Apparel buyers: where are you buying from now? You have probably noticed that more and more apparel is coming from Bangladesh, and that several multinational brands, including Wal-Mart, Levi Strauss, H&M, Marks & Spencer, and GAP, as well as buying agents such as Li & Fung, are now doing their fashion production in this comparatively small Southeast Asian country.
In a report named "Bangladesh's ready-made garments landscape: The challenge of growth" released by McKinsey last year, 89% of interviewed Chief Production Officers from a range of leading European and US apparel players responded that Bangladesh will be their top sourcing spot over the next five years. In fact, 72% of those respondents are already carrying out direct sourcing activities in Bangladesh.
How has this situation developed?
Bangladesh was once only famous for the production and export of jute and jute products. Starting in the 1980s, the Bangladesh government implemented a slow but steady liberalization of the trade arena so as to boost economy. A large number of trade barriers were abolished or reduced. Various new measures, including tariff liberalization, flexible exchange rates, relaxing foreign-investment limitations, and privatization of public enterprises, were put into force. Some very attractive incentives were also offered to export oriented industries, such as zero-tariff facilities for the import of capital machinery and raw materials, to name just one.
These policies have been successful in attracting a large number of foreign enterprises and have given Bangladesh's GDP a steady boost. In 2011, exports and trading contributed 57% of its GDP, a very rewarding figure for this small country where trade-related activities took up only some 11% of GDP in the early 1980s. But the country is thinking bigger – it targets this figure to rise to over 66% by 2015. Analysts therefore believe the country will be launching more trade favorable initiatives in the near future, so it is no wonder that the number of local offices and factories set up by overseas enterprises is on the increase.
Externally, the fact that Bangladesh still falls under the EU Generalized System of Preferences (EU-GSP) makes it even more eye-catching for European buyers. The rules were further broadened in January 2011 to allow duty-free imports from Bangladesh for that stage of the product processing that takes place within the country. So, nobody could be happier than apparel suppliers in Bangladesh and their European buyers.
Competitive Labor Cost Advantage
When free trade is at issue, then cheap labor is obviously the most dominating factor. With the frightening increases in the minimum wage in the "world's factory", China, garment buyers around the world are being forced to look for an alternative, and so their eyes are turning to Bangladesh, which offers a large pool of competitive labor in terms of wage levels. This wage gap is discussed in the article entitled "Rising Wages Blunt Chinese Factories' Edge" in the previous section.
Although it was announced in November 2010 that the wage level would be reviewed every two years, labor costs in Bangladesh will still be low in comparison to China and some other Southeast Asian countries.
Good Technical Skills
In addition to competitive labor costs, the high factory capacity and mature labor skills found in Bangladesh readily appeal to apparel buyers. Over 30 years of development in Bangladesh have nurtured the national textile and apparel industry. There are currently around 5,000 apparel factories with 3.6 million workers in Bangladesh, far more than in other Southeast Asian countries; for example, there are around 2,500 factories in Indonesia, 2,000 in Vietnam and 260 in Cambodia (according to the same McKinsey report).
An overseas factory owner in Bangladesh described local labor as more dedicated and skillful than in nearby regions, and that local labor is quick to learn and able to pick up new tasks easily, thus making them the perfect choice for labor intensive industries, including garment and apparel production.
The service performance of Bangladeshi suppliers also greatly impresses overseas buyers. In another report by McKinsey, 39% of surveyed suppliers there offered lab services to clients, 36% offered design services, 21% operated composite units for fabric production to reduce lead times, and 10% provided ticketing services. The result shows that, on top of good quality apparel products, Bangladeshi suppliers have been adding value to their production. This makes them much more appealing to buyers.
Too good to resist?
Well, before you make any international calls or buy air tickets, it would be better to be prepared for some of the challenges that you might encounter in Bangladesh. Top of the list is infrastructure: this has always been criticized for its instability and unreliability. Some very basic infrastructure, including electricity supply, roads, rails, ports and air transport networks remain underdeveloped despite a long history of exporting. The Bangladesh government has been concentrating its efforts on improving transport coverage and efficiency, but the results still leave something to be desired.
In some cases, factories run their own oil-fired electricity generation facilities in order to avoid public power outages and shortages.
Another drawback is found in the poor raw-materials supply within Bangladesh. This means suppliers have to import almost every piece of material for fabric, garment and apparel production. The high dependency on imports of raw materials prolongs lead times and increases production costs. The supply chain is also rendered vulnerable as failure at a single point can cause breakdown or failure of the chain.
Last but not least, the political situation sometimes is unfavorable towards efficient sourcing. Corruption can be a big problem for buyers and to cope with this properly requires a great deal of effort and very close management.
Intellectual property, commercial-dispute settlement, customs procedures, and anti-counterfeiting measures are neither under full protection nor properly defined by law.
The downsides to doing business in Bangladesh may be somewhat daunting. Nevertheless, apparel sourcing there seems to be the main current trend, if not an unavoidable one. So perhaps it is time to join the mainstream, while taking care to avoid risk and achieve efficiency and transparency through careful planning and execution!