RMG: Invasion of formidable rival's home market

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Shamsul Huq Zahid
The Asian Development Bank (ADB) dedicated a substantial part of its latest Quarterly Economic Update (QEU), released last Monday, to the Bangladesh readymade garments (RMG) sector that belying speculations by the doomsday preachers did exceptionally well in the last couple of years.
But the Bank while reviewing the sector's lacklustre performance in the first quarter of the current financial year (2007-08) and the possible threat coming from the People's Republic of China (PRC) following the expiry of the safeguard quota restriction in 2008 has made some valuable suggestions that deserve immediate attention of the country's policymakers and owners of the export-oriented RMG units.
Such attention is necessary just because of the fact the sector fetches nearly 75 per cent of the foreign exchange earning of the country. It has become all the more necessary to enable the country withstand any future disruption in the inflow of remittances, particularly from the Bangladeshi expatriates working in the Middle Eastern countries.
The remittance flow might be seriously affected in the near future if the Gulf Cooperation Council (GCC) members adopt a Bahrain proposal for a six-year residency cap on all expatriates. Over 2.0 million Bangladeshis are now employed in the GCC countries, the majority being in the Kingdom of Saudi Arabia and the United Arab Emirates. During the last financial year, the total inward remittance flow was nearly $ 6.0 billion. If the current trend persists, the remittance income of the country might hit $ 7.0 billion mark at the end of the current fiscal.
The RMG sector is now in midst of a depressed demand situation, mainly because of a weak economy in the United States, the largest market for Bangladesh apparels, unabated rise in oil prices and increase in prices of raw materials such as cotton, yarn and dyeing chemicals. This particular development has come as a serious blow to the RMG units that had to overcome difficulties created by political turmoil in the later part of the year 2006 and workers' unrest.
The ADB has suggested strengthening competitiveness by South Asian countries as far as RMG exports are concerned by lowering their production and trade costs. For instance, it said, India and Pakistan are net exporters of textiles while Bangladesh and Sri Lanka are major apparel exporters. Thus, the region can well improve quantity, quality and cost of production through cross-border investment in mutually complementary industries.
Bangladesh, according to the ADB, now sources only 17 per cent of its textile imports from South Asia. The bank maintained that the exporters could significantly reduce cost and lead time by importing the same from India and Pakistan. At the present stage of development of the RMG sector in Bangladesh, it is highly unlikely that the stakeholders are not aware of their benefits.
Low productivity-only 50 to 60 per cent of the potential productivity, according estimate by experts-- remains yet another problem facing the Bangladesh RMG. This is an area where Bangladesh needs to better its performance through employment of improved technology and machinery and labour skill development. Bangladesh, the ADB report said, equals or outperforms India in 'flexibility with orders, quality and price'. But it falls behind its giant neighbour when it comes to innovation and design services, compliance with labour standards, consistency and reliability. Greater investment in textile and backward linkage industries for woven garments and labour skill development are extremely important to live up to the expectations of the foreign buyers and also increase the domestic value addition.
The lower domestic value addition, particularly of woven garments, has been a long-drawn problem. Because of higher value addition, about 90 per cent, Bangladesh knitwear exporters now utilize about 85.3 per cent of the GSP (generalized system of preference) offered by the European Union (EU) countries. But the woven garments having a value addition rate between 25 and 30 per cent are utilizing only 35.5 per cent of the GSP facility. Had the facility offered by the EU under the Rules of Origin in place, the woven garment exporters could have exploited the GSP facility to a great extent. Because of the opposition from the local textile lobby, the much talked-about SAARC cumulation is unlikely to be implemented here in the near future.
The ADB has also made a time-befitting suggestion that Bangladesh RMG should seriously strive to have a portfolio of buyers across regions reducing its dependence on the US and the EU markets. The entry of some potential South East Asian competitors such as Cambodia and Vietnam as the supplier of low-end items in the global apparel market has come as a serious threat to Bangladesh.
In this context, the ADB has given a valuable piece of advice that deserves close scrutiny by the Bangladesh RMG exporters. It said Bangladesh, one of the largest producers of low end apparels, can enter the market of China, the largest global exporter of textiles with no immediate rival.
Referring to duty free access granted to 84 Bangladeshi products, most of which are garments and textile products, by China under the Asia-Pacific Trade Agreement, the ADB said China mainly imports jerseys, pullovers, T-shirts, men's shirts and similar products at an average cost of about $22000 a tonne. Bangladesh exports the same products almost at half of that price. There should not be any valid ground for the Chinese importers not to buy those from Bangladesh if they find the quality of products was up to their satisfaction. Bangladesh RMG exporters having competitive edge over others should not miss this unique opportunity to enter the market of more than 1.3 billion people.