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    RMG sector: Leading in times of uncertainty

    Zahedul Amin

    The ongoing labour unrest is the latest in the series of setbacks hindering our RMG sector. With two large industrial accidents occurring in quick successions, the sector has been under pressure for quite some time. The current turmoil is further aggravating the already-precarious situation, which many feel has far reaching impacts.
    We take a lot of pride in our RMG sector, with its record breaking export performance and its position as the second biggest RMG exporter after China. Sustained growth of RMG is seen as an integral part of our aspirations for achieving middle income status.

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    Renowned consulting firms like Mckinsey have already attested to the sector’s growth potential. However, amid prevailing optimism and fanfare, industry leaders have failed to gauge the structural changes looming large in the horizon.
    Current uncertainties
    Rising wages: The current turmoil is mainly centered on workers’ demand for a hike in wages. With rising food and non-food inflationary pressure, wage hike seems a reasonable demand. However, currently a huge gap exists between the workers’ demand for a minimum wage of Tk8,000 and BGMEA’s offered wage of Tk3,600. The negotiation may ultimately yield minimum wage between Tk4,500-5,500, which is set to result in a 60% increase from existing levels.
    Historically export price of apparels is “upward sticky” meaning it’s unlikely to increase significantly despite rising input costs. As a result, RMG owners will have to find ways to squeeze out costs in other areas. Either they have to move to manufacture higher value products or risk losing out to competitors within existing product verticals.

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    Currency depreciation for India: A depreciating Indian currency has once again boosted the price competitiveness for Indian exporters. As a result, RMG manufactured in India will become attractive to international buyers resulting in a possible loss of export orders from Bangladesh. The downward trend in Indian economy is set to persist for sometime which may lead to prolonged period of cheap Indian rupee and will not bode well for us.
    Rise of Myanmar: Myanmar’s road to democracy has enabled them to move away from international isolation. The current government has repeatedly portrayed their pro-business credentials by devising policies encouraging international investors. With geographic location beside China and access to sea, Myanmar has strategic value. Availability of cheap labour and natural resources is an added sweetener. Alongside, the Myanmar government is heavily investing in infrastructure which may take a couple more years to take shape.
    Myanmar’s RMG sector is still at a nascent stage and is unlikely to pose a major challenge for the next couple of years. However, given the pace of their economic growth, the sector may turn into a big player for cheaper RMG products. Some Bangladesh RMG entrepreneurs are already complaining of losing some export orders to Myanmar.
    Industrial accidents and image issues: Recent spate of industrial accidents has seriously dented the image of RMG sector abroad. Some international buyers have already expressed their reservations about continuing breach in the sector’s compliance issues. USA has already suspended GSP facility for Bangladesh and EU is threatening to follow suit. Possible cancellation of GSP by EU may have devastating impact on Bangladesh.
    Way forward
    Move to high value range: Bangladesh has historically operated at the lowest rung of the RMG product line. Low value-high volume buyers have chiefly sourced from Bangladesh due to significant cost competitiveness. However, with rising wage rate, Bangladesh’s competitiveness will seriously be hampered and may result in shifting of orders. The RMG sector needs to undertake a long term strategy for product innovation which should allow them to cater to higher value segment. The success of Sri Lankan RMG industry is a case in point.
    Merger and acquisition (M&A): Currently, 5,000+ RMG factories operate in Bangladesh among which half lack adequate infrastructure for complying with international standards. These firms mainly rely on sub-contracting deals from larger RMG units. Due to smaller profit margin, smaller RMG companies are unable to invest in infrastructure resulting in frequent industrial accidents.
    Government should encourage larger RMG companies to acquire smaller ones with the view to further consolidate the industry. Smaller number of RMG units can also be monitored easily by regulatory authorities. Regulations for M&A should be further streamlined and simplified with incentives dished out for encouraging industry wide merger.
    Development of middle management: Although RMG sector is one of the major export earners of the country, there remains a distinct apathy for working in this sector. This is primarily due to unattractive salary structure discouraging top talents from applying. Market leaders must understand the value of quality human capital for taking the industry forward.
    Design centre: Government needs to work closely with BGMEA and BKMEA to invest heavily in RMG design centers and training academies. This will increase the repository of skills for designing professionals allowing them to come up with innovative products.
    Overall, the era of cheap labour will soon be gone and local RMG should rise to the occasion to allay any possible uncertainty. The industry leaders, with the support of the government, must steer away the sector from being factor-driven to an innovation-driven one.

    Zahedul Amin is the Co-founder and Director of Finance at LightCastle Partners, an emerging market specialized business planning and intelligence firm. Earlier, he worked as the Assistant Vice President, Risk Analysis Unit, in HSBC. He completed his E-MBA at the Institute of Business Administration (IBA), University of Dhaka, and completed his undergraduate degree from the same institute. He can be reached at [email protected], Twitter: @amin_zahed

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    • Bijon Islam

      Great article, Zahed -reading this I definitely attest that its time we move up the value chain

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