The Flanarant: Bangladesh's surprising fall in garment sales
By Mike Flanagan | 14 February 2012
It's a widely held belief that Bangladesh is going to be the biggest beneficiary of any move of garment sourcing out of China. But not only is the volume of Bangladeshi exports slowing, prices are also inflating - and a serious shortage of manufacturing capacity means the country is struggling to cope with extra demand. Mike Flanagan looks at the issues.
Last month, I contrasted two views of how the apparel industry might break out of the 'Great Slumpflation Crisis' of 2012. One thought efficiency could be radically improved by dramatic spending in infrastructure, such as roads, power supply and new factories. The other called for a marketing reorientation by the world's retailers and brands - which I promised to look at in more detail.
But since then there's been a lot of publicity (especially on this site) for a McKinsey survey of Bangladesh, which strikes me as epitomising some misconceptions buyers and their advisors often have about all this. So let's look at this first.
If there's one belief more widely held than China's growing uncompetitiveness, it's that Bangladesh is going to be the biggest beneficiary of the inevitable move out of China.
McKinsey concludes that Bangladesh has a stack of problems to deal with - but nonetheless, should increase its apparel exports by up to 15% a year to 2016. Its main support for this prediction is a phone survey it carried out between September and November 2011 among chief purchasing officers (CPOs) of European and US businesses accounting for 66% of Bangladesh apparel exports. Those CPOs, in essence, said their buying from Bangladesh had grown - and would carry on doing so for the next four years.
But three days before the report was published, US import data showed America's Bangladeshi garment imports, measured by volume, had fallen 30% year-on-year in October. And this year-on-year decline in purchases has been pretty much going on since June - precisely the period during which all those CPOs were telling McKinsey they were buying more.
European apparel imports from Bangladesh slowed less rapidly, but by September 2011 were more or less unchanged (in volume) from 2010, after hefty double-digit growth at the beginning of the year.
Now McKinsey talked to a lot of buyers and sellers to create its forecasts. No doubt its report accurately describes what buyers and sellers were thinking. But there's no evidence they ever checked whether the information they were getting corresponded to what was actually happening on the ground.
And the reversal in the fortunes of the Bangladesh garment making industry has been so abrupt, and so counter-intuitive, it really looks as if buyers and sellers don't know what's happening.
In January 2011, for example, Bangladeshi garment imports into the US were 17% up, when measured in square metres of fabric, on January 2010. But by November 2011, they were down 14%.
And though the volume of Bangladeshi apparel shipments to the US has shown annual declines since June 2011, Bangladeshis are still using words like "surge" and "boom" to describe their exports - largely because they insist on measuring in dollars. With the average price per square metre of Bangladeshi imports into the US in November 2011 an extraordinary 25% up on 2010, the dollar value of trade soared even though the number of garments collapsed.
Bangladeshi garments sold to the US are now inflating almost twice as fast as Chinese garments, so the cash value of imports looks healthy.
And those few Bangladeshis who've noticed the slowdown in the volume of exports blame it entirely on problems in Europe.
In fact, Bangladesh has held its share of EU procurement fairly well (though still nothing like the surging growth Mc Kinsey's interviews implied), because the growth in ex-factory prices has been offset by more generous duty-free access to Europe. Bangladeshi sales to the US have fallen the hardest, with Bangladesh's share just below 6% in November after being around 7-8% in the first quarter of the year.
Serious capacity problem
Bangladeshi sales have slowed in my view, both because ex-factory prices have risen so sharply, and because of the country's serious capacity problem. Bangladesh isn't getting the orders buyers, at the most senior level, want to place because it can't cope with extra demand right now.
Some aspects of that capacity problem are out of the garment industry's hands, and the Bangladeshi government has concrete plans to deal with others - though some are proceeding more slowly than planned.
The country's short of electricity generating and transmission equipment, and the roads from Dhaka (where the factories are) to Chittagong (where they have to get for loading onto ships) are awful. So garment makers can't run their sewing machines all the time, and there are delays in getting what they succeed in making to the port in time to catch the boat.
Unlike some of its neighbours, though, Bangladesh really is building new electricity capacity and a proper road from factories to the port, so those two problems will fade away by about 2014/2015 - although not before. But 97% of Bangladeshi suppliers want still more government spending on infrastructure.
And some problems are - or ought to be - entirely in the industry's own hands.
Mohammed Shafiul Islam Mohiuddin, president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), blames a "severe scarcity of skilled manpower" for factories using just 60% of their capacity. His solution? For the government to "take some measures to resolve the issue in greater interest of the nation", complaining that "nothing has materialised yet" from the government. Heaven forbid business owners might actually train their own staff, as the Chinese do.
New factory development
One aspect, astonishingly, is in garment factories' hands and certainly shouldn't be: the decision on who opens new garment factories.
The best places to build new factories are in the country's Export Processing Zones. But they're close to full - and the government has given the two trade associations, the BGMEA and its rival the Bangladesh Knitwear Manufacturers 'Association (BKMEA, the right to decide who can set up garment plants in them.
Those associations' view is simple: only Bangladeshi-owned businesses, because in the words of BKMEA president Salim Osman: "Foreign investors might create workers' unrest because of the mismatch in wages and benefits that the local and foreign units offer to their respective workers."
No foreign owners, in other words, because they pay too much.
As a result, new factory development has come to a halt in Bangladesh. Just two new garment making companies were created in 2011, according to the country's official Business Registrar. Letters of Credit to import textile equipment into Bangladesh were 25% lower in the July-October quarter than a year earlier.
And we can find not a single example of an Indian or Pakistani manufacturer in the past two years moving to Bangladesh - though Indian and Pakistani newspapers are full of stories about local businesses wanting to.
Bangladeshi garment prices are going up because factory owners are keeping capacity down to maximise their profits. They then have the cheek to whine because their government's not training their staff for them.
Why is the country's government allowing businesses to decide who's going to compete with them? Well, the fact that 29 of the country's 300 Members of Parliament own garment factories might offer a clue.
There's no doubt that buyers want to make clothes in the country they'd like Bangladesh to be: cheap, business-friendly, widely English speaking. But it's getting pricier astonishingly fast and the only businesses it's friendly to seem to be Bangladeshi-owned factories. The country's got a serious capacity problem, and there's little prospect of any new capacity in the foreseeable future.
True its government announced a new garment village in mid January. But Bangladeshi governments have been making these announcements regularly since at least 2001, when Clothesource first reported on one. Not a single one of these announcements has ever turned into a real building programme.
Now at some point things might change. But I wouldn't bet on it. Those buyers telling McKinsey researchers they want to buy more from Bangladesh will probably have a completely different tale to tell when they look at how little they actually bought there in 2012.
Developing industry dilemmas
Bangladesh's story typifies what's happened in lots of developing countries with apparel and textile making facilities. At one point, a country looks attractive, and buyers want to put a lot more business there. But expanding any industry puts a strain on a country's roads and ports, and there's a limit on how many good workers will migrate to rapidly-expanding towns (often a euphemism for unhygienic sprawling slums).
In densely populated countries, any further industry expansion will require the displacement of farmland - so farmers and their workers will expect compensation. Few developing countries have the resources to pay for all this - and few displaced farmers will ever agree they've been compensated fairly.
And while 97% of manufacturers want more government spending on roads and power, there's zero interest among those manufacturers in paying the extra taxes needed to provide that infrastructure.
As Bangladesh's Finance Minister put it in November "the owners of the readymade garment industries make one complaint after another. They always highlight their problems and seek advantages from the government. And we [the government] also indulge their whims considering the sector as a 'spoilt' one."
So making progress takes time, and in democratic countries that means a lot of time. What's more, the whole process is getting tougher. Rising food prices mean farmers are often getting better off. They expect still higher compensation for new industries or roads going though their land - and their children need higher wages to tempt them to cities they know aren't as paved with gold as everyone thought a few years back.
How governments and business owners adjust to all this is utterly unpredictable. Chief purchasing officers got their jobs through skills in negotiation and managing teams: none are selected for advanced expertise in fortune telling.
Since garment industry manufacturing started going global, surveys of buyers' sourcing intentions have consistently failed to predict what buyers actually do a year later. McKinsey is unique in publishing a survey that fails to describe what buyers are actually doing - but is still probably a pretty accurate description of what buyers would like to do.
But if wishes were motor cars, we'd all be driving Porsches. And I believe our industry has to face up to the real possibility Bangladesh won't deliver the extra manufacturing capacity buyers want to see there.
We may have to look to something else for the answer to the Great Slumpflation Crisis of 2012. Of which more next month.
Achim Berg a McKinsey Partner and co-author of the study 'Bangladesh's ready-made garments industry: The challenge of growth' has responded here to some of the points raised by Mike Flanagan.
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