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South Asia’s Garment export sector needs regional outlook, new markets

BANGLADESH – Denim factory in Dhaka

ECONOMYNEXT – COVID -19 or not, South Asia’s readymade garment sector needs to strengthen its regional ties and explore new markets if it is to grow further and remain leaders in the export sector industry experts told a webinar last week.

But, for that to happen, there must be a strong political will, sans the big brother-small brother mentality, and a critical review of Free Trade Agreements, according to two leading apparel sector executives in Bangladesh and Sri Lanka.

The two, the General Manager of Ha-Meem Group, A F M Nurur Rahman of Bangladesh and Group Director, Omega Line Ltd. Felix Fernando were sharing their views on an online discussion on the Restart Asian Economies series on ‘Ideas and Action for the Textile and Readymade Garment Industry,’ organised by the Friedrich Naumann Foundation for Freedom, South Asian Regional office, on Monday, October 5th. The discussion was moderated by the Foundation’s Country Representative in Bangladesh, Dr Najmul Hossain.

According to Rahman, Bangladesh had started to feel the heat, months before the pandemic hit that country. Even as there were delays in receiving raw material, their buyers, mostly located in the G20 countries and facing a recession owing to the virus, were not talking about future orders. Most were placing ‘on-call orders,’ he elaborated.

For the billion-dollar industry, which employs 4.4 million, mostly women, cancellation or orders put on-hold, means looking at an 18pct negative growth in 2021. Bangladesh imports a good portion of the raw materials, and exports 85pct of the finished product to the USA, EU and Canada.

The Bangladesh Garment Manufacturing and Exporters Association (BGMEA), posts that the loss owing to COVID-19 is USD3.18bn worth of orders. Says Rahman, in comparison with March to June of 2019, the value of orders lost the same period this year is about USD4.9bn.

It is not much different in Sri Lanka, where the industry which had enjoyed a steady growth of 5-7% these past few years, has suffered a 25pct decline between January and August this year when compared with the same period of 2019. Sri Lanka, says Fernando, depends on two major markets for its garments- the USA and the EU, to which 90pct of the products are exported. Though attempts are being made to get back to normal, he pointed out that with the EU and the USA heading into the winter months, and a second wave of the virus expected to raise its head during that season, the situation is in the balance.

Indeed, since the online discussion on Monday, Sri Lanka’s garment industry, which was on a slow recovery mode, has faced a further set-back with over a thousand workers attached to a garment factory testing positive for COVID-19. Most areas where patients have been identified are currently under police curfew, and several garment factories have been closed. Nearly 15pct, of the country’s more than 8 million strong workforces, is employed in the apparel sector. As in Bangladesh, a majority garment sector employees are women.

Fernando explained that while there are small, medium, large and a few extra-large companies in the garment trade, 75pct of the workforce is employed by the larger groups, and also account for 75pct of the export figures, which is around USD5.6bn. With the country under lockdown in the early months of the year, some companies switched to producing Personal Protective Equipment (PPE). However, here too, though there were many inquiries and good demand, by the time local companies had acquired the relevant certifications, the orders had gone elsewhere. Despite that, he added that the industry had undertaken about a half a billion dollars’ worth of PPE orders.

As cost-saving measures, both countries stopped over-time work. Identifying the importance of skilled workers Bangladesh had opted not to retrench any production line staff but to lay off and reduce various other facilities for those in the management and higher income category. In the case of Sri Lanka, though factories were closed till mid-April, employees had received full pay in March and April. The government allowed companies to pay their staff 50pct of the wages in May and June and helped with a subsidy. Companies had also been permitted to pay either 50pct of the salary or LKR14,500 whichever was higher to those staying at home, with the proviso that when they do come into work, they must be also paid in full for those days. While this scheme was in effect until end September, given that orders are still not up to expected numbers some companies have appealed for an extension until December.

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As well staff had been brought in on a one week on, one week off basis, while those companies with several plants, shut down a few, to adhere to social distancing and cope with reduced orders. Fernando added that a voluntary retirement scheme, with the compensation calculated according to the number of years served, and work years left had been offered and that a majority who took this package were those in management. All plans were put in place in consultation with the government, labour department and trade unions.

Amongst the few factories that closed, were those that had been struggling even before COVID-19, he added.

But these are temporary measures to deal with an emergency situation, the focus they point out, must be on growing regionally.

Both speakers were of the opinion that for the industry to be more price competitive and be quick on the turn around, better and consistent policies are required.

Rahman sees bottlenecks at the Port etc. affecting lead times. As the Christmas season nears, buyers will make short-order requests based on consumer behaviour, and the industry must be ready for that. If not, their biggest competitor, Vietnam could grab the orders. While COVID-19 ‘taught us to work with low costs and high efficiency,’ he stressed that uninterrupted energy supply and better access to health care facilities, which was identified when dealing with the pandemic, must be sorted out.

Even though the country has several fabric mills, he says, the country is still dependent mainly on China, which is not eligible for GSP plus for its raw materials. That affects the price negotiations with buyers.

Bangladesh also lacks support in the area of Research and Development to keep up with changing trends in the industry.

Though considered a supplier of high quality and value-added goods it is time to ‘Get out of the basic garment mentality’ says Fernando, adding that pre-COVID, the country had been advocating a Hub Concept. Political instability resulted in the country being placed in the middle-income category, thereby earning the GSP plus from the EU, ‘but should we remain in that income level, simply to be awarded the GSP?” Nor will the planned fabric mill zone ensure self-sufficiency in raw materials, he adds.

Even while it is clear why import controls have been introduced to deal with foreign debt, Sri Lanka needs to consider how feasible local production of fabric will be; the requirement for water and wastewater disposal must be considered. Fernando believes more expert advice in this regard is necessary to identify what is “cheaper to import and what is cheaper to produce locally.’ While a few fabric mills have been set up, he is not convinced that even with the establishment of the proposed zone, even 25pct of the requirement will be met.

‘What is necessary is policy consistency’, he says, adding that Sri Lanka must revisit and renegotiate its Free Trade Agreements (FTAs). Some provisions may not have been beneficial to the country, but there were some good points; The volume of exports to India and China, for instance, is much less than what Sri Lanka imports from them; ‘the trade balance is not in our favour, ’he said, adding that where a $ billion dollars’ worth of fabric is imported from India, Sri Lanka’s exports to India is around USD50mn. While India too qualifies for GSP plus and offers a good price on its fabrics, they need to improve on their delivery and after-sales service, he explained. Vietnam, he points out has FTA’s with many countries, including the EU, and that is why they are where they are today, compared to ten years ago.

As well, it is time to explore new markets, such as Japan.

Fernando also claims that for the industry to be more efficient, labour and customs regulations need to be updated to allow for better lead times; ‘we need the flexibility to work 45 hours within three to five days, when necessary.’

Given the current circumstances, Bangladesh is wary of seeing a level of recovery that it enjoyed even at the end of 2019, while, it is uncertain whether Sri Lanka would reach its USD8bn target by 2023, with usual buyers of both countries still reeling under the pandemic.

Perhaps it’s time governments of both countries work towards strengthening regional growth of the industry. (Colombo, October 10, 2020)