Table of Contents

Introduction Operations and infrastructure Financing local operation Organization Structure Views of the Future APPENDIX

2 2-5 5-7 7 8

Introduction
Based on previously conducted research on economic, financial and business/ tax environment of our country, we came to the supposition that a US based MNC will be willing to invest in the RMG sector of Bangladesh. In fact, US based MNCs as well some other North American investors have shown interest in directly investing in this sector. Ever Fashion Ltd and Shahriar Fashions Ltd are one of those RMG companies, which are result of such foreign investment. Shahriar Fashion Ltd was taken over by a Canadian company named Gildan. Since the take over, Gildan is in charge of all management decisions as well as production and quality control in Shahriar Fashions Ltd.

Operations and infrastructure

RMG companies in Bangladesh commonly focus on manufacturing basic t-shirt is more then the ones producing taking complex order from their buyers. For a company taking orders for basic garments product, it has to make bulk production in order to make a profit (as the profit margin per t-shirt is very low). When the small amount of profit is multiplied with the huge amount of t-shirt sold each month, it adds up to an adequate profit that enables the companies to run efficiently (around 20+ container per month) Since the labor rate is significantly low, the companies can easily use the strategy of bulk production. Therefore, the companies, using this strategy, looks for buyers who are willing to give mass order and US based companies like Wal-Mart are a prime target. After many years of importing from different garments industries in Bangladesh, Wal-Mart finally set up its own production company that would be ruled under specifications provided by Wal-Mart itself. First, it got to know the culture, the environment for setting up a business and finally they took the decision to set up their own factory. By doing so Wal-Mart no longer needs to hire any outside quality control team. Their hired employees and labors in production has specialized in producing the t-shirt according over and over again, which minimized the chance for error and rejection and enhanced efficiency. The parent company can now place all their basic t-shirt order in one place instead of going to several other factories. This way the whole operation will have coherence and will be under control of the parent.

For all business stakeholders, infrastructure (transport and utilities supply) is the single largest issue hampering Bangladeshs RMG industry. Buyers today are forced to carefully select the type of products to source from Bangladesh, since congested roads, limited inland transport alternatives, and the lack of a deep-sea harbor add inefficiencies to garment lead time. With the aim to move toward sourcing more fashionable, shorter lead time items in Bangladesh, reliable and fast transport is becoming extremely important. The transport issues need to be solved quickly in order to avoid a collapse in the transport network as volumes continue to grow.

As the RMG industry is highly dependent on the Dhaka-Chittagong highway and Chittagong harbor as the only main transport routes, the following examples of current issues are already limiting the efficiency of Bangladeshs garment industry: The highway is often congested as capacity planning falls behind demand, increasing transport time from Dhaka to Chittagong up to 20 hours. Lead time for sea freight is increased by about ten days due to the lack of a deep-sea harbor.

Productivity at Chittagong port suffers from inefficient processes (e.g., manual processing), limited crane capacity, and strikes that sometimes span several days at a time.

The Dhaka-Chittagong train connection offers limited capacity (i.e., only for about 120 containers per day) although logistics experts estimate a tenfold capacity need.

At the moment, suppliers are making adjustments and manage around these issues by incorporating additional transport days into planning, building very close relation- ships with transport companies, making drivers more accountable, and by using tracking systems to achieve full transparency of their products movements at all times. The power supply issue seems more likely solvable within the next two or three years, although 90 percent of local suppliers rate the current energy supply as very poor or poor. Today, many factories are investing to ensure having a constant power sup- ply and are using their own generators in order to remain independent of the public energy supply. However, the issuing of gas licenses has been limited, leading to delays in manufacturers expansion plans. Additionally, conserving energy is becoming a more prominent topic. Some 12 sup- pliers have started to move toward greener production and are improving their energy efficiency within the Cleaner Production Initiative, coordinated by the World Banks International Finance Corporation (IFC) in cooperation with six leading garment buyers, including large buyers such as Walmart, H&M, and Marks & Spencer. For example, one vertically integrated supplier recently demonstrated 10 to 12 percent in energy savings in a report on preliminary results of the initiative. Improving the countrys energy supply is a core topic for the current government. Within the last two years, more than 2,000 megawatts of power have been added to Bangladeshs network, new contracts for 34 power plants have been awarded, and negotiations for a joint electricity grid to enable power trade in the region are under way.

Financing local operation

Foreign MNCs can capitalize on the cheap labor in order to lower their cost of production. If the MNCs set up their own subsidiary or go for joint venture or takeover of a local firm they can control the production specifications as well as take decisions regarding management of the company. In Bangladesh Industrial enterprises may borrow from abroad with prior Board of Investment (BOI) approval. But loans are taken in such way only when they are of large amount. But Banks in Bangladesh may extend working capital loans or term loans in local currency to foreign-controlled or foreign-owned firms/companies (manufacturing or nonmanufacturing) operating in Bangladesh on the basis of normal banker-customer relationship, without reference to Bangladesh Bank. Banks in Bangladesh are free to grant local currency loans to joint venture industries in EPZ up to the amount of short-term foreign currency loans obtained from abroad. Government has also made beneficial public policy of introducing back-to-back LC and bonded warehouse facilities provide a tremendous impetus to the export scenario in Bangladesh.1 Because of such financial flexibility provided by government, low cost of labor and low currency strength actually works favorably for foreign buyers. Because of these factors Bangladesh is able to sell garments products at comparably very low price. Besides, Bangladesh Taka is fully convertible for settlements of trade related transactions. Import license is not required for import of items not in the control list. An importer has automatic access to foreign exchange for import of all items outside the control list, and also for import of control list items as per general or specific authorization of the office of the Chief Controller of Imports and Exports. Bangladesh in 2010 were still at an average 13 percent according to the IMF more than double the level of Chinas average lending interest rate at 5.4 percent. New industry and service sectors are starting to gain importance for the economy in Bangladesh (e.g., pharmaceuticals, shipbuilding, IT). Today and in the medium term, the labor-intense RMG industry still takes precedence, but in the longer term, a shift in the governments focus will likely emerge.
1

http://boi.gov.bd/key-sectors/garments-a-textiles

The potential for Bangladeshs RMG growth can be realized only if the challenges in the five areas of infrastructure, compliance, supplier performance and workforce sup- ply, raw materials, and economy and political stability are tackled. It will be paramount that stakeholders work jointly to achieve this goal. So considering the financing of local company if a US based garments company were to decide whether to invest or not in Bangladesh based on aforementioned foreign currency transfer regulation, economic condition as well foreign exchange stability, even though there might be risk, would still be interested in investing in Bangladesh.

Organizational structure
The organization structure in most of the garments factories is vertical. Department wise allocated supervisors generally supervise the operational level workers. The supervisors then report to managers. Labor-intensive nature of these companies actually is reason behind such vertically extended organizational structure. Most of the garments companies have similar organizational structure as follows:

Views for the future

Many US companies have shown interest in investing directly in the RMG sector in Bangladesh as RMG product players like Walmart, Nike and Reebok etc. have been getting products manufactured from Bangladeshi garments. So it is expected that besides the few companies, which have been taken over or acquired by international investors, more international investments even US based MNCs will invest in Bangladesh s garments sector directly. There are many reasons why Bangladesh is becoming a more and more lucrative source for garments exporting. One of the reasons is, Wages in Coastal China are increasing, as Chinese RMG manufacturers try to better position themselves in the tight labor supply market. As Western RMG buyers search for the next China, they are evaluating all options to strengthen their proximity sourcing, moving on to Northwest China, Southeast Asia, and other Far East supplier countries. Bangladesh is clearly the preferred next stop for the sourcing caravan. Bangladesh has seen its RMG export levels grow steadily and has become a top global exporter. With around USD 15 billion in export value in calendar year 2010, the RMG industry is currently Bangladeshs most important industry sector (13 percent share of GDP and total export share of over 75 percent). With 12 percent average annual growth rates, clothing exports are the key driving force behind GDP development (7 percent CAGR from 1995 to 2010). The attractiveness for buyers lies in Bangladeshs long-term experience and strong performance in the sourcing country selection criteria of price and capacity as well as product portfolio offered. In the last 15 years, Bangladeshs share of apparel imports to Europe and the US more than doubled, securing Bangladeshs No. 3 position among importers to the European Union 15 (EU-15) and the No. 4 position among US importers. Within just the last three years, 39 percent of the companies represented in the CPO interviews have increased. In addition to price, capacity, and capability, a high share of European CPOs strongly emphasizes the advantages of sourcing in Bangladesh due to favorable trade agreements. The broadening of the EU Generalized System of Preferences (EU-GSP) rules on duty-free imports of garments from Bangladesh to include products with two- stage processing made sourcing from Bangladesh even more attractive. A shift from the currently dominant knitwear (70 percent of import value to the EU-15) to a more balanced sourcing product portfolio can be expected (e.g., the US sourced 26 per- cent knitwear and 74 percent woven in 2010).

Appendix