Diversifying our economy is the best way to ensure that our economy passes the test of time
A few months back, I picked up one of our customers, who had been working with us for several years, from the airport in New York. The Big Apple, as is known, is the hub for all garment business in the US, and brands in New York are notorious for being fast paced, ordering large volumes for dirt cheap prices.
We always go back and forth when it comes to pricing, and even after offering competitive prices for our standards, we always hear about some other manufacturer beating it.
As we sat in the car, conversing on various aspects of the business, he floated the idea that we should consider starting an e-cigarette business, as the business is taking off in the US. It was to eventually take off in Asia as well.
There was not much money to be made in RMG anymore, and we should consider diversifying our business. My family has been in this business for over 30 years now. He is not the first person to say this to me.
It is no big secret that 2019 was a difficult year for RMG in Bangladesh, a key factor been increase in wages. According to a Penn State study on Bangladesh apparel industry, prices offered by lead customers to suppliers declined by 13% since 2013 (although its likely that this percentage is much higher in reality), which decreased margins by 13.3%.
Add to that the substantial capital expenditures due to increased compliance requirements, increased global competition and the perils of fast fashion on manufacturing. Small manufacturers are struggling to keep up, mid-size manufacturers think the business is not what it used to be and large ones continue to expand despite challenges. In 2019 alone, hundreds of factories are expected to close after the recent wage hike.
It is difficult to imagine this industry will thrive a decade later. Our over dependence on this industry begs the question: How should a growing nation thrive amidst challenges faced by its largest industry? The need for developing new industries have never been more prevalent.
Despite challenges, Bangladesh has managed a steady GDP growth since 2005. A large population base of 165 million and rising standard of living makes Bangladesh an exciting prospect for foreign investors. Japan American Tobacco’s $1.47 billion acquisition of Akij Tobacco is a landmark moment that points towards foreign interest in the Bangladeshi market.
The growing population has several holes in its economy such as medical and pharmaceuticals, power, agriculture, consumer products and construction. There are export opportunities as well in several sectors like leather and electronics. These holes resemble opportunities for local entrepreneurs to capitalize on.
The textile industry still accounts for 80.7% of the total exports of our economy. The growth of this industry have been slow in recent times due to rising wages, requirement of capital investments after the Rana Plaza incident, oversaturation in a few products (woven bottoms and cotton knits), poor mid-level management and rising global competition.
Bangladesh’s inability to be included in Free Trade Agreements such the Trans Pacific Partnership (which was stopped by the Trump presidency, although it was a major cause for concern in the industry when the idea was being floated) and Regional Comprehensive Economic Partnership (which includes 16 countries in the world) are not good news for the garment manufacturers.
The reality is that most of our institutions are not well equipped to face the challenges that the industry will face in the coming years. To add a cherry on top, our financial institutions are struggling to cater to SMEs, rescheduling debt for larger corporations and further adding to the distress.
Most will wither away in the next decade or so.
For how much longer will we have a thriving RMG industry? Only time will tell. In such a situation, our policymakers should focus on developing new industries that can help decrease our dependence in this industry. This can start by identifying key industries, subsidizing them and making opportunities available to the masses.
Abir Chowdhury is Director, AJ Group.