MR INTERNATIONAL

Bangladesh is the world’s second largest Readymade Garment (RMG) exporter, just behind China. Country’s 81% of exports come from the RMG sector, and the textile and apparel sector contributes around 20% to Bangladesh’s GDP. It employs around 20 million people in the country and is the major driving force of the country’s economy.

Agriculture, as the case in India, has been the backbone of economy and chief source of income for the people of Bangladesh, the country made of villages. Government wants to decrease poverty by getting highest productivity from agriculture and achieve self-reliance in food production. Apart from agriculture, the country is much concerned about the growth of export division. Bangladesh have accelerated and changed her exports substantially from time to time. After Bangladesh came into being, jute and tea were the most export-oriented industries. But with the continual perils of flood, failing jute fibre prices and a considerable decline in world demand, the role of the jute sector to the country’s economy has deteriorated (Spinanger, 1986). After that, focus has been shifted to the function of production sector, especially in garment industry.

The garment industry of Bangladesh has been the key export division and a main source of foreign exchange for the last 25 years. At present, the country generates about $5 billion worth of products each year by exporting garment. The industry provides employment to about 3 million workers of whom 90% are women. Two non-market elements have performed a vital function in confirming the garment industry’s continual success; these elements are (a) quotas under Multi- Fibre Arrangement1 (MFA) in the North American market and (b) special market entry to European markets. The whole procedure is strongly related with the trend of relocation of production.

Bangladesh plans to get the middle-income country status by 2021, and RMG sector is going to play a major role in it. Bangladesh has set itself a target of achieving apparel exports worth $50 billion by 2021, and it seems to be on the right track. In the last financial year, FY18, the Export Promotion Bureau (EPB) states that Bangladesh’s overall exports grew by 5.81%, reaching $36.67 billion, owing to the growth in apparel exports. The garment exports as per EPB registered an 8.76% growth in this fiscal year, which was 1.51% higher than the set target.

Here are the main characteristics of the RMG in Bangladesh:

Quick Returns
The biggest factor being the quick returns this segment offers the investors. This is the only sector in the country that gives returns in 3 to 5 years. Also, being the second biggest apparel exporter globally, there are huge growth opportunities that the sector offers.

Moreover, China is losing ground, owing to its growing production costs, which opens an immense prospect for Bangladesh to seize more market share.

Labor Availability
The biggest strength that Bangladesh has over its competitors is its cheap and vast workforce. The minimum wage in Bangladesh is lower than that in China, Cambodia, India, and Vietnam.

Also, there are around 37 private and public universities producing textile graduates in the country every year, further adding to the skilled manpower for the segment. Moreover, favorable government policies, bank facilities (for raw material purchase), and strengthening backward linkage supporting industries create a strong case for the sector.

The Duty-free Advantage
Bangladesh has Least Developed Country (LDC) status that qualifies it for duty-free market access or reduced tariff facilities to many developed and developing nations, globally. Bangladesh enjoys duty-free access to around 52 countries, including countries in the EU, the USA, Australia, Switzerland, Japan, Turkey, Russia, Norway, New Zealand, China, South Korea, Thailand, Malaysia, and India, for the trade of many products.

Bangladesh has also signed many trade deals offering Bangladesh exports a preferential treatment, like SAARC Preferential Trading Arrangement, Asia-Pacific Trade Agreement, Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Co-operation, South Asian Free Trade Area, and the Trade Preferential System among the OIC member states.

Technology Adoption
Bangladesh has attracted many major global retail brands, and with the technology and quality compliance parameters has also seeped in Bangladesh’s apparel manufacturing systems. Moreover, Bangladeshi manufacturers and exporters have built excellent vertical capacities, which only China could offer before, which help global brands to ensure more transparency and coordination in their supply chains.

The country has henceforth adopted the most sophisticated apparel manufacturing and management technologies to cater to their international customers. This has resulted in a substantially high rate of quality achievement and technical compliance in Bangladesh’s RMG sector.

Future of Bangladesh’s RMG Sector
Bangladesh has three financial years left to match its annual apparel exports target of USD 50 Bn. This requires the sector to grow at a war footing at a rate above 60%.

The year 2016–17 showed a sluggish growth for the country, owing to the slowing down of trade with the US. The 2017–18 shows more promise, but the current trends make it difficult for Bangladesh to achieve the set target, but it is not yet impossible.

To achieve a USD 50 Bn target, an annual CAGR of 16.9% is needed, which can be achieved, provided Bangladesh keeps on capitalizing on available opportunities and its strengths.

Like other 3rd world countries Bangladesh is a developing country. Her economic development depends firstly on agriculture and secondly on industry. Although Bangladesh is not developed in industry, it has been enriched in Garment industries in the recent past years. In the field of Industrialization garment industry is a promising step. It has given the opportunity of employment to millions of unemployed, especially innumerable uneducated women of the country. It is making significant contribution in the field of our export income.

Historical background of the Garment Industry:

Once the cloth of Bangladesh achieved worldwide fame specially muslim and jamdani cloth or our country was used as the luxurious garments of the royal figures in Europe and other countries. The British rulers in India didn’t develop our cloth industries at all. Rather they destroyed them and imported cloths from England. Garment Industry Large-scale production of readymade garments (RMG) in organized factories is a relatively new phenomenon in Bangladesh. Until early sixties, individual tailors made garments as per specifications provided by individual customers who supplied the fabrics. The domestic market for readymade garment, excepting children wears and men’s knit underwear (genji) was virtually non-existent in Bangladesh until the sixties.

Since the late 1970s, the RMG industry started developing in Bangladesh primarily as an export-oriented industry although; the domestic market for RMG has been increasing fast due to increase in personal disposable income and change in life style. The sector rapidly attained high importance in terms of employment, foreign exchange earnings and its contribution to GDP.

Most importantly, the growth of RMG sector produced a group of entrepreneurs who have created a strong private sector. Of these entrepreneurs, a sizeable number is female. A woman entrepreneur established one of the oldest export-oriented garment factories, the Baishakhi Garment in 1977. Many women hold top executive positions in RMG industry.The hundred percent export-oriented RMG industry experienced phenomenal growth during the last 15 or so years. In 1978, there were only 9 export-oriented garment manufacturing units, which generated export earnings of hardly one million dollar. Some of these units were very small and produced garments for both domestic and export markets. Four such small and old units were Reaz Garments, Paris Garments, Jewel Garments and Baishakhi Garments.

Reaz Garments, the pioneer, was established in 1960 as a small tailoring outfit, named Reaz Store in DHAKA. It served only domestic markets for about 15 years. In 1973 it changed its name to M/s Reaz Garments Ltd. and expanded its operations into export market by selling 10,000 pieces of men’s shirts worth French Franc 13 million to a Paris-based firm in 1978. It was the first direct exporter of garments from Bangladesh. Desh Garments Ltd, the first non-equity joint-venture in the garment industry was established in 1979. Desh had technical and marketing collaboration with Daewoo Corporation of South Korea. It was also the first hundred percent export-oriented company. It had about 120 operators including 3 women trained in South Korea, and with these trained workers it started its production in early 1980. Another South Korean Firm, Youngones Corporation formed the first equity joint-venture garment factory with a Bangladeshi firm, Trexim Ltd. in 1980. Bangladeshi partners contributed 51% of the equity of the new firm, named Youngones Bangladesh. It exported its first consignment of padded and non-padded jackets to Sweden in December 1980.

Till the end of 1982, there were only 47 garment manufacturing units. The breakthrough occurred in 1984-85, when the number of garment factories increased to 587. The number of RMG factories shot up to around 2,900 in 1999. Bangladesh is now one of the 12 largest apparel exporters of the world, the sixth largest supplier in the US market and the fifth largest supplier of T-shirts in the EU market. The industry has grown during the 1990s roughly at the rate of 22%.

The growth of the industry in terms of number of units and employment generation is shown in table – 1 below:

[Source: BGMEA]

At present there are about 5000 garment industries in the country and 75 percent of them are in Dhaka. The rest are in Chittagong and Khulna. These Industries have employed fifty lacks of people and 85 percent of them are illiterate rural women. About 76 percent of our export earning comes from this sector.

The country’s RMG sector, to a creditable level has relieved Bangladesh from over populous unemployment burden through providing the largest employment next to agriculture, transport, and trade and industry sector. This sector has uplifted the neglected section of the population, thus radically transforming the socio-economic condition of the country. Such empowerment and employment raised awareness regarding children education, health safety, population control disaster management only so for. It is an epoch making event in the history of Bangladesh.

Motahar Hossain Rana

The RMG industry of Bangladesh has been unprecedentedly disrupted by the Covid-19, and the recovery process is quite challenging for the industry since the crisis persists. The first wave of the pandemic swamped the industry through the cancellation of orders, deferred payments/discounts by buyers, cash crunch hitting the backbone of the industry to maintain regular operations of the industry.

Thanks to our Honorable Prime Minister for her gracious and visionary steps which helped the industry to stay afloat during the peak hour of Covid-19. Extension of wage assistance loan and other vital stimulus packages for this industry, especially the easing off and enhancement of the export development fund, retention of foreign currency in a single pool for Back-to-Back import payments, extending the tenure of realization of export proceeds, and most importantly suspension of loan classification enabled us to withstand the effect of the first wave.

While we were trying to recover from the shock caused by the first wave of the pandemic during July-September of 2020, the second wave marked its beginning during the final quarter of 2020 and has worsened the situation. On this backdrop, it is difficult to project 2021 since there is a number of uncertainties around us.

Recovery from the virus, as well as the recovery of the global economy, trade and business is still ambiguous to a great extent. Based on the current trend and scenario it appears that the global apparel market may continue to experience a slowdown till May/June 2021.

Major challenges for the industry

Slowdown in export:

The second wave of Covid-19 has already forced us to experience its severity as it crippled the western world. Cities in Europe and the USA, which are the major markets of our clothing, are either under lockdown or state of emergency. Export has been on a falling trend once again during October – December 2020, after a slight recovery in August and September 2020.

RMG export in October 2020 has declined by 7.78% on a year-over-year (y-o-y) basis, while October 2019 had seen 19.79%, meaning that the growth in October 2018 and 2020 is -26.03%. Similarly, the y-o-y growth of export in November 2020 was -2.66%, but growth between November 2018 and 2020 is -14.32%.

The recently published data for December makes it more appalling as export plunged by 9.69%. This wrapped the annual export performance with an unprecedented fall of 16.94%.

Changing buying behavior and underutilization of capacity: 

With the detection of the new strain of the virus and retail sales growth in both the USA and EU been on a declining trend (i.e., -16% in November and -13% in October 2020 respectively), the situation has further aggravated at the buying end.

Though we don’t have an inclusive picture over the real-time ‘cancellation’ scenario in the industry and non-payments, but a survey on 50 factories shows that instead of cancellation buyers are following a ‘go slow’ approach in placing new orders and factories reported 30% less order, which is the picture industry-wide and getting worse day by day.

Though the first wave was more severe and cancellation during the second wave is not that rampant, but buyers are following a different approach to managing their supply chain. Instead of cancellation, we are experiencing a slowdown in order placements. This is as severely adverse as the first wave since factories are not being able to have a forecast and plan their capacity. Such an uncertainty puts the industry in an unpredictable situation and impacts in the area of –

1. Uncertainty over confirmed business, shipment, payment and WIPs
2. Allocation of capacity (utilized and unutilized)
3. Optimum management of supply chain and use of resources
4. Economic impact and business viability
   
   Unprecedented decline in price: 

While the price decline has already been a trend in the global market for decades, the COVID-19-led disruption has further escalated the situation. We have lost 2.87%-unit value in 2020, and during September-December the decline was recorded at 4.82%. Given the scenario of underutilization of capacity which already spurred cost and increased cost of compliance especially to maintain health and safety at factories, such a scenario is unsustainable.

Financial vulnerability and support needed to reconstruct the industry:

This is important to note the differences between the impact of the first wave and the second wave of COVID-19. With a slight pause, the recurrence of COVID has appeared as ‘decapitating the already dead’. Injured by the first wave the industry was already bleeding and left to such a disrupted and weakest position that severity of a fraction of the magnitude of the first wave may be more intense.

Important to note that –  

1. The industry has lost 6 billion dollars in export in FY2019-20, meaning that the capacity was seriously under-utilized.
2. Acceptation of high discounts and delayed payments to clear the canceled goods which have its impact on the financial stability of this industry (we lost 4.85% of unit value since September on a year-over-year basis)
3. The forced loan has been created against factories mostly working for bankrupted buyers
4. The industry had to pay wages and all the regular payments (essential overhead). The repayment of the wage support loan is scheduled to start from January 2021 which has a significant financial bearing on factories. An example might be helpful to understand the scenario. If a factories’ wage bill is 1 crore taka per month, then it has drawn (1X4 =) 4 crore takas as wage loan incentive for April-July, and an equal installment over 18 months would cost 22 lacs Taka per month, which is one-fifth of the usual wages of a regular month. During this crisis moment, when factories are still in a troubling situation and difficult to stay in business with regular expenses when the price is slashed up to 5% which is around 30% of the monthly wage, so the payment of 20% additional wages while operating in less capacity-efficiency thus assuming increased overhead costs per unit of product, and getting less paid of an amount equivalent to 30% of monthly wages, it is logically and mathematically not supporting the business model.
5. Moreover, since the export markets are deeply shocked by the second wave and the impact on export is apparent, to allow the factories to survive and to protect the livelihoods of millions a second stimulus package, particularly wage assistance loan would be critical for the industry for at least 4 months.

Reconstruction of the industry from the damages done by COVID-19 and protecting the livelihoods of our workers is of topmost priority for us in 2021. While we need legal protection to save our factories from forced loans caused by buyers’ bankruptcies, special measures are needed to allow factories turnaround from the damages, particularly relieving them from bad loans and outstanding liabilities for a considerable tenure so that the factories don’t suffer from suffocating borrowing limits from banks.

We are ever grateful for the supports from the government which saved the industry and the livelihood of our 4.1 million workers from a possible catastrophic consequence of the first wave. We hope that through the continued support from the government we will be able to stay in the course throughout the second wave, though it’s very difficult to foresee the severity of the impact on the global economy and the recovery process.

Vulnerability in the trading system, e.g., contractual arrangement:

COVID has exposed the vulnerability in global trade which needs to be addressed pragmatically and systematically to make trade more predictable, safer and sustainable for mankind. The weaknesses in the contractual arrangements between parties in global trade is something which has been exposed by COVID and needs to be addressed. The situations like bankruptcies of the global brands and resulting non-payments to suppliers across borders must be taken with adequate importance. Appropriate safeguard measure is also needed globally by forums like WTO or WCO or UNCTAD or ICC in collaboration with developed and developing nations to ensure due diligence in trade.

Besides, we need policy reforms to resolve insolvency so that it protects business and investment, also makes the path of new entrepreneurs’ smoother. The need for a safe exit policy has been an urge by the industry for quite some time, and the post-pandemic reconstruction of the industry may falter without an appropriate arrangement to deal with insolvencies.

Maintaining health and hygiene at workplace: 

While saving the industry from further disruption by COVID and maintaining safer operation, particularly the health and hygiene practices across the industry, would be the priority in the coming days. BGMEA has taken several steps in this area in collaboration with ILO and Maya to raise awareness among the workers at factories.

4^th IR led disruptions:

Technology has been one of the few great forces which is going to reshape the industry and the supply chain in near future, be it digital payment of wages or pursuing the path toward innovation.

The readymade garment industry has already made a significant move in the area of digital wage payments recently, and as per the visionary leadership and directives by our Honorable Prime Minister Sheikh Hasina almost all the garment workers were paid with their wages digitally (either through digital bank transfer or mobile financial outlets) during the months of the first wave of COVID. BGMEA has been actively involved with the government and promoting digital wage payment since last year, and currently, we are collaborating with an agency which is working on an interoperable digital transaction model.

Besides innovation and efficiency has been one of the priority agenda for us to ensure business sustainability, and we are working on that front to enable our members easily access technologies, in terms of building capacity through skills development as well as creating access to finance.

The increasing share of online sales vis-à-vis brick and mortars has gained further momentum due to COVID-led germophobia which may significantly change the buying behavior of the consumers. So, it is high time Bangladesh revisited its strategy regarding online marketing and sales.

LDC graduation is a matter of pride for us and it is important for us to also understand the challenges that Bangladesh has. 73% of Bangladesh’s RMG exports enjoy duty-free access as an LDC ($25 billion out of $34 billion), which will be completely waived and the margin of preference will diminish for Bangladeshi products compared to our competitor countries, especially for Vietnam since Vietnam has signed FTA with EU which will come in to force next month or in August this year.

Market access in post LDC era and sustainable graduation:

LDC graduation is a matter of pride for us and it is important for us to also understand the challenges that Bangladesh has. 73% of Bangladesh’s RMG exports enjoy duty-free access as an LDC ($25 billion out of $34 billion), which will be completely waived and the margin of preference will diminish for Bangladeshi products compared to our competitor countries, especially for Vietnam since Vietnam has signed FTA with EU which will come in to force next month or in August this year.

Furthermore, in the EU, we enjoy single transformation rules of origin under EBA at this moment, and with the graduation, Bangladesh will have 2 options – GSP Plus or Standard GSP, and both of them require double transformation rules of origin which is difficult for us and will make it difficult to fully utilize the EU GSP as we are currently enjoying. Besides, there are few criteria that a country should meet to qualify for GSP Plus, especially the ratification and compliance to 27 international conventions and the condition to comply with the 7.4% threshold will come on our way to retain preferential access to the EU market. With everything set and done, with Vietnams EUFTA coming into play, the extension of EBA (through bilateral or multilateral initiatives), and exploring FTA possibilities with preference-giving countries are important. Therefore, charting our path to sustainable graduation, effectively pursuing the matter of insolvency resolution would be on our cards.

Diversification of products within RMG as well as diversifying the export sectors will be key to Bangladesh’s sustained industrial development.

Concluding Remarks

It’s difficult to draw a prediction on 2021 since we have many uncertainties to be cleared like containing the virus and the success of the vaccines/vaccination, and how quickly the global economy responds in the post-pandemic era.

Probably we are at the end of the tunnel, but the ray is not visible yet to project the future confidently. But we certainly hope that 2021 will be a year of coming back and we expect the industry to make a turnaround sometime in mid-2021. Now we need to be more watchful and monitor the situation cautiously.

Given the fact that Bangladesh occupies only 6.8% of the global market, we have enormous potentials and strengths to contribute more to our economy in the coming days.

Diversification: 

Diversification of products within RMG as well as diversifying the export sectors will be key to Bangladesh’s sustained industrial development.

Concluding Remarks

It’s difficult to draw a prediction on 2021 since we have many uncertainties to be cleared like containing the virus and the success of the vaccines/vaccination, and how quickly the global economy responds in the post-pandemic era.

Probably we are at the end of the tunnel, but the ray is not visible yet to project the future confidently. But we certainly hope that 2021 will be a year of coming back and we expect the industry to make a turnaround sometime in mid-2021. Now we need to be more watchful and monitor the situation cautiously.

Given the fact that Bangladesh occupies only 6.8% of the global market, we have enormous potentials and strengths to contribute more to our economy in the coming days