Ready Made Garments in Bangladesh: a Market Survey             16 juli 2007

Editors: Netherlands Embassy in Dhaka (Economic Affairs department) EVD
Mainly based on: GTZ (German Technical Cooperation): “Value chain analysis for the ready-made garment sector in Bangladesh”,
September 2005.

Contents
   Introduction
   Overview of the RMG sector in Bangladesh
   Bangladesh and international RMG developments
   RMG value chain
   SWOT of RMG sector
   Opportunities for Dutch trade and investments
   Incentives and approach

Introduction

Bangladesh is centrally located in South Asia with strong economic performers like China and India as its neighbours. Bangladesh considers itself a small country, but with approximately 140 million people Bangladesh clearly has the potential to become a large consumer market and already is a large market for cheap labour. Although today Bangladesh is still a low income country, tomorrow Bangladesh could very well become the next emerging market in Asia.

When looking at the World Bank “ease of doing business ranking 2007”, Bangladesh ranks number 88 out of 175 countries (number 1 being the best rank). To compare, China ranks 93, India 134 and Vietnam 104. Based on this ranking it is fair to say that Bangladesh performs relatively well compared to countries in the region that attract a lot of Dutch trade and investment. Despite that, Bangladesh has received little interest of Dutch traders and investors thus far. Part of this can be explained by the image of the country; people tend to associate Bangladesh with floods and poverty. In addition, infrastructural impediments and corruption are real problems that influence business location decisions. On the positive side, Bangladesh’s macroeconomic performance has been solid over the last years. Economic growth was on average 6% per year (2003-2006). In addition, the budget deficit and inflation are relatively low, the government is committed to structural reforms to enhance the business climate and a big anti-corruption drive is currently being executed. Also, (basic) English is widely spoken as a second language and the political situation can be assessed as relatively stable (despite the fact that the country is in a state of emergency since early 2007).

The objective of this market scan is to inform Dutch traders and investors about specific opportunities for doing business in Bangladesh’s garments sector.

This market scan is predominantly based on a report prepared for GTZ (German Technical Cooperation): “Value chain analysis for the ready-made garment sector in Bangladesh”, September 2005. In addition, information gathered by the Netherlands Embassy in Dhaka (Economic Affairs department) and the EVD is used.

Overview of the RMG sector in Bangladesh1

The RMG sector is responsible for about 74% of Bangladesh’s export and hence an important driver of economic growth. RMG is by far the most important industrial sector of the country, employing approximately 2-3 million workers (mostly women) in nearly 5.000 production plants. RMG activity is mostly located in and around Dhaka (the capital) and Chittagong (the seaport).

RMG can be subdivided into the two main categories woven and knit. The main product groups are:

Woven

Knitwear

The RMG industry in Bangladesh started booming in the mid-eighties. Soon it became Bangladesh’s dominant export product. In fiscal year 2005/06, woven contributed circa 38% to total export and had a growth rate of 23%. In the same year, knit contributed circa 36% to total export and grew as much as 35%. Over the past years, the share of exported knitwear increased significantly compared to the share of woven garments. This is mainly due to lacking availability of domestic fabrics for woven garments and insufficient export quality. In addition, the re-establishment of import quota for garment from China (till end 2007) benefited the export of knitwear in particular.

The yarn produced in Bangladesh generally meets international quality standards and customer requirements because of the upper quality level of raw cotton that is used. The same goes for local fabric production. However, the local capacity for good quality plain and jacquard fabric is not sufficient. Woven has to import circa 75% of its raw material, while knit only has to import 10% of its total fabric requirement and circa 15% of its yarn.

The quality of the RMG strongly depends on the technical equipment and qualification of the machine operators. Even with many garment factories (especially the larger ones) having excellent machine parks, the lacking qualification and efficiency of operators and line inspectors / production management lead to quality problems and a high share of rejects. In addition, many garment companies show a lack of marketing know-how in the fields of communication, distribution systems and/or customer service. Likewise, there is generally no independent pro-active customer acquisition by the manufacturer in Bangladesh. Contact and orders are usually established by the customer or his purchasing agency / buying office in Bangladesh.

One of the competitive advantages of the garment industry in Bangladesh is its relatively low production costs due to low level of salaries. The minimum wage for an (unskilled) RMG worker is EUR XX.

The Bangladeshi garment sector is structured with two strong professional associations: the BGMEA (predominantly woven industry) and BKMEA (exclusive knitwear industry). The vast majority of the production plants are member of one of the two. Both associations offer basic services to their members (i.e. information and assistance concerning branch and company issues, support regarding customer or supplier contacts or lobbying with the government of Bangladesh) next to a few specialized services such as the BKMEA’s annual knitwear exhibition. In addition, both organizations have expressed their willingness to share information with new and interested Dutch traders and investors.

Next to BGMEA and BKMEA, other important stakeholders are the BTMA (textile manufacturers), various chambers of commerce (such as the Foreign Investors Chamber of Commerce and Industry/FICCI), the Board of Investment, Export Promotion Bureau and the Export Processing Zones (EPZs). Foreign companies are registered either with the Board of Investment or in the EPZs.

Bangladesh and international RMG developments2

Competition, concentration tendencies among manufacturers and traders as well as the abolition of import quotas and restrictions for the EU market characterize the current international RMG market.

The international market for garment exports is dominated by China (26.9% of world exports), followed by extra-EU export (8.2%), Turkey (4.3%), India (3%), Mexico (2.6%), Bangladesh (2.3%), Indonesia (1.9%) and the USA (1.8%). 3

The international market for garment imports is dominated by the USA (27.9% of world imports), followed by the EU (extra-EU import 24.7%), Japan (7.8%), Russian Federation (2.7%) and Canada (2.1%)4. The dependence of garment imports, especially in major EU countries, is growing because of the increasing production costs and a rapid decrease of production capacity in Western Europe. In the case of Bangladesh, the EU imported 55% of the Bangladeshi RMG, followed by the USA (28%), Canada (4%) and Japan (2%) in 2006.

Garment imports by the EU or the USA can be divided in two broad groups: (1) “Outward Processing Traffic”(OPT) or production subcontracting and (2) imports of RMG. Within the recent past, many EU buyers tend strongly towards RMG imports from Asia because of strong and rising competition and therefore pressure to cut costs. As a consequence, suppliers have to be able to offer a basic product development (a Ready to Sell (RTS) product range) in addition to an efficient production process, purchase of materials and financing of materials and finished goods. Below an overview of the various types of co-operation between garment suppliers and international customers is given, including the required service level of the supplier.

In addition to the service level requirements there are other major performance requirements for a supplier by (potential) international customers:

The vast majority of garment manufacturers in Bangladesh works on a RTU basis for their customers (90%), meaning that production and procurement of fabrics, yarns or trims are provided by the supplier whereas all product samples / designs and sometimes even the connection to fabric suppliers abroad is given by the customer. The other 10% have already advanced to RTS. Given the trend described above, it is clear that most suppliers in Bangladesh need to make a step forward (from RTU to RTS) to keep up with international customer demand. China and India – Bangladesh’s main competitors – are already heading for RTS.

RMG value chain5

The cotton knitwear sector (raw cotton has to be imported) in Bangladesh shows an almost complete value chain. Spinning, yarn dyeing, knitting, confection of knits and garment finishing are done in the country. Some of the factories are even fully vertically integrated: from spinning to finished garments.

The situation for woven garments is completely different. There are only a few weaving mills in Bangladesh offering a sufficient quality standard for exports and consequently the majority of fabrics that are used for woven garments exports has to be imported. This means higher purchasing costs, stronger dependence on an external supplier and also pricing disadvantages due to higher import duties on the EU markets (non-compliance with the so-called ‘rules of origin’).

The average gross value addition for each production step in Bangladesh is as follows: spinning (17%), weaving (15%), knitting (18%), dyeing/finishing (15%) and the production of finished garments (28%).

As mentioned above, the self sufficiency of garment production in Bangladesh is quite high in knitwear (approximately 80%), whereas the woven garments sector only has a self sufficiency of 25%. However, compared to its main competitors, Bangladesh has a substantially lower self sufficiency in both sectors, particularly with respect to spinning and weaving.

SWOT of RMG sector6

Below a SWOT analysis of the RMG sector in Bangladesh is presented. The opportunities and threats mainly depend on the further development and commitment of textile and garment companies, strategies and activities of associations and the government and likewise on the developments on international markets. For that reason, the described opportunities and threats should be regarded as an indication for potential change and risks for the garment sector in Bangladesh. The strength and weaknesses on the other hand are rather factual and easy to observe.

Opportunities for Dutch trade and investments

From the above, it becomes clear that the opportunities in the Bangladeshi garment market mainly lay in (a) increasing the self sufficiency of the sector, (b) taking the next step (i.e. from RTU to RTS) and (c) improving management and marketing. When also taking into account the information gathered during the RMG roundtable at the Netherlands embassy in Dhaka (May 2007) and after consultations with Modint (Dutch textile branch organisation) the following specific opportunities for Dutch trade and investments arise:

A - Increasing the self sufficiency of the garments industry in Bangladesh

B - Moving forward to ‘Ready to Sell’

C - Improving management and marketing

Incentives and approach

The government of Bangladesh provides many incentives for foreign investors. Below a short overview is given, more information can be obtained from the Netherlands embassy in Dhaka or the relevant agencies of the government of Bangladesh (see annex for web addresses).

Financial incentives

Other incentives

In addition, there is already an international business community active in the garment sector in Bangladesh and there are circa 10 reliable foreign commercial banks active in Bangladesh that have the necessary import/export experience

As an entrance strategy for the Bangladeshi market in general, it is recommended that the Dutch trader/investor seeks a local partner. This will make it easier to capture and understand the market. Matchmaking facilities can be offered by the various chambers of commerce and industry and the BGMEA and BKMEA. However, it is probably wise to consider also getting in touch with Dutch companies in the garment sector that are already present in Bangladesh (mostly joint ventures) for more insight information.