Meeting RMG challenges through merger and acquisition

The garment industry has emerged as the engine of the Bangladesh economy. Around 3.6 million people are working in this sector while 80 per cent of them are women. About 20 million people are either directly or indirectly depending on the sector for their immediate livelihoods. Therefore, considering all these factors it can easily be assumed that Bangladesh has enabling conditions for faster growth of the industry. These factors include low manufacturing cost, export-friendly policy, geographical location, availability of workers, and long experiences in manufacturing and export.
Ironically for the last few years, Bangladesh hit the headlines of international print and electronic media quite frequently due to some incidents like Tazreen fire, Rana Plaza collapse, demonstrations of workers for wage hike and others. After those incidents, brands came up with several initiatives to improve working conditions, building and fire safety. But the harsh reality is that a significant number of factories might not comply with the demand of brands in terms of relocation and restructuring of the factory buildings.
On the other hand, with the passage of time, wages of workers and officials will move upward naturally. Significant investment is required to make the factories compliant in terms of building and fire safety. So, investment cost will increase. This eventually will reduce the capacity of factories to expand their businesses by constructing new production units. Consequently, shutting down of small factories and low expansion rate of big factories would put some adverse impact on the economy of Bangladesh in terms of less employment generation, low growth in exports, and low growth of supporting industry like accessories, fabric and yarn manufacturing.
Now it is time to think differently as to how we can cope with the current situation given the challenges like high investment cost for restructuring of the factory buildings, pressure for wage increments of workers and officials, and demand from buyers/brands to reduce the selling prices and competition coming out from countries like India, Vietnam, Myanmar, China and Cambodia. From the point view of business, coping up with these challenges becomes simple for any business as long as certain profit margins are ensured. But maintaining the profit margin after going through all these challenges is very difficult unless one puts in series of strategic efforts.
To maintain the profit margin, multinational companies in the electronics sector, for an example, Samsung, Sony and Panasonic, are inventing new products with new features each year. Fierce competition and high investment cost have made them more innovative. Companies in the aviation sector go for merger and acquisition often, for example, the British Airways and the Iberia, the United Airlines and the Continental Airlines.
In a similar way, merger and acquisition (M & A) could be one of the options for garments factories in Bangladesh to maintain the stable profit margin even after overcoming the aforementioned challenges and to ensure their future growth.
A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed. Sections 12-14 of the Companies Act, 1994 deal with reconstruction and amalgamation (acquisition and merger) of the companies. This section requires companies to make application to the court under Section 12, which empowers the court to sanction compromise or arrangement as proposed by the companies.
Strategically M & A can be beneficial in the following way in the context of current situation of garments industry:
Brands/buyers usually prefer to place order to big factories as this kind of factories tends to be more compliant, efficient and trustworthy. As a result, big factories' production facilities are always occupied with orders from different buyers. These big factories could even grasp more orders if they have further capacity.
On the other hand, small factories, which tend to be less compliant and efficient compared to big factories, are having less order. On the top of it, small factories are struggling to cope up with standards especially in the area of fire and building safety. They are not also capable to hire skilled workers and officials. Through M & A, big factories can take more orders as they will have more capacity while they merge with small factories and on the other hand, small factories will also survive as their standards will be improved with sufficient work for becoming the part of big factories. So M & A will help both big and small factories to sustain through a win-win situation by taking the maximum orders from the buyers.  
From the point of economies of scale, factories going through the M & A would help to achieve the economies of scale. Economies of scale are the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output. It would help those factories to reduce the long-run average costs of production. Factories can afford to invest in expensive and specialised capital machinery. Businesses can split complex production processes into separate tasks to enhance efficiency. Factories can expand its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices and lastly, large factories have access to credit facilities, with favourable rates of borrowing.  
From the ground of synergy, two companies that are merged to form one company can achieve operational excellence through transfer of best practices. A merged company will achieve superior competitiveness in terms of lead time, unit price, quality, and production volume. Eliminating overhead and better utilisation coming out of mass production will help to reduce the unit price of the product. A merged company will get opportunity to expand its business through the cross- selling opportunities in overlapping buyers. On the top of it, a merged company can also look for new buyers based on the expanded capacity.
In the context of standard upgradation in the area of fire and building safety, M & A will help efficiently. Let's assume that small factories need to relocate their plants for meeting the standards like size and number of staircase, strength and structural flaws in the building etc. For small factories, it is going to be very hard task to relocate everything as their financial capacity is not at this level even after having the partial support from others. In that case, if small factories could merge with or are acquired by big factories, it is possible to relocate the factories while no one in the factories will lose his/her job. Moreover, new factories formed either through merger or acquisition will be in a position to comply with any standards. Two factories formed one company either by merger or acquisition can provide more wages and salaries to their workers and officials due to the increased profit coming out from the synergy and economies of scale and for the same reasons; profit margin for the owners will also be higher.
From the bargaining point of view with buyers regarding price of garments product, M & A will give any factory owner great privilege. Just assume that due to M & A, number of factories in Bangladesh decreases to 1200 but with higher capacity: equivalent to 6000 factories. So the sourcing options for buyers will be limited. Limited options for sourcing for buyers will put the factory owners in a favourable position while negotiating prices of garment products.
If the total number of factories decreases due to M & A, it would be greatly convenient for garment associations and the government in a sense that they can effectively and efficiently take care of the factories. The government can easily monitor and assist the apparel factories in implementing the standards; associations can devise a better plan to implement measures among the factories to improve the working conditions.
Factories formed through M & A will have the ability to take care of their workers and officials due to availability of adequate skilled human resources in the management position, higher profit margin and supervision and guidance getting from the government and associations. As a result, workers will be satisfied and eventually there will be no demonstration or disputes.
The rapid growth of textile industries creates environmental pollution, mainly pollution in water bodies. The reason of water pollution is lack of appropriate environmental management in textiles in Bangladesh. There are several environmental management options in textiles. Among various options most popular and effective option is establishment of perfect waste water treatment plant which is conventionally known as Effluent Treatment Plant (ETP). It is very expensive and needs certain skills to run it smoothly. Higher standards and profit margin stemming from the large factory facilities due to M & A will enable to have functional ETP, which eventually will keep our water bodies pollution free.
In case of M & A, we have to take into account some factors. Very few institutions, which can assist in M & A, are available in Bangladesh. According to the website of the Investment Corporation of Bangladesh (ICB), it provides assistance to companies in this regard. There is also no evidence or example of M & A especially for garments and textiles in Bangladesh about how much successful it could be.  There are some certain costs of M & A. Mergers and acquisitions can be costly due to high legal expenses and the cost of acquiring a new company that may not be profitable immediately. Moreover, if  problems unknowingly emerge after a sudden acquisition of another company's shares, this could convert the acquisition approach very expensive and/or redundant.
But to become number one or the best, the garment sector needs to take the challenges. To stay in the business with sufficient profit margin while maintaining high standards of working conditions, fire and building safety, M & A could be one of possible strategic decisions.
--The writer is an industrial            and production engineer                  in garment industry. ripon06@gmail.com