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Small RMG factories find it difficult to survive

The shortage of readymade garment (RMG) work orders from international brands and retailers to small and medium-sized (SME) RMG factories is so severe that many apparel entrepreneurs are looking for buyers to sell factories and depart the industry for good.

The results of the COVID-19 pandemic have brought the SME garment units to their knees as orders wiped out with the worldwide sales drop.

Bangladeshi-Small-RMG-factories-difficult-survive
Figure 1: The results of the COVID-19 pandemic have brought the SME garment units to their knees as orders wiped out with the worldwide sales drop.

COVID-19 impact and scenario

RMG factories, regarded as the lifeline of Bangladesh’s economy, had faced unusual payment delays from buyers, order cancellations and suspensions and non-availability of loans from the stimulus package.

Though, the big garment factories are doing better to some extent in terms of getting orders, thanks to better handling mechanisms stemming from their large production facilities and aptitude to make shipments on time.

During the COVID-19 pandemic last year, 300 SME units which are also members of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) had to close down, said Rezwan Selim, a Director of BGMEA, quoting BGMEA’s data.

Of them, almost 20 garment factories have reopened and some are struggling to revive as they did not receive work orders and were not able to manage funds, Selim added, who looks after labor affairs and closed factories.

The stream of work orders is not enough even for the big factories, he sadly added.

Rezwan Selim said, “A bulk of the factories, mostly the SMEs, are running at 40% to 50% capacity because of the lockdown in key export destinations due to the second COVID-19 wave. Since the influx of RMG orders in big units is slow, the SMEs are not receiving the associated subcontracting orders.”

Around 50,000 RMG workers lost jobs for the closing of the factories.

Looking to remain incognito, an RMG factory owner in Gazipur said he was looking for a buyer for his factory built-in 2017 on 22 bighas of land.

COVID-19-impact-Bangladesh-RMG
Figure 2: COVID-19 impact on RMG.

He had 1,400 workers in his factory before the pandemic hit Bangladesh in March 2020. Six months later in September, he had to shut the factory, and all the workers lost their job. Besides, as production came to a grinding halt, raw materials worth Tk 200 million lay idle on his factory and at the port. While losing BDT 120 million as one of his US buyers declared bankruptcy due to the COVID-19.

Recently, the entrepreneur partially reopened the factory to supply the domestic market. Today only 70 workers are employed at his factory.

The entrepreneur said, “I had been struggling to revive my business even before the COVID-19 pandemic as I invested a lot of money to comply with the factory safety recommendations of the Accord.”

It is to be mentioned that Accord on Building and Fire Safety in Bangladesh had referred factory safety improvement plans.

More than 70 percent of garment factories in Bangladesh are small and medium-sized. Around 10% of the RMG factories said during the ongoing business slowdown, 50% to 100% of the work orders did not cover costs, yet those had to be accepted to survive in the business.

They did so just to keep their business afloat, according to a recent study of the Centre for Policy Dialogue (CPD)

To this point, fashion retailers and brands have restored 90 percent of the canceled and suspended orders worth $3.18 billion, but they are delaying making payments, dealing a blow to the SME units.

Yet in its study, the CPD found that only 44 percent of factories were certain about orders in the six months to April.

The rest 56 percent have different levels of uncertainty. Of them, 11 percent had a high level of uncertainty on orders. These factories are mainly small.

In his heyday, the Gazipur-based garment factory owner used to export garment items worth nearly 700 million annually and he would pay Tk 17 million in wages to workers every month.

“I owe Tk 700 million to banks,” he said.

He could not qualify for the soft loan from the government-sponsored stimulus fund because of stringent conditions. And he could not repay bank loans from the incomes of the garment business.

“I have to sell my factory and the land to repay the bank loans. And the repayment of the bank loan would be the end of my 18 years of business life,” he said.

But in the last 18 years, he ran the factory with the hope to establish a business empire. But the fallouts of COVID-19 have shattered his dreams.

This fate of the garment owner is also reflected in the garment export data.

Between July and January, the first seven months of the current fiscal year, garment shipments declined 3.44 percent year-on-year to $18.40 billion.

This correspondent spoke to at least 10 exporters having small and medium-sized garment factories and industry leaders to know about the fates of the SME units.

They said the situation had been improving after the first wave of COVID-19 had passed but it started deteriorating with the onset of the second wave as fresh lockdowns were introduced in major export destinations in Europe and the US.

Mostafiz Uddin, Managing Director of Denim Expert said, “I have been able to recover 75 percent of the business. I could not recover 100 percent because of the second wave.”

Buyers prefer placing orders with a big unit to ensure deliveries are made on time and as the big units have the room to negotiate prices, he said.

The entrepreneur requested that the government come up with a flexible policy so that all factories, especially the SMEs, can benefit from the stimulus package.

Md Ehterab Hossain, Managing Director of Base Fashion, and Md Emdadul Haque, General Manager of Dynasty Sweater (BD), shared stories of order cancellations and reductions and discounts.

“Orders worth $2 million were stuck and finally I had to agree to settle it at a 15 percent discount,” said Hossain. Base Fashion ships T-shirts and polo shirts worth $1 million every month.

“I am struggling to keep my business afloat as the number of orders has plunged,” Hossain said.

The abnormal price hike of yarn has just added further woes to the SMEs. The prices of yarn went up by more than $1 per kg over the last three months, said, industry operators.

Bangladesh-SME-garment-factories-condition-2020
Figure 3: SME factories’ condition in 2020.

Small and medium RMG factories dearth support

BGMEA Director Selim said many of the SMEs did not get the stimulus fund because they were not directly making exports.

The closed SMEs used to export one or two consignments and largely worked in conjunction with a big unit through subcontracting.

Rubana Huq, President of the BGMEA, said the SMEs were the worst-affected when it comes to managing finance and business since they worked for buyers having relatively smaller turnovers.

When asked whether there was a gap when it came to a single policy serving both the big units and SMEs, she said, “Absolutely yes.”

“Therefore, they require different policy measures to survive in this crisis period,” she said.

The government has provided an additional working capital scheme for the SMEs during the pandemic, she said.

However, the working capital loan support was difficult to access as far as readymade garment factories are concerned because of stringent processes requiring due diligence, she said.

Another factor is the nature of business and the modality of the financial assistance required for the RMG enterprises which differ from any other sector, she added.

“For the immediate term, special assistance to SMEs concerning accessing finance to turn around and reconstruct themselves would be critical for continuing the growth journey of the industry and economy at large,” said Huq.

Mohammad Hatem, senior vice-president of the Bangladesh Knitwear Manufacturers and Exporters Association, said apparel exporters faced harassment in availing stimulus loans because of stringent conditions and bureaucratic tangles.

Many of the SMEs could not avail the loan at all although they needed it the most, he said.

Some circulars of Bangladesh Bank are unjust for the SMEs, he said.

Only bigger units had been entitled to availing the loan from the stimulus package, Hatem said.

However, after negotiations with the central bank and the finance ministry, the conditions were eased a bit, he added.

Selim said many of the SMEs did not get the stimulus fund because they were not directly making exports.

KI Hossain, President of the Bangladesh Garment Buying House Association, said most of the SMEs were dependent on subcontracting but now it was not available due to the inflow of fewer orders from international retailers and brands.

Khondaker Golam Moazzem, Research Director of the CPD, said the government’s Tk 1,000 crore technological upgradation fund should be spent in its true sense to improve online sales of small and medium units so that they can ride out the difficult times.

Nazneen Ahmed, a Senior Research Fellow of the Bangladesh Institute of Development Studies (BIDS), said a price war in the global garment business was ongoing.

Since the bigger units have a competitive edge, they can absorb the losses. But small and medium-sized units cannot afford that, Ahmed said.

Both Moazzem and Ahmed said orders for big factories had not been fully restored. Small suppliers that were used to catering to small buyers and retailers were in trouble.

“The government needs to ensure that the small and medium-sized units receive soft loans from the stimulus packages. Their loan repayment period should be extended,” Ahmed added.

If anyone has any feedback or input regarding the published news, please contact: info@textiletoday.com.bd

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