The Fashion War that Matters: Assessing Bangladesh RMG’s International Competitiveness

    LightCastle Analytics Wing
    LightCastle Analytics Wing
    Bangladesh RMG Competitiveness

    It is no secret that Bangladesh’s Ready Made Garments and Apparel Sector is one of its largest growth drivers. Being primarily export-led when it comes to generating revenue, the industry held 6.8% of the global apparel market share as of 2019.[1] Besides this, the sector constitutes an approximate 84% of total National Exports. [2] The Center for Policy Dialogue (CPD) reported that the sector employs approximately 3.5 million people, of which, approximately 60.8% are women.[3]

    A devastating impact has been felt throughout the industry in the wake of the coronavirus pandemic. With a long line of cancelled orders, unsold stock, and declining demand, the sector is struggling to function at expected levels. The industry recorded a 14% decline in growth in the first ten months of the current financial year (July 2019-April 2020) which is the largest negative growth figure in the last 5 years. Coupled with other macroeconomic factors such as an overvalued exchange working against the favor of the sector, it is certainly looking at an uphill battle at the moment.

    It is imperative that the sector  find a way back to its position of power and establish a sustainable framework going forward. En route to achieving this, Bangladesh can learn a number of things from its close competitors in the RMG sector globally and galvanize its competitive edge. 

    Scrutinizing the Competition: The Major Players in Global RMG

    Vietnam  

    Vietnam holds about 6.20% of the global market share for Apparel as of 2019— a stat that has changed only marginally from the previous year’s figure. However, it earned USD 2 Billion more than Bangladesh in export terms during the months of October-December, 2019. This strong showing combined with the fact that the country has been much more successful than Bangladesh in containing the coronavirus outbreak may mean that it is on course for possibly dethroning Bangladesh from its position of being the 2nd largest exporter of RMG.

    Vietnam’s strong showing in RMG can be further boosted by the finalization of its Free Trade Agreement with the European Union. Vietnam is the EU’s second-largest trading partner after Singapore in the Association of Southeast Asian Nations (ASEAN) bloc. The EU is also a major export destination for Bangladesh RMG. The FTA will mean that Vietnam will enjoy up to 99% eliminated tariffs on exports to the EU while Bangladesh struggles to yet establish similar free trade agreements or bilateral trade agreements with the removal of the Generalized System of Preferences (GSP) on the horizon.

    Bangladesh RMG Competitiveness
    FIGURE: Vietnam RMG- Key Figures / Source: The Business Standard[4]

    Vietnam also has a diversified product basket when it comes to exports in RMG and products have relatively higher value-added.  Per Hour Labor Productivity Per Worker in Vietnam was calculated at USD 4.09 compared to USD 3.45 in Bangladesh, as of 2016 according to the Asian Productivity Organization. It is assumed that Vietnam still holds this advantage in Labor Productivity though supply and cost of labor are lower in Bangladesh.

    The first 6 months of 2020 showed that Vietnam earned USD13.18 billion from exporting textile and sewing products according to the General Statistics Office. In the same period, Bangladesh earned USD11.92 billion.

    While it is too early to draw conclusions, Bangladesh must truly up the ante to face this fierce competition.

    India 

    India is ranked 4th in terms of RMG Exports as of the WTO’s World Trade Statistical Review 2020. India’s market share rose to 3.5% in 2019 from 3.3% in 2018.[1] About 45 million people are directly employed by the textiles and apparel sector.

    India is the largest cotton producer in the world, producing 33.7 million bales of 170 kgs each annually.[5] Because of this large production volume, India is able to capitalize on not only low material prices when it comes to producing RMG products, but also when exporting cotton.

    Bangladesh RMG Competitiveness
    FIGURE: Key Figures for Indian RMG / Source: India Brand Equity Foundation

    In tandem with its high output of cotton, Yarn-dumping by India at prices quoted to be up to 30% lower than local production costs from India has caused a significant problem for Bangladesh’s local firms in the apparel sector. This problem is exacerbated by Bangladeshi RMG businesses making high-quantity imports via bonded warehouses (facing zero-tariff).[6]

    To promote export of readymade garments and made-ups, Government of India increased Merchandise Export from India Scheme (MEIS) rates from 4 to 6 percent under the mid-term review of Foreign Policy 2015-21. Essentially, this scheme aims to incentivize garments exporters by subsidizing a portion of the cost of export borne as duties. This allows for easier market access for their exporting firms. (Read more: [7])

    India has higher Labor Productivity than Bangladesh. Per Hour Labor Productivity Per Worker in India was USD 6.41 compared to USD 3.45 in Bangladesh.  

    Turkey 

    Turkey’s global market share in RMG increased to 3.2% from 3.1%, placing them as the 5th largest exporters according to WTO’s World Trade Statistical Review 2020.[1]

    Turkey’s RMG products basket is 80% cotton and they are the 6th largest producers of cotton.[8] Turkey is geographically positioned to allow strategic access to the EU market which allows it to benefit when exporting. Recently, it has come under competition from China’s Belt Road initiative in this regard.

    Turkey also has multiple signed free trade agreements, many of which are with European countries. While this allows preferential market access and solidifies the EU as the major destination for Turkish RMG exports, Turkey is also keen to diversify its export destinations as it pursues new FTA-s with African countries such as Djibouti, The Democratic Republic of Congo, as well as with South American countries such as Peru and Colombia.

    A pre-pandemic estimation from Statista gave a Compound Annual Growth Rate(CAGR) for 2020-2024 of 18.7%[9] though this may now be cut down by a few notches owing to global demand downturn.

    Analyze, Adapt, Overcome : Learning from the Competition

    According to the World Economic Forum’s Global Competitive Report 2019, Bangladesh stands at a low position of 105th, With Turkey, Vietnam and India ranked at 61st, 67th, and 68th respectively.[10] The ranking is based upon a set of factors(or pillars) that determine productivity in each country. Under each pillar, there are a number of different indicators that combine for an aggregate score.

    Using the performance of Bangladesh in some of these pillars and their underlying indicators as a point of reference, we can analyze the competitiveness of the domestic RMG sector through a SWOT model.

    Strengths

    ⧪ One of the Key Advantages that Bangladesh has benefitted from over the years is its sustained low labor costs. Though the subject of labor unrest in the past, the matter has become gradually more stable and less prone to frequent disruptions in production owing to labor uprisings.

    While such low costs have prevailed, they may not be the sustainable way forward for Bangladesh and they cannot leverage this alone in the long term, especially in the face of the global competition being more open to technology adoption. 

    CostUnitIndia ChinaBangladeshVietnamCambodia
    Labor Cost USD/month160-180550-600100-110170-190180-190
    Power Cost USD/kwh0.10-0.120.15-0.160.09-0.120.08-0.100.20-0.25
    Water Cost US Cents/m^316-2055-6020-2250-8070-90
    TABLE: Estimated Cost in the RMG Sector / Source: Wazir Analysis

    ⧪ Bangladesh enjoys the demographic dividend of a young population that contributes to its low labor cost as well as gives the opportunity for productivity gains in the future if upskilling is carried out systematically.

    ⧪ Green RMG, the increase of which has also been termed the green revolution, refers to environmentally-sustainable production practices in the sector. It includes waste management, energy efficiency, and water conservation. As concern for climate change rises globally, producers, buyers, and consumers are all becoming aware of the transparency and implications of the apparel industry supply chain.

    The LEED (Leadership in Energy and Environmental Design) certification, awarded by the U.S Green Building Council (USGBC), is considered to be the global standard of compliance and safety.

    There are 91 LEED-certified factories in Bangladesh, which is higher than any other country. Of the 10 highest rated LEEDS certified factories, six are located in Bangladesh.[11]

    This not only goes a distance in securing preference in terms of exports but also presents itself as a lucrative standing for incoming FDI.

    Weaknesses

    ⧪ Bangladesh does not have a significantly diverse range of export destinations. The key to long-term export sustainability lies in diversifying trade destinations so as to lower dependence on markets such as the U.S and the U.K who have moved towards near-shoring their products at competitive, if not lower prices, owing to their adoption of automation, fast fashion, and availing of economies of scale.

    Bangladesh RMG Competitiveness
    FIGURE: Bangladesh’s Top Export Destinations in FY19 / Source: Export Promotion Bureau (EPB)

    ⧪ BGMEA data showed that about 73 percent of the country’s total USD 34.13 billion RMG export earnings in the last fiscal year came from five items: T-shirts, Sweaters, Trousers, Jackets and Shirts.[12] There is an urgent need to diversify the product range of Bangladesh RMG. Though about 51 new products have been identified by the BGMEA, the pandemic has put an obstacle in place in terms of gradually introducing these products to the export markets. Bangladesh can also take the example of Vietnam and move into higher-value RMG products as opposed to exclusively low cost items

     Bangladesh suffers from low worker productivity in the RMG Sector for which upskilling is paramount. Lack of diversified skills and a climate that is not yet ripe for technological innovation or automation means that Bangladesh must focus on this aspect to remain competitive even at the risk of higher labor costs incurred. All of Bangladesh’s closest competitors have higher worker productivity and have upskilling programmes that Bangladesh can follow.

    Opportunities

    ⧪ Bangladesh must follow in the footsteps of Turkey and Vietnam by securing FTAs or Bilateral Trade deals so as to improve their access to destination markets. This is especially important with the possible revocation of GSP if Bangladesh graduates from LDC status in 2024, and with the guarantee of GSP+ facility being up in the air.

    In addition to this, Bangladesh can work to attract FDI from countries that have shifted investment away from China. Though India, Indonesia, Vietnam, etc are already working to this end, Bangladesh Economic Zone Authority (BEZA), is currently developing 100 economic zones, three of which have been allocated to Japan, India, and China. These will include lucrative opportunities such as tax exemptions and duty-free import to help attract FDI.[13]

    ⧪ China has announced a tariff exemption for 97% of Bangladeshi products to be effective from July 1, 2020. A total of 8,256 Bangladeshi products will come under this zero-tariff treatment and this exemption is perceived to boost trade between the two countries as Bangladesh previously enjoyed this privilege for only 3,095 of its products.[14]

    This provides an excellent opportunity for Bangladesh to not only benefit from trading with China but also adopt production processes and technology from China which enabled their rise to the top of global RMG.

    A large percentage of raw material imports for the Textiles and apparel sector in Bangladesh is sourced from China. Bangladesh imported textile fibres and articles worth USD5.02 billion, out of its total USD13.63 billion import, from China in FY 2018-19 according to EPB Data. Stronger trade relations will allow for easier access to raw materials and a better RMG ecosystem.

    China has also agreed that Bangladesh will get preference if China is able to develop a vaccine to COVID-19.

    ⧪ Bangladesh can take advantage of being a world leader in Green RMG to add higher value to their products.

    Threats

     Vietnam’s FTA coming into play may mean fierce competition and possible lost demand for Bangladesh from Europe, as Vietnam have fared significantly well in tackling the coronavirus threat. Their diversified export basket would give them an edge in the case of a price war with Bangladesh’s narrow RMG exports basket.

    Besides the FTA from Vietnam, Countries such as Ethiopia, Kenya, Cambodia and Indonesia are all future competitors and potential threats in the long run. It would be wise to secure FTAs with African Nations on the merit of their high cotton production volume

     Cancellation of orders has been devastating for the RMG sector as BGMEA reports an estimated loss of over USD 3.15 billion worth of pending work orders of which, payment for only about a quarter had been negotiated.[15] With no sight of a lapse in the number of infections, the sector may be in serious trouble in all future transactions as well, despite some glimmers of hope existing such as Primark agreeing to pay its dues.

    Bangladesh RMG Competitiveness
    FIGURE: RMG SWOT Analysis

    Conclusion

    While competitive rankings may be important at a political level, laying the foundation for a sector that thrives sustainably in the long run is essential for the Bangladesh RMG sector. With a strong endowment of resources available, there is no doubt that the industry will continue to be a major thrust sector in years to come.

    Bangladesh must now focus on capitalizing on their strengths to diversify their exports basket, add higher value to their Apparel exports and secure greater labor productivity in the future. It will also be crucial to improve trade relations and fast-track trade agreement negotiations to stamp out the chances of any major disruptions in the RMG value chain over the coming few years.

    There are evidently a number of things Bangladesh can take away from analyzing the  machinations of its closest competitors and government support in adopting these changes will go a long way in ensuring economic prosperity.

    In a post-covid world, Bangladesh RMG will have to work even more diligently in maintaining workplace standards and regulations. We have seen first-hand the disruptive nature of a sudden exogenous shock on such an important sector. We must ensure that cases like this will never again leave the country’s economy at its mercy.

    Sartaz Zahir, Content Writer and Sanjir Ali, Senior Business Consultant and Project Manager at LightCastle Partners, have prepared the write-up. For further clarifications, contact here: [email protected]

    References

    LightCastle Analytics Wing

    LightCastle Analytics Wing is the research division of LightCastle Partners. It is tasked with producing periodic reports on the different sectors of the economy, analyzing trends in markets and making methodical, thorough and intelligent analysis to improve strategy and drive business growth.