Shifting Sands of the Apparel Industry

Shifting Sands of the Apparel Industry

March 29, 2016

By LightCastle Partners 

Bangladesh currently sits as the second largest player in the apparel industry behind China. As China moves up towards more value-added products, it leaves behind more opportunities for countries like Bangladesh to strengthen their foothold in low-value apparel markets. However, the competition is also hot on its trail, with emerging players such as Vietnam and Ethiopia vying to make headway as well. Although Bangladesh is undoubtedly doing well in the apparel industry, it can ill afford to rest on its laurels.

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RMG is at the Heart of the Bangladesh Growth Story

When Bangladesh’s export-oriented ready made garments (RMG) sector began its modest journey in the late 1970s, few foresaw its meteoric rise and the substantial role it would play in driving Bangladesh’s economic fortunes. Bangladesh’s substantial cost advantage in labor, augmented by early advantages gained by preferential trade agreements such as the MFA have contributed to the industry’s rise as a global player from the 90s onwards.

Read: The Bangladesh Growth Story

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New Players Emerging in the Global Sourcing Scenario

At the moment, Bangladesh occupies a comfortable position in the global apparel export scenario, contributing 5.1% of the export volume. Although the end of the MFA in 2005 sparked doom and gloom predictions from many analysts, Bangladesh has continued to grow at a robust pace. An important factor for this sustained growth is China’s shift towards higher value production, leaving much room to grow for Bangladesh’s apparel industry—exports grew from 6.9 billion USD in 2005 to 25.5 billion USD in 2015.

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Despite international backlash following a series of industrial accidents in 2012 and 2013, Bangladesh still remains the top sourcing destination among CPOs for the next five years. Although countries such as Vietnam are hot on its heels, the true long-threat might arise in the form of new players such as Ethiopia. Ethiopia currently enjoys a vast cost advantage over Bangladesh, with rage rates currently almost half of those in Bangladesh.

Furthermore, other factors such as preferential trade agreements (GSP to USA and EU) surplus electricity, cheap land price, preferential investment terms and proximity to EU and USA also play an important role in accelerating Ethiopia’s apparel export growth.

Changing Fortunes in the Export Destinations

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Bangladesh is also facing running into problems with the US market, which is currently the single largest importer of Bangladeshi apparels. In 2013, USA cancelled GSP for Bangladesh’s exports citing a variety of reasons. It should be noted that, although apparel did not originally fall under GSP, BGMEA was lobbying hard to get tariff free access for apparel exports. Thus GSP cancellation is a significant roadblock on the way to getting such benefits for the apparel industry.Although Bangladesh’s apparel industry is currently buoyed by robust domestic growth, it faces some external challenges in regards to some of its export destinations. The EU, which is currently the largest market for Bangladeshi apparels (61%), has been experiencing sharp depreciation due to the Eurozone crisis caused by Greece’s debt default. A depreciating Euro means that Bangladeshi apparel exports are becoming more expensive in the Eurozone.

Read Also: Powering Bangladesh’s Future

Bangladesh is also facing running into problems with the US market, which is currently the single largest importer of Bangladeshi apparels. In 2013, USA cancelled GSP for Bangladesh’s exports citing a variety of reasons. It should be noted that, although apparel did not originally fall under GSP, BGMEA was lobbying hard to get tariff free access for apparel exports. Thus GSP cancellation is a significant roadblock on the way to getting such benefits for the apparel industry.

The Way Forward

  • Move towards higher value products: As it stands, Bangladesh runs the risk of entering a race to the bottom, with both current competitors and new entrants sporting highly competitive wage rates which are close to or even lower than Bangladesh’s average wages in the apparel industries. With future pressure from unions being likely to pressure further increases in wages, staying exclusively in low value product markets will be difficult to maintain. Thus, moving into higher value products should be an important long-term focus for the key players in the apparel industry.
  • Stick with drive for renewed compliance: Moving into higher value products will require significant amount of investment in factory development and R&D. Two ways to secure this is through government patronage, which can be garnered by showing a consistent commitment to compliance, which is an important issue in the post-Rana plaza landscape. Secondly, compliance is also a good green signal for international buyers who will be more likely to give orders for higher value products in the future. At the moment, satisfactory progress has been made in the 528 factories visited by the Alliance for Bangladesh Workers Safety to deliver the highest international standards as of September 2015. However, there is still a lot of room to grow as 1/5th of the factories visited have completed less than 20% of the planned upgrades.
  • Depreciatory Monetary Policy: Depressing the Bangladeshi taka will make Bangladeshi exports cheaper to buy in our export destinations. This can provide a good mitigating influence in the face of rising costs due to higher wages.
  • Improve Backward Linkages: Most of the raw material for apparel sector has to be imported from abroad. Although some of the cotton used is sourced locally, for instance, the vast majority of it is sourced abroad, mostly from China. In this regards, manufacturers can consider forward contracting to protect against potential shocks in the global cotton market. Alternatively, manufacturers can explore the option of acquiring lands in Africa to establish cotton plantations in the long run.
  • Developing Mid-Tier Management: Currently, there is a significant deficit of talented mid-tier managers in the apparel industry. Due to branding issues and low pay compared to other industries such as banks and FMCG, most fresh graduates are reluctant to enter the apparel sector. RMG leaders and the government must work hand in hand to increase the attractiveness of the apparel industry as a place of employment.
    Some ways this can be achieved is through closer relations with reputed public and private universities, for example through seminars, programs and courses that introduce the prospects and workings of the RMG sector to university students.
  • Strengthening Diplomatic Ties: The government must pursue diplomatic overtures with top importers such as the US and With the USA in particular, reinstating GSP privileges should be a priority since that will pave the way for similar tariff free access for apparel exports.

About the Research

All information contained herein is obtained by LightCastle from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein “As IS” without warranty of any kind.
LightCastle adopts all necessary measures so that the information it uses is of sufficient quality and from sources LightCastle considers to be reliable including, when appropriate, independent third-party sources. However, LightCastle is not an auditor and cannot in every instance independently verify or validate information received in preparing publications.

About LightCastle Partners

LightCastle Partners (LCP) is a business data firm. It works at the intersection of market data and company specifics to simplify decisions and drive business growth. It has served several reputable clients including Mitsubishi, Generac, Asian Capital Advisors, Care Inc., Swiss Contact Katalyst and top tier local corporates among others.

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