the expansion of bangladesh rmg in foreign markets

The Expansion of Bangladesh

RMG in Foreign Markets

Term Paper for International Business

Emdadul Haque, Jewel Das, Abdullah Al Mamun, Nahid Rijwan

Report on theoretical and practical knowledge about concurrent business strategy and its possible future expansion strategy

UNIVERSITY OF DHAKA


RMG in Foreign Markets

Term Paper for International Business


12/20/2011

theoretical and practical knowledge about Bangladesh RMG sector, its concurrent business strategy and its possible future expansion strategy


RMG in Foreign Markets Term Paper for International Business


Bangladesh RMG sector, its concurrent business strategy and its possible future expansion strategy.

2

CH-1: Introduction

Readymade garment is a success story for Bangladesh. The industry started in the late

1970s, expanded heavily in the 1980s and boomed in the 1990s. The quick expansion of

the industry was possible because of the following unique nature of the industry.

� The technology is less complicated (easy to transfer),

� Machineries are cheap and easy to operate (sewing machines),

� A large female labor force that is easy to train is readily available.

Besides the low cost of labor, one of the major factors behind the success of RMG is the

availability of offshore financing for world-priced inputs through back-to-back letter of

credit (L/C) under the special bonded warehouse scheme. Presence of foreign buyers is

also a major factor that introduces the system of international subcontracting. Foreign

buying houses not only bring the international market to the doorstep of local

entrepreneurs, they also ensure the availability of essential inputs such as imported fabrics

and accessories for the industry. They also did the greatest favor for the RMG industry of

Bangladesh by bringing the latest designs and by monitoring output quality. These

measures especially enabled inexperienced garments entrepreneurs to establish a strong

foothold.

Cause of Expanding BD RMG More to the Foreign Market

1. Major changes in the trading environment

Phasing out of MFA, inclusion of China into WTO, US Trade and Development Act

2000, and inclusion of some social clauses into the WTO Charter.

2. Role of preferential treatment under MFA and GSP

Multi-fiber Agreement (MFA) and Generalized System of Preference (GSP1) mostly

facilitated the rapid growth and expansion of the industry. Bangladeshi entrepreneurs

took advantage of MFA and GSP facilities to successfully enter into the US, Canada

and EU market. The World Bank Country Study shows that during 1980s, US

importers actively pursued imports from Bangladesh. While quota restrictions on

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giant competitors provided a guaranteed market for Bangladeshi garments in USA

and Canada, preferential treatment under GSP allowed Bangladeshi apparels a zero-

tariff access to markets of the European Community. Quota and GSP, therefore,

played a significant role in rapid growth and development of RMG industry in

Bangladesh.

3. The phasing out of MFA

The phasing out of MFA had occurred in four stages. The UR agreement envisages

the phase-out of MFA over the period of ten years from January 1, 1995 and a quota

free world had begun from January 1, 2005. However, that the integration system is

back loaded, most of the items of interest to Bangladesh was integrated only in the

last stage of MFA phase out, on January 1, 2005.

With the phasing out of MFA over the long term, there is an import surge into all

these (western) markets from the most efficient producers, at the cost of less efficient

ones. The eventual abolition of quota, and price and exchange rate considerations,

could divert foreign buyers to more traditional sources such as Hong Kong and Korea,

or to potentially cheaper sources such as Vietnam, Nepal, Laos and Cambodia.

4. Inclusion of China into WTO

The high likelihood of China’s inclusion into WTO is a special concern particularly

for Bangladesh, because China is a major competitor in the global market in most of

the important categories where the Revealed Comparative Advantage (RCA) of

Bangladesh is greater than one. Evidence shows that when Sweden eliminated all

quotas on Textile and Cotton (T&C) products in 1991, a massive shift took place

towards China, whereas countries in Southeast Asia and South Asia hardly profited.

As also revealed a few years ago, when Canada unilaterally removed quotas on shirts

and blouses, there was again a massive shift towards China and particularly a large

shift away from Bangladesh. While the value of imports from the four non-OECD

suppliers in 1996 (i.e. India, Hong Kong, South Korea and Bangladesh) had decreased

by 25% through 1998, the value of imports from China had increased by 140%. The

general apprehension is that Bangladeshi RMG will face a serious shock if the same

thing happens again.

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End Result:

The conversion of GATT into WTO has changed the global trading environment

remarkably. Particularly, the phasing out of the Multi-fiber Arrangement (MFA) and

abolition of GSP is a serious challenge to many developing countries. Bangladesh has

been exporting RMG successfully over two decades with the lowest labor cost in the

region. It also has substantial experience in subcontracting with foreign buyers. With the

abolition of quota and GSP, the trading environment has become fiercely competitive.

Bangladesh, whose economy is heavily dependent on this sub-sector, will now have to

compete against textile giants like China and India. Analysis of the internal and external

environment suggests eliminating inefficiencies and irregularities from the country’s

production and exporting processes. This paper found strong arguments for forward and

backward integration, as well as the need to penetrate into new markets and diversify into

new products.

5

CH-2: RMG and Bangladesh Economy

The ready-made garment (RMG) industry of Bangladesh started in the late 1970s and

became a prominent player in the economy within a short period of time. The

industry has contributed to export earnings, foreign exchange earnings, employment

creation, poverty alleviation and the empowerment of women.

The export-quota system and the availability of cheap labour are the two main reasons

behind the success of the industry. In the 1980s, the RMG industry of Bangladesh was

concentrated mainly in manufacturing and exporting woven products. Since the early

1990s, the knit section of the industry has started to expand. Shirts, T-shirts, trousers,

sweaters and jackets are the main products manufactured and exported by the industry.

Bangladesh exports its RMG products mainly to the United States of America and the

European Union. These two destinations account for more than a 90 per cent share of the

country’s total earnings from garment exports. The country has achieved some product

diversification in both the United States and the European Union.

Recently, the country has achieved some level of product upgrading in the European

Union, but not to a significant extent in the United States. Bangladesh is less

competitive compared with China or India in the United States and it is somewhat

competitive in the European Union.

The phase-out of the export-quota system from the beginning of 2005 has raised the

competitiveness issue of the Bangladesh RMG industry as a top priority topic. The most

important task for the industry is to reduce the lead time of garment

manufacturing. The improvement of deep-level competitiveness through a reduction in

total “production and distribution” time will improve surface-level competitiveness by

reducing lead time. Such a strategy is important for long-term stable development of the

industry, but its implementation will take time. In contrast, the establishment of a central

or common bonded warehouse will improve surface-level competitiveness by reducing

lead time, but deep-level competitiveness will not be improved and long-term

industry development will be delayed. Therefore, granting permission to establish in the

private sector such warehouses with special incentives, such as the duty-free import of

raw materials usable in the expor

garment manufacturing is a critical issue for Bangladesh.

Second, Bangladesh needs to improve the factory working enviro

social issues related to the RMG industry. International buyers

compliance with codes of conduct. T

diversification as well as upgrading pro

Moreover, the Government of Bangladesh

The development of the port and other phys

utilities, a corruption-free business envi

priority concerns for the Government to consider

international buyers and investors.

The RMG industry is the only multi

industry in Bangladesh. Whereas the industry contributed

the country’s total export earnings in 1976, its share increase

those earnings in 2005. Bangladesh exported garments worth the equivalen

billion in 2005, which was about 2.5 per cent of the global total valu

billion) of garment exports. The country’s RMG industry grew by more than 1

per annum on average during the last 15 years. The foreign exchange e

employment generation of the

from year to year. Some important

noted in table 1.

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raw materials usable in the export-oriented garment industry for reducing the lead time in

garment manufacturing is a critical issue for Bangladesh.

Second, Bangladesh needs to improve the factory working environment and

social issues related to the RMG industry. International buyers are very

compliance with codes of conduct. Third, issues related to product

diversification as well as upgrading products needs to be addressed with

Moreover, the Government of Bangladesh needs to strengthen its support.

The development of the port and other physical infrastructure, the smooth

free business environment and political stability

priority concerns for the Government to consider in its efforts to attract

international buyers and investors.

The RMG industry is the only multi-billion-dollar manufacturing and export

stry in Bangladesh. Whereas the industry contributed only 0.001 per cent to

country’s total export earnings in 1976, its share increased to about 75 per cent of

earnings in 2005. Bangladesh exported garments worth the equivalen

2005, which was about 2.5 per cent of the global total valu

exports. The country’s RMG industry grew by more than 1

during the last 15 years. The foreign exchange e

employment generation of the RMG sector have been increasing at double

m year to year. Some important issues related to the RMG industry of Bangladesh are

reducing the lead time in

nment and various

are very particular about

hird, issues related to product and market

ducts needs to be addressed with special care.

support.

ical infrastructure, the smooth supply of

ronment and political stability are some

in its efforts to attract

lar manufacturing and export

only 0.001 per cent to

d to about 75 per cent of

earnings in 2005. Bangladesh exported garments worth the equivalent of $6.9

2005, which was about 2.5 per cent of the global total value ($276

exports. The country’s RMG industry grew by more than 15 per cent

during the last 15 years. The foreign exchange earnings and

RMG sector have been increasing at double-digit rates

issues related to the RMG industry of Bangladesh are

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In the decade of the 1980s, Bangladesh’s exports doubled from US$0.9 billion to US$1.8

billion, which in the next decade increased to just over US$ 5 billion on its way to reach

US$10 billion by the end of the fiscal year 2005-06 (Figure 1). Since the beginning of the

1990s exports in US dollars have increased at a rate of 14 percent per annum as against a

comparable GDP growth rate of about 5 per cent. This apparently impressive

performance of export trade has been single-handedly driven by the RMG sector, which

has witnessed its share in total exports rising from virtually nothing in 1980 to 75

percent in 2006. RMG exports comprise woven and knitwear products. Although

woven items have traditionally dominated RMG exports, knitwear items, as shown in

Figure 2, has demonstrated a very robust growth performance in recent times, increasing

its share in total RMG exports from as low as 10 percent in 1992 to 48 percent in 2006.

Currently, there are more than 4,000 RMG firms in Bangladesh. More than 95 percent of

those firms are locally owned with the exception of a few foreign firms located in export

processing zones (Gonzales, 2002). The RMG firms are located mainly in three main

cities: the capital city Dhaka, the port city Chittagong and the industrial city

Narayangonj. Bangladesh RMG firms vary in size. Based on Bangladesh Garment

Manufacturers and Exporters Association (BGMEA) data, it is found that in 1997 more

than 75 per cent of the firms employed a maximum of 400 employees each. Garment

companies in Bangladesh form formal or informal groups. The grouping helps to share

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manufacturing activities, to diversify risks; horizontal as well as vertical coordination can

be easily found in such group activities.

Ready-made garments manufactured in Bangladesh are divided mainly into two broad

categories: woven and knit products. Shirts, T-shirts and trousers are the main

woven products and undergarments, socks, stockings, T-shirts, sweaters and other casual

and soft garments are the main knit products. Woven garment products still dominate the

garment export earnings of the country. The share of knit garment products has

been increasing since the early 1990s; such products currently account for more than 40

per cent of the country’s total RMG export earnings (BGMEA website). Although

various types of garments are manufactured in the country, only a few categories, such as

shirts, T-shirts, trousers, jackets and sweaters, constitute the major production-share

(BGMEA website; and Nath, 2001). Economies of scale for large-scale production and

export-quota holdings in the corresponding categories are the principal reasons for

such a narrow product concentration.

Highly labour-intensive nature of production process characterizes the garment industry.

Even as late as in 1985, just about 0.1 million people were employed in RMG industry,

but within the next 20 years it grew rapidly to reach about 1.9 million, accounting for 35

per cent of all manufacturing employment in the country – 80 per cent of whom

were women (Rahman, 2004). The trend growth rate of employment for the period 1980-

2004 has been estimated to be 24 percent per annum. It has been suggested that if one

considered the jobs created in the complimentary enterprises as a result of the growth in

this sector, the number of people either directly or indirectly depending for their

employment on the existence and expansion of the RMG sector would rise to three

millions. Currently, for every US$3,600 worth of RMG export there is one worker in the

industry and over the past two decades the employment elasticity of RMG export

has decreased considerably. This is mainly attributable to rising labour productivity and

partly due to the changing composition of clothing exports as reflected in the growing

share of knit-RMG, which is relatively less labour intensive. The woven sector with an

export volume of US$3.5 billion in 2004 employed 1.4 million workers, while there were

0.5 million people in the US$1.9 billion knitwear industry.

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Structural Factors and the Growth of the Sector

International Trade Environment: The Demand Side

The international trade in textiles and clothing was long restricted in developed countries

and the resultant quota system for controlling imports caused global dispersion of

production in the sector by limiting imports from countries that would have a larger

volume of exports were they not constrained by their quota allocations.

While the intention was to provide protection to domestic manufacturing units in the

importing countries from the relatively efficient producers in developing countries, the

operation of the ‘managed trade’ regime in the process led to exporting opportunities in

countries where textile and clothing were not traditional export items. Many

international business firms, in particular those from the Asian newly industrializing

economies (NIEs), facing binding quota restrictions in their own countries, relocated

part of their production and trade to other relatively poor developing countries

including Bangladesh. As the process of production was labour intensive in nature,

especially in the production of apparels, the availability of cheap and easily trainable

labour in these countries facilitated the growth and development of the sector. The quota

system ensured a reserved market status for the new suppliers and gave them some time

to develop and learn the skills required in the production and marketing.

Domestic Trade Policy and Producers’ Response: The Supply Side

Apart from the international trade environment, the growth of the RMG sector in the

country coincided with Bangladesh’s changing trade policy regime, providing the

much needed policy support to the export sector. Up till the early 1980s Bangladesh

followed a very rigid import-substituting trade regime. This generated a highly distorted

incentive structure resulting in widespread allocative and productive inefficiency, which

not only inhibited the prospect for growth but also led to a policy induced anti-export bias

thereby undermining the potential for export growth. In the face of serious

macroeconomic imbalances and stagnating export performance, the policy of reforms

for stabilization and structural adjustment was undertaken. This policy reversal

introduced generous promotional measures for exports so that the erstwhile bias against

the export-oriented investment could be reduced significantly.

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Important export-promotion schemes include, inter alia, allowing exporters to open letter

of credit (L/Cs) for the required imports of raw materials against their export L/Cs

(popularly known as the back-to-back L/Cs), bank credit at a subsidized rate of interest,

duty free import of machinery, providing intermediate inputs at world price either by

bonded warehouse or by duty draw back facilities, cash subsidies, and exemption from

value-added and other taxes.

The most important incentive schemes that Bangladesh has so far undertaken for the

promotion of RMG exports in particular. Along with these promotional schemes, duty-

free and quota-free access to the EU market greatly contributed to the growth of the RMG

sector. These incentives available to exporters to a large extent mitigated the problem of

policy induced anti-export bias especially against the RMG sector.

Amongst other supply side issues, infrastructure has always been and continues to be a

prime cause for concerns for industrial and export growth. Inefficiencies in ports

and inland transportation along with the industry’s critical dependence on imported

raw materials (especially for woven RMG products) would imply much longer lead

time i.e. the time between the receipt of export orders and their reaching the

importing countries’ ports. Currently, the average lead-time for Bangladesh’s export

consignment varies between 90-120 days in comparison with an envisaged ideal

situation of 30-45 days. When a significant proportion of the raw materials for the

finished products have to be imported from abroad, which is usually procured under a

back-to-back L/C, the delivery chain involves a two-way shipping, requiring a relatively

long delivery time. This problem is exacerbated by poor management and lack of

equipments in ports. Bangladesh’s main seaport, Chittagong, handles about 100-05

lifts per berth a day, which is far below the standard 230 lifts a day as suggested by

UNCTAD. Ship turnaround time is five to six days compared about one day in efficient

ports thus causing severe congestion (World Bank-BEI, 2003). All this makes the

Chittagong port as one of the most expensive routes to international trade.

Another major supply side issue has long been affecting the Bangladeshi producers

and overtime has only deteriorated is the inadequate and unreliable electricity supply.

According to one survey, firms in Bangladesh experience power interruptions 247-

250 days a year causing 3-3.3 percent output loss. More than 80 percent of the

producing units therefore have to rely on generators for uninterrupted power supply.

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Since electricity produced from the generators are much more expensive than the

supplies from the national grid, excessive costs undermine the competitiveness of the

exporters.

Shortage of skilled labour is another problem. As Bangladesh mainly produces low value

added bulk products with relatively unskilled workers, entrepreneurs so far have managed

to tackle this problem through low-paid on-the-job training. However, in the absence of

readily available skilled workers and managers the task of diversifying into high-value

added items has proven to be difficult. Apart from the above-mentioned factors, invisible

costs of doing business, and poor institutions, political unrest and natural calamities

have affected the business of RMG firms in Bangladesh.

Since Bangladesh’s exports of RMG grew taking the advantage of MFA quotas that

restricted the export supply from many other relatively efficient and advanced

developing countries (such as India and China) and since supply side factors did

not show any marked improvement, there had been a great deal of apprehension

about Bangladesh’s continued success in clothing exports after the expiry of MFA.

In fact, several academic exercises predicted severe consequences for Bangladesh.

However, after two years of the quota elimination, Bangladesh has managed to

maintain it past growth performance. Safeguard measures slapped on China by the EU

and US are thought to have protected sourcing from Bangladesh. From 2008 when these

measures will have to be withdrawn, it is now feared that, the real pressure on the country

will begin to emerge.

CH-3: Business Process of RMG sector

A typical coordinated marketing channel for the export of Bangladeshi RMG Products is

as shown below:

The basic business process involves the following steps:

1. Buy Raw materials from suppliers.

2. Arrange Organize Production methods.

3. Get Buyers requirements design, style, color, material.

4. Prepare demo sample product and get approved by Buyers QC.

5. Product Requirements from Customers after satisfactory sample delivery.

6. Get Order and Shipment Details.

7. Process L/C.

8. Before shipment go through Quality Checking Inspection.

9. Revised pricing.

10. Shipment and Payment on Delivery.

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Business Process of RMG sector


The basic business process involves the following steps:

Buy Raw materials from suppliers.

Organize Production methods.

Get Buyers requirements design, style, color, material.

Prepare demo sample product and get approved by Buyers QC.

Product Requirements from Customers after satisfactory sample delivery.

Get Order and Shipment Details.

Before shipment go through Quality Checking Inspection.

Shipment and Payment on Delivery.

Business Process of RMG sector


Product Requirements from Customers after satisfactory sample delivery.

13

Business Process Flow Diagram:

RMG

MANUFACTURER

Supplier

Organize

Production

Method

Buyers Provide

Design, Style, Color,

Material Samples

Demo

Sample

Approved

Sample

Customer

Buyer’s

QC

Order, Pricing & Shipment Details

Shipment

Process L/C

Pre-shipment QC Inspection

Revised Pricing

Raw Material

Payment of Delivery

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CH-4: Market Entry Strategy for Bangladesh RMG

When an organization has made a decision to enter an overseas market, there are a variety

of options open to it. These options vary with cost, risk and the degree of control which

can be exercised over them. The simplest form of entry strategy is exporting using either

a direct or indirect method such as an agent, in the case of the former, or countertrade, in

the case of the latter. More complex forms include truly global operations which may

involve joint ventures, or export processing zones. Having decided on the form of export

strategy, decisions have to be made on the specific channels. Many agricultural products

of a raw or commodity nature use agents, distributors or involve Government, whereas

processed materials (as like RMG products), whilst not excluding these, rely more heavily

on more sophisticated forms of access.

Basic issues

An organization wishing to "go international" faces three major issues:

1. Marketing - which countries, which segments, how to manage and implement

marketing effort, how to enter - with intermediaries or directly?

2. Sourcing - whether to obtain products, make or buy?

3. Investment and control - joint venture, global partner, acquisition?

Marketing Issues:

Product support

� Product sourcing

� New products

� Product management

� Product testing

� Manufacturing specifications

� Labeling

� Packaging

� Production control

� Market information

Promotion/selling support

� Advertising

� Promotion

� Literature

� Direct mail

� Exhibitions, trade shows

� Printing

� Selling (direct)

� Sales force

� Agents commissions

� Sale or returns

15

Price support

� Establishment of prices

� Discounts

� Distribution and maintenance of

pricelists

� Competitive information

� Training of agents/customers

Inventory support

� Inventory management

� Warehousing

� Distribution

� Parts supply

� Credit authorization

Service support

� Market information/intelligence

� Quotes processing

� Technical aid assistance

� After sales

� Guarantees

� Warranties/claims

� Merchandising

� Sales reports, catalogues literature

� Customer care

� Budgets

� Data processing systems

� Insurance

� Tax services

� Legal services

� Translation

Distribution support

� Funds provision

� Raising of capital

� Order processing

� Export preparation and

documentation

� Freight forwarding

� Insurance

� Arbitration

Financial support

� Billing, collecting invoices

� Hire, rentals

� Planning, scheduling budget data

� Auditing

Market Choice Decision:

The choices of foreign markets depend on their long run profit potential. Favorable

markets are:

• Politically stable developed

• Developing nations with free market systems

• Relatively low inflation rates and private sector debt

16

And less desirable markets are:

• Politically unstable developing nations

• Developing nations with mixed or command economies

• Developing nations with excessive levels of borrowing

Markets are also more attractive:

• When the product in question is not widely available

• Satisfies an unmet need

Cunningham identified five strategies used by firms for entry into new foreign markets:

1. Technical innovation strategy - perceived and demonstrable superior products

2. Product adaptation strategy - modifications to existing products

3. Availability and security strategy - overcome transport risks by countering

perceived risks

4. Low price strategy - penetration price and,

5. Total adaptation and conformity strategy - foreign producer gives a straight copy.

In building a market entry strategy, time is a crucial factor. The building of an

intelligence system and creating an image through promotion takes time, effort and

money. Brand names do not appear overnight. Large investments in promotion campaigns

are needed. Transaction costs also are a critical factor in building up a market entry

strategy and can become a high barrier to international trade. Costs include search and

bargaining costs. Physical distance, language barriers, logistics costs and risk limit the

direct monitoring of trade partners. Enforcement of contracts may be costly and weak

legal integration between countries makes things difficult. Also, these factors are

important when considering a market entry strategy. In fact these factors may be so costly

and risky that Governments, rather than private individuals, often get involved in

commodity systems.

Modes of Market Entry:

Several alternative entry strategies can be considered, as shown in Figure

Indirect export

The market-entry technique that offers the lowest level of risk and the least mark

control is indirect export, in which products are carried abroad by others. The firm is not

engaging in international marketing and no special activity is carried on within the firm;

the sale is handled like domestic sales.

There are several different

1. The simplest method is to deal with foreign sales through the domestic sales

organization. For example, if a firm receives an unsolicited order from a customer in

Spain and responds to the request on a one

exporting. Alternatively, a foreign buyer may approach to the firm. Products are sold

in the domestic market but used or resold abroad. This type of arrangement may arise

if, for example, a foreign department store has a buying office in

country. If the exporting firm does not follow up the contact with a sustained

marketing effort, it is unlikely to gain future sales.

17

Modes of Market Entry:


Fig: Entry Modes

entry technique that offers the lowest level of risk and the least mark



the sale is handled like domestic sales.

There are several different methods of indirect exporting:

The simplest method is to deal with foreign sales through the domestic sales


Spain and responds to the request on a one-off basis, it is engaging in casual



if, for example, a foreign department store has a buying office in


marketing effort, it is unlikely to gain future sales.


entry technique that offers the lowest level of risk and the least market



The simplest method is to deal with foreign sales through the domestic sales


engaging in casual



if, for example, a foreign department store has a buying office in the firm’s home


18

2. A second form of indirect exporting is the use of international trading companies with

local offices all over the world. Perhaps the best-known trading companies are the

Sogo Sosha of Japan such as Mitsui or Mitsubishi. The size and market coverage of

these trading companies make them attractive distributors, especially with their credit

reliability and their information network. The trading companies of European origin

are important primarily in trade with former European colonies, particularly Africa

and Southeast Asia. The drawback to the use of trading companies is that they are

likely to carry competing products and the firm’s products might not receive the

attention and support the firm desires.

3. A third form of indirect exporting is the export management company located in the

same country as the producing firm and which plays the role of an export department.

That is the firm has the performance of an export department without establishing one

in the firm. The economic advantage arises because the export company performs the

export function for several firms at the same time. The producer can establish closer

relationships and gains instant foreign market contacts and knowledge. The firm is

spared the burden of developing in-house expertise in exporting. The method of

payment is the commission and the costs are variable. Export management companies

handle different but complementary product lines which can often get better foreign

representation than the products of just one manufacturer.

Indirect export can open up new markets without requiring special expertise or

investment. Both the international know-how and the sales achieved by these indirect

approaches are generally limited. In this approach, the commitment to international

markets is very weak.

Direct export

Exporting requires a partnership between exporter, importer, government and transport.

Without these four coordinating activities the risk of failure is increased. Contracts

between buyer and seller are a must. Forwarders and agents can play a vital role in the

logistics procedures such as booking air space and arranging documentation.

As we can see, it is still in the indirect exporting stage. If the apparel manufacturers

intend to implement the direct exporting channel, for sure they are going to be benefited.

19

In direct exporting, the firm becomes directly involved in marketing its products in

foreign markets, because the firm itself performs the export task (rather than delegating it

to others). This necessitates the creation of an export department responsible for tasks

such as:

• Market contact

• Market research

• Physical distribution

• Export documentation

• Pricing.

This approach to export requires more corporate resources and also entails greater risks.

The expected benefits are:

• Increased sales

• Greater control

• Better market information

• Development of expertise in international marketing.

To implement a direct exporting strategy, the firm must have representation in the foreign

markets. This can be achieved in a number of ways:

� Sending international sales representatives into the foreign market to establish

contacts and to directly negotiate sales contracts.

� Selecting local representatives or agents to prospect the market, to contact

potential customers and to negotiate on behalf of the exporting firm.

� Using independent local distributors who will buy the products to resell them in

the local market (with or without exclusivity).

� Creating a fully owned commercial subsidiary to have a greater control over

foreign operations. (In most cases, the commercial subsidiary will be a joint

venture created with a local firm to gain access to local relationships.)

Foreign manufacturing

Under certain conditions, a firm may find it either impossible or undesirable to supply

foreign markets from domestic production sources. For example:

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• Transportation costs may be too high for heavy or bulky products

• Custom rates or quotas on imports can render products non-competitive

• Government preferences for local products can prevent entry in the foreign market

Any of these conditions could force the firm to manufacture in foreign markets in order to

sell there. Positive factors can also induce the firm to produce abroad – for example:

• The size and the attractiveness of the market

• Lower production costs

• Economic incentives given by public authorities.

Varied approaches can be adapted to foreign manufacturing.

Assembling

Assembling is a compromise between exporting and foreign manufacturing. The firm

produces domestically all or most of the components or ingredients of its product and

ships them to foreign markets to be put together as a finished product. By shipping CKD

(completely knocked down), the firm is saving on transportation costs and also on custom

tariffs which are generally lower on unassembled equipment than on finished products.

Another benefit is the use of local employment which facilitates the integration of the

firm in the foreign market.

Notable examples of foreign assembly are the automobile and farm equipment industries.

In similar fashion, Coca-Cola ships its syrup to foreign markets where local bottle plants

add the water and the container.

Contract manufacturing

In contract manufacturing, the firm’s product is produced in the foreign market by local

producer under contract with the firm. Because the contract covers only manufacturing,

marketing is handled by a sales subsidiary of the firm which keeps the market control.

Contract manufacturing obviates the need for plant investment, transportation costs and

custom tariffs and the firm gets the advantage of advertising its product as locally made.

Contract manufacturing also enables the firm to avoid labour and other problems that may

arise from its lack of familiarity with the local economy and culture.

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A drawback to contract manufacturing is loss of profit margin on production activities,

particularly if labour costs are lower in the foreign market. There is also the risk of

transferring the technological know-how to a potential foreign competitor. This risk is

lessened, however, where brand names and the marketing know-how are the key success

factors. A frequent problem is also quality control.

Licensing

Licensing is another way to enter a foreign market with a limited degree of risk. It differs

from contract manufacturing in that it is usually for a longer term and involves greater

responsibilities for the local producer. Licensing is similar to franchising except that the

franchising organization tends to be more directly involved in the development and

control of the marketing program.

The international licensing firm gives the licensee patent rights, trademark rights,

copyrights or know-how on products and processes. In return, the licensee will- Produce

the licensor’s products, Market these products in his assigned territory and Pay the

licensor royalties related to the sales volume of the products. This type of agreement is

generally welcomed by foreign public authorities because it brings technology into the

country.

The major drawback of licensing is the problem of controlling the licensee due to the

absence of direct commitment from the international firm granting the licence. After few

years, once the know-how is transferred, there is a risk that the foreign firm may begin to

act on its own and the international firm may therefore lose that market.

Joint ventures

Foreign joint ventures have much in common with licensing. The major difference is that

in joint ventures, the international firm has an equity position and a management voice in

the foreign firm. A partnership between host- and home-country firms is formed, usually

resulting in the creation of a third firm.

This type of agreement gives the international firm better control over operations and also

access to local market knowledge. The international firm has access to the network of

22

relationships of the franchisee and is less exposed to the risk expropriation thanks to the

partnership with the local firm. This type of agreement is very popular in international

management. Its popularity stems from the fact that it permits the avoidance of control

problems of the other types of foreign market entry strategies. In addition, the presence of

the local firm facilitates the integration of the international firm in a foreign environment.

Direct investments

According to Kotler and Keller the ultimate market entry mode is direct investment

where the company has direct ownership of foreign-based facilities for manufacturing or

assembly. This can happen either by buying part or full interest in a local company or by

building its own facilities. If the ownership is complete this is referred to as sole venture

or wholly owned subsidiary. If a part of a local company is bought it might be easy to

confuse with a joint venture, but the distinction is clear. A joint venture results in a new

legal entity whereas partial ownership through direct investment means investing in an

existing legal entity.

In this arrangement, the international firm makes a direct investment in a production unit

in a foreign market. It is the greatest commitment since there is a 100% ownership. The

international firm can obtain wholly foreign production facilities in two primary ways:

- It can make a direct acquisition or merger in the host market

- It can develop its own facilities from the ground up.

In some countries, governments prohibit 100% ownership by the international firm and

demand licensing or joint ventures instead.

23

Comparative Entry Strategies

The various entry mode options form a continuum; as shown on this slide, the level of

involvement, risk, and financial reward increases as a company moves from market entry

strategies such as licensing to joint ventures and ultimately, various forms of investment.

When a global company seeks to enter a developing country market, there is an additional

strategy issue to address: Whether to replicate the strategy that served the company well

in developed markets without significant adaptation. To the extent that the objective of

entering the market is to achieve penetration, executives at global companies are well

advised to consider embracing a mass-market mind-set. This may well mandate an

adaptation strategy.

Here is analyzed the characteristics of export, contractual and investment entry modes

from five aspects of control, dissemination risk, resource commitment, flexibility and

ownership.

Entry

Method

Control Risk Resource

Commitment

Flexibility Ownership

Investments High Low High Low High

Contracts Medium Med-High Med-High Medium Med-High

Exports Low Low Low High Low

24

Choice of an Entry Mode:

It is suggested that to conceptualize a firm’s desired level of different mode

characteristics without considering its actual entry mode used; the efficacy of mode

choice models would be improved. Based on this advice a diverse range of situational

influences that could bear on a firm’s desire for certain characteristic of mode choice”.

Some factors would influence a firm to choose a desired entry mode. These factors were

summarized in the following table-

Situational

influences

Firm factor Firm-specific advantages

Experience

Strategic considerations

Environmental

factors

Demand and competitive conditions

Political and economic conditions

Socio-cultural conditions

Moderating

variables

Government policies and regulations

Firm size

Corporate policies

25

Entry Decision Framework

Fig: Entry mode choice framework

Here is introduced a dynamic mode choice framework different from previous

conceptualization of mode choice which just depict a series of situational influence

directly affecting mode choice.

Therefore a firm cannot just consider an institutionalizing mode; it needs to consider the

characteristics of modes, the firm factors, environmental factors and other factors when it

chooses entry mode.

26

CH-5: SWOT Analysis

The new environment represents a serious threat to Bangladesh. On the one hand, it is

opening a vast market with unlimited export potentials; on the other hand, it signals fierce

competition from textile giants like China, India and, from efficient producers like

Thailand, Sri Lanka and Vietnam. Competition may also come from Sub Saharan Africa

and the Caribbean countries due to preferential treatment from USA through TDA 2000.

Different regional agreements like NAFTA also appear to be unfavorable for the RMG

sector of Bangladesh.

Given the changed scenario described above, the following sections focus on SWOT

(strengths & weaknesses and opportunities & threats) analysis of the RMG industry of

Bangladesh.

Strengths

One of the strengths behind the success of RMG of Bangladesh is the availability of low

cost labor compared to other countries in the region. The labor rates in textile industry

(compiled by Warner International) show that the average hourly wage rates for

Bangladesh, India, Pakistan and Sri Lanka were respectively US$ 0.23, $0.56, $0.49

and $0.39 (Bhattacharya 1999a). Being in the manufacturing of RMG for two decades,

Bangladesh now possesses a large pool of skilled & semiskilled manpower. Moreover,

there are many unemployed young men and women who can easily be converted into a

skilled workforce if needed.

Given the fairly long learning curve in this industry, extensive experience in dealing with

foreign buyers, offshore bankers, shippers, and Clearing and Forwarding (C&F) agents is

a valuable asset for the exporters of Bangladesh.

Weaknesses

Dependence on others for raw materials, low productivity, limited knowledge in

international marketing information, poor infrastructure, political instability, disruptive

trade unionism, inefficiency in port management, and excessive dependence on RMG

sub-sector are the major weaknesses of the industry.

27

The industry is heavily dependent on others for outsourcing of raw materials such as

clothing and accessories. Bangladesh is currently importing raw materials (gray fabrics)

for its RMG factories from countries like India, China and Thailand under back-to-back

L/Cs. In a quota free environment, these countries will obviously try to export finished

apparels to North American markets rather than sell fabrics to countries like Bangladesh

(Bhattacharya 1999b). With equal access to the world market, these direct competitors

will either stop selling materials to their competitors like Bangladesh (a strategic move)

or charge higher prices for their materials (because of increased internal demand). In

either case, Bangladesh will face difficulty in procuring the required raw materials at

reasonable prices.

Another major shortcoming of the apparel sector is the low productivity of its workers.

The laborer productivity of Bangladesh is much lower than that of Sri Lanka, South

Korea and Hong Kong (Reza, Rashid and Rahman 1998). Low productivity might erode

the advantage of low cost of labor of Bangladesh.

Exporters of Bangladesh also have limited access to current market intelligence and

international trade information because, so far, foreign buying houses have been

dominating the marketing part of the business. In a post MFA era, if these buying houses

shift their bases to other countries, Bangladeshi exporters may face serious problems in

finding their ultimate buyers. At present problems in port management is a serious

challenge to RMG industry of Bangladesh. The Chittagong Port is the most important

entry and exit point for trade and commerce of the country. Almost 90 percent of the

exports and 75 percent of the imports of Bangladesh are accomplished through the

Chittagong Port. Therefore, it is considered as the country’s economic lifeline. The

Chittagong Port is one of the most inefficient and corrupt ports in the world. A World

Bank study estimated that handling charges for a 20-foot container were $640 in

Chittagong compared with $220 in Colombo and $360 in Bangkok. The study added,

inefficiency at Chittagong port could be costing the economy as much as $600 million

annually. Besides this, there are numerous demands for “under-the-table” payments that

are reportedly required at every step of export processing, from opening of letters of

credit to the clearance of goods from Customs. According to a survey, the hidden costs

paid by importers per consignment ranged from Tk.4, 700 to Tk.36, 800 (about US$100

to $735). These inefficiencies and corruption seriously hamper the competitiveness of

Bangladeshi garment in the world market.

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Besides numerous procedural, physical and/or infrastructure related bottlenecks; some

sociopolitical consequences have added fuel to the chronic go-slow and congestion

problem at the port. Some of these problems are:

• Frequent work stoppage by different service providers, dock laborers, transport

workers etc.

• Excessive dock labor unionism (there are about 30 different agencies/groups

including 22 workers unions).

• Politicization of Collective Bargaining Agents (CBA).

• Direct involvement of powerful local politicians, elite and musclemen

• Illegal gratification practices (it has been a common phenomenon since long).

These vested interest groups are so powerful that they were able to stop the Government’s

attempts to construct a private container terminal near the Chittagong Port and another at

Patenga which were supposed to be funded by the Asian Development Bank. This and

many similar activities of different groups are undoubtedly unlawful but it seems that

nobody has the ability to stop it.

Opportunities

The greatest opportunities lie on the unlimited market outside Bangladesh. In a quota free

world, the United Nations Commission for Trade and Development (UNCTAD 1986)

estimated that removal of the MFA and tariffs by developed countries will expand exports

of clothing by 135 percent and textile by 78 percent. Trela and Whalley (1990), using a

global general equilibrium model, estimated that the change will be much larger: the

value of imports of textiles and clothing will rise by 305 percent in the US, 200 percent in

Canada, and 190 percent in EU. This indicates that phasing out of quota will expand the

market tremendously. Asia by far is the largest player in the world textile and clothing

market and, industry experts are confident that, overall, Asia still will dominate.

Although Bangladesh lags behind in the textile sub-sector, it is very likely that the sector

will get a boost through forward integration with RMG. In the knitting sector,

Bangladesh gained substantial competitive advantage over her competitors. According to

the Bangladesh Knitwear Management and Exporters Association (BKMEA), the cost of

yarn production per kg. In the private sector of Bangladesh is only US$1.48, whereas in

29

India it is $1.78 in Pakistan $1.60, in Japan $2.38, in Korea $1.73 and in Thailand $2.78.

Therefore, knit-RMG has a good prospect for Bangladesh in post MFA period.

The apparel sector of Bangladesh mainly exports low-cost products to the international

market. But she can move into high value added products through diversification. This is

not impossible given her two decades of experience, good relationship with buyers,

worldwide reputation, and presence in quality-conscious United States and EU markets.

Recently it has already penetrated the difficult but lucrative quality-conscious Japanese

market.

Threats

The biggest threat will be the fierce competition from efficient producers like Hong

Kong, China, India, Thailand, and Sri Lanka, Vietnam and many SSA and Caribbean

countries. Threats might come not only from marketing but also from outsourcing. As

mentioned earlier, more than 95 percent fabrics are imported from direct competitors. The

potential danger after 2005 is that these countries might either stop selling their raw

materials to Bangladesh or increase the price of their materials tremendously. Whatever

may be the case, Bangladesh will lose some competitive edge in the world market.

Environmental issues, labor standard, Trade Related Aspects of Intellectual Property

Rights (TRIPs) etc. might also appear as a deadly threat to developing countries like

Bangladesh.

Although developing countries are not being singled out for environmental issues, being

poorer, they cannot obviously maintain rigorous environmental standards. Moreover, the

fact that their competitive advantage often lies in natural resources and pollution-

intensive industries implies that they are vulnerable to being pressured to enforce stricter

standards or face less market access for their exports to developed countries.

Other issue like child labor has already proved as a sensitive issue in the western market.

Compliance to the Rules of Origin4 (ROO) may threaten the future market access and

performance of RMG sector of Bangladesh. In the case of woven-RMG, a two-stage, and

in the case of knit-RMG, a three-stage transformation (cotton to yarn, yarn to fabrics, and

fabrics to RMG) process is required for imported yarn from India. Bangladesh exporters

30

also had to pay back exempted duties amounting to about US$60 million to EU on the

grounds of ROO violation and circumvention.

Regionalism is another threat to the industry. The World Bank country study expresses its

concerns that “Over the medium term it is also possible that NAFTA may lead to a

displacement of East Asian RMG imports into the U.S. and Canada. To the extent these

exports by the more efficient East Asian producers are then diverted to the European

Community, they may tend to displace Bangladesh’s RMG exports into Europe”. In the

US market another challenge will come from Mexican apparel industry where it has zero

tariff access because of NAFTA. Mexico’s share in US clothing imports increased by

over 200% in the period 1993-98.

31

CH-6: Recommendations & Conclusion

Recommendations:

Based on this Report findings, we hereby states that, though Bangladesh is now the third

largest country in RMG production, there are several problems still standing in between

RMG’s success and smooth running. We noticed while preparing this report, there are

numbers of drawbacks in this sector which needs to be taken care of by proper authority

(Government, BGMEA and other stakeholders). These are as follows:

i. Bangladesh produces mostly basic products- which are low cost items; the

share of fashion products i.e., high value added product is very low.

ii. Bangladesh does not produce the basic raw materials (only a negligible

quantity of cotton but no manufactured fiber) and as such has to depend

totally on sensitive global market.

iii. Because of inadequate backward linkage, lead-time happens to be long,

nearly 3 months.

iv. Public power supply is erratic.

v. Bank interest rate is still high enough, particularly of private sector bank,

for investment of export oriented high value project.

vi. HRD facility, productivity and quality support, testing and accreditation

support, design support and compliances are yet to be enhanced.

vii. Cost of doing business is high because of under table money

viii. Lack of marketing tactics

ix. Absence of easily on-hand middle management

x. A small number of manufacturing methods

xi. Lack of training organizations for industrial workers, supervisors and

managers.

xii. Fewer process units for textiles and garments

xiii. Sluggish backward or forward blending procedure

xiv. Incompetent ports, entry/exit complicated and loading/unloading takes

much time

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xv. Unless new strong market is explored in home or abroad, any non-

cooperation from USA & EU may jeopardize the whole Bangladesh RMG

export business and consequently the textile manufacturing.

xvi. Sudden price hike of cotton and yarn in the global market may push

Bangladesh to a very awkward situation to devastate the business.

xvii. The type of labor and political anarchies of the recent days if prevails in

the future, Bangladesh may lose the business in the way Sri Lanka has lost.

Conclusion:

Bangladesh economy at present is more globally integrated than at any time in the past.

The MFA phase-out will lead to more efficient global realignments of the textile and

clothing industry. The phase out was expected to have negative impact on the economy of

Bangladesh. Recent data reveals that Bangladesh absorbed the shock successfully and

indeed RMG exports grew significantly.

33

BIBLIOGRAPHY

1. Rahman, Mustafizur & Anwar, Asif; “Bangladesh Apparels Export to the US Market:

An Examination of Competitiveness vis-à-vis China” Paper 62, Centre for Policy

Dialogue (CPD), September, 2006

2. Razzaque, Abdur & Eusuf, Abu; “Trade and Development Linkage: A Case Study of

Ready Made Garment Industry in Bangladesh” Unnayan Shamannay, Dhaka, April

2007

3. Haider, Mohammed Ziaul; “Competitiveness of the Bangladesh Ready-made Garment

Industry in Major International Markets”; Asia-Pacific Trade and Investment Review;

Vol. 3, No. 1, June 2007

4. Murshid, Khan Ahmed Sayeed; “THE GLOBAL FINANCIAL CRISIS

IMPLICATIONS FOR BANGLADESH”; BIDS-PRP WORKING PAPER SERIES,

2009; Working Paper No. 1

5. “Economic Policy Paper on Improving Access for Bangladesh in Global Markets”;

Prepared under the DCCI-CIPE/ERRA Project, 2005; Dhaka Chamber of Commerce

and Industry (DCCI)

6. “INTERNATIONAL MARKET EXPANSION”; Calx Europe, November 2007

7. Robbani, M Golam; “WORLD TRADE ORGANIZATION AND THE

READYMADE GARMENT INDUSTRY OF BANGLADESH: A CRITICAL

ANALYSIS”; 2005

8. “Entry Modes for International Markets”; International Review of Business Research

Papers; Vol.3 No.1. March 2007, Pp.183 – 196

9. “Market-Driven Management: Entry Strategies in Foreign Markets”; 2007; chapters:

10 (page 249), 13 (page 300)

10. http://www.fao.org/docrep/W5973E/w5973e0b.htm; “Market Entry Strategies:

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the expansion of bangladesh rmg in foreign markets

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