B a n g l a d e s h

The Dazzl ing Delta Your Growth Strategy in Asia

Bangladesh’s growth story is one that few saw coming. In the face of

persistent challenges, the country’s stable economic growth has provided

the bedrock for a prosperous future.

With a forecasted growth rate that’s only second to India, Bangladesh looks

to stride towards middle income country status by 2021, banking on the

shoulders of both established core industries such as the RMG sector as

well as newer, rapidly growing sectors such as the ITES industry. The

growing middle class, with its big appetite for consumerism, also has a large

role to play in this future growth.

2

The Bangladesh Growth Story ………………………………………………………………………………... Page 3

Shifting Sands of the Apparel Industry ………………………………………………….……………….. Page 10

Powering Bangladesh’s Future ……………………………………………………………....……………… Page 14

Is Footwear Bangladesh’s Next Export Tiger? ………………………………………………………… Page 18

Pharmaceutical Industry Remains a Key Thrust Sector ………………………….………………. Page 22

IT and ITES Growth Key to Achieving Digital Bangladesh ………………………..……………… Page 26

Global Brands Already on the Bandwagon ……………………………………………………………… Page 30

Investing in Bangladesh …………………………………………………………………………………………… Page 31

3

Shifting Sands of

the Apparel Industry

Bangladesh’s economy has held strong with stable economic growth

throughout the last decade. In the next ten years, it is set to perform even

better. The country is being buoyed by brisk domestic demand and

supported by a booming RMG sector, flourishing remittance flow, record

high foreign currency reserve and international investors’ interest in FDIs.

Geographic proximity to emerging Asian powerhouses - India and China - will

further add impetus to the country’s drive towards middle income status.

173 Billion USD

Annual GDP (2014)

6.7% GDP Growth Rate

ADB Forecast, FY 15-16

31.2 Billion USD

Total Exports, FY 14-15

25.5 Billion USD

RMG Exports, FY 14-15

27 Billion USD FOREX Reserve, October 2015

12.8 Billion USD

Remittance Revenue, FY 14-15

1.53 Billion USD

FDI, FY 14-15

17% Debt to GDP Ratio

FY 14-15

4

While many of its competitors have faltered and lost their ways, Bangladesh’s economy has held strong in the last decade with GDP growing by 6.1% per annum as of 2014. This growth is impressive, taking into account frequent instances of natural calamities and political unrest in this period which have at times hindered economic activity.

Inflation has remained stable over 2015 at 6.21% (Source: Bangladesh Bank) as the country has enjoyed a relatively stable political situation this year. Reining of inflation is attributed to declining growth of non-food inflation e.g. Rent, which has contributed to lower inflationary pressure. Bangladesh Bank has also adopted a tight monetary policy which has further led to lower inflation.

This fiscal year, the Asian Development Bank is particularly bullish about Bangladesh’s economic

prospects. The ADB has upgraded its FY 2015-16 GDP growth forecast for Bangladesh from 6.5% to

6.7%. This is notable as for the rest of the Asia Pacific (except Vietnam and Fiji) the ADB has

downgraded its initial forecasts.

7.56

6.83

6.39

6.31

6.15

5.51

4.81

4.60

4.59

4.10

0.92

India Bangladesh Philippines China Vietnam Indonesia Pakistan Egypt Nigeria Nepal Brazil

AVERAGE GDP GROWTH (%)- 2015-2020

SOURCE: IMF

8.2%6.8% 6.7% 6.3% 6.20% 5.6% 5.0%

4.1% 3.5% 3.4%

Indi

a

Chin

a

Ban

glad

esh

Phili

ppin

es

Asi

a A

vera

ge

Mal

aysi

a

Indo

nes

ia

Thai

land

Sou

th K

orea

Sin

gapo

re

ADB FORECAST OF GDP GROWTH RATE (%),

FY 2015-16

3.3

11.2

7.7

3

9.6

5.86

13

9

3.2

9.8

6

Export Import Remittance Agriculture Industry Service

Sectors

SECTORAL GROWTH RATE IN FY 2014-2015 VS

ADB's FORECASTS FOR FY 2015-2016

FY 2015 FY 2016

SOURCE: ADB

SOURCE: ADB

5

Bangladesh has performed well compared to other comparable countries and sovereign ratings by both

Moody’s and S&P are testament to the economy’s resilience. The ratings are driven by a healthy

economic outlook, progress on policy reform and limited vulnerability to fiscal and external funding

stress. Local currency country risk ceiling is affirmed at Baa3, Long term foreign currency bond B2 and

Bank Deposit ceiling at B1.

Exports have been growing based on the blossoming RMG sector which has clocked USD 25.49 billion

in FY 14-15. Remittance revenues has grown to the tune of USD 12.8 Billion in 2015, albeit at a slower

pace. However, import growth has declined at a relatively higher rate which contributed to positive

current account balance.

Bangladesh is experiencing record high forex reserve position, currently standing at USD 27 billion as

of October 2015. The current reserve can comfortably cover 7 months of country’s import. This

continued growth in Forex reserve is attributable to steadily improving RMG export, the stable exchange

rate and satisfactory growth in remittance earnings.

Manpower export is also set to improve as the new opportunities are opening up in markets such as

Japan and Thailand. Malaysia also continues to have high demand for Bangladeshi workers.

Government has been investing heavily in infrastructure developments, especially in the field of power

generation. Since 2009, power generation capacity has more than doubled, increasing from 4,942 MW

to 11,877 MW in 2015, with 68% of the population having access to electricity. Over the next five years,

the government plans to increase power generation by 12,853 MW. The private sector will provide 40%

of this increased electricity.

The private sector is mainly involved in the power industry through rental power plants. Entrepreneurs

have established quick rental power generation plants which have been regularly supplying to the

national grid, contributing to lower electricity shortage.

Government has been working to improve efficiency of the Chittagong Port which has the potential of

doubling its capacity. In fact, in May 2015, the port handled 185, 684 TEU (twenty foot equivalent

units) of import and export, the highest in the port’s 38-year history.

There also are long term plans of establishing a deep sea port in Sonadia and both Chinese and Indian

investors have expressed interest in developing the sea port. Establishment of seaport can significantly

reduce export lead times and earn steady flow of revenue for the government.

6

A recent report by the Boston Consulting Group on Bangladesh’s growing middle class consumer

segments highlights the exciting opportunities for B2C firms in Bangladesh that will emerge in the next

decade. According to their research, over 60% of consumers expect their income levels to rise in the

next 12 months. They represent the middle and affluent consumer (MAC) class: although currently

they only account for 7% of the population, by 2025 that will increase to 19%. This translates to a

market base of 34 million spread out over 61 cities in Bangladesh.

Although MAC consumers usually work within a budget, they want value for money and are less likely

to be swayed by pricing decisions compared to their counterparts in other South Asian markets.

Overall, Bangladeshi consumers spend $130 billion annually, with a 6% annual growth in consumer

spending. This huge consumer base is something that global consumer brands can hardly ignore.

374520

818

1314

2002 2007 2012 2014

GDP/Capita (USD)

SOURCE: BCG

SOURCE: World Bank

7

Bangladesh is at the crux of “Chindia”. The close geographic proximity to these fast-growing economic

powerhouses not only leads to strong trade relations but also gives access to potent market

opportunities.

Furthermore, the shift in manufacturing in China as it moves out from low cost production to more value

addition oriented production has created a gap that many emerging economies are scrambling to fill.

Bangladesh is one of the better equipped countries with the capacity, access and cost-base to assume

a leading role in this shift.

With competitive labor wage rates compared to other countries, Bangladesh is also set to continue its

success story in the RMG sector. With product diversification and new markets in Asia the volume may

well exceed USD 40 billion by 2020.

68 113

66 120

118 126

193 204

262

Bangladesh

India

Sri Lanka

Vietnam

Pakistan

Cambodia

Indonesia

China Inland

China Coast

MIN. WAGE RATE FOR RMG SECTOR (IN USD/MONTH)

SOURCE: ILO

8

Additionally, Bangladesh has one of the lowest Public Debt to GDP ratios compared to other frontier markets – even India and Vietnam.

Although RMG provides the lion’s share of Bangladesh’s export volume, the country is rapidly

diversifying into other sectors for exports as well. Non-RMG exports currently stand at 5.8 Billion USD

and are exported to grow to 11 billion by 2025. This growth is driven by emerging sectors such as Light

Engineering, Pharmaceuticals, Leather and IT.

Italy- 132%

USA- 103%

UK- 89%

India- 66%

Vietnam- 51%

Bangladesh- 17%

PUBLIC DEBT TO GDP RATIO (2014)

509.72

249.16

483.81

126.06

132.54

90.11

72.67

42.92

0 100 200 300 400 500 600

Shrimp

Leather Goods

Leather Shoes

Bicycles

ITES

Consumer Electronics

Pharma

Ceramics

Export - Emerging Sectors in USD mn (FY 2014-15)

Bangladesh-

1.17%

Frontier

Market-

2.90%

SOURCE: CIA FACTBOOK

FDI TO GDP RATIO

0.28

0.8 0.74 0.79 0.770.96 0.91 0.78

1.19

1.731.53

FY 2003-

04

FY 2004-

05

FY 2005-

06

FY 2006-

07

FY 2007-

08

FY 2008-

09

FY 2009-

10

FY 2010-

11

FY 2011-

12

FY 2012-

13

FY 2013-

14

FDI (USD BN)

SOURCE: WORLD BANK

SOURCE: EPB

SOURCE: WORLD BANK

9

Bangladesh has been experiencing increasing FDI over the last decade. FY 2014 inward FDI was USD 1.53 billion (highest in the manufacturing sector – USD 722.8 million). However, there is still room for much improvement, as the FDI to GDP ratio in Bangladesh (1.2%) is still well below the frontier market average (2.9%).

Bangladesh capital markets have developed steadily over time, although they still lack depth and

breadth due to the absence of financial instruments such as derivatives.

However, to their credit, Bangladesh capital markets have very low and even negative correlation with

developed, emerging and other frontier equity markets. Therefore, an exposure to Bangladesh

significantly improves risk adjusted returns.

The market has returned 203% since Jan 2007 (16.33% p.a.). For long term investors looking to participate in the Bangladesh growth story – now is a good time to start investing.

It is worth noting that 4 of the 5 largest stocks in December 2015 belong to the infrastructure or

infrastructure sectors.

0

2000

4000

6000

8000

10000

0

1000000

2000000

3000000

4000000

3/1/

2007

3/4/

2007

28-0

6-20

07

26-0

9-20

07

6/1/

2008

3/4/

2008

2/7/

2008

5/10

/200

8

12/1

/200

9

8/4/

2009

5/7/

2009

6/10

/200

9

5/1/

2010

1/4/

2010

28-0

6-20

10

29-0

9-20

10

29-1

2-20

10

31-0

3-20

11

28-0

6-20

11

2/10

/201

1

4/1/

2012

3/4/

2012

28-0

6-20

12

4/10

/201

2

8/1/

2013

8/4/

2013

8/7/

2013

8/10

/201

3

13-0

1-20

14

10/4

/201

4

9/7/

2014

16-1

0-20

14

15-0

1-20

15

13-0

4-20

15

13-0

7-20

15

14-1

0-20

15

DSEX

Inde

x

Mar

ket C

ap (i

n M

illio

n BD

T)

DHAKA STOCK EXCHANGE PERFORMANCE (JAN'07 TO DEC'15)

Total Market Cap in Taka (mn) DSEX Index

2.45 2.41 2.23 2.131.7

Khulna Power Company

Limited

Beximco Pharma BSRM Steel Lafarge Surma Cement KDS Accessories Limited

STOCK VALUE IN USD (BN)

SOURCE: DSE

SOURCE: DSE

10

Shifting Sands of

the Apparel Industry

Bangladesh currently sits as the second largest player in the apparel industry

behind China. As China moves up towards more value-added products, it

leaves behind more opportunities for countries like Bangladesh to

strengthen their foothold in low-value apparel markets. However, the

competition is also hot on its trail, with emerging players such as Vietnam

and Ethiopia vying to make headway as well. Although Bangladesh is

undoubtedly doing well in the apparel industry, it can ill afford to rest on its

laurels.

25.4

Billion USD

RMG Export (FY 14-15)

81%

Of Total Export

RMG Export (FY 14-15)

14%

Annual Growth

FY 13-14

5.1%

Global Market Share

11

When Bangladesh’s export-oriented readymade garments (RMG) sector began its modest journey in the

late 1970s, few foresaw its meteoric rise and the substantial role it would play in driving Bangladesh’s

economic fortunes. Bangladesh’s substantial cost advantage in labor, augmented by early advantages

gained by preferential trade agreements such as the MFA have contributed to the industry’s rise as a

global player from the 90s onwards.

At the moment, Bangladesh occupies a comfortable position in the global apparel export scenario,

contributing 5.1% of the export volume. Although the end of the MFA in 2005 sparked doom and

gloom predictions from many analysts, Bangladesh has continued to grow at a robust pace. An

important factor for this sustained growth is China’s shift towards higher value production, leaving much

room to grow for Bangladesh’s apparel industry—exports grew from 6.9 billion USD in 2005 to 25.5

billion USD in 2015.

Despite international backlash following a series of industrial accidents in 2012 and 2013, Bangladesh

still remains the top sourcing destination among CPOs for the next five years. Although countries such

as Vietnam are hot on its heels, the true long-threat might arise in the form of new players such as

China,

34.0%

India,

5.4%

Bangladesh,

5.1%

Vietnam,

4.7%

Indonesia,

4.5%Turkey,

3.5%

SOURCE: UNITED STATES INTERNATIONAL TRADE COMMISSION

GLOBAL APPAREL EXPORTERS

0

10

20

30

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

RMG EXPORT TREND 2001-2014 (IN

USD BN)

Knitwear Woven

SOURCE: MCKINSEY

48%

33% 30% 30% 30%23%

13% 10%5% 5% 5%

Bang

lade

sh

Viet

nam

Indi

a

Mya

nmar

Turk

ey

Chin

a

Ethi

opia

Indo

nesia

Egyp

t

Sri L

anka

Tuni

sia

TOP SOURCING DESTINATIONS, 2015-2020

SOURCE: EPB

3768

120

Ethi

opia

Bang

lade

sh

Viet

nam

AVERAGE WAGES IN RMG

SECTOR

SOURCE: WAGEINDICATOR

12

Ethiopia. Ethiopia currently enjoys a vast cost advantage over Bangladesh, with rage rates currently

almost half of those in Bangladesh.

Furthermore, other factors such as preferential trade agreements (GSP to USA and EU) surplus

electricity, cheap land price, preferential investment terms and proximity to EU and USA also play an

important role in accelerating Ethiopia’s apparel export growth.

Although Bangladesh’s apparel industry is currently buoyed by robust domestic growth, it faces some

external challenges in regards to some of its export destinations. The EU, which is currently the largest

market for Bangladeshi apparels (61%), has been experiencing sharp depreciation due to the Eurozone

crisis caused by Greece’s debt default. A depreciating Euro means that Bangladeshi apparel exports are

becoming more expensive in the Eurozone.

Bangladesh is also facing running into problems with the US market, which is currently the single largest

importer of Bangladeshi apparels. In 2013, USA cancelled GSP for Bangladesh’s exports citing a variety

of reasons. It should be noted that, although apparel did not originally fall under GSP, BGMEA was

lobbying hard to get tariff free access for apparel exports. Thus GSP cancellation is a significant

roadblock on the way to getting such benefits for the apparel industry.

Move towards higher value products: As it stands, Bangladesh runs the risk of entering a

race to the bottom, with both current competitors and new entrants sporting highly

competitive wage rates which are close to or even lower than Bangladesh’s average wages in

the apparel industries. With future pressure from unions being likely to pressure further

increases in wages, staying exclusively in low value product markets will be difficult to

maintain. Thus, moving into higher value products should be an important long-term focus

for the key players in the apparel industry.

Stick with drive for renewed compliance: Moving into higher value products will require

significant amount of investment in factory development and R&D. Two ways to secure this is

through government patronage, which can be garnered by showing a consistent commitment

to compliance, which is an important issue in the post-Rana plaza landscape. Secondly,

compliance is also a good green signal for international buyers who will be more likely to give

orders for higher value products in the future.

USA

21%

Canada

4%

EU

61%

Emerging

Markets

14%

Bangladesh's RMG export FY 2015

SOURCE: EPB

SOURCE: EXCHANGERATES.ORG

13

At the moment, satisfactory progress has been made in the 528 factories visited by the

Alliance for Bangladesh Workers Safety to deliver the highest international standards as of

September 2015. However, there is still a lot of room to grow as 1/5th of the factories visited

have completed less than 20% of the planned upgrades.

Depreciatory Monetary Policy: Depressing the Bangladeshi taka will make Bangladeshi

exports cheaper to buy in our export destinations. This can provide a good mitigating

influence in the face of rising costs due to higher wages.

Improve Backward Linkages: Most of the raw material for apparel sector has to be imported

from abroad. Although some of the cotton used is sourced locally, for instance, the vast

majority of it is sourced abroad, mostly from China. In this regards, manufacturers can

consider forward contracting to protect against potential shocks in the global cotton market.

Alternatively, manufacturers can explore the option of acquiring lands in Africa to establish

cotton plantations in the long run.

Developing Mid-Tier Management: Currently, there is a significant deficit of talented mid-tier

managers in the apparel industry. Due to branding issues and low pay compared to other

industries such as banks and FMCG, most fresh graduates are reluctant to enter the apparel

sector. RMG leaders and the government must work hand in hand to increase the

attractiveness of the apparel industry as a place of employment.

Some ways this can be achieved is through closer relations with reputed public and private

universities, for example through seminars, programs and courses that introduce the

prospects and workings of the RMG sector to university students.

Strengthening Diplomatic Ties: The government must pursue diplomatic overtures with top

importers such as the US and EU. With the USA in particular, reinstating GSP privileges should

be a priority since that will pave the way for similar tariff free access for apparel exports.

14

Powering Bangladesh’s

Future

If RMG is at the heart of the Bangladesh success story, then the power

infrastructure is its lifeblood. Greater power generation as well as access to

electricity is key to fueling the growth of not only key industries but also the

growing appetites of urban middle-class households. At the moment,

continued heavy investment in energy infrastructure has made improvements

but by 2030 Bangladesh’s power demand may well reach 34,000 MW. The

challenge of filling this gap represents a multibillion dollar opportunity for

investment.

12,071

MW Current Installed Capacity

6,431 MW

Current Average Demand

34,000 MW

Projected Energy Demand (2030)

62% Of the Population

Have Access to Electricity

63% Of Electricity Fuel

Is Supplied by Natural Gas

42%

Of Electricity Is supplied by the Private Sector

15

The government has made great strides in electricity generation over the last decade. Over the period

2006-2015, peak demand of electricity in the national grid grew at a CAGR of 8.11% per year, from

2787 MW in 2006 to 6078 MW in 2015. On the supply end, installed capacity grew at a faster pace of

9.11% CAGR per year, from 4650 MW to 11282 MW.

Furthermore, load-shedding has become far less frequent during this period as peak electricity

generation has usually kept pace with peak demand. Consistent electricity generation is a key issue for

thrust sectors such as RMG, and also a key factor in facilitating greater internet activity among the

population.

However, there is still much work to be done for the future, as electricity demand may well reach

34,000 MW by 2030. This means that not only will the government need to continue to heavily invest

in the power sector, but must also expand the scope of operations as well as change its nature over

time.

Moreover, 62% of the population is currently covered by the electricity grid with the rest of the

population set to come online in the near future. This represents a still untapped market of 61 million

people who will be connected to the national grid in the coming years as Bangladesh continues its

growth trajectory out of the LDC category.

10,283

17,304

25,199

33,708

6,170

10,382

15,749

21,910

2015 2020 2025 2030

POWER GENERATION AND DEMAND (MW),

2015-2030

Prj Demand Prj Elec GenSOURCE: BPDB

0

2000

4000

6000

8000

10000

12000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

POWER GENERATION AND DEMAND (MW),

2006-2015

Installed Capacity (MW) Peak Hour Generation Peak Demand (MW)

SOURCE: BPDB

16

The power industry is unique in the fact that overhauling it can impact all components across the vertical

production chain. This presents ample opportunity for investment in areas ranging from electricity

generation to distribution channels in the fuel sourcing function.

At the moment, the vast majority of the electricity generated (62.59%) comes from natural gas, which

is currently the cheapest fuel source. However, this status quo cannot remain much longer as natural

gas reserves are depleting fast and won’t be able to support electricity demand after 2019.

For the next five-year plan of 2016-2020, the Planning Commission has outlined the need to move away

from natural gas. The focus will be shifted towards imported coal and LNG, which will be used to

generate an additional 6000 MW of electricity.

A significant portion of this additional power will be provided by the private sector. Already, the private

sector provides 42% of the total installed capacity.

The search for long-term alternatives to natural gas is already underway. Although coal currently is

the target of the largest efforts in this context, other options such as hydroelectricity and solar power

are also being explored. Overall, there is the opportunity to potentially invest 70.5 Billion USD to

gear up for Bangladesh’s power needs of 2030.

Coal: Currently providing only 3% of the fuel mix, coal is scheduled to provide 50% of the fuel

for electricity generation by 2030. This move can be justified by two reasons: firstly, there are

huge reserves of coal in Northern Bangladesh, estimated to be around 3 Billion Tonnes.

Secondly, there is also the option of importing coal in the short term, as laying the

groundwork for building substantial coal mining facilities will take some time.

Currently, the Coal Power Generation Company is courting foreign firms for building the

Matarbari Coal Power Plant, which is set to be the largest coal-fired power plant in

Bangladesh’s history.

Hydroelectricity: With hydroelectricity, there is the option of exploring regional power grid

connectivity in earnest. This has already seen some modest beginnings with the start of

electricity import from India in October 2013 on a pilot basis of 173 MW, with the potential

21.11%

8.05%

2.10%

4.21%

1.94%

62.59%

CURRENT FUEL MIX

Furnace Oil Diesel Coal Power Import Hydro Natural Gas

25.9

17.9512.2

8.1 6.22.57

Diesel Furnace

Oil

LNG Imported

Coal

Imported

Power

Domestic

Gas

COST OF GENERATION (TK/UNIT)

SOURCE: BPDB

SOURCE: Planning Commission

17

to generate 1000 MW of electricity from this arrangement. However, with hydroelectricity,

the scope of regional connectivity is much greater. In fact, the SAARC region, especially

countries like Nepal and Bhutan, has the potential to generate 300,000 MW worth of

hydroelectric power, which would significantly benefit member states like Bangladesh who

have shortages.

Solar Power: Bangladesh has managed to implement one of the most successful long-term

Solar Home System (SHS) Projects so far. Since the program’s inception in 2003, IDCOL has

worked with 47 partner organizations to install 3.8 million SHSs, providing electricity to 20

million rural people. IDCOL currently targets to build 6 million more units by 2017. The

project has also garnered financial support from World Bank, who offered the government

78.4 million USD in 2014 to finance 480,000 SHSs.

The private sector is also deeply involved with other solar power projects. Rahimafrooz, the

nation’s largest solar power provider, has expressed interest in building rooftop solar

installations at various areas of Dhaka and Chittagong. In fact, it has already built a 50kw

grid-tied solar panel on the rooftop of the Bangladesh Secretariat building at Segunbagicha,

Dhaka. Dhaka Power Distribution Company Limited (DPDC) is buying electricity from the

plant.

In fact, the government has committed to eventually installing solar panels on the rooftops

of all government buildings.

The solar power sector is also experiencing foreign investor activity. Skypower Global, one of

the world’s largest solar power producing companies, is set to invest 4.3 billion USD in

Bangladesh’s solar power industry.

LNG: Liquefied Natural Gas (LNG) can augment the country’s energy needs by allowing for

import of liquefied natural gas and subsequent gasification on landing and distribution. The

groundwork has been laid to construct Bangladesh’s first floating LNG terminal at

Moheshkhali which is going to have a capacity to handle 5 million MT/year of LNG.

Importing LNG is a logical next step if we want to continue use natural gas as a majority fuel

source in the face of depleting reserves.

Furthermore, the state-owned North-West Power Generation Co Ltd (NWPGCL) is also

planning to build a 750MW-850MW re-gasified LNG-based combined cycle power plant in

Khulna. This plant will use LNG imported through India.

Wind Power: Although the potential benefits to be reaped from this sector are extensive, no

significant project has been yet started in wind energy. Bangladesh’s 710 km coast line

provide ample ground for future projects.

18

Is Footwear Bangladesh’s Next Export Tiger?

Although RMG provides 80% of Bangladesh’s total exports, several sectors

have popped up over the last decade which represent potential for greater

export diversification. Footwear is one such sector. Footwear exports have

grown almost 10 times over the last decade, from 68 million USD in 2004 to

673 million USD in 2015. With eyes set on lucrative markets such as the EU,

USA and India, Bangladesh’s footwear industry is in a prime position to play

a larger role in Bangladesh’s export fortunes over the next decade. This is

due, in part, to robust backward linkages, especially leather sourcing.

673

Million USD

Footwear Export (FY 14-15)

2.2%

Of Total Export

Footwear Export (FY 14-15)

25.76%

CAGR

(2004-2015)

211

Billion USD

Projected Global Market

Size (2018)

19

Bangladesh’s footwear industry has experienced a

meteoric rise since the last decade. With a CAGR of 25.76% per year, total footwear exports grew from

68 million USD in 2004 to 673 million USD in 2015. This growth parallels the current growth of the

global footwear market, which is currently forecasted to grow to 211 billion USD by 2018. At the

moment, Bangladesh only holds 0.5% of this market.

The growth of the local footwear industry is boosted to a large extent by the growth of the overall leather industry. Recently, total export has exceeded USD 1 billion mark in 2014 for the leather sector which has been due to rising global demand and renewed interest amongst local entrepreneurs for manufacturing footwear. Some international investors have forayed in the sector setting up factories in local Export Processing Zones (EPZs). The strong leather industry in Bangladesh gives unique advantages to the footwear industry, as there is the opportunity of total vertical integration in the value chain, from raw leather to the final product. For instance, Bangladesh produces superior quality leather from local livestock, which is subsequently processed by tanneries concentrated around the capital city. The annual production of leather hovers around 250 Million square feet each year with supply peaking during the religious festivals of Eid, especially Eid-ul-Adha. The tanneries in Bangladesh have often come under criticism for being environmentally unfriendly. This has prompted the government to build a 200-acre Leather Industrial Park in Savar at a cost of USD 60 Million. The park will include state of art Effluent Treatment Plants (ETPs) to treat the waste generated while processing the leather in the tanneries.

185 189 192 196 200 203 207 211

2011 2012 2013 2014 2015 2016 2017 2018

SOURCE:TRANSPARENCY MARKET RESEARCH ON FOOTWEAR

GLOBAL FOOTWEAR DEMAND (USD BN),

2011-2018

PROJECTED

@ 1.9%

CAGR68 88 95 123 159 183 204298 336

419

550

673

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

FOOTWEAR EXPORTS (USD MN),

2004-2015

SOURCE: EPB

20

As the majority of leather is exported to the EU (54%), the recent decline in demand in EU market of

leather hides has adversely affected the Bangladesh leather market.

This decline in demand has been reflected in a fall in global hide prices, prompting local buyers being

less likely to buy the raw hides as well. As a result, 40% of the hides bought by tannery warehouses

since last Eid-ul-Adha is still unsold.

If this global demand deficit persists, then there is an opportunity for the rawhide sellers to shift their

focus to local footwear manufacturers, provided that the expanding footwear industry also has

matching demand for their excess hide supply.

The crackdown on compliance in the leather industry, especially the insistence on shifting tanneries

from Hazaribagh to Savar, has prompted many footwear manufacturers to try their hand in the non-

leather footwear sub-sector, which, at the moment, is free from such regulation.

Over the years, Bangladesh has emerged as a leading exporter of quality, low price non-leather

footwear to key global retailers such as H&M, Decathlon, Kappa, Sketchers, Fila, and Puma. Exports

from this sector stood at 171.57 million USD in FY 13-14.

This shift is also driven by the comparatively low input costs of non-leather footwear. While a leather

shoe costs $9 to make, a pair of non-leather shoes can cost as low as $3.2.

106.76 106.06 104.5 100.33 96 9482.5

71 74.8 74.75 70.4

Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov

PRICES OF HIDES IN GLOBAL MARKET, 2015

(IN DOLLARS PER POUND)

Countries

including Japan,

USA, Australia,

India

28%

EU

54%

Emerging

Markets such as

Vietnam,

Indonesia,

Turkey, Costa

Rica

18%

Regionwise Market for Bangladesh Leather Exports

SOURCE: EPB

SOURCE: INDEXMUNDI

21

The growing middle class segments in key Asian markets such as China and India means that products such as footwear are going to be increasingly seen as more brand and status-driven instead of being necessities. This will create the opportunity to market higher value products to these regions. In fact, there is good potential for growth in Bangladesh’s domestic market as well. Rising per capita income, along with the growing MAC segment, shows encouraging signs for both entry level and higher value products in the future.

A good strategy for footwear manufacturers would be shift their focus to the top export destinations in

the long run. At the moment, the EU is the largest export destination of Bangladesh’s footwear

industry. However, even in 2013 only 4 EU countries (Germany, France, United Kingdom, Italy) feature

in the top 10 global footwear markets (source: Euromonitor).

To gain a greater share of the pie, Bangladeshi footwear manufacturers should target both established

top markets such as USA, China and Japan and also emerging markets such as Mexico, which will be

thriving by 2018.

Top 5 Global

Markets (China,

Russia, Brazil,

USA, Japan),

206,950,308.65,

31%

EU,

361,586,029.27,

54%

Emerging Markets

such as India, Peru,

Panama, UAE

, 104,732,256.98,

15%

REGIONWISE MARKET FOR BANGLADESH

FOOTWEAR EXPORTS (USD MN), FY 14-15TOP 10 FOOTWEAR MARKETS, 2013 AND 2018

Ranking 2013 2018

1 USA USA

2 China China

3 Russia Russia

4 Brazil Brazil

5 Japan Mexico

6 Mexico Japan

7 Germany United Kingdom

8 France Germany

9 United Kingdom Italy

10 Italy France

SOURCE: EPB

SOURCE: EUROMONITOR

22

Pharmaceutical Industry Remains a Key Thrust Sector

The pharmaceutical sector in Bangladesh is one of the thrust sectors and

plays a vital role for the country’s economy. The sector utilizes highly

skilled manpower along with advanced machinery for manufacturing high

quality generic medicines and vaccines for local and international markets

at competitive prices. With a current market size of $1.2 billion, the

market is poised to cross $2 billion by 2018. In fact, provided the political

situation remains as stable as it has been for the last year, the growth may

be even higher than projected.

1.2

Billion USD Local Market Size (2015)

2 Billion USD Estimated Local

Market Size (2018)

300 Companies

Operating in the Market

72.64 Million USD

Total Pharma Exports (FY 14-15)

23

According to IMS projections, the global pharmaceutical market will grow to USD 1.135 trillion from

USD 953 billion at a compound annual growth rate (CAGR) of 3-6% during 2013-2017.

Led by China, the BRIC countries (Brazil, Russia, India, and China) accounts for almost 70% of all

pharmaceutical market sales. Parallel to the global picture, the emerging countries show a positive

growth trend, where Bangladesh is one of the Tier 3 pharmerging countries that is forecasted to

contribute to this industry growth by 6–9% between 2013–2017.

In the global market, the lion’s share of export is contributed by patented drugs. In the domestic

market, however, the inverse is true: 85% of the drugs sold are generics and 15% are patented drugs.

The local market comprises of 83 active pharmaceutical companies, out of which top 20 companies

control 85% of the market share. The local market size currently rests at USD 1.53 billion, with local

manufacturers meeting 97% of the demand.

Incepta Pharmaceuticals Ltd, Renata Ltd, Drug International Ltd, Eskayef Bangladesh Ltd, Sanofi, Beximco Pharmaceuticals Ltd and Opsonin Pharma are the top market players. Square Pharmaceuticals stands out as the market leader with 19.3 percent market share with its close rivals being Incepta, Beximco and Opsonin. Beximco has recently entered EU market and is enlisted in London Stock Exchange as well. These companies are also well known for exporting high end branded drugs such as anti-cancer drugs and cardiac medicines. High-tech insulin manufacturing plants have started operation to meet the country's growing demand.

As a member of WTO and being enlisted as one of the LDCs, Bangladesh currently enjoys the benefits of intellectual property rights that allows producing generic drugs and exports until 2032 without compulsory licenses or paying the patent holders and thus providing an advantage to the local manufacturers and exporters. This has allowed pharma companies to exports to 107 countries in Europe, Asia, Africa and Latin America with export standing at USD 72 million in 2015. However, there is still much ground to be covered, in terms of both share of Bangladesh’s total export (0.23%) and share of the global pharmaceutical export market (0.11%).

1,776 2,043 2,349 2,701 3,104 3,573 4,108 4,725

5,433

FY

2014

FY

2015

FY

2016

FY

2017

FY

2018

FY

2019

FY

2020

FY

2021

FY

2022

B A N G L A D E S H G R O W T H F O R E C A S T

( U S D M N )

SQUAR

E

INCEPTA

PHARMA

9%BEXIMCO

9%

OPSONIN

PHARMA

ESKAYEF

5%

RENATA

5%

ACME

4%

A.C.I.

ARISTOPHARMA

4%

DRUG

INTERNATIONAL

4%

Others

31%

TOP 10 FIRMS' MARKET SHARE

SOURCE: BAPI

SOURCE: PHARMA WORLD

24

Healthy growth trajectory is boosting the pharmaceutical manufacturers towards R&D for newer generics with global standards in place. The DGDRA Bangladesh is playing the key role in inspecting the WHO, GMP and SOP of the pharmaceutical manufactures and enrolling the certifications for subsequent two years’ validity from the date of inspection. Furthermore, to meet the staggering local and international demand, the government has extensively imposed lower or zero import duty and VAT for certain raw materials/ items and certain capital machineries, and also allowed tax holidays of four to six years to investors in this sector.

The Bangladeshi pharmaceutical market is growing at a fast pace and has a promising future. According to Business Monitor International's latest report, Bangladesh has moved one step upward to occupy the 14th position amongst 17 regional markets. This sector offers an enormous investment opportunity and has the potential to export alongside the RMG sector in terms of value, catering to increasing consumption worldwide.

Under WTO’s Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), 48 LDCs,

including Bangladesh, were granted exemption from drug patent fees in producing generic drugs until

2016. Recently, this was extended to 2032.

Although the advantage that can be gained from TRIPS has been much lauded in Bangladesh, in reality

not much benefit has been gained due to lack of infrastructure required for producing quality generic

drugs cost effectively.

To rectify this, the industry needs to focus on strengthening backward linkages. The government also

needs to create an export-friendly environment with activity from both public and private sector

stakeholders.

1.2% 1.6%

19.2%

78.1%

ITEMWISE EXPORT IN FY 2014-15

Glands & Extracts, Secretions for

Organotherapeutic Uses

Human & Animal Blood; antisera,

vaccines, micro-organism

Medicament mixtures not In

dosages

Medicament mixtures put In

dosages

41.68 45.14 49.1260.94

70.45 72.64

FY 2009-

10

FY 2010-

11

FY 2011-

12

FY 2012-

13

FY 2013-

14

FY 2014-

15

Pharmaceuticals Products Export (USD Mn)

SOURCE: EPB

SOURCE: EPB

25

Localize Pharmaceutical Value Chain to Reduce Costs: One of the highest cost components in

medicine production is APIs, which can contribute as much as 40% of the total cost. At the

moment, 80% of these APIs are imported from India and China.

Although 15 Bangladesh companies (such as Beximco, Square and Opsonin) are

manufacturing active pharmaceutical ingredients (API), this is a very small percentage of the

85 active firms in the market.

Backward integration in APIs is a key issue for the pharma industry’s growth. Currently India,

the top generic drug player, has 3500 Drug Master File (DMFs) approval for APIs whereas we

have none.

To mitigate this, the government has taken the significant step of constructing an API

Industries Park at Munshiganj, 40 km from the capital. About 40 firms are planned to be

established at the plant, which will include a central effluent treatment plant incinerator.

However, the project, originally scheduled to be completed by 2012, has been repeatedly

delayed, with costs rising by 55%. As a result, progress in backward integration regarding APIs

has stalled.

Bioequivalence testing, which determines if the generic version is identical to original brand,

is another crucial part of the value chain. This is mandatory for product registration in any

developed market and is very expensive when conducted abroad in USA or Europe.

A central bioequivalence and drug testing laboratory would help the industry by not only

reducing this cost, but also allowing for routine quality checks on locally produced drugs,

further strengthening the case for entry into developed markets.

Greater collaboration between industry and academia: A potent and mature medical

academic community is instrumental to fostering a healthy R & D culture in the industry. The

government can take cues from its Indian counterpart, which has taken steps to establish

specialized pharmaceutical institutes such as the National Institute of Pharmaceutical

Education and Research (NIPER).

More long-term commitment to creating export-friendly environment: In addition to the

existing tax holidays and import duty exemptions, the government can also explore other

options such as creating Special Economic Zones (SEZs) for the pharma industry to create

localized, internationally competitive export environments. SEZs already have a proven track

record as SEZs in India and China have significantly boosted pharma exports.

Similar to the way the government is currently supporting the IT industry, it can hold various

seminars, conferences and exhibitions to promote the industry. Creating a dedicated seed

fund, or even better, a venture capital fund for funding entrepreneurs aspiring to carry out

R&D for emerging products such as biologic drugs is also another option that is worth

considering.

Engage in Contract Manufacturing with MNCs: Bangladesh’s considerable cost advantages

makes it a good candidate for contract manufacturing as MNCs are looking to shift outsourcing

operations from previously cost effective regions such as India and China. Already a 60 billion

USD business, contract manufacturing has huge potential for Bangladesh.

26

IT and ITES Growth Key to Achieving Digital Bangladesh

With modest beginnings in the late 90s, the ITES industry has come a long way.

Buoyed by strong internet and mobile infrastructure along with falling internet

bandwidth costs, the ITES sector now has over 800 firms, along with 10,000

freelancers. With a current market size of 400 million USD, a significant

portion of the ITES industry is export oriented. Enjoying strong government

support and burgeoning private sector interest in tech startups, the IT and ITES

industries are targeted to capture 1 billion USD worth of exports by 2018.

400

Million USD

Total Market Size (FY 14-15)

132.54

Million USD

Total IT Exports (FY 14-15)

20-30%

Growth Per Annum

1

Billion USD

IT Export Target (2018)

27

Of the 800 IT companies currently registered in Bangladesh, majority of them are involved in

customized application development and maintenance. This caters to the needs of firms in sectors like

banking, telecom, pharmaceutics, RMG and Textile sectors, who have contributed to the increasing

domestic demand for customized ITES solutions.

Manufacturing sectors including garment, textile and pharmaceuticals have created sustainable

demand for IT solutions like ERP, HR and Payroll management systems, and production and financial

management software. As a result, the domestic IT service industry has grown by 20 to 30 percent per

annum over the last few years (Source: BASIS).

Although most Bangladeshi market players initially offered their services and products predominantly

on the domestic market, Bangladeshi software solutions and ITES are nowadays exported to other

regions like Europe and Northern America.

Around 200 Bangladeshi ICT companies are serving international markets offering outsourcing

services and project delivery models. Total IT and ITES exports stand at 132.34 Million USD for FY 14-

15.

76%50%

45%18%17%

11%7%

3%3%

Customized Application

IT Enabled Services

E-commerce

Product Development

Mobile Application

System Integration

R&D Services

IT Infrastructure

Reseller

SPECIALIZATION OF IT & ITES COMPANIES

Software

44%

ITES

56%

Industry Revenue Proportion

SOURCE: BASIS

SOURCE: BASIS

26.08 24.0932.91 35.96

45.31

70.81

101.63

124.72 132.54

FY 2

006-

07

FY 2

007-

08

FY 2

008-

09

FY 2

009-

10

FY 2

010-

11

FY 2

011-

12

FY 2

012-

13

FY 2

013-

14

FY 2

014-

15

Yearly IT Export Earnings (USD mn)

68%

33%20% 18% 15%

9% 9% 8% 8% 8%

USA UK

Cana

da

Aust

ralia

Denm

ark

Net

herla

nds

Ger

man

y

Indi

a

Japa

n

UAE

TOP EXPORT DESTINATIONS

SOURCE: BASIS, EPB

SOURCE: BASIS

28

In terms of export destinations, North America (Canada and the US) dominates, whereas European

countries like the UK, Denmark, the Netherlands and Germany have emerged over the last few years as

major export destinations. Furthermore, with over 10,000 ICT freelancers active in Bangladesh as of

2015, the prospect of IT outsourcing is now brighter than ever.

The government’s Digital Bangladesh initiative has played an instrumental role in helping to boost IT

exports through setting up infrastructure for enhanced connectivity, ICT based citizen service delivery

and also an ICT based Education system.

Initiatives like Digital World and BASIS Softexpo are playing a positive role in building awareness and

promoting IT sector to both domestic and the international market. Internet connectivity has been

vastly enhanced over the country, with internet penetration standing at 23.03% as of 2015.

Although it is still in its infancy, ITES industry’s robust growth rate (19.8% CAGR per annum) represents

an opportunity to build the next thrust sector for Bangladesh exports. The global ITES market is vast

(2.19 trillion USD), and with the right strategies, Bangladesh can become a key global player before

long.

Sub-sectors such as BPO (93.4 billion USD) are sizeable in their own right. India, the market leader in

BPO, currently has a BPO export earnings of 19 billion USD.

At the moment the majority of ITES firms (62%) in Bangladesh cater only to the domestic market. In the

long run, however, export-orientation is the only logical choice for using ITES as a major avenue for

export-led growth.

Domestic-

Driven, 62%

Export-

Oriented,

38.00%

FOCUS OF ITES FIRMS IN BANGLADESH

19

14.4

2

India Phillipines Sri Lanka

EXPORT EARNINGS OF TOP BPO EXPORTERS (USD

BN) IN FY 13-14

SOURCE: BASIS, IDLC

SOURCE: GULF TIMES, CUSHMAN & WAKEFIELD

29

For the last few years, Bangladesh has seen the rapid rise of a vibrant startup community. This mostly

informal but tightly connected private sector community, which consists of investors, mentors and

startup evangelists, have worked closely with government initiatives such as a2i and Digital World.

Startup events such as Innovation Xtreme have also attracted global attention to the exciting tech

startup developments in Bangladesh.

Local ventures like BDJobs.com and NewsCred have raised international funds with many local tech companies like chaldal.com raising seed finance from local and international investor networks. In the last year, the startup community has become more organized with several incubators, mentorship and networking platforms and even accelerators appearing in quick succession.

Notable stakeholders acting in this regards include the Founders’ Institute, Seedstars Dhaka, Startup Bangladesh, Startup Cup Bangladesh and most recently, GP Accelerator. With the growth of such an extensive support structure buoyed by both public sector and private sector support, there is now more opportunity than ever for aspiring IT entrepreneurs to enter the market and contribute to the industry’s growth on both national and global levels.

30

Global Brands Already Aboard the Bandwagon

Many multinational companies are maintaining market presence as a

precursor to more heavy involvement. However, some major international

companies in different sectors have chosen to take the plunge and enjoy

superior returns. Some of them are:

31

Investing in B angladesh

Recently, attractiveness of Bangladesh as an investment destination has increased manifold, especially due to the country’s preferential trade status in major international markets, inexpensive labor and proximity to China and India. Increasing labor costs in China has further precipitated a shift of investment to neighboring regions. Given the backdrop, Bangladesh government is keen to attract investment not only to positively tilt the balance of payment position, but to further rejuvenate the economy through employment generation and GDP growth.

A host of policies have been adopted to incentivize foreign investment. Tax Holidays: Foreign investors will receive tax holiday ranging from 5 to 7 years based on geographic location. For instance, for industrial enterprises located in Dhaka and Chittagong, tax holiday is for five years. While it is seven years for locations in Khulna, Sylhet, Barisal and Rajshahi divisions. Accelerated depreciation facility: Industrial units financed by foreign investors will enjoy an accelerated depreciation allowance post tax holiday period. Such allowance is available at 100 per cent cost of the machinery or plant if the industrial undertaking is set up in the areas falling within Dhaka, Chittagong and Khulna. If the industrial undertaking is set up elsewhere in the country, accelerated depreciation is allowed at the rate of 80 per cent in the first year and 20 per cent in the second year. Concessionary duty on imported capital machinery: No import duty will be charged for imported machinery for industrial units which are 100% export oriented in nature. For the rest, 5% import duty will be charged for initial installation or BMRE/BMR of the existing industries. Full repatriation of Capital: Full repatriation of capital invested from foreign sources will be allowed. Similarly, profits and dividend accruing to foreign investment may be transferred in full. If foreign investors reinvest their dividends and or retained earnings, those will be treated as new investments. Legal protection: The policy framework for foreign investments in Bangladesh is based on 'The Foreign Private Investment (Promotion & Protection) Act. 1980, which ensures legal protection to foreign investment in Bangladesh against nationalization and expropriation. It also guarantees non-discriminatory treatment between foreign and local investment, and repatriation of proceeds from sales of shares and profit. Despite change in government, there has been a continuity of policies with regards to attracting foreign investments. Bilateral agreement and treaty: The Government of Bangladesh has a series of bilateral investment agreements with a number of countries in Asia (China, India, Japan, Singapore, South Korea, Sri Lanka, Thailand, Iran, Malaysia, Pakistan, Philippines), Europe (Belgium, Denmark, France, Germany, Poland, Romania, Sweden, The Netherlands, United Kingdom, Italy, Romania, Switzerland, Turkey) and North American (Canada, USA). In addition, Bangladesh is a signatory to MIGA (Multilateral Investment Guarantee Agency), OPIC (Overseas Private Investment Corporation) of USA, ICSID (International Centre for Settlement of Investment Disputes) and a member of the WIPO (World Intellectual Property Organization) permanent committee on development co-operation related to industrial property. Preferential Trade Agreements: Bangladesh has a number of preferential trade agreements with countries having significant market size e.g. GSP with EU, quota and tariff free access to Canada and Japan.

32

Alongside, Bangladesh has recently signed Trade and Investment Co-operation Framework Agreement (TICFA) with the US where bilateral trade issues will be discussed. Currently, talks are underway to revive the GSP suspension imposed by the US government last year.

International investors can undertake investments seamlessly through the Board of Investment (BOI) and Central Bank’s support.

Foreign investors can also invest directly in Bangladesh’s vibrant Capital market which can hedge investor’s portfolio risks in the event of global economic downturn. The following steps need to be taken by foreign investor for investing in the capital market:

A Foreign Currency (FC) Account is needed for inward and outward remittance.

A Non-resident Investor’s Taka Account (NITA) is required for converting foreign currency into Taka.

All Capital Market investors are required to conduct trading through a Stock Broking Account maintained with any Stock Broker/Member of the respective Stock Exchange.

In order to trade dematerialized shares listed with the Stock Exchanges, investors must have a Beneficiary Owners (BO) Account with CDBL.

NRB & Foreign Investors may choose to appoint a Custodian to ensure trade execution and safe custody of shares.

Set-up of plant:

- Purchase/lease of factory land

- Import of machinery

- Industrial Adhoc IRC

- clering of capital machinery

- Environmental Risk clearance

- Fire license

- Connection of utility lines

Step-3

Application to BOI will include:

- BOI prescribed form

- Project profile

- Memorendum of Artices of Association

- Certificate of incorporation

- TIN/ VAT registration

- Trade license

Step-2

-Opening bank account as per 'Foreign Exchange transactions 1996.

- Trade license

- Tin Certificate

- Company formation

Step-1

LightCastle Partners (LCP) is a business data

firm. We work at the intersection of market

data and company specifics to simplify

decisions and drive business growth. Till date,

we have served several reputable clients

including Mitsubishi, Generac, Asian Capital

Advisors, Care Inc., Swiss Contact Katalyst and

top tier local corporates among others. The founding partners have backgrounds in

Corporate and Investment Banking, Audit and

Advisory with firms like Citi, HSBC, StanC,

KPMG and Delloite.

About Us

Analysts: Bijon Islam Co-founder, CEO

Mohammad Kashif Choudhury Assistant Vice President

Md. Sazzad Hossain Nahid Assistant Vice President

Ivdad Ahmed Khan Mojlish Co-founder, Managing Director

Zahedul Amin Co-founder, Finance and Strategy

M. Saifur Rahman Co-founder, Marketing and Business Development

Muhtasim Sarowat Rayed Junior Associate

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and reliable. Because of the possibility of human or

mechanical error as well as other factors, however, all

information contained herein “As IS” without warranty

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when appropriate, independent third-party sources.

However, LightCastle is not an auditor and cannot in

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information received in preparing publications.

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