IB Termpaper Final

Table of Contents
1.0 Introduction ............................................................................................................................................ 1 1.1 Origin................................................................................................................................................... 1 1.2 Background ......................................................................................................................................... 1 1.3 Problem Statement ............................................................................................................................. 4 1.4 Objectives............................................................................................................................................ 5 1.6 Scope ................................................................................................................................................... 5 1.7 Limitation ............................................................................................................................................ 6 2.0 Methodology........................................................................................................................................... 6 2.1 Research Design .................................................................................................................................. 6 2.2 Data Collection Method ...................................................................................................................... 6 2.3 Analysis Design.................................................................................................................................... 7 2.4 Sampling Design .................................................................................................................................. 8 3.0 Industry Overview ................................................................................................................................. 10 3.1 Background of the Industry .............................................................................................................. 10 3.2 Sales Trend ........................................................................................................................................ 10 3.3 Product Composition ........................................................................................................................ 11 3.4 Market Composition ......................................................................................................................... 12 Table 5: US Knit and Woven Imports .......................................................................................................... 17 3.5 Competitive Advantages of Bangladesh ........................................................................................... 17 3.6 Disadvantages of Bangladesh ........................................................................................................... 19 4.0 Demand-Side Dynamics ........................................................................................................................ 20 4.1 Major Buyers ..................................................................................................................................... 21 4.2 Factors Influencing Sourcing Decisions ............................................................................................. 22 4.3 Plans of Buyers Regarding Sourcing in Bangladesh .......................................................................... 26 5.0 Supply-Side Dynamics ........................................................................................................................... 29 5.1 Major Players .................................................................................................................................... 29 5.2 Factors Influencing Profitability of Manufacturers ........................................................................... 30 6.0 Supply Chain Analysis............................................................................................................................ 32
6.1 Lead Time .......................................................................................................................................... 32 6.2 Profit Margin ..................................................................................................................................... 34 6.3 Backward Linkage.............................................................................................................................. 36 6.4 Sourcing of Raw Materials ................................................................................................................ 38 7.0 Analysis of Global Recession ................................................................................................................. 38 7.1 The US economy ............................................................................................................................... 39 7.2 The EU economy ............................................................................................................................... 47 8.0 Recession in Bangladesh ....................................................................................................................... 50 9.0 RMG sector of Bangladesh during recession ........................................................................................ 54 10.0 Analyses of Psychological factors affecting Buying behavior & Fashion trends of US & EU .............. 56 10.1 Buying Behavior .............................................................................................................................. 57 10.2 Fashion Trend.................................................................................................................................. 59 11.0 Analysis of changing dollar value and its impact ................................................................................ 62 11.1 Impact in competitor countries Where Bangladesh stands? ....................................................... 65 11.2 A Hypothetical Case of TRENDSETTERS - a manufacturer of Wal-Mart ......................................... 69 12.0 Analyses of impact of Recession on Profitability & Mode of Payment .............................................. 70 12.1 Order Book Situation ...................................................................................................................... 71 12.2 Profit Margin ................................................................................................................................... 81 12.3 Competitiveness.............................................................................................................................. 91 12.4 Mode of Payment ........................................................................................................................... 96 13. Growth Potential................................................................................................................................. 100 13.1 Sales .............................................................................................................................................. 100 13.2 Product Composition .................................................................................................................... 101 13.3 Price .............................................................................................................................................. 101 13.4 Buyer/Market Potential ................................................................................................................ 102 14. Market Diversification......................................................................................................................... 102 14.1 Current Scenario ........................................................................................................................... 102 14.2 Comparison of Market Diversification with India and China: ....................................................... 104 14.3 Potential Markets of Bangladesh RMG: ........................................................................................ 107 14.4 Market Diversification Strategies: ................................................................................................ 113 15. Product Diversification ....................................................................................................................... 116 15.1 Current Scenario ........................................................................................................................... 116
15.2 Need for Product Diversification: ................................................................................................. 122 15.3 Future Potential Products to Be Exported .................................................................................... 124 15.4 Possible Strategies for Product Diversification: ............................................................................ 133 16. SWOT Analysis of Main Competitors .................................................................................................. 134 16.1 Pakistan ......................................................................................................................................... 135 16.2 Sri Lanka ........................................................................................................................................ 137 16.3 Vietnam ......................................................................................................................................... 137 16.4 Cambodia ...................................................................................................................................... 139 16.5 China ............................................................................................................................................. 140 16.6 India .............................................................................................................................................. 142 17.0 Analysis of the responses & measures taken by Bangladesh & its competitors to encounter recession ................................................................................................................................................... 143 17.1 Measures Taken ............................................................................................................................ 143 17.2 Strategies yet to be adopted ........................................................................................................ 145 17.3 Required Measures to overcome the effects of global recession ................................................ 146 17.4 Required measures to increase the profitability of RMG industry ............................................... 150 17.5 Current Competitive Advantages of Bangladeshi RMG sector ..................................................... 150 17.6 Current shortcomings of Bangladeshi RMG Sector ...................................................................... 154 18.0 Analysis of recent global recession on the RMG sector of Bangladesh The Broad Objective ....... 157 18.1 Impact of recession on RMG exports of Bangladesh .................................................................... 158 18.2 Analysis ......................................................................................................................................... 160 19.0 Research Findings ............................................................................................................................. 164 20.0 Recommendations ............................................................................................................................ 166 20.1 Recommendations proposed by Bangladesh Bank....................................................................... 166 20.2 Short Term Policies: ...................................................................................................................... 166 20.3 Long Term Policies ........................................................................................................................ 167 21.0 Conclusion ......................................................................................................................................... 169 References ................................................................................................................................................ 170
Global Recession and its impact on RMG sector of Bangladesh
1.0 Introduction
1.1 Origin
This report has been prepared as per the requirement for the course International Business Environment under the instruction of the course instructor Dr. Abu Yousuf M Abdullah, Professor of Institute of Business Administration of University of Dhaka.
1.2 Background
The Ready Made Garments (RMG) industry for a period of time has been the main source of growth in Bangladeshs export market and also the foremost employment generating sector. The direct contribution to GDP from this is about 11 percent, when compared it is relatively small, but the industry plays key role in employment and in the income provision to the poor class of Bangladesh, employing directly about 2.5 million people (September 2008 est.)i, which is about 48% (total employment in the manufacturing sector is 5.2 million according to BBS) in the employment in the manufacturing sector, and in this around 80% are women (USITC, 2004)ii. The industry supports indirectly about 12 million people out of a country of 147 million (July 2006 est. Source: CIA World Fact Book)iii. The export-oriented readymade garments (RMG) sector in Bangladesh started its journey in late 1970s as a small non-traditional export sector. The RMG boom in Bangladesh initiated in the early 1990s, when free-market oriented government policies and a variety of incentives to RMG producers first enabled entrepreneurs to invest widely in the sector. Throughout the 1990s, the RMG industry grew steadily, from 759 RMG factories at the start of the decade to 2,726 by 1998. In September, 2008 the number of RMG factories in Bangladesh stands at 4,740 (Source: BGMEA). After a few decades it has become the major export revenue earning sector, employing the major portion of human resource working in the industrial sector of the country. The RMG that is produced in Bangladesh is primarily for export. The Bangladesh RMG industry has thus far concentrated on the US and EU markets: about 32% of Bangladesh RMG exports are to the US, another 60% is to the EU and the remaining 8% goes to other countries. In 200708, RMG accounted for 75.83% of all of Bangladesh exports in terms of value.
The growth of RMG sector is due to the increase in the number of firms producing RMG in Bangladesh. The global recession following the events of September 11, 2001 had a distinct impact on the Bangladesh RMG industry, leading to the closure of several non-performing small RMG firms. The exports of RMG suffered as well, recording a 7% decrease in that period. However, the industry was able to stabilize and continue growing throughout 2002, resulting in a 13% growth in exports in 2003. In the period 1990-2004, Bangladeshs market share in total world exports of clothing has only increased from 0.46% to 1.07%. Over the past one and half decade, RMG export earnings have increased by more than 8 times with an exceptional growth rate of 16.5% per annum. However, China has recorded a spectacular growth of market share, from 7.95% in 1990 to 21.04% over the same period. Thus China has grown extremely competitive in global markets.iv The good news, however, is that Indias market share is not as large as Chinas. This is not due to weaknesses in Indias RMG industry rather, Indias already diverse export portfolio means that they are not as reliant on the export of RMG as Bangladesh although their market share has grown, from 2.22% in 1990 to 3.33% in 2004. Prior to January 1, 2005, all predictions indicated that the Bangladesh RMG industry would suffer acutely in the face of open competition from India and China. Experts seemed unanimous that the end of the MFA would provide a severe shock to the Bangladesh RMG industry, and that such a shock would make it difficult for our RMG factories to continue their impressive growth trend. In the post-MFA era, Bangladeshs RMG exports have not declined but, in fact, have continued to grow. In 2005, RMG exports to the US grew by US$ 392 million, a growth of 18.8% over the previous year. Till April 2006, a total of US$ 925.5 million worth of RMG had already been exported to the US. This provides a monthly average of US$ 231.4 million worth of exports. In 2006, 49.13% of our total RMG exports came from EU countries. In 2006, RMG sector earned 33.1% of its export revenue from US market. The exports grew steadily in this period for other countries. In 2006, 17.64% export revenue was earned by exporting apparel products in other markets and the percentage increased to 18.43% in the following year. Bangladesh's exports to the USA grew by almost 5 percent in 2007, according the US Department of Commerce. v But the export volume in the US market did not increase that much compared to EU market. Through our research, we found out that, due to the US recession, the manufacturers of Bangladesh experienced some drop in the number of orders from the US buyers in the latter
half of the year 2007. Among the RMG exporting countries, only Vietnam did not face the heat of the US recession last year because their export-oriented industries are specially insulated against any extraneous or political disturbances which enable the country to produce goods and services at cheaper price than in any other country in the subcontinent.vi Bangladeshs RMG exports to the world market reached an all time high value of over USD 9.35 billion in the end of 2007. Woven apparel exports and knitwear exports stood at USD 4.61 billion and USD 4.74 billion respectively. In 2007, the RMG sector experienced a growth of 4.67%. While this growth rate is not as impressive as the one achieved in the previous years, the relative position of Bangladesh, compared to most regional competitors in the two main export markets remains strong. An additional highlight for 2007 is that for the first time in the sectors history knitwear exports exceeded those of woven apparel. The global RMG market is estimated at US $400 billion at present. Bangladeshs share of this market is estimated to be around 6% at the end of this year. There is ample opportunity for the industry to grow and Bangladeshi manufacturers are confident that the countrys market share in the next 2-3 years will stand at around 8-10% of the global market. In spite of having a strong and growing RMG sector, new threats and global challenges are upon Bangladeshs RMG sector. Both the major export markets of Bangladesh have started experiencing recessions in their own economy from the second quarter of the 2007-2008 financial year. The US and EU economists are concerned about the fact that various economic indicators are showing an upcoming recession in both the economies. The main factor pushing the US economy into recession is the weakness in the housing market. The recovery of the US economy that began in November 2001 was primarily fueled by the US housing market. With prices now headed downward, construction and home sales have dropped off by almost 20 percent against year ago levels. Even more importantly, borrowing against home equity, which had been the main factor fueling consumption growth, will plummet as many homeowners lack any further equity to borrow against. The result will be a downturn in consumption spending, which together with plunging housing investment, will likely push the economy into recession. The economy will see a substantial net loss of jobs, with nominal wage growth slowing as the labor market weakens over the course of the yearvii. The EU is faced by similar economic downturns and is feared to gear a recession in the EU.
European company investment, consumer spending and exports declined in the second quarter of 2007, dragging the economy into a 0.2 percent contraction and pushing it to the brink of a recession. Investment by companies fell 1.2 percent, the first decline in five years, and household expenditure dropped 0.2 percent after stagnating in the previous three months.viii The ongoing recession in the major export markets of RMG is posing as a new challenge for Bangladeshs RMG sector. The effect of the recession might adversely affect the RMG sector in the coming years. Focus should be put on the measures that the other competing RMG exporting countries are taking, especially the measures of the Chinese and Indian Economy. Bangladeshs competitiveness at this challenging time also needs to be analyzed. An insight is required on how this global recession, especially in the major buying nations, is likely to affect the RMG industry of Bangladesh.
1.3 Problem Statement

For over a decade the Ready Made Garments (RMG) industry has been playing a significant role in Bangladeshs economy. It contributes to almost 11% of the total GDP of Bangladesh. The garments produced in Bangladesh is primarily for the purpose of export and a major portion of our foreign currency earnings depends on RMG products. The lion share of our RMG exports goes to US and EU markets. About 32% of RMG are exported to the US, another 60% to the EU and the remaining 8% are exported to other countries. Bangladeshs RMG export to the world market reached an all time high value of over USD 9.35 billion by the end of 2007. However, this momentum of increasing export market share has recently been hampered by the ongoing global recession. The global economic slump has been caused largely due to high oil prices which led to both high food prices and global inflation. Moreover, the substantial credit crisis leading to the bankruptcy of several large, well established financial institutions in the US economy; the worlds largest economy played a massive part in this economic downturn worldwide. In addition, the US economy entered the year 2008 with a declining dollar value, which alone acts as a stirring factor to the stability of the global economy; especially impacting on those countries whose export industry largely depends on the US market. In this prevailing situation, the effect of this global recession might have an adverse effect on the RMG sector of Bangladesh; putting a halt to the growth of the country s economy. This
indeed is a very crucial time period for Bangladesh to adjust with the economic turmoil that the whole world is facing as experts predict that this recession would be continuing till 2012. An insight is thus required to measure the readiness and competitiveness of the RMG sector to face the current challenges as well as the aftereffects of the global recession. Consequently, it is required to be looked upon into whether this continuing global recession will have a robust impact on the expansion of the RMG sector of Bangladesh.
1.4 Objectives 1.4.1 Broad objective

To analyze the impact of the recent Global Recession on the RMG sector of Bangladesh.
1.4.2 Specific Objectives

1. Analyze the psychological factors affecting the buying behavior and fashion trends of European and US markets. 2. Analyze the impact of changing dollar value on the RMG industry of Bangladesh 3. Analyze the impact of recession on the overall profitability of Bangladeshi RMG manufacturers. 4. Analyze the scope of innovative strategies to increase the overall profitability of RMG industry to counter the ongoing global.
1.6 Scope
The scope of our study has covered three types of data sources: RMG manufacturers For our research, we have chosen only those RMG manufacturing units that are located inside Dhaka city. This portion of our scope is divided into two parts which are respectively woven and knitwear units. A total of 18 RMG manufacturing units was covered for the purpose of the report. Buying Houses We have gained insight from 2 buying houses for woven and knitwear manufacturing units who
mainly serve for the US and EU markets. In this case also we have chosen only those buying houses that are located inside Dhaka City. Personnel related to Export Promotions Bureau/RMG Expert For the purpose of the research, we have conducted personal interviews with Mr. Fazlul Haque, President of Bangladesh Knitwear Manufacturers and Exporters Association. This interview provided us a full picture of the present scenario and future prospects of Bangladeshi Readymade Garments industry from both the perspectives of manufacturers and buyers.
1.7 Limitation
1. The scope of this study is confined to only Dhaka city. Inclusion of other cities may have added value to the study but not feasible due to time constraint and inconvenience. 2. Study of the buying pattern of USA and EU buyers is solely dependent on the data provided by the corresponding buying houses and secondary information as primary data collection in the US and EU market was not possible.
2.0 Methodology
2.1 Research Design
The research paper is an explorative study in nature. Exploratory research was conducted because the problem has not been identified clearly till now. Exploratory research helped in determining the existence of the actual problem and different dimensions of it. In our exploratory research we relied on secondary research such as reviewing available articles published in journals, research papers, reports and websites; and qualitative approaches such as discussions with teachers, experts, and regulatory bodies, and more formal approaches through key informant interviews.
2.2 Data Collection Method 2.2.1 Primary Data

Primary data is gathered from interviews with persons involved with RMG sector of Bangladesh. The list of interviewee includes Bangladeshi RMG entrepreneurs, officials of Bangladesh
Garments Manufacturers and Exporters Association (BGMEA), Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) and buying houses. To conduct the interviews with the various personnel, we have prepared a checklist which would provide us with vital qualitative views and informations which was crucial for our analysis and research. The checklist prepared for this purpose covers all possible areas that are significant to our topic and helped us to analyze the current situation prevailing in Bangladesh. The checklist for secondary research can be found in the Appendix section of the proposal.
2.2.2 Secondary Data

Secondary research is carried out through detailed study of: 1. Relevant websites, journals, research papers and reports 2. Various write-ups and books concerning the RMG industry of Bangladesh by experts of various fields These data demonstrate the scenario of ongoing global recession, trend of Bangladeshi RMG products of last FY 2007 and 2008 and responses of US and EU buyers towards these products etc. One secondary checklist has been prepared keeping in mind the information and data required from our secondary research and all these data would be numeric in nature. The checklist is attached in the Appendix section.
2.3 Analysis Design

The proposed research topic is Global recession and its impact on the RMG sector of Bangladesh. Thus the scope of our research includes two different dimensions. First, the existence and magnitude of global recession is analyzed through secondary data analyses. Then, the primary data collection and its analyses helped us to find out whether there is any change in the RMG exports of Bangladesh and determine the relationship; if existent, between the global recession and this change experienced in the RMG sector. The existence and magnitude of global recession is analyzed through quantitative data analyses from secondary checklist. We have used regression analysis to find out the relationship
between the indicators of recession and the change in RMG export volume. Recession has both long term and short term impact on a countrys economic activities. Hence, we would look into both the short term and long term impact of this ongoing global recession on the RMG export of Bangladesh. To analyze the short term impact of recession on the RMG exports we have done regression analysis between three indicators of recession; Stock index of NASDAQ, oil price & CPI and RMG exports of Bangladesh to USA. To analyze the long term impact of recession on the RMG exports we have taken only one variable, Gross Domestic Products (GDP) and done regression analysis between GDP of USA and RMG exports of Bangladesh to USA. Through primary data collection we tried to find out the factors which are influenced by the ongoing global recession. A checklist has been developed to identify any significant change in order volume and profit margin is experienced under the current circumstances. The primary checklist also collected vital data regarding any changes in the psychological factors of the consumers in the buying country. We also tried to find out the viewpoints of RMG entrepreneurs on innovative strategies to counter the negative impacts. For analysis of the collected information from the primary checklist, we developed frequency tables against each question. The factors are identified in accordance with the highest response (modal value) coming from the respondents.
2.4 Sampling Design 2.4.1 Sampling Technique

Non Probability Sampling: Non-probability sampling has been selected as the sample was chosen solely based on personal judgment as the subjective judgment on deciding the sample makes the study convenient and more feasible. Quota Sampling: We have chosen Quota Sampling Technique because our sampling technique follows a two stage restricted judgmental sampling. 1. In the 1st stage, the population elements were divided into controlled categories or quotas. 2. In the 2nd stage, the sample elements were chosen on the basis of judgment or convenience.
2.4.2 Sampling Frame

RMG Units Buying Houses
2.4.3 Sampling Elements

The sampling elements were selected on the basis of judgment and convenience. The following are the elements that we have chosen for the study: Big Enterprise Medium Enterprise Small Enterprise EPZ Non EPZ Exporter to US Market Exporter to EU Market Buying House- US Market Buying House- EU Market
2.4.5 Sample Size

According to the information provided by Bangladesh Garments Manufacturers Enterprise Association (BGMEA) on September, 2008; there are a total of 4740 RMG factories currently operating allover Bangladesh, 3302 in Dhaka division. Now, taking a sample size of 3302 and by using the precision level of 5% to select the sample size will result into a sample of 344. The calculation of sample size determination is shown below: Population Size, N = 3302 Level of Significance, = 5% Z score, z = 1.96 Success Rate, p = 0.5 Failure Rate, q = 0.5 Precision level D0= 5% Sample Size n = (N z2 p q) / (ND02 + z2 p q)
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Using these data, our sample size = 344 It was quite difficult to screen such a huge number of garment factories because of time, budget and manpower constraint. Therefore, we have conducted our research on 18 major garment factories. These factories was chosen considering four factors-export volume (Large/ medium/small), exporting countries (EU/US), manufacturers or buying houses, EPZ/ non EPZ factories.
3.0 Industry Overview

3.1 Background of the Industry
The export-oriented readymade garments (RMG) sector in Bangladesh started its journey in late 1970s as a small non-traditional export sector. After a few decades it has become the major export revenue earning sector, employing the major portion of human resource working in the industrial sector of the country. According to a World Bank report in 2006, the total workforce of RMG sector was 1.92 million, with an annual growth rate of nearly 24 percent .1 However, Bangladesh being a Least Developed Country (LDC), faces difficulties in the specialization of manufactured exports. Deficient marketing skills, infrastructure, and poor investment atmosphere outweighs the benefits derived from low wage costs.
3.2 Sales Trend

RMG exports have been growing at a respectable rate. In the year 2006 and 2007 RMG exports grew by 22.9% and 16.5% respectively. BGMEA has predicted the export earnings from RMG to double by 2010. Moreover, the global apparel market is also increasing in terms of volume. It has grown by 42% and 46% respectively in 2005 and 2006. So, the scenario is very optimistic for the RMG industry of the country. Although the US is the largest buyer country of Bangladeshs RMG items, exports to USA had not been satisfactory last year. But the situation has been improving in the later months of
Rahman, Mustafizur, Debapriya Bhattacharya, and Khondaker Golam Moazzem. Bangladesh Apparel Sector in Post MFA Era. Dhaka: Centre for Policy Dialogue, February 2008.
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2007 and initial part of 2008. The reasons behind this will be explored in later parts of the report. Europe has been a huge market for apparel export for Bangladesh. The ratio of exports to USA and Europe has been on average of 35:65 in recent years. The main reason can be the GSP benefits that large Bangladeshi manufacturers have been enjoying. Export growth in knitwear has been much higher than that of woven garments, mainly due to the strong backward linkage of the knit industry in Bangladesh which has played the major role in coping with the Rules of Origin in Europe market. However, the medium and small sized knitwear manufacturers and woven manufacturers in general, have not been able to take the GSP benefits due to weak backward linkage. Of the total woven garments export to Europe only 40% enjoys GSP benefits and are subject to MFN duty which is averaged at around 12%. Although exports to Europe have been increasing but it has grown at a comparatively lower rate than the US market. Composition of Europe and US exports has been slowly moving towards US market. In the year 2004 exports to Europe were 219% of exports in USA but came down to 178% in 2006.
3.3 Product Composition 3.3.1 Woven vs. Knit

Historically woven garments have been the prominent RMG products. However, growth in knitwear sector has been more significant compared to woven products. Strong backward linkage support in knitwear sector is the major reason behind this. Therefore it is easier for knit exporters to avail the GSP facilities by complying with Rules of Origin concept.
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Figure 1: Growth of Woven & Knit Garments
At present, market share of woven and knit products is almost equal. For the first half of FY 2007, earnings from knitwear have crossed the share of woven products for the first time. Amongst Asian countries, Bangladesh is ranked just below China in the case of knitwear export and in the case of woven products after China and India.
3.3.2 Product Diversification

Total apparel export from Bangladesh is very concentrated to very few products both in US and Europe markets. Major apparel items exported from Bangladesh are shirts, trousers, jackets, Tshirt and sweater which comprise more than 80% of total export. Although these five items have been the major apparel items composition of these products have been changing. In the early 90s shirts contributed to the 50% of the total apparel exports which came down to 13.6%. Major improvement has been in the bottom section especially in trousers. During 1993-2006 average annual growth in trousers has been 26.68%. According to manufacturers there is better scope of value addition in the production of bottoms and many manufacturers are inclining towards this item. Export growth of sweaters has been satisfactory (21.56%). In terms of relative share, the product composition has been almost the same in both US and EU markets.
3.4 Market Composition

Currently two major markets of RMG from Bangladesh are US and EU markets. According to our research, we found that majority of the manufacturers in Bangladesh export their products to the major two markets. Bangladesh needs to increase the market growth in these countries through introducing high value added products. Small enterprises tend to concentrate in one market, either EU or USA because of their low level of production capacity, weak marketing linkages etc. There are also a handful of big manufacturers who export their apparel products to more than two markets. Majority of our RMG export goes to 6 EU countries: Germany, United Kingdom, France, Italy, Belgium and the Netherlands. Revenue wise, the US market is the second biggest market after EU countries. Rest of the RMG exports go to countries like Canada, Australia, Russia, Japan etc.
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In 2006, 49.13% of our total RMG exports came from EU countries. In 2006, RMG sector earned 33.10% of its export revenue from US market. The exports grew steadily in this period for other countries. In 2006, 17.64% export revenue was earned by exporting apparel products in other markets and the percentage increased to 18.43% in the following year. Bangladesh's exports to the USA grew by almost 5 percent in 2007, according the US Department of Commerce. 2 But the export volume in the US market did not increase that much compared to EU market. Through our research, we found out that, due to the US recession, the manufacturers of Bangladesh experienced some drop in the number of orders from the US buyers in the latter half of the year 2007. Only Vietnam did not face the heat of the US recession last year because their export-oriented industries are specially insulated against any extraneous or political disturbances which enable the country to produce goods and services at cheaper price than in any other country in the subcontinent.3 The current scenario of export in major markets is discussed below:
3.4.1 United States:

Trade Policy: In recent years, because of increasing imports, a number of phenomena are occurring in the textiles and apparel sectors of the USRestructuring operations in the form of consolidation of production, divestiture of noncore product lines, mergers and acquisitions Increased global sourcing, including the use of assembly operations in Mexico and the Caribbean countries Adoption of the quick response manufacturing, marketing and distribution systems Increased power of big retails companies which are taking on production responsibilities in their private label product lines
Build it in Bangladesh. The Daily Star. February 26, 2008. <http://www.thedailystar.net/story.php?nid=24999> 3 Recession waxing and waning before looming. The Independent. January 28, 2008. <http://www.independent-bangladesh.com/features/recession-waxing-and-waning-beforeloomingdc.html>
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The principal trade policy instruments of the US affecting apparels sector are quotas, tariffs and rules of origin. The US has import quotas on apparels from 47 countries, of which 37 are WTO embers. For imports from Bangladesh, 31 categories face quotas. The quotas limit quantities of the specific categories without any group limits. The first challenge came in 1984, however, when the US served a "call notice" to impose quotas, alleging market disruption from an import surge of woven shirts from Bangladesh. Many factories went out of business. The US proposed a liberal "global quota" on exports of all categories of apparels and textiles. Bangladesh, however, opted for a restrictive quota on shirts only, and kept the door open for export of other categories. Garment manufacturers took this opportunity to diversify production. The US imposed quota restrictions on about 30 more categories, as exports to the US increased till the Uruguay Round WTO Agreement on Textiles and Clothing became effective in January 1995. Market and Product Growth: Knitwear imports of the US from Bangladesh amounted to USD 75.18 million in September 2007, a 20% decline from the same month in 2006. Yet, year-end September 2007 data show a 13.64% overall increase in knitwear imports, suggesting an overall positive export growth for the period October 06-September 2007. Of the 17 categories at the 4-digit level, the best performing item is Women and Girls suits. Despite its relatively small share in overall imports from Bangladesh, the growth of this item in the months of July, August and September has reached an astonishing 244%, 168% and 40% restively, and a year end growth of 71%. Significant positive growth has also been recorded in other categories as indicated in table 2. Mens /Boys shirts, despite having a positive growth of 8.04% when compared to YE 2006, have seen a significant decline for the months of August and September at -63% and -68% respectively. Other trailing items include categories HS 6102, 6107, 6113, and 6116. Woven apparel imports from Bangladesh have also exhibited a negative growth of nearly 15%. All the items with the highest import share, including Women and Girls shirts have exhibited either sluggish or negative growth. The performance of W/G blouses is also lagging behind with a September decline of 51.1% and an overall decline of 11.41%.
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3.4.2 European Union:

Trade Policy: The main trade policy instruments concerning exports of textiles and clothing to the EU are quotas and tariffs. The EU maintains 209 quotas on textile and clothing from 21 countries including 7 non-WTO countries. Though EU imposes no quotas on apparels from least developed countries including Bangladesh, three product groups-4, 6, and 8 are double checked in surveillance. European countries also imposed quotas, but withdrew the restrictions once imports started showing downward trend. Successive governments supported RMG export with facilities like bank credit at reduced rates of interest, duty free import of machinery, cash subsidy, and exemption from value-added and other taxes. In addition to quota-protected export markets, Bangladesh's RMG industry benefited from tariff concessions granted under the EU's Generalized System of Preference (GSP) and more recently under its Everything But Arms initiative for Least Developed Countries. However, for duty-free access to the EU markets, apparels produced in a LDC must fulfill its GSP Rules of Origin, which require that a two-stage transformation must take place within its territory. For woven garments this means that the fabrics used in production should be locally produced, while for knitwear products the used yarn should be of domestic origin. Fortunately, almost all Bangladeshi exporters of knitwear, and a significant portion of woven garments, succeeded in meeting those criteria. Most woven garments made in Bangladesh have low domestic value added content, and, therefore, do not qualify for EU GSP facilities. According to one estimate, Europe is the destination of about 35 percent of Bangladesh's woven exports, of which only 40 percent receive GSP benefits. A significant proportion of Bangladesh's apparel exports to the EU are subject to the MFN duty, which is averaged around 12 percent. Before phase out of the MFA, it was thought that Bangladesh would not have any problem in the EU market because of the GSP tariff preference. However, failure to satisfy EU rules of origin made a large proportion of woven garments ineligible for DF entry.
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Market and Product Growth: EU is the largest destination of Bangladeshi apparels and its accounts for about 60% of the countrys total RMG exports. During the month of August 2007, knitwear exports of Bangladesh to the EU amounted to 333.31 million Euros, which is 7.1% higher than that of the previous year. W/G suits and M/B underpants are the best performing among 17 items at the 4 digit level. These two categories have exhibited robust growth both in the month of August as well as throughout the year achieving a year-end growth rate of 41.87% and 71.75% respectively. During the month of August 2007 woven apparel exports of Bangladesh to EU have declined 3.6% over the same period of previous year and year-end data shows a negative growth of 2.66%. Of the 17 categories of woven apparels at the 4 digit level, best performing item in terms of the growth rate is Shawls and Scarves, yet the relative share of this item remains insignificant and its annual growth is -24.85% W/G blouses grew by nearly 60% in the month of August, reaching the highest annual growth rate of any woven apparel product (20.29%). W/G shirts category is the worst performing item among high export volume items. In the period Jan-Aug 2007, Bangladeshs export to the European Union have either stagnated or declined in comparison to the same period in 2006. Specifically, knitwear imports from Bangladesh to the EU have risen by a meager 0.19%, while woven imports have declined by approximately 9%. Larger losses have been experienced from Indonesia and Cambodia, whereas China, Turkey and Vietnam appear to be the largest winners. Chinese imports in the EU have risen by 33% and 26% for knitwear and woven apparels respectively. The situation appears slightly different in the United States market. During Jan-Aug 2007, knitwear imports from Bangladesh have risen by 18.3% while woven imports by 11.3%. Despite the achievement of a significant growth rate in knitwear imports from Bangladesh, the figure remains relatively smaller than some of the countrys competitors, namely China and Vietnam, indicating potentially a loss in relative market share. Woven import growth is noteworthy in
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sight of the decline observed in India and Sri Lanka. In this category, imports from Cambodia are stagnating. Table 5: US Knit and Woven Imports KNIT Jan-Aug 2007(US$) 534263930 1016964775 6268767789 914345607 1137780603 691841120 481781921 1330866932 WOVEN Jan-Aug 2007(US$) 1511543425 579864626 9258560953 1429012278 1606454057 302827937 612438338 1392486008
Growth % 18.3 31.8 50.5 15.1 33.2 6.2 9.1 42.4
Growth % 11.3 0.3 22.8 -7.1 4.4 17.4 -9.3 15.4
Bangladesh Cambodia China India Indonesia Pakistan Sri Lanka Vietnam Source: USITC
3.5 Competitive Advantages of Bangladesh

Bangladesh is currently regarded by many as one of the top five exporters of readymade garments. Hence, the buyers around the world are recognizing Bangladesh as the Taylors of the World. Its competitive edge relies primarily on the abundance of human resource in the country. Specific advantages in this regard are 1. Cheap labor: Low wages have traditionally been a major strength of Bangladesh's laborintensive apparels sector. The hourly wage rate in Bangladesh's apparels sector is lower than China and Sri Lanka (US$ 0.39 as compared to US$ 0.69 and US$ 0.48 respectively). However, wage rate of other competitors such as Pakistan and India are somewhat similar to Bangladesh's, being US$ 0.41 and US$ 0.38 respectively (USITC, 2004).4 While Bangladeshs cost of labor has gone up since the government declaration of minimum wage of Tk. 1620 per month. The wage rates in China, India, and Vietnam have also been rapidly
Rahman, Dr. Mustafizur. Bangladesh After MFA Phases Out. Dhaka: Center for Policy Dialogue, Jun. 2005.
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increasing due to their consistent economic growth and increase in the overall standard of living. 2. Large experienced work force: The garments industry right now is employing a significant portion of the nations workforce. Through decades of experience, the average labor skill in the RMG sector in Bangladesh developed significantly. The quality of products produced in Bangladesh is, according to both buyers and manufacturers, a key advantage of Bangladeshs apparel business. 3. Self sufficiency in the accessories industry: The majority of enterprises consider local sources to be the most important for procurement of accessories. More than 75-85% of entrepreneurs of knit and sweater units procure major share of their accessories (about 8090%) from local sources; about 50% entrepreneurs of woven units do so from the local market. However, Local manufacturers has to procure accessories like buttons, zippers, labels, hangers, etc. from countries like China and India5 if the buyer nominates any international source to meet its required standard. 4. Strong backward linkage in the knitwear industry: The knitting section of the RMG sector has seen great progress mainly due to its strong backward linkage. The capacity of the backward linkage is debatable, with sources in BKMEA claiming it to be 95% of local requirements and sources in BGMEA being conservative and estimating it to be around 80%. Nonetheless, it is no doubt stronger than that of the woven sector of Bangladesh and knitwear industries of other competing countries. In the knitting industry, the setup cost is comparatively lower than the weaving units. Thus more entrepreneurs enter this industry and combined with the accessories industry, play a major part in the development of the overall knitting industry. 5. Scalability of manufacturers: While majority of the RMG manufacturers in competing countries like China, fall within the small and medium enterprise (SME) category, according to a number of interviewees, Bangladesh has a relatively larger proportion of manufacturers
Rahman, Mustafizur, Debapriya Bhattacharjee, and Khondaker Golam Moazzem. Bangladesh Apparel Sector in Post MFA Era. Dhaka: Center for Policy Dialogue, 2008. pp.120
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who have successfully achieved high economies of scale. Thus, they are able to provide the manufacturers with cheaper prices and greater volumes for orders. 6. Continuous investment in technology and machineries: Bangladeshi garments
entrepreneurs are constantly investing in newer technologies to facilitate their production. The country can boast of having a better equipped RMG sector in terms of technologies and machineries compared to its competitors. This allows it to offer better quality and production lead time for its buyers. 7. Adaptability to buyers style and design requirements: Due to its skilled workforce and advanced technologies, the apparel vendors of Bangladesh are able to adapt to the design and style requirements of the buyers very easily. Working with the same buyers for a long time is another reason behind this advantage.
3.6 Disadvantages of Bangladesh

Most disadvantages of Bangladeshs garments sector is its internal problems. There is a common feeling among businessmen that the public sector of the country is not taking the right measures to help this sector capitalize on its opportunities. The key disadvantages for this sector are 1. Political uncertainty: According to most buyers as well as vendors, the present political uncertainty in Bangladesh is undermining the potential of the RMG sector. Confrontational politics had caused the countrys exports severe damage earlier, but the current uncertain situation is also having negative effects. Vendors are hopeful that orders will increase further once a democratic government comes to power. 2. Power shortages: A major threat to Bangladeshs booming RMG export is the countrys current power shortage. Due to shortage of power, gas and diesel, industries are not able to work to their full capacity. BGMEA fears that production in RMG industry might fall by 50 percent and production cost might go up by about 25 percent due to the crises. Due to power shortage shipments are sent through air, thereby it increases the cost 6.
South Asia Analyst Group. May 25, 2008 <http://www.saag.org/%5Cpapers19%5Cpaper1852.html>
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3. Labor unrest: Labor unrest was one of the major reasons behind the slump in the garments industrys performance in the latter half of last year. Vendors are apprehensive that if the spiraling prices of essential commodities dont go down or any assistance such as rations are not provided to garments laborers, another upsurge might take place throughout the country and hurt the RMG export of the country further. 4. Lead time: In Bangladesh the lead time for apparel exports is significantly more than that of its competitors. Foreseeing market demands by 4 to 5 months is impractical and buyers most definitely prefer companies that can respond to their needs quickly. Recent developments in the Chittagong Port, however, have been very positive and both buyers and manufacturers are quite satisfied with the current situation. Now, the customs authority of Bangladesh needs to improve so that goods can be cleared faster. 5. Lack of favorable government policies: Although RMG makes up nearly 76% of the import basket, it has been given few benefits by the government. Many government policies are damaging because they delay the speed of business operation. Even though there was a cash assistance of 25% on the knitting industry for export initially, it has fallen to a mere 5% now. 6. Poor midlevel management: The garments industry has so far failed to attract highly trained and qualified managers for its midlevel management. Nearly all of the garments manufacturers of the country are run by the owners and generally have a very weak midlevel management. This leads to a very centralized structure and may cause peripheral problems as the company grows. Most garments factories also have a very high ratio of workers to managers, which combines with the poor management skills of the managers makes it even more difficult for them to manage and often results in labor unrest.
4.0 Demand-Side Dynamics

The readymade garments sector, especially the low-end product market, is essentially a demand-driven market. The buyers have more bargaining power than the manufacturers and have deep influences on manufacturers decisions. The primary reason is that the m arket has
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more suppliers than is needed7. Other reasons, applicable particularly for Bangladesh, will be discussed in later chapters. Bangladesh operates mostly in the low-end basic apparel market, which displays certain characteristics that make it very unique from markets of other businesses. Firstly, the demand in the market almost never shows substantial fluctuations. Rather, it experiences a steady growth over time. Secondly, there is little scope for innovation regarding the product, and such innovations are, in effect, need based. Thirdly, the production process is very labor intensive; hence, major suppliers in the market are LDCs with an abundance of cheap labor. As a consequence, developing nations tend to abandon this industry as soon as they reach the 2nd phase of economic development, characterized by a transition to manufacturing high-value products, e.g. electronic goods, heavy machinery, etc.
4.1 Major Buyers

The global RMG market is estimated at US $400 billion at present. Bangladeshs share of this market is estimated to be around 6% at the end of this year. There is ample opportunity for the industry to grow and Bangladeshi manufacturers are confident that the countrys market share in the next 2-3 years will stand at around 8-10% of the global market8. Historically, the largest market of the Bangladesh garments industry has been the European Union, where about 50% of the total garments export is sent. The second largest market and the largest individual country that sources from Bangladesh is the United States of America with a share of 31% of the total RMG export of Bangladesh. The largest single buyer of Bangladeshi apparel items is Wal-Mart, whose annual sourcing from Bangladesh stood at around $800 million. The biggest EU based buyer of Bangladeshs RMG is H&M, having won the BGMEA Best Importer Award for the last two years. It might be mentioned here that while Wal-Mart avails its liaison office in Bangladesh, other buying houses
7 8
Perera, Aruna. Personal interview. 17 Mar. 2008. Chowdhury, Anwar-Ul-Alam. Personal interview. 13 Apr. 2008.
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(e.g. Li & Fung), and also contracts between its head-office and selected manufacturers for its sourcing, H&M procures its merchandise solely through its local liaison office. Besides these two, many large international apparel brands are sourcing from Bangladesh
4.2 Factors Influencing Sourcing Decisions 4.2.1 Economic Condition of Buyers Country
Since the worldwide apparel industry is very much a demand-based one, the economic conditions of the buyer countries have a significant impact on the buyers sourcing decisions. If the economic condition of a country is not favorable, there will be a drop in the demand for most goods and services. This usually has two possible implications for the buyer. Firstly, experiencing a drop in sales, the buyer might cease to place further orders to the vendors. Secondly, it will source only from those vendors who offer the lowest prices. However, the RMG industry of Bangladesh is not very likely to suffer from any drop in sales volume in such a situation since most of the RMG industry players of the country produce low end basic apparels. As mentioned earlier, basic commodities do not display significant falls in demand even in adverse economic conditions. There are some large manufacturers in Bangladesh producing mid-range items as well as the basic ones. But such companies may not suffer much due to economic problems in the buyer countries. The reason can be explained by Bangladeshs safeguard against the second implication. The second possible implication puts Bangladesh in an even more favorable condition. Bangladeshs strength in the RMG business has historically been cheap labor costs, and hence, cheap selling prices. As a consequence, buyers willing to source only at the cheapest price will have to come to Bangladesh. This has been confirmed through the interviews conducted none of the American buyers admitted any decline in sales of their basic apparel items or for such brands. The present scenarios of the global economy and of Bangladeshs latest export figures prove this hypothesis. The United States of America is, according to many experts, undergoing an economic recession. The unemployment rate in the country is high, major share market indices
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are falling and the average household earning is lower than in 1999 once inflation is adjusted 9. This apparent recession has a chain effect and is generally considered to have caused a global economic slowdown. But Bangladeshs RMG export has not experienced any negative impacts whatsoever. The country did experience a slowdown in export growth in the July-November period of the current fiscal year (2% year on year growth compared to double digit growths of previous years), but this has mostly been accredited to political uncertainty and labor unrest within the country10. This became evident in January, when the total export showed a staggering 51% increase year on year, backed primarily by the performance of the RMG sector11. The argument presented is further strengthened by the fact that most buyers and vendors interviewed confirmed that Bangladesh is enjoying an increase in its sales volume of RMG, and that this trend can be expected to continue at least for the next 3-5 years. Another aspect of the US recession is the length of time before it ends. While some believe that the recession will continue to hamper the countrys economy for a long time, there are ot hers who are hopeful that measures taken by the Fed are going to have some effect on curbing the recession, and that the economy might return to normalcy after this years presidential elections.
4.2.2 Currency Appreciation/Depreciation

Since the US dollar (USD) is the most commonly used and accepted currency in international trade, the value of the buyers/vendors currency against the USD plays a pivotal role in sourcing decisions. An appreciation against the USD means an increase in the cost of production for the manufacturers, but a decrease in the effective purchasing price for the buyers. The USD is currently in a process of realignment, depreciating in value against many
Leonhardt, David. "U.S. Recession Appears Unavoidable." International Herald Tribune 9 Mar. 2008. 13 Apr. 2008 <http://www.iht.com/bin/printfriendly.php?id=10830410>. 10 Country Report: Bangladesh. Economist Intelligence Unit. London, Mar. 2008. pp.11 11 "Garments Eye $18b Export by 2010 as China Struggles with Strong Yuan." The Financial Express 16 Mar. 2008.
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major currencies. The causes behind this trend have been identified as speculations about the countrys growth prospects, weak equity markets, and a large current account deficit 12. Bangladeshs principle competitive edge against other Asian countries comes from its position against the USD. The Taka (BDT) has remained virtually constant against the dollar in the current fiscal year compared to the previous one. But many of its competitors, like China, Vietnam and India have witnessed a rise in their cost of production due to their currencies appreciating strongly against the USD. In China, the Yuan (RMB) appreciated about 7% last year, and another 3% in the first two months of this year. The Indian Rupee (INR) has gained about 11% in 200713. In Vietnam, the Dong (VND) gained 1.07% in the central banks exchange rate and 5% in the unofficial market against the USD since last December. This is another reason behind Bangladeshs strong export performance since the beginning of this year 14.
4.2.3 Trade Agreements

Trade agreements are a major part of the global RMG market and can play crucial roles in buyers decisions. The Multi-Fiber Arrangement (MFA) governed the world trade in textiles and garments from 1974 through 2004, imposing quotas on the amount developing countries could export to developed countries. During the MFA period, as many as 52 countries were involved in the garments sector. But after the abolishment of the MFA, this number came down to around 30-35 countries, and by 2012, it may come down to only 12-13 strong players15. The rationale behind this is that during the MFA period, buyer countries were forced to buy from a diverse range of countries because of the quota that was imposed. But in the post-MFA period, these countries have no restriction on the amount they can source from any particular country. Hence, they will opt to limit the number of countries they buy from, sticking only to those that are most competitive in the trade. This mindset of the buyers has been instrumental in the success of Bangladeshs RMG sector in the post-MFA era. Bangladesh, in the first 3 years of the
12
Implications of a US Dollar Depreciation for Asian Developing Countries. Asian Development Bank. Manila, Nov. 2002. pp.14 13 "Garments Eye $18b Export by 2010 as China Struggles with Strong Yuan." The Financial Express 16 Mar. 2008. 14 "Falling Dollar Costs Vietnams Exporters." The Daily Star 17 Mar. 2008. 17 Mar. 2008 <http://www.thedailystar.net/story.php?nid=28116>. 15 Chowdhury, Anwar-Ul-Alam. Personal interview. 13 Apr. 2008.
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abolishment of the MFA quota restrictions, enjoyed a 60% increase in its RMG export. Some of its competitors like China, Vietnam, Cambodia, and India, however, have also seen similar growths in their business after the MFA was lifted. Bangladesh enjoys duty-free access in the EU market for all its products due to the European Commissions Everything but Arms scheme under the Generalized System of Preference (GSP) agreement. This agreement states that all least developed countries (LDC) will have duty free access in the EU if they comply with the set rules of origin 16. Since Bangladesh still has some way to go before becoming a middle income country, the GSP can be expected to assist Bangladeshs export trades at least for the next 10 -15 years. However, since 2001 the US has excluded a list of 20 apparel items from their GSP which incidentally covered most of Bangladeshs export items. On the other hand, the US has a legislation named the African Growth and Opportunities Act (AGOA), through which it supports 37 designated Sub-Saharan African countries. The act originally covered an 8 year period from October 2000 to September 2008; but amendments signed into law by President George Bush in 2004 have extended AGOA to 2015. At the same time, a special dispensation relating to apparel was extended by three years to 200717. According to many buyers, the absence of any trade agreements in favor Bangladesh in the US is a drawback for the RMG sector. Bangladesh also enjoys a duty-free preferential access to Canada and Japan through some agreements that have relatively liberal rules of origin and value addition requirement. These countries, besides having these trade agreements also have a good market potential which large Bangladeshi manufacturers are trying to explore. There are some other trade agreements besides the GSP and the AGOA that may prove to be crucial for Bangladeshs RMG sector. The trade barrier imposed on China by the EU and the US is one of them. To protect the interests of the local businesses of these regions as well as those of other LDCs, the US and the EU have restricted the growth of Chinese RMG exports to 7.5%
16
The rules of origin are (i) a minimum of 30% value addition in the country for products whose raw materials are procured locally, and (ii) a value addition of 50% or more in two stages of production for products whose raw materials are procured from other countries in the same region. 17 AGOA.info> Resource on the African Growth and Opportunities Act. AGOA.info. 14 Apr. 2008 <http://www.agoa.info/index.php?view=about&story=about>.
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per year from 2005 to 2008. The abolishment of this restriction may be regarded as a risk to Bangladesh, but there are other factors associated as well. China, in its process of economic development, is likely to stop facilitating the textiles and garments business in order to go into more high value products e.g. electronic goods or heavy machineries. Moreover, the appreciation of the RMB against the USD and subsequent increases in cost of labor is not going to help the garments exporters of the country. Because of these reasons, garments businesses from China are contemplating expanding or moving their production facilities in Bangladesh 18. The most recent development in international trade agreements, the current WTO negotiation in the Doha round, has intriguing future possibilities for the RMG sector of Bangladesh. Under the Non-Agricultural Market Access (NAMA) agreement, developed member countries and developing member countries declaring themselves in a position to do so are going to provide duty-free and quota-free market access (DF-QF) for at least 97% products originating from LDCs, defined at the tariff line level, by 2008. This may result in a substantially changed scenario with respect to the competitiveness regime of Bangladeshs exports in the developed countries. There will be an erosion of preference for Bangladesh in the markets of EU, Japan, and Canada where Bangladesh has a duty-free access, due to Chinas increased competitiveness due to the DF-QF decision; but it comes with the possibility of enhanced market access against the AGOA countries in the US depending on the nature of implementation of this decision 19.
4.3 Plans of Buyers Regarding Sourcing in Bangladesh

Individual buyers sourcing strategy is critically dependent on three factors (i) price, (ii) quality, and (iii) lead time. In essence, these three factors are very much inter-connected and it is usually the combined outcome of all three that influence buyers decisions. Buyers usually prefer working with the same set of vendors for a long time because of the trust and understanding that develops with time. But in terms of countries they source from, they do tend to transfer orders from less competitive countries to more competitive ones if no restrictions are imposed. This is, however, a gradual process implying that no single buyer has
18 19
Nam, Kort York. Personal interview. 18 Mar. 2008. Current WTO Negotiations Under Doha Round: Insights from CPDs Geneva Tracking Mission 2008 . Center for Policy Dialogue. Dhaka, Mar. 2008. pp.6-7
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the power to increase or decrease the sales of a country substantially. From the perspective of the buyers interviewed during the preparation of the report, Bangladeshs major strengths in RMG trade is not cheap selling price, but rather, the quality offered at competitive prices. Shortening the lead time could be a catalyst in increasing the countrys RMG export.
4.3.1 Limiting the Number of Vendor Countries

In the absence of any sort of trade agreements, it is likely that buyer countries would want to source from as few countries as possible. With the gradual economic development of China and India, it is likely that the low end basic apparel manufacturing business is going to move away from these countries, and Bangladesh is a likely destination of this capacity transfer. It is worth mentioning here that this does not mean the garments industry is going to close down completely in these countries, but rather, only a gradual decline in the low value RMG products will be experienced. Countries like India will still continue to dominate the upper segments of the market through their established reputation and expertise in exclusive fashionable items. It can safely be stated that Bangladesh, in the coming few years, is going to be a lucrative sourcing destination of large apparel buyers. All the buyers interviewed for this project have confirmed that they are looking forward to increase their orders to Bangladesh. While the US based VF Corporation is already sourcing 50% of its total Asian purchases from Bangladesh 20; UK based brand George is confident enough to make Bangladesh one of its focus countries for the next two years and claim that Bangladesh will become the tailors of the world in the near future21.
4.3.2 Limiting the Number of Vendors Within Bangladesh

The buyers perspective regarding the number of vendors they are willing to w ork with is another matter of interest for the report. Since compliance is a big issue nowadays, most large buyers with high consumer visibility start working with a vendor only after the vendor has been certified as being compliant. There are varying degrees of support these buyers provide the
20 21
Hassan, Noor Mehdi. Personal interview. 11 Mar. 2008. Shakur, Idris. Personal interview. 22 Mar. 2008.
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manufacturers with regarding compliance, but most usually inspect the vendors production facility and recommend the changes necessary for complying with the buyers standard. This is the reason that major buyers do not usually work with a large number of companies, but rather focus on selected manufacturers who already have an established image in the market. But since, the buyers interviewed are looking to increase their sourcing from Bangladesh; they are planning to increase the number of vendors they work with, having checked them for compliance.
4.3.3 Shift from LC to Contracts

The increased competition and price sensitivity in the global RMG market has given rise to a new trend a shift from LCs to contractual payment. High cost of banking services in buyer countries is the principal reason behind this trend. Since achieving high economies of scale is crucial in the basic apparel market, the buyers foresaw the huge amount of money that could be saved if the commission and processing charges for LCs could be avoided. Moreover, moving from LCs to contract allows to buyers to retain their liquidity for a longer period of time. Hence, they started putting pressure on the vendors. In a short time, the trend of moving away from LCs has become preferred in global trade, with only around 13% of the total trade conducted through LCs and the rest through contracts and other forms of payments nowadays. But in Bangladesh, 90% of the export business is still conducted on LCs 22. But the trend in payment is gradually moving towards contracts. The readymade garments industry is a buyer-dictated market, and as such, buyers are able to impose the payment terms on the vendors. More than half of the buyers interviewed are slowly moving towards contractual payment terms, with the majority of these buyers operating in the European market. However, it would not be appropriate to conclude that the EU based buyers prefer shifting from LCs to contracts more than American based buyers. Rather, it is more likely that this is a global trend gaining momentum in most parts of the world.
22
Haque, Fazlul. Personal interview. 11 Mar. 2008.
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5.0 Supply-Side Dynamics

The suppliers of the readymade garments are very easily identifiable through a few common characteristics they possess. This business flourishes in countries where there is wide availability of cheap labor due to its labor intensive nature. As a consequence, it is usually the least developed countries that are the major manufacturers of garments and textiles. Bangladesh is globally one of the biggest suppliers of RMG items. The country operates predominantly in the lower market segments that comprises of the basic apparel items. Knitwear makes up most of the total export (52% as of December 2007) in this sector due to strong backward linkage and low initial investment, but most of the countrys large manufacturers produce either woven items or both knit and woven. There is a clear preference of suppliers for the EU market due to the GSP and a positive perception about European buyers. But the USA is the largest country sourcing from Bangladesh as is has a massive market size. Most There are a lot of interesting developments that may change the scenario of the RMG industry of Bangladesh in the near future.
5.1 Major Players

The total number of garment factories stands at 4,49023. Of the 4,300 factories in Bangladesh since 2006, 1,673 are woven factories, 1,495 are knit, and 392 are sweater factories. The rest 1,300 are currently not in production (BGMEA 2006). Identifying the largest companies in the RMG is a complicated task, since numerous manufacturers have more than one company and there are small groups of companies who have formed groups and export their products together24. However, some of the top players in the garments trade are i. Opex Group, Pacific Group, Standard Group, Hamim Group, NASA, and Alif Group for woven items; and ii. Fakir Group, Apex Group, and NR Group for knitwear.
23
About BGMEA. BGMEA. 14 Apr. 2008 <http://bgmea.com.bd/index.php?option=com_content&task=view&id=12&Itemid=26>. 24 Abdullah, Abu Yusuf Md. Personal interview. 7 Mar. 2008.
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5.2 Factors Influencing Profitability of Manufacturers

Recent global trends are having significant impact on the profitability of readymade garments vendors. Many vendors are concerned about the drop in the profit margin of their businesses. There are three main factors assumed to be associated with it and hence, their impact on the profitability of vendors will be explored.
5.2.1 Decrease in Profit Margin

After the phasing out of the MFA agreement, the increased competition in the market resulted in a drastic increase in price sensitivity. The buyers were pushing the vendors to lower their prices as much as possible. On the other hand, the price of raw materials, especially cotton, has also gone up due to the rise in fuel prices and other dynamics in the international market. As such, many vendors fear that their profit margin is going to be squeezed hard. Particularly in Bangladesh, where the average bargaining power of vendors is extremely low, buyers are very likely to take advantage of this fact and force vendors to squeeze prices. This is partly true, and very concerning considering the rising cost of labor. But buyers and manufacturers have different solutions to this threat. The buyers claim that although the margin is being squeezed for each unit produced, they are increasing the volume that is sourced from vendors, allowing them to adjust the rising costs and still retain a net profit. In this context, the profitability relies solely on the discretion of the vendor. The vendor should plan ahead and calculate the lowest possible price he or she can accept and reject orders at prices lower than that calculated price. While large manufacturers like Opex Group are trying to obtain more control over the value chain through which they can offer lower prices, the smaller players in the market are going to suffer the negative impacts of this trend till they reach the scalability and backward linkage needed. Another strategy is to create more value addition in the product through in-house research & development. A company producing its own designs has the option of adding premium to its selling price and thus, increasing the profit margin. This strategy is successfully being implemented by Pacific Group.
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5.2.2 Shift from LC to Contract

The global shift in offering payment through contracts instead of LCs is also having an effect on the vendors. But unlike the profit margin squeeze, it is rather helpful for the vendors. Contractual payment has two main advantages for the vendors (i) it somewhat reduces the cost of banking services and other associated costs, and more importantly, (ii) it saves vendors the time otherwise occupied in bureaucratic hassles in receiving the export LCs25. Interviewees who have started working on contracts reported that they were saving a substantial amount of time by avoiding LCs. Also, as most of Bangladeshs competing countries have accepted working on contracts, the unwillingness of local entrepreneurs might deter the buyers and force them to seek business elsewhere. This kind of thought provides a non-tangible benefit for the vendors on working on contracts instead of LCs. The problems associated with this trend are the legal restrictions of the exporters. Except Type A (offshore) companies operating in the EPZ areas, all companies have to open import LCs for raw material sourcing. Many exporters are aggravated because of this restriction and feel that the law needs to be changed. Also, Bangladesh Bank does not have any laws for holding banks liable in case of contractual payments and vendors themselves have to be the consignee for their shipments in such cases. Therefore, successful vendors only engage in contractual terms with buyers they have been working with for a long time. This seems to be only way of reducing risk for Bangladeshi garments manufacturers.
5.2.3 Shift in Cash Cycle

Due to increased market competition, it was assumed that buyers would want to elongate the cash cycle to facilitate their liquidity. Consequently, they are continuously pressurizing the vendors for longer payment schedules. The vendors are forced to comply with this demand because of their low bargaining power. Moreover, interest factoring is not an option for the vendors, as the buyers are squeezing the prices of RMG items.
25
Shakur, Idris. Personal interview. 22 Mar. 2008.
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6.0 Supply Chain Analysis

6.1 Lead Time
Lead time has been one of the deciding factors of efficiency in RMG business. Apparel sector is no longer bi-seasonal and buyers have been pacing order 4-6 times a year to keep with the dhanges in the fashion world. Therefore, quick delivery is considered as a strong competitive advantage. Unfortunately Bangladesh has been performing poorly in this aspect. It takes almost 90-100 days before the buyer receives the goods. This is less than competitive compared to other countries like China, India, Vietnam, Cambodia who can deliver the service much quicker. Table: Typical Lead time Components. (Source BGMEA) Days Taken after preceding step Components Producer Receives LC Raw material Supplier Receives LC Supplier Produces and ships goods Raw materials sails and reaches Ctg. port Port Clearance and inland transportation Garments Produced and shipped Finished goods sails and reaches buyer Total lead time Total Lead Time Optimal Time 0 4 15 21 5 20 25 25 90 Non-optimal Time 0 6 30 30 9 30 30 30 135
As shown on the table typical lead time for local manufacturers has been within 90-135 days. As for knit wear the time is considerably less due to strong backward integration. Although some of manufacturers have been able to supply within 60 days the equation of more than 90 days is taken for granted. If we compare the lead time of Bangladesh with other competing countries our competitive disadvantage will be evident.
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Country Mexico Italy Vietnam Cambodia India China Source:BGMEA
Lead Time (Days) 15-20 15-20 60-90 60-90 60-90 60-90
The process of lead time can be categorized into three parts. First is the pre-production process that includes order placement, opening LCs and supply of raw materials. Second comes the production of apparels and the third includes the delivery process to the respective customers. The major reason behind the prolonged lead time in Bangladesh is the delay in the first process. Bangladesh has to import most of the raw materials (cotton) from USA, Sudan, Pakistan, India, Iran and Turkey. Therefore, a lot of time is taken in procuring these raw materials. Bangladesh is highly dependent on raw materials supplying countries for manufacturers apparels (about 80%). Given the geographic position of Bangladesh and the prevailing shipping routes, it takes considerable time for shipments from these countries to reach the ports in Bangladesh. The time requirement is further lengthened by the fact that goods have to be brought back from China and elsewhere through transshipment at Singapore or Malaysia as goods cannot be shipped directly to Bangladesh from these countries. As a result it takes 25-30 days for the consignment to reach local ports. On the other hand, competitors like China, India and Cambodia to some extent enjoy self-sufficiency in this aspect. Central Bonded Warehouse can be an effective solution in procuring fabrics within a short time and that can reduce lead time to a great extent. It is estimated that establishment of an efficient CBW in Bangladesh would lead to the saving of 4 days on LC opening process as well as remove the need for spending up to 40 days on the fabric production, shipping and port clearance of export materials. This can result into a lead time less than 60 days. But, in order to be efficient CBW must keep current
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market demand and fashion trends into account. Proper dissemination of fabrics also needs to be ensured. In terms of production process Bangladesh is quite at par with other competitors. But only 5% of the total lead time is spent on production. However, the production process is affected by frequently interruption of energy supply. Bangladesh is currently in the grip of an intense power crisis, with load-shedding of approximately 1800-2000 megawatts occurring in pick hours- an increase of almost 150% since 2005, according to recent reports. such a crisis is having adverse impact on the output of the RMG industry by decreasing output by approximately 25-30%. The post-production process heavily depends on the port facility which has been a matter of discourse for a long time. Bureaucratic customs procedures, insufficient no. of vessels, etc. have prolonged the shipment of goods. But there has been a significant improvement in the Chittagong port, hub of 80% of our international trade. The port clearance lead time has been reduced to almost 4 days from 12 days. This can be attributed to caretaker governments recent activities to address management, operation and labor relation issues. Elimination of labor unions at port has been a driving factor in improvement of port facilities. Port clearance procedures have been reduced from 47 steps to 12 steps which has been significant in reducing lead time. Still bureaucratic customs environment need to be improved. Customs automation can also be an effective measure. According to BGMEA president port clearance can be reduced to 2 days if the customs procedures are automated.
6.2 Profit Margin

One of the major issues that have affected RMG manufacturers is the fact that buyers are continuously pressurizing to reduce unit selling price. Market being very competitive reduction in unit price is expectable in upcoming years as well. Unit prices of most major items have been decreasing over the years. Price of total apparel exports per square meter have been decreasing on an average of 6.2% yearly in last for years. Same trend has been observed in the major items like cotton shirts and trousers. W/G Cotton trouser has been worse affected which has been 3 rd largest exported item in US. However, the effect on profit margin has varied from different apparels (woven, knit, denim).
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6.2.1 Woven Products

During 2007 to 2004 unit prices of woven garments have decreased on an average by 6.2%. This is a global phenomenon which has affected major competitors like India, China, Pakistan, Sri Lanka etc. This has reduced the profit margin of the manufacturers by a significant margin. Moreover increased price of raw materials especially cotton in the international market is another worrisome factor for the manufacturers. According to US based International Cotton Advisory Committee (ICAC), global cotton price may rise by more than 8% during 2008-2009. It is sure to have an adverse impact on the profit margin of the local manufacturers. Moreover, price of yarn international market is on the rise. According to yarn producers, the price of yarn was $ 2.40 per kg in January 2007, which reached around $ 2.45 in July. It increased to $2.50 in August and in September 2007 it was selling in $2.70 to $2.80 per kg. 26
6.2.2 Knit Products

The situation is relatively better in the case of knit fabrics. During 2007 and 2004 unit prices of knit garments were reduced by only 1.34% compared to 6.345 which were for woven garments. As Bangladesh has a strong backward linkage inn knit sector and most of the fabrics (80%) can be procured locally manufacturers have been able to cope with the situation.
6.2.3 Denim Products

Bangladesh has a major advantage in denim products because of the value addition aspect. On the contrary to woven and knit garments, unit selling price of denim products has been stable. In some cases the selling price is increasing even. Pacific Jeans, one of the major denim exporters of the country has been very efficient in negotiating over the selling price due to its value added products. Pacific Jeans, having a strong R&D department have been able to deliver unique and fashionable products to the vendors which has compelled the buyers to get the products at a premium price.
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http://www.tg-supply.com/article/view.html?id=19291
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Most of the denim manufacturers import denim fabrics predominantly from India and deals with the rest of the production locally. As for denim fabrics the unit price has been under control and it is expected to rise in near future. Indian denim industry has been concentrating on capacity building which can be a good sign for our denim garments producers. Arvind Mills, among the largest denim makers in the world, has increased its capacity utilization to 85-90 per cent. Although the profit margin per unit Bangladesh has been declining RMG manufacturers have not severely affected by the situation due to large volume of orders. Exports in terms of volume have increased both in US and EU market. Therefore capacity building has been a crucial issue in this regard. The current capacity situation will be dealt elaborately in later segments. In order to tackle this low profit margin situation there are some basic issues that should be critical.
6.3 Backward Linkage

Bangladesh has emerged as a significant player in RMG industry within a short period of time. But in many cases Bangladesh has been acting as cut and sew service providers and the value addition in each step of production has fallen short significantly. This can be attributed to our weak backward linkage which has been a burning topic for quite some time now. Bangladesh does not have competitive advantage in textile spinning and weaving. Because of the oversupply of standard yarns and fabrics in world market, promotion of backward linkages in spinning and weaving operations is not economically viable. Stages in Garments Production Spinning Weaving Knitting Dying/Finishing Finished Garments Gross value Addition 17% 15% 18% 15% 28%
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Bangladesh is very much self-sufficient in the knitwear sector (80%) and strong backward integration has been possible in this sector. But, self sufficiency in woven sector has only been around 25% and rest of the fabrics for garments production is dependent on import. Moreover the quality of the local fabrics is not up to the expectation of the buyers and thus importing quality fabrics from China, Pakistan, India is the solution for the manufacturers. Table: Self-sufficiency Woven Garments in % Bangladesh Spinning Weaving Finishing Garments P. 20 20 20 100 China 70 70 70 100 India 10 95 95 100 Indonesia 30 30 30 100 Pakistan 100 100 100 100
Table: Self Sufficiency Cut and Sew Knitted Garments in % Bangladesh Spinning Knitting Finishing Garments P. 70 95 95 100 China 90 90 90 100 India 100 100 100 100 Indonesia 80 80 80 100 Pakistan 100 100 100 100
Table: Self Sufficiency Knitted Garments in % Bangladesh Spinning Yarn Dye Knitting Garments P. 10 20 100 100 China 70 70 70 100 India 10 95 95 100 Indonesia 30 30 30 100 Pakistan 100 100 100 100
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The major reason behind the lack of strong backward linkage especially in the woven sector has been the high cost associated with it. Setting up a composite woven mill may cost about BDT 100-150 crore whereas for a composite knitting mill the cost of installation is within BDT crore. Therefore, spinning and weaving sector in knit ware has flourished a lot. Moreover, according to experts spinning and weaving of woven fabrics is more complicated than knit fabrics.
Competitive advantage for Bangladesh in terms of production has been cutting & sewing and quality finished products. But Bangladesh does not have a comparative advantage in textiles such as yarn and textiles. This can be attributed to comparative disadvantage in production of raw cotton locally and excess capacity in textiles in major textile exporting country. Moreover, importing quality fabrics from china, India and East Asian countries has been cost effective and has ensured quality finished product. Therefore, revolutionary change in backward linkage in Bangladesh in upcoming years is less than expected although some of the big players have been working on building composite factories like. Opex. But it is recommended to concentrate more on the forward linkage more better value added products.
6.4 Sourcing of Raw Materials

Bangladesh imports cotton from the USA, Sudan, Pakistan, China, Taiwan, India, Iran and Turkey. Yarn making chemicals are imported from India, China and Germany. Bangladesh heavily relies on importing fabrics from countries like China, Thailand, India, Pakistan etc. Although textile industry is local market is stable enough due to buyers specific and quality assurance manufacturers prefer to import raw materials.
7.0 Analysis of Global Recession

Various reports, articles, news, etc. in different media express the view that the US and EU economies are experiencing recessions in recent times. It is believed that the recession has been initiated by the credit crunch in the financial and housing sectors of the economies, especially US. In order to identify if there has been any change in the economic indicators that prove actual recession in the economies, the economic data has to be analyzed.
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To identify the ongoing recession in the US economy, an insight is required on the various economic data of past periods so that the change in economic condition of recent times can be observed clearly. For this purpose, the monthly data of the years 2006, 2007 and 2008 (till the most recent data available) have been collected and analyzed through statistical techniques. One thing should be mentioned here, if annual data for years before 2006 were used, the recession would not have been clearly understood because the economic downturn has started a few months back. Thus, monthly data for the past 34 to 36 months has been collected and analyzed to best reflect the economic situation and to illustrate the ongoing recession.
7.1 The US economy 7.1.1 Consumer Price Index (CPI)

In times of economic downturn or recession, the consumer price index of an economy generally falls. The fall in consumer price index signifies a set of economic factors such as a fall in aggregate demand of goods and services in the economy because of slump in demand among consumers and businesses, a fall in consumer spending/expenditure, a fall in retail sales, etc. Thus, the Consumer Price Index alone accounts for all the economic indicators mentioned. Thus, to identify if the CPI of USA has experienced decline, the following data were collected and analyzed. Table 1: Consumer Price Index of USA from January 2006 to October 2008 Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average 2006 198.3 198.7 199.8 201.5 202.5 202.9 203.5 203.9 202.9 201.8 201.5 201.8 201.6 2007 202.4 203.5 205.4 206.7 208
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208.4 208.3 207.9 208.5 208.9 210.2 210.0 207.3 219.1 218.8 216.6
2008 211.1 211.7 213.5 214.8 216.6 218.8 220

Source: Bureau of Labor Statistics , USA (Base Period: 1982-84)
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Figure 1: CPI of USA from January 2006 to October 2008
Consumer Price Index - USA (2006-2008)

225 220 215 CPI of USA 210 205 200 195 190 185
2006
Jan Mar May Jul
2007
Sep Nov Jan Mar May Jul
2008
Sep Nov Jan Mar May Jul Sep
The trend line of Consumer Price Index (CPI) of USA shows that there has been steady rise in the index in the period of January 2006 to mid July 2008. Since mid July, the price index experienced fall and till October 2008, the index has kept on falling. The fall has been significant in October 2008. This fall in CPI in the mentioned period has been in the same period when the US financial sector and major industries started experiencing hardships. Thus a fall in CPI since mid July till October is an indicator of recession in the US economy since price level rises in times of economic growth and falls in times of recession. Figure 2: CPI of USA in 2008
Consumer Price Index - USA (2008)

222 220 218 CPI-USA 216 214 212 210 208 206 Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct.
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7.1.2 GDP and GDP Growth Rate in USA (Quarterly)

When an economy is hit by recession, the Gross Domestic Product (value of goods and services produced within the economy) either falls or the GDP growth rate falls. The fall in GDP signifies a set of economic factors such as a fall in production and output of goods and services in the economy, a fall in employment because of job cuts by firms to match falling production, and a resultant fall in earning and expenditure by citizens of the state. A fall in GDP growth rate signifies that the economic growth of the nation has slowed down which can result to reduction in employment, income and expenditure by citizens. Thus, GDP alone accounts for all the economic indicators mentioned. Thus, to identify if the GDP of USA and the GDP growth rate has experienced decline, the following data were collected and analyzed. Table 2: Quarterly GDP (in billions of current dollars) and GDP growth rate in USA (2006-2008)
Period GDP 2006 2007 2008 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 12959.6 13134.1 13249.6 13370.1 13510.9 13737.5 13950.6 14031.2 14150.8 14294.5 14420.5 0.88 0.91 1.05 1.68 1.55 0.58 0.85 1.02 0.88 1.35
GDP 1.35 growth rate
Source: Bureau of Labor Statisticsx Figure 3: GDP (in billions of current dollars) from January 2006 to October 2008
Quarterly GDP of US (in billions of current dollars)

15000 14500 Quarterly GDP 14000 13500 13000 12500 12000 2006-Q12006-Q22006-Q32006-Q42007-Q12007-Q22007-Q32007-Q42008-Q12008-Q22008-Q3
In the above graph is can be seen that the value of GDP in USA has not experienced decline throughout the period studied (January 2006 September 2008). GDP of USA is seen to rise in
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each quarter. Thus, it cannot be understood form this curve whether US economy has faced any recession in recent times or not. This curve which uses the values in billions of current dollars is not sufficient in identifying the recession in the US economy. Thus, another curve has been prepared using the data of GDP growth rate in USA in the period studied which is given below: Figure 4: Quarterly growth rate of GDP in USA
Quarterly GDP growth rate

1.80 1.60 1.40 GDP Growth Rate 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2006-Q2 2006-Q3 2006-Q4 2007-Q1 2007-Q2 2007-Q3 2007-Q4 2008-Q1 2008-Q2 2008-Q3
In this curve, it can be seen that the growth rate of US GDP plunged significantly in second and third quarter of 2007. However, the important thing for this report that can be seen from this graph is that the GDP growth rate has fallen in the third quarter of 2008 after two consecutive quarters of rise in GDP growth rate. Third quarter of 2008 includes the months of July, August and September. Thus, the GDP growth has been hurt from July to September which supports the presence of a recession in USA. This goes in line with the findings of the other indicators of recession that have already been analyzed in this report.
7.1.3 Average monthly retail price of gasoline in USA: 2006 2008

The economic indicator which responses most quickly with economic growth or recession, is the gasoline prices in the economy. Whenever there is a fall in consumer spending in the economy (which can be because of fall in per capita income or because of job cuts) a direct effect is observed on oil prices since oil is a necessary commodity of any economy. Thus, a fall in
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oil price is again a good indicator of recession. The following data were collected and analyzed to identify the oil price trend from January 2006 till November 2008. Table 3: Average monthly retail price of Gasoline in USA (nominal cents per gallon including taxes) Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2006 235.9 235.4 244.4 280.1 299.3 296.3 304.6 303.3 263.7 231.9 228.7 238 2007 232.1 233.3 263.9 290.9 317.6 310 301.3 283.3 283.9 284.3 311.8 306.9
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2008 309.6 308.3 330.7 349.1 381.3 411.5 414.2 383.8 374.9 320.5 220.8
Source: Energy Information Administration (official statistics of US government
Figure 5: Average monthly retail price if gasoline in USA (nominal cents per gallon including taxes)
Average gasoline price per gallon in USA (20062008)

450 400 350 300 250 200 150 100 50 0 Gasoline Prices
2006
2007
2008
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov
From the above line chart it can be seen that oil prices in USA has been fluctuating from January 2006 to mid July 2008 but the general trend in this period has been increasing. However, since mid July 2008 till November 2008 oil price has been decreasing. In November 2008, the oil price has slumped significantly (by 100 cents per gallon within one month). This fall in oil price is an indicator of the recession in the US economy since the major reason for this price slump is a fall in demand of gasoline by consumers. Moreover, the time since when gasoline price started to fall is mid July which is in line with the time since when the US economy has been facing hardships.
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7.1.4 Stock price index of USA: 2006 2008

Stock price index is directly affected by the performance and development of the economy since the stock price index signifies the business conditions of the state, reflects the investor confidence on major corporations and business in the economy. It has been historically observed that at times of recession or times of shake of business confidence, the stock prices plunge. Thus, to identify the condition of the stock price index in USA, the following data has been collected and analyzed. Table 4: Stock price index of USA: 2006-2008
Year 2006 2007 2008 Jan 2305.8 2463.9 2389.9 Feb 2281.4 2416.2 2271.5 Mar 2339.8 2421.6 2279.1
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Apr 2322.6 2525.1 2412.8
May 2178.9 2604.5 2522.7
June 2172.1 2603.2 2293
July 2091.5 2546.3 2325.6
Aug 2183.8 2596.4 2367.5
Sep 2258.4 2701.5 2091.9
Oct 2366.7 2859.1 1721
Nov Dec 2431.8 2415.3 2661 2652.3 1535.6
Source: NASDAQ Stock Index
Figure 6: Stock price index of USA: 2006-2008
Stock Price Index - USA

3,500.00 3,000.00 Stock Price Index 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0.00
2006
2007
2008
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov
From the above line chart it can be seen that the stock price index followed a steady pattern from Jan 2006 to May 2008. However, since May 2008, the stock price index has been falling. This might be the result of losing investors confidence, decreasing p rofitability of corporation that deters investors from investing in stocks, etc. The significant slump in stock prices occurred in the period of September 2008 to November 2008. Thus, the fall in stock price index since May 2008 is an indicator of recession in the US economy.
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7.1.5 Import of RMG by USA from the world

Since the three analyses done above indicate that there are obvious indicators of recession in the US economy, it can be assumed that the recession will affect the demand of RMG imports in the US market. The total US imports of RMG should fall in the period when the recession is observed (since mid July till date) or the imports in the mentioned period should be lower when compared with the same time periods of previous years. In order to find out whether actual imports of RMG by US from the whole world has been affected by the ongoing recession, the following data has been collected. Table 5: Total import of RMG by USA (values in million dollars) Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2006 5685.5 5183.9 5533.5 4864.8 5197.3 6595.3 6905.6 7532.3 7418.5 7041.9 5882.8 5472.1 2007 6264.6 5740.7 5903.4 5192.6 5657.0 6431.2 7217.7 7741.5 7143.5 7210.8 5782.4 5201.2 2008 5929.1 5844.6 5219.4 5234.3 5415.9 6107 7167.4 7188.7
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Source: United States International Trade Commission (USITC)
Figure 7: Import of RMG by USA from the world (values in million dollars)
EXPORT OF RMG TO USA

9000 8000 USA RMG Import 7000 6000 5000 4000 3000 2000 1000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
2006
2007
2008
From the above diagram, it can be seen that the import of RMG by USA form the world follows a particular pattern where it can be seen that the imports mainly increase May to August period in a year and imports decrease from September to December in the year. In 2008, the trend looks similar i.e. from May to August, the imports of RMG has increased. Although USA has been going through recession from mid July 2008, the recession has left little impact on the
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import of RMG. However, if the import pattern during August is looked at then it will be seen that in the years 2006 and 2007, the imports increased significantly in August but in August 2008, imports have not risen from July but rather remained steady. This can be a result of the ongoing recession in the USA economy during that period.
7.1.6 Bangladeshi RMG export to USA

Since all the previous analyses shows that there has been an ongoing recession in the US economy and the US imports of RMG has also been affected, it is of utmost importance to find out if there has been a fall in Bangladeshs export of RMG to USA. If there is a decrease in RMG exports this would indicate that Bangladeshs RMG exports has been hit by the ongoing global recession and is being adversely affected. If Bangladeshs RMG exports are still seen to follow growth pattern this would indicate that there has not been any impact of recession is the US economy on the RMG exports of Bangladesh. The data and analysis furnished below shows Bangladeshs RMG exports to USA in the studied period. Table: Monthly data for 2006 JAN FEB MAR APR MAY JUN JUL In 1,000,000 Dollars 225 185 240 193 183 249 242 290 311 271 211 202 AUG SEP OCT NOV DEC
Source: United States International Trade Commission (USITC) Table: Monthly data for 2007 JAN FEB MAR APR MAY JUN JUL In 1,000,000 Dollars 271 208 283 234 223 245 245 335 260 267 202 220 AUG SEP OCT NOV DEC
Source: United States International Trade Commission (USITC) Table: Monthly data for 2008 JAN FEB MAR APR MAY JUN JUL In 1,000,000 Dollars AUG SEP
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276 244 290
257
242
270
306 308
335
Source: United States International Trade Commission (USITC) Figure: Export of Bangladeshs RMG to USA (values in million dollars)
EXPORT OF RMG TO USA

Bangladesh's RMG Export to USA in Millio Dollars 400 350 300 250 200 150 100 50 0
2006
2007
2008
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep
Bangladeshs export of RMG to USA has experienced fluctuation in the studied period from January 2006 to September 2008. However, one thing to mark from the data and the trend of export is that in the period when USA is going through a recession, Bangladeshs export volume to USA has increased rather than being adversely affected. From May 2008 to September 2008, there has a gradual rise in exports of RMG form Bangladesh to USA. Thus, Banglades hs RMG exports have soared in spite of decrease in total RMG imports from the world by USA.
7.2 The EU economy 7.2.1Consumer Price Index of EU

To identify if the CPI of USA has experienced decline, the following data were collected and analyzed.
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Table 6: Consumer Price Index of EU from January 2006 to October 2008 Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2006 100.64 100.93 101.41 102.07 102.42 102.53 102.43 102.6 102.65 102.74 102.82 103.21 2007 102.75 103.09 103.71 104.3 104.58 104.71 104.44 104.57 104.95 105.49 106.03 106.48 2008 106.25 106.7 107.6 108.05 108.72 109.17 109.08 109.04 109.34 109.39
Source: EUROSTAT
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Figure 8: Consumer Price Index of EU (2006-2008)
Consumer Price Index of EU (2006-2008)

112 110 108 CPI- EU 106 104 102 100 98 96
2006
Jan Mar May Jul
2007
2008
Sep Nov Jan Mar May Jul Sep
Figure 10: Consumer Price Index of EU in 2008
Consumer Price Index of EU (2008)

110 109.5 109 108.5 108 107.5 107 106.5 106 105.5 105 104.5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct
CPI-EU
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The trend line of Consumer Price Index (CPI) of EU shows that there has been steady rise in the index in the period studied. However, if the rise in CPI in the period of July 2008 to October 2008 is compared to the rise in CPI in the period of January 2008 to June 2008, then it can be observed that the rise has been dampened. The rise in July to October is very little and the CPI is almost steady. Thus a fall in CPIs growth indicates a slowdown in the economic growth of EU.
7.2.2 Average monthly price of crude oil in EU (2006-2008)

In analyzing the US economy, data on average retail prices of all gasoline in the US consumer market was used. However, in EU, there is no such data on average retail gasoline price. Each member state of EU sets has its own gasoline prices. Thus, gasoline prices of separate member countries of EU would not give a complete picture of the recession. However, the purchase price of crude oil in EU is same for all member countries because, EU being an economic union and customs union, follows a common external policy for international commodity purchases. Thus, in analyzing Oil price in EU, the average monthly price of crude oil has been used. Table 8: Average monthly price of crude oil in EU (2006-2008) Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2006 52.5 51.8 52.6 57.6 55.7 55.4 58.7 57.8 50.3 47.7 46.7 47.4 2007 42.2 44.9 47.3 50.2 50.3 52.6 55.2 52.4 55.2 57.7 62.8 62.8 2008 62.4 64.1 66.1 69.8 80.1 85.9 85.3 77
Source: European Commission (Energy Division)
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55.2 43.1
Figure 11: Average monthly price of Crude oil in EU (2006-2008)
Average monthly price of crude oil

100 90 80 70 60 50 40 30 20 10 0
Oil Price
2006
Jan Mar May Jul
2007
2008
Sep Nov Jan Mar May Jul Sep Nov
50
From the above line chart it can be seen that crude oil prices in EU has been quite steady from January 2006 to mid July 2008 but the general trend in this period has been increasing. However, since mid July 2008 till November 2008 oil price has been decreasing. This fall in crude oil price is an indicator us the recession in the EU economy since the major reason for this price slump is a fall in demand of gasoline by consumers. Moreover, the time since when gasoline price started to fall is mid July which is in line with the time since when both the EU and US economy has been facing hardships.
8.0 Recession in Bangladesh

The global financial crisis, which originated in the sub prime mortgage market in the United States, is now in full flow. Although it first appeared that Bangladesh would escape the worst of the crisis, recent falls in export orders for RMG and textile products, which constitute eighty percent of foreign currency earnings, have made policymakers uneasy. Additionally, it is feared that the remittance flow might dry up because fewer Bangladeshis are going to work abroad. Although we are not tuned into the global economy; share prices falling in America will have no direct effect on Bangladeshis living in Bangladesh, what has to be understood is that we live in an interconnected world, and can never be totally isolated from the workings of the wider world. The 'domino' effect of the financial crisis should not be underestimated just because we are not directly affected. A prolonged global economic crisis, especially in advanced economies, may pose a big challenge to Bangladesh, Bangladesh Bank forecasts in its quarterly report released yesterday. The risks may channel through exports, remittances and foreign capital inflows. The exports of traditional items such as jute, jute goods, handicrafts, electronics, frozen food, leather and ceramic products including some primary commodities and engineering products declined significantly in the last six months, according to the BB report on the January-March period. It is apprehended that exports of RMG products could also slow down in the near future. Bangladesh Bank was upbeat on Bangladesh's performance in the first nine months of the current fiscal year to be ended in June 2009. It attributed the success mainly to the country's
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limited international openness to short-term capital flows and innate wariness about excessive debt. Export earnings showed a dip in October 2008, hurt by global recession, but the overall export earnings bounced back and regained its momentum in November 2008. Exports registered a slower 5.5 percent growth in the January-February period but the overall growth was 15.9 percent in the July-February of the current fiscal year over the same period of previous fiscal year.
In the reported period, RMG (woven and knitwear products) registered higher exports but some other commodities such as raw jute, jute goods, leather, frozen shrimps and fish, fertilizer and terry towels declined over the same period of last fiscal year. RMG exports recorded 21.2 percent growth in the July-February period of fiscal year 2008-2009. Knitwear exports in US in the first four months of current calendar year (2009) witnessed only 6.77 per cent growth against the corresponding period last year (2008). On the other hand, a total of 24.27 per cent growth was witnessed in the first four months of 2008 against the corresponding period of 2007. Export of woven product in US during the first four months of current calendar year witnessed 8.66 per cent growth against the corresponding period last year. On the other hand, a total of 21.96 per cent growth was witnessed in the first four months of 2008 against the corresponding period of 2007.
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Total merchandise imports declined by 3.9 percent during January-February of 2009 compared to 12.1 percent growth recorded in October-December quarter of the current fiscal year. Capital machinery import recorded a 12.4 percent decline. Inflation has significantly subsided in the January-March period. The point-to-point inflation stood at 5.04 percent in March 2009, down from 6.03 percent in December 2008 and 10.19 percent in September 2008. The foreign exchange market remained mostly stable due to a healthy situation in the foreign exchange reserves. The current account balance maintained a sizeable surplus worth $816 million in the July-February period of the current fiscal year. Private sector credit grew year-on-year at 19.8 percent in February 2009, which was 19.4 percent in the same period a year earlier. The disbursement of agricultural credit in the JulyFebruary of FY09 stood at Tk 5,940 crore, which is 7.2 percent higher than the same period a year ago. To prevent the adverse effect of recession on Bangladesh, a crisis management fund will be formed in the next fiscal year (2009-2010) that will provide quick financial assistance to entrepreneurs hurt by the ongoing global crisis.
Source: The Daily Star27

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Bangladesh Bank Sees Slowdown. The Daily Star. June 4, 2009. <http://www.thedailystar.net/newDesign/news-details.php?nid=91150>
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The U.K market hasn't stabilized yet with the volume of orders falling, and the prices have gone down even in some cases by 50 percent for the RMG products for export. The proposed stimulus packages for the RMG sector, are predicted not to help all that much. The bodies from garment sector instead demanding for the bank interest rates to be cut down, and for banks to extend or linger loan repayment terms. They are also appealing for greater infrastructure support from the government when it comes to services like electricity, gas, water etc. The power cuts have really affected the RMG industry adversely. It all assumed to have started with the fires in 2006, when a lot of RMG buyers were frightened away. Even then Bangladesh had consistent demand. In 2007, they received orders for three and a quarter lakh pieces worth $2.1 million. In 2008, the number shrank to just over two lakh items worth $1.2 million. Up until now Bangladesh has tried to make the best of it and there have not been any job losses. But if things continue to go down this route, job cuts are feared to be inevitable in the future. Moreover, there is the possibilities of the fires like the one we had a few days ago as a result of the workers' anger at not being paid in time. With the onset of the global financial crisis, there have also been concerns over remittance flows to third world countries. The World Bank's Global Economic Outlook projects a 4.2 percent to 7.3 percent decline in remittance flows to South Asia in 2009. Although remittance flows have been encouraging so far, Bangladesh Bank has warned that we would have to wait till the last quarter of the year to know whether the World Bank's prediction will actually come true or not. Anecdotal evidence suggests that a lot of Bangladeshis working abroad, especially those occupying low skilled positions in Middle Eastern countries, are coming back after having lost their jobs. This is a double-edged sword as those coming back cannot contribute to the flow of remittance into the country, and at the same time will increase the number of people unemployed in the country. Remittances from the developed economies like USA and Europe could also face setbacks depending on the duration and the depth of crisis.
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The inflow of workers' remittances, the critical anchor for the country's current account balance recorded 14.5 percent growth during January-March of the current fiscal year. The inflow of workers' remittances recorded a strong 24.5 percent growth in the July-March period of the current fiscal year. The issue of remittance is very crucial to Bangladesh. They form a large chunk of our dollar reserves and therefore finance imports into a country that is highly dependent on imports. Moreover, many families and individuals depend, to differing extents, on money sent by relatives working abroad. When this cash flow stops, as it undoubtedly has from those who have lost their jobs abroad, it reduces the spending power of the families. This in turn will affect retail businesses, as there will be less demand. As mentioned earlier, the 'domino' effect of this crisis should not be underestimated. It's not all doom and gloom, however. Positive signs have been there in recent times. The price of oil has risen to $70/barrel, and this means that operations in middle-eastern countries will resume in full flow. That means that more workers may not be laid off, and the remittance flow into our country may be sustained. The new budgets effect is crucial. One change that will affect the higher society - while helping the poor - is that luxury items will be taxed higher to increase government expenditure; a compulsory weapon in the fight against recession. The new budget also promises a reduction in bank interest rates for small and medium enterprises in an effort to help them grow. Being a low-income country, our economy is precariously placed and therefore even minor setbacks can have disastrous effects.
9.0 RMG sector of Bangladesh during recession

There are some good news and some bad news for RMG sector of Bangladesh despite the ongoing recession in the world economy. Presently, RMG takes up around 80 percent of the country's exports which is 5% more than the data of last year. Bangladesh fetched $11 billion from exports of the item last year and is expecting more than the figure this time, even during the global recession. It has the low cost advantage over other competitors and the buyer
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countries are now more interested in our product for this advantage facing recession in their countries. The US imports of knitwear and woven garment from Bangladesh during July-December 2008 were more than $558 million and $1.21 billion respectively, according to the Export Promotion Bureau (EPB) data. USITC (United States International Trade Commission) says the total import of knitwear from the world in the US was 1.56 percent down during June-December in 2008, whereas knitwear imports from Bangladesh marked a 24.87 rise in the same period. When global woven imports in the US for this period were 3.72 percent down, the items import from Bangladesh increased by 12.02 percent. The 5.1 percent rise in February 2009 retail sales of Wal-Mart, globally known for cheap clothing, reflects a strong presence of Bangladesh RMG products in the US. However, the entire US retail sales of clothing marked a 2 percent drop during July-November in 2008, compared to the same period a year earlier. The USITC data show a 5.60 percent decline in the US imports of knitwear from Cambodia in the July-December period, 4.60 percent increase from China, 0.13 percent decline from India, 12.56 percent increase from Indonesia, 2.38 percent decline from Pakistan, 0.06 percent increase from Sri Lanka, 10.93 percent decline from Thailand and 23.56 percent increase from Vietnam. During the same period, the import of woven items by US from Cambodia declined by 6.30 percent, 5.13 percent increased from China, 9.51 percent declined from India, 8.25 percent declined from Indonesia, 4.33 percent increased from Pakistan, 3.85 percent declined from Sri Lanka, 6.57 percent declined from Thailand and 7.79 percent increased from Vietnam. US imports more than US$70 billion garment items annually from all over the world. The worlds export market of readymade garment (RMG) items is $410billion where Bangladeshs market share is only 2.0 percent.
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Meanwhile, EPB data show that Bangladeshs RMG exports reached US$6.05 billion durin g the first half of the current fiscal year 2008-09, registering a 24.18 percent growth. Of the total export target, $12.267 billion has been fixed for the two main sub-sectors of RMG. Of this amount, US$6.583 billion is for knitwear, 19 percent up from it s last years export performance, and $5.684 billion for woven, 10 percent up from the last years figure. Bangladesh fetched $10.7 billion from RMG exports in the same period of 2007-08. On different perspective, some see the making of mainly basic items as an advantage for Bangladesh's RMG to keep itself immune from global crisis, but many lament such product nondiversification. They point to China who has made a significant diversification over the last few years in their garment products and grabbed the global apparel market. As a result, the rate of value addition in China's exportable garment products is higher than other countries. Bangladesh now taps only 2.0 percent of the global apparel trade a year, according to industry insiders. It might be more if the country could have manufactured high fashioned and fancy clothing items. The country is yet to properly tap the market potential for RMG products in South Africa, Canada and India (which allow duty-free access), Japan, China, New Zealand, Australia, Brazil, Mexico and the Middle Eastern countries. Even though at present, 3.0 million workers are directly employed in 45,000 woven, 1700 knitwear and 1300 spinning, weaving, finishing and dyeing factories in Bangladesh, the RMG sector suffers from 25 percent shortage of skilled workers which is a huge drawback for overcoming the recession and also to tap the possibly expanding market demand for the recession as Bangladesh has lower cost advantage over other competing countries.
10.0 Analyses of Psychological factors affecting Buying behavior & Fashion trends of US & EU
Bangladeshi RMG industry has been on the growth phase for last few years. In the year 2006 and 2007 RMG exports grew by 22.9% and 16.5% respectively. This industry has passed through
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hurdles, struggled to mark its existence amongst stronger competitors like China, India, Vietnam, Combodia, Turkey etc. and ultimately achieved its competitive position as a reliable and buyer friendly RMG exporting country amongst its competitors. Currently Bangladesh represents most of the major apparel brands of USA & EU. This industry has experienced a sharp rise in the number of orders placed by the US companies in the first few months of this year. But the whole scenario started to change after this recent recession. The ongoing recession has been affecting all spheres of economy; readymade garments industry is not an exception. According to recent data and experts opinion, some psychological factors like changing buying behavior, changing fashion trends are worsening the current situation. For this reason, we incorporated these factors while dealing with global recession and its impact on RMG sector.
Result of Primary Research

Figure 12: Variables constituting Psychological factors related to RMG purchase
Psychological Factors
16 14 12 10 8 6 4 2 0 Changing Buying Behavior Changing Fashion Trends Yes No Not Sure
10.1 Buying Behavior

As discussed earlier, the major buyer countries of Bangladeshi RMG products are currently undergoing an economic recession. Their major share market indexes are falling, unemployment rate is on a rise, per capita income is decreasing. All of these negative factors are resulting into less expenditure by the end users of RMG products residing in those
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countries. They are spending less money on clothing compared to other period of time. Apparel or clothing industry is largely dependant on demand of buyers which makes the fact inevitable that the economic condition, buying patterns etc. of importing countries would definitely affect the RMG industry worldwide. Bangladesh operates mostly in the low-end basic apparel market which has now became an advantageous factor for Bangladesh compared to other RMG exporting countries. Major buyers of bangladeshi RMG products constitute of super market giants, fashion houses and buying houses. The interviews of RMG entrepreneurs supported this fact. Most of the garments factories export their products to single destination while large factories aim at varied destinations. Most of them are producing for renowned super shops and fashion houses. Because of the decrease in expenditure, average number of orders is not increasing along with the decrease in selling price. The shipment of current orders are also being delayed because of slow sales of RMGs in the buyer countries resulting into increased storage cost which are borne by the local garments factory owners. The information collected through interviews with the RMG entrepreneurs of Bangladesh revealed these problems. They opined that inspite of decreasing growth rate they are still getting orders and yet not facing any huge crisis. Overall 72% of the interviewees agreed that the sale of RMG products is decreasing. But they are not that much tense about this decreasing trend of RMG products as basic commodities do not display significant falls in demand even in adverse economic conditions. According to the interviewees, Bangladesh has emerged dealing with several negative factors and they believe that the strength of Bangladesh being the cheapest seller will protect this sector from any huge downfall.
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Figure 13: Factors affecting the buying behavior of end consumers
Factors affecting buying behavior

16 14 12 10 8 6 4 2 0 Change in Preference of Buying Cheaper Clothes Change in Sale of RMG products Preference in knitwear over Woven Products Increased Decreased Unchanged Not Sure
Bangladeshs exporting only basic RMG products gives it a competitive edge over other countries operating in RMG industry. The demand of basic low-end RMG products almost never shows substantial fluctuations. Users curtail their costs in expensive and exclusive items but they need basic clothing in any case. The volume of purchase is certainly decreasing but Bangladesh is suffering much less due to this change in expenditure compared to other countries. Bangladesh is the strongest contender in its current target segmentxvi. Secondly, there is very little scope for innovation regarding the product, and such innovations are, in effect, need based. Thus Bangladesh is not undertaking additional cost in innovation unlike its competitors. Ultimately, we can conclude that the changing buying behavior of consumers are affecting Bangladeshi RMG sector but the effect is still not that much as it was feared. Luckily Bangladesh exhibits certain charecteristics and qualities which will help it emerge from any future adverse condition.
10.2 Fashion Trend

The term Fashion is employed to describe the current and popular trend going around. Fashion, by description, changes constantly. The changes may proceed more rapidly than in
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most other fields of human activity. Clothing industry experiences this change more than any other industry as people choose this medium to express their personality, identity and so on. Thus fashion also plays a huge role in determining the future of Bangladeshi RMG sector. According to the interviwees, buyers set their requirement of clothes, specify their demand, give detail instruction and garment factories produce according to the buyers specifications. Thus Bangladesh or any other RMG exporting countries have no contribution in producing specific types of clothes at a certain time or affect the fashion trend. Bangladesh rather attempts to change its procedure according to this changing fashion trend. This trend was also reflected in the primary interviews conducted with RMG owners. Since they have no contribution in affecting the fashion trend of buyer countries as well as cannot ever predict the future changes in the fashion trend, 15 interviewees expressed their negation in considering changing fashion trend as a factor affecting export volume. One significant change which can be viewed in the history of Bangladeshi RMG sector is the movement of the focus of production from woven to knit products. The growth dynamics of the sector over the last decade evince two clear phases: during the initial period it was the wovenRMG which dominated the structure of apparel exports, whilst in recent years which could be termed as a second phase, it is the knit-RMG which emerged as no less of an important segment in the RMG sector with its share growing up steadily and local value retention fast approaching the level of woven-RMG. Comparing to last decade, the export volume of knit products has increased nine folds while woven product export volume only tripled. In 19891990, the ratio of export between knitwear and woven wear was 1:41.13. In 1996-1997, the ratio became 1:2.93. Now it is standing at 1:1.02. These facts bring front a picture of tremendous growth of knitwear export that for the last 5-6 years is holding the strong position of RMG industry in the export basket of Bangladesh. Table 9: Change in Export volume of Knit and Woven Products Year Knitwear
Volume change 1989-90 14.84 0 in 0.77 BD 609.32
Woven Wear
Percentage Share(%) Volume Export 29.34 change in 31.67 BD
Total Export
Bangladesh
Percentage Share(%) RMG Export 624.16
1923.7
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1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
131.2 118.57 204.55 264.14 393.26 598.32 763.3 940.31
784 -9.62 72.51 29.13 48.88 52.14 27.57 23.19
7.64 5.95 8.58 10.42 11.32 15.41 17.28 18.22 19.49 22.08 23.14 24.38 25.26 28.25 32.58 36.26 37.39
735.62 1064
20.73 44.64
42.83 53.36 52.06 50.97 52.85 50.2 50.65 55.09 56.18 53.59 52.02 52.2 49.76 46.54 41.58 38.78 38.25
866.82
1717.55
1182.57 1993.9 1445.03 2382.89 1555.78 2533.9 2228.35 3472.56 2547.13 3882.42 3001.25 4418.28 3783.64 5161.2 4020.17 5312.86 4352.39 5752.2 4860.43 6467.3 4583.8 4912.1 5986.09 6548.44
1240.48 16.59 1291.64 4.12 1835.09 42.07 1948.81 6.2 2237.95 14.84 2843.33 27.05 2984.81 4.98 3082.56 3.27 3364.2 9.14 3124.56 -7.12 3258.27 4.28 3538.07 8.59 3598.2 1.7 4083.82 13.5 4657.63 14.05
1035.36 10.11 1269.83 22.64 1496.23 17.83 1459.24 -2.48 1653.83 13.34 2148.02 29.88 2819.47 31.26 3816.98 35.38 4553.6 19.3
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5686.09 7602.99 6417.67 8654.52 7900.8 10526.16 9211.23 12177.86
Source: BKMEA website
In FY 200s3-04, knitwear for the first time exceeded woven wear and became the leader in terms of quantity exported with 91.6 million dozens. Knitwear is still leading in terms of quantity exported and is widening the gap day by day. EU is the main export region of Bangladeshi Knitwear constituting 79% (US$ 2227.27 million) of total knitwear export in FY 2003-2004 followed by USA (14.27%, i.e. US$ 402.38 million).
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Figure14: Change in the production volume of Knitwear & Woven products
Comparative Statistics of Knit Wear & Woven Wear

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0
Million US $
Volume of Knitwear (in Million US $)
Volume of Woven wear (in Million US $)
1992-1993
2001-2002
1989-1990
1990-1991
1991-1992
1993-1994
1994-1995
1995-1996
1996-1997
1997-1998
1998-1999
1999-2000
2000-2001
2002-2003
2003-2004
2004-2005
2005-2006
Source: BKMEA Website
Production of knit products is comparatively cheaper than woven products. This is the reason why knit composite units have been increasing in last ten years. Again, orders for knit products are also on a rise compared to woven products. Thus Bangladesh is focusing more on producing knit products. The profit margin is also higher in case of knit products.
11.0 Analysis of changing dollar value and its impact

A country has flexible exchange rates when exchange rates move purely under the influence of supply and demand. In such a system, the government neither announces an exchange rate nor takes steps to enforce one (Samuelson and Nordhaus). Another term often used is floating exchange rate, which means the same thing. Bangladesh government applied floating exchange rate at end-May 2003. Since the US dollar (USD) is the most commonly used and accepted currency in international trade, the value of the buyers/vendors currency against the USD plays a pivotal role in sourcing decisions. An appreciation against the USD means an increase in the cost of production for the manufacturers, but a decrease in the effective purchasing price for the
2006-2007
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buyers. The USD is currently in a process of realignment, depreciating in value against many major currencies. The causes behind this trend have been identified as speculations about the countrys growth prospects, weak equity markets, and a large current account deficit xviii. Table10: Change in the value of BDT against Dollar Month January 2006 February 2006 March 2006 April 2006 May 2006 June 2006 July 2006 August 2006 September 2006 October 2006 November 2006 December 2006 Rate of US Month $1 to BDT 72.08 71.37 71 70.73 70.25 69.85 69.81 69.71 67.6 67.97 69.05 69.1 January 2007 February 2007 March 2007 April 2007 May 2007 June 2007 July 2007 August 2007 October 2007 November 2007 December 2007 Rate of US Month $1 to BDT 69.15 69.00 68.82 69.22 69.05 69.02 68.51 68.70 68.68 68.61 68.58 January 2008 February 2008 March 2008 April 2008 May 2008 June 2008 July 2008 August 2008 September 2008 October 2008 November 2008 December 2008 Rate of US $1 to BDT 69.15 69.00 68.82 69.22 69.05 69.02 68.51 68.70 68.71 68.68 68.61 68.58
September 2007 68.71
RMG sector is a major foreign currency earner of Bangladesh. This sector has experienced tremendous growth during the last two decades. Generally, an industry initially develops in response to domestic demand, and then subsequently turns to export once it becomes mature. The evolution of the garment industry in Bangladesh has not followed this pattern. Instead of growth being spurred by domestic demand, the rise of the RMG industry in Bangladesh can be ascribed to growing demand in developed countries for cheap apparel. Exchange rate therefore has a huge influence over the international competitiveness of the RMG products.
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Figure15: Trend of the changes in Exchange rate of BDT against Dollar
Exchange Rate of Per Unit USD in BDT

73 72 71 70 69 68 67 66 65
The exchange rate steadily depreciated against US dollar from 2003 to the start of 2005. However, the depreciation rate started to rise from 2005 to 2007. The currency depreciated by almost 17 % during the second period. As a result, the Bangladeshi RMG products became artificially cheap to foreign buyers and more orders were made for procurement. Bangladeshs principle competitive edge against other Asian countries comes from its position against the USD. The Taka (BDT) has remained virtually constant against the dollar in the current fiscal year compared to the previous one. But many of its competitors, like China, Vietnam and India have witnessed a rise in their cost of production due to their currencies appreciating strongly against the USD. In China, the Yuan (RMB) appreciated about 7% last year, and another 3% in the first two months of this year. The Indian Rupee (INR) has gained about 11% in 2007xix. In Vietnam, the Dong (VND) gained 1.07% in the central banks exchange rate and 5% in the unofficial market against the USD since last December. This is another reason behind Bangladeshs strong export performance since the beginning of this year xx.
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11.1 Impact in competitor countries Where Bangladesh stands?

China and India the two big players in the Global RMG market, have experienced significant appreciation in their respective currencies. A report in the London based Financial Times published recently said that the Chinese Yuan (RMB) appreciated 17 per cent over the past three years. According to the table given below, the Chinese currency Yuan appreciated 6.58% in the year 2007 and it rose further 5% in the year 2008. Since 2007 RMB has appreciated 13.6% which had significant impact on Chinas export to USA and other countries. Table 11: Change in the value of Yuan against Dollar Month January 2006 February 2006 March 2006 April 2006 May 2006 June 2006 July 2006 August 2006 September 2006 October 2006 November 2006 December 2006 Rate of US Month $1 to RMD 8.06 8.04 8.02 8.02 8.02 7.99 7.97 7.95 7.90 7.88 7.83 7.80 January 2007 February 2007 March 2007 April 2007 May 2007 June 2007 July 2007 August 2007 October 2007 November 2007 December 2007 Rate of US Month $1 to RMD 7.77 7.74 7.72 7.71 7.65 7.61 7.57 7.55 7.47 7.39 7.29 January 2008 February 2008 March 2008 April 2008 May 2008 June 2008 July 2008 August 2008 September 2008 October 2008 November 2008 December 2008 Rate of US $1 to RMD 7.18 7.11 7.01 6.99 6.94 6.86 6.84 6.83 6.79 6.84 6.83 6.84
September 2007 7.49
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Figure 16: Trend of the changes in Exchange rate of Yuan against Dollar
8.50 8.00 7.50 7.00 6.50 6.00
Exchange Rate of Per Unit USD in RMB
RMG, being a labor intensive and low profit margin industry is facing a setback due to the gradual appreciation of RMB. China, the vast supplier of U.S market in terms of Textiles and Apparels, is facing challenge to find new market for the textiles it produces. RMB appreciation and shrinkage of demand badly hurt the consumption of Chemical fibers in Chinese Textiles industry. The two ways impact of higher cost of production caused by increasing price of raw materials and lower effective selling price caused by dollar devaluation is affecting Chinese RMG & Textile sector. For this, the RMG growth of China has been slowing down ever since 2005 after RMB started to appreciate. On the other hand, Indian exports enjoyed the advantage of slow depreciation of currency during the period of mid-2005 to mid-2006. Rupee showed a turn around since August 2006. From March 2007 onwards, Rupee experienced a rise in its value. Another round of appreciation is visible between August-October 2007, which has been relatively mild. In the period when Rupee got depreciated against US Dollar in 2005-06, Indian monthly exports grew by 51%.xxi Table 13: Change in the value of Rupees against Dollar Month January 2006 February 2006 Rate of US Month $1 to INR 43.96 44.21 January 2007 February 2007 Rate of US Month $1 to INR 44.07 44.08 January 2008 February 2008 Rate of US $1 to INR 39.31 39.96
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March 2006 April 2006 May 2006 June 2006 July 2006 August 2006 September 2006 October 2006 November 2006 December 2006
44.48 44.86 46.22 45.87 46.49 46.43 45.95 44.90 44.59 44.11
43.10 41.04 40.36 40.58 40.18 40.63 39.75 39.26 39.52 39.41
40.02 40.45 42.15 42.93 42.47 43.25 46.45 49.40 49.55 48.20
Since April 2007, as there has been sharp rise in the value of Rupee, there is a severe impact on the export growth rate. The Indian Rupee (INR) has gained about 11% in 2007 xxii. The cumulative exports during the period of April-October 2007 have been US $ 85.5 billion (Rs.3.5 trillion) which in US Dollar terms was a growth of around 21%. However, in Rupee terms the growth declined to only 7% implying a serious blow in terms of rupee realization of Indian exports. RMG and Textile is an important sector in Indias export basket. This sector has negligible use of imported inputs and is employer of a large number of people in India. Rupee appreciation has indicated loss in export growth both in textile as well as in readymade garment (RMG) sector. The decline in RMG exports has been more severe. The exports fell by 4.21% in US Dollar terms and by 13.19% in Rupee terms. Figure 17: Trend of the changes in Exchange rate of Rupees against Dollar
Exchange Rate of Per Unit USD in INR

60 50 40 30 20 10 0
China, the top player in the global apparel business, poses a big challenge to Bangladesh. China controls about 40 percent of global RMG business. But it is facing a steep challenge from the
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constantly increasing RMB against US Dollars. However, to reduce the impact of appreciation of RMB the Chinese government has declared tax rebates on exports to increase the profitability of the sector. No doubt, the RMG sector of China is not in the advantageous position for this RMB appreciation but based on the sheer volume and market share China has in the global RMG export market, the experts are saying that the country will be able to adapt to this changing environment. However, in case of India steep decline is observed at the product level. Both the knitwear and woven sector has faced decline due to the increase in cost of production. RMG exports fell by more than 10% in USA market which comprises of 31% of the market and by only 4% in EU market having share of 45% of total RMG exports. Clothing sector is highly labor intensive. An investment of Rs.100 million generates 500 direct and 200 indirect jobs. Around 5.8 million people are engaged in apparel industry. Due to slowing down of the export growth, employment generation will be mere 12% of what has been targeted. In fact in many sub categories, job losses are already reported. It is estimated that for every percentage point of appreciation, profitability of exports in textile sector is hit by 1.2%. To overcome this crisis, India decided to depreciate its currency against US Dollars as depreciation is usually good for exports, provided it does not follow a very volatile, random trend. However, given the inherent volatility and short-term fluctuations, any major medium or long term benefit of this depreciation could not be foreseen by Indian economists as the increase in freight cost payable in dollars and repayment of overseas loans will keep the cost of production in the same level.xxiii However, the profit margin is going down due to dollar depreciation but still Bangladesh is surely having an edge over its competing countries by adopting present currency related policies. Analyzing the position of the competitors, it can be said that the overall cost of production in India and China, the two big players of the RMG export market, has increased significantly over the past three years. Through depreciating the currency value against US Dollars, Bangladesh has been able to maintain the cost of production more or less at the same level.
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Figure 17: Variables affected by Dollar devaluation
Effects of Dollar Devaluation

18 16 14 12 10 8 6 4 2 0 Profit Margin Change in cost of production Change in Financial Cost
Unchanged Increased Decreased
Through our primary research we have found that US dollar devaluation is considered as a very much prominent factor in determining several facets of impact on RMG sector. As discussed earlier, the US dollar devaluation has been going around for a considerable amount of time and by now every RMG owners is very much concerned about this fact. According to them, US dollar devaluation is not only affecting their profit margin but also affecting their current production cost. As it can be seen from the chart, 14 interviewees consider that changing dollar value is decreasing profit margin while the remaining 4 conveyed that their profit margin is still unchanged. Moreover, 17 of the interviewees think that their cost of production is increasing due to the changing dollar value while only 1 of them considers that changing dollar value is not changing the production cost.
11.2 A Hypothetical Case of TRENDSETTERS - a manufacturer of WalMart

The largest single buyer of Bangladeshi apparel items is Wal-Mart, whose annual sourcing from Bangladesh stood at around $800 million. It might be mentioned here that while Wal-Mart avails its liaison office in Bangladesh, it also sources from other buying houses (e.g. Li & Fung), and head-office selected manufacturers.
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We have taken Trendsetters a manufacturer of Wal-Mart for our case study to identify the changes in the level of profitability over the last 2 years. The Trendsetters manufactures only sweaters and sources only to Wal-Mart. It sources around USD 2 million to Wal-Mart annually. To produce the sweaters Trendsetters needs to import raw materials like yarn, buttons, zippers, buckles etc. from China. At the beginning of 2006, Wal-Mart used to pay $3.5 per sweater allowing a profit margin of 60c per sweater to the manufacturer. But in 24 months time, it now pays $3.4 per sweater which means Wal-Mart has cut down its sourcing price by about 3%. Trendsetters exports raw materials complying with the government rule of exporting less than 75% of the total production cost. The per unit raw material cost behind each sweater is $2 which has increased by 15% to $2.30. Now the production cost of each sweater has increased to $3.2 whereas it was $2.90 two years ago. This increase in the cost of production is largely due to the dollar devaluation against RMB which left the company with a profit margin of 20c per sweater. This is applicable for all the RMG manufacturing units of Bangladesh. The RMG industry is overall suffering from the pressure of decrease in profit margin, one of its variable is dollar depreciation for which the sourcing prices of raw materials becomes more expensive hence squeezing the profit margin.
12.0 Analyses of impact of Recession on Profitability & Mode of Payment

RMG industry of Bangladesh has surpassed many critical obstacles throughout its journey of the last 30 years. It has faced fierce competition from its competitors but it is still on the right track to grab the lion share of the global market. Now, it is one of the major RMG exporting countries. But, recently, because of the ongoing global recession, the growth of the industry has been hampered. Though, the growth rate has fallen marginally, the entrepreneurs are satisfied with the growth rate as the competitors are comparatively more affected; thus giving us a competitive edge. The impact has been less mainly due to the fact that Bangladesh solely focuses on producing and exporting basic garment items. As of secondary sources, the countrys RMG sector is still experiencing growth despite t he challenges faced. However, reviews reveal that the profitability has decreased marginally as the selling price of clothes has gone down while on the other hand production cost has gone up sharply owing to various reasons. Nevertheless, the entrepreneurs are optimistic that the industry will recover the short-term shortcomings and can dominate the global arena in the
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longer run by taking necessary steps like, diversifying its market, implementing innovative marketing strategy, producing raw material in the country etc. For the purpose of this research, a survey was carried out which enabled us to get an insight into the overall scenario prevailing in the sector at present and assisted in analyzing whether the global recession has created any negative impact on the overall profitability of the industry. The factors that were considered for analyzing the situation are given below: 1. Order Book Situation 2. Profit Margin 3. Competitiveness 4. Shift in Mode of Payment (From Back to Back LC to Direct Contract)
12.1 Order Book Situation

As the year 2008 ends, the continuing recession that has taken the world; especially the western countries by storm can in reality pose as a big threat to the prosperity of the RMG industry of Bangladesh. Whether it has already has any bearing or not for this growing industry of Bangladesh is a matter of concern and a very good way of understanding or evaluating the impact is through scrutinizing the order book situation of the local manufacturers. These data would give a true picture of the overall scenario which would depict actually if there has been any impact of this recession or not. The section below will reflect on eight variables that are crucial to the order book situation of the vendors and changes in these variable caused by recession can in actuality have a severe impact on the number of orders coming to Bangladesh and in the process affect the overall profitability of the industry.
12.1.1 Change in order volume

The quantity of orders placed by the importers and buyers gives a very good indication to recognize any presumed change being experienced by RMG manufacturers. Bangladesh RMG industry experienced an impressive 44.66 percentxxiv growth with an export earning of nearly $4353 million in the third quarter of the current year spanning from July to September compared to the corresponding period of last year. This has been achieved despite financial meltdown in developed countries, especially in the major importing destinations of ready made
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garments industry of Bangladesh; US, EU. Nevertheless, it should be mentioned here that third quarter of last year experienced deterioration in growth as the month of September was recorded as the worst in the entire history of the RMG industry of Bangladesh. However, this growth does not necessarily establish that the RMG sector has not been affected by the ongoing recession. According to the survey conducted, the respondents cited that the orders of third quarter of this year were placed mostly in the months of June and July of this year. This might be a reason why these data reflect a rather insignificant change as far as order volume is concerned.

Figure 18: Change in Order Volume
Change in Order Volume

8 7 6 5 4 3 2 1 0 Increased significantly Increased marginally Remained unchanged Decreased marginally Decreased significantly Export to United States Export to European Union
While comparing the order volume of last years third quarter to the US; as can be seen from the chart above, the orders have largely increased with very minimal declination. Out of the eighteen respondents, order volume increased marginally for eight respondents while six experienced unchanged order placement. Only three instances were seen where the order volume in fact decreased marginally with one mentioning significant decline in orders. These data suggests that the financial turmoil faced by the importing countries have yet to put a substantial impact on the order volume of RMG for export.
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12.1.2 Change in value addition

From the previous section, it was perceived that the orders are still increasing despite the ongoing recession being faced by importing countries. However, an interesting change in pattern of orders was noticed concerning the type of products. A considerable portion of the responds were not encouraging towards increasing value to the products exported because currently the low value added products are fetching more orders compared to the high value added ones. As the chart shows, twelve manufacturers stated that value addition for products remained unchanged with very minimal concern regarding supplementary accessories, materials, designs as orders are largely coming for low value added basic products. In four occasions, it was seen that the extent for value addition is in fact decreasing as buyers are cutting down on value adding accessories and materials for lower price. Only two cases hinted that value addition is being encouraged and demanded by adding up various accessories and different styling.

Figure 19: Change in Value Addition
Change in Value Addition

12 12 10 8 6 4 2 0 Value Addition Value addition increased Value addition decreased Remained unchanged Value Addition 2 12 4 2 4 Value addition increased Value addition decreased Remained unchanged
Thus it can be concluded that due to recession and financial crisis, the buyer market is emphasizing on importing low value added products and thereby increasing order for such products.
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12.1.3 Change in Cash Cycle

Of the components that have been used, cash cycle provides a very apparent picture of recession and its impact on the order book situation of RMG manufacturers and the entire sector. Owing to the recession, the importing countries are faced with acute liquidity crisis. This fact is very much eminent in their actions off late as they are not being able to hand over payment of orders that were placed beforehand; even as early as the second quarter of the current year. And as a result of this delay, the RMG manufacturers are being affected the most in terms of taking further orders for the future. From the chart, it is very apparent that the cash cycle has increased compared to previous time spells due to the ongoing recession. As many as fifteen manufacturers responded positively concerning the increasing trend of cash cycle whereas three observed no or very negligent amount of change in their cash cycle.

Figure 20: Change in Cash Cycle
Change in Cash Cycle

15 16 14 12 10 8 6 4 2 0 Increased Unchanged Decreased Cash Cycle 15 3 0 0 3 Increased Unchanged Decreased
These data prove that recession has had an enormous impact on the cash cycle of the local RMG manufacturers. This is a huge drawback for them since this lack of cash in hand it does not allow them to receive future orders and drastically effects their order book situation.
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12.1.4 Change in Expenditure on clothes by end users

The people living in countries going through recession are currently faced with severe cash crisis which is directly affecting their day to day behavior. Lack of cash in hand and uncertainty are causing them to spend much more conservatively in every sphere; even in cases of basic needs like clothing. As of secondary research, we have found that consumer expenditure in the markets on cloths have decreased by 20%xxv . This phenomenon alone has a massive bearing on the order book situation of exporting countries and Bangladesh; being one of the leaders in terms of export is also expected to suffer the consequences. Our survey also provided a comprehensible depiction of the scenario. Regarding changes in terms of expenditure on cloths by end users, fourteen respondents stated that consumer expenditure in the buyer markets have decreased. For instance, the manufacturers mentioned that if the consumers used to buy 5 t-shirts a month before the financial crisis, they are now buying 3 t-shirts a month. The rest of the four respondents were not sure regarding the end users buying behavior and thereby did not comment.

Figure 21: Expenditure Change on Clothes
Expenditure Change on Clothes 14

14 12 10 8 6 4 2 0 Increasing Not sure Decreasing 0 Expenditure Change (End Users) 0 14 4 4
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The above circumstances can help us to conclude that due to the financial crisis, the end users are buying less which is having a direct impact on the order book situation of the manufacturers. With the fall in the end users buying number, the orders being placed by the importers are also drying out proportionately.
12.1.5 Diversification of products

Bangladesh mainly focuses on manufacturing basic garment items. It is recognized in the importing markets as the cheapest low end garment producing country of the world. Unlike competing countries like India and China who have huge line of high end products, big brands and fashion wears, Bangladesh still produces the low end basic items. As a result, it has less diversified products compared to the aforementioned competitors. From the survey result, it can be seen that two respondents stated that product diversification is increasing, one said it is decreasing. However, the majority of the responds; fifteen, came for unchanged product diversification as those manufacturers mentioned that their buyers are not looking for diversified products. They said that the buyers are still sticking to the basic items they produce. As for the reason behind this outcome, they told that as Bangladesh is widely known for producing low end products, buyers usually place orders for only such basic items and do not consider Bangladesh as far as high end fashion items are concerned.
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Figure 22: Product Diversification
Product Diversification
16 14 12 10 8 6 4 2 0 Increased Unchanged Decreased Product Diversification 2 15 1 2 1 Increased Unchanged Decreased 15
As for the impact on the order book situation owing to the current recession, a very interesting situation is prevailing in regard to this component of product diversification. Recession has caused severe credit crisis in the importing countries and it has played a significant role in changing the buying behavior and habit of the end users. But this criterion, according to most, is actually saving Bangladesh from experiencing huge slump in orders. With end users preferring cheaper cloths, the demand for low end products is decreasing at a less significant rate compared to high end products. Therefore, Bangladesh is yet to face acute decline in the number of orders because of its specialization in basic garment items whereas competing countries that specializes in high end products are facing comparatively a larger slump in orders.
12.1.6 Change in sale of RMG

As depicted earlier, countries in the west are facing enormous cash crisis due to the recession currently going on; creating huge panic among the people. Jobs are being lost which is causing higher level of uncertainty. Thereby, people are actually spending only where necessary and are stressing more on savings. Consequently, spending on clothing has decreased as well. As
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mentioned earlier, spending expenditure on clothing has decreased by almost 20% which has resulted in change in sales. According to the survey results, it can be observed that almost all of the respondents cited that a decreasing trend has been seen in regards to sale of RMG products. Thirteen manufacturers said that there has been a fall in the sale of garment items, whereas five were unsure about the change taking place in the buyer market.

Figure 23: Change in sale of RMG
Change in Sale of RMG

14 12 10 8 6 4 2 0 Increased Remained Unchanged Decreased Sale of RMG 13 5 0 0 5 Increased Remained Unchanged Decreased 13
As demand for readymade garments is in the decline, the importers are naturally pulling off orders to save themselves from severe losses. Therefore it can be deduced that the decreasing trend in sale of RMG products is having a significant effect on the order book situation of RMG manufactures.
12.1.7 Change in preference for knitwear over woven products

In recent years knitwear has been gaining momentum in terms of export earning. Few years ago woven items led knitwear by almost twofold margin. However, it has experienced very impressive growth and very recently surpassed woven items as far as total export is concerned.
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In regard to this viewpoint, contemplation was made that perhaps demand for knitwear has increased compared to woven products. From the survey conducted, it was seen that the respondents do not actually agree with this contemplation. Nevertheless, twelve respondents were not sure about this whilst six denied the particular perspective saying that in reality there has been no change in demand for knitwear over woven wear. Thus it can be depicted from the survey that demand or preference for knitwear over woven items in essence does not necessarily lead to export growth. Rather, in recent years, knit manufacturing composites have increased in great number in Bangladesh due to the strengthening of backward linkage which has attracted more investment. This perhaps is the determinant behind this particular scenario.

Figure 24: Preference in Knitwear over woven products
14 12 10
Preference in Knitwear over woven products
8 6 4 2 0 Yes Not sure No Preference in knitwear oven woven products 0 12 6 Yes Not sure No
This also goes on to prove that the ongoing recession has had impact on increasing demand for knit products. Even though order for knitwear is increasing recently, it does not rely on the fact that demand for these items are increasing. Instead, the quantity of order is increasing as the number of knit composite units is escalating at a much higher rate compared to woven manufacturing units.
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12.1.8 Changing buying Behavior

As discussed earlier, the major buyer countries of Bangladeshi RMG products are currently undergoing an economic recession. Their major share market indices are falling, unemployment rate is on a rise, per capita income is decreasing. All of these negative factors are resulting into less expenditure by the end users of RMG products residing in those countries. They are spending less money on clothing compared to other period of time.

Figure 25: Change in Buying Behavior
18 16 14 12 10 8 6 4 2 0 Yes Unsure No
Change in Buying Behavior 16
Yes 2 0 Buying behavior 16 2 0 Unsure No
As the chart shows, apparently that majority of the respondents believe that a change has taken place in the buying behavior of the end users of their products. The rest of the two responds were unresponsive to the viewpoint and cited that they were unsure of the fact. This picture suggests that the demand of buyers is not similar to what it was perhaps even few months back. However, the clothing industry is largely dependant on demand of buyers which makes the fact inevitable that the economic condition, buying patterns etc. Of importing countries would certainly have an effect on the order book situation. Bangladeshs exporting only basic RMG products gives it a competitive edge over other countries operating in RMG industry. The demand of basic low-end RMG products almost never shows substantial fluctuations. Users
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curtail their costs in expensive and exclusive items but they need basic clothing in any case. The volume of purchase is certainly decreasing but Bangladesh is suffering much less due to this change in expenditure compared to other countries and the effect on order book situation is comparitivly low.
12.2 Profit Margin

Profit margin is perhaps the best indicator concerning the profitability aspect and would give the best judgment regarding any sort of impact of recession. This is the factor that conceivably affects the manufacturers the most and would help us to determine whether recession is leaving any brunt or not.
12.2.1 Dependency on imported raw material

Any ready made garment manufacturing country is heavily dependent on raw materials. In the last few years, the continuous rise in prices of raw materials has exerted great pressure on every garment exporting countries. Bangladesh, one of the major players in this sector, procures raw materials from abroad and then processes them into finished products, which is time-consuming and one of the causes of high lead-time for local exporters. To compete in the market effectively the readymade garments sector needs reliable and shorter pipeline source for finished fabrics of export quality. To achieve this some new investments are required in dyeing printing and finishing plants. The prices of garment raw materials on the world market increased more than 50 percent over the last one year. Prices increased 30 percent on the local market in the same period. The local manufacturers spend 5-8 percent of total export value of their exportable RMG products on raw materials. As said by the interviewed RMG entrepreneurs, the scenario has not changed drastically due to recession. Out of the eighteen entrepreneurs we talked to, only eleven entrepreneurs believe that, our profit margin has decreased for dependency on imported raw material during the ongoing recession whereas, four consider that, our profit margin was not hampered due to importing raw materials during the current recession. However, the rest three respondents were not certain about any negative impact on profit margin. According to the three respondents who consider, Bangladesh is now more affected for importing raw material,
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recession caused the price hike of the necessary raw materials and as Bangladesh has to depend on other countries for raw materials, thus it has a lesser profit margin than before. Four of the respondents believe that, recession does not directly relate to profit margin and dependency on raw materials. The frequency table and bar graph found from the survey conducted is given below:

Figure 26: Dependency on Imported Raw Material
Dependency on Imported Raw Material

12 10 8 6 4 2 0 Yes Unsure No Yes Unsure No
Sourcing of raw materials 3 11 4
This graph gives us a picture that, the profit margin is currently going through a declination due to dependency on raw materials in the last two quarters which means, recession has made an impact in this regard and can bring down the profit margin even more in the near future.
12.2.2 Cash Cycle

Cash cycle or cash conversion cycle is the length of time between the purchase of raw materials and the collection of accounts receivable generated in the sale of the final product. Because of the ongoing US recession, the buyers are delaying to pay the sellers for the previously placed orders. As the manufacturers are receiving money later than the scheduled time, they are not being able to buy new raw materials and as a result, they cannot go for new orders. Thus,
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manufacturers of Bangladesh are giving up their orders to their competitors. At the same time, they receive devaluated money as they receive money after the scheduled time. The sellers, as a result, are having a smaller profit margin in their formerly placed order and are giving up their new orders simultaneously. The RMG manufacturers we talked to for our study are extremely frustrated regarding the cash cycle scenario. Out of the 18 entrepreneurs, 15 entrepreneurs have faced the consequences of larger cash cycle in the last two quarters. However, the other 3 entrepreneurs stated that, they have not experienced any alteration in cash cycle in their most recent transactions. So, the outcome we obtained from the survey suggests us that, the RMG manufacturers are suffering because of the longer cash cycle which took place because of the ongoing recession. The survey result which we obtained is illustrated below in table and bar graph:

Figure 27: Cash Cycle
16 14 12 10 8 6 4 2 0 Increased Unchanged Decreased
15
Cash Cycle
Increased 3 0 Cash Cycle 15 3 0 Unchanged Decreased
Thus, we can come to the conclusion stating that the cash cycle is becoming lengthier and as a result it is having negative impact on the profit margin made by the RMG entrepreneurs.
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12.2.3 Value Addition

As a result of this ongoing global recession, the buyers are looking for cheaper gods rather than value added products as their buying power has declined after this crunch time. They have cut down their spending on clothing and they are focusing on meeting the everyday needs. The amount they spend for RMG products is considered as spending on luxurious items. They are buying less number of products compared to the previous quarters. The buyers also have stopped looking for style, design and the aesthetic touch. Rather, they are just sticking to the products which can cover their basic requirements from a garment and which are cheap as whenever they are going for any value added products, they have to pay a lot more than the usual amount which exceeds their budget most of the time. As the buyers are not buying value added products, the manufacturers have to produce cheaper goods and sell their items at a low price and as a result, they cannot opt for higher profit margin. Most of the times, they have to cut down their price to sell their items because or else, they have to give up new orders. From our analysis, we have found out that, in most of the cases the entrepreneurs are affected as the buyers are not looking for value added products. Two-third of our surveyed manufacturers have stated that, they are not being able to generate as much profit as they used to generate because of this demand transformation. The outcome of our survey is shown below:
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Figure 28: Value Addition
12 12 10 8 6 4 2 0 2
Value Addition
4 Value addition increased Value addition decreased Value Addition Value addition increased Value addition decreased Remained unchanged Value Addition 2 12 4 Remained unchanged
From the above table and bar graph, we can clearly observe that, only 2 entrepreneurs have said, there is an increase of value addition scope whereas, 12 entrepreneurs have already faced the negative impact of reduced value addition scope. Thus, in conclusion, we can say that, the reduced value addition scope caused by the current global recession has hampered the profit margin of the RMG exporters.
12.2.4 Change in expenditure of end users

Due to recession, price of the basic goods are increasing regularly although the employee salary did not increase. As a result, the buyers are not opting for luxurious items. Rather, they are only buying the goods which are required to satisfy their everyday needs. As a result, they have reduced their expenditure on clothes. Consequently, RMG manufacturers from all over the world are being affected as their sales have decreased drastically. From the respondents of our checklist, we have come to know that, price of garments has decreased by 2-3% in the recent past due to lesser amount of sales of garments and at the same time, the production cost is increasing. Therefore, the manufacturers are often facing difficulty to meet their production budget. The manufacturers are not being able to produce
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goods within the price limit and thus, they have to refuse orders. Some of the entrepreneurs had to refuse 8-9% of their order in the last two quarters and they had to give up 2-3% of profit in the previous orders. From our checklist, we have found out that, out of 18 RMG manufacturers, 4 of the exporters think that, the profit margin has decreased because of declining expenditure and the rest of the personnel surveyed are not sure about this factor. None of the respondents stated that, their expenditure on clothing has increased. For that reason, manufacturers are enjoying smaller margin of profit at present. The survey result we obtained is shown in table and bar chart below:

Figure 28: Change in expenditure by end users
Expenditure Change by End Users

16 14 12 10 8 6 4 2 0 Increasing Not sure Decreasing 0 Expenditure Change (End Users) 0 14 4 4 14
Thus, it can be stated that, the garment manufacturers are being affected because of the ongoing recession and accordingly, the RMG industry of our country has already started facing the negative impact of recession.
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12.2.5 Preference in knitwear over woven products

Bangladesh RMG sector has successfully passed some critical tests and is now sailing with two masts: knit and woven. The sub-sectors are now in healthy competition among themselves to take the role of leadership within the country. When the industry started its operation, it was almost totally dependent on woven exports. Now, the scenario has changed as knitwear exports have equaled woven wear exports. Now, it holds nearly 50% market share of the industry whereas the ratio of knitwear exports and woven wear exports stood at 1: 41.13 in 1989-90. But this change is not taking place due to recession. The growth of knitwear products has been taking place for the last 20 years. From our survey result, we have found out that, recession is not a reason behind the change in the export pattern of Bangladesh rather the growing demands of knitwear over the last 20-25 years is the foremost cause of this trend. Out of the 18 personnel surveyed, none of them considered recession as a reason of this change in buying behavior of the end users. The outcome we found from our study is illustrated in the table and the graph below:

Figure 29: Preference in Knitwear over Woven Products
Preference in Knitwear over Woven Products

14 12 12 10 8 6 6 4 2 0 Yes Not sure No Preference in knitwear oven woven products 0 12 6
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Hence, we can conclude that recession does not have any impact in the end users preference in knitwear over woven products. This change is an aftermath of the buying behavior change over the past 30 years.
12.2.6 Change in cost of production

The production cost has been increasing for the last few years. And at the same time, the RMG manufacturer has to keep a low price for their products so that they can retain their customers. Therefore, the sellers have to settle for smaller margin of profit because otherwise they are losing customers. The buyers are now spending lesser amount of money on clothes as the buying power has decreased drastically in the last few quarters because of the current global recession. The production cost has been increasing gradually in the last few years but the manufacturers were able to meet their budget as they used to maintain a satisfactory profit margin but after this recession took place, the gap between the price and cost is lessening quite frequently and the manufacturers are now facing uncertainties as currently they are having very low profitability. Simultaneously, they have to set a cheap price which does not generate much profit. Often, the sellers are giving up new orders as they are not being able to meet the production cost budget.

Figure 30: Cost of Production
Cost of Production
18 16 14 12 10 8 6 4 2 0 17
Increased Unchanged Decreased 1 0
Cost of production
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From our checklist survey we have come to know that, the sellers have to maintain the same quality with higher cost and with low price which results in cutting down their profit margin. Out of the 18 personnel surveyed, 17 respondents had to experience higher cost of production which ultimately leads to lesser profit margin. Therefore, we can conclude saying that the increase in cost of production due to recession is resulting in lower profit margin. The survey result is depicted in the above table and graph.
12.2.7 Change in other costs

Bangladesh as a nation faces severe energy crisis with intermittent electricity and gas supply. The total production of this energy does not satiate the demand of the entire country and thus creates great suffering in every sphere of life; especially for industrial units. The RMG manufacturers also face great intricacy in order to keep their conversion process running and thereby have to depend on additional power sources like oil run generators. Because of the global recession taking place in the last few quarters, it has drastically affected quiet a number of constituents such as huge fluctuation of oil prices, stock prices and gold prices. All these have been going through grave instability; and in the process having bearing on various aspects. The fluctuations in oil price during the last few months are shown in the chart below: Table 14: Retail Price of Gasoline in year 2008 Month January, 2008 February, 2008 March, 2008 April, 2008 May, 2008 June, 2008 July, 2008 August, 2008 September, 2008 October, 2008 All Types of Gasoline, U.S. City Average Retail Price 309.6 308.3 330.7 349.1 381.3 411.5 414.2 383.8 374.9 320.5
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Due to the increased cost of oil, the cost allotted for energy sector has gone up as the energy sector. As a result, the financial cost accommodated for this sector by the owners has gone up drastically. The survey results also revealed that out of the eighteen manufacturers, twelve think that due to recession and its impact on variables such as oil price has hugely increased their financial cost of continuing the whole process, maintenance etc. For instance, one manufacturer elaborated that he has to spend taka hundred thousand per month on buying oil for running his plants generator. This cost rocketed in the past couple of months due to sheer rise in oil price. But he also mentioned that this is one cost he has to bear this expense as without the provision of generators he cannot keep his work running. Figure 31: Gasoline Prices in the Year 2008
Gasoline Price
450 400 350 300 250 200 150 100 50 0 309.6 308.3 330.7 349.1 381.3 411.5 414.2 383.8 374.9 320.5
With selling prices of garment products remaining stable and financial costs rising due to recession, the manufacturers have to sacrifice on their profit margin.
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Figure 32: Change in other costs
Change in Other Costs

15 10 5 0 0 Increased Unchanged Decreased Financial Cost 12 6 0 12
6 Increased Unchanged Decreased
12.3 Competitiveness
Bangladesh is one of the leading RMG manufacturing and exporting countries of the world. Though China leads all its other competing countries by a massive margin, Bangladesh is still a very important market for the buyer countries as it specializes largely on producing very cheap low basic products. However, the ongoing recession has created enormous panic among the exporting countries as the demand for readymade garments and its sale has fallen sharply due to the existing liquidity crisis. Nevertheless, this entire circumstance has created an interesting prospect for Bangladesh. The section beneath would evaluate the position of Bangladesh RMG sector from the competitive perspective and analyze its drawbacks as well as competitive advantages.
12.3.1 Change in quality

The manufacturers cannot compromise quality as they have to meet certain standard to export their items and to stay in the competition. Bangladesh faces tough competition from its competitors: China, India, Vietnam etc. So, in order to reign in the global field, RMG exporters have to maintain the quality of their products. Due to recession, the cost of maintaining the same quality has increased and at the same time, the price has decreased. Accordingly, the
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profit margin has decreased. Now, in order to retain customers, the manufacturers have to maintain the same quality with lower profit margin which is affecting the RMG entrepreneurs and ultimately the RMG industry of Bangladesh. From our survey, we have found out that, the manufacturers are extremely bothered due to this concern. None can sacrifice quality for higher profit margin because it will have a negative effect on the reputation of the manufacturer. Most of the survey respondents we talked to for our study were forced to maintain the same quality with higher production cost and lower price due to the existing recession.
12.3.2 Product diversification

Bangladesh RMG industry lacks of manufacturing wide range of products. It does not focus on product diversification rather it is mainly based on the basic products such as t-shirts, shirts, jeans pants, formal pants etc. Bangladesh, in order to head towards the leading position, in the global market should start focusing on diversifying its products. Due to recession, Bangladesh RMG industry has gained a competitive edge over its competitors as the end users are not looking for any other items other than the basic clothes now. The other competitors are suffering even more now as their market is based on a huge product line. We have learnt from our survey respondents that the impact of recession will not be understood completely now in Bangladesh as the industry are totally based on basic items. But, they are predicting that, the impact on our RMG industry will be visible from the second quarter of the next year. They have suggested that, Bangladesh should produce varied products so that in can capture more market share than now. Out of the 18 respondents we have surveyed, 15 respondents said the product line has not changed and only 2 entrepreneurs have said that, there is an increase of product diversification. Thus, we can conclude saying that, Bangladesh RMG industry is not facing any severe trouble due to recession for lacking diversified product line.
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Figure 33: Product Diversification
Product Diversification
15 10 5 0 Product Diversification Increased Unchanged Decreased Product Diversification 2 15 1 2 1 15
Increased Unchanged Decreased
12.3.4 Change in sale of RMG

The recession is altering the buying behavior of the end users. They are spending less amount of money on clothing and as a result, the recession is hampering the sales of RMG industry of the exporting countries. Ultimately, the RMG industry of Bangladesh is not having the growth rate it used to have. Bangladesh RMG industry, based totally on exporting the basic items, has gained a competitive edge over its competitors as the buyers have to buy these items. China, India, Vietnam having diversified product range are being affected by the ongoing recession. Bangladesh can grasp this opportunity and can grab more market share now by invading the unexplored market and by diversifying the product range. It will assist the industry to secure a stronger position in the global scenario. Bangladesh RMG industry is still growing which is a blessing for the industry. The personnel, we have surveyed, have told us that the industry is still growing but they are not satisfied with the growth it had in the last two quarters as they are accustomed with much higher growth rate. Out of the 18 personnel surveyed, 13 respondents experienced a growth in sales and the rest of the 5 respondents experienced a decline is sales. This suggests that Bangladesh RMG industry is still on the right track despite facing the heat of recession. The survey result is graphically represented below:
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Figure 34: Change in RMG sale
Change in RMG Sale

14 12 10 8 6 4 2 0 Increased Remained Unchanged Decreased Sale of RMG 13 5 0 0 5 Increased Remained Unchanged Decreased 13
Thus, we can draw a conclusion saying that, the RMG industry is still operating strongly in the market in spite of the recession whereas the other competitors are losing the momentum.
12.3.5 Innovative marketing strategies

Bangladesh is lagging behind its competitors mainly because of not having pioneering marketing strategies. It should have some innovative marketing policy to foster the sales. The other competitors of Bangladesh are moving forward through implementing their policies. The RMG entrepreneurs, we have talked to, are also concerned regarding this issue as the Bangladeshi RMG industry is losing their momentum because of not having revolutionary promotion policy. They have stated that, illiteracy is the major reason for not being able to execute such strategies. They have also stated, as the manufacturers of the competing countries are educated, they have implemented feasible and profitable marketing policies to capture the lion share of this market. Bangladeshi exporters should set some objectives and develop a practical strategy accordingly so that they can surpass their global competitors.
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12.3.6 Infrastructure Development

The infrastructure of Bangladesh RMG industry is falling behind its competitors as it lacks sufficient energy resources. China and India have the advantage of having sufficient energy resources. Bangladeshi RMG industry, on the other hand, lacks energy resources. Bangladeshi RMG entrepreneurs have to incur a huge cost as they have to pay a lot for running generators. They sacrifice a great amount of profit just to run their operation. The competitors do not have to give up profit due to this. Bangladesh has all the modern equipments which are used for this sector. The machineries are very advanced and the manufacturers are really happy regarding the technology used in this industry. But they are frustrated as it takes more cost to maintain those than their customers. Though Bangladesh has the advantage of not only cheap but also experienced labor and modern technology but still they are losing their competitive edge due to incurring a huge cost. The competitors of Bangladesh have gained a competitive edge in this aspect.
12.3.7 Exploring new markets

Bangladesh is lagging behind its competitors because of not having wide market diversification. Its export market is mostly based on United States, some countries of European Union (EU) and Canada. They have not explored a lot of huge market. For example, Japan is totally untouched by the Bangladeshi RMG industry. If Bangladeshi manufacturers can start exporting in Japan, which has a market size of about 20 billion, they can capture more market share in the global market. It should start focusing on expanding its market. Bangladesh RMG industry is trailing behind because of having a market concentrated on few countries. Still, it is in the competition and operating strongly. In this intensely competitive global market Bangladesh cannot afford to have a narrow market size like this. All the respondents, we have talked to have, believe that if the Bangladeshi RMG industry can widen the market and products, it can obtain the lion share of the market. They are endeavoring to establish a diversified market within the next 4-5 years.
12.3.8 Employee wage structure

Bangladesh is in an advantageous position when it comes to employee wage structure. The major competitors of Bangladesh have to pay much higher salary. Bangladesh has the
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advantage of cheap and skilled labor force. Bangladeshi labors get a low wage standing at $0.23/hour which is Tk.16.20/hour whereas the Indian labors get almost two and a half times higher than that of Bangladeshi labors. The Chinese labors get almost 4 times higher than that of Bangladeshi labors. Bangladesh can utilize this advantage and can excel in the global market. From the figure above, we can see that Bangladesh has to incur the lowest cost among all the major players of the globe. The major competitors have to pay much higher than Bangladeshi RMG exporters. Chinese government has passed a new labor law which does not let them work for more than 8 hours a day. From our secondary data collection and our survey conducted, we have come to know that, it is not a result of the ongoing recession. So, analyzing this data, we can conclude saying that, Bangladesh did not gain any competitive edge regarding employee wage structure due to recession.
12.4 Mode of Payment

Due to the financial turmoil the west is currently facing; every country is attempting different means to stabilize this crisis. And the lack of liquid cash has forced them to undertake certain measures which have brought an unhurried but gradual change concerning the payment mode of buyers as well as suppliers. Although due to its slothful growth the intensity of the impact is yet to be felt; but already it has started to have affect on the profitability of RMG manufacturers of the country.
12.4.1 Shift from LC to contract

As the financial crisis has been continuing for months now, severe credit crisis is present in the importing countries economy. And as discussed earlier, because of drop in sales of products, the buyers cash cycle is increasing. Consequently, they are being reluctant to disburse payments for orders that were placed before as well as for orders that are being placed at present. Owing to lack of liquid cash they are gradually pressing the RMG manufacturers of Bangladesh to shift their mode of payment from LC to contract. Incase of contracts, the buyers have additional bargaining power over the exporters as they can delay the payment. Besides, through contract, they can also impel discounts as well as cancel the order without incurring any loss on their side.
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However, as this change is transpiring slowly, it is yet to affect the entire industry of the country at present. From the survey it was revealed that eight responds came negatively against the viewpoint, four agreed and stated that it has already started to have an impact on their profit margin whereas six remained indifferent towards the whole issue. Nevertheless, although the results do not suggest that this change in mode of payment is a setback for the manufacturers, but it is assumed that gradually it will batter the manufacturers profitability to a great extent in the near future.

Figure 35: Shift in Mode of payment
Shift in Mode of Payment

10 10 9 8 7 6 5 4 3 2 1 0 Yes Unsure/ Indifferent No 6 Yes Unsure/ Indifferent No Shift in Mode of Payment 2 10 6
12.4.2 Cash Cycle

Due to the ongoing recession, the buyers are trying to elongate the cash cycle to facilitate their liquidity and recuperate from the current credit crisis. Consequently, they are continuously pressurizing the manufacturers for longer payment schedules. It must be added here that the local manufacturers are forced to comply with this demand because of their low bargaining power. Moreover, interest factoring is not an option for them as well, as the buyers are squeezing the prices of RMG items. As conferred before, the majority of the respondents were in agreement that due to recession the cash cycle has increased, thus affecting the overall prosperity of the individual vendors as well as the entire industry.
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12.4.3 Sourcing of raw materials

Raw materials sourcing have been affected by shift in mode of payment. As the mode of payment has been shifted to direct contract from back to back LC, the suppliers are now reluctant to source raw material because they prefer LC rather than contract as they do not want engage themselves in such low profit margin industry. They can generate more profit in LC compared to contract. We have not got the clear picture regarding this issue as the RMG entrepreneurs, we have talked to, were not too sure about it. Out of the 18 entrepreneurs, 4 interviewees consider that, this shift in mode of payment has affected the RMG industry of Bangladesh. However, 3 of the respondents have stated that, the RMG industry is not affected by this and 11 other interviewed respondents were not sure about it. As it is a recent change, the RMG entrepreneurs are still not certain whether this will affect them or not.

Figure 36: Sourcing of Raw Materials

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Sourcing of Raw Materials

12 10 8 6 4 2 0 Yes Unsure No 11
Yes Unsure
Sourcing of raw materials 3 11 4
No
12.4.4 Dependency on bank loans

As for the shift in mode of payment from LC to contract, as revealed earlier, the payment of orders is getting delayed as the buyers are deferring their schedules, timelines; resulting in expansion of their cash cycle. From the survey conducted, it was revealed that twelve respondents stated that to comprise with this current scenario, their dependency on bank loans is increasing to a great extent. Five interviewees pointed out that their reliance on bank loans remained unchanged despite increase of costs while one respondent was unsure regarding this fact. The chart below shows the responds. Figure 37: Dependency on Bank Loans
Dependency on Bank Loans 12

12 10 8 6 4 2 0 Dependency on Bank Loans Increased 12 Unchanged 6 0 Decreased 0 6
100
The growing costs of labor and production as well as financial costs are compelling the manufacturers to rely on bank loans as a result of the extension of the buyers cash cycle. Thus, it is quite evident that recession in actuality is growingly making the local manufacturers dependent on bank loans which increase their financial risk to a huge extent and having an impact on their overall profitability.
12.4.5 Change in cost of production

As described in the earlier section, recession has resulted in extension of buyers cash cycle which has increased the local manufacturers dependency on bank loans to a large extent. But this matter has also affected the production cost incurred by the manufacturers. As reliance on bank loans increase, it is consequentially increasing cost of production due to the fact that interest rate of banks in Bangladesh are quiet high compared to other competing countries; the rate currently standing at approximately 16%xxvi. As stated earlier, the survey results demonstrated that dependency on bank loans have increased which has consequentially increased the cost of production of the manufacturers leaving an effect on their profit margin and total profitability.
13. Growth Potential

13.1 Sales
In 2007, total apparel exports throughout the world valued USD 400 billion. Bangladesh only exports USD 9.21 billion, which is only 2.30% of the total market size. Furthermore, the global RMG market will also grow in the years to come and approximately the annual growth rate of the global RMG market is 20-25%.28 The economic development of China and India in recent years has increased the standard of living of the mass people and hence the labor wage is also going up continuously. The increase in labor wage in these two countries made this sector less profitable. So both the countries are shifting towards more profitable industries than RMG sector which unleashes great opportunities to countries like Vietnam, Bangladesh, and Cambodia etc. But labor wage is also increasing in Vietnam and on the other hand, the RMG
28
Chowdhury, Anwar-Ul-Alam. President, BGMEA. Personal Interview. April 13, 2008
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sector of Cambodia is not that strong compared to Bangladesh. Moreover, the political unrest situation in Pakistan and Sri Lanka is forcing buyers to source from alternative countries. On the comparison, the RMG sector of Bangladesh is equipped with advanced machineries and skilled labor force. Moreover, the industry is presently operating in 60% efficiency. All the above mentioned factors make Bangladesh one of the favorites to capture a significant portion of the global market in the future.29
13.2 Product Composition

At present, major portion of Bangladeshs export revenue comes from low -end products. The industry entrepreneurs are trying to increase the export of the high-end products, carrying on with the growing orders of low-end garments. The high-end products yield much higher profit margin and the entrepreneurs believe that they have the capacity of producing high-end products to cater the needs of the buyers. Moreover, the industry is also realizing the importance of value added service and necessity of Research and Development Department (R&D). Through these services the garment enterprises can attract more buyers and can earn more profit. As more value addition and variation can be done in bottoms rather than tops, so the entrepreneurs are shifting towards producing more bottoms in future. From the research conducted for the paper, it was found that buyers pay more for the value added services than for only cutting and sewing.30
13.3 Price
Presently, different buyers are sourcing from 30-35 countries all over the world. But in about 5 years time, the buyers would reduce the number of sourcing countries to 12 -13 countries for better quality control and efficient procurement. So the ever decreasing trend of unit price of garment products will not prolong in future. Moreover, better entrepreneurial and bargaining skill of the local entrepreneurs will be a key factor in determining the prices of the product. The industry is becoming aware about these issues. So the general connotation of RMG sector being a buyer driven market will be changed. Besides, the production efficiency is another lifeline for
29 30
Chowdhury, Anwar-Ul-Alam. President, BGMEA. Personal Interview. April 13, 2008 Ahmed, Salahuddin. Director, Columbia Garments. Personal Interview. March 23, 2008
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the RMG sector. At present, the industry operates at 40% production efficiency. If this percentage goes up, then the industry will be able to manufacture products at a lower production cost.31
13.4 Buyer/Market Potential

Presently, Bangladesh exports about 80% of its products to US and EU market. To create market and buyer diversification the industry is seeking opportunities to explore new markets. At present, Bangladesh also exports to countries like Australia, Canada and many East Asian countries besides US and EU. In future, the industry emphasizes on expanding the market share in these countries.
14. Market Diversification

14.1 Current Scenario
The international market for garment imports is dominated by the USA (27.9% of world imports), followed by the EU (24.7%), Japan (7.8%), Russian Federation (2.7%) and Canada (2.1%), as shown in Fig 3 below. The dependence of garment imports, especially in major EU countries, is growing because of the increasing production costs and a rapid decrease of production capacity in Western Europe. Germany has led the EU market in the last few years followed by UK, France, Italy and the Netherlands. In the case of Bangladesh, the EU imported 55% of the Bangladeshi RMG, followed by the USA (28%), Canada (4%) and Japan (2%) in 2006. As a single country, USA has been the highest apparel importer from Bangladesh.
31
Haque, Fazlul. President, BKMEA. Personal Interview. March 11, 2008
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Fig 3: Percentage of Exports to Major Importing Countries

3% 5% 37% 9% 5%
4%
America
Germany UK France Italy Belgium Netherlands Spain
12%
25% With the USA and the EU being the major markets of Bangladesh RMG exports, Bangladesh also exports to 180 countries in the world. However Bangladeshi exports could not make any significant turnover in 172 of the countries, yielding only 24% of the total export earnings, while the top-9 markets US, Germany, UK, France, Italy, the Netherlands, Canada, Belgium and Spain generated 76%. This dependency on a few markets can prove to be quite a problem for RMG exports if there is a reduction in demand in any one of the markets or if Bangladesh through loss of advantage loses its share of exports to these regions to other competing countries. We have seen reduction of RMG exports to the USA in this year in light of the on going recession of the US economy. Had there not been an increase in exports to the EU, the RMG sector would have to undergo serious order cutbacks, which would have a negative impact on the entire economy. After the end of the MFA era, Bangladesh has faced severe competition from countries like China, India, Sri Lanka, Vietnam etc. China and India are the two global giants that have already carved out a sizable niche for them in the global RMG market. China appears as the top supplier of Readymade Garments in the world amounting to 65.9 billion USD and constitutes approximately 25% share in the world market. India with a share of over 3% is the 5th major exporter of RMG with exports of 8.08 billion USD.
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This scenario was made possible through abundance of their aggressive cost cutting techniques, presence of adequate backward linkages, well developed infrastructure, short lead times and other factors that are still lacking in the Bangladesh RMG sector. Thus Bangladesh could very well see its export market being taken over by these two countries and other countries and face a loss in export share if it cannot diversify its export markets. Other reasons to go for diversification are: i) ii) iii) To reduce chance of exploitation by the buyer, due to high dependency. Saturation of existing markets Balancing with alternative market in the event of misunderstanding with existing buyer. Although there has been a lot of discussions on diversifying export markets, very little has actually been done about it. The main reasons for this failure to achieve market diversification goals have been cited as: The attitude of big hitters in the apparel trade, who feel safe to stay in business with the existing key markets that offer easier market access and pose minimum or no risk is to be blamed. The big export houses, which can afford to make more investments and face risks, do not take the initiate to cultivate new markets. Growth in Bangladeshs major markets in the past few years made major expo rters complacent and they felt no urgency for looking for new markets.
14.2 Comparison of Market Diversification with India and China:

If we look into the export markets of India and China, we can see that they have managed to diversify their export markets quite extensively. Fig. 4 & 5 depict the percentage of RMG exports to Indias and Chinas major markets. For India, the main market is USA, with around 40% of exports going there. However, the rest of the
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major markets occupy similar shares. China has diversified its markets very successfully, by reducing over-dependency on one market.
Fig 4:Percentage of RMG Exports of India to Major Importing Countries 2% 5% 6% 3% USA UK
40%
12%
U ARAB EMTS FRANCE GERMANY NETHERLAND
10% 8% 14%
SPAIN
ITALY
CANADA
The export destinations of India with a significant growth rate are much higher than that of Bangladesh. In other words markets of India are more diversified than of Bangladesh. Indias exports to six of the top-15 export destination countries have grown in 2004-05. There has been a sharp decline in Indias exports to Hong Kong, Germany, Bangladesh and Sri Lanka. However, exports to the United States, Singapore, Belgium and Japan have seen major improvements. Most of the countries, which are prime destinations for India, may be targets for Bangladesh as well. Among the above-mentioned countries USA is a prime destination for both the countries and Bangladesh needs to maintain its competitive edge so that the market is not lost. In terms of percentage of share, UAE is the next highest exporting country of Indias goods. However, the potentials in this market are not truly utilized by Bangladesh. The market in China has experienced a very high growth rate and Bangladesh can consider exploring the opportunities of exporting to this market. There are number of similarities in the overall RMG industry environment between the two countries. However, many of these markets require
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more high value added products, which Bangladesh is not currently producing. As a result both product and market diversification need to go hand in hand. Fig 5:Percentage of RMG Exports of China to Major Importing Countries 6% 6% 6% 9% 4% 27%
Japan
United States Hong Kong Romania Germany Russia Korea, South
16%
26%
United Kingdom
The export destinations of China are more widely spread than both Bangladesh and India for that matter. Japan is the largest market destination for Chinese RMG products, and this market can be a very prospective one for Bangladesh. However the Japanese market requires more high value added and low volume products which is a challenge for Bangladesh. The next largest market is US, which is also true for Bangladesh. One feature of the Chinese RMG destinations is that there are many countries with small share like-Australia, Singapore, Spain, Kazakhstan, UAE, Bulgaria, South Africa, Turkey, Panama, Netherlands, Switzerland and Mexico. Therefore the Chinese export destinations are very diversified which reduces its dependence in a couple of countries. This strategy of not keeping all the eggs in one basket can be followed by Bangladesh as well. Especially now when china is moving to more high value market, the vacuum resulting from that can be captured by Bangladesh. Moreover, as mentioned earlier, some of the above mentioned markets require high value products which implies that both product and market diversification need to go hand in hand.
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The table 10 shows the Herfindahl-Hirshman Concentration Index for geographical distribution of clothing exports from Bangladesh, India and China. This concentration index also shows the lower levels of market diversification for Bangladesh compared to India and China. Table 10: Herfindahl-Hirshman Concentration Index for geographical distribution of clothing exports from Bangladesh, India and China Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Bangladesh 0.560 0.460 0.470 0.480 0.460 0.420 0.410 0.570 0.579 China 0.470 0.490 0.470 0.370 0.400 0.400 0.400 0.508 0.465 0.447 India 0.360 0.300 0.300 0.310 0.300 0.330 0.310 0.350 0.417 -
Source: Textile and Clothing Industry of Bangladesh in a changing World Economy, Selim Raihan, Research Fellow, Center for Policy Dialogue, 2001 The concentration values are higher for Bangladesh than for China or India. This means that Bangladesh RMG exports go to fewer countries than either of the two countries or that exports are concentrated in fewer markets. Bangladesh enjoys the duty-free market access benefit under the Generalized System of Preference (GSP) & Everything But Arms (EBA) from EU. In view of the current lack of adequate market diversification, Bangladesh is trying to expand its market in countries like Australia, Canada, Japan, Norway, New Zealand etc., which also allow duty free imports. Thus these countries should get the preference as potential markets for Bangladesh. Other regions of interest to carve out a niche for Bangladesh garments are Russia, Eastern Europe, the Nordic countries, Central Asia, Africa, and the Middle East.
14.3 Potential Markets of Bangladesh RMG:

The potentials of these countries as prospective markets are discussed below:
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14.3.1 Japan
Japan is the 2nd largest economy in the world after USA with a GDP of $4.22 trillion (2006 est.). Japan imports around $524.1 billion worth of goods and services. It is the third largest market for textiles and clothing after the EU and the USA. Japans share of the world apparel imports increased from about 3.8% in 1980 to 8.3% in 1997. The leading apparel exporting countries to Japan are China, South Korea, and Thailand. Chinas market sh are in Japan for apparel increased from 14.1% in 1980 to 27% in 2006. The corresponding figures for South Korea are 15% and 23.2%. Table 11: Supplier Countries to Japan for RMG Rank 1 2 3 4 5 6 7 8 9 10 Source: CPD Bangladesh however, has not yet been able to export sizeable quantity of apparels to Japan. Out of Bangladesh's $8 billion export of RMG products, Japan imports products worth $37 million that is only 0.46% of its total import of RMG products. The main reasons behind this scenario are: 1. Lack of information about Bangladeshi apparels 2. Delay in shipment 3. Lead-time crisis 4. Weak industrial infrastructure Country Total RMG Imports China Italy Vietnam Korea, South United States Thailand France India Indonesia Philippines Value of Imports in Million US$ 21188.05 17448.49 965.07 588.09 373.58 258.86 236.70 191.08 141.11 115.14 90.71 % Share 100 82.35 4.55 2.78 1.76 1.22 1.12 0.90 0.67 0.54 0.43
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5. Social unrest stemming from political instability If the RMG sector is able to minimize these shortcomings, then hopefully Bangladesh can tap into the big and lucrative market in Japan.
14.3.2 Canada
Canada, with a GDP of about $1.165 trillion and total imports amounting to $40.4 billion, imports about $6150.46 million dollars worth of RMG goods. Table 12: Rank in RMG Imports by Canada Rank in RMG Imports by Canada 0 1 2 3 4 5 Source: AEPC, India As it can be seen from the table, although Bangladesh is the second largest exporter of RMG goods to Canada, the difference in export percentage between Bangladesh and China (the largest exporter) is very large. China holds over 50% of the total Canadian RMG market. If Bangladesh can manage to keep prices as competitive as China, it can exploit the Canadian market. Country Jan-Sept 2007 ($ million) TOTAL China Bangladesh USA Mexico India 5338.436 2821.194 344.604 304.044 214.248 261.852 %age Share in JanSept 2007 100 52.85 6.46 5.70 4.01 4.91
14.3.3 Russia
Russia constitutes approximately 0.4% share in world imports of RMG. Russia is top importing country for RMG in the CIS region with approximately 53% share in total imports of RMG by CIS
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region. Russias imports of RMG amounted to $1.5 billion and RMG constituted 1.6% share in the Russias total imports. Russias imports of Ready made garments have shown a growth of 85.7% in 2206 from 2005. Table 12: Rank in RMG Imports by Russia Rank 1 2 3 4 5 6 7 8 9 10 Source: AEPC, India The previous table shows the various shares of major RMG exporting countries to Russia. China occupies close to half of the total Russian RMG market. We can see that Bangladesh is not present among the top 10 exporting countries. This means that the Russian market can be a very good potential market for Bangladesh if it can compete effectively in terms of price and quality with these other countries. Country China Turkey Italy Germany Kyrgyz Stan Poland Vietnam India Indonesia France Value of Imports( $ million) 605.00 157.63 137.40 83.73 54.93 39.37 30.62 29.12 28.37 26.77 % share 40.52 10.56 9.2 5.61 3.68 2.64 2.05 1.95 1.9 1.79
14.3.4 South Africa

South Africa is the economic powerhouse of Africa comprising around 25% of the entire continents GDP. It is the most advanced economy in the African continent. South A fricas imports of RMG amounted to $1.01 billion in 2006 and registered a growth of 34.3%. China is the top supplier of RMG to South Africa with 78.4% share with other major suppliers including Cambodia, Mauritius & Myanmar. South Africa imports from India stood at 40.14 million USD & registered decline of 22.05%. Thus Bangladesh has a huge potential market in South Africa with a possibility of exporting around 969.95 million USD worth of RMG goods.
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14.3.5 Australia
Australia is a prosperous, Western-style market economy with a GDP approximating to $645.3 billion and total annual imports being close to $127.7 billion. It is a good potential market for RMG of Bangladesh with its duty free access.
2000 1800 1600 1400 1200 1000 800 600 400 200 0
$Millions
1746.69
8.542 Bangladesh
16.55 India China
Fig 6: Comparison of RMG exports to Australia
As the previous graph would show, market share of Bangladesh for RMG in Australia is almost negligible compared to China. The fact that China is in a better strategic position with Australia can explain this scenario. This factor along with lower lead times for China makes Chinese RMG products more preferable.
14.3.6 Argentina
Argentina is ranked as the 8th largest importer of RMG in the LAC Region with imports amounting to $227.17 Million. Argentinas imports of Ready-made garments showed a growth of 30.20% in Yr. 2005 over Yr. 2004 and this trend has been continued. RMG products constitute 0.43% share in Argentinas global imports. China has become Argentina's top source of RMG imports by replacing Brazil. China has captured a growing share in Argentina's import market, rising to this year's 34.1 % from 11.3% in 2005. The market share of China's clothing
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products in Argentina has been growing steadily due to their competitive prices and the improved quality of the products.
Fig 7: Comparison of RMG exports to Argentina

30 25 20 15 10 5 0 China Bangladesh 1.468 24.36
As the graph shows, China holds a very big share of the market compared to Argentina. So Bangladesh can attempt to capture a portion of the market by trying to achieve lower costs and higher quality.
14.3.7 Middle East Countries

For the Middle East countries, China dominates the market for low value goods and European manufacturers dominate the market for high value added items. This market is quite a lucrative one considering the purchasing power of the people in the oil-rich countries. Thus Bangladesh can attempt to capture a higher segment of the market.
Millions
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$Millions
Fig 8: Comparison of RMG exports to Middle East

1266.66
1400 1200 1000 800 600 400 200 0
341.12
3.165 China Bangladesh India
14.3.8 India
As surprising as it may seem, but India is also a very good potential market for RMG goods considering the market size of India. Over the last decade, India has managed to develop comparative advantages in certain capital intensive industries and information technology sector. Thus the opportunity costs of India producing RMG goods has increased and it would be beneficial for them if they allowed duty free access for our RMG products and they shifted their resources to more capital intensive and technology oriented sectors.
14.3.9 CIS Region

Kyrgyzstan, Ukraine and Kazakhstan are the 3 largest importing countries for Readymade Garments in the CIS region after Russia. Si9nce Bangladesh is a major importer of cotton, the main raw material for our RMG sector from this region, there is a good opportunity to develop a strong bilateral trade with this area.
14.4 Market Diversification Strategies: 14.4.1 Build favorable image of the nation and undertake branding
Image building and branding can achieve a high level of value addition and enhance Bangladeshs reputation as a quality supplier of apparel. As branding is an expensive investment, incentives and opportunities should be provided to exporters, such as through a
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Brand Fund and by encouraging foreign collaboration to launch collective brand names through corporate marketing companies. For the Made in Bangladesh label to make its mark in the global marketplace, an active promotion campaign will be required by the industry, government, and Export Promotion Bureau. Exhibitions, fairs or expositions, and such events can be organized. The basic function of such events is to bring together, in a single location, a group of marketers to set up exhibits of their products. Trade fairs serve the purpose of meeting between the buyers and sellers and to showcase offers from the sellers and also to book orders at the show.
14.4.2 Obtaining government support on market access negotiations and trade facilitation
The government should take initiative to create business relationship with countries, which are importing garments from countries other than Bangladesh. Government can help open up new markets for Bangladesh exports through trade diplomacy and signing of free trade agreements. All our Ambassadors and High Commissioners should be instructed to give the search for new markets and the expansion of existing ones the highest priority.
14.4.3 Undertake in-depth product-country potential analysis to identify potential markets

Analysis of World Trade data for identification of potential markets & lucrative products for stepping up export of textile articles. Compare competitiveness of Bangladesh through data on Bangladeshs share and competitor supplier countries for select products in select markets.
14.4.4 Solving the problem of lack of marketing strategies

Most RMG companies are manufacturing-oriented with a passive selling approach, waiting for production orders from abroad, taking no active steps to obtain orders from new and potential clients.
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14.4.5 Quality Product Profile Development

In the post quota period, quality rather than quantity would be the driving force in the post quota regime. Although we can provide cheap prices we are weak in factors like value addition and fashion designing as in cotton knit fashion-wear like ladies blouses. Other countries have an edge over us when it comes to fashion garments since international garment trade is more oriented towards the fashion content of garments rather than its volume.
14.4.6 Develop a wide Product Mix Basket

Most retailers prefer to outsource their requirements from a single supplier as it saves them time and money. So, Bangladesh needs to widen and integrate the mixed products basket of textiles and clothing items to attract these one-stop buyers.
14.4.7 Improvement in supply side capacity

Strong supply side capacities are crucial in capitalizing on new export opportunities, in assimilating technology transfer and in capturing the spillovers from subcontracting and related trade and investment linkages. This will enable us to reap greater benefits from globalization.
14.4.8 Production of high value items

The quality of stitching in Bangladesh is today considered among the best in the world. This expertise should now be used to produce a wider range of RMG products, in particular more value added items. This will require investment in consultancy services and the development of new training programs and institutions. Bangladesh needs its own designers, specialists in quality control, experts and supervisors.
14.4.9 Duty free access to the Indian market

The government should make a special effort to persuade the Indian government to fulfill its commitment to extend duty free access to all ready made garments from Bangladesh along with 24 other items. Every effort should be made to get India to implement this commitment
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within the next hundred days. Duty free access to the Indian market will open up tremendous opportunities for Bangladesh.
15. Product Diversification

Diversified product mix, efficient logistics, ability to provide one stop window for goods and service are increasingly defining the preference of buyers, worldwide. In order to expand the market share and survive in the up coming free global competition in the international market, product diversification appears to be an indispensable strategy. The more varied the product line and range, the better the competitive strength. However, Bangladeshs apparel sector operates mainly at the lower-end segment of the international market. Exports are highly concentrated on low value items such as boys/men's shirts, T-shirts, women's skirt and blouses. Although knitwear products achieved tremendous growth but these are low-value products with small profit margins. They also face fierce competition from other countries' producers in the post-MFA world. The range of products produced and exported by Bangladesh is shown in Table 13 (Appendix). Unlike India and other major competitors, Bangladesh has hardly concentrated on R&D. Its exposure to fashion is at its lowest and this has led to Bangladesh following design trends from buyers. Bangladesh has nothing new to offer to buyers except what is already being produced. The buyers, on the other hand, are constantly looking for newer design concepts, product innovations to reduce their roles in the channel- that Bangladesh is able to provide none of, but India and others are becoming quite good at.
15.1 Current Scenario

We can measure current position of diversity of products in Bangladesh using the following indices:
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15.1.1 Export Similarity Index

Export Similarity Index measures the similarity of the exports of any two countries (or country groups) to a third market. It is a ratio of the product elasticity of substitution (in demand) between imports from two different sources to the aggregate (across all products) elasticity of substitution of imports from those sources. The export similarity index (ESI) provides useful information on distinctive export patterns from country to country. It is defined as: ESI = Min {Sj(AC), Sj(BC)} Where A is Bangladesh, B is the selected comparator country, and C is the specific market (E.g. the European Union) and Sj is the share of the industry Js exports in the exporting countrys total exports. The index varies between zero and 100, with zero indicating complete dissimilarity and 100 representing identical export composition. ESI can be used to identify competitors of Bangladesh in clothing. A study of similarity between Bangladesh and other RMG exporting countries can help the assessment of Bangladeshs competitiveness. The table provides values of ESI for selected countries for 1990, 1996 and 1997 based on 4-digit level data on clothing exports. It is evident that the ESI values were higher in 1996 than in 1990. For the U.S Market in 1997, the ESI values are higher for Sri Lanka, India, Indonesia, China, the Philippines, and Mexico compared to, for instance, Pakistan, Malaysia, Singapore and Jamaica. The ESI has increased in 1997 compared to that in 1996 for Sri Lanka, Pakistan, Indonesia, China, Taiwan, Mexico and Jamaica. In the European market, the ESI values are higher for Sri Lanka, India, Indonesia, Hong Kong, the Philippines and Thailand. The data in the table are quite backdated but no recent analysis has been done for the Export Similarity Index for RMG apparels, and so was not available. And the calculations itself are outside the scope of this report.
Table 14: Export Similarity Index for Bangladesh in Clothing Exports
Countries
USA
EU
Total Market
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Sri Lanka India Pakistan Indonesia China Hong Kong South Korea Malaysia Philippines Singapore Thailand Taiwan Vietnam Mexico Dominican Republic Jamaica
1990 0.27 0.12 0.15 0.27 0.29 0.21 0.13 0.13 0.29 0.17 0.19 0.30 0.20 0.39 0.19
1996 0.78 0.64 0.49 0.67 0.58 0.61 0.63 0.42 0.63 0.48 0.59 0.57 0.50 0.66 0.57 0.25
1997 0.83 0.61 0.56 0.68 0.60 0.59 0.59 0.42 0.62 0.47 0.51 0.58 0.50 0.68 0.55 0.36
1990 0.30 0.13 0.21 0.32 0.35 0.34 0.31 0.17 0.22 0.20 0.43 0.40 0.55 0.16 0.06 0.08
1996 0.72 0.62 0.35 0.62 0.50 0.66 0.47 0.33 0.55 0.48 0.57 0.45 0.48 0.41 0.39 0.65
1997 0.74 0.64 0.39 0.74 0.53 0.73 0.55 0.36 0.65 0.54 0.64 0.52 0.47 0.45 0.39 0.20
1990 0.28 0.12 0.21 0.31 0.25 0.27 0.19 0.17 0.26 0.20 0.36 0.32 0.62 0.22 0.41 0.22
1996 0.74 0.70 0.54 0.70 0.69 0.68 0.60 0.41 0.62 0.61 0.65 0.55 0.63 0.71 0.59 0..34
1997 0.79 0.70 0.55 0.75 0.70 0.70 0.60 0.42 0.66 0.59 0.64 0.59 0.67 0.70 0.58 0.47
Source: Computed from data in the World Trade Analyzer
15.1.2 Herfindhal-Hirschman Index Product Concentration of exports

We can examine the degree of concentration of clothing exports from Bangladesh based on the Herfindahl-Hirschman index among different countries using the Herfindahl-Hirschman Index (HHI). This index is a measure of the size of firms in relationship to the industry and an indicator of the amount of competition among them. Here we apply it as a measure of size of Bangladesh exports compared to India and China, and the amount of competition between them. The index is defined as follows: HHI= *( S )
i 2 1/2
- ( 1/n) ]/[1-(1/n) ]
1/2
1/2
Where S is the share of the ith category of exports in total exports of clothing and n is the
i
number of categories of clothing. HHI can range from 0 to 1. The larger the number of categories of clothing the lower the HHI. Thus, if a respective country has a high HHI-closer to 1, it means that product concentration is high and product diversification is low. On the other hand, a low HHI means that product concentration is low and the country produces a diversified range of products.
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The following table reports the values of the HHI for Bangladesh, China and India for clothing exports. We can see that: The concentration index has been more or less steady for Bangladesh during the period. Thus number of categories of products being made is more or less steady. The index for India and China, on the other hand, has been decreasing, indicating an increase in number of categories of goods being made. Hence these 2 countries have been experiencing greater product diversification. Between them, India has been diversifying at a greater rate, although Chinas one is lowest among all 3 countries. The index for Bangladesh is higher, compared to that for India and China. Thus this is evident that Bangladeshs product concentration is highest and diversification is the lowest compared to its major competitors. Table 15: Herfindhal-Hirschman Product Concentration of exports from Bangladesh, India, and China Year 1993 1994 1995 1996 1997
Source: World Trade Analyzer
Bangladesh
0.32 0.37 0.35 0.32 0.30
India
0.28 0.29 0.30 0.26 0.25
China
0.18 0.19 0.18 0.18 0.18
15.1.3 Compositions of Clothing Exports from Bangladesh

Table 16 shows leading categories of clothing exports from Bangladesh in 2007 under the HS. There are in total 34 HS code categories for under the 61 ARTICLES OF APPAREL & CLOTHING ACCESSORIESKNITTED OR CROCHETED. As we can see from Table 4, Bangladesh is exporting all of these 34 categories except 6213 handkerchiefs and 6216 gloves, mittens and mitts, not knit or crocheted. Although this is quite a significant variety of products, if we examine the proportion of each item as a percentage of the total exports of RMG we will see a clearer picture of the level of diversification in Bangladesh.
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We must not confuse this as a diversified export profile. If we look closely, under T-shirts and sweaters/pullovers, suits (jackets & trousers) account for 76.1% of entire exports. The remaining categories of items are being exported at minimal amounts, with majority being at less than 1% of total exports-most closer to 0% than to 1%. This can be due to one or two firms exporting certain items in the category, however this does not diversify the total export product range for Bangladesh.
According to the 19 BGMEA categories of products, 5 categories- Shirts (A), Trousers (H), Jackets (C), T-shirt (P) and Sweater (O) account for about 81.5% of total clothing exports from Bangladesh in 2005-2006. Thus there is a very high level of product concentration in these 4/5 items in Bangladesh and very limited amount of product diversification. Bangladesh should try to reverse this situation by producing and exporting larger quantities of these neglected items, since technology and skills required for them is already present; as well exploring newer items. Table 16: Compositions of Clothing Exports from Bangladesh
Sweater (O)
. . 70.41 196.6 296.29 271.7 325.07 476.87 517.83 578.37 616.31 893.12 1044.01
Year
1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006
Shirts (A)
805.34 791.2 807.66 759.57 961.13 1043.11 1021.17 1073.59 871.21 1019.87 1116.57 1053.34 1056.69
Trousers (H)
80.56 101.23 112.02 230.98 333.28 394.85 484.06 656.33 636.61 643.66 1334.85 1667.72 2165.25
Jackets (C)
126.85 146.83 171.73 309.21 467.19 393.44 439.77 573.74 412.34 464.51 364.77 430.28 389.52
T-shirt (P)
225.9 232.24 366.36 391.21 388.5 471.88 563.58 597.42 546.28 642.62 1062.1 1349.71 1781.51
Sum
1238.65 1271.5 1528.18 1887.57 2446.39 2574.98 2833.65 3377.95 2984.27 3349.03 4494.6 5394.17 6436.98
Total
1555.79 2228.35 2547.13 3001.25 3781.94 4019.98 4349.41 4859.83 4583.75 4912.09 5686.09 6417.67 7900.8
% Of total
79.6% 57.1% 60.0% 62.9% 64.7% 64.1% 65.2% 69.5% 65.1% 68.2% 79.0% 84.1% 81.5%
Knitwear 6109 t-shirts, singlets, tank tops etc, knit or crochet

6110 sweaters, pullovers, vests etc, knit or crocheted
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Woven
6203 mens or boys' suits, ensembles etc, not knit etc 6204 womens or girls' suits, ensemble etc, not knit etc 6205 mens or boys' shirts, not knitted or crocheted
15.2 Need for Product Diversification:

The reasons for product diversification are discussed below. 1. Reduction of Risk: 63.2% of Bangladeshs entire RMG exports accrue from 5 categories of items- this is a high product concentration and also very risky. If for any reason, there was a fall in demand of a particular kind of product. E.g. shirts, which make up 23% of exportsthen this 23% of export revenue is at risk. Bangladesh can lose the entire market, and survival maybe questionable. It is always better to diversify and spread risks so as to reduce dependency on any single item. However, this is exactly where Bangladesh is failing, and other competitors are beating us in terms of market share as well as export earnings. Bangladesh has a comparative advantage in the production of cheaper standard items. As long as we have this strength, the manufacturers should not abandon the market, & should instead exploit it to the fullest possible extent. Those who find an opportunity to earn higher profits by moving up the value ladder should of course do so.
2. Value Addition to increase export earnings: Value addition accrues mostly in the designer items. It is estimated that the final retail value of an apparel product sold to the consumer in export markets 5-10 times higher than the ex-factory price of the product depending on various factors. As a result, country is losing significant amount of export earnings. Bangladesh needs to diversify products with a view to moving to upper end and more expensive products The sooner local entrepreneurs can catch on to this trend the brighter will be the future of RMG. So, in addition to the current product range of shirts, overcoats, jackets/ blazers, trousers, and T-shirts; we should also move forward to produce and export high value products like suits, leather made winter jackets, woolen jumper etc. Bangladesh can enhance its value addition capacity substantially
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through diversification of apparel products and by moving into more value-added, high-priced, high fashion products. 3. Building brands to gain customers: Brands, in todays consumer oriented market, play important role in terms of market penetration and higher unit value realization. Brands assure the consumers that the products are of certain quality, durability and compliant to several social, environmental and quality standards. The major markets- USA and EUare entirely dominated by various global brands, and Bangladeshi exporters are merely suppliers to such brands. Brand development, therefore, is not only aimed at deeper and wider penetration in major selected markets by producing greater variety of goods, but also to increase the acceptability of Bangladeshi apparels for increased export earnings. However, brand promotion is not only an expensive proposition but also requires very carefully designed multi-stakeholder strategy, on a sustainable basis. 4. Range of variety goods offered: Most retailers prefer to outsource their requirements from a single supplier as it saves them time and money. Buyers look for new "full package" suppliers offering them a one-stop service platform. Therefore, Bangladesh needs to widen and integrate the mixed products basket of textiles and clothing items, as it would be incremental to the exports. India has wide range of textiles and clothing products from handmade sari to suits of sophisticated fine fabric made in modern mills, and they can win over customers just by offering such a variety of items. 5. Backward Linkage products: One aspect of product diversification could be the development of backward industries. There are insufficient numbers of establishments of RMG backward industries such as textiles and accessories industries in the RMG sector and they can barely meet the local requirement. Special efforts and policy initiatives should be undertaken to establish adequate number of such industries to supply domestically the required fabrics and various RMG accessories like buckram, zipper, sticker etc. in this sector. Hence, in the globalized economy and ever-changing fashion world, product diversification is the key to continuous business success. In order to expand the market share and survive in the up coming free global competition in the international market, product diversification appears to be an indispensable strategy. The more varied the product line and range, the better the competitive strength. Diversified product mix, efficient logistics, ability to provide one stop window for goods and service are increasingly defining the preference of buyers, worldwide.
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15.3 Future Potential Products to Be Exported

Unlike India and East Europe, Bangladesh has hardly concentrated on R&D. Our exposure to fashion is at its lowest and this has led to us following design trends from our buyers. On the other hand, the buyers are constantly looking for newer design concepts, while we are able to provide none.
15.3.1 Based On BGMEA Codes:

Under the current items already being exported but in minimal quantities, we can explore the following categories of products: B- Ladies Fashion Wears D- Coats, Blazers, Suits E- Dresses including uniforms F- Children/Infants Wears G- Outer Wear, Overall, Coverall
15.3.2 Based On HC Code gaps:

There are many classifications of products traded in the world market. Product classification is based on the international standards adopted for grouping products, such as the Standard International Trade Classification (SITC) and the Harmonized System (HS). The Harmonized Commodity Description and Coding System, popularly known as Harmonized System or HS, is a multipurpose international goods nomenclature used as the basis for Customs tariffs and for the compilation international trade statistics all over the world. The HS was developed by the World Customs Organization (WCO) and was implemented on 1 January 1988 by an international Convention that was also known as HS Convention, which came into force on 1 January 1988. The HS coding system is maintaining by the WCO through the Harmonized System Committee. Globally 5,000 commodity groups identified in a six digit code, first 2 digit define for chapter level, 4 digit define for Sub-Heading, 6 digit define for Product,
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further 8 digit and 10 digit level are specify for managed the every country there own commodities. These are detailed in Table 16 and Table 17 (Appendix) As we saw in the previous section, Bangladeshs export of RMG is concentrated on 4/5 major basic items. The rest of the items are exported just for the sake of it and do not contribute much in terms of export earnings or diversification. However, we need to do reduce the proportion and dependency of exports in these categories by increasing export of items in categories other than these. The categories of clothing and apparel export that could be aimed by RMG firms according to HD codes are: Knitwear items currently being exported at less 1%: 6101 mens or boys' overcoats etc, knit or crochet
6102 womens or girls' overcoats etc, knit or crochet 6103 mens or boys' suits, ensembles etc, knit or crochet 6106 womens or girls' blouses & shirts, knit or crochet 6107 mens or boys' underpants, pjs, etc, knit or crochet 6108 womens or girls' slips, pjs, etc, knit or crochet 6111 babies garments & accessories, knit or crocheted 6112 track suits, ski-suits & swimwear, knit or crochet 6113 garments, knit etc, coated etc rubber, plastic etc 6114 garments nesoi, knitted or crocheted 6115 pantyhose, socks & other hosiery, knit or crochet 6116 gloves, mittens and mitts, knitted or crocheted 6117 Made-up clothing access nesoi. parts etc. knit etc
Woven items currently being exported at minimal amounts:

6201 mens or boys' overcoats, cloaks etc, not knit etc
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6202 womens or girls' overcoats etc, not knit or crochet 6206 womens or girls' blouses, shirts etc not knit etc 6207 mens or boys' undershirts etc, not knit or crochet 6208 womens or girls' slips etc, not knit or crochet 6209 babies garments & accessories, not knit or crochet 6210 garments, of felt etc, or fabric impregnated etc 6211 track suits, ski-suits & swimwear, not knit etc 6212 bras, girdles, garters etc., knitted etc or not 6213 handkerchiefs 6214 shawls, scarves, mufflers, mantillas, veils etc. 6215 ties, bow ties & cravats, not knitted or crocheted 6216 gloves, mittens and mitts, not knit or crocheted 6217 made-up clothing access nesoi, garment etc parts nesoi
15.3.3 Product Diversification scope in Germany

Germany is a major market for Bangladesh, with Bangladesh ranking as the 3rd largest exporter only after China (19.46%) and Turkey (12.35%), as we can see from Table 18. However Bangladeshs share of the German market (6.43%) is measly compared to its predecessors. There is a huge gap in market shares, which leaves lots of scope for improvement in this market. One way of doing it is of course through product diversification. Table 19 (Appendix) shows the major products being imported by Germany. The tabulation highlights Germanys Global Imports for 34 focus items. The top 4 items of Germanys Global Imports constitute 56.2% share in Germanys total imports. These 4 items identified above are the potential thrust items, which are Bangladeshs specialty:
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6204 womens or girls' suits, ensemble etc, not knit etc 16.56% 6110 sweaters, pullovers, vests etc, knit or crocheted- 13.83% 6203 mens or boys' suits, ensembles etc, not knit etc-13.58% 6109 t-shirts, singlets, tank tops etc, knit or crochet- 12.23% However, as we saw above Bangladesh could only manage 6.43% of the market by focusing on these items. So we have consider the 30 items which constitute the remaining 44.8% of the market: Table 20: Percentage change in exports in various HS codes Hs code and description % Change yr. 2006/05 6101 mens or boys' overcoats etc, knit or crochet 15.11 6102 womens or girls' overcoats etc 33.77 6103 mens or boys' suits 15.95 6106 womens or girls' blouses & shirts, knit or crochet 17.89 6114 garments nesoi, knitted or crocheted 19.02 6116 gloves, mittens and mitts, knitted or crocheted 12.37 6206 womens or girls' blouses, shirts etc not knit etc 12.29 6210 garments, of felt etc, or fabric impregnated etc 25.2 6211 track suits, ski-suits & swimwear, not knit etc 10.33 6216 gloves, mittens and mitts, not knit or crocheted 9.52
Source: AEPC, India Thus as we can see above there are at least 10 items with very growth rates in demand that Bangladesh is taking almost no advantage of. However, especially significant here are 2 following items, having high growths which Bangladesh is producing none of: 6116 gloves, mittens and mitts, knitted or crocheted with growth rate of 12.37% 6216 gloves, mittens and mitts, not knit or crocheted with growth rate of 9.52%
15.3.4 Product Diversification Scope in Japan:

Among the RMG products currently exported to Japan, only 2 of 63 HS 6 digit level categories under HS 61 (HS 610110 and HS 611130) have been included for preferential treatment under the revised GSP
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scheme in 2003. The total export of these two items in 2001 was USD 8.87 million. However, 63 categories of knitwear items have been newly included in the revised GSP Scheme of 2003, which Bangladesh did not export earlier to Japan; though the export value of these 63 categories to the world market amounts to USD 251.36 million. Of the newly included items in 2003 Bangladesh exported only two items to Japan. Bangladesh exports a large number of HS 61 items in the global market, and so there is potentially good scope for export of these to the Japanese market by taking advantage of the new GSP Scheme. He made a price advantage analysis and found that Bangladesh has export opportunities for Undergarments and Dresses for women and girls, Garments of babies, Mens suit and ties.
Export data indicate that Bangladesh currently exports only limited quantities of these products to the global market. A scope for quota and duty free export of such high-end products to the Japanese market will help Bangladesh realize the potentials of diversifying her apparel product basket.
Given Bangladeshs proven capacity to compete the export of these items in the global market, the recent inclusion of HS 61 category into the preferential regime has opened a window of opportunity for Bangladesh to explore new markets for these products in Japan. All 66 HS 62 6 digit level categories were included for preferential treatment under the revised GSP scheme in 2003. The total export of HS 62 products from Bangladesh to the world market is valued at USD 419.84 million. The inclusion of 66 additional items under preferential regime is likely to enhance export opportunities of such items from Bangladesh to Japan. According to the Top 10 HS 62 items, Bangladesh holds price advantage primarily in high-end items for women and babies. The price advantage of these items range from 22.2% to 95.1% over Japans average import price of the same products from other countries in the world.
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15.3.5 Product Diversification by China: Comparison

One of the major reasons behind Chinas growth is its diversified product range in the large markets and market diversification undertaken. So China can be considered as a benchmark i.e. where Bangladesh RMG would like to reach. Hence the comparison is shown reflecting Chinas current status of RMG- result of diversification, among other factors.
Products exported by China to US market:
As expected, following its accession to the WTO, China started to entrench its foothold in the US market for many products, most notably, apparels and textiles. In view of the surge in imports from China, and its impact on the US economy, US Trade Representative and the Chinese Commerce Minister signed an MOU16 on 8 November, 2005 according to which the US was to permit import of certain Chinese T&C products in accordance with annual levels. Table 21: Agreed levels of certain products under the US-China MOU
Source: Compiled and computed from US- China MoU
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The above table gives a vivid scenario of the vast product diversification of China compared to that of Bangladesh. China exports sewing thread, knit fabric, special purpose fabric with already a 2% growth over the last year (2006-2007). China even increased the level of export of baby socks to the US market within this time period, with a current growth of 15%. Export of cotton knits shirts experienced grew from 12.5% in 2006 to 15% in 2008. China even exports the following in large quantities: Sweaters, Swimwear, Pile towels, Blinds, Woolen suits and trousers, Lass fabric Underwear
The growth of all these items has increased significantly over the years. Unfortunately, Bangladesh doesnt export any of the above mentioned items at all. But there is high scope of product diversification of Bangladesh as well.
Table 17: Top 10 RMG Items exported to USA by Bangladesh CAT 340 347 348 659 341 647 338 352 634 359 Total export Share (%) Description M&B shirts M&Btrousers, breeches &shorts W&G trousers, breeches &shorts Other MMF apparel W&G shirts & blouses M&Btrousers, breeches &shorts M&B knit shirts Cotton underwear Other M&B coats Other cotton apparel Jan-July 2006 175.95 327.16 206.8 80.91 70.03 73.03 90.62 63.99 33.69 52.37 1646.22 71.35
Source: Analyzed on the basis of CPD Trade Database
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Exports of Bangladesh in M&B knit shirts, M&Btrousers, breeches &shorts and W&G trousers, breeches &shorts have increased extensively over 2005-2006. But other M&B coats and W&G shirts & blouses have experienced a contraction in the exports. Out of 22 products exported by China to US market, Bangladesh has only 10 products in common. Thereby, Bangladesh ought to examine the MoU signed between the USA and China with due care. It is to be borne in mind that the agreement gives the US wider coverage for a number of products and over a longer period. The agreement allows China to ensure export growth over a period of three years and gives predictability to its exports. And since the MoU agreement also gives some breathing space to Chinas low income competitors such as Bangladesh by limiting Chinas export to the US market, Bangladesh has a lot of opportunity for product diversification due to the increasing self-sufficiency in knit fabrics. Even at 10-digit disaggregated level Bangladesh enjoys price competitiveness vis--vis China for a number of apparel items. Even before quotas were imposed on Chinese exports Bangladesh was competing with Chinese exporters of some of these mass-produced items. Bangladesh should focus on these items. It is possible that China at present is concentrating on upper end segment of the market for these items (higher quality, fashion, design) driven by quotas under the MoU. Once these quotas are removed, China will start to penetrate the lower end of the market for these same items, putting Bangladeshi exporters under increased competitive pressure. However, since Bangladesh had been competing with China in these markets even before the MoU was put in notion, she should further strengthen its competitive advantage in view of the expiry of the MoU by end 2008. Contributing Factors to Chinas Competitive Edge in Products: Bangladesh: Likely effect of quota Removal: The status of Bangladesh as an overall supplier to U.S. market is uncertain. Considered by some U.S. firms to be competitive alternative to China for mass-produced, low-end apparel. Labor - Very low wage rates; productivity improving, government is working to improve labor standards. Inputs - Relies heavily on imports for woven fabric; becoming increasingly self-sufficient in knit fabrics. Special Arrangements - Duty-free access: EU, Canada, and Norway. Products - Mass-produced basic garments, knit cotton tops and woven cotton pants
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China: Likely effect of quota Removal: Likely to be supplier of choice for most large companies and retailers; uncertainty regarding textile-specific safeguards. Long term, competitiveness may diminish as strong economic growth leads to greater domestic demand for T&A. Showed high growth in export of goods for which it became eligible for quota-free entry in 2002. Contributing Factors: Labor - Per-unit labor costs very low due to low wages and high productivity. Inputs - Produces fabrics, trim, packaging and most other components. Products Among the best in making at any quality or price level. Worlds largest producer and exporter of T&A, notwithstanding tight quotas in major world import markets Technology and Productivity: Chinas advantage in terms of technology used in the apparels sector and the resultant productivity gain is in terms of per worker value addition. In recent years, Chinas strategy in the textiles/apparels sector had primarily focused on technological upgradation. Chinas average wage rate in the apparels sector is higher than Bangladesh. However, higher productivity is what provides China its competitive advantage in the US market as against Bangladesh
Effect of Chinas Competitive Edge in Products: Table 22: Rank Of Bangladesh And China In the US RMG Export Market Country Bangladesh China 1995 13 1 2000 13 2 2003 16 1 2004 14 1 2005 10 1
Source: CPD Trade Database Between 1995 and 2005 China ranked the topmost exporter of RMG products to the US market. The vast product diversification of China can be accounted for this success. However, in 2001; China slipped to the second position and lost to Mexico. It regained the top place in the following year and was able to retain this till the end of 2005. Bangladesh continues to remain a major player in the US market, though its relative standing has seen wide variations. Before the quota phase-out she hovered around the fifteenth position; following quota de-restriction she has become one of the ten top exporters to the US
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market. This increase was experienced both in value terms as well as volume terms. Bangladesh can improve this scenario by further product diversification.
15.4 Possible Strategies for Product Diversification:

1. Investment in human capital and technology to build up skill, design and capacity:
Moving to production of higher value items will require investment in consultancy services and the development of new training programmes and institutions. Bangladesh needs its own designers, specialists in quality control, experts and supervisors. We need gradual build up of skill, technology and capacity. Alternatively, this can be speeded up through intake of FDI (as in China, Sri Lanka and Cambodia). Much investment will be needed to make the transition. Foreign direct investment may act as a catalyst in this respect. Development of design schools to keep pace with the latest fashion developments in the world and to train workers to match the demand is important. 2. Image building and promotion of Bangladesh's RMG products :
The government, with the help of a reputed international public relations company, should launch a media campaign in the US and Europe to promote simultaneously the image of the country, its range of RMG products and other exports. In addition to the media campaign Bangladesh should increase its participation in trade fairs and specialized garment exhibitions and fairs. BATEXPO which has been postponed should be held at the earliest opportunity. All our missions abroad should be fully mobilized to ensure the maximum possible participation from overseas buyers. 3. Appoint business-oriented commercial officers located in principal markets abroad to promote newer products being offered: Bangladesh embassies abroad should appoint dynamic business-oriented commercial officers whose main job will be to promote export products through direct contact with potential buyers.
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4. Incorporate local skills in stitching, lace work and embroidery into RMG manufacturing process: Measures could be undertaken to exploit local skills in stitching, lace work and embroidery. These locally available skills, which form part of the national culture, could provide substantial value addition. However, for this, substantial training would be needed so as to develop the necessary knowledge and know-how to transform the national skills into exportable products. Thus, a joint private sector effort, or government inputs are needed to develop these skills, benefiting from and exploiting a cultural heritage.
5. Establishing a research center:
Since R&D and market research will be critical to expand the product mix and public support in this area, this can prove significantly beneficial. The role of the research center would be to gather and disseminate information effectively to local manufacturers on the latest developments in products and markets, including information on fabric developments, blends, colors, patterns, latest fashion trends and design forecasting, as well as providing customer service to foreign buyers purchasing from Bangladesh.
16. SWOT Analysis of Main Competitors

The RMG industry is a colossal industry, compared to any industry in the world. Clothing being a basic necessity for human beings, the demand for RMG is soaring rapidly with increasing world population and economy. Almost all countries produce RMG products; however, not all are good exporters. The Figure below shows the global RMG market share of different leading exporters.
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World Apparel Export Scenario 2005-06

China, 26.90% Indonesia, 1.90% Mexico, 2.60% Bangladesh, 2.30% Turkey, 4.30% SSA, 1.80% EU, 8.20% India, 3%
The following diagram shows the factors that influence RMG production and the competitive positioning (by giving very simple rankings) of the RMG industry in a few countries with respect to economic & political support and proficiency in production. Country Competitive Factors Infrastructure Integrated Economic Political Production Power Stability *** Ranking Govt. Clear Support Strategy + + Week
Bangladesh China India Pakistan Vietnam ***= Concerning Knitwear sector Legends: Strong
Medium
16.1 Pakistan
Pakistan has developed its industry in both textiles as well as readymade garments. The country specializes in textiles and made-up textile products such as bed linen. Its industry is structured into the small and medium-sized plants and the non-mill sector, i.e. the cottage industry, that manufactures 80% apparel products.
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In 2005, the country achieved a good export growth in the US market though not much in the EU market. The US and EU imports of T&C from Pakistan increased in volume by 19.2% and 4.7% respectively, in 2006 compared with the previous year. Currently, around 25% of Pakistani RMG products are being exported to the USA. Experts predicted that Pakistan would be among the best gainers in South Asia in the post-MFA era. But it has not been able to make use of its full potential. Despite the fact that the country has a vertically integrated production structure and has carved out a niche for cotton bed linen in the global market, Pakistan has not been able to take benefit of the re-imposition of quotas on China right after the dismantling of the MFA. But subsequently, it did very well in the EU market, expanding by 33.5% in sales value. However, the government has provided several incentives to the RMG sector and has further plans to provide more such facilities in the future. But due to the political unrest situation prevailing in the country, the RMG sector is now facing immense crisis from lack of orders from the buyers. The situation has turned so bad in the country that many entrepreneurs of RMG industry are thinking about relocating the factory setup in other parts of South-Asia, especially in Bangladesh. The SWOT analysis of RMG industry of Pakistan is given below:
Strong Textile and RMG base Specializes in a niche market of bed linen Large Human Resource
Strength Weakness Opportunities Threats
Cottage industry manufactures 80% apparel products Lack of ability to expand production
Huge potential market in US Strong Backward Linkage
Unrest political situation Not using full potential of quota free market
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16.2 Sri Lanka

Sri Lanka has made marginal gains in exporting RMG to the USA and the EU. This island nation faced decline in exports of RMG in 2005, right after the dismantling of the MFA. But subsequently, it did very well in exporting to the EU, expanding by 33.5% in sales value. However, Sri Lanka has not been able to perform similarly in the USA. Sri Lanka is not endowed with the availability of extensive cheap labor like Bangladesh or India and so they do not have much of a success story in the RMG industry as those countries. But the entrepreneurs in Sri Lanka have found an effective way to overcome the hurdle by focusing on niche products. Sri Lanka has successfully created its niche in manufacturing undergarments of women. Moreover enterprises are individually trying to create new niches everyday. This effort from the private sector has been a key driver in propelling the RMG industry of Sri Lanka to grow apparently in a sustainable way. The SWOT analysis of RMG industry of Sri Lanka is given below:

16.3 Vietnam
Specializes in a niche market of women undergarments
Weak RMG base Lack of product diversification
R&D of new niches
Unrest political situation Not taking full advantage of post-MFA period Strong competion from countries like Bangladesh, India, Vietnam
Vietnams textile and garment industry has experienced rapid development in last few years which made the sector a vital element in the countrys economy. In 2004, the RMG sector
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employed 2.1 million people directly, representing 4.7% of the total employment within the country. The industry has a number of leading textile and garment enterprises. The local manufacturers and buyers of Bangladesh are considering Vietnam and Cambodia as the most direct competitors for the coming years. The future for the textile and garment industry in Vietnam looks promising. Vietnam joined the WTO at the beginning of 2007 and seems set to build upon its recent export success. Moreover, the Vietnamese government is highly supportive of the textile and garment sector, and there are strong incentives to attract foreign investment. The government has outlined ambitious plans for the development of the industry. If these plans are fulfilled, employment and exports in this sector will double by the year 2010. The textile-garment industry has a remarkable average growth rate of 20%. With this growth rate and removal of trade barriers, the growth rate can mount up to 30% each year which will enable the country to reach the target of USD 10-12 billion export turnovers by 2010. However, new challenges have emerged. The growth rate of this industry since the abolition of quotas is low compared to other countries, because of lack of labor. Moreover, in the recent years, the country is experiencing rapid economic growth which has increased the standard of living of the Vietnamese people. So the labor wage is increasing at a constant rate which directly affects the industry as the profit margin is getting low and prices of raw materials are increasing at the same time. The SWOT analysis of RMG industry of Vietnam is given below:
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16.4 Cambodia
Exploring new potential markets Diversified Market Sourcing country of many reputed buyers
Lack of labor
Supportive government policies Remarkable growth rate
Improvement in standard of life Not taking advantage of quota free market
As mentioned above, Cambodia is also considered to be a potential competitor in RMG exports in coming years. In recent years, Bangladesh has been successful in gaining market share in the EU knitwear and US woven market; but it failed to increase its market share in the other markets. On the other hand, Cambodia has managed to capture a much greater share of the US knitwear market but its other market share is either constant or falling. The garment industry has played an important role in the Cambodian economy. It has attracted about 30% of the countrys Foreign Direct Investment and generated more than a quarter of a million direct employments for poor rural Cambodians, and it has also provided even more jobs in supporting industries. It is clear that the MFA expiration on December 31, 2004 has had an adverse effect on the garment industry of Cambodia. Nevertheless, Cambodias garment industry has been largely benefited from cheap but efficient labor which enabled the country to enjoy some niche markets. The SWOT analysis of RMG industry of Cambodia is given below:
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16.5 China
Low worker salaries Good labor standard
Stagnent or falling market share Weak Backward Linkage
Congenial environment for foreign investment india and China's shift towards other industries
Affected in post-MFA period Lack of industries in the country
China, popularly known as factory of the world with its booming economy, is the potential economic superpower of tomorrow. Principal factors behind the triumph in their economy include abundant resources, a very efficient transport system, literate, well trained and highly productive workforce and significantly low wage-rates. The Chinese government offers substantial investment incentives such as long tax holidays, capital grants, free land, low utility rates, compensation for worker training, and other benefits to companies willing to locate plants. Chinas advantages and incentives allow large industries like RMG to produce and export in large volumes to the developed nations of the world. All these factors have made China a massive production valley of numerous products including RMG. Apparently China seems to be an all in all in the RMG sector. But, China has some underlying weaknesses as well. For example, slow adoption of international standards (e.g. cotton grading), lack of policies on corporate social responsibilities and care for environment, increasing labor cost and labor shortage, rising energy cost etc. Another threat for the RMG industry of China is the appreciation Chinese currency. In the recent time, appreciation of Yuan makes the Chinese RMG products less competitive in the global market. As a result, producers are becoming more interested to supply in their local markets.
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According to WTO data, Chinese exports of RMG counted for almost 27% of the global RMG exports in 2005, signifying that China was a major force in global RMG markets even before the end of the MFA. With the end of MFA, China initially made considerable progress, attaining 25% of the import share in the US market in 2005, and a 33% import share in the EU market. It thus achieved an overall growth of 50% in US imports and 42% in EU imports in value terms during 2005. However, such gains did not last. The USA and the EU re-imposed quotas in importing on several categories of products as a safeguard against China. This slowed down the steep growth of China. According to import figures compiled by the ADB (2006), during the first six months of 2006, the volume of clothing shipments from China fell by almost 15% and the value by almost 11%. The impact of this is now felt all over the world including in countries like Bangladesh, Cambodia, Indonesia and Vietnam, countries that benefited through getting quotas. According to recent studies, it is revealed that Bangladesh is the only country that can produce textile items at least 20-30 percent cheaper than China. The SWOT analysis of RMG industry of China is given below:
Low wage-rates Literate and highly productive work force Well developed infrastructure Diversified market Slow adoption of international standards Lack of policies on CSR Appreciation of Chinese currency Increasing labor cost and labor shortage Supportive government policies Exploration of new markets Developing new niche products
Strength
Weakness
Opportunities
Threats
Quota imposed on China Rising energy cost
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16.6 India
The textile & Clothing industry of India is the strongest one in South Asia. The industry experienced continued growth in the post-quota period. The country has two major advantages compared to the rest of South Asia. 1. Indias production structure is vertically integrated very well. Up to 98.5% of value addition takes place within the country itself. This endowment allows them to obtain raw materials at a relatively low price and also has helped them to achieve the shortest lead time. 2. India is well-capable of producing diverse RMG products. For these reasons, the RMG sector of India is extremely flexible. The government has been careful in formulating strategies targeted to facilitate growth in the sector. But, India also has some weaknesses. They are low labor productivity, weak Indian labor laws, inadequate infrastructure in many cases, appreciation of Rupee and last but not the least, a highly fragmented supply chain mainly due to Government policies and lack of coordination between industry and trade bodies. Existence of large number of intermediaries adds to the cost but also lengthens the lead time. Indias total T&C exports to the world has increased by 17.06% in 2005 compared to 2004. Recently, the US imports of T&C products from India increased by 13.7% and 14.4%, respectively, in value and volume terms in 2005. Though exports to the EU and US markets have grown rapidly, Indias exports to Asian countries including Japan have fallen steeply. Indias exports of T&C products to 38 countries, excluding Middle East, declined by 22% in 2005. The largest drops in exports were recorded in countries like Bangladesh, Indonesia, Japan and South Korea in absolute terms, while exports increased slightly to China and Thailand. This resulted as some exports have been diverted to the quota-free market of the EU and the US. The SWOT analysis of RMG industry of India is given below:
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Vertically integrated production structure Wide range RMG products Low labor productivity and weak Indian Labor Laws Inadequate infrastructure Fragmented supply chain & lack of coordination between industries Congenial environment for foreign investment Quota-free market of the EU and the US
Exports to Asian countries fallen steeply Tough competition from neighboring countries Shift towards other industries
17.0 Analysis of the responses & measures taken by Bangladesh & its competitors to encounter recession
RMG industry alike any other industry demands some constant improvement measures for fostering its growth potential and setting quality benchmarks. Several measures are continuously being adopted by RMG owners and related persons to overcome this industrys present problems. At the same time, many fields of interest are yet left out of attention. These current disadvantages, competitive edge, required strategies provide a significant impact in the prospect of our RMG sector and thus require special attention.
17.1 Measures Taken 17.1.1 Strengthening backward linkage industry

According to the RMG owners, the first and foremost significant venture carried forward by Bangladeshi RMG industry is strengthening backward linkage industry. Bangladesh has been importing fabrics for its RMG sector from countries like China, India, Tha iland, Pakistan etc. Lack of raw materials and high cost of finance has hindered Bangladeshs involvement in strengthening backward linkage. But entrepreneurs have extensively invested in last 5-8 years in backward linkage industry; especially in textile sector. This
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improved backward linkage has facilitated Bangladeshs decreasing dependency on China and other countries for raw material import. Although it is not significant enough, it can be the starting toward achieving self sufficiency in terms of using raw materials along with utilizing our human resources.
17.1.2 Quality Machineries

All of the RMG owners along with high officials of RMG Industry agreed on the fact that Bangladesh possesses superior quality of machineries, structures, technologies etc. which proves Bangladesh excellence in maintaining quality infrastructure facilities. These infrastructures have been developed in last 8-9 years with careful attention and thoughtful decisions. Recent development in port facilities have successfully aided for the constant objections of RMG owners.
17.1.3 Product diversification

Recently some improvement measures have been taken to counter the ongoing recession. Product diversification has recently started in last two years resulting with a view to gradually increasing value addition. But the level of product diversification is still low and thus value addition is not standing at a satisfactory level. From the survey conducted, it was observed that the main reason behind this is lack of awareness and necessary knowledge among RMG owners xxvii.
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Figure 38: Steps already taken to counter Recession

Steps already taken to counter Recession

15 11 10 5 0 0 9 7 5 2 0 2 0 0 7 7 9 7 11 9 7 6 5 Increased Decreased Unchanged 12 13
17.2 Strategies yet to be adopted 17.2.1 Exploring new RMG export market
Apart from those abovementioned steps, no prominent strategy has yet been endeavored by Bangladeshi RMG owners or RMG governing authorities. In the interviews conducted, BGEMA & BKMEA officials as well as RMG owners especially emphasized on exploring new RMG export
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market. Regarding the implementation of innovative marketing strategy, interviewees opined that Bangladesh is considering this strategy with almost zero level of importance which in turn is resulting into the losing at least a small pie of its growth potential.
17.2.2 Research & Development

Bangladesh is currently opting for higher level education in fashion technology and research related studies. BGMEA has opened a fashion house in 2003xxviii along with some more fashion institutes through private initiatives. Recently national university has approved bachelor degree on fashion designing in its approved institutes. But for countering recent recession no new steps have been taken for research and development.
17.3 Required Measures to overcome the effects of global recession

For the sake of improvement of the current scenario, Bangladesh needs to take several useful steps. Our primary interviews revealed that RMG owners are completely aware of these required changes and they vow towards such positive changes.
17.3.1 Reduction of rate of interest in loans from banks

Bangladesh has one of the maximum interest rate (currently 16%) among all countries of the world. This interest rate has remained unchanged for quite a long period and worked as a catalyst in hampering many potential business opportunities. For this reason, all the RMG owners interviewed commented on the urgency of decreasing this interest rate with a view to help fostering this profitable sector which has been contributing into a significant portion of GDP.
17.3.2 Enabling subsidy from government

Subsidy or special financial aid in favor of RMG has yet not been issued for RMG owners by the Bangladesh Government like competitor countries. Thus, all RMG owners opined that subsidy or similar kind of special treatment should be facilitated for RMG industry. Some key areas where enabling subsidy can help are raw material import, energy facilitation, custom requirements etc.
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17.3.3 Research and development

As discussed earlier, Bangladesh is not that much involved into any type of research and development activities regarding RMG sector. Local garments factories are only producing as per requirement of their buyers whilst competitors are capturing a better market share using this tool. Thus 60% of the interviewees opined that necessary steps should be taken by governing bodies of RMG sector to fight this existing situation.
17.3.4 Strong international lobbying

BGMEA and Bangladesh government jointly assigned a lobbyist firm for passing a favorable bill in the congress of USA which couldnt succeed. After that failure, the owner bodies of RMG industry are not enthused about lobbying so far as they have already taken this type of effort as fruitless. But successful international lobbying can dramatica lly increase the current order volume of RMG products and ultimately affect the competitive position of Bangladesh as a whole. Similarly, owner bodies are also not enthused about quota and preferential access though there seem a lot of lucrative opportunities waiting ahead and can be achieved by these facilities.
17.3.5 Reducing labor unrest

Reducing labor unrest is considered as one of the prominent step needs to be taken for the overall benefit of RMG sector in both short and long run. RMG owners are already conscious about this fact and trying to improve the situation by individual and collective effort. Unfortunately, Government involvement is still lower than the required level. The political power of the parties plays a crucial role in this scenario.
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Figure 39: Required Measures to overcome Recession

10 10 8 6 4 2 0 Yes Unsure/ Indifferent No Shift in Mode of Payment 2 10 6 2 Yes Unsure/ Indifferent No 6
20 15 10 5 0
18
Required Measures to overcome Recession

18 18 14 13 15 12 5 0 5 2 2 11 4 0 00 4 0 Yes No Not Sure 14
4 00 00 0
17.3.6 Gas and electricity supply

Assurance of sufficient and constant supplies of utility services has probably been demanded for the longest period of time by the ga rments factories owners and related trade bodies. But this immensely important point of gas and electricity supply has not been answered by the government. Especially current caretaker government is following contractionary policy for energy management to overcome ongoing national energy crisis
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and the main axe is on the full time running industries like RMG. All of our interviewees strongly emphasized on the importance of ensuring proper energy facilities.
17.3.7 Friendly Investment Policy

Two of our very strong competitor in RMG sector, China and Vietnam get immense help from its government. The investment friendly policies of competing countries assist them in acquiring a better hold on the overall industry as well as on the backward linka ges. Compared to those countries, Bangladeshi RMG sector gets almost no assistance from the existing investment policies.
17.3.8 Export- import Policy

Almost 95% of our survey respondents were satisfied with the existing current export import policy. In Bangladesh, the RMG sector currently earns 75% of the total export revenue of the country. So, undeniably this is the most profitable industry at present. As a result, government regulations are not that strict concerning this sector.
17.3.9 Port Facilities

There has been a significant improvement in the Chittagong port, hub of 80% of our international trade. The port clearance lead time has been reduced to almost 4 days from 12 days. This can be attributed to caretaker governments recent activities to addr ess management, operation and labor relation issues. Port clearance procedures have been reduced from 47 steps to 12 steps which were proven to be very much significant in reducing lead time. Therefore RMG owners stated their full satisfaction towards port facilities. Now their only unfulfilled concern is the custom facilities related with the port activities. Customs automation can also be an effective measure. According to BGMEA president port clearance can be reduced to 2 days if the customs procedures a re automated.
17.3.10 Exploring new RMG markets

In last one year the necessity of exploring new RMG export markets for Bangladesh has become the call of time. All of the interviewees, especially governing bodies like BGMEA and BKMEA, stressed emphasis on the urgency of exploring new markets for their RMG products. As RMG export market for Bangladesh is very much limited for last many years leaving several large potential markets untapped, coordinated and long term steps are urgently required by the owner bodies and Bangladesh government.
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17.4 Required measures to increase the profitability of RMG industry

Through our interviews with RMG owners we tried to capture the view of them towards increasing the profitability of the overall RMG sector and came across very dynamic options. Although production of knitwear products is continuously rising, none of them actually emphasized on that nor considered knitwear as a probable prominent contributor in future profitability of RMG sector.

Figure 40: Areas of focus to increase profitability
Areas of Focus to increase Profitability

20 15 10 5 0 2 4 12 7 56 0 2 0 7 3 56 0 2 00 16 15 16 18 13 5 0 00 Yes No Not Sure 18
All of them are looking forward to in depth investigation of this sector in search of any yet untapped development corner especially in the field of value addition and reduction of lead time. Lastly, they demanded assurance of proper energy supply in all of their factories.
17.5 Current Competitive Advantages of Bangladeshi RMG sector

Although we have scarcity in terms of natural resources as compared to our competitors, namely china and India, our advantage in human resources can not be matched by other countries. Despite having quite an inefficient labor force, we have been able to maintain almost the same level of quality as that of China and India, while having a labor cost much lower than those of other competitors. Again, living standard for competing countries has
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increased significantly. This improved living standard has increased the labor cost in the major competitor countries like China and India leaving Bangladesh in a better position. Figure 41: Hourly wage of Garments workers in different countries
C o u n t r y
Bangladesh Indonesia Pakistan Sri Lanka India China El Salvador Lithuania Mexico Hong Kong Germany USA 0
Hourly Wage in the Garments Industry of Major 0.23 Competitors in World Market
0.43 0.49 0.57 0.57 0.86 1.08 1.46 1.75 5.13 10.03 11.13 2 4 6 Hourly Wage ($/Hour) 8 10 12
17.5.1 Export of basic RMG products

From our primary research, we saw that there is common consensus about a strong advantage for Bangladesh for which in short run (even in long run in opinions of some RMG owners) Bangladesh possesses very little threat of falling export volume. Despite this pertaining recession and changing buying behavior, demand for basic RMG products has remained almost same. Some experts also think that now people will consume less for luxury products and transfer their budget to buy basic RMG products. By this, the demand for basic RMG products from Bangladesh will increase. But, this concept is not prevailing in all the respondents of our research even though it is encouraging for our RMG sector.
17.5.2 Preferential Quota system

Bangladesh is getting preferential treatment from EU under the Generalized System of Preference (GSP) scheme as well as some substantial quotas made available in the US marketxxix. But currently the absence of preferential quota is currently not creatin g any barriers for us as the market share of Bangladesh actually increased in the global RMG
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market in post Multi Fiber Agreement (MFA) era. From this perspective it seems that the absence of preferential quota is rather advantageous for the RMG sector of Bangladesh.

Figure 42: Competitive advantages of Bangladesh
Competitive Advantages of Bangladesh

18 18 16 14 12 10 8 6 4 2 0 16 13 11 10 6 3 00 4 2 3 4 2 0 0 2 0 0 14 11 7 4 33 33 Yes No Not Sure 14 12 12
17.5.3 Modern Machineries

As discussed earlier, Bangladesh is perfectly competitive in the field of modern equipments and infrastructure. All the competitors are using similar machines and having equal technical advantage on the basis of new machineries. Thus no immediate measure is required right now.
17.5.4 Quality production

This is the third most important advantage for Bangladesh as per comments of our primar y research respondents. In fact, this edge is actually working as the blood line in this sphere of ever increasing growth of export in RMG sector. Bangladesh is considered as a quality supplier among the buyers and competitors of the RMG world. In fact competitor countries
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like Vietnam, Cambodia etc. are assigning workers and advisors from Bangladesh to supervise their quality assurance process because of this positive image.
17.5.5 Experienced human resource

This is the second most important advantage for Bangladesh in recent time as opined by the RMG owners in our primary survey. It actually resulted from our long history of production and continuous improvement and innovation in human resource management and production process of RMG sector of Bangladesh. Nowadays, Bangladesh is actually exporting experienced human resource for RMG sector in different competitor countries like Vietnam, Cambodia etc. This export is occurring mainly in production management and quality control process.
17.5.6 Increase in standard of living of competitors

It is another very much advantageous factor for Bangladesh in perspective of increasing labor and operating cost in competing countries. Because of this increased living standard of China, India etc., these countries are now bound to provide increased salary and additional facilities to their workers which in turn are increasing their production cost. But Bangladesh still can offer the same price to the buyers. Thus Bangladesh is not at all losing any orders due to these increased costs unlike its competing countries.
17.5.7 Trust earned from the buyers throughout the last decade
The driving force of acquiring new orders and conforming to current buyers requirements is the trust earned from the buyers throughout the years of better performance and greater quality product supply. This phenomenon is ensuring repetitive orders from buyers and new agreements from prospective markets who are often switching their orders from our competitors.
17.5.8 Ability to produce as per the requirement of buyers

This factor is considered as the primary requirement for quality export. Moreover, RMG owners of Bangladesh normally do not reject orders until their capacity fill out. For product diversification, owners in Bangladesh are very much open to new ideas and whenever
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there is a chance for diversification they grab it to increase their export. For these types of conformance qualities Bangladesh is acquiring more and more orders from buyers.
17.5.9 Duty free access in EU

Currently Bangladesh is getting a preferential duty free access in EU under underdeveloped country quota xxx and getting an upper hand over China, India etc. This access is helping immensely to increase its total import of RMG.
17.6 Current shortcomings of Bangladeshi RMG Sector 17.6.1 Labor unrest

Labor unrest is the darkest side for RMG sector of Bangladesh in recent time. In perspective of the respondents of our primary research, if untreated this labor unrest will become the most disadvantageous phenomenon for our country and will paralyze our RMG sector in a very short time. This labor unrest is also an indirect result of shifting mode of payment because of the current recession. The shift in mode of payment lengthens the cash cycle and later hampers the cash payment ability of the RMG entrepreneurs. This delay hinders timely salary payment igniting the labor unrest in some cases. Longer cash cycle also reduces the entrepreneurs profitability and ability to pay the other wages and facilities for labors.
17.6.2 High interest rate

As discussed earlier, interest rate of Bangladesh is very high ranging from usual 16% to 26% as many RMG owners take loan as SME owner. This high interest rate is a strong impediment for RMG sector Bangladesh. Moreover, there is no preferential or special loan facility for RMG sector of Bangladesh.
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Figure 43: Current shortcomings of Bangladeshi RMG sector
Current shortcomings of Bangladeshi RMG sector

18 18 16 14 12 10 8 6 4 2 0 3 1 0 0 4 2 0 0 0 0 6 6 Yes No Not Sure 14 12 12 12 16
17.6.3 Raw materials sourcing

In spite of remarkable investment in backward linkage of RMG sector raw material sourcing is still a major headache for RMG owners. The grim part is that major raw material sourcing country (China) of Bangladesh is also the major competitors of Bangladeshi RMG products. Due to recession, the prices of these raw materials are also on a rise resulting into high cost of production for Bangladesh.
17.6.4 Longer Lead time

Given the geographic position of Bangladesh and the prevailing shipping routes, it takes considerable time for shipments from these countries to reach the ports in Bangladesh. The time requirement is further lengthened by the fact that goods have to be brought back from
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China and elsewhere through transshipment at Singapore or Malaysia as goods cannot be shipped directly to Bangladesh from these countries. As a result it takes 25-30 days for the consignment to reach local ports. On the other hand, competitors like China, India and Cambodia to some extent enjoy self-sufficiency in this aspect. If we compare the lead time of Bangladesh with other competing countries our competitive disadvantage will be evident. Table 15: Comparison of Lead time of RMG exporting countries Country Mexico Italy Vietnam Cambodia India China Bangladesh Source: BGMEA Lead Time (Days) 15-20 15-20 60-90 60-90 60-90 60-90 90-135
17.6.5 No preferential access or trade agreements in the USA

The primary interviews revealed that Bangladesh currently is not getting any preferential access or is not a part of any type of favorable trade agreements in the USA while countries from Africa get special treatment under a preferential access named AGOA. This unbalanced treatment is giving those countries an upper hand on Bangladesh and harming our export towards USA.
17.6.6 Energy crisis

Due to the ongoing recession, fuel price has increased firstly and worsened the present energy crisis in Bangladesh. Bangladesh is currently in the grip of an intense power crisis, with loadshedding of approximately 1800-2000 megawatts occurring in pick hours- an increase of almost 150% since 2005, according to recent reports. Such a crisis is having adverse impact on the output of the RMG industry by decreasing output by approximately 25-30%. Thus all interviewees expressed their complaint against this energy crisis.
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Figure 44: Current shortcomings of Bangladeshi RMG sector (cont.)
Current shortcomings of Bangladeshi RMG sector(cond.)

16 14 12 10 8 6 4 2 0 15 13 11 7 3 0 2 3 0 0 2 0 0 0 8 10 8 16
Yes No Not sure
18.0 Analysis of recent global recession on the RMG sector of Bangladesh The Broad Objective
In macroeconomics, a recession is a decline in a country's gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year. An alternative, less accepted definition of recession is a downward trend in the rate of actual GDP growth of a country. To be more precise, it can be said that recession refers to a significant decline in economic activity spread across the economy, lasting more than a few months. A recession has many attributes that can occur simultaneously and can include declines in coincident measures of activity such as employment, investment, and corporate profits. A severe or prolonged recession is referred to as an economic depression.
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Recently, as discussed in the earlier part of the report that USA, the worlds largest economy has been suffering from the grasp of recession. The economic downturn in the USA caused by the credit crunch has affected even the strongest economies of the European Union member countries. In the last few months the USA and EU member countries have experienced thousands of job cuts, bankruptcies of large corporation and negative GDP growths. As both USA & EU are the two top buyers of Bangladeshs RMG, more than 80% of our RMG export, so its a matter of significant concern for the whole industry. Many possibilities like less number of sourcing orders, reduction in the profit margin, increase the cash cycle etc. are looming over the RMG industry of Bangladesh. In the next part of the report, we have tried to analyze the actual impact of the buying countries economic recession on the RMG export of our country.
18.1 Impact of recession on RMG exports of Bangladesh

Recession has both long term and short term impact on a countrys economic activities. Hence, we would look into both the short term and long term impact of this ongoing global recession on the RMG export of Bangladesh.
18.1.1 Short Term Impact

To analyze the short term impact of recession on the RMG exports we have taken three variables. They are: Stock Index of NASDAQ Oil Price CPI
Rationale: The stock market and the oil market react most promptly in any economic situation. During any recession, both these markets react negatively. A stock market index is a method of measuring a section of the stock market. During the recession, as economic activities take a downturn so the investors in the stock market loses interest in investing
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and so the stock prices go down usually. But the market remains unstable as the stock prices keep going up and down throughout the recession phase. We have taken the stock index of NASDAQ as variable for the analysis because the NASDAQ-OMX group operates New York Stock Exchange (NYSE), the second largest stock market in the USA and eight other stock exchanges in Europe. So, it will give us a thorough study about the ongoing global recession in both USA and Europe, which are the two major markets of Bangladeshs RMG exports. In case of oil market, the price of oil is also likely to go down as the demand of oil goes down substantially. As oil is used largely in production purposes so it is quite normal that when economy is going downwards, resulting in reduced production and thus bearing a significant impact on oil price. Moreover, USA consumes 25.20% of total oil produced worldwide. xxxi So, oil price worldwide depends largely on the economic condition of USA. Both stock index and oil price is termed as volatile index as these variables change fast on the reaction of most recent economic build-ups. Consumer Price Index (CPI) is a measure of the average price of consumer goods and services purchased by households. As during the recession, the unemployment hits the economy so there is a significant change in the overall consumption of the population. Moreover, as RMG export depends largely on the purchasing capacity of the consumers of the buyer countries so there is ought to be a significant relationship between CPI and RMG export from Bangladesh.
18.1.2 Long Term Impact

To analyze the long term impact of recession on the RMG exports we have taken only one variable, Gross Domestic Products (GDP). GDP is one of the measures of national income and output for economy of a country. GDP is defined as the total market value of all final goods and services produced within the country in a given period of time. It is also considered as the sum of a value added at every stage of production of all final goods and services produced within a country in a given period of time, and it is given as a money value. In the period of recession, a
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countrys overall output or production falls so usually GDP also falls when such economic downturns occur. GDP per capita is often used as an indicator of standard of living in an economy, the rationale being that all citizens would benefit from their country's increased economic production. Therefore, same is the case with a vice-versa situation and therefore, we are using GDP per capita as the only variable to measure the long term impact of recession of RMG exports of Bangladesh. Rationale: GDP is a long term indicator of a countrys economy. It indicates the performance of a countrys overall economy and through that we are going to find out if any economic downturn or recession has any long term impact on our RMG Exports.
18.2 Analysis 18.2.1 Analysis of Short Term impact of recession on RMG export of Bangladesh
The independent variables are: Stock Index of NASDAQ Oil Price CPI The dependent variable is: Bangladeshs RMG Exports to USA Ten years monthly data of all the variables were taken to run the regression analysis between independent variables Stock Index, Oil Price & CPI and dependent variable RMG exports of Bangladesh to USA. The regression model and the final output is depicted in the next section.
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18.2.2 Regression Model of Short Term Impact

Variables Entered/Removed (b) Variables Entered Oil Price USA, Stock Index USA, CPI USA(a) Variables Removed
Model 1
Method . Enter
a. All requested variables entered. b. Dependent Variable: RMG Export to USA from Bangladesh Model Summary Adjusted R Square .615 Std. Error of the Estimate 36.93050635
Model 1
R .790(a)
R Square .625
a. Predictors: (Constant), Oil Price USA, Stock Index USA, CPI USA ANOVA (b) Sum of Mean Model Squares df Square F 1 Regression 267880.564 3 89293.521 65.471 Residual 160935.751 118 1363.862 Total 428816.316 121 a. Predictors: (Constant), Oil Price USA, Stock Index USA, CPI USA b. Dependent Variable: RMG Export to USA from Bangladesh Coefficients (a) Unstandardized Coefficients Standardized Coefficients Sig. .000(a)
Model
Sig.
B Std. Error Beta 1 (Constant) -162.091 128.200 CPI USA 1.317 .819 .340 Stock Index USA 9.858E-03 .006 .111 Oil Price USA .367 .170 .455 a. Dependent Variable: RMG Export to USA from Bangladesh
B Std. Error -1.264 .209 1.608 .110 1.699 .092 2.162 .033
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18.2.3 Model Analysis of short term impact

As illustrated earlier in the report, the four variables used for this model are oil price, stock price, CPI of USA and RMG exports of Bangladesh to USA. Summarizing the model, it can be seen that the result for the adjusted R Square is 0.615 which suggests that 61.5% of the entire data can be explained. This outcome also suggests that a strong correlation exists between the three independent variables and total RMG export of Bangladesh to the US. Subsequently the result for ANOVA test; which is used to analyze the variances reveals that precisely 100% of the data taken into account are in the acceptance range as the significance rate is 0.000 with the numeric value for F coming at 65.471 which means that the adjusted R square is significant. Furthermore, the coefficients table demonstrates the result of t-test. The t-test determines the significance of each of variable individually. From the table it can be seen that the critical value of t for CPI is 1.608 with a significance level of 11% which suggests that 89% data of the dependent variable can be predicted by CPI and the remaining 11% is positioned in the rejection region. As for stock index, the value for critical t stood at 1.608 with a significance level of approximately 9% which deters that 91% of the data can be predicted. And for oil price, the critical value is 2.162 having a significance level of 3% which suggest that a staggering 97% of the entire data lies in the acceptance region. The results for all of the three critical values of t are very close to 5% with one being below the standard margin of 5% means that all the variables can predict the dependent variable. However, as the significance level of oil price is as low as 3% means that oil price predicts the dependent variable best. So from the above model, we can say that the recession has short term impact on the RMG exports of Bangladesh. Therefore, we can conclude that the ongoing global recession is having impact on our RMG exports which means we will face marginal growth or decline compared to exports of last year.
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18.2.4 Regression Model of Long Term Impact

Variables Entered/Removed (b) Variables Variables Model Entered Removed Method 1 GDP Qtr(a) . Enter a. All requested variables entered. b. Dependent Variable: RMG Qtr
Model Summary Adjusted R Square .640 Std. Error of the Estimate 101.0475
Model R R Square 1 .806(a) .649 a. Predictors: (Constant), GDP Qtr
ANOVA (b) Sum of Squares Regression 773800.271 Residual 418634.863 Total 1192435.134 a. Predictors: (Constant), GDP Qtr b. Dependent Variable: RMG Qtr Model 1 Mean Square 1 773800.271 41 10210.606 42
df
F 75.784
Sig. .000(a)
Coefficients (a)
Unstandardized Model Coefficients B Std. Error 1 (Constant) -328.322 100.034 GDP Qtr 7.632E-02 .009 a. Dependent Variable: RMG Qtr
Standardized Coefficients Beta .806
t -3.282 8.705
Sig. .002 .000
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18.2.5 Model Analysis of Long Term Impact

For this regression analysis only one independent variable; the quarterly value of GDP of USA was used. The data table exhibits that the adjusted R square for the quarterly value of GDP stands at exactly 64% which indicates that from the whole dataset, 64% of the data can be explained. As the coefficient of determination exceeds the moderate the value of 50%, therefore it can be deduced that there lies a strong relationship between GDP and the total RMG export to the US. Subsequently the result for ANOVA test; which is used to analyze the variance reveals that precisely 100% of the data taken into account are in the acceptance range as the significance rate is 0.000 with the numeric value for F coming at 75.784 which means that the adjusted R square is very significant. Furthermore, the coefficients table demonstrates the result of t-test and from the table it can be seen that the critical value of t for GDP is 8.705 with a significance level of 0% which suggests that 100% data of the dependent variable can be predicted by GDP. The result for the critical value of t reveals the strong relationship between GDP of USA and RMG exports of Bangladesh to USA. So from the above model, we can say that the recession has moderate long term impact on the RMG exports of Bangladesh. Therefore, it can be concluded that if this recession continues for a longer period of time, the RMG export of Bangladesh will face negative impact.
19.0 Research Findings

Our research dealt with analyses of impact of recession on profitability & mode of payment on the RMG sector of Bangladesh. The research was prepared to scrutinize the current situation prevailing in the industry and through our primary and secondary research we have been able to determine the short and long term consequences of recession that are already being felt and the effects impending. The findings which could be singled out are as follows:
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Of the four factors analyzed for assessment of profitability, profit margin being affected the most. Order book situation still unwavering, though experiencing lesser growth compared to previous quarters. Variables already adversely affected by recession are: o Value addition- decreasing o Cash cycle-increasing o Change in sale of RMG-decreasing o Change in buying behavior(towards lesser cloths)- affirmative o Cost of production- increasing o Change in other additional costs- increasing o Dependency on bank loans- increasing Since Apparel or clothing industry is largely dependant on the demand pattern, recession is resulting into less expenditure by the end users of RMG products. But Bangladesh is experiencing an upper hand over its competitors as it produces basic lowend RMG products and these products do not display significant falls in demand even in adverse economic condition. Bangladesh is still getting enough orders but losing in areas of decreasing profit margin in each item, increasing storage cost due to delayed shipment etc. In case of changing fashion trend, Bangladeshi manufacturers have little to carry out further activities since they produce only according to the buyers specifications. Bangladesh rather attempts to change its manufacturing procedure according to this changing fashion trend. Thus the manufacturers placed very high importance on buying behavior whereas put very little weight on changing fashion trend in terms of affecting RMG imports. Product diversification is still not a big concern for RMG owners as they only try to deliver the required products of buyers. Sufficient R&D activities are absent and value addition through product diversification or own design is still a neglected idea among them. The main cause for lack of value addtion effort is that the RMG industries of Bangladesh are extremely specialized and backward linkage industry is not very much strong yet. Through our secondary research we have found out that there is a strong relationship between economic performance of buyer countries and our RMG exports. The secondary research shows that Bangladesh will face both short term and long term consequences.
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20.0 Recommendations
20.1 Recommendations proposed by Bangladesh Bank
Recently the central bank proposed three options to offset the probable negative impacts on the RMG exports that account for over 75 percent of the country's total exports worth nearly $15 billion in fiscal 2007-08. The options are: Enhancing the efficiency of customs, ports and infrastructure as exporters need cost cutting measures to stay competitive, Installation and strengthening safety net programs for garment workers through public-private partnerships An uninterrupted supply of power and other inputs. Through our research we have found out that these are some of the steps which Bangladesh need to take to overcome the detrimental effect of the ongoing global recession. The recommendations are as follows:
20.2 Short Term Policies:

Cash Incentives (Around 10%) should be provided to the RMG entrepreneurs on the export value of the garments. Bank interest rates should be lowered further, even after the recent decreased rate of 13% from previous rate of 14% in order to ensure free flow of funds in the RMG sector. Bank services should be made less costly which will increase the overall profitability of the industry. Bangladesh Bank should meet periodically with local Banks to monitor developments in the RMG sector. Local Banks should be encouraged to substantially reduce their charges across the board, in particular their commission on LCs. Equally important Bangladesh Bank should ensure that local banks promptly settle their payments against LCs on the due dates. Government should rescind VAT on RMG units and reduce tariffs at the Chittagong Port. Innovative marketing strategies to attract more order which will enhance the order book situation
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Although presently the entire cost of lobbying and research work in the US is being underwritten by BGMEA, it is essential that the government of Bangladesh assume this responsibility either partially or in full. This will ensure the optimum co-operation, coordination and team work between all the key persons in Washington and also between the team in Washington and the proposed task force in Dhaka.
20.3 Long Term Policies

The RMG enterprises need to put emphasis on Increasing efficiency and productivity of the RMG factories. Bangladesh need to increase the level of value addition by better combining the players in the chain of value addition and establishing industry hubs where a whole production industry including small backward linkage units will carry on the process in hermonized succession. More backward linkage facility should be established in the country to Reduce dependency on countries like China for raw material by investing local backward industry in both micro and macro level. Bangladesh should now focus on exploring new markets. This portfolio diversification will minimize the risk of the whole sector by decreasing dependency on one or two buying countries. New potential markets like Japan & Middle East should be capitalized by the RMG manufacturers. Bangladeshi manufacturers should collectively try to improve on its bargaining skills of the entrepreneurs and try to pass on a part of the increased raw material cost and storage cost to the buyer incurred due to delayed procurement of finished goods. The profit margin will slightly increase through this step. Easing of rules of the Credit Information Bureau of the central bank to help textile exporters tackle the recession. Government should explore the opportunity of producing electricity through Private initiatives to cater the growing needs of the RMG sector.
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The biggest impediment of further growth of RMG sector is the lack of Infrastructure. So the concerned associations should take proper step for infrastructure development to ensure adequate electricity, gas and port facility to RMG manufacturers. While there has been some recent improvement in reducing customs procedures, much more needs to be done. The Govt. should immediately engage the services of a top IT firm to provide a software package, which could further simplify the existing procedures while allowing for full transparency. This will enable the govt. to closely monitor the performance of the customs authorities, avoid corruption, increase customs revenues and substantially reduce transaction time and costs. Establish a competent and well-funded Garment Technology Training Center in Dhaka, with an affiliated center in Chittagong. These centers should be capable of imparting professional competence in advanced garment production technologies including CAD, computerized pattern grading, marker planning and computer controlled cutting, etc. Major regional blocs such as NAFTA, EU and the East Asian Region heavily dominate the textile and clothing industry. A way to survive against the Western blocs is by forming functional regional ties, such as SAARC and ASEAN, to accelerate and encourage regional and bilateral free trade. Also transformation of the South Asian Preferential Trading Agreement (SAPTA) into South Asian Free Trade Area can help strengthen position of South Asian countries, including Bangladesh. Currently intra-South Asian trade in apparel is quite small. Govt. should permit unrestricted air freight services to all major export destinations for garments, as well as to countries from where fabrics are imported. There should be a minimum of red tape. The govt. should rapidly move to an "open skies" policy and give the maximum possible encouragement to the private sector. In order to move from assembly type operations to full package supply system, starting from R&D to warehousing at destination, Bangladesh must develop backward and forward linkages in the textile and clothing industry. This implies development of efficient spinning and weaving industries, which are generally capital intensive. Private companies lack financial resources to establish large-scale textile operation or vertically
169
integrated operations. Accordingly, government must play a role by providing financial resources at low interest rates, although this must be performance based.
21.0 Conclusion
The history of the Readymade Garments Sector in Bangladesh is a fairly recent one. Nonetheless it is a rich and varied tale. The RMG sector of Bangladesh has come to play an increasingly crucial role in the economy and society of Bangladesh. However, the latest financial crisis that has taken the whole world by storm; especially the western countries who are the major buyer of RMG goods of Bangladesh have spread across the exporting nations as well. With sharp increases in oil price, food price etc and the cost of living has gone up. But on the other hand due to credit crisis theres been huge drop in the unemployment rate as numerous institutions are facing bankruptcy. Besides, per capita income has decreased rapidly which is the major reason why the buying behavior of the end users of readymade garments; posing threat to the manufacturers and the overall industry prosperity. From the report analysis, it was clearly seen that at this present situation, Bangladesh RMG industry is also placed in an extremely critical position and have started to experience consequences of the financial turmoil. Though it was seen that the extent of bearing has been very minimal, it is assumed that if the recession continues, the RMG sector might be hit badly in the long run. It was revealed from the research that the severe fluctuation of the US dollar has been controlled strictly by the Bangladesh Bank by preserving a very stable exchange rate in order to facilitate the RMG sectors operation. Furthermore, the area in which the impact is seen notably is the profit margin of the exporters; as it is being scarcely hit by the change noticed in the end users change in expenditure for buying cloths as well as other factors. With the profit margin facing declination, the manufacturers assume that if the recession continues, it would be hard to sustain. The present situation demands the RMG manufacturers of Bangladesh to respond to the current situation accordingly. And by taking accurate measures, this global phenomenon can be confronted.
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Table of Contents

Global Recession and its impact on RMG sector of Bangladesh

Global Recession and its impact on RMG sector of Bangladesh

Global Recession and its impact on RMG sector of Bangladesh

Global Recession and its impact on RMG sector of Bangladesh

1.3 Problem Statement

Global Recession and its impact on RMG sector of Bangladesh

1.4 Objectives 1.4.1 Broad objective

1.4.2 Specific Objectives

Global Recession and its impact on RMG sector of Bangladesh

2.2 Data Collection Method 2.2.1 Primary Data

Global Recession and its impact on RMG sector of Bangladesh

2.2.2 Secondary Data

2.3 Analysis Design

Global Recession and its impact on RMG sector of Bangladesh

2.4 Sampling Design 2.4.1 Sampling Technique

Global Recession and its impact on RMG sector of Bangladesh

2.4.2 Sampling Frame

2.4.3 Sampling Elements

2.4.5 Sample Size

Global Recession and its impact on RMG sector of Bangladesh

3.0 Industry Overview

3.2 Sales Trend

Global Recession and its impact on RMG sector of Bangladesh

3.3 Product Composition 3.3.1 Woven vs. Knit

Global Recession and its impact on RMG sector of Bangladesh

Figure 1: Growth of Woven & Knit Garments

3.3.2 Product Diversification

3.4 Market Composition

Global Recession and its impact on RMG sector of Bangladesh

3.4.1 United States:

Global Recession and its impact on RMG sector of Bangladesh

Global Recession and its impact on RMG sector of Bangladesh

3.4.2 European Union:

Global Recession and its impact on RMG sector of Bangladesh

Global Recession and its impact on RMG sector of Bangladesh

Growth % 18.3 31.8 50.5 15.1 33.2 6.2 9.1 42.4

Growth % 11.3 0.3 22.8 -7.1 4.4 17.4 -9.3 15.4

3.5 Competitive Advantages of Bangladesh

Global Recession and its impact on RMG sector of Bangladesh

Global Recession and its impact on RMG sector of Bangladesh

3.6 Disadvantages of Bangladesh

South Asia Analyst Group. May 25, 2008 <http://www.saag.org/%5Cpapers19%5Cpaper1852.html>

Global Recession and its impact on RMG sector of Bangladesh

4.0 Demand-Side Dynamics

Global Recession and its impact on RMG sector of Bangladesh

4.1 Major Buyers

Global Recession and its impact on RMG sector of Bangladesh

Global Recession and its impact on RMG sector of Bangladesh

4.2.2 Currency Appreciation/Depreciation

Global Recession and its impact on RMG sector of Bangladesh

4.2.3 Trade Agreements

Global Recession and its impact on RMG sector of Bangladesh

Global Recession and its impact on RMG sector of Bangladesh

4.3 Plans of Buyers Regarding Sourcing in Bangladesh

Global Recession and its impact on RMG sector of Bangladesh

4.3.1 Limiting the Number of Vendor Countries

4.3.2 Limiting the Number of Vendors Within Bangladesh

Global Recession and its impact on RMG sector of Bangladesh

4.3.3 Shift from LC to Contracts

Haque, Fazlul. Personal interview. 11 Mar. 2008.

Global Recession and its impact on RMG sector of Bangladesh

5.0 Supply-Side Dynamics

5.1 Major Players