Bangladesh’s apparel exports could triple by 2020 as European and US buyers plan to strengthen their presence in the country and new players enter the market seen as ‘next China’, according to a study by McKinsey & Company.
The global management consulting firm and trusted adviser to the world’s leading businesses, governments and institutions said Bangladesh’s high growth in the readymade garment sector would continue for a decade. The country’s sourcing market will get crowded amid incumbent buyers’ plan to stay for long, and new markets are increasingly becoming important customers for Bangladesh.
“Depending on how well the most severe issues can be managed, the market will realistically develop at an annual rate of 7-9 per cent within the next 10 years, resulting in an export value of around $36 billion to $42 billion,” the study said.
Bangladesh fetched $12.59 billion from garment exports in 2010-2011, accounting for around 80 per cent of national exports and 13 per cent of gross national product, according to government data.
Recently, McKinsey conducted a study to review Bangladesh’s RMG growth formula. It is an extensive interview-based survey of chief purchasing officers from leading apparel players in Europe and the US, who account for $46 billion in total apparel sourcing value and covering 66 per cent of all apparel exports from Bangladesh. The study also included a telephone-based survey of more than 100 local garment suppliers and in-depth research.
It said while China is starting to lose its attractiveness due to a rise in costs of doing business, the sourcing caravan is moving on to the next hot spot. Costs have also increased significantly in other key sourcing markets, leading buyers to question their current sourcing strategies.
In 2010, China dominated RMG imports into Europe and the US, accounting for about 40 per cent of the import volume in each region. But the McKinsey survey shows that CPOs almost unanimously favour moving some of their sourcing away from China. Fifty-four per cent of them shared their plans to decrease their activities in the world’s second largest economy by up to 10 per cent, while 23 per cent stated that they sought to decrease their share of sourcing by more than 10 per cent over the next five years.
“As Western buyers search for the ‘next China’, they are evaluating all options to strengthen their proximity sourcing, moving on to north-west China, South-East Asia and other Far East supplier countries. Bangladesh is clearly the preferred next stop for the sourcing caravan.”
The study further said other markets in South-East Asia will increase their exports too, but will not be able to replace – at least in the near future – Bangladesh as a viable RMG sourcing hub.
Bangladesh offers the two main “hard” advantages – price and capacity. It also provides satisfactory quality levels, especially in value and entry-level mid-market products. All CPOs named price attractiveness as the first and foremost reason for purchasing in Bangladesh, and said the country’s price levels will remain highly competitive in the future.
Half of the CPOs mentioned capacity as the second biggest advantage of Bangladesh. With 5,000 RMG factories employing about 3.6 million workers, the country is clearly ahead of South-East Asian suppliers in terms of capacity offered (e.g., Indonesia has about 2,450 factories, Vietnam 2,000 and Cambodia 260 factories).
The other markets such as India and Pakistan would have the potential to be high-volume supply markets, but high risk or structural workforce factors prevent utilisation of their capacity.
A high share of European CPOs strongly emphasise the advantages of sourcing in Bangladesh due to favorable trade agreements, with the broadening of the EU Generalised System of Preferences rules on duty-free imports of garments from the country.
Taking these drivers into account, Bangladesh’s RMG industry will continue to face growing demand. The CPOs want to increase the value of their sourcing in Bangladesh by about 10 per cent annual growth rate, whereas mid-market players plan an annual growth rate of around 14 per cent.
While Bangladesh represents some very promising advantages in certain dimensions, a number of challenges could create hurdles for companies seeking to source from the country. For all business stakeholders, infrastructure (transport and utilities supply) is the single largest issue hampering Bangladesh’s RMG industry. The power supply issue seems more likely solvable within the next two or three years, although 90 per cent of local suppliers rate the current energy supply as very poor or poor.
Some 93 per cent of the European and US CPOs interviewed agreed that the compliance standard in Bangladesh has somewhat improved (67 per cent) or strongly improved (26 per cent) within the last five years. However, gaps exist and new risks may be emerging.
A gap between customer requirements and supplier capabilities or investment plans is emerging, as currently only 50 to 100 local garment manufacturers are able to produce at an advanced level in terms of product categories, productivity, services and compliance.
Apart from a lack of investment in new machinery and technologies, the current insufficient size of skilled workforce also impedes an increase in productivity and a move towards more sophisticated products.
Experts estimate that there is currently a 25 per cent shortage of skilled workers in Bangladesh’s RMG industry.
Also, existing challenges will multiply if suppliers are not able to fill higher-skill middle management positions, according to McKinsey.
The European and US CPOs say economy and political stability are one of the key areas of risk when sourcing in Bangladesh. About half of them said they would reduce the value of their sourcing in the country if political stability were to decrease. A majority of them see corruption as a major hurdle for doing business in Bangladesh. Further, productivity needs to improve to close the existing productivity gap in comparison to other sourcing countries.
The McKinsey study further said the potential for Bangladesh’s RMG growth can be realised only if the challenges in areas of infrastructure, compliance, supplier performance and workforce supply, raw materials, and economic and political stability are tackled. The three main stakeholders – the Government, suppliers and buyers – can accomplish the development potential and solve Bangladesh’s RMG growth formula. “Only if wholehearted efforts are led by all stakeholders together, will the stage be set to support a future ‘rebranding’ of Bangladesh.”