1.

INTRODUCTION
The Ready –Made Garments (RMG) sector of Bangladesh has emerged as the biggest
earner of foreign currency. The RMG sector has experienced an exponential growth since
the 1980s. The sector contributes significantly to the GDP. It also provides employment
to around 4.2 million Bangladeshis. An overwhelming number of workers in this sector
are women. This has affected the social status of many women coming from low income
families. Bangladesh-origin products met quality standards of customers in North
America and Western Europe, and prices were satisfactory. Business flourished right
from the start; many owners made back their entire capital investment within a year or
two and thereafter continued to realize great profits. Some 85 percent of Bangladeshi
production was sold to North American customers, and virtually overnight Bangladesh
became the sixth largest supplier to the North American market.

After foreign businesses began building a ready-made garment industry, Bangladeshi

capitalists appeared, and a veritable rush of them began to organize companies in Dhaka,
Chittagong, and smaller towns, where basic garments--men's and boys' cotton shirts,
women's and girls' blouses, shorts, and baby clothes--were cut and assembled, packed,
and shipped to customers overseas (mostly in the United States). With virtually no
government regulation, the number of firms proliferated; no definitive count was
available, but there were probably more than 400 firms by 1985, when the boom was
peaking.

After just a few years, the ready-made garment industry employed more than 200,000
people. According to some estimates, about 80 percent were women, which was never
noticed previously in the industrial work force. Many of them were woefully underpaid
and worked under harsh conditions. The net benefit to the Bangladeshi economy was
only a fraction of export receipts, since virtually all materials used in garment
manufacture were imported; practically all the value added in Bangladesh was from
labor.

1
2. RMG SECTOR IN BANGLADESH

The RMG industry cuts and stitches the finished product into apparel, which is then
marketed. Bangladesh entered the export market of apparels in 1978 with only 9
units and earned only $0.069 million. During the last two decades this sector has
achieved a phenomenal growth, due to policy support of the government and
dynamism of the private sector entrepreneurs. Now the number of RMG units is
around 4,000 and the export earnings have reached at $6.40 billion. For the moment,
2.0 million garment workers are working in the RMG units, of whom 80 per cent are
women. RMG roughly covers 76 per cent of the total export of the country and is the
highest earning industry in the economy. Study shows that the RMG sector and
related upstream and downstream activities are estimated to contribute an income of
about $ 5.0 billion which is equivalent to about 9.0 per cent of Bangladesh's current
GDP. RMG business started in the late 70s as a negligible non-traditional sector with
a narrow export base and by the year 1983 it emerged as a promising export earning
sector. Over the past one and half decade, RMG export earnings have increased by
more than 8 times with an exceptional growth rate of 16.5 percent per annum. In
FY06, earnings reached about 8 billion USD, which was only less than a billion USD
in FY91. Excepting FY02, the industry registered significant positive growth
throughout this period.

Figure: Trend of RMG Export Volume, Export Growth and Contribution to GDP

2
Source: Export Promotion Bureau (EPB) and Economic Trends, Bangladesh Bank
In terms of GDP, RMG’s contribution is highly remarkable; it reaches 13 percent of GDP
which was only about 3 percent in FY91. This is a clear indication of the industry’s
contribution to the overall economy. It also plays a pivotal role to promote the
development of other key sectors of the economy like banking, insurance, shipping, hotel,
tourism, road transportation, railway container services, etc. A 1999 study found the
industry supporting approximately USD 2.0 billion worth of economic activities
(Bhattacharya and Rahman), when the value of exports stood at a little over USD 4.0
billion. The sector has created jobs for about two million people of which 80 percent are
women who mostly come from rural areas. The sector opened up employment
opportunities for many more individuals through direct and indirect economic activities,
which eventually helps the country’s social development, woman empowerment and
poverty alleviation.

3. FACTOR ENDOWMENT
Factor conditions for Bangladeshi Clothing industry are skilled human resources and vast
labor force, government supports for textile and clothing technological upgrades, creation
of textile and clothing villages, special economic/export processing zones, duty reduction
for the import of inputs/machines, incentive for use of local inputs, income tax reduction,
and international supports like GSP, GSP+, duty free access etc.

3.1. Labor
RMG is a labor intensive industry. Since Bangladesh is a labor-abundant country, it is
logical for Bangladesh to demonstrate its comparative advantage in clothing. Because of
the abundance of labor, the labor cost of Bangladesh is also very low compared to the
other developing countries. The wages paid to RMG workers in Bangladesh are the

3
lowest even by the South Asian regional standard, which can be easily understand from
the following table-

But for gaining the comparative advantage, more than physical abundance, other things
like- availability of skilled labor, management skills, efficiency and productivity of
labour, education and training facilities are more important. In Bangladesh, the garment
workers are mostly women with little education and training. The employment of an
uneven number of unskilled labors by the garment factories results in low productivity
and comparatively more expensive apparels. Bangladesh labor productivity is known to
be lower when compared with that of Sri Lanka, South Korea and Hong Kong SAR.
Bangladesh must look for ways to improve the productivity of its labor force if it wants to
compete regionally if not globally.

3.2. CAPITAL

With the growth of RMG sector, Bangladeshi entrepreneurs also acquired the expertise of
mobilizing resources to export-oriented RMG industries. Foreign buyers found
Bangladesh an increasingly attractive sourcing place. To take advantage of this cheap
source, foreign buyers extended, in many cases, suppliers' credit under special
arrangements. In some cases, local banks provided part of the equity capital. The problem
of working capital was greatly solved with the introduction of back-to-back letter of

4
 credit, which also facilitated import of quality fabric, the basic raw material of the
industry.
The investment pattern that took place between 2000 to 2004 has a varying trend.
Investment volume didn’t correspond with how many factories were established. The
amount of capital investment in RMG sector from 200 to 2004 is shown in the following
table-

Capital Investment in the RMG Sector

Calendar Year Basis

Value in Crore
Taka
Total Sweate Woven
New Total Woven Knit r Knit
Year Factory Investment Factory Invest. Fact. Invest. Factory Invest. Fact. Invest.
200 187.5
0 234 351.20 125 0 52 31.20 32 80.00 25 52.50
200 148.5
1 225 327.80 99 0 67 40.20 38 95.00 21 44.10
200 157.5
2 152 270.30 46 69.00 31 18.60 63 0 12 25.20
200 250.0
3 172 328.60 36 54.00 34 20.40 100 0 2 4.20
200 237.5
4 201 373.10 60 90.00 34 20.40 95 0 12 25.20
Source: BGMEA new membership file. Calendar Year Basis

From the above table we can observe that there has been a huge fluctuation in the amount
of investment. The fluctuation of capital investment cannot be explained by reason of the
post-MFA factor only. Although it may be a reason it is not the only reason. The relative
prospect of other sectors or the increased capital cost may also account for the variation.
Moreover, the RMG sector has been witnessing a declining trend since early 2007 when
an army-backed caretaker government took over the power. Many businessmen were in
hide at that time. When an elected government assumed the power in 2009, the energy

5
crisis came to the front as a major barrier to the growth of the sector. Still, gas and
electricity connection is kept off.

However After a prolonged slowdown in demand, import of capital machinery and

industrial raw materials has bounced back strongly in the fiscal year 2011, reflecting a
bright prospect for the country’s RMG sector.
A jump in export orders for readymade garments (RMG) and the demand for equipment
to set up power plants have fuelled the import splurge, according to bankers and
industrialists.

Bangladesh Bank statistics show the letters of credit (LCs) settled for capital machinery
import were worth $975 million during the first half of the fiscal year 2010, up by 35
percent from $722 million for the same period a year ago.

3.3. RAW MATERIALS

The RMG industries in Bangladesh mostly depend on imported raw materials.

Bangladesh imports raw materials for garments like cotton, thread colour, Yarn, fibre,
etc. This dependence on raw materials hampers the development of garments industry.
Moreover, foreign suppliers often supply low quality materials, which result in low
quality products. A large proportion of the raw materials for RMG are imported from
countries such as India, China, America, Uzbekistan and Thailand under back-to-back
letter of credit facility. It is an advantage for RMG sector of BD. Depending on the
buyer’s requirement Bangladesh can import raw materials from best sources. About 70%
knit raw materials are produced in Bangladesh. About 90% of woven fabrics and 60% of
knit fabrics are imported to make garments for export.

6
The fabric requirement in the RMG sector for year 1999-2000 is shown in the following
table-

FABRIC REQUIREMENT IN THE RMG SECTOR OF BANGLADESH

(IN MILLION METRES)
WOVEN FABRIC KNIT FABRIC
Year Requirement Local Imported %Of Requirement Local Imported % Of
(In Million Production (Short Short (In Million Production (Short Short
Fall) Fall)
Metre) (In (In Fall Metre) (In (In Fall)
Million Million Million Million
Metre) Metre) Metre) Metre)
1999 1234 197 1037 84 815 432 383 47
-
2000
2000 1317 237 1080 82 943 566 377 40
-
2001
2001 1386 277 1109 80 1140 775 365 32
-
2002

Source: Report of Gherzi Textile Organisation (GTO), Zurich, Switzerland

And Project Promotion & Management Associates (PPMA), Dhaka

The industry is based primarily on sub-contracting, under which Bangladeshi

entrepreneurs work as sub-contractors of foreign buyers. It has grown by responding to
orders placed by foreign buyers on C-M (Cut and Make) basis. During its early years, the
buyers supplied all the fabrics and accessories or recommended the sources of supply
from which Bangladeshi sub-contractors were required to import the fabrics. However,
situation has improved. At present, there are many large firms, which do their own
sourcing. About 70% knit raw materials are produced in Bangladesh

• Key Success Factors for the Industry

7
Labor costs
Prices
Quality
Delivery time
Long business relationship with key buyers
Energy Cost
New textile mills in Bangladesh are cost competitive compared to imports from Korean
and Indian spinning mills. Given the choice, domestic weavers and spinners prefer to use
locally produced yarn as prices are slightly lower and since there is no involvement of
shipping costs and delivery is more reliable.

3.4. TECHNOLOGY

Bangladesh was ranked 15th in the potential countries for investors and businessmen in
2010, but it was 28th in 2009. The country has recently been identified as one of the
world's top 30 emerging nations in IT services and because of this advancement of IT
sector our RMG sectors are becoming more competitive.

With cheap labor, Bangladesh RMG industries are continuously using some technical
machinery to make more apparel within short period of time. For example, the machinery
cuts the clothes of same size at a time. Labeling also takes a few touches of people. This
system saves time and promotes the timely delivery. As a result, BD’s export quality
increases.

The year 2005 showed two major trends in the world market for textile machineries:
firstly, a jump in shipments of circular-knitting machinery, mainly driven by shipments to
Asia in general, and to China in particular, secondly, significant reductions of
investments in such areas as weaving, texturing and flat-knitting machinery. In the
spinning sector the picture was mixed. While the shipments of short staple spindles rose,
those of long staple spindles and rotors declined. With the yearly global shipment of

8
short-staple spindles in 2005 totaling around 11.2 million units (an increase of 7%
compared to 2004), China alone was the biggest investor in this sector (around 7.2million
short-staple spindles) followed by India (1.4 million), Pakistan (1 million) and
Bangladesh (0.54 million). In case of shuttle-less looms, the major market destination in
2005 was China – 61% (32633 shuttle-less looms) of the global shipment went to China –
compared to a mere 7% (3900 units) imported by Bangladesh.

3.5. INFRASTRUCTURE

The most urgent and important task for the Bangladesh RMG industry is shortening the
lead time; otherwise, international buyers may divert their attention towards other
suppliers for the importation of garment products in the current quota-free business
environment. The best option for Bangladesh is to improve its deep-level competitiveness
by reducing total “production and distribution” time, which will improve surface-level
competitiveness by reducing lead time.

Some factors constraining competitiveness of Bangladesh’s RMG exports included the

absence of adequate physical infrastructure and utilities (e.g., transportation,
telecommunication, stable power supply, efficient seaport, political tolerance, quality
control and a smoothly functioning bureaucracy). According to a recent World Bank-IFC
publication (2006) records that a businessman in Bangladesh needs 35 days to export and
incurs USD 902 per container, whereas his counterpart in India requires 27 days and
spends USD 864 per container. The comparable figures for Pakistan, Sri Lanka and
Vietnam are 24 days and USD 996, 25 days and USD 797, and 35 days and USD 701,
respectively.

The existence of sound infrastructural facilities is a prerequisite for economic

development. In Bangladesh, continuing growth of the RMG sector is dependent on the
development of a strong backward linkage in order to reduce the lead time. The issue of
lead time is one of the major factors that determine competitive edge. Whilst the average
lead time for a woven item ranges between 90-120 days for Bangladesh, for China it

9
ranges between 45-60 days. Following Table shows us the average lead time of woven
and knit items of some of the major clothing competitors of Bangladesh.
(Average No. of Days)

TABLE: AVERAGE LEAD TIME OF KNIT AND WOVEN GARMENTS OF SOME

SELECTED COUNTRIES

This long lead time in Bangladesh is mainly due to the absence of a strong integrated
backward industry. In recent years development of spinning sector has contributed
significantly to the development of an integrated knitwear industry, in Bangladesh with
about 90% fabrics being supplied by domestic spinning and weaving sector. However, in
the weaving sector only about 25-30% of the need of the export-oriented apparels sector
is supplied by domestic suppliers. Indeed, it is the strong backward linkage that gives
China her comparative advantage in apparels production and export. Putting in place a
competitive upstream industries in spinning/weaving continue to remain a major
challenge for Bangladesh.

It has been estimated that this lead time can be reduced to 55 – 75 days if the fabrics
could be sourced locally. Bangladesh’s geographical location also does not help. First,
the raw material (yarn/fabrics) carrying vessels from China or other countries reach the
Chittagong port via Malaysia or Singapore (25 – 30 days). From the port it takes another
week to reach the factory mainly because of the bureaucratic customs procedure. Once
the product is ready for export it takes another few days to deliver to the port and
complete the customs procedure. Once everything is done, the consignments are then

10
shipped to Singapore or Malaysia to be loaded in the mother vessels for the journey to
either Europe or North America (another 28 – 30 days) (Following Figure).

FIGURE: OPTIMAL LEAD TIME FOR WOVEN ITEMS (RECEIVING OF LC TO

DELIVERY TO FINAL DESTINATION)

In order to reduce the lead time the option of establishing Central Bonded Warehouse
(CBW) for certain items (with careful examination of interest of local industries) should
be considered with due urgency. Similarly, SAARC Cumulation which is hanging in the
air for a long time needs also be addressed on an urgent basis. Simultaneously, there is a
need for complete overhauling and upgrading of facilities in the Chittagong port.
Improvements in infrastructural and transport logistics and streamlining of the import
policy by removing cumbersome procedures are a necessity. Substantial upgradation of
the national electricity grid is a must for uninterrupted supply of power; at present this is
available only to the EPZ which contributes about 15% of the country’s total RMG
export.
However, other factors constraining competitiveness of Bangladesh’s RMG exports
included the absence of adequate physical infrastructure and utilities (e.g., transportation,
telecommunication, stable power supply, efficient seaport, political tolerance, quality
control and a smoothly functioning bureaucracy).

11
4. LOCAL DEMAND CONDITION
In 1971, the eastern part of Pakistan became the sovereign state of Bangladesh. At that
time, Bangladesh had only a few composite cotton mills situated at Narayanganj and
Chittagong, but their productions were very negligible compared to huge demands of the
local market.

In 1980, Readymade Garment (RMG) factories began to flourish and became the highest
foreign currency earning sector of Bangladesh, maintaining a vital role in Bangladesh’s
economy. Wanting to compete in the world market, the Bangladesh government and
business segments invested in and developed backward linkage industries to feed the
RMG sectors. Considering the population, the local market required at least 200 million
meters of fabrics, of which only about 100 million meters of fabrics were produced in
Bangladesh. Since then, the local business communities have been setting up mills
rapidly. In 2005, the total number of spindles rose to about 5 million, producing more
than 700 million kilograms of yarn per year.The spinning mills continue to increase
tremendously to meet the requirement of the RMG sector and the hand- and power-loom
sectors, which have been increasing rapidly around the area of Narsingdi, Tangail,
Sirajganj, Kustia, Barisal and Faridpur. These places have become famous for producing
domestic consuming products like shawls, sarees, lungis, bed sheets and gamchha (local
towel). These hand- and power-loom sectors are producing more than 100 million meters
of cloth annually. Under the Rural Electrification Program by “Palli Biddut Sangstha,”
the hand-looms are being gradually converted to power-looms and thus production
capacity is increasing rapidly to meet the demands of population growth.

Apart from increasing power-looms, the RMG and knitting sectors are also developing
rapidly in Bangladesh. The volume of knitting industries increased about 10 times faster
than the pre-liberation period, and it is continuing to grow simultaneously with the
demand of RMG sector. Currently, there are about 2,500 knitting units, producing about
1,500 million meters of fabrics per year. Accordingly, consumption of yarn by the
knitting sector is also increasing rapidly which ultimately encourages entrepreneurs to set
up new spinning mills quickly to meet the huge demand.

12
Besides this sector, the yarns of local spinning mills are also used in many weaving
factories, which produce about 700 million meter fabrics per year. These fabrics are
mainly used in the domestic market, but some of their special quality fabrics which are
made per specific order are used by the garments factories, especially when some
garments buyers place an order without supplying fabrics from abroad. Contribution of
textile sectors to the GDP is more than 5%. This sector is alone accounted for 76% of
national export earning in 2003/04. For all these reasons, the textile sector has been
declared by the government as the Thrust Sector for the country’s economy. The table
below outlines the structure of the Bangladesh textile industry.

5. RELATED AND SUPPORTING INDUSTRIES

RMG industry in Bangladesh has already proved itself to be a resilient industry and can
be a catalyst for further industrialization in the country. However, this vital industry still
depends heavily on imported fabrics. After the liberalization of the quota regime some of
the major textile suppliers Thailand, India, China, Hong Kong, Indonesia and Taiwan
increased their own RMG exports. Currently, Bangladeshi apparel exporters import
fabrics at international prices using back-to-back letter of credit. While procuring through
back-to-back L/C, the importers (Bangladeshi exporters of apparels) pay high interest and
other charges, commissions, fees for the services of the middlemen involved. The
establishment of composite mills or individual units of weaving, spinning and processing
will reduce lead time and increase value addition and employment, in addition to
improving the cost advantages.
Figure 2: Trend of Back-to-Back Import

Source: Foreign Exchange Policy Department (FEPD), Bangladesh Bank

13
Bangladesh export-oriented Readymade Garments (RMG) Manufacturing and Primary
Textile (PT) sector with back up support of the Accessory (trimming & packaging)
industries, contribute 76 percent to total export-earnings of the country. So we can
demand a separate ministry for RMG (Apparel) industry here in Bangladesh. Supporting
industries supply inputs raw materials, which are important to the competitiveness of any
industry. Bangladesh is self-sufficient in knit fabric while accessories and trims suppliers
are more competitive to support the clothing industry. These industries provide cost-
effective inputs and upgrading process, thus stimulating other companies in the chain to
innovate.

With the growth of RMG industry, linkage industries supplying fabrics, yarns,
accessories, packaging materials, etc. have also expanded. The following chart shows the
additional service sectors where employment is increasing-

. INDIRECT
EMPLOYMENT
CREATED BY
RMG INDUSTRY
(200,000
WORKERS)

SHIPPING &
TRANSPORTATION BANKING INSURANCE

Moreover with the growth of RMG packaging industry is also flourishing in Bangladesh.
A USA-Turkey company is going to invest US$ 5.548 million to set up a garments
accessories manufacturing industry in the Adamjee Export Processing Zone, reports
UNB. Hundred per cent foreign owned company, r-Pac Bangladesh Packaging Co Ltd,
will produce barcode, price ticket, care labels, woven labels, integrated labels, offset
labels, hang tag, security labels etc. An agreement, to this effect, was signed between the

14
Bangladesh Export Processing Zones Authority (BEPZA) and the r-Pac Bangladesh
Packaging Co Ltd at BEPZA Complex on 19th of September, 2007

6. STRATEGY, STRUCTURE AND RIVALRY OF

RMG SECTOR IN BANGLADESH

The quota regime under the MFA was a crucial factor in providing the initial stimuli to
the emergence of the e-o RMG sector in Bangladesh and in sustaining its subsequent
momentum over the last decade and half. The RMG record also does credit to
Bangladeshi entrepreneurs who quickly learnt the art of the business from their quota-
hopping partners from South Korea and Hong Kong. Current e-o RMG production is
overwhelmingly a Bangladeshi-private sector dominated activity. Domestic policies
including bonded warehouse facilities, duty drawback incentive, cash compensation
scheme, and the facility of procuring raw materials -- mainly fabrics -- under back-to-
back Letters of Credit (L/Cs) also played an important role in the growth of the sector.
Thus a combination of global opportunities, private sector entrepreneurial spirit and
favorable government policies had combined to stimulate the emergence and thriving of
the e-o apparels sector in Bangladesh.

15
6.1. SUPPORTING FACTORS

In the course of the last decade, the growth of domestic supply capacities was
instrumental in attracting major global buyers to Bangladesh who saw locational
advantage in placing bulk orders for mass-produced apparels items. This helped
Bangladesh emerge as a major player in the global apparels market. In 2003 Bangladesh's
position as supplier of apparels was tenth in the U.S. market, and second in the EU
market. Preferential market access in the EU under the EC Generalized System of
Preferences (GSP) Scheme, which accorded Bangladesh -- as a Least Developed Country
(LDC) -- zero-tariff and quota-free access, also provided Bangladeshi exporters of
apparels crucial market access advantage. There was a relatively secured market access in
the USA under the MFA quota regime, and duty-free, quota-free market access in the EU
(while quotas were imposed on most of its competitors from developing countries). These
provided Bangladesh an opportunity to translate its low wage-based comparative
advantage in the production of apparels into revealed comparative advantage in the global
market.

6.2. EXPORT PERFORMANCE

Bangladesh's export of apparels rose from US$ 2.23 billion in FY1995 to US$ 5.69
billion in FY2004, registering an average robust growth of 10.2 per cent per annum. In
FY2004, out of a total export of US$ 7.60 billion, US$ 5.67 billion or 74.8 per cent was
contributed by the country's apparels sector (46.5 per cent from woven and 28.3 per cent
from knitwear sub-sectors). In recent years, about 90 per cent of incremental export has
been accounted for by export of apparels. The ratio between knitwear and woven apparels
in total apparels export from Bangladesh changed from 18:82 in FY1995 to 38:62 in
FY2004, underwritten by an increasingly strong market presence of knitwear in the
European market; thanks to strong backward linkage in the knitwear sector, and
preferential market access in the EU. Local value retention is also higher in the knitwear

16
sector, about 60 per cent, compared to an average of 30 per cent for the woven sector.
Together the net export earnings from apparels would be about US$ 3.0 billon.

6.3. GROWING IMPORTANCE

The RMG sector's contribution to Bangladesh's balance of payments and foreign

exchange reserves cannot be exaggerated. Bangladesh's RMG sector employs about 1.8
million workers in 3600 factories, which is about one-fourth of the number of employees
engaged in the manufacturing sector. About 70 per cent of the workers in the RMG
factories are women. A study undertaken by the Centre for Policy Dialogue (CPD),
Dhaka, shows that the e-o RMG sector and related upstream and downstream activities
are estimated to contribute an income of about US$ 5.0 billion; this was equivalent to
about 9 per cent of Bangladesh's current GDP. Comparatively, over the same period
Bangladesh's net disbursement of aid was to the tune of only about US$ 800 million.
Hence, it is not difficult to understand why a scrutiny of the possible implications of the
impending change in the global apparels trade regime in the context of the phase out of
the MFA is of such critical importance to Bangladesh.

6.4. Multifiber Arrangement (MFA)

The MFA allows importing countries (mainly high income economies) to negotiate
quotas (quantitative restriction) with exporting countries (mainly emerging economies).
In addition to quotas, high income countries can also place tariffs (taxes) on imported
products like textile and clothing. As an emerging country, Bangladesh has already been
depended on textile and clothing for over half their merchandise export. So, the MFA is
important for Bangladesh to achieve competitive strength in the world market.

17
6.4. 1. Post-MFA Scenario

Looming Uncertainty

It is to be noted in this context that if the phase-out under the MFA had been evenly
distributed, its possible implications would have been relatively clearer by now.
However, because the quotas are back-loaded, most of the apparel categories presently
under MFA quota were derestricted only at the last stage of the phase-out i.e., January 01,
2005. Consequently, for countries such as Bangladesh, for most of the quota categories
exported by it at present, the de-restriction has begun only recently. In the EU, where
Bangladesh has enjoyed quota-free market access, for most of these same categories of
apparels, quotas will remain for its non-LDC competitors. Accordingly, in case of
Bangladesh, as for many other countries, the thrust of the impact of MFA quota de-
restriction was felt all at once, in January 2005. This is one of the major reasons behind
the looming uncertainty in the context of the post-MFA global trading regime in apparels.

Global Apparels Market

The challenge of facing the MFA phase-out is being reinforced by a number of other
important developments in the global apparels market. These are likely to amplify the
challenges of quota de-restriction for countries such as Bangladesh. China's accession to
the WTO in November 2001, which allowed it to export apparels to the U.S., EU and
other markets on Most Favored Nation (MFN) basis, will have a major impact on global
trade in apparels. This is particularly important for Bangladesh since China exports many
apparels items in which Bangladesh has traditionally enjoyed strong market presence in
the USA and the EU. New entrants to the global apparels market such as Vietnam,
Cambodia and Lesotho are also expected to pose a formidable challenge to Bangladesh in
some of its traditional markets of mass produced apparels. The global trading regime in
apparels is also changing very significantly: fashion seasons are becoming shorter and
buyers are no longer ready to wait for 90-120 days after placing export orders. In the
post-MFA period, ability to shorten the lead-time is likely to become crucial for being
considered as a possible source by buyers. At present Bangladesh has a strong backward

18
linkage in knit-segment of the e-o RMG sector, with 80 per cent of the knit-fabrics being
sourced from local knitting units. However, in case of woven-segment, only 15 per cent
of the fabrics required by the RMG industry can be met from local sources, with the rest
(85 per cent) being imported from countries such as India, Pakistan, Hong Kong and
Taiwan. A relatively longer lead-time is becoming an important constraining factor for
Bangladesh in the context of quota phase-out since buyers will be free to import apparels
from fabric-producing countries capable of supplying export orders on short notice.
China, Pakistan and India are likely to take advantage of this situation.

The average price of apparels items is likely to fall considerably once the quota premium
goes following quota-derestriction. Competitive pressure will lead to erosion of quota-
premium and push prices down; the signs are already there in the global market.
Consequently, Bangladeshi exporters will be forced to reduce their offer prices for
apparel items.A number of recent market access initiatives have provided preferential
market access to many of Bangladesh's competitors, particularly in the U.S. market where
Bangladesh does not enjoy duty-free access. Such initiatives include regional trading
alliances such as NAFTA, bilateral FTAs and other preferential arrangements such as
US-Vietnam trade agreement and, more particularly, non-reciprocal regional initiatives
such as the AGOA, and the CBI. Mauritius and the Lesotho, which produce some mass
produced items similar to Bangladesh's, have been able to take advantage of the
preferential treatment under the AGOA, particularly due to the derogation in terms of the
Rules of Origin (RoO).

Further lowering of the MFN tariffs under the ongoing negotiations on non-agricultural
market access (NAMA) is likely to lead to a gradual erosion of the preferences margin
accrued to countries such as Bangladesh under the various GSP schemes.

Because of e-commerce and introduction of IT in the apparels trade, the buyer-customer

relationships and the nature of apparels business are undergoing important changes. In all
likelihood the role of buying-houses, which have traditionally been a crucial part in
apparels business in Bangladesh will be significantly diminished. In future apparels trade
retailer-producer direct contact will be the norm of the day. As a result, producers will be

19
expected to take more responsibility in terms of design and quality of the apparels
products. Bangladesh's current buying-house intermediated apparels trade will also need
to take into account this evolving buyer-producer relationship. Consequently, the role of
forward linkage and direct marketing channels is also becoming very important for
Bangladesh's competitive presence in the global market.

Pressure on RMG units to comply with various standards, including environmental

standards, security concerns of importing countries, Social Accounting standards such as
SA-8000, are also expected to increase significantly. While these are likely to push up the
cost of production, their non-compliance will mean that buyers will be reluctant to place
orders with those factories. Thus, compliance issues are likely to become important for
Bangladesh's e-o RMG units, and this is likely to increase the cost of doing business in
apparels.

The upshot of the above discussion is that there are other important factors at play, along
with quota-derestriction. The impact of all these factors will come into play from the
beginning of 2005, and gradually unfold over the subsequent months and years.

6.4.2. MFA Phase-Out: The Emerging Scenario

Early Signals and Major Competitors

The major impact of MFA phase-out will be felt after the final phase-out in January 2005
and it is too early to make an assessment. However, the early signals stemming from the
first three phase-outs are already becoming visible; and these signals are quite disquieting
for Bangladesh. Bangladesh's export of apparels to the U.S. market has come down from
US$ 1956 million to US$ 1629 million between FY2002 and FY2004. This drop down
has also taken place in categories which have not been derestricted, substantiating the
argument that, in the new trading regime in apparels, factors other than quota
derestriction are also at play, including China's enhanced entry into the U.S. market,
following quota derestriction. A recent study by the American Textile Manufacturing

20
Institute (ATMI) shows that China's shipments of apparels categories that were removed
from quota control has increased by an average of 794 per cent (in volume terms) since

2001. China's share in U.S. import of quota-derestricted items has gone up from 9 per
cent to 65 per cent (as of March, 2005). The corresponding share for Bangladesh has also
come down from 7 per cent to 2 per cent. An ongoing study at CPD, which examines the
impact of the MFA phase-out under the first three stages, provides an indication of the
challenges for Bangladesh's apparels industry. In the third stage of the phase-out, in
January 2002, out of the 31 quota categories for which there were quotas on Bangladesh's
exports to the US market one quota category was derestricted i.e. category 847 (trousers,
breeches and shorts). Bangladesh's export of this category fell from US $22.81 million in
2001 to $16.04 million in 2002 and to US$ 14.92 million in 2003 (by 29.7 per cent and
34.6 per cent respectively). China's export of this same category went up from $89.9
million to $559.9 million between 2001 and 2003. In 2001, prior to the third stage of the
phase-out, Bangladesh had exported US$ 354.29 million worth of apparels to the US
market in all categories which were integrated in the first three phases. In 2002 and 2003
export of these derestricted items fell to US$ 263.27 million and US $214.30 million (a
decrease of 25.7 per cent and 39.5 per cent compared to 2001).

In view of the above, it is significant to note that China's export of category 239 (babies
garments), which was derestricted in January 2002 (Bangladesh did not have any quota
for this item), went up from US$ 120.70 million to US$ 867.33 million between 2001 and
2003 (an increase by 618.6 per cent). Bangladesh's exports of this item came down from
US$ 96.82 million to US$ 66.48 million over the corresponding period (a decrease of
31.3 per cent). Similarly, in the case of another item, category 350/650 (robes, dressing
gowns), China's exports rose exponentially from US$ 33.68 million to US $199.31
million (an increase of 491.9 per cent), while Bangladesh's exports came down from
US$16.34 million to US $11.51 million (a decrease of 29.6 per cent). Thus, the China
factor is becoming a critical variable, and its importance as a major apparel exporter is
likely to increase manifold in the post-MFA period.

21
BANGLADESH'S RELATIVE STRENGTHS

Low wages have traditionally been a major strength of Bangladesh's labour-intensive

apparels sector. The hourly wage rate in Bangladesh's apparels sector is lower than those
in China and Sri Lanka (US$ 0.39 as compared to US$ 0.69 and US$ 0.48 respectively);
however, wage rate of other competitors such as Pakistan and India are somewhat similar
to Bangladesh's, being US$ 0.41 and US$ 0.38 respectively (USITC, 2004). As data
shows, between 1997 and 2004 average price of Bangladesh's Knit-RMG has come down
from US$ 27.72 per dozen to US$ 23.45 per dozen, a fall of 15.4 per cent; for Woven
RMG average price has come down from US$ 41.87 to US$ 39.1, a fall of 6.6 per cent.
In recent years, the growth in export earnings from apparels sector has been possible by
expansion of export volume: volume-wise export of apparels has increased from 53.45
million dozens to 90.49 million dozens for woven RMG, and from 27.54 million dozens
to 91.60 million dozens for knit-RMG between 1997 and 2004. Bangladesh's strength has
traditionally been the capacity to supply mass produced apparels items such as T-shirts,
basic cotton shirts, pullovers and jackets, sweaters, and basic women's wear. Falling
prices under competitive pressure indicate that if Bangladesh is to sustain its market
presence, it will need to substantially enhance productivity. It is unlikely that producers
will be able to squeeze wages further. In this context, the government should support
recent initiatives by some of Bangladesh's exporters to move up market to more value
added products. A Fashion and Design Institute has been established to support the e-o
apparels sector. The capacity of this institute and its linkage with the RMG industry need
to be strengthened further.

Performance in the EU

Bangladesh's export to the EU has continued to rise sharply in recent years, notably after
quota derestriction in the third stage in January 2002. Between FY2002 and FY2004
export to the EU has increased from US$ 2411.5 million to $3652 million (or by about 51
per cent). This growth was underwritten both by the growth of knitwear export to the EU

22
which increased from US$ 1019.7 million in FY2002 to US$ 1780.6 million in FY2004,
and woven apparels which registered a growth from US$ 1391.8 million to US$ 1871.2
million over the corresponding period. However, there is cause for concern in the EU
market as well. Bangladesh's export of items for which quota was derestricted in the EU
under the first three stages of MFA phase-out has indeed come down quite significantly
since 2002. As CPD analysis bears out, Bangladesh's export to the EU, in the 17 quota
categories which have been derestricted till now, has come down from US$ 204.2 million
to US$ 124.3 million between 2001 and 2003, or by about 40 per cent. This ought to be
of much concern to Bangladesh.

6.4.3. Strategies for Post-MFA Era

Need for Investment

Bangladesh will need to take energetic steps to address the emerging challenges from the
market place. There is an increasing sign of defensive restructuring within the
Bangladesh's RMG sector. Data on import of textile and RMG machineries indicate that
the larger apparel units are positioning themselves to access the opportunities emerging
from a quota-free trade regime in apparels. However, the smaller factories, many of
which have been working on a sub-contract basis until now, may not be able to survive
under the new environment. This may lead to a situation where a smaller number of well-
organized, technology-driven factories, benefiting from economies of scale, compliance
assurance capacity and competitive strength, may come to dominate the country's
apparels sector. This may lead to the exit of a large number of smaller firms, meaning
large-scale lay-offs. Thus, while the overall export of apparels may not decrease
significantly, at least in the near future, there may be disproportionately large-scale lay-
offs. In view of such an outcome, some stakeholders have put forward the proposal of a
Contingency Fund to be created with support from the government and entrepreneurs'
association. This fund could be utilized for such activities as skill up gradation to enhance
productivity, re-skill of workers to enable them to search for alternative income
generating opportunities, and for providing credit facilities to redundant workers.

23
Consequently, establishment of strong backward linkage in spinning and weaving will
assume critical importance for Bangladesh.

A CPD study shows that an investment of about US $5.0 billion will be required to put in
place the required backward linkage industries: US $2.8 billion in spinning, US$ 1.2
billion in weaving and US$ 1.0 billion in dyeing finishing. A report on 'Post-MFA
Development Strategy and Technical Assistance for the RMG Sector', prepared by
Gherzi Textil Organisation, Switzerland, for the Ministry of Commerce (MOC),
Bangladesh has come out with the proposal that to meet the challenges after 2004, it will
need to set up 45 Spinning mills, 82 Weaving mills, 81 Knitting and Knit Processing
mills, and 51 Woven Processing mills. This will require an investment of US$ 2.3 billion.

Strengthening backward linkage in textiles is crucial for Bangladesh in meeting the

challenge of post-MFA regime. This is important not only to enhance the competitive
strength of Bangladesh but also to reduce the lead-time. There are already signs of
ongoing technological up gradation in Bangladesh's apparels industry. Over the past five
years (FY2000-FY2004) about $800.0 million worth of machineries have been imported
for e-o apparels and textile sectors of the country. However, technological up gradation is
mainly concentrated in the so-called 'smart factories' which refer to the relatively and
technologically larger and more advanced ones. There is a need for a comprehensive
strategy to strengthen both backward linkage in apparels, and the state of technology in
the apparels sector itself. Experts have suggested that the GOB should set up a
Technology Up gradation Fund for the apparels/textile sectors to help promote adoption
of new technology, facilitate process and product modification, support upward
movement along the value chain, provide credit at favourable rates and encourage other
productivity enhancing initiatives. China has been able to bring down price of apparels by
about 44 per cent from US$ 6.23 per square metre to US$ 3.37 per square metre once
quotas on apparels were removed in 2002. It will not be easy for Bangladesh to sustain
such downward pressure on prices without significantly raising the productivity in the
country's apparels sector.

Backward and Forward Linkages

24
Global trade in apparels has traditionally functioned under buyer-driven supply chains.
However, there are growing signs that, while under the quota regime it was global buyers
who had come to Bangladesh's producers, under a quota-free regime Bangladeshi
producers will be required to go to the global buyers. Efficient marketing channels and
direct contacts with buyers are likely to become crucial factors of market presence in a
post-MFA world. Of no less importance will be the issue of substantially bringing down
the lead-time. The days of 90 days lead-time will be over. Serious effort must be made to
further strengthen backward linkages for producing fabrics, particularly for providing
inputs to the export-oriented woven-RMG sector. At the same time, to reduce the lead-
time setting up of central bonded warehouses, to begin with for fabrics that are not
produced in Bangladesh, will need to be given serious consideration. Efficient
infrastructure services and port facilities, reduced administrative hassles and a conducive
investment environment will be necessary to bring down the cost of doing business in
Bangladesh. Development of land ports with regional countries, and Bangladesh's
seaports, where the average turnaround period is 5-6 days compared to 1-2 days in other
ports in the region, must be given top priority if the lead-time is to be effectively reduced.
Preferential margins under the various GSP schemes are set to suffer erosion as partner
countries bring down their tariffs. In view of this, there should be renewed effort towards
global zero-tariff access under LDC-friendly rules of origin (RoO).

GOB initiatives

The Post-MFA Implementation Team set up by the Government of Bangladesh has

identified six core areas for training and skills up gradation: (i) Productivity
Management, (ii) Quality Management, (iii) Compliance Norms, (iv) Merchandising, (v)
Marketing, and (vi) Inventory Management. GOB estimates show that these activities
will require an amount equivalent to $40.0 million. However, till now availability of
funds for these activities has been very low. There is an urgent need to mobilize domestic
resources and trade-related technical assistance (TRTA) from development partners in
support of these programs. The government has recently taken a number of steps to
address the concerns of the e-o RMG industry of the country. These include reduced
number of steps in terms of customs clearance from 56 to 12, has revised schedule of

25
down payment for repayment of loan by RMG entrepreneurs and has eliminated tax on
electively for the sector.

More Focus on Winning Items

Analysis carried out at CPD to assess the export performance of categories, which have
been derestricted under the first, second and third phase-outs of the MFA mandated under
the ATC shows that even at the 10-digit level there are apparel items where Bangladesh
continues to enjoy revealed comparative advantage in the global market. Bangladesh has
been able to expand its exports of a number of such items after these were derestricted.
For example, of the 46 quota categories derestricted in the second phase, Bangladesh
exported apparels items in 26 categories. Under these quota categories, 112 apparel items
at 10-digit level were exported by Bangladesh. Total earnings from exports of these items
have risen from $86.4 million to $94.4 million between 1998 and 2002, with a number of
items being able to make significant gains. Once imports of such items are derestricted,
can expand export in these apparel items. Analysis of unit price levels bears evidence of
Bangladesh's competitive strength in some major categories, primarily in such items as
mass-produced shirts, men's wear, jackets, sweaters, etc. This competitive strength should
allow Bangladeshi exporters of these particular items to expand their export. There is no
place for complacency though. The present upsurge of export in some items, more
precisely knitwear items, and more particularly, in the European Union, bears this out. It
should be noted here that quotas are still in place on most of the categories where
Bangladesh is demonstrating strong growth in the EU and Bangladesh's exporters taking
advantage of the quota-free access to the EU market. Analysis shows that there are a
number of apparel items where it will be extremely difficult to sustain the competitive
pressure from suppliers in China, India, Vietnam, Mauritius, Turkey and some of the
Caribbean countries once the quotas are gone.

China as the Contender

It is true that under China's WTO accession provisions, the U.S. may take recourse to
safeguard measures against the surge of imports of apparels from China if this growth is

26
perceived to have caused disruption and serious material injury to its domestic producers.
Safeguard measures allow putting cap of 7 per cent on growth of import from China and
will be in place till 2008; USA has already applied such measures selectively on export of
a number of apparel items by China. There are special product specific safeguard
measures, which the U.S. may continue to practice till 2012, albeit subject to more
stringent provisions. However, despite some safeguards already in place, and the threat of
new safeguards, China is likely to dominate the emerging global apparels trade scenario.
Market analyses indicate that for Bangladesh, China will be the country to watch out. In a
number of apparels categories India, Vietnam, Turkey, Cambodia and other countries will
be Bangladesh's major competitors.

Defensive Restructuring

It is encouraging to note that within the country the early signs of defensive restructuring
in the apparels sector are already becoming visible. The so-called smart factories have
started to re-strategies and reposition themselves in preparation for the inevitable changes
consequent to the quota phase-out. A number of factories are moving out of the Dhaka
city where most of the factories have traditionally been located; entrepreneurs are
consolidating production to ensure economies of scale; some garment clusters are taking
shape. There is a need to support this process through public sector investment in
providing common services including infrastructure and utility, common facilities, such
as water affluent facilities, training of workers and in other related areas. In this context,
idea of setting up garment pallis (garment villages) with common facilities needs to be
promoted through concrete action.

On the Radar Screen of Global Buyers

There are indications that once quotas are derestricted the number of sourcing countries
will be reduced from the current level of 50 to about 8-10. However, as a recent study
shows, Bangladesh will continue to remain on the radar screen of major global retail
chains (USITC, 2004). There are apparel items where Bangladeshi firms have
demonstrated their capacity to emerge as major global suppliers. Global giant retail

27
chains such as Wal-Mart, GAP and H & M have opened offices in Bangladesh in recent
years, and are planning to continue to work with Bangladesh's producers on a long-term
basis. However, their behavior will be dictated by the ability of Bangladeshi
entrepreneurs to offer apparels at a competitive price, in accordance with quality
specifications, and within the required time. Pragmatic initiatives will need to be taken to
design a package of support to help the domestic backward linkage textile industry to
remain competitive in an increasingly competitive market for fabrics. Reducing the lead-
time should be given topmost priority in Bangladesh's policies.

As marketing of apparels undergoes significant changes to take advantage of modern

business methods, a closer link is necessary between buyers and producers, bypassing the
intermediation role traditionally performed by buying houses. This close interface is
likely to create its own demands in terms of production flexibility, product and process
modification and diversification, quality assurance and control, and compliance with
various standards including social standards such as SA-8000, quality standards such as
ISO-9000, and environmental standards such as ISO-14000. More attention will need to
be given to workers' benefits and rights as trade union (TU) rights and decent work
related demands are required to be addressed at the firm level. Already the USA has set a
time limit for allowing TU rights in Bangladesh's Export-Processing Zones (EPZs) for
the purpose of GSP eligibility. All these developments will have cost implications. Only
productivity gains and the ability to move up the value chain will enable firms to remain
competitive in the global market and face cost escalation.

Global Initiatives

Bangladesh should also continue to pursue and promote the demand of the LDCs for
zero-tariff access for goods of their interest, particularly apparels. A major reason behind
Bangladesh's robust export performance in the EU has been the zero-tariff access
accorded under the EU-GSP Scheme. In recent times, zero-tariff access for apparels
accorded to Bangladesh in 2002 under the revised GSP Scheme of Canada has
contributed to Bangladesh's significant growth in export to this market. Export to Canada
has gone up from US$ 98.0 million in FY2002 to US$ 256.4 million in FY2004. Zero-

28
tariff access to U.S. market, where tariffs on various apparels items exported by
Bangladesh average about 15 per cent could potentially give a tremendous boost to
Bangladesh's apparels export. It is of interest to note here that import duties on
Bangladesh's apparels in USA in 2003 stood at about $306 million, equivalent to about
four times the net disbursed aid received from the USA in recent years. A study carried
out by CPD shows that zero-tariff access to U.S. market will lead to an increase of
Bangladesh's export to USA by 50 per cent (or about a billion dollar). In recent times,
zero-tariff market access facility provided by Canada in 2002 has also helped Bangladesh
to increase her export from US$ 97.91 million to $256.4 million between FY2002 and
FY2004.Bangladesh should also explore opportunities for more South-South trade in
apparels, particularly in view of the ongoing regional trade negotiations with participation
of Bangladesh such as SAFTA and BIMSTEC. Bangladesh should be careful in ensuring
that apparels do not figure in the negative list of partner countries. More favorable
treatment under the Generalized System of Trade Preferences (GSTPs), which is an
agreement on tariff reduction and tariff liberalization among developing countries) should
also be explored, particularly in the context of receiving more favorable treatment for
export of apparels to India and China. The argument for receiving zero-tariff access for
Bangladesh's apparels is also reinforced by the fact that all African and Caribbean LDCs
are already receiving zero-tariff under the US Trade and Development Act (2000) and the
Caribbean Basin Initiative. Recently a proposal has been floated in the U.S. Congress and
Senate to provide zero-tariff access to 15 LDCs including Bangladesh under the Trade
Relief Assistance for Developing Economies (TRADE) initiative. Bangladesh will need
to keep a keen eye on this proposal, and vigorously pursue her interests in this context.

29
7. FOREIGN DEMAND CONDITION
The growth pattern of RMG exports can be categorized into two distinct phases. During
the initial phase it was the woven category, which contributed the most. Second phase is
The Growth Pattern of Woven and Knitwear Categories. Bangladesh was the sixth-largest
exporter of apparel in the world after China, the EU, Hong Kong, Turkey, and India in
2006. That year, Bangladesh's share in world apparel exports was 2.8%. Let see the
Bangladesh exports earning position of ready made garments in US through a table.

The US was the largest single market with US$3.23 billion in exports, a 30% share in
2007. Today, the US remains the largest market for Bangladesh's woven garments taking
US$2.42 billion, a 47% share of Bangladesh's total woven exports. The European Union
remains the largest regional destination-Bangladesh exported US$5.36 billion in apparel;
50% of their total apparel exports. The EU took a 61% share of Bangladeshi knitwear
with US$3.36 billion exports.

30
 The United States and European Union generate more than 90 per cent of the total RMG
export earnings of Bangladesh (BGMEA and the Export Promotion Bureau websites; and
Quddus and Rashid, 2000). The shares of other importers, such as Australia, Canada,
China, Japan and the Russian Federation as well as countries in the Middle East, in the
total RMG export earnings of Bangladesh are minimal. The country has achieved some
product diversification in both the United States and the European Union. Recently, the
country has achieved some level of product upgrading in the European Union, but not to
a significant extent in the United States. Though Bangladesh is less competitive
compared with China or India in the United States but it is somewhat competitive in the
European Union.

Investing $9.63 Employment

China For Bangladesh Jacket Opportunity
Due to Million
Low s
Goldtex High Dhaka Export
Garments Labor Shirts 2,767 Local
Garments Labor Cost Processing
Manufacturing cost Pants and 23
Ltd, in China Zone (EPZ) etc. Foreign
Industry
Nationals

Foreign Investment Procedure

31
 Moreover, foreign demand condition for Bangladesh ready made garments is being kept
in a good position. The RMG sector is expected to grow despite the global financial crisis
of 2009. As China is finding it challenging to make textile and foot wear items at cheap
price, due to rising labor costs, many foreign investors, are coming to Bangladesh to take
advantage of the low labor cost.

8. LOCATION OF THE MARKET

Currently, there are more than 4,000 RMG firms in Bangladesh. More than 95 percent of
those firms are locally owned with the exception of a few foreign firms located in export
processing zones. Bangladesh RMG firms vary in size. The RMG firms are located
mainly in three main cities: the capital city Dhaka, the port city Chittagong and the
industrial city Narayangonj.
The following table concentrates on location and provides an insightful idea on the
locations of BD RMG sector----

DHAKA Number Knit Woven Sweater total

CITY
Row% 14 38 8 60
Col% 23.3 63.3 13.3 100
Near Dhaka Number 44 13 16 73
City

Row% 60.3 17.8 21.9 100

Col% 61.1 15.3 48.5 38.4
DEPZ Number 5 12 2 19

Row% 26.3 63.2 10.5 100

32
 Col% 6.9 14.1 6.1 10
Chittagong Number 6 13 5 24
Row% 25 54.2 20.8 100
Col% 8.3 15.3 15.2 12.6
CEPZ Number 3 9 2 14
Row% 21.4 64.3 14.3 100
Col% 4.2 10.6 6.1 7.4
Total Number 72 85 33 190
Row% 37.9 44.7 17.4 100
Col% 100 100 100 100

9. MARKET ACCESS ISSUES

Bangladesh’s apparels could have enjoyed a significant advantage over the Chinese
exports had there been preferential market access for her products in the US market. As is
known, the US GSP scheme for the LDCs does not include apparels. Moreover,
regrettably, the Hong Kong Ministerial Decision of the WTO on the duty-free, quota-free
market access for the LDCs allows Bangladesh and other LDCs to have preferential
(zero-tariff) access only for 97 per cent of their product. In all likelihood, the USA will
take advantage of this flexibility to include all (or almost all) apparels items in the 3 per
cent exclusion list. Bangladesh’s strategy in view of this should be to negotiate with the
US in a manner that allows exclusion of at least some of the apparels items of her major
interest from the ‘3 per cent exclusion list’ of the US and to gradually work towards an
all embracing DF-QF decision within the ambit of the WTO. Given that, many of the
apparels items of Bangladesh face tariff peaks in the US such DF-QF market access will
provide her with considerable competitive edge in respect of China. Consequently,
Bangladesh should actively pursue in the WTO the demand for DF-QF market access for
all products from all LDCs. In this regard Bangladesh should also actively lobby for a

33
speedy consideration by the US Senate of the TRADE Bill which was placed before the
US Congress in 2005 to provide preferential market access to a number of LDCs and
developing countries including Bangladesh.

As a matter of fact, with the ending of the tenure of the 109th Congress in December,
2006 validity of the TRADE Bill 2005 has lapsed. The bill will now have to be
reintroduced in the newly elected 110th Congress. It needs to be kept in mind that as far
as the apparels market is concerned the global pie is likely to substantially increase in the
near future.

Consequently, it will not be a zero-sum game for exporters to the US market – there will
be space for many players. Rising costs and a natural desire for major buyers have led to
a situation where major international apparels buyers are now pursuing a China plus One
strategy. It should be Bangladesh’s own strategy to ensure that as far as the US market is
concerned it is Bangladesh and not Vietnam or Cambodia which come in to fill in this
gap.

Early Period of Growth

Phase-Out of Export- 1977-1980
Quota System (2005)
Boom
Days
1982-1985
Withdrawal of Canadian RMG
Quota Restriction (2003) Quota
(BD)
Restriction
1985
Child Labor Issue &
Solution Significant Development in
1993-1995 Knitwear Sector (1990)

Some Important Issues Regarding RMG

34
10. MAJOR EXPORTERS IN THE WORLD
MARKET

Bangladesh exports its RMG products mainly to the United States of America and the
European Union. Besides, Canada, Japan, Australia, New Zealand; Russia etc. also are
other garments importing countries. At present about 20 countries of the world are
importers of our garments. Its market is being expanded in the Middle East, Russia,
Japan, Australia and many other countries.

The industry was successful in exploring the opportunities in markets away from EU and
US. In FY06, a successful turnaround was observed in exports to third countries, which
having a negative growth in FY05 rose three-fold in FY06, which helped to record 23.1
percent overall export growth in the RMG sector. It is anticipated that the trend of market
diversification will continue and this will help to maintain the growth momentum of
export earnings. At the same time a recent WTO review points out that Bangladesh has
not been able to exploit fully the duty free access to EU that it enjoys.

120
Export share to USA

100 Export share to EU

Combined share to US A &

80 EU
Others share to Export
60

40

20

0
2001- 2002- 2003- 2004- 2005-
2002 2003 2004 2005 2006

35
 Chart: Region-wise Share of RMG Export

While this is pointed out to be due to stringent rules of origin (ROO) criteria, the relative
stagnation in exports to EU requires further analysis.

11. STREANGTHS OF THE PRESENT EXPORTERS

□ Adequate supply of labor force of both sexes, attributed with less attitudes
problem (less absenteeism and, aptitude for learning, and loyal) and high morale.
□ Cheaper labor cost.
□ Low cost of captive power generation using gas as fuel.
□ GSP facility up to 2015
□ Easily accessible infrastructure like sea road, railroad, river and air
communication
□ FDI is legally permitted and incentives are provided to them.
□ Moderately open Economy, particularly in the Export Promotion Zones
□ Looking forward to Duty Free Excess to US, talks are on, and appear to be on
hopeful track
□ Investment assured under Foreign Private Investment (Promotion and Protection)
Act, 1980 which secures all foreign investments in Bangladesh
□ Low Bank interest for financing exports
□ Growth prospects of textile industry on the basis of increasing demand.
□ Solid, dyed, prints and Yarn Dyed specialization.
□ Local spinning industry is offering new and innovative yarn all the time.
□ The new generation of professionals in the industry is well educated and highly
skilled, ability to interpret easily buyers’ technical requirements and is extremely
conscious about quality and timely delivery.
□ Government provides incentives to garment factories using local yarn and fabrics.

36
□ Bangladesh continues to enjoy duty free access to EU and Canada, and
negotiations are ongoing for a similar access to the USA.
□ State of the art, vertically integrated factories, producing yarn to quality garments.
Most of the vertical units have their own placement printing and embroidery
units, which offer shorter lead times and the best quality.

Monthly Growth of RMG Exports in BD

37
12. POSSIBILITY OF MATCHING STANDARD AND
PRICE IN INTERNATIONAL MARKET
Here we will discuss about the international competitiveness of Bangladesh RMG sectors
by identifying the way they maintains the standard and price of the exported product.

Standard Matching in the International Market:

The new generation of professionals in the industry is well educated and highly skilled,
ability to interpret easily buyers’ technical requirements and is extremely conscious about
quality and timely delivery.

Textile sector is considered as Thrust Sector by the BD Government and so Govt. is

giving special incentives to entrepreneurs. In turn, it has augmented the overall increase
of production capacity and diversification of product mix in RMG sector. Moreover,
competitive wage rate together with easily trainable workforce, entrepreneurial skill,
expanding supply side capacity, and government policy support is helping BD garment
industries to translate the comparative advantages into competitive advantages.

Bangladesh enjoys duty free access to EU, Canada, Japan, Argentina, Mexico and Brazil,
if the fabric and the garment are produced in the country. Under this facility, almost all
knitwear and most of the woven wear items are exported to these countries duty free. It
indicates a big possibility for Bangladesh RMG sectors to produce more to export more
with same or more quality to abroad. Diversified product mix with a standard quality is
welcoming in the international market. Bangladesh garment industries are capable to
offer all kinds of washes & finishes to the product that maintains a good quality. They are
also equipped to offer embellishments, including printing, hand & machine embroidery
and rhinestones. The product-mix of garment products exported from Bangladesh to the
European Union has changed significantly during the period 1996-2005. The share of
shirts in total garment exports from Bangladesh to the European Union has decreased,

38
whereas the shares for overcoats, jackets, sweaters, suits and some other garment
products have increased in recent years. These changes demonstrate that Bangladesh is
achieving some level of product diversification and continuously maintaining a good
level of standard in exporting garment products to the European Union. In addition, a
gender analysis indicates that Bangladesh has achieved some upgrading of its products
recently in terms of exporting garment products to the European Union. Garments for
females are treated as upgraded products compared with garments for males, since they
add more value on average. The earnings of Bangladesh from the export of garments for
females to the European Union have increased during the period 1996-2005.

Countries diversify by increasing the number of trade partners they have (breadth), and/or
by exporting new products to old markets (depth). While deepening relationships with
existing markets is key for export growth, geographical diversification is found to be of
great significance for low income countries such as Bangladesh

Price Matching in International Market:

Unhealthy competition over repeated price cut by a section of Bangladeshi garment

exporters has intensified in the recent months that may cost a huge price loss to the
country’s prime export earning sector, industry people and experts fear. They say the
growth of Bangladesh textile and apparel industries will be hindered if the price cut
competition continues.

Production Cost
Offer price @ @$9
$6
BD Exporters

Price Cutting Example in BD

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Emdad, who started his career in the country’s pioneer garment exporting company, told
New Age that a section of short-sighted entrepreneurs had always been engaged in price
war and forced others to follow them. The top executive of the Babylon provides New
Age with the latest comparison on the prices of T-shirts that European Union had
imported from different countries, including Bangladesh. Citing European Commission
data, he said in 2008, Bangladeshi exporters had shipped highest volumes of T-shirts to
European market. But the unit price remained much lower than the exporters of others
countries. A made-in-Bangladesh T-shirt was shipped just for 1.22 Euro which was 37
per cent less than the global average price. Exports price of a Turkish T-shirt was 3.35
Euro, Chinese 2.03 Euro, Moroccan 1.56 Euro while an Indian T-shirt was shipped at
2.10 Euro. Echoing Emad, a Bangladeshi merchandiser working with a Dhaka sourcing
office of a world leading European retailer says as importers easily get discount on very
next Bangladeshi supplier they always search for the cheapest one. ‘If a quotation on per
dozen of basic T-shirt at $12 from a local knitter is negotiated with four suppliers, it can
easily be settled at $9,’ said the executive seeking anonymity. Rafiqul Islam, the
consultant in Dhaka for a Washington-based labor right group, points out that availing the
world cheapest wages, cheaper gas and electricity and no cost for managing waste, local
exporters produce cheapest garments.‘Exploiting their workers local exporters continue
making their price offers cheaper while importers instigate them as they find Bangladesh
a fertile ground for such unhealthy competition,’ he said.
The Bangladesh Knitwear Manufacturers and Exporters Association president, Fazlul
Hoque, traced that unhealthy competition on price cut had been enhanced much in
ongoing recession period. ‘With flow of orders squeezes the suppliers are in race to get
the orders by an affordable loss while some buyers are taking the chances and making the
suppliers victims,’ said Hoque. He also said that if the Export Promotion Bureau
monitored the unit prices of exports, the BKMEA would support their initiatives. ‘At
least, for discouraging them psychologically, the EPB can check unit prices that don’t
meet even the basic costs of production.’ The executive director of the Centre for Policy
Dialogue, Professor Mustafizur Rahman, says export price war in Bangladesh is a very
critical economic behaviour, which is difficult to rule. ‘Buyers usually take this
opportunity when competition on price cut goes on in a sourcing market like Bangladesh

40
that has several thousands of suppliers,’ he says. Mustafiz, however, suggested that the
government could strictly monitor the labour right and environment compliances and
should ensure that a non-complaint exporter cannot compete with a compliant exporter.
China and some other competitors of Bangladesh have implemented sharp price-cutting
policies in exporting garment products over the last few years, but Bangladesh has failed
to respond effectively to such policies. China was able to drop the export price of 29
garment categories by 46 per cent on average in the United States within a year, from
$6.23 per sq meter in December 2001 to $3.37 per sq meter in December 2002.
Bangladesh needs to respond to such price-cutting policies of its rivals in order to remain
competitive in the quota-free global market.

13. MODE OF TRANSPORTATION

The Dhaka-Chittagong road remains the main transportation link connecting the
production units, mostly situated in and around Dhaka and the port in Chittagong, where
the raw material and the finished products are shipped in and out. Despite increased
dependence on air transportation, trucks remain the main vehicles for transporting raw
materials and finished products for Bangladesh garment exports. The industry responded
by calling upon the Bangladesh navy to help with trawlers and renting a plane from Thai
Air that was used to directly fly garment consignments from the Dhaka airport to the
Chittagong airport several times a day.

According to a study by a multilateral capital donor, the Bangladesh economy can

increase its economic output by one per cent and foreign trade by 20 per cent a year by
making transportation on the Dhaka-Chittagong corridor more efficient.
The waterways could be a relatively cheaper mode of cargo transportation for
Bangladesh’s readymade garments (RMG) industry. Transportation using roads costs
more time and money. Different users should have the option of using the mode suitable
for them. The options would be available only when all the modes are efficiently run.

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14. PACKAGING

The total printing and packaging sector is one of the largest employers in Bangladesh like
the RMG sector, where about 2 million people are employed and 80% are women. The
packing section cannot start working until all the clothes are ready for packaging;
because the clothes are packed according to the buyers' specified ratio.

RMG industries follow some Packaging Instructions for each product, pack size and type
to make the product effective and attractable to the customer. Protection for the product
it selves during transport and its users during use is ensured by the packaging. At the
same time some important issues are also mandatory with every product to be provided
during export. Like-

Company Batch Manufacturing Page No. : 1 of 40

logo Record

Product Product Effective

Batch No.: Batch size Batch size

Manufacturing Expiry date: Shelf life:

Prepared by: Verified by: Approved by:

Batch Records(Written on the Carton)

Symbols that communicate care procedures may be used in addition to words, but the

42
words must fulfill the requirement of the care label rule. Some instructions are absolutely
important for a user to use and to take care of product. Foreign customers are very
conscious about rules and manual indication of a product. So to make the product in
export quality, RMG uses smart instructions in packaging. For 100% cotton Jeans,
instructions are like below-

15. PREFERENTIAL TREARMENT IN FOREIGN

MARKET

Both external and internal factors contributed to the phenomenal growth of RMG sector.
One external factor was the application of the GATT-approved Multifibre Arrangement
(MFA) which accelerated international relocation of garment production. Under MFA,
large importers of RMG like USA and Canada imposed quota restrictions, which limited
export of apparels from countries like Hong Kong, South Korea, Singapore, Taiwan,
Thailand, Malaysia, Indonesia, Sri Lanka and India to USA and Canada. On the other
hand, application of MFA worked as a blessing for Bangladesh. As a least developed
country, Bangladesh received preferential treatment from the USA and European Union
(EU). Initially Bangladesh was granted quota-free status. To maintain competitive edge
in the world markets, the traditionally large suppliers/producers of apparels followed a
strategy of relocating RMG factories in countries, which were free from quota restrictions

43
and at the same time had enough trainable cheap labour. They found Bangladesh as a
promising country. So RMG industry grew in Bangladesh.

Some countries had internal problems, for example, Sri Lanka; and some other countries
of Southeast Asia experienced rapid increase in labour cost. Buyers looked for alternative
sources. Bangladesh was an ideal one as it had both cheap labour and large export quotas.
The EU continued to grant Bangladesh quota-free status and GSP (Generalized System of
Preferences) privileges. In addition, USA and Canada allocated substantially large quotas
to Bangladesh. These privileges guaranteed Bangladesh assured markets for its garments
in USA, Canada and EU. The domestic factor that contributed to the growth of RMG
industry was the comparative advantage Bangladesh enjoyed in garment production
because of low labour cost and availability of almost unlimited number of trainable cheap
labour.

16. IPLC ISSUES

There are some developed countries like German; EU etc. who divert their technology to
Bangladesh to produce ready-made garments at a lower cost. Actually, advanced
garment’s machineries are invented in the industrial country like USA but their labor cost
is very high due to high standard of living. So it’s better for USA to shift the production
task to developing country like Bangladseh. After production, USA may import it or
repurchase the ready made garments from BD.

44
17. VALUE ADDITION

Future Opportunities for RMG Field:

♦ Bangladesh has now a scope to go for more fashion oriented products deserving
high price in the global market.
♦ With the help of further increase of productivity & quality and design support,
Bangladesh can minimize cost and maximize profit and export value.
♦ Bangladesh, as a proven experienced RMG & Textile manufacturer, can expand
share in the existing market (USA, EU, Australia, Canada, etc.) and can also
explore opportunity in Japan & CIS countries.
♦ In the long run, Bangladesh has a scope to target huge populated country like
China and India- where demand as well as cost of manufacturing will be wider.
♦ EU is willing to establish industry in a big way as an option to china particularly
for knits, including sweaters
♦ If skilled technicians are available to instruct, prearranged garment is an option
because labor and energy cost are inexpensive.

Investment Opportunities in Bangladesh Textile:

RMG and textile sectors have enormous investment opportunities. Government provides
highly favorable policy framework for investment in these sectors. Investors have the
following choices:

• Establishment of new textile / RMG mill in the private sector.

• Joint ventures with the existing textile / RMG mill.
• Acquisition of public sector textile mills that are being privatized.
• Indirect investment through financial services and / or leasing.

Bangladesh - the country of world famous muslin fabric has now emerged as an apparel
giant in the world textile and apparel market. The RMG sector contributes around 75

45
percent to the total export earnings. In 2007 it earned $9.35 billion. This sector also
contributes around 13 percent to the GDP, which was only around 3 percent in 1991. Of
the estimated 2 million people employed in this sector, about 70 percent of them are
women from rural areas. The RMG sector is expected to grow despite the global financial
crisis of 2009, many foreign investors, are coming to Bangladesh to take advantage of the
low labour cost, product quality and compliance. USA is the largest importer of
Bangladeshi RMG products, followed by Germany, U.K, France and other E.U countries.
The country exports its apparel products worth about 9.0 billion US$ per year to the
USA, EU, Canada and most of the Scandinavian and Middle Eastern countries. At
present the country is the 6th largest apparel supplier to the USA and EU countries. Most
of the high street retailers, lifestyle and fashion shops like Asda, Debenhams, Giorgio
Armani, H&M,M&S, Mother care, Next, Peacock, Primark, Sainsbury’s, Tesco, Zara are
sourcing from Bangladesh.

The foreign trade of readymade garments from BD has shown rapid rates of growth over
the past ten years now making BD the world's twelfth largest exporter of garments and it
is responsible for about 76% of Bangladesh's foreign exchange earnings.

Export Value of RMG

46
18. NEW TRADE THEORY ISSUES

Bangladesh and India has signed a memorandum of understanding (MoU) on 16th of

September on procedural arrangements for duty-free entry of eight million pieces of
Bangladeshi apparels into India annually. The country's garment entrepreneurs are
eagerly looking for alternative markets to reduce their dependency on a few markets.

Though international financial institutions such as the World Bank and IMF have been
consistently pursuing the claim that trade liberalisation in BD is conducive to achieving
high economic growth and alleviating poverty, all economists in the country do not
endorse it. Trade liberalisation has been one of the major policy reforms in BD. It has
been implemented as part of the overall economic reform programme, namely the
structural adjustment programme (SAP) which was initiated in 1987 and formed the
component of the ‘structural adjustment facility’ (SAF) and ‘enhanced structural
adjustment facility’ (ESAF) of the IMF and World Bank. This adjustment programme put
forward a wide range of policy reforms including trade policy, industrial policy,
monetary policy, fiscal policy and exchange rate policy, privatisation of state-owned
enterprises and promotion of foreign direct investment.

19. OTHER IMMPORTANT ISSUES FOR ‘RMG’

SECTOR

Bangladesh RMG sector are not on an absolute good position. It is facing some weak
points and threats like-

1. Bangladesh produces mostly basic products- which are low cost items; the share
of fashion products i.e., high value added product is very low.
2. Bangladesh does not produce the basic raw materials (only a negligible quantity
of cotton but no manufactured fiber) and as such has to depend totally on sensitive
global market.

47
 3. Because of inadequate backward linkage, lead-time happens to be long, nearly 3
months.
4. Public power supply is erratic.
5. Bank interest rate is still high enough, particularly of private sector bank, for
investment of export oriented high value project.
6. HRD facility, productivity and quality support, testing and accreditation support,
design support and compliances are yet to be enhanced.
7. Cost of doing business is high because of under table money
8. Lack of marketing tactics
9. Absence of easily on-hand middle management
10. A small number of manufacturing methods
11. Lack of training organizations for industrial workers, supervisors and managers.
12. Fewer process units for textiles and garments
13. Sluggish backward or forward blending procedure
14. Incompetent ports, entry/exit complicated and loading/unloading takes much time
15. Unless new strong market is explored in home or abroad, any non-cooperation
from USA & EU may jeopardize the whole Bangladesh RMG export business and
consequently the textile manufacturing.
16. Sudden price hike of cotton and yarn in the global market may push Bangladesh
to a very awkward situation to devastate the business.
17. The type of labor and political anarchies of the recent days if prevails in the
future, Bangladesh may lose the business in the way Sri Lanka has lost.

Bangladesh has a need for foreign help to meet the growing demand of ready made
garments in significantly. Therefore, The country’s apparel exporters — both woven and
knitwear — have demanded a ban on Foreign Direct Investment (FDI) in ready-made
garment (RMG) sector outside the Export Processing Zones (EPZ).The government
withdrew the ban in 2006 to woo FDI in RMG sector. Bangladesh Garment
Manufacturers and Exporters’ Association (BGMEA) and Bangladesh Knitwear
Exporters’ Association (BKMEA) made the demand to the government recently.

48
The Ministry of Commerce (MoC) feels the demand of apparel exporters is logical to a
great extent, while the Board of Investment (BOI) seems interested to go by the existing
rule that has no restriction on FDI in RMG sector. While it is assume that the
competitiveness of local garments would be hit hard if the foreign investors with their
global expertise and reputation invested in local RMG sector beyond the EPZs. Many
small and medium size garment factories will face closure as they would fail to compete
with foreign investors. Therefore some opposition pointed out against the decision of
BOI to allow FDI. But it is also considerable that to meet the growing demand of rmg
products in home and abroad, the necessity of FDI is more significant

The two-way trade between the countries might reach $2 billion in a couple of years
from $1.4 billion now, if Bangladesh diversifies its products. Bangladesh has enormous

49
potential to attract Canadian investments, particularly in the readymade garment sector,
after a massive rise in production costs in China. Also, the situation has created
opportunities for Bangladesh, to fully utilise the duty-free and quota-free market access
to Canada. Many Canadian firms, which were outsourcing garments from China now
moving to markets like Bangladesh for relatively cheaper price. For an example,
Canadian T-shirt giant Gildan Activewear has invested in Bangladesh. The firm has
bought a local garment company by $15 million last year.

50
20. CONCLUTION AND RECOMMENDATION

Bangladesh economy at present is more globally integrated than at any time in the past.
The MFA phase-out will lead to more efficient global realignments of the textile and
clothing industry. The phase out was expected to have negative impact on the economy
of Bangladesh. Recent data reveals that Bangladesh absorbed the shock successfully and
indeed RMG exports grew significantly both in FY05 and (especially) in FY06.

Due to a number of steps taken by the industry, Bangladesh still remains competitive in
RMG exports even in this post phase-out period. Cheap labor is no longer seen to be a
mainstay of comparative advantage. The need for establishing strong backward linkage
was appropriately realized and accordingly necessary steps were taken by all quarters of
the RMG industry, which has been reflected in the decreased pattern of back-to-back
import supported by increased domestic value addition. However further progress is in
order, and a strong public sector role is necessary to mediate the establishment of textile
mills with global standards. An appropriate policy regime is needed to encourage the
importation of technology, intermediate and raw materials, so that the local industries get
a chance to reduce its average cost to international level and narrow the lead time.
Presently, Bangladesh’s apparel sector operates mainly at the lower-end segment of the
international market. Although knitwear products achieved tremendous growth but these
are low-value products with small profit margins. Bangladesh can enhance its value
addition capacity substantially through diversification of apparel products and by moving
into more value-added, high-priced, high-fashion products. Woven category can be more
attractive via large capital investment. If cost effective investment can increase in the
spinning and weaving sub-sectors, as it has been in the past few years, Bangladesh has
the possibility of building a competitive export-oriented RMG sector with strong
backward linkages in the textiles sector. Training is always considered as an effective
instrument for upgrading skills and raising efficiency of human resource, which
eventually ensures increased productivity. Some initiatives have been taken by the
entrepreneurs of the relevant sector but much more needs to be done. Necessary steps
should be taken both by the public and the private sectors, and development partners to

51
establish appropriate fashion and technology institutes. Improvement in working
conditions and organizational environment can also result in increased productivity,
which eventually renders these enterprises more competitive. To remain competitive in
the post-MFA phase, Bangladesh needs to remove all the structural impediments in the
transportation facilities, telecommunication network, and power supply, management of
seaport, utility services and in the law and order situation. The government and the RMG
sector would have to jointly work together to maintain competitiveness in the global
RMG market. Given the remarkable entrepreneurial initiatives and the dedication of its
workforce, Bangladesh can look forward to advancing its share of the global RMG
market. In addition to the fact that the industry is vulnerable because it is highly
dependent on the imported raw materials, the infrastructure in the country is deplorably
underdeveloped. Problems in power supply, transportation and communication create
serious bottlenecks. Inadequate port facilities result in frequent port congestion, which
delays shipment. All these increase the lead-time to process an order, i.e. the time from
the date of receiving an order to the date of shipment.

52
REFFERENCES

● International Business (Environments and Operations) –by Daniels,

Radebaugh & Sullivan

Websites:

1. http://webcache.googleusercontent.com/search?
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AQRvT4rSEcw

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7. http://www.apparel.com.bd/?cat=29

8. training.itcilo.it/decentwork/.../S6%20Employers%20RMG.pdf

9. www.banglapedia.org/httpdocs/HT/G_0041.HTM

10. www.unescap.org/tid/publication/aptir2456_haider.pdf

11. www.gafinet.org/.../Textiles%20value%20proposition-2010.p

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READY MADE GARMENT SECTOR IN BANGLADESH

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