkey, which has emerged as a base for European production because of its advantages in the geographical location, raw materials production and skilled workers. Turkey also offers a decreased lead time, a quick response manufacturing model, a substantial domestic production of cotton and artificial fibres, relatively good labour conditions, and above all, a preferential customs agreement in place with EU.
3) Myth 3:
Buyers are renewing their faith in Bangladesh manufacturing:
Not true. Bangladesh readymade garment sector cannot grow if incidents of fire related accidents continue to happen. A recent reaction from a retailer based in UK prompts your columnist to write this. The retailer had production in the knit factory that was burnt to ashes a few days ago. The unit was compliant, built in steel and concrete and was a symbol of modern manufacturing in the sector. Unfortunately, fire broke out in the store, could not be controlled and once again, brought attention to the brands that source from Bangladesh, which obviously don't want their names being splurged all over international media at a point when Rana Plaza still continues to be the focus of discussion in the world market.
A few trepidations need to be listed as I travel on board Z812 to travel to Guangzhou in China, where for the next 3 days, your columnist will only try and buy over 100 fire doors for the factories. These doors are apparently going to resist fire for at least two hours and will prevent the fire from spreading to other areas and floors. These doors are supposed to put back a million pieces to the production planning, being put on hold by a retailer, which believes that fire doors and sprinklers will protect the manufacturing base in Bangladesh. In fact, your columnist is installing all these fire doors in buildings she is exiting in the next six months. While I shift to new buildings in the next 180 days, these doors will have to be put in the old buildings and be again taken off the frames, only to be transferred to the new units in no time. But, guess what? One particular retailer will not take a chance for the next 180 days and thinks that fires are going to burn their labels down in a factory that has lasted for the last 20 years without (touchwood) any major hazard. That is how shaken the faith is on the manufacturing reality of Bangladesh.
So while the honourable minister hopes that one percent source tax is not a major issue for the manufacturers, there are hundreds of factories that cannot afford to pay a dime more than what they do now. While the Honourable Finance Minister thinks that the sector is flourishing, there are hundreds of exporters who didn't have orders in May and may be struggling three months down the line. While the Honourable Minister rationalises the one percent source tax, he also needs to be kindly advised that instead of slapping tax increase on the sector, the sector needs to be nurtured back to safety with additional fund allocation to relocate the small factories to industrial parks in places like Gazariain, Munshiganj in the next three years. Instead of paying more taxes, 90 percent factories need assistance to remediate with at least Tk 3-5 crore (per factory) within the next six months and will need all the infrastructural support to relocate to new destinations.
While internationally, the G7 leaders in Bavaria have just agreed to establish a Zero Vision Fund, in essence an insurance fund to compensate victims of future disasters and improving working conditions, our Honourable Finance Minister needs to kindly be advised on the current woes of the readymade garment sector, so that he can promptly revise his decision and save the four million plus workers who bring food to at least another 20 million people in their families.
Honourable Finance Minster, the readymade garment sector is far from being the healthy adult that you think it is. In order for it to grow into a full-fledged compliant sector in the next three years, it will need you to nurse it and bridge while it limps to remediation and recovers from its image deficit soon enough to retain brands and retailers from all over the world. Paying beyond 0.3 percent as source tax will simply kill the sector. This is a prediction coming from someone within the industry and not from critics or economists who may be very disconnected from our ground reality. The $50 billion dream may well be over.
The writer is Managing Director, Mohammadi Group.