an analysis on the garment sector

7/30/2019 An Analysis on the Garment Sector

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The garment sector: strength, prospects and challenges

The world set the spotlight on Bangladesh and strongly questioned the integrity of the garment industryafter the countrys one of the most shocking tragedies on April 24. Fear of GSP cancellation by the EUmade the business mood gloomy and anxiety increased as the countrys industrial backbone and mightiest

pillar of foreign exchange came under threat. Is the garment industry strong enough to endure thispressure? Are the problems toxic enough to jeopardise the future health of the industry? What are the

prospects and scopes of improvement? Lets have a look.

The industry generates a total of $19 billion in exports and employs 3.6 million workers dispersed among5,400 factories. Currently the sector accounts for 78 percent of exports and contributes 16 percent to thegross domestic product.
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Expectations of rapid industrialisation in future years invariably indicate further growth of the garmentsector. This is also because China, the largest exporter of manufactured garments in the world, is losingits appeal in the apparel realm due to labour shortages and higher wages. A McKinsey report suggests that86 percent of the chief purchasing officers in their survey wanted to move out of China, and Bangladeshis their next preferred destination. The country is expected to gain much of Chinas share in the cut -throat

apparel terrain.

Cheap labour is abundant, some of them willing to work at a wage rate of $0.20 an hour. This is less thana fifth of the labour costs in China. Capacity is another primary advantage. With a total of 5,400 factories,Bangladesh is clearly ahead of other garment suppliers, for instance, Indonesia has 2,450 factories,

Vietnam 2,000 and Cambodia 260.

Another key prospect lies in the size of the global apparel business which is worth $1 trillion a year.According to Bangladesh Knitwear Manufacturers and Exporters Association, the EU and the US are thetwo largest importers of Bangladeshi garments and 86 percent of the total exports are serving these two

giants. But how big is our 86 percent in the sphere of total garment demand in the EU and US? Thenumber may seem meager, because Bangladesh caters to only 6 percent of their total apparel demand, asopposed to China, which serves 30 percent.

The current average wage rate in the sector is one of the lowest in the world. Though minimum wageswere raised in November 2010, a study by the Fair Wear (a non-profit lobby group) found that someworkers were receiving less than the new minimum; nearly a quarter were reassigned to lower pay grades.Recipients of the new minimum wage salaries were not necessarily better off, since inflation soared ashigh as 12 percent the following year. Yearly ramp-up of wage rates which help negate the effects of

rising inflation are absent in the sector.

Low levels of work safety also pose a massive problem. Between 2000 and 2013, more than 1,500 livesperished in garment industrial disasters caused by fire, building collapses or stampedes. Fire breakouts arethe most common, with two out of three accidents recounting to faulty fire extinguishers and electricalshort circuits. Though industrial accidents are a recurring phenomenon, the trend is not exclusive to

Bangladesh.

British magazine The Economist called garment factory fires a distinctly South Asian tragedy whenPakistan experienced the death of 300 people in two separate factory blazes in Karachi and Lahore in

September 2012.

There is a reason why this vicious cycle continues. Foreign buyers squeeze the suppliers every year tosliver the cost per unit of garment; garment manufacturers, on the other hand, compete with each other byunder-cutting one anothers prices; consequently price declines further. Now with a lower profit margin,manufacturers refuse to undertake costly renovations and discover different means of maximising profit.One way they do this is by subcontracting their production to smaller non-complaint factories. Sometimesthis is carried out without the knowledge of the foreign buyers and that is why a lot of global clothingbrands deny their authorisations in the factories even though their labels were found in the rubble afteraccidents.


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The majority of workers receive training on the job or in regional basic sewing schools, as vocationaltraining institutions currently do not exist. Since it has been announced that minimum wages will beadapted in two-year rhythms, the manufacturers require significant efficiency increases to offset the risingcosts in the future. These require investments in vocational training institutions. If not, the manufacturers

will keep on discovering loopholes in order to decrease costs.

McKinsey & Co reports that the garment sector could triple by 2020, employing six million people. Thisdepicts that the productivity of the industry may rise as it moves towards high value exports. To addressthe current problems the government can develop a system where tax holidays are attached to factorycompliance. Moreover, vocational training schools and a clear roadmap of wage increments is crucial sothat manufacturers can adjust costs with having future wage increments in mind. If not, problems will

lead to losing EUs GSP status, leaving Bangladesh to lose its competitiveness in the global garmentbusiness.

How important is GSP status?

What makes Bangladeshi readymade garments so attractive to the Western countries? The EU alone is

gobbling up 60 percent of our garment exports and the US comes in second with 26 percent. Are ourproducts made with a magical concoction that makes it irresistible to the Westerners? The answer is yes.For any good creation, we need an impeccable mix of fine ingredients. Our ingredients in this case are

price, capacity and the EUs GSP status.

Price is a key element which draws buyers closer. Since wages are low, it gives the country a competitiveedge in low costs of production. Capacity is our second ingredient and a total of 5,400 factories make the

countrys capacity higher than that of rivals like Indonesia and Vietnam.
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However, the final ingredient which gives our garments that extra zing is GSP status. GSP is aninstrument by which developed nations help the poorer countries foster more trade. For instance, with the

EUs GSP status, Bangladeshi garment products can enter the European market duty free; in its absence,it has to pay 12 percent import duties for most products. This status helps decrease the cost per unit ofgarments, causing the demand to rise. This not only helps the garment industry but also the entire

economy. Increased trade means higher export earnings which help promote further industrialisation,leading to higher economic growth.

Now let us look at a more concrete example. Bangladeshs apparel exports to the EU made a leap sinceJanuary 2011 when it allowed GSP for Bangladeshi garments made from imported fabrics. Previously,Bangladesh used to enjoy the GSP benefit only for those garments made from local fabrics.There is a 46 percent rise in apparel exports between a year without and with GSP, indicating theimportance of this status in the countrys apparel industry.

The Eurozone debt crisis has affected the garment industry in recent times and we need its GSP status

more than ever. Without it, the price per unit of garment will rise and this may lead to many Europeanbuyers turning their backs on our products. Losing this status will lead to the loss of an essentialingredient in our brew. Without a proper mix of all our ingredients, we cannot present an irresistible

product to our buyers.

Faaria Tasin , Head of research at The Daily Star.

Some other news headlines on the same issue

Thursday, 25 April 2013: Savar tragedy to impact on GSP decision on Bangladeshi products:

Mozena

Wednesday, 1 May 2013: The European Union has threatened to suspend Bangladeshs preferential

trading status unless it improved safety standards in its readymade garment factories.

Sunday, 19 May 2013: Export orders for RMG accessories mark fall due to political turmoil

Monday, 20 May 2013: Walmart 'blacklists' 250 RMG units

Tuesday, 21 May 2013: Bangladesh yet to reap duty-free access benefits from Malaysia

an analysis on the garment sector

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