The chairman and CEO of Youngone Corporation – that owns the Korean Export Processing Zone (Kepz) – Kihak Sung, has been present in Bangladesh since the late seventies as an investor. His hard work and vision helped him build Youngone into an international giant in manufacturing. In this interview, the veteran investor explains the problems of any investor in Bangladesh and how Bangladesh can emerge as the prime apparel sourcing destination by addressing the problems.
TBS: How has Covid-19 impacted the Kepz?
Kihak Sung: I can say so far we have managed through Covid-19 pretty well despite the nine-week shutdown.
However, uncertainty is very high at the moment. As I said before, if the environment is improved, production activities will resume fully.
As for the KEPZ, we continue building all the backward linkage industries so that we can compete with competitive prices, good quality and quick delivery.
During the past few months, we have invested a great deal in improving the environment of the KEPZ – we have planted 400,000 more trees and created an additional reservoir with 200 million gallons of water. We have also started on a solar energy project with its first phase of 5MWp to be completed by the end of 2020.
Besides the developed production facility of six million square foot, we want to contribute further to Bangladesh by investing in a four million square foot facility to substantially improve the Man Made Fiber (MMF) supply chain and backward linkages that Bangladesh needs.
TBS: The pandemic has deeply affected fast fashion; how do you see the apparel market in the next few years?
Kihak Sung: The fast fashion market has been negatively affected by the pandemic. However, we should take note that active functional wear – like bicycle clothing, yoga-wear, outdoor/sports apparel – sales seem to be recovering quicker, as people are getting more health conscious.
If we make an effort to work on favourable policies on the adjustment of exchange rate, supportive administration, reduction of electricity and power cost, investment in MMF, etc., Bangladesh can well become the apparel sourcing destination in the post-Covid-19 era for its quick delivery, competitive prices and high quality.
TBS: You have been investing in Man Made Fiber backward linkages for the last few years; how can Bangladesh strengthen itself in this area and what are the challenges?
Kihak Sung: Youngone has been producing ski-wear, outerwear and downwear since mid 1970s in Korea and their materials were composed of manmade fibers. When we first invested in Chittagong in the early 1980s, we imported raw fibers such as polyester for carding and processing, then filled them into nylon outerwear for export in volume to the Swedish markets.
In the late eighties, we were producing polyester padding for winter garments and supplying it to garment manufacturers in Chattogram, Bangladesh. That was one of the first MMF backward linkage industries in Bangladesh. In the late 1990s, we had become a supplier of raw materials including nylon and polyester fabrics to apparel manufacturers as we had the complete structure of weaving, dyeing, and finishing factories in Bangladesh.
Today, in the KEPZ, we have already established facilities of 120,000 square meters, producing MMF with: circular knitting, warp knitting, weaving, dyeing, finishing, and lamination work. We can possibly extend the facilities by an additional 80,000 square meters, which would then become a milestone in the Bangladesh MMF backward linkage industries.
Our upcoming investment project in MMF backward linkage will be "recycled" fiber production in cooperation with another leading global group. This fiber production business will require a large-scale investment and, most importantly, conducive administrative services from the Bangladesh government's proactive investment policy and implementation, infrastructure development, promotion, and strong support on FDI.
TBS: How Bangladesh can attract foreign direct investment (FDI) or FDI moving away from China?
Kihak Sung: Although the ready-made garments (RMG) industry is somehow operating, other industries will have difficulties in competing regionally and globally due to the complicated administrative procedures, lack of inducement policy for investment and lack of infrastructure – like ports and electricity. First and foremost, Bangladesh needs to have more market-oriented and investment-friendly policies.
Next, since both the infrastructure and the backward linkage industries are not yet fully developed, the Bangladesh RMG industry has a lead time of at least 15 to 30 days longer than that of other competing countries.
We have difficulties in developing our Bangladesh operation to its full potential because of the country's insufficient pro-business image, longer lead time and higher than expected production cost. On a day-to-day basis, our middle and senior management are often occupied by complicated administrative tasKihak Sung when they should be concentrating on developing products and improving productivity. Therefore, buyers tend to buy high-end products from other competing countries rather than Bangladesh even when they cost a bit more.
There are many hidden restrictions on FDI that need to be addressed in a cooperative and practical manner.
TBS: As a pioneering foreign investor in Bangladesh, would you share the experience of what types of challenges foreign investors face in Bangladesh?
Kihak Sung: We were one of the first foreign direct investors in this country when there was not even a proper export system in the 1980s and we have been growing our investment since then.
In the early 1980s, the company's initial investment had not been carried out as planned due to the political turmoil in the country and there were questions on the long term viability of investment. In the mid 1980s, the import of all raw materials was blocked for 100 days in the name of protecting illegal trafficking of materials, causing us to lose many customers at that time.
In 1991, there was a devastating cyclone that destroyed most of our production and machinery in our main factory. We managed to recover later on, but both our company and our customers suffered great losses.
As mentioned previously, compared to other competing countries, there are various kinds of challenges which negate the low labour rate advantage of the country. These challenges become the impediments to investment and economic development.
Since 1999, we have been investing in a significant manner in a private export processing zone (EPZ), but we have been facing a consistent set of challenges. We could have cut at least 10 years to reach where we are today and should have completed the MMF backward linkage supply chain considerably by now.
The major challenges faced by foreign investors include:
● Inadequate infrastructure such as: expensive electricity, an inadequate transportation network, high operational costs, and long processing time at ports;
● Changes in regulations – especially retroactive application of the changes;
● A lack of consistent business-friendly policies and regulations such as:
I. Policy in allowing captive power plants to lower cost of electricity
II. Dynamic competitive exchange rate policy to compete with other depreciating countries. This will also abolish significant cash incentives and discrimination against foreign direct investors.
If these challenges can be eliminated or lessened, investors' companies and operations can concentrate on improving productivity, enhancing quality of products and offering better service to customers.
TBS: There is a common saying that Bangladesh lacKihak Sung in mid-level or managerial level manpower, what is your observation?
Kihak Sung: To the contrary, I believe the quality of mid-level or managerial level manpower, and even the senior level is very good in Bangladesh.
The problem is, as I said before, the managers cannot fully concentrate on their actual tasKihak Sung – like enhancing the quality of products, increasing efficiency and effectiveness of the operations, improving customer services and on-time delivery, etc. – due to the inefficient operating environment such as spending time on administrative bottlenecKihak Sung. Eventually, they put behind effective managerial development and get connected to irregularities, which leads to falling productivity and poor business performance. These are the reasons why we still have a few expat managers in production although our company policy is to achieve full localisation in all operations as soon as possible.
It is true that we have an excellent Operation Director in Vietnam who is a Bangladeshi, but I am not sure if he can achieve as much if he is in Bangladesh.
Youngone is planning to establish a state-of-the-art technical institute and college in the Korean EPZ, Chattogram, to meet the future demand of high-quality managers of the industry as well as the country's needs.
TBS: How can Bangladesh's RMG industry diversify its products now that it is largely invested in cotton-based products?
Kihak Sung: Bangladesh started first with cotton-based products and was successful indeed. Afterwards, the world's fiber consumption rapidly moved on to MMF and the country was not prepared to invest in the new market. This caused the problem. Today cotton fiber takes up only 20% of the world market, but Bangladesh has 90% of its business in cotton-based products.
For Bangladesh, the only way to compete globally was with its low cost. This was possible when the wages were sufficiently low, but as costs are getting higher, the industry needs to survive by upgrading the level of product quality, developing differentiated and niche products, etc.
Just selling cotton t-shirts and trousers to the European market will not expand the export volume of the industry. Products will have to be diversified to satisfy the changing needs of consumers. MMF infrastructure should be strongly supported and a mixture of MMF and cotton should be developed to serve the world's demand.
Bangladesh should become the favorite destination of apparel buyers and investors. Therefore, the government and the business community should cooperate and adjust with the growing and changing demands of today's world market.