Why and how should you invest in Bangladesh RMG industry?

Md Ariful Islam,   Merchandiser,   Toray International, Bangladesh Liaison Office,  Email: ariful_islam@toray-intl.com.bd 
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Introduction:

Bangladesh is the 2nd largest Ready Made Garments (RMG) exporter in the world after China. About 81% of its export earnings are coming from RMG. Textile and Apparel sector’s contribution to Bangladesh GDP is around 20%.  About 20 million people are directly associated with the industry. It is clear that main driving force of country’s economy is this industry. Now Bangladesh is dreaming to have middle income country status by 2021, RMG will certainly play a crucial role in materializing the dream.

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Why business in RMG?

1. Quick return:

As per the information from factory owners, RMG is the only sector in Bangladesh where one can get back his investment by 3 to 5 years. The ratio of the return against investment is very high compared to other business or industry.  RMG is a people oriented industry.  Currently it has 4

Figure 1: Abundant and skilled workforce remain as core competence of Bangladesh for textile and apparel business.
Figure 1: Abundant and skilled workforce remain as core competence of Bangladesh for textile and apparel business.

million of employees (Source; BGMEA). So, it can generate a lot of employment opportunity for both skilled and unskilled people. Government is also encouraging to the entrepreneur by providing incentive on export earnings (4% for traditional market and 7% for nontraditional or emerging market) and low taxing policy on the income. Also the social recognition and honor is the main achievement of an RMG entrepreneur. Employment of huge number of people is a great motivation for the industry owners.

2. Huge market opportunities:

Recent export data shows that there is huge chance to grow more RMG business in Bangladesh. Bangladesh has 6.4% of market share where our main competitor china has 36.4% share. RMG export is increasing every year and our market share rose 5.1%, 5.9% & 6.4% through last 3 consecutive years (Source; BGMEA). Our main competitor China, the largest garments exporter of the world, is now losing its garment export for high production cost and short of skilled manpower. Its market share decreased to 36.4% (2016) from 39.3% (2015). There is huge gap in export value between China ($161 Billion) and Bangladesh ($28.67 Billion). It’s a great opportunity for Bangladesh to grab more market shares.

The global apparels market is predicted to be $650 billion by 2020. Where current market is $444 (2016) billion (source: The Financial Express). Continual RMG export growth of Bangladesh is predicting massive opportunities to be a global leader in the export of garments.

The rate of export percentage is increasing each year to the emerging markets like Australia, Korea, Japan and Russia etc. It was 14.79 (2014), 15.29 (2015) & 15.30 (2016) percentage of total export value. It is encouraging RMG exporters to expand their business in the new markets. Government also announced special incentives for nontraditional markets.

3. Abundant & skilled workforce:

The main strength for this business is available workforce. Labor cost is lowest in Bangladesh among the other competitors. Minimum wages in Bangladesh is $ 68 where China is $ 155, Cambodia $ 140, India $ 137, Vietnam $ 107 (Source: University of Delaware, USA).

Figure 2: Minimum wage advantage for Bangladesh.
Figure 2: Minimum wage advantage for Bangladesh.

Skilled and relevant educated manpower is also increasing in this industry.  There is around 37 public & private university and colleges which are producing textile graduates. There are 6 government textile institutes (under Bangladesh Technical education board) for creating diploma engineers for this industry. There are also good numbers of private institutes and polytechnics are generating skilled manpower in every year for this sector.

4. Strong backward & forward linkage:

Favorable government policy and bank facilities for raw material purchase are advantages for this business. There is so many backward linkage supporting industries established in the country. Now a day’s maximum raw materials are available in local market. Around 1430 textile mills are in operation. Capacity of yarn production is 2100 million kg per year. Capacity of fabrics production is 2800 million meters. 85% of knitted fabrics demand met by locally. (Source: Readymade Garment & Textile Industry in Bangladesh- World Textile Conference II, Mumbai September, 2016). Over last few years Bangladesh’s strength in producing cotton based yarn and fabric has increase significantly. Good numbers of plants are in the process now. Chinese and other countries are looking forward in Bangladesh to invest in fiber, fabric and other allied industries in Bangladesh.

5. Geographic & demographic advantage:

Geographically Bangladesh is located in an ideal place which is an additional advantage for international business. Our country has very convenient access to international seaports, air routes and others. It has 3 sea ports (Chittagong, Mongla and Payra), 3 international airports (Dhaka, Chittagong and Sylhet) and 22 land ports.

Every year about 2 lacs youth are entering in job market in Bangladesh. 70% of Bangladesh population is under 40 years of age which gives huge work force availability. Most of these youth is educated.

6. Duty advantages in export destinations:

As a Least Developed Country (LDC) Bangladesh is enjoying duty free market access or reduced tariff rate facilities for RMG export to many developed and developing countries in the world. Tax free facility in importing country is a great advantage for RMG exporters. Bangladesh is getting GSP (Generalized System of Preference) facilities in 38 countries including EU (28 Countries) and some other (10 countries) selected countries. EU countries are importing 90% of garments from Bangladesh. Buyers are planning to increase more sourcing of their target goods from Bangladesh.

7. Recognized hotspot for souring:

Bangladesh’s growth potential has been recognized by many reputed analysts across the globe. Goldman Sachs includes Bangladesh in the “Next 11” emerging countries to watch for along with the BRIC countries (Brazil, Russia, India, and China) and JP Morgan lists Bangladesh among its “Frontier Five” emerging economies worth investing in (Source: The Daily Star). Many research and survey showed that Bangladesh will be the next hot spot for sourcing. As per McKinsey & Company’s research; Bangladesh will be top sourcing country over next 5 years.

Figure 2: What’s next in apparel sourcing? (Source: www.mckinsey.com)
Figure 2: What’s next in apparel sourcing? (Source: www.mckinsey.com)

8. One of the safest RMG industries in the world:

Tajreen and Rana Plaza incident was a wake-up call for the entrepreneurs and all stakeholders. Though it was caused thousands of death but it made the owners, workers and all other parties involved with this business aware and now safety is being considered as integral part of the factories. Now Bangladesh factory is world standard in social compliance and workers safety. This awareness made our garment industry stronger and work friendly. Bangladesh has seen number of initiatives around Tajreen and Rana Plaza incidents i.e. Accord & Alliance altogether Bangladesh could use the learning positively.

Things to be considered while investing in RMG

1. Only efficient companies will survive:

Bangladesh RMG industry is an established sector. It may seem that doing this business is very easy. But reality is different. People those who know the industry well and can manage the business efficiently they only should invest in the sector, opined Engr. Saiful Islam Khan, Managing Director, Essential clothing Ltd. Mr. Khan being a successful young entrepreneur in Bangladesh RMG motivates others to come in this business. But he also warns that only the efficient businesses will survive. He added that management efficiency is the key for success. If the management is efficient many barriers will be easy to overcome.

2. Financial Management is the key:

Mr. Khan particularly emphasized on the importance of managing finances efficiently. He brought the example of Sri Lanka where most the chiefs of the RMG factories are from financial background. He told that as in RMG business the working capital has highest possible impact, managing short term to medium term finances is very critical for the companies. He added that companies usually failed for financial failures not much for technical failures.

3. Investments should add capacity for new product ranges:

RMG business will sustain more 15-20 years in Bangladesh- as per the opinion of Saiful Islam. Moreover we can invest more in this sector to establish for producing high value products- he told. However he added that there is not enough facility to handle small quantity of fancy order i.e. minimum capacity of dye house, all over print factory, sewing unit etc. As per his opinion, new investments should open up market for new product and order ranges.

4. Invest in design and development:

Mr. Khan also emphasized on the importance of design and product development by the garment manufacturers. Till now we are producing clothing as per buyer’s provided design. There is huge opportunity for Bangladesh to develop business in design selling to buyer. Some local giant group of companies already has established own design studio and buyers also like their design and buying a lot, he added.

5. Value addition:

There is a good chance for Bangladesh to earn more foreign currency from producing the high value items. Currently we are producing mostly low value items, for example T-shirts, polo Shirts, basic pants, shorts etc. Still there is shortage of professional ladies under garments, suits, sports garments and work wear factory.  This type of item’s value is high and competition is low.

How to Do?

RMG entrepreneur should pay their main attention on Sales Strategy, Procurement Policy, Quality & Productivity, FICO and Cash Flow management. Besides these, Customer Relationship, Training & Grooming and Analyze Investment opportunities also important to accelerate business in order to achieved organizational goals and objectives. Bargaining and negotiation is prerequisite for price setting. Buyers are placing order with competitive price. Entrepreneur needs to hire people with good negotiation and bargaining skills.

1. Planning:

The first and most important job is to make the business plan and selecting short & long term goal. After that selecting appropriate product line is second job of a RMG entrepreneur. After that working out on project cost and selecting means of financing is the way of starting operation for the venture.

2. Human resources and business process:

Companies must have planning for recruitment and mapping out policy to convert work force into assets. You need to do scheduling the milestone of project design to trial production. See through and evaluating the learning curve.

3. Finance:

Finances can arrange by personal investment or intercompany investment. Local commercial banks also provide project loan to establish industry in apparel sector.  Foreign currency loan also can be availed by the entrepreneurs. Loan from strategic partner customers also can be a mode of finance.

Challenges to be faced:

Bangladesh garment industry has been facing multidimensional problems since its establishment. These are uninterrupted power and gas supply, poor infrastructure, less capacity of sea and airport, political and labor unrest. Price hike for utility services which is have direct impact to the garment industry as well as backward linkage industry.

Valuable working hour is losing in the road due to traffic. Half an hour journey needs 3 to 4 hours to reach the destinations. It is also taking one day or more time to reach goods in Chittagong port from Dhaka where it is supposed to need 7-8 hours. Government should remove all the infrastructural obstacles in the transportation facilities and focus on separate route for the export and import activities. These are may be high way, metro line, more cargo ship etc.

Chittagong port also cannot provide efficient service for shipment. It is hampering mainly in case of raw materials import. Shipment lead time from China is 12-14 days but it is taking additional 10-15 days for clearing the goods. The same scenario is also seen in Airport. By 2-3 days goods are arriving in airport but it needs need more 8-10 days for releasing. It is badly affecting shipment lead time.

Conclusion:

RMG industry occupies a unique position in the Bangladesh economy. To remain successful, government needs to take more strategic policy for investment in the RMG sector to maintain competitiveness in the global RMG market. Despite of all the challenges that exist in the RMG sector of Bangladesh, still there are unlimited prospects and can look forward to advancing its share of the global RMG market.

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