The future of RMG trade
Bangladesh’s garment exports increased from USD 6.8 billion in 2005 to USD 19.9 billion in 2012, recording a compounded annual growth rate (CAGR) of 16.6 percent. The remarkable success of readymade garment exports from Bangladesh over the last 15 years has, despite varied domestic and global challenges, not only surpassed the most optimistic forecast, it has also made us confident to think of big gains in the future. Today apparel export stands at USD 24 billion and it seems this labour-intensive industry is set to exceed the USD 50 billion mark within the next 7 years.
The overall impact of readymade garment exports is certainly one of the most significant social and economic developments in contemporary Bangladesh. With over five million workers (60 percent women) employed in semi-skilled and skilled jobs in producing garments for exports, the development of the apparel export industry has had far-reaching implications for the society and economy. Its contribution to women empowerment is well recognised globally and is the subject of numerous studies. Micro-credit initiatives and larger participation of women in readymade garments manufacturing are two major contributing factors in this success for economic and social empowerment of poor women.
Opportunities and 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 are being cautiously weighed against a prevailing concern for political stability, infrastructure constraints and compliance standards.
I strongly believe that we have massive opportunities to be a global leader in the export of garments. This can in turn lead to significant development and production of textile and ancillary support industries. Given the track record along with the CAGR growth rate of 14 percent, Bangladesh has the potential to far exceed the target of USD 50 billion by 2021. Though somewhat puzzling, Bangladesh's growth potential has been recognised by many reputed analysts across the globe. Goldman Sachs includes Bangladesh in the "Next 11" emerging countries to watch for along with the BRIC countries (Brazil, Russia, India, and China) and JP Morgan lists Bangladesh among its "Frontier Five" emerging economies worth investing in.
The recently published case study by McKinsey & Company, "Bangladesh's ready-made garments landscape: The challenge of growth," eloquently sums up 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 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. It is a report that I would encourage all the actors in the industry to deliberate and reach consensus on to drive the growth agenda.
|STATUS OF RMG MANUFACTURING FACILITIES|
|as of July 2014|
|Inspection completed for factories||282||834||604||1,720|
|Referred to review panel||1||23||14||38|
|SOURCE: TECHNICAL PROGRESS REPORT ON SUSTAINABILITY COMPACT-JULY 8, 2014,EU *NATIONAL TRIPARTITE PLAN OF ACTION|
To highlight a few extracts from the case study and recommendations, the following are worth pondering over
Volatility of raw materials prices has spurred a decline in gross margins and created a general environment of insecurity among buyers.
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.
Although the European and US apparel markets have regained much of their sales following the slump brought on by the most recent global financial downturn, market saturation, consumer price sensitivity, and ongoing economic insecurity continue to put pressure on top-line results.
While European and US buyers dominated by brand players will continue to govern the emergence of regional markets, players will emerge as a force to reckon with and will provide a level playing field traditional exporters.
Bangladesh will benefit in the battle for capacities that is on the horizon.
Hitherto, Bangladeshi exporters have focused on growth based on their two most important advantages - price and capacity. They remained content being providers of satisfactory quality levels especially in value and entry level mid-market products. Overall though, they still lag in acceptable speed to market, compliance standards and a professional management pool.
Availability of large pool of cheap labour and entrepreneurial spirits of Bangladeshi businessmen are two main components of providing large capacity and price competitive offerings to international sourcing market. Of late, buyers have shown increasing discomfort regarding Bangladesh's labour relationships and have threatened to shift to competing sourcing markets. However, Bangladesh is a very homogenous society and as such, ethnic tensions within the labour force are un-heard off, whereas, most of our competitors' labour force is made of multi-cultural segments and fraught with ethnic tensions. This is a major challenge and is the source of labour tensions and production disruptions.
As we all know the future is all about the knowledge economy and despite the highly labour intensive nature of garments industry the desired efficiencies can't be achieved without a large pool of professional management staff. As a matter of fact, our skilled and semi-skilled workers have achieved a great degree of productivity and efficiency compared to what the management staffs were expected to achieve. For a long time, the entrepreneurs have accepted untold pains and financial losses but they have miserably failed to develop a long- term solution. For instance, a quick fix was to hire expatriates to do the job. Unfortunately the quick fix has turned out to be a major drain to earning retention for the nation. It is estimated that the industry remits USD 4 billion a year to expatriates out of a total export earnings of USD 30 billion while the promoters retain a total of USD 1.5 billion. While it's a big disadvantage to exporter profitability, in my opinion, it is also a low hanging fruit as we do produce a large number of business and engineering graduates. All that we need to do is create an enabling environment for them to be trained, motivated and grow to be an inspirational leadership within the industry. Compensation is generally the least of our problems as demonstrated by the quantum of expat payment that the industry makes each year.
Bangladesh faces many hurdles in growing its garments industry. Unfortunately, many of them are peculiar to global standards. On the other hand, it has evolved to be extremely resilient to peculiarities such as longterm political violence, shutdown of transport network and businesses creating havoc in the entire supply chain.
There were uncertainties after the tragic Rana Plaza disaster. No one knew how the international buyers would respond. Gloomy predictions of large scale exodus of orders to alternative sourcing markets were made by many pundits and industry players. Bangladesh's poor workplace safety was the only news coming out of Bangladesh. Bangladeshi garment exporters were facing uncertain times. After the obvious dip in export post-Rana Plaza, the export rebounded to its normal growth trajectory. The Bangladesh Garment Buying House Association has reported that orders from "compliant" factories are rising by 15-20 percent. The US Fashion Industry Association has just released a survey of brands and retailers detailing that 76.9 percent of those surveyed currently source from Bangladesh, with 60 percent anticipating that they will "somewhat increase" from Bangladesh in the "next two years." It's another proof of how resilient the industry has turned out to be.
Another noteworthy development has been the positive attitude of factory owners in cooperating with various government agencies, international organisations and buyer-led initiatives to provide better oversight, governance and compliance on workplace safety and labour matters. Between the Accord on Fire and Building Safety in Bangladesh, the Alliance for Bangladesh Worker Safety and the EU-ILO-Bangladesh Global Sustainability Compact, there is now significant focus on factory safety conditions, including structural integrity and fire safety protections than ever before in the past. It seems Bangladesh is set to make the best of a bad situation.
Looking forward, I am confident that Bangladesh will exceed the target of USD 50 billion with its current momentum. However, what I hope is that it can stand up to tap the potential for the quantum leap for USD 100 billion. Needless to say, it will require the continued investment in the sector both by the entrepreneurs of large and medium exporters as well as the financial sector. Creation of enabling infrastructural facilities will be an absolute necessity. As mentioned earlier, the key will be development of management staff for leadership and innovation. Few of the transformational changes that the industry would have to make to sustain growth and take an increasing market share are :
Move from transactional relationships with buyers to more strategic partnership. 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 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. the 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 defence against unionised labour 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.
The writer is the managing director of the Viyellatex Group