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    Shifting Sand of Global Apparel Market and Bangladesh’s Game Plan

    Zahedul Amin

    Bangladesh Apparel sector has presented itself as a matured contributor to country’s export and growth, contributing to 81% of country’s export (USD25.4 Billion FY14-15) and employing 4.2 million workforce.  The sector’s meteoric rise in global apparel market in early 90s onwards has been augmented by inexpensive labor, favorable government policies and preferential trade agreements. Bangladesh currently sits as the second largest player in the market after China with growing export forecast. While the sector has remarkable achievements over last two decades, with changing dynamics in global market and economy, apparel manufacturers and policymakers can ill afford to rest on their laurels.

    Bangladesh Apparel Export (USD M) (2007-2015)
    Bangladesh Apparel Export (USD M) (2007-2015)

    Bangladesh has been experiencing benefits of shifting orders from China since 2010, as the latter suffered from higher labor wages and rising overheads costs. China also consciously adopted a strategy of moving towards manufacture of higher margin products as opposed to apparel. This propelled Bangladesh as the second largest apparel manufacturer. McKinsey, in their study on apparel market in 2012, clearly pinpointed Bangladesh as the biggest beneficiary as most Chief Procurement Officers (CPOs) of major clothing brands identified Bangladesh as the most popular sourcing destination.

    New Players Emerging

    Over last three years, several different players have emerged including Myanmar, which returned to the mainstream on the back of recent political reforms. Others are also offering competitive costing with the likes of Cambodia and Vietnam leading the way. The biggest long term threat for Bangladesh are some of the Sub-Saharan African nations with Ethiopia posing as the major potential challenger. According to the latest Mckinsey report on apparel sector published in 2015, Bangladesh still retains the preferred position for apparel sourcing, but is closely followed by Vietnam, India and Myanmar. Ethiopia became the first African country to make it to the list.

    Top 3 sourcing destination over next 5 years (Mckinsey 2015)
    Top 3 sourcing destination over next 5 years (Mckinsey 2015)

    Sub Saharan countries like Ethiopia enjoy number of benefits through– preferential trade agreements (GSP to USA and EU), cheap labor (lower than Bangladesh), surplus electricity, cheap land price, preferential investment terms and proximity to EU and USA. In the next decade, countries like Ethiopia can pose a major challenge in the low value segment of the apparel market.

    International Headwind

    Despite sporadic political turmoil within the country, first in early 2014 and then in January 2015, Bangladesh apparel sector has maintained its steady growth, which is remarkable. In the international arena, several economic and political factors have been weighing against Bangladesh’s apparel sector growth.
    Depreciation of Euro against all major currencies has been due to Eurozone crisis spearheaded by Greece’s debt default. Over last one year, Euro has depreciated by almost 18% against BDT which is bad news for local apparel sector. EU countries collectively import 61% of Bangladesh’s apparel export and depreciating euro means Bangladeshi apparels have become more expensive to import. As the Eurozone crises persist, Euro is not expected to gain value soon which may hurt future export to Eurozone. Recent devaluation of Chinese RMB also means Chinese products will artificially get more competitive in international market. However, raw materials procured from China will become cheaper contributing to cost competitiveness of Bangladeshi apparel.

    Exchange Rate Trend between Euro-BDT (FX Exchange)
    Exchange Rate Trend between Euro-BDT (FX Exchange)

    USA, the single largest importer of apparel from Bangladesh, has recently cancelled GSP for Bangladesh’s export citing a number of reasons. Although apparel was never part of GSP, BGMEA had been lobbying hard to get tariff free access for apparel. The recent development will be a major dent in ensuring free access of Bangladeshi apparel.
    Exchange Rate Trend (RMB-USD) Source: FX Exchange
    Exchange Rate Trend (RMB-USD) Source: FX Exchange

    Turkey, considered to be an emerging export destination, has recently imposed tariff on Bangladeshi apparel. As a result, Bangladesh’s apparel export to Turkey has plummeted to USD488 M in FY14-15 from USD623 M in FY13-14.
     The Game Plan

    • Moving towards higher value products: As Bangladesh’s wage rate increases and as cheaper competitors come up, it will increasingly become difficult to sustain business with razor thin margin. RMG conglomerates should increasingly focus on R&D and design to move up value chain and cater to higher value brands. Sri Lanka’s shift upwards in 1980s is a case in point. 
    • Cheaper Currency: Bangladesh Bank’s policy should be to maintain the currency value and not allow appreciation for the sake of exporters. While government is already offering export incentives, cheaper currency will also be a major boost. Alongside, cheaper currency might also attract FDIs in apparel sector, specifically from China. 
    • Forward contract and farming: Apparel sector do not have a robust backward linkage since raw materials e.g. Cotton are not grown locally. As a result, the sector has to fully depend on imported cotton. This may prove to be the Achilles heel for apparel sector which needs to be addressed. Textile and Apparel manufacturers should consider exploring forward contracts for cotton to hedge against price fluctuation in cotton market. This will likely help evade from potential market shock in cotton market. In the long run, manufacturers can collectively look into acquiring lands in Africa for engaging in contract farming of cotton ensuring steady supply. 
    • Developing Mid-Tier management: Local apparel manufacturing sector is starving for talented mid-level management. Due to branding issues and low pay, many talented people are unwilling to enter the sector. RMG leaders must understand the importance of quality human resource and create financially lucrative opportunities for talented graduates. Government intervention and investments are imperative to introduce courses in educational institutions for creating skilled professionals for apparel sector. 
    • Diplomatic Overtures: Government must aggressively pursue economic diplomacy by mending and strengthening relationship with top importers including US and EU countries. Also, concrete steps need to be taken to develop markets in emerging apparel markets like Japan, Turkey, Brazil, Australia and Canada.

    Ending Note
    Mckinsey, in their 2012 report, had projected that Bangladesh’s apparel sector export will grow to USD 42 Billion in 2021. Local industry leaders have earmarked USD 50 Billion RMG export target within 2021. All these promises will turn hollow if concrete steps are not undertaken for ensuring sustainable growth for the sector.
    Time is running out!
     

    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