However, the moot point is whether Bangladesh losing its luster with garment buyers as ongoing factory safety issues and unrest take their toll? The results of a new survey suggest this could be the case - yet it still remains the country of choice in a sector where price continues to hold sway when it comes to sourcing decisions.
What a lot of difference two years makes to the apparel sourcing landscape. Back in 2011 a survey by McKinsey & Company forecast Bangladesh ready-made garment exports would nearly triple within a decade, propelling the country to an annual growth rate of 7-9% and export value of around US$36-42bn by 2020. But new research released by the consultancy firm seems to suggest perhaps not surprisingly - that the country has lost some of its sheen.
The latest survey of chief purchasing officers (CPOs) in 29 European and US apparel companies with a combined sourcing value of US$39bn, warns of the challenge of shifting production to countries with lower labour costs. And it highlights "recent tragic events" - such as the collapse of the Rana Plaza factory complex with the loss of more than 1,100 lives - as among top insecurities surrounding the country.
The executives say they are taking a more cautious view of Bangladesh as a sourcing destination, with nearly one third of them no longer ranking the country as a top-three supplier. Back in 2011, 70% placed it as one of the most likely hotspots over the next five years; but this has now dropped to 47% thanks to "compliance issues and unrest." In other changes in the standing of individual countries, Myanmar/Burma and India have risen up the ratings as places to watch.
The easing of trade restrictions with Myanmar/Burma means 47% of the sourcing professionals now put the country within the top three, while India's standing has risen with 40% of buyers as a beneficiary of the shift from other sourcing countries. But capacity issues are seen as weighing on the potential of Vietnam and Indonesia, while capacity, along with compliance and unrest, have pushed Cambodia's standing as a top-three contender down from 46% of respondents in 2011 to just 13% in 2013. And it also seems companies have revised their attitude to China as a sourcing destination. Although most companies, especially mid-market players, say they favor moving some of their sourcing away from China; this is now less than indicated back in 2011.
End 0f apparel cost deflation
As well as changes in sourcing location, the latest McKinsey & Company survey also leads on the fact that buyers expect sourcing costs to continue to rise in the next 12 months - marking an end to decades of apparel cost deflation. "We have now reached a tipping point and it will become even more difficult to keep consumer prices stable", says the study's author Achim Berg. The value segment and large players are particularly affected, he notes, while the mid-market segment seems to have more margin room to maneuver.
Some 76% of those questioned for the report expect an average of 1.7% higher prices, regardless of where they are sourced. And 14% expect a strong to very strong cost increase of more than 4%. The value segment and large players expect an average cost increase of 2% and 3.5% respectively. The main driver is increasing labour cost (especially in China), followed by rising prices for raw materials and fabric/yarns. In addition, mid-market players appear to be facing a "supplier's market", with a shift of the purchasing power to their disadvantage. According to the survey results, 72% of buyers are planning to decrease the sourcing value share from China. While the expected rise in sourcing price is seen as inevitable, some CPOs have taken steps to try to mitigate it with many major players having already shifted larger parts of their sourcing from China to countries with lower labour costs.
The challenges of such a strategy are most acute for value players that started sourcing in these countries earlier on, and for large players that experience capacity problems when shifting bigger volumes. Proximity sourcing is also becoming more important for 69% of respondents. This is especially true for mid-market players (81 %) and those in Europe (71%).
And companies are becoming more proactive when it comes to corporate social responsibility initiatives - as well as preparing contingency plans to help the III cope with the challenges they face in these countries. "It is becoming increasingly important that buyers - and companies as a whole - take a more end-to-end approach to sourcing and improves their own operational execution as well as that of suppliers," says Berg. "But one thing is for sure, we will definitely see more challenging times ahead."
Wage Disputes Engulf 3000 Garment Units in Bangladesh
The fallout from violent protests in September in Bangladesh's key apparel industrial belts has been estimated cause to financial losses of around BDT6.0bn (USS77rn) for apparel makers, higher production costs, and heightened concerns from buyers over the country's reliability as a source of clothes. Garment exporters say the losses were incurred as a result of production disruption and vandalism during the six days of unrest, which began on 21 September. An official from the Bangladesh Garment Manufacturers and Exporters Associatiol1 (BGMEA) told that nearly 3,000 ready made garment (RMG) units were caught up in the dashes - with 65 factories damaged and arson attacks launched on 25.
The protests began as workers demonstrated against a pay increase tabled by employers in on-going wage negotiations. They were demanding a minimum monthly wage of BDT 8,114 (5104.36), up from the current BDT 3000 ($38.53) entry-level minimum wage for a worker in Bangladesh, which was fixed in 20[0. But apparel factory owners under the Bangladesh Garment Manufacturers and Exporters' Association (BGMEA) have proposed a rise of just 20% to BDD600 (USS46.30).
Peace was restored to the countrys apparel and clothing sector following a series of talks between garment makers, labour representatives and government officials. However, "the overall cost of production in the apparel sector has increased by 12-13% due to the recent trouble, general strikes and political uncertainty over the upcoming general election," Atiqul Islam, President of the BGMEA claimed.
The BGMEA chief said weak infrastructure facilities and the appreciation of the local currency against the US dollar have contributed to the higher cost of production. Buyers have also questioned whether they will receive their Christmas orders, he said, adding that they will be finished on time despite the disruption. "Some foreign buyers have suspended or cancelled their scheduled visits to Bangladesh due mainly to the RMG workers unrest and political uncertainty, the BGMEA chief explained. "We're passing crucial moments right now," he noted, explaining that even an hour's delay in shipment could increase the risk of discounts, cancellation, deferred payment and losses.
Protests over low wages, benefits and working conditions are frequent in the South Asian country, but have gained in intensity. While buyers might not completely abandon the country, Fazhll Hoque, former President or Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), said he fears many may shift some orders to Cambodia and Vietnam. However, garment makers and labour leaders pledged to work together to calm worker unrest. "We've promised to deal payment of workers' salaries and other financial benefits before the Eid-ul-Azha," the BGMEA chief said, adding that they are also working on a "sustainable salary structure" for the garment sector. Atique said the wage board is likely to announce a new minimum salary for garment workers in November.
This article was originally published in the November issue of the Stitch Times Magazine
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