RMG Sector of Bangladesh and International Competition

RMG Sector of Bangladesh and International Competition

Rahamat Ullah Joy
B.sc in Textile Engineering
Daffodil International University
Email: rahamat.tex@gamil.com
Phone: +8801614445257





Abstract :
Bangladesh in one of the 48 least developed countries measured in terms of per capita income, literacy rate and contribution of manufacturing to GDP. The countries 48 percent population lives below the poverty line and the government has planned to reduce the poverty level to 30% by next five years3. Agriculture is still the major employment provider of the country (64%) To alleviate poverty unemployment rate has to be reduced and employment opportunity in the non-agricultural sector has to be promoted. As women constitute almost 50% of total population, consideration of women's integration into the economic activities has already been recognized 4. Foreign trade policy in this regard can contribute in alleviating poverty by encouraging investment in those industries that are based on labor intensive technologies and allow women to be included in labor force. According to comparative advantage theory of classical economists Bangladesh has a great cost advantage due to abundant and cheaper laborers of which 90% are women and it is already evident since late 1970s in export performance of Ready-made Garments (RMG). So far entrepreneurs of RMG are not directly involved in international marketing. But after the year 2005 the market will be open for all the producers and they will have to take the responsibility to market their products directly.

1. Introduction:
The Ready Made Garments (RMG) sector of Bangladesh has emerged as the biggest earner of foreign currency. The RMG sector has experienced an exponential growth since the 1980s. The sector contributes significantly to the GDP. It also provides employment to around 4.5 million Bangladeshis. An overwhelming number of workers in this sector are women. This has affected the social status of many women coming from low income families. Bangladesh-origin products met quality standards of customers in North America and Western Europe, and prices were satisfactory. Business flourished right from the start; many owners made back their entire capital investment within a year or two and thereafter continued to realize great profits. Some 85 percent of Bangladeshi production was sold to North American customers, and virtually overnight Bangladesh became the sixth largest supplier to the North American market. After foreign businesses began building a ready-made garment industry, Bangladeshi capitalists appeared, and a veritable rush of them began to organize companies in Dhaka, Chittagong, and smaller towns, where basic garments--men's and boys' cotton shirts, women's and girls' blouses, shorts, and baby clothes--were cut and assembled, packed, and shipped to customers overseas (mostly in the United States). With virtually no government regulation, the number of firms proliferated; no definitive count was available, but there were probably more than 400 firms by 1985, when the boom was peaking .After just a few years, the ready-made garment industry employed more than 200,000 people. According to some estimates, about 80 percent were women, which was never noticed previously in the industrial work force. Many of them were woefully under paid and worked under harsh conditions. The net benefit to the Bangladeshi economy was only a fraction of export receipts, since virtually all materials used in garment manufacture were imported; practically all the value added in Bangladesh was from labor.

2. Present Situation:
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. 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. With about $15 billion in exports in 2010, ready-made garments are the country's most important industrial sector; they represent 13% of GDP and more than 75% of total exports. Recent surveys carried out by the consulting firm McKinsey and the accounting firm KPMG identified attractive prices as the most important reason for purchasing in Bangladesh. Price levels will remain highly competitive in the future, since significant efficiency increases will offset rising wage costs. Besides labour cost and duty advantage, raw materials and real estate costs are also cheaper in Bangladesh. There is also no doubt that Bangladesh is benefitting from various preferential trade agreements providing tax free entry into several dozen countries. But Bangladesh has its own challenges to overcome. Impediments to investment include unreliable power supply, high real interest rates, corruption, and weaknesses in law and order.

3. History of Apparel Industry in Bangladesh:
There were only 9 export oriented garment manufacturing industry in 1978, earned only 1 million dollar. Some of them were very small, produced RMG for local market as well. Four such small and pioneer garments were Reaz garments, Paris garments, Jewel garments and Boishakhi garments. Reaz garments established in 1960, as a small tailoring outfit, named Reaz store in Dhaka. Served only domestic market of its initial 15 years. In 1973, it changed its name to Reaz Garments Ltd and started to export by selling 10 000 pieces of shirt to France, valued 13 million franc in 1978.That was the first direct export of apparel.Desh Garments Ltd., first joint venture in Bangladesh, Technical and marketing collaboration with S. korean Daewoo Corporation, established in 1979. First 100% export oriented company.In 1980, Youngone (49%) and Trexim (51% equity) formed a company named younone Bangladesh exported first consignment of padded and non padded jackets to sweden in dec 1980.It had trained 120 operators including 3 women in S. korea Went to the production in 1980.

4. Facts and Figures:
In the 1980s, there were only 50 factories employing only a few thousand people. Currently, there are 4490 manufacturing units. The RMG sector contributes around 76 percent to the total export earnings. In 2007 it earned $9.35 billion. This sector also contributes around 13 percent to the GDP, which was only around 3 percent in 1991. Of the estimated 4.2 million people employed in this sector, about 50 percent of them are women from rural areas. In 2000, the industry consisting of some 3000 factories employed directly more than 1.5 million workers of whom almost 80% were female. USA is the largest importer of Bangladeshi RMG products, followed by Germany, UK, France and other E.U countries.

5. The Future:
The RMG sector is expected to grow despite the global financial crisis of 2009.[9] As China is finding it challenging to make textile and foot wear items at cheap price, due to rising labor costs, many foreign investors, are coming to Bangladesh to take advantage of the low labor cost. Even now for the readymade garments most of the manufacture need to bring all the accessories from abroad, which is very costly. Now they are start using locally accessories minting the required quality. Zippers, buttons, labels, hooks, hangers, elastic bands, thread, backboards, butterfly pins, clips, collar stays, collarbones and cartons are the major garment accessories produced in Bangladesh. Many small and medium accessory industries have grown here over the years, particularly to meet high demand from low-end garment makers The accessory market is dominated by multinational companies operating in Bangladesh, because in majority cases, garment buyers prefer accessories from them over the locally available items, Now it is time for the Bangladeshi Merchandiser to introduce more local trims and trims manufacturer to buyer to show their expertise.

6. The challenges of International Marketers in the 21st Century: The Case of Ready-made Garment (RMG) Industry of Bangladesh:
By the year 2005 according to the policy of WTO (World Trade Organization) - the facilities like GSP and Quota in Readymade Garment sector will be phased out. The restrictions under the Multi-Fiber Agreement (MFA) will be phased out in four stages. As an impact of the withdrawal of these facilities, Less Developed Countries, which are enjoying the benefits, have to face fair competition. Bangladesh will not be an exception in this regard as RMG export is the highest foreign currency-earning source of Bangladesh. To abate poverty in Bangladesh, unemployment rate has to be reduced by creating more employment opportunities in the non agricultural sector. For economic development integration of women into formal economic activities must not be overlooked, as they constitute almost 50% of total population. So, foreign trade by labor intensive industries that allow women to participate in formal economic activity can have a significant role in poverty alleviation process. RMG industry has been keeping a momentous part in this context. So far RMG entrepreneurs are recognized as only producers to foreign market. But with immediate effect of withdrawal of preferential treatments they will have to accept the challenges of international marketing/global marketing in a free-market competitive situation as international marketers. They will have to face two levels of uncertainty arising from domestic uncontrollable and international uncontrollable variables. The challenges for future marketers will be to accommodate those uncertainties to controllable variables in order to create market opportunities. This paper attempts to assess the challenges and weaknesses to be faced by international marketers of RMG industry after 2005 in WTO governed free trade economy within the framework of some possibilities and strengths in consideration to significant contribution of RMG industry to domestic economy.

7. Methodology:
Both primary and secondary information have been utilized in designing and preparing this paper. For collecting primary data two open-ended structured questionnaires were developed to interview persons directly involved with Ready-made Garments and Buying Houses. Nonprobability- sampling procedure of convenience sampling has been followed to determine the sample size. From the sample size of 65 RMG concerns and Buying Houses, interviews were conducted among 55 RMG concerns and 10 Buying Houses. Views of other concerned persons like policymakers and buyers have been included in this paper through surveying secondary sources such as books, newspapers, annual reports, different publications of BGMEA and other bodies. The survey covered garments factories of Dhaka City only. The paper is organized as follows: Section-II describes the significance of this sector, which justifies the concern of the authors. Section-III investigates some specific challenges and possibilities for Bangladeshi entrepreneurs, which are based on literature survey. The section- IV describes data collected from primary survey conducted by the authors and examines major areas of strengths and weaknesses through analyzing information available on domestic controllable factors, domestic uncontrollable factors and international uncontrollable factors. Section-V makes some recommendations derived from section IV. The section VI concludes with overall recommendation.

8. Export Products of Bangladesh
List of Export Products of Bangladesh
9. CHALLENGES TO BE FACED BY BANGLADESHI ENTREPRENEURS: A PERSPECTIVE OF INTERNATIONAL MARKETER
Comparative advantage of existing cheap labor will help to continue RMG industry in Bangladesh if the future trade in textile and clothing depends on low cost and high quality products. At present over 60% of world clothing exports are manufactured in developing countries with Asia alone contributing about one third of it. Asia's emergence as the major world supplier has occurred in three successive waves. During the first wave, newly industrialized countries, such as South Korea, Hong Kong, Taiwan and Singapore achieved excellent results in clothing sector. Due to raising labor costs, between 1985 and 1990, the production of clothing increased significantly in the Philippines, Indonesia, Thailand and Malaysia and together they led the world exports during this period. But with the increase of labor costs in these countries they in turn, begun to invest or redistribute part of their production units to third world countries, such as Bangladesh, Pakistan and Sri Lanka, and more recently Laos, Nepal and Vietnam. In these countries labor is more abundant and labor cost is relatively cheaper. The average hourly wage in Bangladesh is less than $0.25, while it is $0.56 in India, $0.49 in Pakistan, and $0.39 in Sri Lanka.7 However, the cost data does not tell anything. Cost needs to be adjusted by productivity. Entrepreneurs were not actively concerned with marketing of their products since the inception (1960s) of RMG export and they don't have to maintain direct relation with foreign market. But the textile sector including RMG will be gradually deregulated and integrated into the GATT (now the World Trade Organization) on the basis of strengthened GATT rules and disciplines over a transitional period of 10 years, four-stage transition period from January 1995 to January 2005. The bilateral textile agreement negotiated under the MFA (Multi Fiber Agreement) will cease to exist following the schedule of integration of which two steps have already been completed, 16% by January 1, 1995 and another 17% by January 1, 1998; step 3 involves further integration of 18% by January 2002, and the step 4 will integrate the remaining 40% of the trade by January 1, 2005. The integration will be carried out on the basis of HS codes or categories. 8 Under the agreement of WTO, GSP and Quota facilities will be withdrawn in the year of 2005. During the transitional period the quota for the items which remain outside the integration process will be enhanced. The significant changes to be noted here is that Bangladeshi entrepreneurs will be recognized as international marketer who will have to compete with local marketers as well as international marketers in free trade world.

10. Domestic controllable factors of the RMG sector of Bangladesh:
Factors
Percentages of Diff. Type
Strengths
Low cost of production
81.54%
Strength
Good quality
60%
Strength
High turnover ratio
44.62%
Strength
Simple technology (labor)
43.08%
Strength
Short pay back period
23.08%
Strength
 
About 96% of total readymade garments have been exported to the US markets and to the markets of the European Union. So, it is very likely that entire RMG export business will be at stake with the elimination of the MFA and GSP trade regimes under the Uruguay Round by the year 2005. As international marketer, they will have to make in depth analysis of all problems and potentialities of international market to maintain its current position and to make growth in domestic economy.

11. Possible challenges or threats:
At the first stage of MFA the US, Canada, Norway, and the EU have applied restrictions. Exports of garments and knitwear from Bangladesh face MFA restrictions in US and Canada only; The EU countries and Norway have not applied MFA quota restrictions on Bangladesh's export. Consequently, garments export from Bangladesh increased rapidly in the EU market to reach a value of US$510 million (or a market share of 1.8 percent) in 1994. At third stage of liberalization USA is expected to remove restrictions on gloves and mittens and silk trousers in Bangladesh which might have substantial effect on Bangladesh's access to the US market.

12. International price comparisons in terms of productivity:
One of the most important aspects of competing in this intensely competitive world is to minimize production costs and maximize quality. Bangladesh textile industry lacks the both. But Bangladesh Textile Mills Association (BTMA) claims that manufacturing cost of spinning mills in Bangladesh is cheaper than many of the Asian countries, including India, Pakistan, Japan, Korea, Thailand and Indonesia. As the Table-4 indicates, per unit manufacturing cost of yarn in private sector mills in Bangladesh is US$1.48 compared with US$1.78 in India, US$1.60 in Pakistan, US$2.38 in Japan, US$1.73 in Korea and US$2.74 in Thailand 11.

13. International comparison of manufacturing cost of yarn 1995 (US$):

 Bangladesh

India
Pakistan
Japan
Korea
Thailand

Public sector
Privet Sector





Total cost for per kg yam
2.56
1.48
1.78
1.60
2.38
1.73
2.74
Index
173
100
120
108
161
171
118
 
14. Backward Linkage:
  • Supporting Industry
  • Spinning, weaving/knitting, dyeing, finishing Industries.
  • In addition to these, Interlining, labels, buttons, sewing threads, packing and packaging materials, zippers, draw strings all are backward linked industries.
  • 70% of accessories collected locally.
  • Share of BB L/C in total export dropped from 68.33% in FY 1995 to 45.1% in the first eight months of FY 2001.
  • Total investment in backward linkage is € 4 B.
15. Conclusion:
It is only about 8 years from now to phase out the MFA in the year of 2005. It is difficult to predict what will be happened with high time margin especially during an era of rapid technological growth. During the last 8 years of the last decade of 20th century the technological knowledge has increased by 6 times. Along with technological life cycle, product life cycle is also changing very fast.l9 So, it is very obvious that with the withdrawal of the MFA consumer taste and preferences will be a major concern for every marketer. The question of sustainability and growth depends on how far and to what extent marketers of RMG industry can cope up with the uncertainties arising from domestic uncontrollable and international uncontrollable factors. For Bangladesh it will be a great challenge as major domestic uncertainties are related to govt. rules and regulations and political factors. In addition to that unknown foreign markets deserve thoughtful attention and an intensive preparation which has not yet been observed in that way. As an outcome of necessary preparation the types of textile and garment products have to be identified which will be comparatively advantageous for Bangladesh. The RMG sector is the most important sector in Bangladesh in context of its contribution to the national economy not only in foreign earning but also to poverty alleviation through employment generation especially for the women workers directly and indirectly through creating different linkages industry. Starting from 1981 export of the RMG has increased to US$4b at a growth rate of 24% per annum. In order to reach competitive strength Bangladesh has a three- way plan. At first to improve the overall operational efficiency and technological up gradation. 
 
Secondly, exploring newer export markets and finally, diversifying the product range. The success depends on appropriate strategy formulation and policy implementation. Considering its current performance and its contribution in the process of economic development future expectation from this industry should not be pessimistic. Rather, all out efforts must be taken from industry as well as govt. to enable international marketers to be successful by adjusting all uncertainties and exploiting all opportunities.

Reference:
  1. Fatema Begum, Muhammad Salahuddin Ahamed, Journal of Business Research, vol. 2, 1999
  2. Journal of International Affairs (Volume 4, Number 2, July-December 1998)
  3. The Independent Bangladesh Yearbook (1999), Garment Industry, p.166
  4. Dowlah CAF (1998), "The Consequences of the GATT Uruguay Round for the Textile and Garments Sector in Bangladesh", Journal of Internal Affairs, Vol. 4, No. 2, Bangladesh Institute of Law and International, Affairs, P. 20
  5. Abrar Ahmed Apu , www.abrarahmedapu.com 
  6. http://textilelearner.blogspot.com/2012/11/present-conditionsituation-of-ready.html

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