The future of RMG trade By David R. Hasanat

Source: Star ARCHIVE

Bangladesh's garment exports increased from USD 6.8 billion in 2005 to USD 19.9 billion in 2012, recording a compounded annual growth rate (CAGR) of 16.6 percent. The remarkable success of readymade garment exports from Bangladesh over the last 15 years has, despite varied domestic and global challenges, not only surpassed the most optimistic forecast, it has also made us confident to think of big gains in the future. Today apparel export stands at USD 24 billion and it seems this labour-intensive industry is set to exceed the USD 50 billion mark within the next 7 years.
The overall impact of readymade garment exports is certainly one of the most significant social and economic developments in contemporary Bangladesh.  With over five million workers (60 percent women) employed in semi-skilled and skilled jobs in producing garments for exports, the development of the apparel export industry has had far-reaching implications for the society and economy. Its contribution to women empowerment is well recognised globally and is the subject of numerous studies. Micro-credit initiatives and larger participation of women in readymade garments manufacturing are two major contributing factors in this success for economic and social empowerment of poor women.

Opportunities and challenges
As China loses its competitiveness further, Bangladesh will emerge as the next RMG hot spot. With Bangladesh having developed a strong position among European and US buyers, many companies are already eager to evaluate the future potential. However, the lure of competitive prices, available capacities, and supplier capabilities offered are being cautiously weighed against a prevailing concern for political stability, infrastructure constraints and compliance standards.
I strongly believe that we have massive opportunities to be a global leader in the export of garments. This can in turn lead to significant development and production of textile and ancillary support industries. Given the track record along with the CAGR growth rate of 14 percent, Bangladesh has the potential to far exceed the target of USD 50 billion by 2021. Though somewhat puzzling, Bangladesh's growth potential has been recognised 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.
The recently published case study by McKinsey & Company, "Bangladesh's ready-made garments landscape: The challenge of growth," eloquently sums up Bangladesh's RMG growth formula which builds on the country's strong starting position and the increasing demand of international buyers. This report provides an overview of the rapid growth seen in Bangladesh's RMG industry and then describes the main hurdles that exist for buyers when it comes to sourcing in Bangladesh. The final section of the report details what the three core stakeholders - government, suppliers, and buyers - can do to overcome the challenges of growth in Bangladesh's sourcing market. It is a report that I would encourage all the actors in the industry to deliberate and reach consensus on to drive the growth agenda.

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To highlight a few extracts from the case study and recommendations, the following are worth pondering over
* Volatility of raw materials prices has spurred a decline in gross margins and created a general environment of insecurity among buyers.
* Costs in China and other key sourcing markets have increased significantly. This is leading buyers to question their current sourcing strategies, resulting in expansion of global direct sourcing and footprint revisions being the current key strategic focus areas.
* Although the European and US apparel markets have regained much of their sales following the slump brought on by the most recent global financial downturn, market saturation, consumer price sensitivity, and ongoing economic insecurity continue to put pressure on top-line results.
* While European and US buyers dominated by brand players will continue to govern the emergence of regional markets, players will emerge as a force to reckon with and will provide a level playing field traditional exporters.
* Bangladesh will benefit in the battle for capacities that is on the horizon.
Hitherto, Bangladeshi exporters have focused on growth based on their two most important advantages - price and capacity.  They remained content being providers of satisfactory quality levels especially in value and entry level mid-market products. Overall though, they still lag in acceptable speed to market, compliance standards and a professional management pool.
Availability of large pool of cheap labour and entrepreneurial spirits of Bangladeshi businessmen are two main components of providing large capacity and price competitive offerings to international sourcing market. Of late, buyers have shown increasing discomfort regarding Bangladesh's labour relationships and have threatened to shift to competing sourcing markets. However, Bangladesh is a very homogenous society and as such, ethnic tensions within the labour force are un-heard off, whereas, most of our competitors' labour force is made of multi-cultural segments and fraught with ethnic tensions. This is a major challenge and is the source of labour tensions and production disruptions.
As we all know the future is all about the knowledge economy and despite the highly labour intensive nature of garments industry the desired efficiencies can't be achieved without a large pool of professional management staff. As a matter of fact, our skilled and semi-skilled workers have achieved a great degree of productivity and efficiency compared to what the management staffs were expected to achieve. For a long time, the entrepreneurs have accepted untold pains and financial losses but they have miserably failed to develop a long- term solution. For instance, a quick fix was to hire expatriates to do the job. Unfortunately the quick fix has turned out to be a major drain to earning retention for the nation. It is estimated that the industry remits USD 4 billion a year to expatriates out of a total export earnings of USD 30 billion while the promoters retain a total of USD 1.5 billion. While it's a big disadvantage to exporter profitability, in my opinion, it is also a low hanging fruit as we do produce a large number of business and engineering graduates. All that we need to do is create an enabling environment for them to be trained, motivated and grow to be an inspirational leadership within the industry. Compensation is generally the least of our problems as demonstrated by the quantum of expat payment that the industry makes each year.

Hurdles
Bangladesh faces many hurdles in growing its garments industry. Unfortunately, many of them are peculiar to global standards. On the other hand, it has evolved to be extremely resilient to peculiarities such as longterm political violence, shutdown of transport network and businesses creating havoc in the entire supply chain.
There were uncertainties after the tragic Rana Plaza disaster. No one knew how the international buyers would respond. Gloomy predictions of large scale exodus of orders to alternative sourcing markets were made by many pundits and industry players. Bangladesh's poor workplace safety was the only news coming out of Bangladesh. Bangladeshi garment exporters were facing uncertain times. After the obvious dip in export post-Rana Plaza, the export rebounded to its normal growth trajectory. The Bangladesh Garment Buying House Association has reported that orders from "compliant" factories are rising by 15-20 percent. The US Fashion Industry Association has just released a survey of brands and retailers detailing that 76.9 percent of those surveyed currently source from Bangladesh, with 60 percent anticipating that they will "somewhat increase" from Bangladesh in the "next two years." It's another proof of how resilient the industry has turned out to be.
Another noteworthy development has been the positive attitude of factory owners in cooperating with various government agencies, international organisations and buyer-led initiatives to provide better oversight, governance and compliance on workplace safety and labour matters. Between the Accord on Fire and Building Safety in Bangladesh, the Alliance for Bangladesh Worker Safety and the EU-ILO-Bangladesh Global Sustainability Compact, there is now significant focus on factory safety conditions, including structural integrity and fire safety protections than ever before in the past. It seems Bangladesh is set to make the best of a bad situation.

Future
Looking forward, I am confident that Bangladesh will exceed the target of USD 50 billion with its current momentum. However, what I hope is that it can stand up to tap the potential for the quantum leap for USD 100 billion. Needless to say, it will require the continued investment in the sector both by the entrepreneurs of large and medium exporters as well as the financial sector. Creation of enabling infrastructural facilities will be an absolute necessity. As mentioned earlier, the key will be development of management staff for leadership and innovation.  Few of the transformational changes that the industry would have to make to sustain growth and take an increasing market share are :
*    Move from transactional relationships with buyers to more strategic partnership. RMG manufacturers increasingly will be required to take on more activities of the supply chain.
*    Development and production of textiles and apparel, combined with intelligent logistic and service concepts will be key to global leadership. It can reverse the current commoditisation trends by offering high value solutions to buyers.
*    A radical move towards rapid customised manufacturing in one of the most demand-volatile sectors through flexibility and integration of cost effective and sustainable processes from fabric processing through to customer delivery. the customer ultimately is only interested in total solution.
*    Overall integration and organisation of all individual processes and technologies into a highly efficient and flexible manufacturing shop floor.
*    Working conditions and benefits must improve as the industry matures.  In the long-run, this would be the best defence against unionised labour unrest.  Investment in worker training, motivational tools and in improved work place conditions and bonus schemes would increasingly be the tools used for enhance productivity.

The writer is the managing director of the Viyellatex Group

Published: 12:00 am Tuesday, March 10, 2015

GSP suspension - blessing in disguise? By Hafiz G. A. Siddiqi

Source: Star ARCHIVE

Prompted by the Rana Plaza disaster that killed about 1137 workers in April 2013, the US government suspended duty-free privileges it had granted under the GSP programme to products exported from Bangladesh. The suspension might be reinstated if and when Bangladesh complies with the conditions stated in the Bangladesh Action Plan 2013. The US consumers, retailers and government had earlier expressed their displeasure because Bangladesh did not, according to their assessment, fully uphold workers' rights, ensure safety in the workplace, improve working conditions, etc. to the level that would satisfy US consumers. Several devastating fires in RMG factories in the recent past, particularly the Rana Plaza episode, changed displeasure into anger, resulting in the suspension. Rana Plaza drew global attention and the whole world including the Parliament and retailers of EU accused Bangladesh anew for violating labour rights, workplace safety norms, etc. Soon after, EU also got involved through its “Sustainability Compact” programme. The collapse created suspicion about the structural integrity of factory buildings comprising the whole apparel industry. Eventually, USTR, EU trade tepresentative and retailers of both sides of the Atlantic decided to have all the factory buildings inspected to determine if they were safe to house RMG factories. Bangladesh has already made it clear that it is committed to full compliance with Action Plan 2013 and also to abide by the 'Sustainability Compact' initiated by EU that calls for detailed time-bound implementation of remedial steps proposed by EU in the areas of labour rights including freedom of association and collective bargaining,  labour law reforms, structural integrity of buildings, workplace safety, health hazards and responsible business practices such as more responsible supply chain management in garment manufacturing.
The US government, Bangladesh government, retailers from US and EU, BGMEA and ILO came together to protect the Bangladesh RMG industry. US buyers formed a consortium of 26 retailers called the 'Alliance for Bangladesh Worker Safety.' Similarly, EU retailers formed an 87 member consortium called 'Accord on Fire and Building Safety in Bangladesh.'  It was decided that the Alliance and Accord would inspect some 1800 factory buildings to determine the actual status.  It is to be noted that reinstatement of GSP privileges by the US would greatly depend on recommendations of Alliance. And whether EU would cancel GSP benefits for RMG or not would partly depend on recommendations of Accord.
The Alliance and Accord have submitted their preliminary reports on the factory inspection.  As reported in the media, initial findings of the inspection indicate that the assumption that a large number of factory buildings of the RMG industry are unsafe is incorrect. During inspection, structural integrity of only 17 factory buildings were found structurally vulnerable and therefore unfit for housing RMG factories. However, since this small percentage is statistically insignificant, it is not a matter of concern. Bangladesh's coimmerce minister highlighted this point by revealing that Accord and Alliance had inspected about 1800 garment factories and found structural faults in less than 2 percent of the factories. This number compares fairly well with the global average. The percentage of global vulnerable factory buildings is 2 percent (New Age).
Full compliance of the Action Plan and Sustainability Compact will generate additional costs of relocation and reconstruction of factory buildings, installation of fire-fighting equipment in individual factories, wage hikes up to “living wages” with supplementary benefits, improved medical services and other compliances. This will increase the total cost of production. Consequently, profits in this sector will decrease unless labour productivity or managerial/operational efficiency or the prices Bangladeshi RMG makers get from foreign buyers increase. If labour costs increase too much, Bangladesh will lose its trump card — low labour cost or the low FOB price. Eventually, the industry will cease to be competitive. Buyers will look for new destinations. Investors will move to more profitable sectors. Consequently, millions of workers, for whom the consumers and the political leaders of US and EU are concerned, will be laid off without any immediate employment opportunity. The consumers and retailers of the US and EU would not want to happen because it is against their ethical buying practices and doing business responsibly. This is evidenced by the fact that US and European consumers refuse to buy apparels produced by sweatshops even if these apparels are cheaper. But for economic reasons, US consumers prefer to continue buying RMG imported from Bangladesh because it is cheaper. If Bangladesh does not export RMG to the US market, US consumers will be deprived of the opportunity to buy clothing at lower prices. This is a dilemma. One way of dealing with this may be for the US government to consider withdrawing the duty on RMG imported from Bangladesh. US consumers will have to agree to buy Bangladesh RMG at higher prices as suggested above if they want the Action Plan and Sustainability Compact implemented.
The above discourse implies that RMG workers need to be empowered. Empowering workers is a shared responsibility of the factory owners, retailers and other actors who play money making roles in the global supply chain. The consumers do not make money but they save money at the cost of the workers. Consumers in US and EU seem to be conscious of their obligations. As regulators, the governments in exporting and importing countries play important roles in changing the status of workers. The government, consumers, retailers and manufacturers need to work jointly to create an environment in which workers can get their “liveable wages” and other legitimate dues.  To create the environment,one must know the answer to the question - why RMG manufacturers do not pay workers “liveable” wages and other legitimate dues. This question has been answered by Jean Lambert, Chairperson of the  EU Delegation for South Asian countries. During her recent visit to Bangladesh, she said, “Global brands should raise the prices they pay to Bangladeshi garment makers so that they can provide a living wage to workers and the brands have to increase the prices they pay to the manufacturers out of corporate conscience”. (The Daily Star, December 11, 2014).
Lambert raised both economic and ethical issues referring to the case of t-shirts made in Bangladesh and sold in EU. She questions, if a t-shirt is sold at two euros in retail markets, how much money is left after deducting the costs of fabrics, threads, buttons, zippers, packaging materials, and other auxiliary items used in making a t-shirt? Besides, one has to adjust costs of electricity, gas, water, factory building maintenance and insurance, local transport,  international freight and insurance, mark-up of the retailers, and all other related costs. Not a hefty amount. The t-shirt manufacturer has to share the leftover amount between themselves and the factory workers. How much remains after the profit for the shirt makers is taken out from the balance? It is unlikely to be large enough to pay the workers all their legitimate dues. The manufacturers are helpless but ethically guilty of exploiting the workers. Who is actually at fault? Lambert points the finger at the big retailers. The retailers usually refuse to pay the t-shirt makers ethical prices because they operate from a stronger bargaining position. Similarly, local manufacturers of t-shirts, and for that matter any apparel maker can get away by paying lower than ethical (liveable) wages to workers because workers do not have bargaining strength. In the process, the manufacturers are blamed. Jean Lambert wants ethical production and buying processes to replace the exploitative process. Lamber'st proposal is however a departure from traditional thinking. It is true that charity does not have any place in business negotiations. But in this globalised world many unbelievable changes have occurred.    
Ethical practices have already permeated in business. Ethics and economics have become two sides of the same coin. For example, the application of CSR, an ethical tool, has become an economic tool as well for business enterprises. Ethics in business is now more pronounced than it was three decades ago. Consumers in the US and EU demonstrate their ethical buying practices by refusing to buy apparels made by sweatshops even if they are cheaper. But at present they buy apparels at prices fixed by the market forces. These prices incidentally are lower than the prices consumers would perhaps be willing to pay if the apparels were made by ethical producers. This implies that consumers enjoy an undefined amount of consumers' surpluses.

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One may examine the global supply chain from the manufacturers to the final consumers and determine who benefits most. Since we do not have data we cannot make any estimate. However, on the basis of media reports and also on a-priori reasoning, one may conclude that manufacturers in Bangladesh who are at the lowest end of the supply chain make lower profits than those made by marketing people or retailers at the highest end of the value chain. Finally, consumers enjoy the benefits of using cheaper clothing produced by badly exploited poor workers, whom the consumers want to help. Since consumers care for these poor workers, they should agree to share their wealth and income. As suggested by Lambert the retailers may pay the manufacturers higher prices for the merchandises they buy. The retailers can recover their loss from the consumers by charging higher prices. Since western consumers enjoy a certain amount of consumer surplus they may agree to pay higher prices if labour standards and working environment in Bangladesh RMG factories improve to the expected level. It is admitted that this is a value loaded proposition. So is the pronouncement of US consumers that they would not buy Bangladeshi garments if factory workers' rights are not fully respected, if workers' are treated inhumanly, etc. US Senator Menendez expressed similar sympathy for some four million poor workers who make apparels for millions of US citizens. According to him, the US has an obligation to help RMG workers in Bangladesh to improve their overall status. We admire his feeling for RMG workers of Bangladesh. I believe that full compliance with EU's Sustainability Compact and the US-sponsored Action Plan 2013 would encourage American and European consumers to pay higher prices for the benefit of workers. This will need a substantial change in the attitude of the US and EU consumers, brands, retailers and Bangladeshi garment makers. Now it is the obligation of the retailers and producers of apparels to negotiate and formulate policies for arriving at the legitimate amount, and methods of transferring the money from the consumers to the workers.
Full compliance to Action Plan 2013 and Sustainability Compact takes a long view of ensuring better quality of life for workers and will benefit Bangladesh most. Once full compliance becomes a reality, the RMG industry of Bangladesh will be at its best provided Menendez and Lambert can convince the consumers to pay ethical prices for RMG they buy from Bangladesh. The factory buildings will not only be safe places but also comfortable for workers to work in. Adequately paid and properly treated happy and healthy workers will work harder to increase managerial/operational efficiency and productivity. Under pressure from the industry, the Bangladesh government will assign highest priority to developing infrastructure, particularly the Dhaka-Chittagong four-lane highway and ensuring uninterrupted gas supply to the RMG industry. This will eventually reduce the cost of doing business in Bangladesh. Bangladesh has already established the largest apparel production capacity in the world with an unlimited reserve of a quickly trainable labour force. Consequently, Bangladesh will continue as the preferred destination for outsourcing by ethical brands/buyers. Although the process of complying with the Alliance and Accord initially appeared distressful, like swallowing bitter pills it should eventually prove to be good medicine for recovery and pave the way for the industry to rise to new heights. Bangladeshi entrepreneurs have already planned to increase RMG exports from the current USD 25.00 billion to USD 50.00 billion by 2021. Our experienced industry leaders will overcome the current challenges as they overcame similar challenges in the past, and prove that the GSP suspension, often dubbed as a wake-up call, is really a blessing in disguise.

The author is Professor Emeritus, BRAC University and Former Vice Chancellor, North South University.

Published: 12:00 am Tuesday, March 10, 2015

A new paradigm for global generic medicines By Mollick Mahmood Hossain

Bangladesh has all the potentials to become a new paradigm for global generic medicines. With a population of 156.66 million, the country's social development indicators are very promising. Bangladesh is enjoying a consistent GDP growth of more than 6 percent over the last 10 years. Commendable progress has been made in areas like annual GDP growth, per capita GDP, population growth, literacy rate etc. The country's balance of payment (export plus foreign remittance minus import) is consistently increasing. Renowned global investment analysts like JP Morgan, Goldman Sachs, Investors Chronicle have highly rated Bangladesh as an attractive investment destination. Outgoing US Ambassador to Bangladesh Dan W Mozena specially focused on the potential of pharmaceutical sector along with the RMG, leather, IT sectors. He said that the Bangladeshi pharmaceutical companies will have a huge market in the USA. Bangladeshi pharmaceutical companies are in the process of getting approval from the US-FDA.
Within two to three decades the Pharmaceutical sector has made a complete turnaround from an import dependent industry to almost self-sufficiency. There are about 270 licensed pharmaceutical manufacturers in the country of which over 198 companies are in operation. Domestic manufacture accounts for 97percent of the drug sales in the local market while the remaining three percent is imported. Pharma sector is now considered technologically the most developed manufacturing industrial sector in Bangladesh and the second highest contributor to the national exchequer. The local market is about USD 1.51 billion and is the largest white collar employment sector.
Pharma exports have risen to around USD 59.82 million in fiscal 2012-13 with CAGR of 25.5 percent for the last five years. There is a growing demand for Bangladeshi medicines in Southeast Asia, Asia Pacific and Africa. At present around 30 Bangladeshi pharmaceutical companies are exporting medicines to 90 countries in Europe, Asia, Africa and Latin America. Bangladeshi companies are now focusing on developed markets such as Europe, Australia, Latin America and the Gulf countries. Top companies have already started exporting to stringently regulated markets and are getting very good responses.
In the next couple of years, the Bangladesh pharma industry will grow stronger and play a major role in the global generic market which is now USD 300 Billion with a CAGR of 9.3 percent. Within 2017, there will be patent expiry of some blockbuster drugs and as a result the global generic market will be more than USD 400 billion. Around 80 percent of the world's population consumes generic products. Moreover, in many countries, new government provisions, changing demographics and the lifestyle will continue to increase the use of global generic medicines. India and China are the major players in the world generic market.
According to industry experts, most of the developed countries are looking for another dependable alternative source rather than India and China and this is where Bangladesh can strongly position itself as the most suitable and competitive candidate to capture substantial market share of global generic medicine. As a result, Bangladesh can emerge as a potential global generic player.
With this objective in mind, in the last couple of years, Bangladeshi pharmaceuticals companies made huge investments (more than USD 500 million) for facility expansion and product development. The country is now capable of producing high-tech biosimilar products such as erythropoietin, enoxaparin, insulin,  etc. and sterile products like LVP and SVP, prefilled syringe, freeze-dried products, MDI (Metered Dose Inhaler), hormone and steroid products in their state-of-the-art manufacturing facilities. The country has a large pool of highly-skilled human resource both at home and abroad who are capable to transform Bangladesh to a major global source of affordable generic medicines and vaccines. By this time, a good number of pharmaceutical companies have obtained certifications from the UK, the European Union, Australia, the Gulf countries and other regulatory authorities. Within a couple of years, more Bangladeshi companies will receive certification from these authorities. At present 3,600 Bangladeshi brands are already internationally registered and among them 100 are in regulated markets.
For contract manufacturing, merger and acquisition in respect to pharmaceutical formulations, Bangladesh is definitely an attractive destination. Bangladesh now has world class pharmaceutical production facilities along with low overhead and other related cost compared to other major cities like Shanghai, New Delhi and Seoul.  The details below show a clearer picture:

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There are still a few challenges ahead. API development capabilities and know-how is a must for being a competent global generic manufacturer. Bangladeshi companies are almost dependent on RM import from foreign countries, thus incurring higher cost of its production. The country also needs to develop own CROs like Bio-equivalence (BE) testing facilities both is the government and private sectors.
It is very encouraging that the Bangladesh government has declared the pharma industry as a thrust sector. It has allocated land for API park development and initiative has been taken for setting up a modern drug testing laboratory in association with the Bangladesh Association of Pharmaceutical Industry (BAPI). The present government is also serious about removing all bottle necks from pharma export.  So, with world class production facilities and international certifications coupled with cost and TRIPS agreement, the advantages are already there.

The writer is Managing Director, Novelta Bestway Pharmaceuticals Ltd.

Published: 12:00 am Tuesday, March 10, 2015