The evolution of Bangladesh readymade garment sector

The readymade garment sector emerged through the establishment of several thousand factories. The following table gives the distribution of factories according to the employment size.
There were 5,000 factories at the time of these listings and it will be about the same now. The median factory had 400 employees [BGMEA, BKMEA-member lists with declared employees]. Only 550 factories had more than 1,000 workers and only 176 more than 2,000. The industry started with small factories as it was easy to set up a garment factory -- one could establish a factory by renting space, buying 50-100 sewing machines, wiring up the factory for electricity, hiring and training the workers, getting a contract for a small order of simple garments and going to work! Sourcing, pricing, quality control were learned by doing. The profits were high; so, small companies could get established. There was no ban on entry. The Bangladesh Bank allowed the use of back-to-back Letters of Credit; and the customs allowed the use of bonded warehouses, thereby reducing the up-front cost of inputs to zero. The government was otherwise little concerned.

Successful companies earned large profits and reinvested in expansion of their sewing lines. Knowledge was gained from experience and productivity (output/worker) increased even as factory size expanded. Initially, neither the United States nor the European Union imposed quotas so Bangladesh could export whatever it could make. Eventually the US government imposed quotas but these were generous as the US Trade Representative (USTR) wanted to support expansion of Bangladesh's RMG sector. The EU established quotas on many countries but never on Bangladesh.
A handful of foreign companies, particularly the Korean company, Youngone, invested early in Bangladesh bringing technical experience, marketing expertise, and with a willingness to employ women. Bangladesh's middle managers and workers gained experience at Youngone and then, hired by other companies, spread knowledge of operating a RMG business. Female Bangladeshi workers went right to work despite misgivings of some.
As the industry grew, the need for subcontracting increased. A large factory has a maximum production capacity (e.g., shirts/month) given some allowed overtime; but orders may be larger than what can be produced by the business receiving the order, so work is subcontracted. This is necessary to balance production capacity and order size. As buyers move towards wanting to deal with only a few factories, the subcontracting becomes even more important.
In recent years, subcontracting has gotten a bad name. Buyers believe, usually correctly, that factory compliance is not met by sub-contractors. The compulsion to demand compliance leads to a reluctance to allow subcontracting. Demands for compliance have many impacts on RMG costs, but a hidden, very significant cost is the difficulty in using subcontracting.
Factories are becoming larger, several with more than 4,000 workers. These large, modern factories are able to manage compliance much better than smaller factories. On the other hand, without subcontracting, balancing capacity and order size becomes more difficult. Factories have too much idle capacity or have to stretch overtime in order to complete orders without subcontracting. This reduces competitiveness.
There is another reason for larger factories: This is essential to allow increased automation, which is now essential for competitiveness and to enable higher wages. For Bangladesh, increasing automation is the next step, essential for increasing competitiveness. As wages increased, if the garment makers wanted to stay competitive then automation was necessary. More machinery for garment manufacturing has been invented to reduce labour requirements. As Bangladesh remains the labour-intensive and low-cost producer, other countries are automating to compete with it. Bangladesh also has to increase automation in order to achieve higher productivity and maintain its strong competitive position.
Increased automation is largely carried out by larger companies that have access to credit and technological skills. If there is to be a successful change in the industrial structure of the RMG sector, much investment is needed. Such automation investments are much more important than the safety investment that Accord and Alliance are forcing on the sector. In addition to credit, more training for workers and on engineering skills for installing and maintaining equipment is needed.
Owners face buyers who are reducing purchase prices while factory costs are rising for wages, energy, transportation and higher taxes. The returns on new investment in the RMG sector are low. To justify investment, lines must be automated, so returns to investment will be higher and expanded capacity will be put in place.
The government can do a great deal more to support the growth of the RMG sector and to increase exports. The de facto dollar peg maintained by Bangladesh Bank is no longer the appropriate way to manage the currency. Management of the exchange rate against a basket of currencies would be more appropriate. The recent weakening of the dollar against the Euro and sterling had a positive impact on exports to the EU and the UK. The change took place without any action by the Bangladesh authorities. The dollar may strengthen again, leading to an adverse impact on exports. To limit such swings, one may combine a shift in the management rule along with a 10 per cent depreciation, combined with a reduction in subsidies to 5.0 per cent from 10 per cent and complete elimination of export subsidies by 2020. Export subsidies are a very poor way to manage the economy and may be illegal under WTO rules or at least subject to countervailing duty as India has imposed.
Actions are necessary to improve Chittagong port, Benapole land port and the air cargo handling in Dhaka. All three suffer from very serious management problems. The tremendous drive to collect revenue and crack down on smuggling results in very slow clearance rate of containers through the ports, slowing delivery of cotton, fabrics and accessories. The failure of the government to untangle these logistical delays illustrates the lack of real understanding of the forces behind export-led growth. The second critical area for the RMG sector is gas and electricity. Electrical power supply has much improved. The major difficulty is quality. There are three measures of quality -- stability of voltage, stability of frequency and no power outages. The current power situation fails on all three characteristics. Most RMG factories experience several power outages a day; these are usually short but this disrupts the sewing lines, reducing overall productivity. The machines being introduced for automation of knitting and sewing lines require stable frequency and voltage. Gas supply is usually not available for new factories. Gas is used to generate electricity of quality satisfactory for advanced sewing lines, so gas availability is essential.
For successful expansion of the RMG sector over the next five years, more aggressive cooperation is needed between government officials and the RMG sector. Such cooperation effort is only meaningful if there is a joint secretariat able to collect and analyse data and recommend data-based solutions.
Prospects for the RMG sector are excellent. But the structure of the sector must change with closure of thousands of small factories and expansion of large factories able to export $100-200 million of garments per year. To reach $50 billion export, the average factory would export $50 million each and we should expect 1000 factories in contrast to 5000 factories averaging only $6 million. This is the change that is needed. Fewer but larger, more productive factories. It will take some years to achieve this, but with good cooperation this change can be accomplished in six or seven years and the $50 billion target reached.

Dr Forrest Cookson is an Economist.
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