I have been part of the RMG industry in Bangladesh for close to 40 years, from its infancy in the early 80s. In those early days it was the law of the jungle, when inexperienced entrepreneurs set up shop with just a few hundred workers while foreign traders flocked in to take advantage of this nascent supply of low-cost garments.
I witnessed the quota days when fortunes were made for those companies who held coveted export quotas and also in the trade of these quota allocations followed by the post-quota boom in investment in the early 2000s. The industry then grew exponentially, significantly boosting the country’s economy.
The global thirst for cheap apparel, the relatively low cost of establishing factories, the efforts of Bangladeshi entrepreneurs, the skill, dedication, and hard work of the Bangladeshi garment worker -- all converged to generate billions in national revenue and enhance the national GDP and spending power of its people.
It also had a tremendous multiplier effect of creating many more supporting industries, and the opportunities, employment, and economic gains for millions of families that came with it.
However, the glory days have been waning for a few years now, especially post-Covid, and it is possible we will see a down trend starting in 2024.
Historically, the apparel industry has shifted from country to country, seeking cheaper production costs. It moved from the West to countries like Taiwan and Korea, then to countries like Sri Lanka and India, and then to Bangladesh, where it settled for over four decades.
Bangladesh has been lucky in that, without having any natural advantage (other than low cost labour) or strategic advantage, we have held on to the business for so long. Now the tides have started moving against us and a portion of the business may begin to move away as we lose competitiveness and more and more factories and industries become inoperative.
This industry may have been a symbol of wealth and prosperity, and at times even of opulence and decadence, but the overall math is not making sense anymore. The general perception is of abnormal profits where companies take advantage of low labour pay and generous orders from international brands to create wealthy empires.
However, the reality these days is that the majority of the companies are struggling to manage the multi-directional challenge of high operational costs, ever declining customer prices, increasing debt and finance costs, coupled with reduced orders stemming from global uncertainties since last year, and now the ongoing labour issues.
A rough estimate of surging operational costs in the last five years: Labour (which represents around 65-70% of a factory cost) has doubled. Utility costs have risen by about 50% and just gas has gone up by 150%. Increasing customer requirements of compliance, marketing, design and developments, and others have added another 1-2% on expenditure.
But most significantly, customers have transferred their cost of finance by introducing deferred payments (up to 90 days in some cases) which has added about 8-9% in extra cost to the supplying companies.
All these have equated into an increase of about 60-75% increase in operational costs of garment factories in Bangladesh in the last few years.
At the same time capex investments, which many factories have had to do to keep up with never-ending customer compliance requirements, have gone up by a whopping 65%.
In the same period, customers have reduced their price by about 20%. This seems most illogical and even unethical, as with inflation rising globally and prices going up for every other item in the world, one would think that there would be some increase in the prices paid by customers to Bangladesh. But it is what it is.
To offset some of this we had an exchange rate benefit of about 38% (but this was mostly since last year or so) and we have had a 10-15% increase in efficiency (the improvements in efficiency are also debatable as traditionally and culturally in Bangladesh we are prone to utilizing more manpower for even simple jobs in comparison to other countries, hence even if our per person wages might be less than other producing nations, our overall cost is not competitive anymore).
But the stark reality is that the math is simply not adding up anymore. For most companies, margins have dwindled to razor-thin low single digits, while periods of reduced orders or work stoppage will cause them to end up in the red and rely on debt financing to stay afloat.
Regardless of the common perception, the industry is struggling to digest the last wage hike in December. As the industry was already on its knees with rising utility costs and low orders, the high percentage of wage increase was a sort of death blow as customers had not reciprocated with increase in prices.
Many numbers of small and even large companies have begun to close down. The smaller factories are struggling due to high cost and low orders. The large factories are also struggling with high cost and low orders, but many of them had also made huge investments with mostly bank finance, with the assumption of a stable ROI which did not materialize (due to the challenges mentioned above).
This year has been difficult even for the small percentage of factories who do not operate with debt, as factory closures have made it difficult to make payroll and they fear that a potential slowdown next will cause them to slide down the same slope of relying on debt to continue operations. Many good long-time entrepreneurs are thinking of exiting this industry while they are still solvent.
It might not be a popular thing to say, but from what I have seen from the general workforce, most workers have expressed satisfaction with the current salary structure. Although the minimum salary has been declared as Tk12,500 (which is only for a novice), semi-skilled workers take home between Tk19,000-19,500 (including basic salary, overtIme, and various incentives).
With this increase, a factory also had to progressively increase the salaries of supporting staff like supervisors, line managers, and others like guards, cleaners, office assistants, etc -- causing a significant net increase in operational cost. Given these realities it is surprising to see various organizations and entities pushing for Tk20,000 and over as a minimum wage and claiming calculations apparently support this.
These calculations cannot be based on any real situation and are definitely arbitrary numbers they are producing. From inside the industry we can clearly see that any further changes at the moment will be disastrous. Rather, the industry needs some time to digest and accommodate the increases and changes already on its plate.
So then what, or who, are causing the agitation among the workers. As per practice, the salary was revised last year in December and it was a number which we feel was more than the market could handle, but still the decision had to be accepted.
Before the August revolution, the industry was running smoothly. The worker agitations emerged suddenly and, if one follows carefully, many demands were beyond the law (as most factories were running as per labour laws, which was ensured by customer compliance audits) and some even illogical. They were initiated to create mayhem and anarchy. As usual, the real interests possibly lie somewhere else but the workers are ultimately being exploited and eventually will be victims if their employment falls at risk.
Who will benefit from anarchy in this industry? It is not for me to know. It could be jhoot businessmen, union leaders, etc. But there is one answer which, as time goes by, we will see if it is true or not.
We have always had competitors in this industry like Vietnam, Cambodia, and others, but most competing countries have had to compete by price, quality, or service, and have not been able to directly influence things in this country.
However, there is a neighbouring country who has a rising garment export trade, and who apparently have access to our political leaders, union leaders, and even many of the influential people in our society.
In fact, there are news reports that they are targeting to reach 65 billion in export by next year from the 44 billion currently and they are giving massive incentives to entrepreneurs to create this infrastructure.
Since they have a history of trying to influence and even have a hand in the policies of Bangladesh, it would not be surprising if, by causing anarchy in the garment industry, they achieve a dual goal of destabilizing the nation, while making the Bangladesh factories uncompetitive and unstable and move out a portion of the apparel export, some of which will end up at their own doors.
And move out it will. From the August turmoil and thereafter the ongoing labour issues, customers are getting worried and have already started shifting orders to find alternative sources for next year.
It will not be surprising to see a 10-15% dip in orders next year. This equates to billions of dollars for Bangladesh revenues. For an already struggling country and government, this will be another catastrophic blow. Unfortunately, by the time this happens (if it happens) and the government realizes that steps need to be taken, it will be too late.
The orders which leave will not come back for a while and in its wake it will leave a slew of sick factories and unemployed workers. I am not an economist or an intellectual, but one can imagine the negative impacts this will have on our country. It would be better if stakeholders take immediate steps to address and prevent these issues (worker unrest, rising cost, lowering customer prices) than try to cure and resuscitate after the fact.
Regarding the pay scale of workers, it is not that factories are opposed to raising salaries. It is that the price and hence receivables of the companies have not gone up in the last few decades. In fact, as mentioned, year on year, it has decreased while cost has gone up.
There is hypocrisy at play on the international brands’ side where they call for living wages, ethics, and compliance while lowering the prices every year. In essence, they take advantage of the oversupply in the country due to unbridled investment in this sector and ignore pleas for giving fair prices by pitting supplier against supplier and creating a price war.
Due to the global uncertainty and dip in orders, factories also underquote to take orders and keep their lines running even if at a loss. However, this just postpones the inevitable as the eventual debt burden is causing many factories, big and small, to shutter their doors.
This industry has been good for many people. Yearly exports worth billions have enabled huge investments, substantial growth, and also a level of wealth among owners that is not visibly present in any other industry here. In a country where the majority of people are struggling, this display of wealth has certainly been unacceptable in many cases.
Ironically, the industry has become a victim of its own success. On the one hand it has contributed hugely to the development of this nation. From impoverished workers 40 years back I now see this generation of workers much better off and able to send their children to schools and universities and afford a decency in life not possible in the past.
I see an industry consisting of millions of people directly and indirectly affording a lifestyle that never existed in our country's history. At the same time, the excesses of some of the owners have overshadowed the benefits in the eyes of our general society. Hence it will be hard to convince people from outside the industry that the economics are not working any more and we may witness a downward spiral.
The goose may have been slaughtered.
We have to dispel the myths and misconceptions about this industry asap. It is a time of crisis that we are facing and it needs steady hands, right strategy, and clear vision to address the challenges. Usually these things are easier said than done, but I pray that the powers that be have the right realizations at the right time and the situation can be salvaged before great damage is done. We cannot afford to point fingers, and stand by and watch the industry wither.
Certainly there is some blame to be put on some bad apples and some bad leadership in the industry itself. Over-expansion, over-leveraging, and bad governance issues haunt the credibility of this sector. But it is also true, that, as it served as a multiplier in the growth of this country, so will its decline cause multiples of negative effects in the economy and prosperity.
The industry leaders, media, government, and union leaders (as representatives of the workers) -- all need to work in consort to salvage one of the biggest revenue streams of the country, otherwise the consequences could be catastrophic.
The author is an apparel industry insider.
