TBS: What impact the extension of lockdown during the second wave has on the clothing industry in Bangladesh?
FH: The RMG industry has been unprecedentedly affected by the Covid-19 pandemic. The industry went through a month-long lockdown and factories remained closed for 45 to 70 days. Productions were lost, the financial system of the factories were shattered, and we faced cancellations of more than 3 billion dollars. Though 90% of those cancelled orders were reinstated later on, it came at the cost of heavy discounts, deferred payments and deferred shipment. A good number of buyers went bankrupt leaving their suppliers at a complete uncertainty with payments unpaid, while suppliers of the raw materials had to be paid by factories. Therefore, a large number of factories faced forced loans and bankruptcy situations, and nearly all factories' financial cash flow cycles were interrupted.
As the industry was recovering from the first wave of the pandemic, exports started turning around from June 2020 which could last till September 2020. But the second wave started taking a toll on export growth in October 2020 (by -7.78%), which took a dire turn in December (-9.69%). Since export was badly affected throughout the year of 2020, we are calculating the growth of 2021 against the corresponding months in 2019. During January-April 2021 RMG export has gone down by 8.30% (by almost a billion dollars) compared to the same period in 2019.
While we have invested millions of dollars after the unfortunate Rana Plaza tragedy in order to ensure safety and remediation across the industry, it already had a certain impact on our cost; the Covid-19 led disruption has further escalated the situation. On one hand, the industry is facing underutilisation of capacity which spurred up cost due to fixed overhead cost. On the other hand, increased cost of compliance especially to maintain health and safety at factories, supplying PPE and other hygiene products have further pushed the costs.
To add to our woes, the recent yarn and dyes/chemicals price hike has added fuel to the fire, and manufacturers are struggling to keep the business and even accepting orders below break-even prices. Price has already been a trend in the global market for decades, during September-December the decline was recorded 4.82%. Price trend continues to worsen as the month of March 2021 posts 5.11% decline in unit price compared to March 2019. Such consecutive declines in unit price do not require further analysis to understand the magnitude of vulnerability in the industry.
The recent surge in infection since March this year is worrying. So far, we have been able to contain the spread of the virus by maintaining strict health protocol and awareness raising. The government imposed a countrywide lockdown from 5 April, however, since the RMG industry proved its strict compliance to its health protocols, disciplined workforce management, the government exempted this industry from the lockdown. So far, until the Eid holiday we have been able to operate our factories with very insignificant infection as reported. From the perspective of the overall supply chain scenario, a prolonged lockdown is definitely not expected, while this is also true that the measure proved to be effective to contain the spread which was shooting up alarmingly. Also, exempting the RMG factories during this lockdown helped us prevent the outflow of orders from Bangladesh as the rest of the competing countries' factories were operational.
As per the latest world economic outlook published by the IMF, the advanced economies have seen 4.7% decline in their economic growth, while the emerging and developing countries posted -2.2% growth. The unprecedented lockdown measures in the EU, USA and many other countries crippled the retail industry in particular. We saw the worst Christmas sales last year. Retail sales in EU and USA continues to drop; the growth was recorded -29% in EU in January and -10% in USA in February this year. So there is a clear decline in demand in the global market. However, the economic growth projection of 2021 sheds some light of hope, as the advanced and the developing economies are projected to have 5.1% and 6.7% growth respectively this year. As per the new projection of WTO, after having a negative growth of 5.3% in 2020, world trade is expected to increase by 8% in 2021.
BGMEA sought government assistance before Eid to pay salaries. The industries were open during the lockdown. Then, why would this industry need government assistance?
Before answering this question, I would like to express my gratitude towards Honorable Prime Minister Sheikh Hasina. The role of the Government to support RMG industry has absolutely been a lifesaver for the industry during the gravest moments induced by Covid-19. The Honorable Prime Minister of Bangladesh announced a stimulus package worth BDT 5000 crore to the export oriented industries including RMG sector which caused a breath of hope for the devastated exporters and businessmen. Because of that salary support, factory owners have been able to pay off their workers even though the production was hauled for consecutive 40 days during March and April. There were unprecedented moves by all the ministries and departments of the government to stand by the industry and help us survive. Policies like stay on loan classification rules and regulations related to export proceed realisation, making the use of EDF more simple were time befitting and lifesaving.
When the worldwide demand track faced a sharp turn, the demand cut stranded the flow of money ensuring a huge decline in the business. At that time, without the government's support the largest industry of Bangladesh could not be able to restore the international business because none of the parties then were taking the responsibility of the cost incurred or the losses due to massive cancellation of orders.
Just when the factory owners were trying to get back on their feet, a second wave of coronavirus marked its beginning and actually pushed them into a tremendous crisis. With a new strain of virus and lockdown imposed around the world, the RMG industry is facing further downturn. Since our industry is heavily capital dependent and its performance and survival are based on cash fluency, without Government support it is very difficult for us to maintain the production and survive through the crisis. It is also notable that factories are being forced to operate with higher costs right now since they have to follow and supply additional health and safety protocol to the workers, and operate with reduced capacity due to lack of sufficient orders. With higher competitiveness issues around other RMG manufacturers' countries, inadequacy of enough support and assistance may lead to a shift of work order to somewhere else, which is not desirable at all.
Has the apparel sector of the country faced any major cancellation or halt of orders during this second wave?
This is important to note the differences between the impact of the first wave and the second wave of Covid-19. With a slight pause, the recurrence of Covid-19 has appeared as 'decapitating the already dead'. Injured by the first wave the industry was already bleeding and left to such a disrupted and weakest position that a severity of a fraction of the magnitude of the first wave may be more intense.
While we were trying to recover from the shock caused by the first wave of the pandemic during July-September of 2020, the second wave marked its beginning during the final quarter of 2020 and has actually worsened the situation. With the detection of the new strain of the virus and retail sales growth in both USA and EU being on a declining trend (i.e. -11% in February, 2021 and -29% in January, 2021 respectively), the situation has further aggravated at buying end. Though the first wave was sudden and apparently more severe, the cancellation during the second wave is not that rampant or sudden, as the buyers are following a different 'Go Slow' approach to manage their supply chain and inventories.
Instead of cancellation, we are experiencing slow down or delay in order placements than what was projected by the buyers originally. This is as severely adverse as the first wave since factories are not able to have a forecast and plan their capacity and cash flow. Such an uncertainty puts the industry in an unpredictable situation and impacts in terms of optimum management of capacity. While the decline in price has already been a trend in the global market for decades, the Covid led disruption has further escalated the situation. We have lost 2.87% unit value in 2020, and during September-December the decline was recorded 4.82%. Given the scenario of underutilization of capacity which already spurred cost and increased cost of compliance especially to maintain health and safety at factories, such scenario is unsustainable.