Syed Ferhat Anwar
On April 24, 2013, the Global Apparel Industry was shaken by a shockwave created in Bangladesh when an eight storied commercial building (Rana Plaza) collapsed killing more than 1100 dedicated work force who made garments to clothe thousands in the world. The sector contributes to almost 80% of GDP, employs around 4 million workers and is the second largest exporter of readymade garments in the world. The world ½ s focus shifted to Bangladesh, perhaps since her independence in 1971, this was the first time that the media was mentioning Bangladesh across the globe. Many Pundits at home and abroad were forecasting a serious impact on the RMG sector which in the recent past had seen several such incidents including the one in Tazreen Garments on November 24, 2012 where 117 people had died. These two incidents in a span of less than six months resulted in formation of global monitoring bodies to assess the status in Bangladesh at the ground level. It was envisaged that the majority of these sweat shops were not safe and thus a storm was looming in the horizon for Bangladesh.
In April of 2012, the world ½ s leading strategy consulting firm McKinsey & Co. published ½ Bangladesh ½ s Ready Made Garments Landscape: The Challenge of Growth ½ . McKinsey made a forecast that Bangladesh RMG could reach $30bn by 2015 and $50bn by 2021 and noted ½ While China is starting to lose its attractiveness in this realm, the sourcing caravan is moving on to the next hot spot. With Bangladesh having developed a strong position amongst European and US buyers, many companies are already eager to evaluate the future potential. ½ The big question since the Rana Plaza accident was – Can Bangladesh steer this vast ocean going vessel in such a short time to be able to reach this destination?
In the aftermath of Rana Plaza, in the latest report of Apparel CPO Survey 2013, McKinsey reiterated that the RMG sector of Bangladesh still held a competitive position. In addition, several other reports also echoed similar opinion. This time, all these reports showcased certain facts that indicated that the sector was not only trying hard to maintain the required global standards, but in fact, in some cases, it was far exceeding the standards set by the competing countries. Thus, the report suggests that Bangladesh is likely to be the best destination that has the ability to take away some of the share presently held by China. However, they are likely to face severe competition from the neighborhood. This is portrayed from the inspection report that is presented in table 1 below.
Table 1: Status of RMG Manufacturing Facilities as of July, 2014 |
||||
NTPA |
Accord |
Alliance |
Total |
|
Total Factories |
1500 |
1400 |
608 |
3508 |
Inspection Completed for Factories |
282 |
834 |
604 |
1720 |
Referred to Review Panel |
1 |
23 |
14 |
38 |
Partially Closed |
0 |
3 |
2 |
5 |
Closed |
2 |
12 |
3 |
17 |
Decision Pending |
0 |
1 |
0 |
1 |
Allowed Operation |
0 |
6 |
9 |
15 |
Source: Technical Progress Report on sustainability Compact-July 08, 2014, EU
Thus, in general terms, one may conclude that Bangladesh will continue to be a destination for providing quality and ethical clothing to the world. The question is ½ can we reach $50 billion by our 50th birthday as envisioned.
The overall performance of the RMG exports in the last one year compared to the previous years has not been that different (Figure 1). It is apparent that the growth rate has been around 9% over the previous year which is slightly lower than the earlier five years average of around 12%. This reduction has been contributed to several factors including image smearing due to Rana Plaza, political turmoil, energy crises, physical distribution, and discriminatory treatment by some major global buyers. Forecasts indicate that the total exports are likely to reach around $27 billion by the end of 2014.
Figure 1: Growth Trend and Value of Apparel Exports from Bangladesh by June 2014 (in Million US $)
Source: Export Promotion Bureau (Compiled by BGMEA)
Based on the trend analysis and taking into consideration that the average growth rate for exports hovers around the 9% mark, the projection for 2021 stands at around US $45 billion. While the same for 10% average growth results in approximately US $48 billion. Thus, one can safely suggest that the sector does not need to do much to reach the goal of $50 billion on the 50th birthday of the country. It is apparent therefore that the sector must take precaution for not making any blunder that may result in dispiriting the brands to stay in Bangladesh. At the same time Bangladesh will have to try and ensure that the very important macro environmental factors such as power and political stability are maintained.
The above simple analysis indicates that perhaps Bangladesh is capable of achieving much more than the targeted figure set for the sector and projected by McKinsey & Co. Let us focus on some basic data and assess what might be achievable. Table 2 depicts some information on competitive scenario of some major exporting countries. The table suggests that Bangladesh is lagging behind in some of the areas and is clearly capable of making substantial improvement on all these areas within the time frame of our study. However, it also shows that India in particular has a superior advantage of grabbing share from China while Myanmar in particular is strategically poised having unchartered waters for China to make a move and shift. In addition, countries like Cambodia and Vietnam are also ready and capable of taking a portion of the cake. Last but not the least, starting from some of the African nations to even some of the developed nations with slow economic growth are part of the race to grab a portion of the large chunk that China controls. Thus the next question pertaining to maintaining of the target set is – Can Bangladesh have a sustainable growth under the prevalent competitive scenario?
Table 2: Comparison of Competitive Factors of Some Major Apparel Producing Countries |
|||||||
Bangladesh |
Myanmar |
Cambodia |
Pakistan |
India |
Vietnam |
Source |
|
Wages (US $/month) |
68 |
55 |
80 |
79 |
65-143 |
89-126 |
ILO |
Productivity (%) |
77 |
N/A |
68 |
88 |
92 |
90 |
CIA |
Bank Interest Rate (%) |
16-18 |
N/A |
13 |
13.5 |
10.6 |
13.5 |
WB |
Container export (US $) |
1025 |
N/A |
755 |
660 |
1120 |
610 |
WB |
Container import (US $) |
1430 |
N/A |
900 |
705 |
1200 |
600 |
WB |
Capacity Utilization (%) |
70 |
67 |
65 |
80 |
65 |
88 |
CIA |
Outsource Destination (%) |
52 |
31 |
28 |
14 |
31 |
48 |
Mckinsey |
Land price (Base 10) |
9 |
3 |
4 |
7 |
5 |
5 |
Other1 |
Sector Perception (Rate) |
AA |
BB |
A |
BB |
AA |
AA |
Other1 |
Trade Prospect (Rank) |
48 |
40 |
N/A |
44 |
8 |
52 |
HSBC |
Entrepreneurship Ranking |
70 |
120 |
95 |
49 |
10 |
42 |
Bloom |
Work Force Exports (US $) |
16 |
N/A |
N/A |
15 |
71 |
11 |
WB |
Economy Size 2050 Rank |
28 |
89 |
77 |
31 |
3 |
41 |
Other2 |
Value Added Products (%) |
10 |
N/A |
15 |
17 |
25 |
32 |
Other1 |
|
Based on the mini comparison, the scenario indicates that Bangladesh Apparel Sector is in reality at a cross road and thus suggesting that the target is necessarily easy to achieve perhaps may become a suicidal decision as a result of complacency. In addition, if one ignores India or Myanmar, one may also fail to transform the threats into opportunity. It requires to be mentioned that the above picture is only a very small portion of the vast market, since some of the emerging production centers and global trends are not considered. However, this will provide us some food for thought; let us thus assess the competitive scenario and create a path for prospect. It requires mention that compliance and maintaining a safe workplace is a prerequisite, not an option.
Bangladesh has a strategic advantage in terms of wages, however, India and Myanmar are breathing over the shoulder. One must clearly understand that price is the deciding factor for selecting sourcing destination. This is truer when one observes that the purchasing intent for consumer goods is falling in major destination (Figure 2) and commodity such as apparel is considered highly price elastic. Lest we get overshadowed by price alone, we should be reminded that fashion still dominates the brand purse and supersedes generics.
Figure 2: Declining Consumer Private Consumption (Europe)
India, Myanmar and Cambodia in particular (within our study framework) have enough capacity to build their industry even further. Bangladesh should consider concentrating on productivity and capacity utilization to start with. Productivity increase by 10 percent over a period of next 6-7 years will result in a net increase of US $5.5 billion on top of the predicted US $48 billion. In addition, capacity enhancement by lower tier manufacturing units will add another US $1.5 billion. Thus, concentrating on these two should be able to push the exports to US $55 billion. The above scenario can also help in increasing the wage of the workers by at least 20% by 2021.
The interest rate decline at par with the rest of the countries can directly be transferred as wages to the workers. Thus, this alone can contribute to at least 9% increase in the wages (on annual basis), considering that almost 70% of costs are attributed to raw material and supplies which are mostly imported. This can further add to enhancement of productivity through utilizing the resources for higher skills and professional workforce. This could further add another US $2-5 billion by 2021.
India is strategically poised to attract US interest to counter Chinese supremacy, while China is likely to use Myanmar as a strategic hub for cost minimization. It is here that Bangladesh must play her cards with due diligence. It is essential that Bangladesh tries to look for Myanmar not only as a joint venture partner but also as a haven for reallocation. We must understand that reallocation costs for Bangladesh manufacturers (US $ 0.5 million for each factory) is going to be extremely expensive and this will seriously affect their competitive advantage at the lower end of product pyramid. On the other hand, Joint Venture accompanied by reallocation possibilities in Myanmar will not only help them continue with the business but more importantly, will be the first step towards moving towards an greater value added alternative compared to being a mere contract manufacturer. Also, this will cut down import costs from China for supplies and raw materials. This strategic move with Myanmar and China can actually result in geometric growth. Bangladesh should be able to undertake such initiative within five years and start earning by our 50th birthday.
Bangladesh should start working on design of fabric which takes away a substantial portion of competitive advantage while contributing towards value addition. Bangladesh must set up such centers focusing on not just collection of fashion apparel and fabric from various destinations but be able to actually produce fabrics and at the same time participate in setting fashion trends at both at the top as well as bottom of the pyramid. This can easily enhance returns between 5-10% in the immediate future.
Bangladesh is today considered one of the power houses in apparel sector, in addition, Bangladesh is also well known for her competitive work force and large youth workforce that are trainable. Bangladesh can further take advantage of the above two through setting up of Bangladesh Export Processing Zones in selected countries. One may think of Myanmar as the starting point because of geographic proximity and strategic alliance with China; however, the major production hub should be near the major markets with a view to further cut costs in the form of freight and time. This is a multidimensional strategy and requires a separate elaboration.
The workforce picture for the RMG sector revealed three very important findings, first, the Bangladesh based manufacturing units employ a large number of expatriates at managerial level who have in the past diligently contributed towards building our sector. However, it is time now to also look for local talents to ensure that they stay within our hubs rather than become a competition. Second, the major buyers ½ representatives for Bangladesh are invariably representatives of competing countries. This is another reason why Bangladesh is so frequently loosing orders to the competition. Last, but not the least, Bangladesh is losing her workforce to competing countries and they have started to look for avenues outside Bangladesh.
Factory classification has become essential based on reports submitted by inspection teams. It is clear that a large number of factories are involved as subcontracting agents and are capable of producing quality goods but do not and in many ways are unable to qualify under the definitional parameter set by the government and the international agencies. The factories falling at the bottom of the pyramid may be placed under the umbrella of SME and at the same time brought under formal clusters within the framework of Bangladesh Small and Cottage Industries (BSCIC) estates. This is part of the sustainability strategy.
The sector must also classify factories by category of products and value addition. This will help in identifying the Strengths and Weaknesses of each of the category and hence develop a prospective market profile. For example, there is no reason for us to believe that the market only exists at the top when majority of the population live at the bottom of the pyramid (BOP). Furthermore, with Bangladesh having a clear competitive advantage in terms of price, one should start looking at the prospect at the bottom of the pyramid and match it with our SME clusters.
Bangladesh must continue to work on improving infrastructure, ensuring power, ensuring compliance, and maintaining a world class working environment. Lest we forget, Bangladesh houses some of the best factories in the world and in fact can set example for all global manufacturers.
In conclusion, it can be stated that the opportunities for Bangladesh even under severe economic, strategic and geopolitical challenges are immense. The ½ Made in Bangladesh ½ tag has made inroads at the highest echelon of global society. Thus, US $50 billion by our 50th birthday in fact is not a difficult target at all. The above analysis shows that we should be able to achieve US $60 billion within the time frame if we work on areas such as productivity, capacity utilization, categorization of manufacturing units, creating new markets at BOP, creation and placement of home grown talents at the decision level, etc.
It is also time for us to focus on the second most important finding of McKenzie, strengthen trade linkages through first, looking at Joint Ventures with major buyers and also signing bilateral and also multilateral agreements with nations. This will ensure not only a sustainable result but also help us in creation of a multinational ½ Made in Bangladesh ½ Brand focusing at the top as we are doing today and create new brands for the bottom.
Syed Ferhat Anwar-Professor, Institute of Business Administration, University of Dhaka
Source: The article was published in the official souvenir of Dhaka Apparel Summit, organized by BGMEA held on 7th ½ 9th December, 2014.