Reports indicate that the government is drafting a new policy with a stronger push to reduce reliance on imported inputs and develop backward linkage industries, aiming for increasing value addition-at least by 50 per cent by 2029. Furthermore, if an exporter fails to meet this requirement, they will lose cash incentives and duty benefits on raw material imports. Consequently, for example, media reports suggest that the minimum value addition for children's garments may double from 15 per cent to 30 per cent. For all knit and woven garments made from cotton and man-made fibers, the threshold could rise from the existing 20 per cent to 30 per cent. Overall, value addition target varies from 30 per cent in ready made garments to 50 per cent in wooden furniture. While such an ambitious target is welcome, it raises a vital question: what could be the scalable source for achieving this significant jump in value addition?
So far, Bangladesh's industrial economy has relied on making copies according to buyers' designs, using imported capital machinery and components. Except for a few sectors like leather products, the primary or sole means of value addition is factory floor labour. Hence, how far it is feasible to increase value addition out of factory floor labour is a subject that requires close investigation. This, in turn, raises an important question about untapped, highly scalable paths to value addition that could actually meet national targets.
To get some insight, let's look at the data for Apple's iPhone. As we know, Apple does not make any hardware components for the iPhone, nor does it manufacture or assemble it. Apple pays out roughly $500 for its base model iPhone 16-which it sells for $799-to cover all supplier components, raw materials, and assembly labour. This data indicates that Apple's own value addition to the iPhone is about 37.5 per cent of the sale price. Does this mean Bangladesh's new policy targets expect local companies to add similar or far more value than Apple does to its flagship product?
Let's look into the segment of the iPhone value chain that is most similar to Bangladesh's industrial economy: manufacturing and assembly. Foxconn does this job for Apple. For the model we are referring to, Apple pays $10 to $15 per phone to cover labour, facility overhead, and equipment. For direct labour, Apple pays Foxconn an estimated $1.50 to $4.50 to assemble each iPhone. This means that the actual contribution of factory floor labour varies from a tiny 0.18 per cent to 0.56 per cent. These data reflect the ground-level reality of where Bangladesh's industrial economy is right now. Besides, role of labour, as low as 6 per cent, in export oriented wooden future making in Bangladesh also offer relevant data point about the value addition challenge Bangladesh faces.
Does this mean that Bangladesh's value addition target is absurd? Not necessarily. Value addition is directly reflected in gross margins. While Apple's gross margin on the iPhone sits around 40 per cent, its Services segment-which includes the App Store, Apple Music, and iCloud-boasts a significantly higher gross margin, regularly tracking at roughly 75 per cent. On the hardware supply side, high value addition isn't exclusive to tech giants; a relatively lesser-known Apple component supplier, Taiwan's Largan Precision, reports gross margins as high as 70 per cent for its optical lenses. Similarly, Taiwan Semiconductor Manufacturing Company (TSMC) regularly reports gross margins exceeding 65 per cent. This demonstrates that substantial value addition is achievable outside of assembly, provided the focus shifts to high-tech component innovation, and proprietary technology for precision manufacturing.
There could be an argument in favour of backward linkages as a means to increase value addition. Unfortunately, Bangladesh has been relying on the exact same factory floor labour for manufacturing lower-level components, meaning that value addition out of labour cannot scale up much. Besides, component-level manufacturing demands higher imports of capital machinery and a massive scale effect to gain a cost advantage. Worse still, importing technology to improve labour productivity does not increase value addition either. To our surprise, it actually reduces local value addition. For example, in 2013, producing and exporting $1 million worth of garments required 220 workers. In 2024, that same volume of production needed just 94, largely due to automation and the adoption of advanced technologies. The data clearly indicates that productivity improvements from imported technology have reduced local value addition. Such a reality raises a vital question: what is the untapped option Bangladesh is left with?
One might argue that since the software and service industries largely rely on human input, Bangladesh should target these sectors to increase value addition. Unfortunately, although value addition in software and services does come mostly from human effort, the per-person earning in Bangladesh's tech sector is very low. For example, a typical freelancer offering services over the internet earns roughly BDT 550 to BDT 1,750 per day. On the other hand, there has been no large-scale success story of major domestic software firms. The underlying reason is a lack of scale and market power effects, which require high-level product evolution management competence-a skillset that goes far beyond traditional education and skill development in computer science, engineering and business. Bedsides, the rapid progress of AI agent has been posing increasing threat to human role in software production and service delivery.
To figure out the way forward for Bangladesh, let's look at how those high-performing firms achieved such enviable levels of value addition. To begin with, Apple's primary means of value addition has been generating ideas and translating them into software features and the overall design of the iPhone. However, that alone was not enough to make money; Apple even suffered losses during the debut of the first iPhone. The success of its high gross margins emerged from the evolution of the iPhone itself and its ecosystem, creating scale, scope, network, and market power effects. Similarly, Largan's 70 per cent gross margin did not come from labour-centric lens polishing; instead, it is the result of unique design and a proprietary manufacturing process. Interestingly, despite a superficial similarity to Bangladesh's RMG business model, TSMC's success in achieving a gross margin above 65 per cent is due to developing proprietary wafer processing techniques. Unlike Bangladesh's RMG factories, TSMC focuses on developing proprietary know-how through the integration and optimisation of third-party production machinery. More importantly, all of these high-value, high-margin business successes are the result of attaining market power through proprietary technology for creating scale, scope and network effect, whether as product or process innovation.
As explained, Bangladesh's current industrial and service economy does not offer a scalable path for increasing value addition. Hence, without opening up a scalable path, setting ambitious value-addition targets and enacting associated regulatory measures may simply lead to the closure of firms, increase in non-performing loans, further slowdown of private investment or reporting of fraudulent data. The untapped path to increasing value addition for Bangladesh lies in gaining market power in international trade by adding value through product and process innovation driven by a proprietary local flow of ideas. Such a possibility may create a temptation to increase R&D funding and incentives. Unfortunately, as there is no natural correlation, that alone is not enough.
M. Rokonuzzaman, Ph.D, academic, and researcher on technology, innovation and policy. Zaman.rokon.bd@gmail.com
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