Kazi Iqbal: I do not think LDC graduation will be a huge threat to our RMG industry
A study by WTO found that Bangladesh’s RMG industry scores lower than Vietnam. TBS sat down with Dr Kazi Iqbal, a Senior Research Fellow at the BIDS, for his thoughts on the WTO report as well as the overall RMG industry
Bangladesh's RMG industry has fallen behind its neck and neck market peer Vietnam in terms of product quality, lead time, as well as sustainability issues, according to a recently published World Trade Organisation (WTO) competitiveness report.
The study found that Dhaka scores remarkably lower than Hanoi on ten indices out of a total of twelve. With Bangladesh set to graduate from being an LDC in a few years, the question remains whether it can deal with the changes following graduation. Dr Kazi Iqbal, a Senior Research Fellow at the BIDS, shared his thoughts with The Business Standard on the WTO report as well as the overall RMG industry.
The Business Standard: Bangladesh is lagging behind its major competitor Vietnam in terms of lead time. Our country scored 3.5, whereas Vietnam's score is 4.5. How does our lead time impact our industry?
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Dr Kazi Iqbal: Lead time has become more important than ever before as 'fast fashion' has become a widely-used model in the global fashion industry. Fashion is changing fast and this is shortening the shelf-life of the garments in the retail stores in Western countries.
This is also a part of planned obsolescence strategy, which allows a trend to 'die' after a certain pre-determined period. This has huge implications for the lead time as retailers want a very quick turnaround of the products.
My hunch is that the average size of the apparel factories is larger in Vietnam than in Bangladesh as foreign direct investment (FDI) played a more important role in the growth of the apparel sector in Vietnam. These larger factories are more likely to be composite ones, integrating all steps of backward linkages.
These industries have a competitive edge over the smaller ones in curtailing the lead time in the fast-moving fashion industry.
Anecdotal evidence suggests that the growth of the RMG sector is occurring at the intensive margin, not at the extensive margin. That is, large enterprises are becoming larger with few new entrants. In this era of 'fast fashion' with tremendous pressure from the buyers to curtail lead time, only the larger industries with integrated backward linkages are likely to survive.
Moreover, Bangladesh does not have its own deep seaport. As a result, we have to ship our RMG products to Europe and North America through Singapore, Sri Lanka and Malaysia's seaport. There is no denying that it extends our lead time too. Until we have our deep seaport, the country will continue to face this problem.
In short, the current trends in fast fashion along with their better infrastructure may have placed Vietnam ahead of Bangladesh.
TBS: Bangladesh is going to graduate from its LDC status soon. Our RMG industry's competitive edge is price and tariff exemption. Will our RMG industry have to deal with a potential drop in orders after graduation?
DKI: This sector has come a long way and has matured enough to absorb any shocks stemming from LDC graduation. About half of our exports go to European countries.
Studies show that in the absence of any preferential treatments, the price of the RMG products will increase by 8-10 percent in the European market. That is, if you sell a T-shirt for one dollar now, you will have to pay 8-10 cents more with no GSP facility. I do not think this is a huge threat to our matured industry.
We also have to keep in mind that the global capacity to produce apparel will not drastically change over the next few years. The foreign retailers know it very well and our bargaining power lies there – global retailers need to use the installed capacity of Bangladesh to source their products.
Having said that, five things are important for the RMG sector for embracing LDC graduation:
i) investment in labour productivity including that of managers;
ii) gradually moving towards corporate governance from family-run business models;
iii) product diversification within RMG towards higher-value products;
iv) creating brand values for the sector and specific industries;
v) bilateral and multilateral agreements with the trade partners.
We need to keep producing low-end products as long as it is profitable. Note that there are no takers after Bangladesh who can produce a huge bulk of garments at a low cost.
I believe the buck will stop here – there is no country to pass the baton on to. That is, the price of 'low cost' RMG products must rise globally as the cost of production (e.g. wage) continues to increase in Bangladesh and other countries including Vietnam. We have to consider this as our bargaining power in the post-LDC era.
TBS: The RMG factories in Vietnam receive a lot of FDI, which enables them to set up large factories with cutting-edge technology. Why can we not attract similar levels of FDI in the RMG sector?
DKI: Vietnam has attracted huge FDI in the RMG sector and they are benefiting from the technology transfer that comes with FDI. That is why FDI is crucial for any developing country.
If Bangladesh receives more FDI in RMG, I believe this will influence the overall technological know-how about the products the country does not produce, or can hardly produce. When a single factory brings modern technology as well as the know-how, it spreads like wildfire in a country like Bangladesh.
This quick and smooth diffusion of technology is argued to be one of the key ingredients of the success story of Bangladesh. Why is there not enough FDI in the RMG sector? This is a puzzle to me.
The BGMEA is very strong as a lobbying group and has a strong influence on the policy. Foreign investors might think that they may not get the necessary edge doing business here in Bangladesh.
However, this is just my speculation. There are huge opportunities for them to invest particularly in high-value products.
It is not easy to diversify products without FDI. In fact, Vietnam's story of a diversified export basket is the story of FDI. We need FDI in RMG to move up along the product ladder.
TBS: How do you see the WTO report on textile and clothing? Do you agree with how indices like production quality, political stability and sustainability have scored?
DKI: I have some observations on these indicators. Consider the product quality first. Bangladesh has scored 3.5 whereas the production quality of Vietnam is 4.5.
It does not mean that Vietnam manufacturers produce the same T-shirt better than Bangladesh. I think it simply means that Vietnam produces high-value products – different products.
I am also not sure how quality is measured here – export value? Higher export value can imply that the manufacturers of Vietnam were able to sell their products to the brands as opposed to non-brand retailers by the Bangladeshi manufacturers.
In terms of political stability, Bangladesh has scored a 2.5. On the other hand, Vietnam has scored 4.5. This also raises some questions – Bangladesh has been politically stable over the last 10 years or so. Not sure why there is a huge gap here.
Regarding sustainability, Vietnam has scored 3.5 whereas Bangladesh has scored 2. After the Rana Plaza accident, the factories have made a huge investment in safety following the initiatives by the Accord-Alliance.
Currently, Bangladesh is a country with the highest number of green factories in the world. The score may suggest that the perception of the West has not changed yet. Sometimes perception moves slower than reality. But we have to take this issue seriously and act on it.
