Even though it seems that the Apparel industry in Bangladesh kicked off in the late 1970s and early 1980s, it actually has its roots deeply settled in the mid-19th century, when the muslin industry flourished in the then small and important city of Dhaka. The journey from then till now has been an extensive one, and the “Made in Bangladesh” tag has slowly made its mark on the high flying retailers of the western world. The importance of the apparel industry in the economy of Bangladesh is very high.
The garments manufacturing sector earned $19 billion in the year to June 2012, one of the impoverished nation’s biggest industries. The RMG industries provide the single source of economic growth in Bangladesh’s rapidly developing economy. Exports of textiles and garments are the principal source of foreign exchange earnings. By 2002 exports of textiles, clothing, and ready-made garments (RMG) accounted for 77% of Bangladesh’s total merchandise exports. By 2013, about 4 million people, mostly women, worked in Bangladesh’s $19 billion-a-year industry, export-oriented ready-made garment (RMG) industry.
Bangladesh is second only to China, the world’s second-largest apparel exporter of western brands. Sixty percent of the export contracts of western brands are with European buyers and about forty percent with American buyers. Only 5% of textile factories are owned by foreign investors, with most of the production being controlled by local investors. SWOT Analysis To understand the nature of the industry, it is important to first understand the current state of the industry. If we dig down deep and analyze with a 360 degree view, we’ll find the following as the key indicators: Strengths
•Adequate and inexpensive supply of labor •EU GSP facilities renewed up to 2015 Weakness •Mainly produces basic products •Produces negligible quantities of raw materials •Inadequate backward linkage •Power supply is erratic •Bank interest rates are high Opportunities •Scope to go for fashion oriented high end products •Further increase of productivity, quality and design support can minimize cost and maximize profit •Can acquire RMG market share of China and India in the long run, where cost of manufacturing will be wider Threats
•Non-cooperation from US and EU can jeopardize the industry •Sudden price hike of raw materials like cotton and yarn may reduce the margins •Labor and political anarchies may result in the businesses’ shifting to other sites Nature of Investors and Financing Running a business in the RMG sector, may seem relatively easy to the naked eye, but if looked down deeply, any other investor with loads of money investing into the sector do not have a guarantee of success. One of the key advantages one can have in this business is having a good network in all sectors of the supply chain.
Knowing the right suppliers is as important as finding the right buyers. And finding the right mix of debt and equity mix is also important for success in the business. As mentioned earlier, bank interest rates for capital financing are still relatively high. Interest rates may go down preferentially for well-known clients based on their banking relationships, but for most investors, the cost of capital is quite high. Apart from banks, the leasing companies and upcoming investment banks also provide lending, but there’s still much work to be done in that sector.
Now from an investor’s perspective, not having a sound business plan in mind before investing in the capital expenditure might prove to be disastrous, as that would spell out instant doom. Any investor must be willing to take the risk of facing initial uncertainty before a sound business model is set up. As far as trade financing is concerned, there is the prevalent practice of back to back LCs being opened in our country, where a RMG manufacturer opens a backed LC for raw materials on the basis of an export order he has received. Now the rationale may seem relatively simple, take money gained from the order, and pay to the suppliers.
The need for working capital is not that exhaustive. However for companies not having proper buffer, one missed shipment, one damaged export order and one failed supply of raw material, may have serious impacts on their business. A supplier not delivering on time will result in them having to delay their shipment, or even a cancelled shipment, which will result in them having to miss out on their other payment obligations. And if they are highly debt leveraged, it will mean them seriously depleting their cash reserves, or having to borrow money at high interest rates.
Good management and a strong commercial and procurement team is a must for mitigating this problem. And it’s not just the microeconomic factors. Several other major risks as mentioned in the SWOT analysis may seriously threaten the investor’s business capabilities. Rising worker unrest in the country, mainly due to minimal wage levels and uncertain political environment is proving to be a major obstacle. Worker protests have become a common scenario nowadays, and foreign buyers are really sitting up and taking notice. Continued problem in this area may result in the business orders to be shifted to other countries.
There is also this impending issue about the EU GSP being withdrawn. Although USA has already withdrawn their GSP facilities, it did not have a major impact, as garments manufacturers were not majorly benefited under their provisions. But for EU to do the same would be major problem for the apparel industry. The margins that they gain on exporting with low duties to these countries would majorly erode their ability to supply orders at low costs, and thus Bangladesh would lose its USP of supplying low cost apparels. Even though EU has recently said that, it has no such immediate plans, but that risk is always there.
Ways Forward The government, the people, the country, everyone is being benefitted from the booming apparel industry. The export volumes in this sector have played a major part in driving up the foreign exchange reserves, and the government has some obligations to help preserve their competitive advantage. One of the foremost initiatives the government should take is to shore up the transport system of the country. The only seaport being Chittagong, all supplies from outside the city are majorly dependent on the Dhaka Chittagong National Highway.
And in all aspects, it is not in the best conditions. It is massively overburdened, and initiatives to develop it into a four lane highway are moving at snail pace. The government should also invest in modernizing the Chittagong port, to make it more effective and improve efficiency. Effort may also be placed to develop Mongla Port, as redirected traffic to that location, combined with a good communication highway in place may help drive down costs. And ofcourse the government buffer funds is a major must have.
To develop and encourage investors, the government set up funds to help investors in need especially those facing a problem situation. There’s already a fund in place where central bank lends funds to banks at LIBOR + 1. 5%, and banks in turn keep a 1% margin and lend it back to investors. This fund must be improved and strengthened further. There should also be an emergency funds for companies facing major disruptions in their processes’, like the recent Standard Group case, where their whole business was jeopardized with the burning of their factories.
From their reserves, the central bank should set up a fund which would be lent to compliant and scaled companies, whose business disruption may spell doom for thousands of families dependent on them. Finally some initiatives should be taken at government level to help find new businesses or new markets. Country to country deals could be made with new regions and yet untapped regions, which would allow our companies to export with low duties and taxes. The government should also take some PR initiatives, as recent debacles such as the Rana Plaza, Tajreen Garments and other such issues have tarnished the image of the apparel industry.
Some image building of the nation’s industry will surely help us retain our existing buyers and win new orders. The success of the apparel industry has surely put Bangladesh on the international map. The chances of seeing a “Made in Bangladesh” label in any international clothing store is now more prominent than ever before. Much work has been done, and yet much more remains. There’s immense potential in this industry, and it is up to all of us to take this forward.