ib termpaper final

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Table of Contents

1.0 Introduction ............................................................................................................................................ 1

1.1 Origin ................................................................................................................................................... 1

1.2 Background ......................................................................................................................................... 1

1.3 Problem Statement ............................................................................................................................. 4

1.4Objectives............................................................................................................................................ 5

1.6 Scope ................................................................................................................................................... 5

1.7 Limitation ............................................................................................................................................ 6

2.0 Methodology ........................................................................................................................................... 6

2.1 Research Design .................................................................................................................................. 6

2.2 Data Collection Method ...................................................................................................................... 6

2.3 Analysis Design .................................................................................................................................... 7

2.4 Sampling Design .................................................................................................................................. 8

3.0 Industry Overview ................................................................................................................................. 10

3.1 Background of the Industry .............................................................................................................. 10

3.2 Sales Trend ........................................................................................................................................ 10

3.3 Product Composition ........................................................................................................................ 11

3.4 Market Composition ......................................................................................................................... 12

Table 5: US Knit and Woven Imports .......................................................................................................... 17

3.5 Competitive Advantages of Bangladesh ........................................................................................... 17

3.6 Disadvantages of Bangladesh ........................................................................................................... 19

4.0 Demand-Side Dynamics ........................................................................................................................ 20

4.1 Major Buyers ..................................................................................................................................... 21

4.2 Factors Influencing Sourcing Decisions ............................................................................................. 22

4.3 Plans of Buyers Regarding Sourcing in Bangladesh .......................................................................... 26

5.0 Supply-Side Dynamics ........................................................................................................................... 29

5.1 Major Players .................................................................................................................................... 29

5.2 Factors Influencing Profitability of Manufacturers ........................................................................... 30

6.0 Supply Chain Analysis ............................................................................................................................ 32


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6.1 Lead Time .......................................................................................................................................... 32

6.2 Profit Margin ..................................................................................................................................... 34

6.3 Backward Linkage.............................................................................................................................. 36

6.4 Sourcing of Raw Materials ................................................................................................................ 38

7.0 Analysis of Global Recession ................................................................................................................. 38

7.1 The US economy ............................................................................................................................... 39

7.2 The EU economy ............................................................................................................................... 47

8.0 Recession in Bangladesh ....................................................................................................................... 50

9.0 RMG sector of Bangladesh during recession ........................................................................................ 54

10.0 Analyses of Psychological factors affecting Buying behavior & Fashion trends of US & EU .............. 56

10.1 Buying Behavior .............................................................................................................................. 57

10.2 Fashion Trend .................................................................................................................................. 59

11.0 Analysis of changing dollar value and its impact ................................................................................ 62

11.1 Impact in competitor countries Where Bangladesh stands? ....................................................... 65

11.2 A Hypothetical Case of TRENDSETTERS - a manufacturer of Wal-Mart ......................................... 69

12.0 Analyses of impact of Recession on Profitability & Mode of Payment .............................................. 70

12.1 Order Book Situation ...................................................................................................................... 71

12.2 Profit Margin ................................................................................................................................... 81

12.3 Competitiveness.............................................................................................................................. 91

12.4 Mode of Payment ........................................................................................................................... 96

13. Growth Potential ................................................................................................................................. 100

13.1 Sales .............................................................................................................................................. 100

13.2 Product Composition .................................................................................................................... 101

13.3 Price .............................................................................................................................................. 101

13.4 Buyer/Market Potential ................................................................................................................ 102

14. Market Diversification ......................................................................................................................... 102

14.1 Current Scenario ........................................................................................................................... 102

14.2 Comparison of Market Diversification with India and China: ....................................................... 104

14.3 Potential Markets of Bangladesh RMG: ........................................................................................ 107

14.4 Market Diversification Strategies: ................................................................................................ 113

15. Product Diversification ....................................................................................................................... 116

15.1 Current Scenario ........................................................................................................................... 116


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1Global Recession and its impact on RMG sector of Bangladesh

1.0 Introduction

1.1 Origin

This report has been prepared as per the requirement for the course International Business

Environment under the instruction of the course instructor Dr. Abu Yousuf M Abdullah,

Professor of Institute of Business Administration of University of Dhaka.

1.2 Background

The Ready Made Garments (RMG) industry for a period of time has been the main source of

growth in Bangladeshs export market and also the foremost employment generating sector.

The direct contribution to GDP from this is about 11 percent, when compared it is relatively

small, but the industry plays key role in employment and in the income provision to the poor

class of Bangladesh, employing directly about 2.5 million people (September 2008 est.)i, which

is about 48% (total employment in the manufacturing sector is 5.2 million according to BBS) in

the employment in the manufacturing sector, and in this around 80% are women (USITC,

2004)ii. The industry supports indirectly about 12 million people out of a country of 147 million

(July 2006 est. Source: CIA World Fact Book)iii.

The export-oriented readymade garments (RMG) sector in Bangladesh started its journey in late

1970s as a small non-traditional export sector. The RMG boom in Bangladesh initiated in the

early 1990s, when free-market oriented government policies and a variety of incentives to RMG

producers first enabled entrepreneurs to invest widely in the sector. Throughout the 1990s, the

RMG industry grew steadily, from 759 RMG factories at the start of the decade to 2,726 by

1998. In September, 2008 the number of RMG factories in Bangladesh stands at 4,740 (Source:

BGMEA). After a few decades it has become the major export revenue earning sector,

employing the major portion of human resource working in the industrial sector of the country.

The RMG that is produced in Bangladesh is primarily for export. The Bangladesh RMG industry

has thus far concentrated on the US and EU markets: about 32% of Bangladesh RMG exports

are to the US, another 60% is to the EU and the remaining 8% goes to other countries. In 2007-

08, RMG accounted for 75.83% of all of Bangladesh exports in terms of value.


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The growth of RMG sector is due to the increase in the number of firms producing RMG in

Bangladesh. The global recession following the events of September 11, 2001 had a distinct

impact on the Bangladesh RMG industry, leading to the closure of several non-performing small

RMG firms. The exports of RMG suffered as well, recording a 7% decrease in that period.

However, the industry was able to stabilize and continue growing throughout 2002, resulting in

a 13% growth in exports in 2003. In the period 1990-2004, Bangladeshs market share in total

world exports of clothing has only increased from 0.46% to 1.07%. Over the past one and half

decade, RMG export earnings have increased by more than 8 times with an exceptional growth

rate of 16.5% per annum. However, China has recorded a spectacular growth of market share,

from 7.95% in 1990 to 21.04% over the same period. Thus China has grown extremely

competitive in global markets.iv

The good news, however, is that Indias market share is not as large as Chinas. This is not dueto weaknesses in Indias RMG industry rather, Indias already diverse export portfolio means

that they are not as reliant on the export of RMG as Bangladesh although their market share

has grown, from 2.22% in 1990 to 3.33% in 2004.

Prior to January 1, 2005, all predictions indicated that the Bangladesh RMG industry would

suffer acutely in the face of open competition from India and China. Experts seemed unanimous

that the end of the MFA would provide a severe shock to the Bangladesh RMG industry, and

that such a shock would make it difficult for our RMG factories to continue their impressive

growth trend. In the post-MFA era, Bangladeshs RMG exports have not declined but, in fact,

have continued to grow. In 2005, RMG exports to the US grew by US$ 392 million, a growth of

18.8% over the previous year. Till April 2006, a total of US$ 925.5 million worth of RMG had

already been exported to the US. This provides a monthly average of US$ 231.4 million worth of

exports.

In 2006, 49.13% of our total RMG exports came from EU countries. In 2006, RMG sector earned

33.1% of its export revenue from US market. The exports grew steadily in this period for other

countries. In 2006, 17.64% export revenue was earned by exporting apparel products in other

markets and the percentage increased to 18.43% in the following year. Bangladesh's exports to

the USA grew by almost 5 percent in 2007, according the US Department of Commerce.v

But

the export volume in the US market did not increase that much compared to EU market.

Through our research, we found out that, due to the US recession, the manufacturers of

Bangladesh experienced some drop in the number of orders from the US buyers in the latter


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half of the year 2007. Among the RMG exporting countries, only Vietnam did not face the heat

of the US recession last year because their export-oriented industries are specially insulated

against any extraneous or political disturbances which enable the country to produce goods

and services at cheaper price than in any other country in the subcontinent.vi

Bangladeshs RMG exports to the world market reached an all time high value of over USD 9.35

billion in the end of 2007. Woven apparel exports and knitwear exports stood at USD 4.61

billion and USD 4.74 billion respectively. In 2007, the RMG sector experienced a growth of

4.67%. While this growth rate is not as impressive as the one achieved in the previous years,

the relative position of Bangladesh, compared to most regional competitors in the two main

export markets remains strong. An additional highlight for 2007 is that for the first time in the

sectors history knitwear exports exceeded those of woven apparel.

The global RMG market is estimated at US $400 billion at present. Bangladeshs share of this

market is estimated to be around 6% at the end of this year. There is ample opportunity for the

industry to grow and Bangladeshi manufacturers are confident that the countrys market share

in the next 2-3 years will stand at around 8-10% of the global market.

In spite of having a strong and growing RMG sector, new threats and global challenges are upon

Bangladeshs RMG sector. Both the major export markets of Bangladesh have started

experiencing recessions in their own economy from the second quarter of the 2007-2008

financial year. The US and EU economists are concerned about the fact that various economic

indicators are showing an upcoming recession in both the economies.

The main factor pushing the US economy into recession is the weakness in the housing market.

The recovery of the US economy that began in November 2001 was primarily fueled by the US

housing market. With prices now headed downward, construction and home sales have

dropped off by almost 20 percent against year ago levels. Even more importantly, borrowing

against home equity, which had been the main factor fueling consumption growth, will

plummet as many homeowners lack any further equity to borrow against. The result will be a

downturn in consumption spending, which together with plunging housing investment, will

likely push the economy into recession. The economy will see a substantial net loss of jobs, with

nominal wage growth slowing as the labor market weakens over the course of the yearvii

.

The EU is faced by similar economic downturns and is feared to gear a recession in the EU.


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European company investment, consumer spending and exports declined in the second quarter

of 2007, dragging the economy into a 0.2 percent contraction and pushing it to the brink of a

recession. Investment by companies fell 1.2 percent, the first decline in five years, and

household expenditure dropped 0.2 percent after stagnating in the previous three months.viii

The ongoing recession in the major export markets of RMG is posing as a new challenge for

Bangladeshs RMG sector. The effect of the recession might adversely affect the RMG sector in

the coming years. Focus should be put on the measures that the other competing RMG

exporting countries are taking, especially the measures of the Chinese and Indian Economy.

Bangladeshs competitiveness at this challenging time also needs to be analyzed. An insight is

required on how this global recession, especially in the major buying nations, is likely to affect

the RMG industry of Bangladesh.

1.3 Problem Statement

For over a decade the Ready Made Garments (RMG) industry has been playing a significant role

in Bangladeshs economy. It contributes to almost 11% of the total GDP of Bangladesh. The

garments produced in Bangladesh is primarily for the purpose of export and a major portion of

our foreign currency earnings depends on RMG products. The lion share of our RMG exports

goes to US and EU markets. About 32% of RMG are exported to the US, another 60% to the EU

and the remaining 8% are exported to other countries. Bangladeshs RMG export to the world

market reached an all time high value of over USD 9.35 billion by the end of 2007.

However, this momentum of increasing export market share has recently been hampered by

the ongoing global recession. The global economic slump has been caused largely due to high

oil prices which led to both high food prices and global inflation. Moreover, the substantial

credit crisis leading to the bankruptcy of several large, well established financial institutions in

the US economy; the worlds largest economy played a massive part in this economic downturn

worldwide. In addition, the US economy entered the year 2008 with a declining dollar value,

which alone acts as a stirring factor to the stability of the global economy; especially impactingon those countries whose export industry largely depends on the US market.

In this prevailing situation, the effect of this global recession might have an adverse effect on

the RMG sector of Bangladesh; putting a halt to the growth of the countrys economy. This


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indeed is a very crucial time period for Bangladesh to adjust with the economic turmoil that the

whole world is facing as experts predict that this recession would be continuing till 2012.

An insight is thus required to measure the readiness and competitiveness of the RMG sector to

face the current challenges as well as the aftereffects of the global recession. Consequently, it isrequired to be looked upon into whether this continuing global recession will have a robust

impact on the expansion of the RMG sector of Bangladesh.

1.4Objectives1.4.1 Broadobjective

To analyze the impact of the recent Global Recession on the RMG sector of Bangladesh.

1.4.2 Specific Objectives

1.Analyze the psychological factors affecting the buying behavior and fashion trends of

European and US markets.

2.Analyze the impact of changing dollar value on the RMG industry of Bangladesh

3.Analyze the impact of recession on the overall profitability of Bangladeshi RMG

manufacturers.

4.Analyze the scope of innovative strategies to increase the overall profitability of RMG

industry to counter the ongoing global.

1.6 Scope

The scope of our study has covered three types of data sources:

RMG manufacturers

For our research, we have chosen only those RMG manufacturing units that are located inside

Dhaka city. This portion of our scope is divided into two parts which are respectively woven and

knitwear units. A total of 18 RMG manufacturing units was covered for the purpose of the

report.

Buying Houses

We have gained insight from 2 buying houses for woven and knitwear manufacturing units who


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mainly serve for the US and EU markets. In this case also we have chosen only those buying

houses that are located inside Dhaka City.

Personnel related to Export Promotions Bureau/RMG Expert

For the purpose of the research, we have conducted personal interviews with Mr. Fazlul Haque,President of Bangladesh Knitwear Manufacturers and Exporters Association. This interview

provided us a full picture of the present scenario and future prospects of Bangladeshi

Readymade Garments industry from both the perspectives of manufacturers and buyers.

1.7 Limitation

1. The scope of this study is confined to only Dhaka city. Inclusion of other cities may have

added value to the study but not feasible due to time constraint and inconvenience.

2. Study of the buying pattern of USA and EU buyers is solely dependent on the data provided

by the corresponding buying houses and secondary information as primary data collection

in the US and EU market was not possible.

2.0 Methodology

2.1 Research Design

The research paper is an explorative study in nature. Exploratory research was conducted

because the problem has not been identified clearly till now. Exploratory research helped in

determining the existence of the actual problem and different dimensions of it.

In our exploratory research we relied on secondary research such as reviewing available articles

published in journals, research papers, reports and websites; and qualitative approaches such

as discussions with teachers, experts, and regulatory bodies, and more formal approaches

through key informant interviews.

2.2 Data Collection Method

2.2.1 Primary Data

Primary data is gathered from interviews with persons involved with RMG sector of Bangladesh.

The list of interviewee includes Bangladeshi RMG entrepreneurs, officials of Bangladesh
http://en.wikipedia.org/wiki/Secondary_researchhttp://en.wikipedia.org/wiki/Secondary_research


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Garments Manufacturers and Exporters Association (BGMEA), Bangladesh Knitwear

Manufacturers and Exporters Association (BKMEA) and buying houses.

To conduct the interviews with the various personnel, we have prepared a checklist which

would provide us with vital qualitative views and informations which was crucial for ouranalysis and research. The checklist prepared for this purpose covers all possible areas that are

significant to our topic and helped us to analyze the current situation prevailing in Bangladesh.

The checklist for secondary research can be found in the Appendix section of the proposal.

2.2.2 Secondary Data

Secondary research is carried out through detailed study of:

1. Relevant websites, journals, research papers and reports2. Various write-ups and books concerning the RMG industry of Bangladesh by experts of

various fields

These data demonstrate the scenario of ongoing global recession, trend of Bangladeshi RMG

products of last FY 2007 and 2008 and responses of US and EU buyers towards these products

etc.

One secondary checklist has been prepared keeping in mind the information and data required

from our secondary research and all these data would be numeric in nature. The checklist is

attached in the Appendix section.

2.3 Analysis Design

The proposed research topic is Global recession and its impact on the RMG sector of

Bangladesh. Thus the scope of our research includes two different dimensions. First, the

existence and magnitude of global recession is analyzed through secondary data analyses.

Then, the primary data collection and its analyses helped us to find out whether there is anychange in the RMG exports of Bangladesh and determine the relationship; if existent, between

the global recession and this change experienced in the RMG sector.

The existence and magnitude of global recession is analyzed through quantitative data analyses

from secondary checklist. We have used regression analysis to find out the relationship


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between the indicators of recession and the change in RMG export volume. Recession has both

long term and short term impact on a countrys economic activities. Hence, we would look into

both the short term and long term impact of this ongoing global recession on the RMG export

of Bangladesh. To analyze the short term impact of recession on the RMG exports we have

done regression analysis between three indicators of recession; Stock index of NASDAQ, oil

price & CPI and RMG exports of Bangladesh to USA. To analyze the long term impact of

recession on the RMG exports we have taken only one variable, Gross Domestic Products (GDP)

and done regression analysis between GDP of USA and RMG exports of Bangladesh to USA.

Through primary data collection we tried to find out the factors which are influenced by the

ongoing global recession. A checklist has been developed to identify any significant change in

order volume and profit margin is experienced under the current circumstances. The primary

checklist also collected vital data regarding any changes in the psychological factors of theconsumers in the buying country. We also tried to find out the viewpoints of RMG

entrepreneurs on innovative strategies to counter the negative impacts. For analysis of the

collected information from the primary checklist, we developed frequency tables against each

question. The factors are identified in accordance with the highest response (modal value)

coming from the respondents.

2.4 Sampling Design

2.4.1 Sampling Technique

Non Probability Sampling:

Non-probability sampling has been selected as the sample was chosen solely based on personal

judgment as the subjective judgment on deciding the sample makes the study convenient and

more feasible.

Quota Sampling:

We have chosen Quota Sampling Technique because our sampling technique follows a two

stage restricted judgmental sampling.

1. In the 1st stage, the population elements were divided into controlled categories or

quotas.

2. In the 2nd stage, the sample elements were chosen on the basis of judgment or

convenience.


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2.4.2 Sampling Frame

RMG Units

Buying Houses

2.4.3 Sampling Elements

The sampling elements were selected on the basis of judgment and convenience. The following

are the elements that we have chosen for the study:

Big Enterprise

Medium Enterprise

Small Enterprise

EPZ

Non EPZ

Exporter to US Market

Exporter to EU Market

Buying House- US Market

Buying House- EU Market

2.4.5 Sample Size

According to the information provided by Bangladesh Garments Manufacturers EnterpriseAssociation (BGMEA) on September, 2008; there are a total of 4740 RMG factories currently

operating allover Bangladesh, 3302 in Dhaka division. Now, taking a sample size of 3302 and by

using the precision level of 5% to select the sample size will result into a sample of 344.

The calculation of sample size determination is shown below:

Population Size, N = 3302

Level of Significance, = 5%

Z score, z = 1.96

Success Rate, p = 0.5

Failure Rate, q = 0.5

Precision level D0= 5%

Sample Size n = (N z2 p q) / (ND02

+ z2

p q)


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Using these data, our sample size = 344

It was quite difficult to screen such a huge number of garment factories because of time,

budget and manpower constraint. Therefore, we have conducted our research on 18 major

garment factories. These factories was chosen considering four factors-export volume (Large/medium/small), exporting countries (EU/US), manufacturers or buying houses, EPZ/ non EPZ

factories.

3.0 Industry Overview

3.1 Background of the Industry

The export-oriented readymade garments (RMG) sector in Bangladesh started its journey in late

1970s as a small non-traditional export sector. After a few decades it has become the major

export revenue earning sector, employing the major portion of human resource working in the

industrial sector of the country. According to a World Bank report in 2006, the total workforce

of RMG sector was 1.92 million, with an annual growth rate of nearly 24 percent.1

However, Bangladesh being a Least Developed Country (LDC), faces difficulties in the

specialization of manufactured exports. Deficient marketing skills, infrastructure, and poor

investment atmosphere outweighs the benefits derived from low wage costs.

3.2 Sales Trend

RMG exports have been growing at a respectable rate. In the year 2006 and 2007 RMG exports

grew by 22.9% and 16.5% respectively. BGMEA has predicted the export earnings from RMG to

double by 2010. Moreover, the global apparel market is also increasing in terms of volume. It

has grown by 42% and 46% respectively in 2005 and 2006. So, the scenario is very optimistic for

the RMG industry of the country.

Although the US is the largest buyer country of Bangladeshs RMG items, exports to USA had

not been satisfactory last year. But the situation has been improving in the later months of

1 Rahman, Mustafizur, Debapriya Bhattacharya, and Khondaker Golam Moazzem. Bangladesh ApparelSector in Post MFA Era. Dhaka: Centre for Policy Dialogue, February 2008.


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2007 and initial part of 2008. The reasons behind this will be explored in later parts of the

report.

Europe has been a huge market for apparel export for Bangladesh. The ratio of exports to USA

and Europe has been on average of 35:65 in recent years. The main reason can be the GSP

benefits that large Bangladeshi manufacturers have been enjoying. Export growth in knitwear

has been much higher than that of woven garments, mainly due to the strong backward linkage

of the knit industry in Bangladesh which has played the major role in coping with the Rules of

Origin in Europe market. However, the medium and small sized knitwear manufacturers and

woven manufacturers in general, have not been able to take the GSP benefits due to weak

backward linkage. Of the total woven garments export to Europe only 40% enjoys GSP benefits

and are subject to MFN duty which is averaged at around 12%. Although exports to Europe

have been increasing but it has grown at a comparatively lower rate than the US market.

Composition of Europe and US exports has been slowly moving towards US market. In the year

2004 exports to Europe were 219% of exports in USA but came down to 178% in 2006.

3.3 Product Composition

3.3.1 Woven vs. Knit

Historically woven garments have been the prominent RMG products. However, growth in

knitwear sector has been more significant compared to woven products. Strong backward

linkage support in knitwear sector is the major reason behind this. Therefore it is easier for knit

exporters to avail the GSP facilities by complying with Rules of Origin concept.


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Figure 1: Growth of Woven & Knit Garments

At present, market share of woven and knit products is almost equal. For the first half of FY

2007, earnings from knitwear have crossed the share of woven products for the first time.

Amongst Asian countries, Bangladesh is ranked just below China in the case of knitwear export

and in the case of woven products after China and India.

3.3.2 Product Diversification

Total apparel export from Bangladesh is very concentrated to very few products both in US and

Europe markets. Major apparel items exported from Bangladesh are shirts, trousers, jackets, T-

shirt and sweater which comprise more than 80% of total export. Although these five items

have been the major apparel items composition of these products have been changing. In the

early 90s shirts contributed to the 50% of the total apparel exports which came down to 13.6%.

Major improvement has been in the bottom section especially in trousers. During 1993-2006

average annual growth in trousers has been 26.68%. According to manufacturers there is better

scope of value addition in the production of bottoms and many manufacturers are inclining

towards this item. Export growth of sweaters has been satisfactory (21.56%). In terms of

relative share, the product composition has been almost the same in both US and EU markets.

3.4 Market Composition

Currently two major markets of RMG from Bangladesh are US and EU markets. According to our

research, we found that majority of the manufacturers in Bangladesh export their products to

the major two markets. Bangladesh needs to increase the market growth in these countries

through introducing high value added products. Small enterprises tend to concentrate in one

market, either EU or USA because of their low level of production capacity, weak marketing

linkages etc. There are also a handful of big manufacturers who export their apparel products

to more than two markets.

Majority of our RMG export goes to 6 EU countries: Germany, United Kingdom, France, Italy,

Belgium and the Netherlands. Revenue wise, the US market is the second biggest market after

EU countries. Rest of the RMG exports go to countries like Canada, Australia, Russia, Japan etc.


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In 2006, 49.13% of our total RMG exports came from EU countries. In 2006, RMG sector earned

33.10% of its export revenue from US market. The exports grew steadily in this period for other

countries. In 2006, 17.64% export revenue was earned by exporting apparel products in other

markets and the percentage increased to 18.43% in the following year. Bangladesh's exports to

the USA grew by almost 5 percent in 2007, according the US Department of Commerce.2

But

the export volume in the US market did not increase that much compared to EU market.

Through our research, we found out that, due to the US recession, the manufacturers of

Bangladesh experienced some drop in the number of orders from the US buyers in the latter

half of the year 2007. Only Vietnam did not face the heat of the US recession last year because

their export-oriented industries are specially insulated against any extraneous or political

disturbances which enable the country to produce goods and services at cheaper price than in

any other country in the subcontinent.3

The current scenario of export in major markets is

discussed below:

3.4.1 United States:

Trade Policy: In recent years, because of increasing imports, a number of phenomena are

occurring in the textiles and apparel sectors of the US-

Restructuring operations in the form of consolidation of production, divestiture of non-

core product lines, mergers and acquisitions

Increased global sourcing, including the use of assembly operations in Mexico and the

Caribbean countries

Adoption of the quick response manufacturing, marketing and distribution systems

Increased power of big retails companies which are taking on production responsibilities

in their private label product lines

2Build it in Bangladesh. The Daily Star. February 26, 2008.3Recession waxing and waning before looming. The Independent. January 28, 2008.


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The principal trade policy instruments of the US affecting apparels sector are quotas, tariffs and

rules of origin. The US has import quotas on apparels from 47 countries, of which 37 are WTO

embers. For imports from Bangladesh, 31 categories face quotas. The quotas limit quantities of

the specific categories without any group limits.

The first challenge came in 1984, however, when the US served a "call notice" to impose

quotas, alleging market disruption from an import surge of woven shirts from Bangladesh.

Many factories went out of business. The US proposed a liberal "global quota" on exports of all

categories of apparels and textiles. Bangladesh, however, opted for a restrictive quota on shirts

only, and kept the door open for export of other categories. Garment manufacturers took this

opportunity to diversify production. The US imposed quota restrictions on about 30 more

categories, as exports to the US increased till the Uruguay Round WTO Agreement on Textiles

and Clothing became effective in January 1995.

Market and Product Growth: Knitwear imports of the US from Bangladesh amounted to USD

75.18 million in September 2007, a 20% decline from the same month in 2006. Yet, year-end

September 2007 data show a 13.64% overall increase in knitwear imports, suggesting an overall

positive export growth for the period October 06-September 2007.

Of the 17 categories at the 4-digit level, the best performing item is Women and Girls suits.

Despite its relatively small share in overall imports from Bangladesh, the growth of this item in

the months of July, August and September has reached an astonishing 244%, 168% and 40%

restively, and a year end growth of 71%.

Significant positive growth has also been recorded in other categories as indicated in table 2.

Mens /Boys shirts, despite having a positive growth of 8.04% when compared to YE 2006, have

seen a significant decline for the months of August and September at -63% and -68%

respectively. Other trailing items include categories HS 6102, 6107, 6113, and 6116.

Woven apparel imports from Bangladesh have also exhibited a negative growth of nearly 15%.

All the items with the highest import share, including Women and Girls shirts have exhibited

either sluggish or negative growth. The performance of W/G blouses is also lagging behind with

a September decline of 51.1% and an overall decline of 11.41%.


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3.4.2 European Union:

Trade Policy: The main trade policy instruments concerning exports of textiles and clothing to

the EU are quotas and tariffs. The EU maintains 209 quotas on textile and clothing from 21

countries including 7 non-WTO countries. Though EU imposes no quotas on apparels from least

developed countries including Bangladesh, three product groups-4, 6, and 8 are double checked

in surveillance.

European countries also imposed quotas, but withdrew the restrictions once imports started

showing downward trend. Successive governments supported RMG export with facilities like

bank credit at reduced rates of interest, duty free import of machinery, cash subsidy, and

exemption from value-added and other taxes.

In addition to quota-protected export markets, Bangladesh's RMG industry benefited from tariff

concessions granted under the EU's Generalized System of Preference (GSP) and more recently

under its Everything But Arms initiative for Least Developed Countries. However, for duty-free

access to the EU markets, apparels produced in a LDC must fulfill its GSP Rules of Origin, which

require that a two-stage transformation must take place within its territory. For woven

garments this means that the fabrics used in production should be locally produced, while for

knitwear products the used yarn should be of domestic origin. Fortunately, almost allBangladeshi exporters of knitwear, and a significant portion of woven garments, succeeded in

meeting those criteria.

Most woven garments made in Bangladesh have low domestic value added content, and,

therefore, do not qualify for EU GSP facilities. According to one estimate, Europe is the

destination of about 35 percent of Bangladesh's woven exports, of which only 40 percent

receive GSP benefits. A significant proportion of Bangladesh's apparel exports to the EU are

subject to the MFN duty, which is averaged around 12 percent. Before phase out of the MFA, it

was thought that Bangladesh would not have any problem in the EU market because of the GSP

tariff preference. However, failure to satisfy EU rules of origin made a large proportion of

woven garments ineligible for DF entry.


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Market and Product Growth: EU is the largest destination of Bangladeshi apparels and its

accounts for about 60% of the countrys total RMG exports. During the month of August 2007,

knitwear exports of Bangladesh to the EU amounted to 333.31 million Euros, which is 7.1%

higher than that of the previous year.

W/G suits and M/B underpants are the best performing among 17 items at the 4 digit level.

These two categories have exhibited robust growth both in the month of August as well as

throughout the year achieving a year-end growth rate of 41.87% and 71.75% respectively.

During the month of August 2007 woven apparel exports of Bangladesh to EU have declined

3.6% over the same period of previous year and year-end data shows a negative growth of

2.66%.

Of the 17 categories of woven apparels at the 4 digit level, best performing item in terms of the

growth rate is Shawls and Scarves, yet the relative share of this item remains insignificant and

its annual growth is -24.85%

W/G blouses grew by nearly 60% in the month of August, reaching the highest annual growth

rate of any woven apparel product (20.29%). W/G shirts category is the worst performing item

among high export volume items.

In the period Jan-Aug 2007, Bangladeshs export to the European Union have either stagnated

or declined in comparison to the same period in 2006. Specifically, knitwear imports from

Bangladesh to the EU have risen by a meager 0.19%, while woven imports have declined by

approximately 9%. Larger losses have been experienced from Indonesia and Cambodia,

whereas China, Turkey and Vietnam appear to be the largest winners. Chinese imports in the

EU have risen by 33% and 26% for knitwear and woven apparels respectively.

The situation appears slightly different in the United States market. During Jan-Aug 2007,

knitwear imports from Bangladesh have risen by 18.3% while woven imports by 11.3%. Despite

the achievement of a significant growth rate in knitwear imports from Bangladesh, the figure

remains relatively smaller than some of the countrys competitors, namely China and Vietnam,

indicating potentially a loss in relative market share. Woven import growth is noteworthy in


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sight of the decline observed in India and Sri Lanka. In this category, imports from Cambodia are

stagnating.

Table 5: US Knit and Woven Imports

KNIT WOVEN

Jan-Aug

2007(US$)

Growth % Jan-Aug

2007(US$)

Growth %

Bangladesh 534263930 18.3 1511543425 11.3

Cambodia 1016964775 31.8 579864626 0.3

China 6268767789 50.5 9258560953 22.8

India 914345607 15.1 1429012278 -7.1

Indonesia 1137780603 33.2 1606454057 4.4

Pakistan 691841120 6.2 302827937 17.4

Sri Lanka 481781921 9.1 612438338 -9.3

Vietnam 1330866932 42.4 1392486008 15.4

Source: USITC

3.5 Competitive Advantages of BangladeshBangladesh is currently regarded by many as one of the top five exporters of readymade

garments. Hence, the buyers around the world are recognizing Bangladesh as the Taylors of

the World. Its competitive edge relies primarily on the abundance of human resource in the

country. Specific advantages in this regard are

1. Cheap labor: Low wages have traditionally been a major strength of Bangladesh's labor-

intensive apparels sector. The hourly wage rate in Bangladesh's apparels sector is lower

than China and Sri Lanka (US$ 0.39 as compared to US$ 0.69 and US$ 0.48 respectively).

However, wage rate of other competitors such as Pakistan and India are somewhat similar

to Bangladesh's, being US$ 0.41 and US$ 0.38 respectively (USITC, 2004).4

While

Bangladeshs cost of labor has gone up since the government declaration of minimum wage

of Tk. 1620 per month. The wage rates in China, India, and Vietnam have also been rapidly

4 Rahman, Dr. Mustafizur. Bangladesh After MFA Phases Out. Dhaka: Center for Policy Dialogue, Jun.2005.


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increasing due to their consistent economic growth and increase in the overall standard of

living.

2. Large experienced work force: The garments industry right now is employing a significant

portion of the nations workforce. Through decades of experience, the average labor skill in

the RMG sector in Bangladesh developed significantly. The quality of products produced in

Bangladesh is, according to both buyers and manufacturers, a key advantage of

Bangladeshs apparel business.

3. Self sufficiency in the accessories industry: The majority of enterprises consider local

sources to be the most important for procurement of accessories. More than 75-85% of

entrepreneurs of knit and sweater units procure major share of their accessories (about 80-

90%) from local sources; about 50% entrepreneurs of woven units do so from the local

market. However, Local manufacturers has to procure accessories like buttons, zippers,

labels, hangers, etc. from countries like China and India5

if the buyer nominates any

international source to meet its required standard.

4. Strong backward linkage in the knitwear industry: The knitting section of the RMG sector

has seen great progress mainly due to its strong backward linkage. The capacity of the

backward linkage is debatable, with sources in BKMEA claiming it to be 95% of local

requirements and sources in BGMEA being conservative and estimating it to be around

80%. Nonetheless, it is no doubt stronger than that of the woven sector of Bangladesh and

knitwear industries of other competing countries. In the knitting industry, the setup cost is

comparatively lower than the weaving units. Thus more entrepreneurs enter this industry

and combined with the accessories industry, play a major part in the development of the

overall knitting industry.

5. Scalability of manufacturers: While majority of the RMG manufacturers in competingcountries like China, fall within the small and medium enterprise (SME) category, according

to a number of interviewees, Bangladesh has a relatively larger proportion of manufacturers

5 Rahman, Mustafizur, Debapriya Bhattacharjee, and Khondaker Golam Moazzem. Bangladesh ApparelSector in Post MFA Era. Dhaka: Center for Policy Dialogue, 2008. pp.120


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who have successfully achieved high economies of scale. Thus, they are able to provide the

manufacturers with cheaper prices and greater volumes for orders.

6. Continuous investment in technology and machineries: Bangladeshi garments

entrepreneurs are constantly investing in newer technologies to facilitate their production.

The country can boast of having a better equipped RMG sector in terms of technologies and

machineries compared to its competitors. This allows it to offer better quality and

production lead time for its buyers.

7. Adaptability to buyers style and design requirements: Due to its skilled workforce and

advanced technologies, the apparel vendors of Bangladesh are able to adapt to the design

and style requirements of the buyers very easily. Working with the same buyers for a long

time is another reason behind this advantage.

3.6 Disadvantages of Bangladesh

Most disadvantages of Bangladeshs garments sector is its internal problems. There is a

common feeling among businessmen that the public sector of the country is not taking the right

measures to help this sector capitalize on its opportunities. The key disadvantages for this

sector are

1. Political uncertainty: According to most buyers as well as vendors, the present political

uncertainty in Bangladesh is undermining the potential of the RMG sector. Confrontational

politics had caused the countrys exports severe damage earlier, but the current uncertain

situation is also having negative effects. Vendors are hopeful that orders will increase

further once a democratic government comes to power.

2. Power shortages: A major threat to Bangladeshs booming RMG export is the countrys

current power shortage. Due to shortage of power, gas and diesel, industries are not able to

work to their full capacity. BGMEA fears that production in RMG industry might fall by 50

percent and production cost might go up by about 25 percent due to the crises. Due to

power shortage shipments are sent through air, thereby it increases the cost6.

6 South Asia Analyst Group. May 25, 2008
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3. Labor unrest: Labor unrest was one of the major reasons behind the slump in the garments

industrys performance in the latter half of last year. Vendors are apprehensive that if the

spiraling prices of essential commodities dont go down or any assistance such as rations

are not provided to garments laborers, another upsurge might take place throughout the

country and hurt the RMG export of the country further.

4. Lead time: In Bangladesh the lead time for apparel exports is significantly more than that of

its competitors. Foreseeing market demands by 4 to 5 months is impractical and buyers

most definitely prefer companies that can respond to their needs quickly. Recent

developments in the Chittagong Port, however, have been very positive and both buyers

and manufacturers are quite satisfied with the current situation. Now, the customs

authority of Bangladesh needs to improve so that goods can be cleared faster.

5. Lack of favorable government policies: Although RMG makes up nearly 76% of the import

basket, it has been given few benefits by the government. Many government policies are

damaging because they delay the speed of business operation. Even though there was a

cash assistance of 25% on the knitting industry for export initially, it has fallen to a mere 5%

now.

6. Poor midlevel management: The garments industry has so far failed to attract highly

trained and qualified managers for its midlevel management. Nearly all of the garments

manufacturers of the country are run by the owners and generally have a very weak

midlevel management. This leads to a very centralized structure and may cause peripheral

problems as the company grows. Most garments factories also have a very high ratio of

workers to managers, which combines with the poor management skills of the managers

makes it even more difficult for them to manage and often results in labor unrest.

4.0 Demand-Side Dynamics

The readymade garments sector, especially the low-end product market, is essentially a

demand-driven market. The buyers have more bargaining power than the manufacturers and

have deep influences on manufacturers decisions. The primary reason is that the market has


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more suppliers than is needed7. Other reasons, applicable particularly for Bangladesh, will be

discussed in later chapters. Bangladesh operates mostly in the low-end basic apparel market,

which displays certain characteristics that make it very unique from markets of other

businesses.

Firstly, the demand in the market almost never shows substantial fluctuations. Rather, it

experiences a steady growth over time.

Secondly, there is little scope for innovation regarding the product, and such

innovations are, in effect, need based.

Thirdly, the production process is very labor intensive; hence, major suppliers in the

market are LDCs with an abundance of cheap labor.

As a consequence, developing nations tend to abandon this industry as soon as they reach the

2nd

phase of economic development, characterized by a transition to manufacturing high-value

products, e.g. electronic goods, heavy machinery, etc.

4.1 Major Buyers

The global RMG market is estimated at US $400 billion at present. Bangladeshs share of this

market is estimated to be around 6% at the end of this year. There is ample opportunity for the

industry to grow and Bangladeshi manufacturers are confident that the countrys market share

in the next 2-3 years will stand at around 8-10% of the global market8. Historically, the largest

market of the Bangladesh garments industry has been the European Union, where about 50%

of the total garments export is sent. The second largest market and the largest individual

country that sources from Bangladesh is the United States of America with a share of 31% of

the total RMG export of Bangladesh.

The largest single buyer of Bangladeshi apparel items is Wal-Mart, whose annual sourcing from

Bangladesh stood at around $800 million. The biggest EU based buyer of Bangladeshs RMG is

H&M, having won the BGMEA Best Importer Award for the last two years. It might be

mentioned here that while Wal-Mart avails its liaison office in Bangladesh, other buying houses

7 Perera, Aruna. Personal interview. 17 Mar. 2008.8 Chowdhury, Anwar-Ul-Alam. Personal interview. 13 Apr. 2008.


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(e.g. Li & Fung), and also contracts between its head-office and selected manufacturers for its

sourcing, H&M procures its merchandise solely through its local liaison office. Besides these

two, many large international apparel brands are sourcing from Bangladesh

4.2 Factors Influencing Sourcing Decisions

4.2.1 Economic Condition of Buyers Country

Since the worldwide apparel industry is very much a demand-based one, the economic

conditions of the buyer countries have a significant impact on the buyers sourcing decisions. If

the economic condition of a country is not favorable, there will be a drop in the demand for

most goods and services. This usually has two possible implications for the buyer. Firstly,

experiencing a drop in sales, the buyer might cease to place further orders to the vendors.

Secondly, it will source only from those vendors who offer the lowest prices.

However, the RMG industry of Bangladesh is not very likely to suffer from any drop in sales

volume in such a situation since most of the RMG industry players of the country produce low

end basic apparels. As mentioned earlier, basic commodities do not display significant falls in

demand even in adverse economic conditions. There are some large manufacturers in

Bangladesh producing mid-range items as well as the basic ones. But such companies may not

suffer much due to economic problems in the buyer countries. The reason can be explained by

Bangladeshs safeguard against the second implication. The second possible implication puts

Bangladesh in an even more favorable condition. Bangladeshs strength in the RMG business

has historically been cheap labor costs, and hence, cheap selling prices. As a consequence,

buyers willing to source only at the cheapest price will have to come to Bangladesh. This has

been confirmed through the interviews conducted none of the American buyers admitted any

decline in sales of their basic apparel items or for such brands.

The present scenarios of the global economy and of Bangladeshs latest export figures prove

this hypothesis. The United States of America is, according to many experts, undergoing an

economic recession. The unemployment rate in the country is high, major share market indices


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are falling and the average household earning is lower than in 1999 once inflation is adjusted9.

This apparent recession has a chain effect and is generally considered to have caused a global

economic slowdown. But Bangladeshs RMG export has not experienced any negative impacts

whatsoever. The country did experience a slowdown in export growth in the July-November

period of the current fiscal year (2% year on year growth compared to double digit growths of

previous years), but this has mostly been accredited to political uncertainty and labor unrest

within the country10

. This became evident in January, when the total export showed a

staggering 51% increase year on year, backed primarily by the performance of the RMG

sector11

. The argument presented is further strengthened by the fact that most buyers and

vendors interviewed confirmed that Bangladesh is enjoying an increase in its sales volume of

RMG, and that this trend can be expected to continue at least for the next 3-5 years.

Another aspect of the US recession is the length of time before it ends. While some believe that

the recession will continue to hamper the countrys economy for a long time, there are others

who are hopeful that measures taken by the Fed are going to have some effect on curbing the

recession, and that the economy might return to normalcy after this years presidential

elections.

4.2.2 Currency Appreciation/Depreciation

Since the US dollar (USD) is the most commonly used and accepted currency in international

trade, the value of the buyers/vendors currency against the USD plays a pivotal role in

sourcing decisions. An appreciation against the USD means an increase in the cost of

production for the manufacturers, but a decrease in the effective purchasing price for the

buyers. The USD is currently in a process of realignment, depreciating in value against many

9 Leonhardt, David. "U.S. Recession Appears Unavoidable." International Herald Tribune 9 Mar. 2008. 13Apr. 2008 .10 Country Report: Bangladesh. Economist Intelligence Unit. London, Mar. 2008. pp.1111 "Garments Eye $18b Export by 2010 as China Struggles with Strong Yuan." The Financial Express 16Mar. 2008.
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major currencies. The causes behind this trend have been identified as speculations about the

countrys growth prospects, weak equity markets, and a large current account deficit12

.

Bangladeshs principle competitive edge against other Asian countries comes from its position

against the USD. The Taka (BDT) has remained virtually constant against the dollar in the

current fiscal year compared to the previous one. But many of its competitors, like China,

Vietnam and India have witnessed a rise in their cost of production due to their currencies

appreciating strongly against the USD. In China, the Yuan (RMB) appreciated about 7% last year,

and another 3% in the first two months of this year. The Indian Rupee (INR) has gained about

11% in 200713

. In Vietnam, the Dong (VND) gained 1.07% in the central banks exchange rate

and 5% in the unofficial market against the USD since last December. This is another reason

behind Bangladeshs strong export performance since the beginning of this year14

.

4.2.3 Trade Agreements

Trade agreements are a major part of the global RMG market and can play crucial roles in

buyers decisions. The Multi-Fiber Arrangement (MFA) governed the world trade in textiles and

garments from 1974 through 2004, imposing quotas on the amount developing countries could

export to developed countries. During the MFA period, as many as 52 countries were involved

in the garments sector. But after the abolishment of the MFA, this number came down to

around 30-35 countries, and by 2012, it may come down to only 12-13 strong players15

. The

rationale behind this is that during the MFA period, buyer countries were forced to buy from a

diverse range of countries because of the quota that was imposed. But in the post-MFA period,

these countries have no restriction on the amount they can source from any particular country.

Hence, they will opt to limit the number of countries they buy from, sticking only to those that

are most competitive in the trade. This mindset of the buyers has been instrumental in the

success of Bangladeshs RMG sector in the post-MFA era. Bangladesh, in the first 3 years of the

12 Implications of a US Dollar Depreciation for Asian Developing Countries. Asian Development Bank.Manila, Nov. 2002. pp.1413 "Garments Eye $18b Export by 2010 as China Struggles with Strong Yuan." The Financial Express 16Mar. 2008.14"Falling Dollar Costs Vietnams Exporters." The Daily Star 17 Mar. 2008. 17 Mar. 2008.15 Chowdhury, Anwar-Ul-Alam. Personal interview. 13 Apr. 2008.
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abolishment of the MFA quota restrictions, enjoyed a 60% increase in its RMG export. Some of

its competitors like China, Vietnam, Cambodia, and India, however, have also seen similar

growths in their business after the MFA was lifted.

Bangladesh enjoys duty-free access in the EU market for all its products due to the European

Commissions Everything but Arms scheme under the Generalized System of Preference (GSP)

agreement. This agreement states that all least developed countries (LDC) will have duty free

access in the EU if they comply with the set rules of origin16

. Since Bangladesh still has some

way to go before becoming a middle income country, the GSP can be expected to assist

Bangladeshs export trades at least for the next 10-15 years.

However, since 2001 the US has excluded a list of 20 apparel items from their GSP which

incidentally covered most of Bangladeshs export items. On the other hand, the US has a

legislation named the African Growth and Opportunities Act (AGOA), through which it supports

37 designated Sub-Saharan African countries. The act originally covered an 8 year period from

October 2000 to September 2008; but amendments signed into law by President George Bush

in 2004 have extended AGOA to 2015. At the same time, a special dispensation relating to

apparel was extended by three years to 200717

. According to many buyers, the absence of any

trade agreements in favor Bangladesh in the US is a drawback for the RMG sector. Bangladesh

also enjoys a duty-free preferential access to Canada and Japan through some agreements that

have relatively liberal rules of origin and value addition requirement. These countries, besides

having these trade agreements also have a good market potential which large Bangladeshi

manufacturers are trying to explore.

There are some other trade agreements besides the GSP and the AGOA that may prove to be

crucial for Bangladeshs RMG sector. The trade barrier imposed on China by the EU and the US

is one of them. To protect the interests of the local businesses of these regions as well as those

of other LDCs, the US and the EU have restricted the growth of Chinese RMG exports to 7.5%

16 The rules of origin are (i) a minimum of 30% value addition in the country for products whose rawmaterials are procured locally, and (ii) a value addition of 50% or more in two stages of production forproducts whose raw materials are procured from other countries in the same region.17AGOA.info> Resource on the African Growth and Opportunities Act. AGOA.info. 14 Apr. 2008.
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per year from 2005 to 2008. The abolishment of this restriction may be regarded as a risk to

Bangladesh, but there are other factors associated as well. China, in its process of economic

development, is likely to stop facilitating the textiles and garments business in order to go into

more high value products e.g. electronic goods or heavy machineries. Moreover, the

appreciation of the RMB against the USD and subsequent increases in cost of labor is not going

to help the garments exporters of the country. Because of these reasons, garments businesses

from China are contemplating expanding or moving their production facilities in Bangladesh18

.

The most recent development in international trade agreements, the current WTO negotiation

in the Doha round, has intriguing future possibilities for the RMG sector of Bangladesh. Under

the Non-Agricultural Market Access (NAMA) agreement, developed member countries and

developing member countries declaring themselves in a position to do so are going to provide

duty-free and quota-free market access (DF-QF) for at least 97% products originating from

LDCs, defined at the tariff line level, by 2008. This may result in a substantially changed scenario

with respect to the competitiveness regime of Bangladeshs exports in the developed countries.

There will be an erosion of preference for Bangladesh in the markets of EU, Japan, and Canada

where Bangladesh has a duty-free access, due to Chinas increased competitiveness due to

the DF-QF decision; but it comes with the possibility of enhanced market access against the

AGOA countries in the US depending on the nature of implementation of this decision19.

4.3 Plans of Buyers Regarding Sourcing in Bangladesh

Individual buyers sourcing strategy is critically dependent on three factors (i) price, (ii)

quality, and (iii) lead time. In essence, these three factors are very much inter-connected and it

is usually the combined outcome of all three that influence buyers decisions. Buyers usually

prefer working with the same set of vendors for a long time because of the trust and

understanding that develops with time. But in terms of countries they source from, they dotend to transfer orders from less competitive countries to more competitive ones if no

restrictions are imposed. This is, however, a gradual process implying that no single buyer has

18 Nam, Kort York. Personal interview. 18 Mar. 2008.19Current WTO Negotiations Under Doha Round: Insights from CPDs Geneva Tracking Mission 2008.Center for Policy Dialogue. Dhaka, Mar. 2008. pp.6-7


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the power to increase or decrease the sales of a country substantially. From the perspective of

the buyers interviewed during the preparation of the report, Bangladeshs major strengths in

RMG trade is not cheap selling price, but rather, the quality offered at competitive prices.

Shortening the lead time could be a catalyst in increasing the countrys RMG export.

4.3.1 Limiting the Number of Vendor Countries

In the absence of any sort of trade agreements, it is likely that buyer countries would want to

source from as few countries as possible. With the gradual economic development of China and

India, it is likely that the low end basic apparel manufacturing business is going to move away

from these countries, and Bangladesh is a likely destination of this capacity transfer. It is worth

mentioning here that this does not mean the garments industry is going to close downcompletely in these countries, but rather, only a gradual decline in the low value RMG products

will be experienced. Countries like India will still continue to dominate the upper segments of

the market through their established reputation and expertise in exclusive fashionable items.

It can safely be stated that Bangladesh, in the coming few years, is going to be a lucrative

sourcing destination of large apparel buyers. All the buyers interviewed for this project have

confirmed that they are looking forward to increase their orders to Bangladesh. While the US

based VF Corporation is already sourcing 50% of its total Asian purchases from Bangladesh 20;

UK based brand George is confident enough to make Bangladesh one of its focus countries for

the next two years and claim that Bangladesh will become the tailors of the world in the near

future21

.

4.3.2 Limiting the Number of Vendors Within Bangladesh

The buyers perspective regarding the number of vendors they are willing to work with is

another matter of interest for the report. Since compliance is a big issue nowadays, most large

buyers with high consumer visibility start working with a vendor only after the vendor has been

certified as being compliant. There are varying degrees of support these buyers provide the

20 Hassan, Noor Mehdi. Personal interview. 11 Mar. 2008.21 Shakur, Idris. Personal interview. 22 Mar. 2008.


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manufacturers with regarding compliance, but most usually inspect the vendors production

facility and recommend the changes necessary for complying with the buyers standard. This is

the reason that major buyers do not usually work with a large number of companies, but rather

focus on selected manufacturers who already have an established image in the market. But

since, the buyers interviewed are looking to increase their sourcing from Bangladesh; they are

planning to increase the number of vendors they work with, having checked them for

compliance.

4.3.3 Shift from LC to Contracts

The increased competition and price sensitivity in the global RMG market has given rise to a

new trend a shift from LCs to contractual payment. High cost of banking services in buyercountries is the principal reason behind this trend. Since achieving high economies of scale is

crucial in the basic apparel market, the buyers foresaw the huge amount of money that could

be saved if the commission and processing charges for LCs could be avoided. Moreover, moving

from LCs to contract allows to buyers to retain their liquidity for a longer period of time. Hence,

they started putting pressure on the vendors. In a short time, the trend of moving away from

LCs has become preferred in global trade, with only around 13% of the total trade conducted

through LCs and the rest through contracts and other forms of payments nowadays. But in

Bangladesh, 90% of the export business is still conducted on LCs22

. But the trend in payment is

gradually moving towards contracts. The readymade garments industry is a buyer-dictated

market, and as such, buyers are able to impose the payment terms on the vendors. More than

half of the buyers interviewed are slowly moving towards contractual payment terms, with the

majority of these buyers operating in the European market. However, it would not be

appropriate to conclude that the EU based buyers prefer shifting from LCs to contracts more

than American based buyers. Rather, it is more likely that this is a global trend gaining

momentum in most parts of the world.

22 Haque, Fazlul. Personal interview. 11 Mar. 2008.


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5.0 Supply-Side Dynamics

The suppliers of the readymade garments are very easily identifiable through a few common

characteristics they possess. This business flourishes in countries where there is wide

availability of cheap labor due to its labor intensive nature. As a consequence, it is usually the

least developed countries that are the major manufacturers of garments and textiles.

Bangladesh is globally one of the biggest suppliers of RMG items. The country operates

predominantly in the lower market segments that comprises of the basic apparel items.

Knitwear makes up most of the total export (52% as of December 2007) in this sector due to

strong backward linkage and low initial investment, but most of the countrys large

manufacturers produce either woven items or both knit and woven. There is a clear preference

of suppliers for the EU market due to the GSP and a positive perception about European

buyers. But the USA is the largest country sourcing from Bangladesh as is has a massive market

size. Most There are a lot of interesting developments that may change the scenario of the

RMG industry of Bangladesh in the near future.

5.1 Major Players

The total number of garment factories stands at 4,49023

. Of the 4,300 factories in Bangladesh

since 2006, 1,673 are woven factories, 1,495 are knit, and 392 are sweater factories. The rest

1,300 are currently not in production (BGMEA 2006). Identifying the largest companies in the

RMG is a complicated task, since numerous manufacturers have more than one company and

there are small groups of companies who have formed groups and export their products

together24

. However, some of the top players in the garments trade are

i. Opex Group, Pacific Group, Standard Group, Hamim Group, NASA, and Alif Group for

woven items; and

ii. Fakir Group, Apex Group, and NR Group for knitwear.

23About BGMEA. BGMEA. 14 Apr. 2008.24 Abdullah, Abu Yusuf Md. Personal interview. 7 Mar. 2008.
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5.2 Factors Influencing Profitability of Manufacturers

Recent global trends are having significant impact on the profitability of readymade garments

vendors. Many vendors are concerned about the drop in the profit margin of their businesses.

There are three main factors assumed to be associated with it and hence, their impact on theprofitability of vendors will be explored.

5.2.1 Decrease in Profit Margin

After the phasing out of the MFA agreement, the increased competition in the market resulted

in a drastic increase in price sensitivity. The buyers were pushing the vendors to lower their

prices as much as possible. On the other hand, the price of raw materials, especially cotton, has

also gone up due to the rise in fuel prices and other dynamics in the international market. As

such, many vendors fear that their profit margin is going to be squeezed hard. Particularly in

Bangladesh, where the average bargaining power of vendors is extremely low, buyers are very

likely to take advantage of this fact and force vendors to squeeze prices. This is partly true, and

very concerning considering the rising cost of labor.

But buyers and manufacturers have different solutions to this threat. The buyers claim that

although the margin is being squeezed for each unit produced, they are increasing the volume

that is sourced from vendors, allowing them to adjust the rising costs and still retain a net

profit. In this context, the profitability relies solely on the discretion of the vendor. The vendor

should plan ahead and calculate the lowest possible price he or she can accept and reject

orders at prices lower than that calculated price. While large manufacturers like Opex Group

are trying to obtain more control over the value chain through which they can offer lower

prices, the smaller players in the market are going to suffer the negative impacts of this trend

till they reach the scalability and backward linkage needed.

Another strategy is to create more value addition in the product through in-house research &

development. A company producing its own designs has the option of adding premium to its

selling price and thus, increasing the profit margin. This strategy is successfully being

implemented by Pacific Group.


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5.2.2 Shift from LC to Contract

The global shift in offering payment through contracts instead of LCs is also having an effect on

the vendors. But unlike the profit margin squeeze, it is rather helpful for the vendors.

Contractual payment has two main advantages for the vendors (i) it somewhat reduces the

cost of banking services and other associated costs, and more importantly, (ii) it saves vendors

the time otherwise occupied in bureaucratic hassles in receiving the export LCs25

. Interviewees

who have started working on contracts reported that they were saving a substantial amount of

time by avoiding LCs. Also, as most of Bangladeshs competing countries have accepted working

on contracts, the unwillingness of local entrepreneurs might deter the buyers and force them to

seek business elsewhere. This kind of thought provides a non-tangible benefit for the vendors

on working on contracts instead of LCs.

The problems associated with this trend are the legal restrictions of the exporters. Except Type

A (offshore) companies operating in the EPZ areas, all companies have to open import LCs for

raw material sourcing. Many exporters are aggravated because of this restriction and feel that

the law needs to be changed. Also, Bangladesh Bank does not have any laws for holding banks

liable in case of contractual payments and vendors themselves have to be the consignee for

their shipments in such cases.

Therefore, successful vendors only engage in contractual terms with buyers they have been

working with for a long time. This seems to be only way of reducing risk for Bangladeshi

garments manufacturers.

5.2.3 Shift in Cash Cycle

Due to increased market competition, it was assumed that buyers would want to elongate the

cash cycle to facilitate their liquidity. Consequently, they are continuously pressurizing the

vendors for longer payment schedules. The vendors are forced to comply with this demand

because of their low bargaining power. Moreover, interest factoring is not an option for the

vendors, as the buyers are squeezing the prices of RMG items.

25 Shakur, Idris. Personal interview. 22 Mar. 2008.


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6.0 Supply Chain Analysis

6.1 Lead Time

Lead time has been one of the deciding factors of efficiency in RMG business. Apparel sector is

no longer bi-seasonal and buyers have been pacing order 4-6 times a year to keep with the

dhanges in the fashion world. Therefore, quick delivery is considered as a strong competitive

advantage. Unfortunately Bangladesh has been performing poorly in this aspect. It takes almost

90-100 days before the buyer receives the goods. This is less than competitive compared to

other countries like China, India, Vietnam, Cambodia who can deliver the service much quicker.

Table: Typical Lead time Components. (Source BGMEA)

Days Taken after preceding step

Components Optimal Time Non-optimal Time

Producer Receives LC 0 0

Raw material Supplier Receives LC 4 6

Supplier Produces and ships goods 15 30

Raw materials sails and reaches Ctg. port 21 30

Port Clearance and inland transportation 5 9

Garments Produced and shipped 20 30

Finished goods sails and reaches buyer 25 30

Total lead time 25 30

Total Lead Time 90 135

As shown on the table typical lead time for local manufacturers has been within 90-135 days. As

for knit wear the time is considerably less due to strong backward integration. Although some

of manufacturers have been able to supply within 60 days the equation of more than 90 days

is taken for granted.

If we compare the lead time of Bangladesh with other competing countries our competitive

disadvantage will be evident.


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Country Lead Time (Days)

Mexico 15-20

Italy 15-20

Vietnam 60-90

Cambodia 60-90

India 60-90

China 60-90

Source:BGMEA

The process of lead time can be categorized into three parts. First is the pre-production process

that includes order placement, opening LCs and supply of raw materials. Second comes the

production of apparels and the third includes the delivery process to the respective customers.

The major reason behind the prolonged lead time in Bangladesh is the delay in the first process.

Bangladesh has to import most of the raw materials (cotton) from USA, Sudan, Pakistan, India,

Iran and Turkey. Therefore, a lot of time is taken in procuring these raw materials. Bangladesh

is highly dependent on raw materials supplying countries for manufacturers apparels (about

80%). Given the geographic position of Bangladesh and the prevailing shipping routes, it takes

considerable time for shipments from these countries to reach the ports in Bangladesh. The

time requirement is further lengthened by the fact that goods have to be brought back from

China and elsewhere through transshipment at Singapore or Malaysia as goods cannot be

shipped directly to Bangladesh from these countries. As a result it takes 25-30 days for the

consignment to reach local ports. On the other hand, competitors like China, India and

Cambodia to some extent enjoy self-sufficiency in this aspect. Central Bonded Warehouse can

be an effective solution in procuring fabrics within a short time and that can reduce lead time

to a great extent. It is estimated that establishment of an efficient CBW in Bangladesh would

lead to the saving of 4 days on LC opening process as well as remove the need for spending up

to 40 days on the fabric production, shipping and port clearance of export materials. This can

result into a lead time less than 60 days. But, in order to be efficient CBW must keep current


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market demand and fashion trends into account. Proper dissemination of fabrics also needs to

be ensured.

In terms of production process Bangladesh is quite at par with other competitors. But only 5%

of the total lead time is spent on production. However, the production process is affected by

frequently interruption of energy supply. Bangladesh is currently in the grip of an intense power

crisis, with load-shedding of approximately 1800-2000 megawatts occurring in pick hours- an

increase of almost 150% since 2005, according to recent reports. such a crisis is having adverse

impact on the output of the RMG industry by decreasing output by approximately 25-30%.

The post-production process heavily depends on the port facility which has been a matter of

discourse for a long time. Bureaucratic customs procedures, insufficient no. of vessels, etc. have

prolonged the shipment of goods. But there has been a significant improvement in the

Chittagong port, hub of 80% of our international trade. The port clearance lead time has been

reduced to almost 4 days from 12 days. This can be attributed to caretaker governments recent

activities

ib termpaper final

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