Pros and Cons of garment industry: Future prospects and challenges of Bangladesh Garment Business

Author: Joy Sarkar

Written: May, 2013

Published : December, 2013

Store showing that, they don’t source from Bangladesh

Store showing that, they don’t source from Bangladesh

ABSTRACT

The importance of the textile industry in the economy of Bangladesh is very high. The garments manufacturing sector earned $19 billion in the year to June 2012, one of the impoverished nation’s biggest industries. Currently this industry is facing great challenges in its growth rate. The major reasons for these challenges can be the global recession, unfavorable trade policies, internal security concerns, the high cost of production due to increase in the energy costs, different safety issues specially fire, etc. Depreciation of Bangladeshi Taka that significantly raised the cost of imported inputs, rise in inflation rate, and high cost of financing has also effected seriously the growth in the textile industry. As a result neither the buyers are able to visit frequently Bangladesh nor are the exporters able to travel abroad for effectively marketing their products. With an in-depth investigation it was found that the Bangladesh textile industry can be brought on top winning track if government and others individuals takes serious actions in removing or normalizing the above mentioned hurdles. Additionally, the government should provide subsidy to the textile industry, minimize the internal dispute among the exporters, withdraw the withholding and sales taxes etc. Purchasing new machinery or enhancing the quality of the existing machinery and introducing new technology can also be very useful in increasing the research and development (R and  D) related activities that  in the modern era are very important for increasing the industrial growth of a country. 

INTRODUCTION

Export

Major Item Exported from Bangladesh (2011-12)

The RMG industries provide the single source of economic growth in Bangladesh’s rapidly developing economy.[1] Exports of textiles and garments are the principal source of foreign exchange earnings. Agriculture for domestic consumption is Bangladesh’s largest employment sector. By 2002 exports of textiles, clothing, and ready-made garments (RMG) accounted for 77% of Bangladesh’s total merchandise exports.[2] By 2013, about 4 million people, mostly women, worked in Bangladesh’s $19 billion-a-year industry, export-oriented ready-made garment (RMG) industry. Bangladesh is second only to China, the world’s second-largest apparel exporter of western brands. Sixty percent of the export contracts of western brands are with European buyers and about forty percent with American buyers.[3] Only 5% of textile factories are owned by foreign investors, with most of the production being controlled by local investors.[4] 

HISTORY OF THE TEXTILE INDUSTRY IN BANGLADESH

Traditionally, artisans working in small groups, in what are often referred to as cottage industries, produced most of the textile in the sub-continent. There were many such artisans in the area that was to become Bangladesh. In fact, from prehistoric times until the Industrial Revolution in the eighteenth century, East Bengal was self-sufficient in textiles. Its people produced Muslin, Jamdani, and various cotton and silk fabrics. These were all well regarded even beyond the region as they were manufactured by very skilled craftsmen. The material produced by the artisans of Bengal started facing

Bangladesh’s textile industry has been part of the trade versus aid debate. The encouragement of the garment industry of Bangladesh as an open trade regime is argued to be a much more effective form of assistance than foreign aid. Tools such as quotas through the WTO Agreement on Textiles and Clothing (ATC) and Everything but Arms (EBA) and the US 2009 Tariff Relief Assistance in the global clothing market have benefited entrepreneurs in Bangladesh’s ready-made garments (RMG) industry. Bangladesh with a population of about 156 million, has the highest population density in the world. In 2012 the textile industry accounted for 45% of all industrial employment in the country yet only contributed 5% of the Bangladesh’s total national income.[5]

Unpredictable consumer demand, market trends of variety,   vigorous competition beginning in the eighteenth century after short product life cycles and low barriers of entry the textile the growth of mechanized textile mills in the English Midlands. and apparel  industry  is  one  of the  most highly competitive  This eventually led to a great decline in the number of Bengali workers skilled enough to produce such high quality fabrics. According to popularly held beliefs, as the region’s spinners and weavers meant competition for their emerging textile industry, the British imperialists responded by trying to force the artisans to stop production. They were said to have sometimes used methods as harsh as cutting off the thumbs of the craftsmen so they would never be able to spin or weave again. However, as was the case with the traditional handloom fabrics, indigo dye production also gradually declined. The problems of the indigo industry were principally a result of two factors. First, because indigo was a cash crop, the British administrators in this part of the empire forced farmers to grow the indigo plant in order to increase the administrators’ profits. Unfortunately, the indigo plant is nitrogen depleting and thus exhausted the soil very quickly. Another reason for indigo’s gradual disappearance as a dye stuff was the unpredictable nature of the plant. Sometimes one farmer would have a good harvest, while his neighbor would not be able to produce anything. The combination of poor yields and the unpredictability of the crop gradually led farmers to cease growing the plant and moving on to other, more profitable crops. The fabric produced and dyed in British factories flooded the Indian markets. In time, its importation became one of the points of contention in the growing independence movement of the sub-continent. As separation production again profitable, the textile industry was reorganized as new methods of production were adopted. Water, a necessity for the chemical processes involved in processing the modern dyes now used, was abundant in East Bengal. This contributed to the establishment of mechanized textile factories in the area establishment of mechanized textile factories in the area. However, after 1947 and the partition of East and West Pakistan from India, most of the capital and resources of Pakistan came under the control of West Pakistanis. The textile industry thus stagnated in East Pakistan as momentum for development shifted from the eastern part of the country to the west. The west also grew more cotton than the east, which was used as a plea for developing the industry in the west instead of in the east. The majority of all industries in the east were also owned by West Pakistani industrialists. When Bangladesh gained its independence from Pakistan in 1971, the new government nationalized the textile industry, as it did with many other businesses in which West Pakistanis had been the principal owners. Although there were some Bangladeshi industrialists, they did not form a large or politically powerful group and thus had to surrender control of their factories to the government as well. All of the country’s textile factories were then nationalized and organized under the Bangladesh Textile Mills Corporation, or BTMC.

Some important phases of the Bangladesh RMG industry

Period

Event

1977-1980

Early period of growth

1982-1985

Boom days

1985

Imposition of quota restrictions

1990s

Knitwear sector developed significantly

1995-95

Child labor issue and its solution

2003

Withdrawal of Canadian quota restriction

2005

Phase-out of export-quota system

2013

Uncertainty about the US GSP and different internal problems including political unrest and poor working environment

PROBLEMS AND CHALLENGES 

Lack of Modernize Machinery and Equipment: The textile industry has obsolete equipment and machinery. The inability to timely modernize the equipment and machinery has led to the decline of Bangladesh textile competitiveness. Due to obsolete technology the cost of production is higher in Bangladesh as compared to other countries like India, Pakistan and china.

Lack of Research and Development (R&D): The lack of research and development (R& D) in the many cases especially like fashion designing and developing. Our approach is to copy the buyers design but creating and designing fashion would help in a great extent. Research and Development (R&D) can play a vital role in this case.

Finance Bill to Burden Industry Further: All Bangladesh Textile Mills Corporation has told that government’s actions are not matching according to its expectations for the textile industry and its smooth growth. According to him, reintroduction of minimum tax on domestic sales would invite unavoidable liquidity problem, which is already reached to the alarming level. Also the textile industry was facing negative generation of funds due to unaffordable mark-up rate on the one hand and acute shortage of energy supply and unimaginable power tariff for industry [7].

Increasing Cost of Production: The cost of production of textile rises due to many reasons like increasing interest rate, double digit inflation and decreasing value of Bangladeshi Taka. The above all reason increased the cost of production of textile industry which create problem for a textile industry to compete in international market [8].

Internal Issues Pose a Larger Threat for Bangladesh’s Textile Industry: Bangladesh’s textile industry is going through one of the toughest period in decades. The global recession which has hit the global textile really hard is not the only cause for concern. The high cost of production resulting from an instant rise in the energy costs has been the primary cause of concern for the industry. Depreciation of Bangladeshi Taka during last few years raised the cost of imported inputs. In addition, double digit inflation and high cost of financing has seriously affected the growth in the textile industry. Bangladesh textile exports have gone through challenges during last three years as exporters cannot effectively market their products since buyers are not enough visiting Bangladesh due to adverse travel advisory and it is getting more and more difficult for the exporters to travel abroad. Additionally, he stressed that government should take immediate measures to remove slowdown in the textile sector. High cost of doing business is because of intensive increase in the rate of interest which has increased the problems of the industry. Also loans availed crisis by the industry, hence, the volume of non-performing loans has reached to an alarming situation. Moreover, power shut downs may result in massive unemployment resulting in law and order situation. [9] 

Another vital issue is political unrest of Bangladesh. In the recent days it has caused a great hamper to the RMG business. The transport systems used in receiving raw materials and delivering goods to the port has been severely disturbed.

Energy Crisis:

Electricity Crisis: As a consequence of load-shedding the textile production capacity of various sub-sectors has been reduced by up to 30 percent. Many joint meeting of organization were held at different times to formulate a joint strategy to address the alarming electricity crisis being faced by the textile industry. The meeting unanimously decided to constitute a joint working group of electricity management for the textile industry in the larger interests of the value chain of the textile industry [10]. The joint working group will meet shortly to design a detailed plan to pursue the following goals; immediate total exemption from Electricity load shedding for the textile industry value chain; Rationalization and reduction of electricity tariff. The load-shedding of electricity cause a rapid decrease in production which also reduced the export order. The cost of production has risen due to instant increase in electricity tariff. Due to load shedding some mill owner uses alternative source of energy like generator which increase their cost of production further. Due to such dramatic situation the capability of competitiveness of this industry in international market effected badly.

Gas Shortage: Gas load-shedding continues in textile industries despite a significant increase in temperature. A Spokesman for the Bangladesh Textile Mills Corporation (BTMC) claimed that 60 to 70 per cent of the industry had been affected and was unable to accept export orders coming in from around the globe. Continuous gas disconnection over months, causing huge production losses are badly affecting the capability of the industry. In the larger interest of the economy and exports, the government should “ensure utility companies provide smooth electricity and gas supply to the textile industry”.

Tight Monetary Policy: The continuity of tight monetary policy causes an intensive increase in cost of production. Due to high interest rate financing cost increases which cause a severe effect on production. The withholding tax of 1% also effects the production badly. The high cost of doing business is because of intensive increase in the rate of interest which has increased the problems of the industry. The government should take immediate measures to remove slowdown in the textile sector.

Removal of subsidy on Textile sector: The provisions of Finance Bill 2012-2013 are not textile industry friendly at all. Provisions like reintroduction of 0.5% minimum tax on domestic sales, withholding tax on import of textile and articles etc., are nothing but last strick on industry’s back. Reintroduction of minimum tax on domestic sales would invite unavoidable liquidity problem, which is already reached to the alarming level. The textile industry was facing negative generation of funds due to unaffordable mark-up rate.

Lack of new investment: Bangladesh textile industry is facing problem of Low productivity due to its obsolete textile machineries. To overcome this problem and to stand in competition, Bangladesh Textile Industry will require high investments. There is a continuous trend of investing in spinning since many years. Bangladesh is facing externally as well as internally problems which restrict the new investment. The unpredictable internal condition of Bangladesh cause a rapid decrease in foreign investment that affected all industries but especially textile industry.

Industrial Safety and other issues: Recently Bangladesh is facing a lot difficulties regarding the GSP facilities in The USA especially. USTR hearing held in Washington on March 28, 2013, Thursday. 13-member Bangladesh delegation team had attend the meeting and Bangladesh had answered more than 150 questions on trade union and labor standards at the USTR hearing by the panel of judges.  Bangladesh made clear its position on major issues of occupational health and safety, including progress on probe into the killing of laborer leader Aminul Islam.

But Bangladesh has failed to prove the implementation and sincerity on occupational safety as Rana Plaza, Savar collapsed on April 24, 2013 causing a death of 1,127.Approximately 2,500 injured people were rescued from the building alive.( The search for the dead ended on 13 May). As Bangladesh failed to prove them so the USA is going to review the decision and probably Bangladesh is going to lose GSP facility in the USA.

Besides Rana Plaza tragedy, Tazreen Fire Tragedy, Tung Hai Sweater Factory fire and continuous worker unrest in the RMG factories has compelled the foreign customers to think twice to source from Bangladesh. The ultimate customers of different countries have shown their objection against the products from Bangladesh ‘condition’.

Rana Plaza Collapse at Savar, Bangladesh

Rana Plaza Collapse at Savar, Bangladesh

Fire Tragedy at Tazreen Fashions, Ashulia, Dhaka, Bangladesh

Fire Tragedy at Tazreen Fashions, Ashulia, Dhaka, Bangladesh

Placard against fashion of Bangladesh ‘Condition’

Placard against fashion of Bangladesh ‘Condition’

United States and EU cuts imports of textile from Bangladesh: United States cancels huge of textile orders of Bangladesh. US also impose a high duties on the import of textile of Bangladesh which affects the export in a bad manner. US and EU are the major importer of Bangladesh textile which creates a huge difference in export of Bangladesh textile after imposing a restriction on import of Bangladeshi textile goods. Latest issues compelled these buyers to withdraw their order from Bangladesh and they are thinking about alternative market.

Backward Linkages Industries: Prices of cotton, and other raw material used in textile industry fluctuate rapidly in Bangladesh. The rapid increase in the price raw material affects the cost of production badly. The increase in raw material prices fluctuates rapidly due to double digit inflation and instable internal condition of Bangladesh. Due to increase in the cost of production the demand for export and home as well decreased which result in terms of downsizing of a firm. Hence the unemployment level will also increase. Govt. should take serious step to survive the textile industry. In order to decrease the price raw material for textile we need to increase our production capability. Simultaneously, the government should make arrangement for introducing international system of Cotton Standardization in Bangladesh to enhance quality and value of

Poor Supply Chain: The phenomenal expansion of the RMG industry in Bangladesh and the dramatic increase in the population in addition to an increased standard of living in the country has led to a large demand-supply gap as shown by the following table. Only 21% of the total demand for yarn is met locally in Bangladesh. The figures for grey are not much better as only 28% of the total demand is met locally [11]. The finishing sub-sector currently is able to process all of the locally produced grey, but will need to expand at as with the weaving and knitting sub-sectors. All sectors of the textile industry face many of the same challenges. These problems include lack of power, obsolete technology, low capacity utilization, lack of machinery maintenance, a workforce that is not adequately trained, problems with labor unrest and militancy, political unrest causing disruption such as Hartals, and a lack of working capital. The problems with electricity were evident to me on my visit to the Sinha Textile Mills; I was told that it is more efficient to power the factory continuously by a generator, instead of letting production be hampered by power failures.

The Effect of Global Recession on Textile Industry: In economics, the term ‘recession’ means “The reduction of a country’s Gross Domestic Product (GDP) for at least two quarters; or in normal terms, it is a period of reduced economic activity.” Bangladesh is developing economy in the world, and one of the lowest in terms of the dollar. It is sad to see our economy like this now.

Effect of Inflation: Inflation rate is measured as the change in consumer price index (CPI).Inflation is basically a general rise in the price level. It is decline in the real value of money. Inflation can have adverse effect on economy. Bangladesh is one of prey of inflation. It still faces high double digit inflation. The increase in inflation causes the increase in the cost of production of textile good which return in downsizing. The double digit inflation causes reduction in exports of textile [12].

RECOMMENDATIONS TO OVERCOME THE CHALLENGES OF GARMENT INDUSTRIES 

Despite all the challenges that exist in Bangladesh, the companies can still highly benefit from its sourcing offering. Together effort from three main stock holders like government, suppliers and buyers can work to overcome these various hurdles to success. [13]

Some Recommendations are given as under:

  • Zero rating on import of all textile machinery
  • Zero rating exports
  • Tariff reduction
  • Incessant energy supply to textile units
  • Issues relating to the market access
  • Duty free market access to European Union and United States,
  • Remedy though Foreign Direct Investment (FDI)
  • Image building of Bangladesh to Attract Foreign Direct Investment (FDI)
  • Focus on Value Addition, Technology Up-gradation and Capacity Building
  • Human Resources Development, Reducing the cost of doing Business in Bangladesh
  • Need for Improving Textile Production, Awareness of International Quality
  • Subsidy removal should be taken a back
  • Interest rate should be low down in order to survive this industry
  • Electricity and gas tariff, Removal of Energy Crisis
  • Exploration of new Export Markets, Bonded warehouse facilities, Duty free importation of raw materials of export in the RMG
  • Avoidance of double taxation for joint venture projects, Income tax exemption for up to three years for foreign technicians
  • Duty on dyes and chemicals should be withdrawn
  • Duty free import of capital machinery,
  • Appoint an advisory committee to represent the industry to the government
  • Improvement of research and computer technology, All sectors of the industry will be modernized, Rehabilitated as much as possible,
  • The policy calls for the establishment of many new factories and projects, but does not provide a scheme for financing them. It should be overcome.
  • The lack of training and technology is mentioned, but no steps are suggested for enhancing the kills of the workforce and engineers, No suggestions are made for setting up institutions to conduct the technical and marketing research needed to upgrade the quality of Bangladeshi products to make them more appealing in the international market.
  • The need for the expansion of the Bangladesh’s infrastructure such as road, port, and railway capacities to accommodate increased imports and exports is not mentioned, the great problems arising from the shortage of land on which to build the necessary factories is also not considered. The policy states that environmental pollution is negligible, but does not go further into the matter. However, it was very obvious to me on one of my factory visits that affluent treatment and disposal in the industry is a very serious problem. The need for more power is mentioned, but no plans have been devised on how the expansion will be undertaken.

THE FUTURE OF THE TEXTILE INDUSTRY IN BANGLADESH 

The textile industry in Bangladesh has grown in an unplanned manner and a critical demand-supply gap has arisen for both yarn and fabric. The crisis will naturally deepen unless appropriate backward linkages, the incorporation of the fundamental steps in the textile industry all through to the RMG industry, can be built to meet the rapidly approaching challenges in the global textile market. As the population is growing and the standard of living is increasing in Bangladesh, the demand for textiles is increasing rapidly.

Dramatically increase capacities in spinning, weaving, knitting, and dyeing, printing, and finishing sub-sectors. This will require the adoption of the most modern and appropriate technology to ensure quality products at competitive prices.

The possibility of increased yarn production in Bangladesh is an issue that has been looked into extensively by many researchers. These investigations have revealed the country actually has a comparative advantage over all competitors in terms of the expense of yarn production. However, in regards to the total yarn cost, Bangladesh’s advantage over India and Pakistan disappears, even though it remains competitive with other producers. This is essentially a result of the higher cost of raw materials in Bangladesh, as most need to be imported. Bangladesh has a lower waste percentage than all its competitors. Power along with Korea is the cheapest in Bangladesh amongst all the yarn producers. The country also has a very low depreciation rate and a fairly low interest rate as well, aided by a low conversion cost as well. However, the price of auxiliary materials in Bangladesh is the highest among all the yarn producers, as is the price of raw materials. Due to these two factors Bangladesh loses its comparative advantage over India and Pakistan. Most of the raw cotton imported by Bangladesh comes from overseas. The country is not only handicapped by the import tariffs and shipping expenses, but India and Pakistan subsidize the raw cotton, which is sold locally, resulting in countries like Bangladesh paying more for the same cotton. The outcome for the Bangladeshi spinning mills of such price differentials is that they obtain raw cotton of the same quality at prices, which are approximately 30% higher than the Indian mills, and Pakistani mills [14]. In addition, Bangladesh’s spinning mills have to pay another 6 to 7% for handling, freight, and commission charges which put them

in a disadvantageous situation. The new infrastructure development surcharge, or IDS, on all imports, which was stipulated in the 1997/98 fiscal year, added another 2.5% to the price of imported raw cotton. The weaving and knitting sub-sectors will also need to expand at a rapid rate, as there is a large demand-supply gap in the country. With increased investment in the sub-sectors and modernized machinery, Bangladesh could profit greatly from larger and more competitive weaving and knitting sectors. As current dyeing facilities are mostly dependent on imported fabrics, they are expanding at a rate which is not dependent on any of the other sectors. However, as local grey becomes more competitive, and its production is increased, the dyeing, printing, and finishing sub-sector will also need to expand to accommodate for the increased supply. The leakage from bonded warehouse facilities and smuggling of materials across borders also need to be monitored closely in order to assure the competitiveness of the local industry [15]. The reduction of such problems will automatically improve the market position resulting in improved opportunities for the expansion of the Bangladeshi textile industry.

CONCLUSION

On a report from the New York Times, Disney has said their branded merchandise will no longer be made in Bangladesh. Some stores of different countries are declaring that they don’t source from Bangladesh. It is very much negative for the branding of Bangladesh items. The devastation of Rana Plaza is now going to affect all the other plazas and the men and women who go there to win bread, not knowing where the products they work on end up and the business behind the makings.

According to the report it will take $3 billion dollars to bring Bangladesh’s 4,500 factories into compliance with building and fire standards, which really isn’t not that much of an investment since annually Bangladesh makes $18 billion from clothing exports.

It was encouraging to see that the New York Times article encouraged European Union and Obama Administration to play their roles in enforcing proper labor laws and compliance measure. Hopefully, the Bangladesh govt. would not be found wanting in extending fullest cooperation to international efforts.

The made in Bangladesh brand has taken years to be accepted by the international market. It has given livelihood to 3.5 million Bangladeshis out of which 80% are women. That is a huge step for Bangladesh where women in the work force still is not old enough idea. [16]

Several and frequent deadly issues and the violent political environment of Bangladesh have been causing a great loss to the RMG business. Despite of these problems Bangladesh is trying to hold strong position in the world market. But if these occurrences continues and no fruitful measures are taken, then the foreign customers will have no choice but to source from other countries than Bangladesh and that would be a serious problem for the business of Bangladesh. On the other hand thinking that, this condition of Bangladesh will be solved overnight is not realistic. A long term plan, implementation and of course the mutual honest effort of BGMEA, Bangladesh Government, RMG Manufacturers and Buyers will help a lot to overcome this condition.

REFERENCES

[1] “Reproductive Health and Rights is Fundamental for Sound Economic Development and Poverty Alleviation,” United Nations Population Fund. Retrieved June 9, 2009.

[2] “Textiles on the WTO Website”. WTO Secretariat. Archived from the original on 3 November 2008. Retrieved 2008-10-29.

[3] Paul, Ruma; Quadir, Serajul (4 May 2013). “Bangladesh urges no harsh EU measures over factory deaths”. Dhaka: Reuters.

[4] “Garment industries in Bangladesh and Mexico face an uncertain future”. Textiles Intelligence. 2003-10-15. Retrieved 2009-08-07.

[5] Keane, Jodie; te Velde, Dirk Willem (7 May 2008) (PDF). The role of textile and clothing industries in growth and development strategies (Report). Investment and Growth Programme Overseas Development Institute (ODI). Retrieved 9 May 2013.

[6] Textile Industry— Special Report (2009)

[7] Bangladesh Observer-Business Survey (2009)

[8] http://www.fiber2fashion.com

[9] Asian Economic Review- (2011)

[10] http:// http://www.asiantextilejournal.com (2009)

[11] http://www.epb.gov.bd (2011-2012)

[12] Centre  for  Policy  Dialogue  (CPD)  Bangladesh,   Contribution  of  the  RMG  Sector  to    Bangladesh Economy, Paper 50, (2002)

[13] http://www.fpcci.com.bd (2007)

[14] Bangladesh Textile Today (BTT) (2011)

[15] Standard and Poor’s, Textiles Industry Survey Monthly Investment (2004)

[16] http://www.thedailystar.net/beta2/news/challenge-before-garments-sector/ (2013)

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Posted on December 26, 2013, in Expert Articles. Bookmark the permalink. 1 Comment.

  1. Arifur Rahman Raju

    nice presentation.

    Like

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