Bangladesh: World’s Top sourcing Hub

Bangladesh has become one of the most lucrative destinations for clothing sources in the world. Formidable rivals are no longer interested in producing basic clothing items and doing costly businesses. Bangladesh belongs to Least Developed Country (LDC) category, which ensures international favors to Bangladesh in doing international business in clothing sector; like Generalized System of Preferences (GSP) and/or GSP Plus facilities, Everything but Arms (EBA) agreement, and Duty-Free-Quota-Free Market Access (DFQFMA) initiative.

Apart from this, government has attached top priority to the clothing industry sector through cash incentive/return on export clothing items and tax reduction. Some other forces in creating the lucrative clothing hub are: bonded warehouse facilities with government participation, back-to-back Letter of Credit (L/C), bilateral, regional and free trade agreements, user-friendly rules implementation and established linkage Textile industry.

The country entered the apparel export market in 1978 with only nine units and earned US$ 0.069 million. During the last three decades, this sector has achieved a phenomenal growth due to policy support of the government and more importantly, dynamism of the private sector entrepreneurs along with extremely hardworking workers. Now the number of RMG units is around 6,000 and the export earnings have exceeded US$ 20 billion. Knit garments are exported to 152 countries and woven products to 132 countries. Analysts say the apparel export earnings can be more than doubled by the year 2020.

The revised draft on Rules of Origin (RoO) from European Commission (EU) has definitely turned Bangladesh into the most lucrative destination in the world. Presently implemented RoO for GSP scheme is two-stage conversion process; namely, yarn to fabric and fabric to clothing; while drafted new RoO is one stage; namely, fabric to clothing. Duty-free access of 205 garment items by China from Bangladesh has opened further opportunities for Bangladesh.

Global clothing buyers and retailers set up their liaison/ procurement/sourcing offices in Dhaka and some of them are- Wal-Mart, Tesco, M&S, H&M, Zara, Adidas, JC Penny, IKEA, LI & Fung, and Uniqlo. German premium brand, Hugo Boss, is going to source clothing from Bangladesh for the first time in history. Bangladeshi clothing products are gradually expanded to Japan, China, Australia, and Latin American countries.

Retailers are betting on Bangladesh’s garment industry more than that of any other country in the coming years, Wall Street Journal reported. Bangladesh’s $20 billion garment business came out ahead of smaller rivals Vietnam and Cambodia in the ranking of countries with the highest potential for future sourcing, according to a new study by consulting firm McKinsey &Co. “Bangladesh is going to be No. 1,” recent study shows.

To seize export opportunities in China, Bangladesh is concentrating on creating room for higher manufacturing growth. Bangladesh’s per capita manufacturing value-added, for instance, is $107.65, compared to China’s 1,147.12 and India’s 163.44. So, Bangladesh virtually needs a manufacturing makeover diversifying both export basket and destination. In doing so, the country needs to get its manufacturing priorities right. Owing to the economy’s structural problem, it is hardly surprising that Bangladesh’s export basket is very narrow, but Bangladesh is nurturing policies that would help cut down negative effects and pave way for broader entry of the international importers into Bangladesh.

Going forward, Bangladesh devises both short- and medium-term strategies to boost its manufacturing output. In the short run, we are in effort to exploit its existing comparative advantages fully in the area of RMG exportables. To become a competitive manufacturing location and diversify its export basket, Bangladesh grapples with a number of factors that affect export diversification in the medium to long run. We are of the opinion that Bangladesh is ready to live up to the demands of the international importers.

Picture: Large share of their sourcing value away from China to other countries over the next 5 years, Compiled by KMPG Report-2013, McKinsey’s apparel CPO survey 2013 & World Bank.

The new research shows that production capacity and price appear to trump safety and labor issues when it comes to choosing where to source clothes from. The minimum wage structure and high number of garment factories in Bangladesh have made the country a magnet for global retailers. Though Importers have formed safety pacts aimed at improving working conditions, but this also has helped improve its image. As it Clothing makers from around the globe are now planning to increase their reliance on Bangladesh in the future.

CHINA’S VERTICAL ECONOMY AND CHANCE OF BANGLADESH: In fact, China is the only country that has sustained near double-digit growth for three consecutive decades in the history of economic development. China has become the second largest economy in the world. However, China now faces some structural problems. Per unit labor cost in the country is on the rise. Its labor productivity grew at 7.0 to 13 per cent in the past two decades, leading to higher wage cost and losing its foothold as the world’s lowest cost manufacturer of consumer goods. China’s exchange-rate policy and global imbalances are also prompting Beijing to concentrate on high-end manufacturing and services sectors, known as vertical economy.

China’s vertical economy would create much room for low-end labor-intensive manufacturing in Bangladesh and other South Asian economies that faced Chinese competition until recently. China is projected to buy about $20 trillion worth of goods and services in this decade.

Bangladesh, one of the post-China emerging economies, has already started competing with China in global apparel exports.  In fact, China is now using Bangladesh to outsource its RMG products taking advantage of the cheap labor costs here. For now, China remains the world’s largest garment producer by far, with more than $150 billion in annual exports. But its minimum wage is three times the $68 monthly base rate of Bangladesh. Bangladesh is tied with Italy for the No. 2 spot for current exports; Italy is historically a major producer of fashion and accessories, but is declining in consideration of importance.

Bangladesh will be able to export US$ 1.0 billion worth of RMG to China within a few years. There will be demand of US$ 650 billion in the global clothing and apparel market by 2020, where there is a scope for Bangladesh to contribute $44.56 billion. China is an untapped opportunity for Bangladesh and at the same time Bangladesh is a lucrative destination for Chinese consumers as we sell at  10 to 15 per cent lower price due to duty-free access facility.

Customers shop for clothes at a Uniqlo store, owned by Japan’s Fast Retailing Co. Uniqlo has opened two stores in Bangladesh, a favorite low-cost sourcing hub for many international retailers, but a country where, until now, they have not sold their clothes. Photo: Reuters/ Andrew Biraj.

“The reason Bangladesh went from zero to hero in the garment sector is because there is no country with such low labor and other costs,” said ArvindSinghal, chairman of India-based retail consultancy Technopak Advisors. “No buyer is in a hurry to move from Bangladesh because Western retailers are stressed about passing any retail price increases to customers,” he said. “Currently, there is no substitute for Bangladesh, where manufacturers even risk operating from rickety structures to cap costs.”

Wal-Mart Stores Inc has stood by its Bangladesh production, saying the south Asian nation remains an important sourcing market. H&M also said its quest for alternative manufacturers was not at the expense of Bangladesh. “We’re not reducing our purchases from Bangladesh. We aspire to have long-term relations with our suppliers,” H&M spokeswoman ElinHallerby said. “We are always looking at new production capacity to support our continuous expansion.”
The latest data from Bangladesh highlights its enduring appeal: garment exports in June rose 26 per cent year on year to $2.2 billion. More than four million people, mostly women, work in Ban­gladesh’s clothing sector, making it the second-largest global apparel exporter behind China.

‘New Economics of Fashion’ now in Bangladesh: Bangladesh has now become one of the most sought after garment manufacturing hubs, which has led to western apparel brand owners and retailers targeting Asia as their prime consumer market. Bangladesh’s Fashion industry is now one of Asia’s primary production bases, which is complemented by its 5000+ factories and cost effective labor. With booming productivity, increased infrastructure, increased use of technology, professionalism in contractors, highlabor safety etc. Bangladesh is going to stabilize this industry for fashion products.  Bangladeshi manufacturers now set their attention on improving internal efficiencies by adopting new technology, new sourcing strategies and stricter safety standards to make the clothing industry safer and profitable.
Other reasons behind the top retailers’ interest in Bangladesh Knitwear are availability of skilled labor, utility service at lower price, convenience of duty-free custom bonded warehouse, improved GSP advantages under regional cumulative, simplification of tariff regime, meeting world standard on social compliance issues, easily accessible infrastructure like sea road, railroad, river and air communication etc.