"The Bangladeshi garment industry has shown repeated resilience in handling crises"

"The Bangladeshi garment industry has shown repeated resilience in handling crises"

In late June and early July, Bangladesh's garment industry was hit by a number of new long-term threats. But the industry's leaders appear unaware of the real severity these threats posed to their viability, writes Mike Flanagan.  

Islamist terrorism

Islamist militants stormed an upmarket restaurant in the Gulshan area of Dhaka on 1 July, killing 20 people, including nine Italians, seven Japanese, an Indian, and an American, before security forces were able to end the 12-hour stand-off.  Most of the Italians worked in the garment industry: reports claimed all the murdered were killed after failing to recite passages (in Arabic) from the Koran.

Bangladeshi trade associations condemned the killings, but most industry figures said heightened security fears could be managed and that manufacturers would simply hold meetings with Western customers in Asian cities outside Bangladesh.

Abdullah Hil Rakib, head of exporter Brothers Fashion, said: "Within six months...things will be back to normal."

Hennes & Mauritz and Marks & Spencer said their operations in the country were "not immediately affected" by terrorism. James Moriarty, Alliance country director and former US Ambassador, added: "The Alliance and our member companies will continue to stay the course."

All true: terrorism can't be ruled out anywhere these days.

But the Gulshan attacks specifically targeted visiting Westerners. This raises the prospect of retailers and brands – as well as the Alliance and Accord – deciding it is too dangerous to send in Westerners to inspect factory inspection or production. They will need to use locals. And in the past few years, the main Bangladesh trade association has tried to get Bangladeshis who tell the truth about conditions in factories prosecuted for sedition (which can be punished by life imprisonment).

In an industry widely criticised for inadequate buyer supervision, some factory owners, resenting customer interference, would probably be happier with inspectors they can threaten. But that could easily undermine the whole country's credibility with buyers and the credibility of its compliance procedures.

Air cargo security

Citing security concerns at Dhaka's international airport, Germany on 26 June announced it would restrict direct air cargo imports from Bangladesh.

That day, Lufthansa was forced to leave up to 60 tons of garments in Dhaka. Germany's new rules – like those introduced earlier by the UK and Australia – require air cargo to be re-screened at a third country until procedures at Dhaka are substantially improved.

Germany is Bangladesh's second largest apparel market, with imports from Bangladesh in the 11 months to May 2016 coming to $4.2bn, just behind America's imports of $5.1 bn.

Airfreight delays are serious in a country whose main port, Chittagong, is severely congested and has dreadful road links with the Dhaka area. The German and British restrictions add further delay to shipments bound for Europe, which still accounts for over 60% of Bangladesh's apparel exports.

Though logistics in Bangladesh were recognised by the World Bank in mid-June as being less awful than two years earlier, transport remains a serious restraint on the country's competitiveness.  Recently announced World Bank grants to upgrade transport systems paid no attention to the needs of merchandise exporters.

Bangladesh to benefit from $360m logistics investment

Brexit

On 23 June the UK voted to leave the EU. The country accounted for 12.7% by US dollar value of Bangladesh's apparel exports in the 11 months to May 2016: just behind the US and Germany, but substantially ahead of any other export destination. Once the UK leaves the EU – which may not be for several years – Bangladesh loses its automatic right of duty-free access to the UK.

Bangladeshi reaction to the Brexit decision was concerned only with the consequent devaluation of the pound, and likely pressure from British buyers for lower prices. "UK businesses…will negotiate to discount prices," said Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue. MA Jabbar, managing director of DBL Group added: "One of our big buyers in the UK has already communicated with us to give discount on prices."

Once the UK leaves the EU, there can be no certainty it will continue to offer Bangladesh duty-free terms: the Brexit decision is a shock, and threatens to change many aspects of British foreign policy.

The real implications

I believe Bangladeshi garment makers have missed the point of these three threats, and outsiders have avoided drawing attention to how they really affect Bangladesh's apparel competitiveness.

The Bangladeshi garment industry has shown repeated resilience in handling crises. There is no doubting the determination of Western customers to keep buying from them, or the determination of the Accord and Alliance to ensure they can buy with confidence.

Alliance brands "staying the course" in Bangladesh

But will businesses want to buy from Bangladesh if the dangers of sending in staff from outside increase their risk of serious compliance failures? If fewer export markets are likely to offer duty-free access, or if airfreight can no longer be relied on to get urgent garments out when timely surface transport isn't possible, will Bangladesh be able to compete on price and reliable delivery times?

The fourth threat: the Bangladesh government

It's perfectly possible none of these dangers will materialise. But in the course of just two recent weeks, all became more likely. Meanwhile, both the Accord and the Alliance keep having to terminate suppliers. Recent reviews of inspection reports are showing between a quarter and half all factories need urgent retrofitting for safety. Just 4% of Alliance factories have been fully certified as structurally compliant, while 97% of all factories used by Accord signatory companies are behind schedule on remediation.

97% of Accord member factories lag on remediation

To complicate things further: Bangladesh's government repeatedly insists it is going ban the Accord and Alliance from any kind of activity in Bangladesh after mid-2018 – because "the government has earlier committed to foreign investors that trade unionism will not be allowed inside Export Promotion Zones."

With buyers' profits under continuing pressure, it's naïve to expect customers to fund more upgrading, unlikely many factories can afford it themselves – and almost certain the upgrading programme won't be complete by mid-2018. 

Any sensible risk appraisal system will make sourcing from Bangladesh look a great deal more difficult today than it looked at the beginning of June.

Assurances of "standing by Bangladesh" are certainly meant sincerely. But will they stand up to the increased threats of terrorism and the loss of a major duty concession?

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Second Bangladesh attack renews safety fears