Developing competitive RMG sector to meet future challenges

The phase out of the Multifibre Agreement (MFA) on 31st December, 2004 as per the Agreement on Textile and Clothing (ATC) of the WTO has brought to an end of the ‘managed’ trade regime in the global trade in apparels and textiles. This had several implications for the global trade in apparel. Apparel manufacturing factories and exporting countries could operate without any restriction of the quota, importers had the opportunity for open sourcing, retailers could take advantage of competitively priced supply and consumers could enjoy the benefits in terms of broader choices and lower price.

All these have consequently boomed global trade in apparels. However, the phase out of MFA had put garments manufacturers and exporters to a tougher environment where competitive edge to be the only criteria for survival in the global apparel trade. With the passing of every day the battle for survivor becoming more tougher owing to entry of new manufacturers and exporters of apparels. Now the situation has changed from what was in the past. Now too many exporters are chasing too few customers. As such competition has become severe. Now for survival what is needed is competitive production and price. Therefore, developing a competitive garment Industry has been the demand of the time. But before, we venture into the process of how to build a competitive garment industry, let us evaluate the existing environment of global apparel trade.

At present when international production capacity far outstripped worldwide demand for imported garments low macro- costs constitute the difference between a competitive flourishing garment industry and a bankrupt one. As such the coming years will be critical for all those who are in the global apparel industry. In such a back drop all factors appear to us, to be negative for most Third World countries.

* Garment demand from developed countries is falling and will continue to slide;

* Garment production facilities are increasing worldwide as more and more countries use garments exports as the first step in the industrialization process;

* Trading blocs are redirecting garments purchases to bloc members and favoured suppliers.

Then there is the controversial issue of international trade liberalization. Regretfully, instead of making world trade more equitable, trade liberalization looks like a one way street–the Third World liberalizes while the industrialized West benefits. Given the current trade policies in the North America and the Europe, there is every possibility that the Third World tariffs will be forced down while those in the industrialized countries will remain unchanged and the Third World non–tariff barriers will disappear while industrialized nations’ barriers remain in spite of repeated promises made frequently at WTO ministerial meetings.

To the textile and garments industries in the Third World countries such trade liberalization had been catastrophic. The second and third line garment producers in Asia, Africa, Central and South America have received a double barrel gun shot that have been completely decimated their industries.

Trade liberalization as it appears to be evolving will not bring Third World countries’ apparels exporters unlimited access to markets in the developed world. Certain forms of restrictions would curtail their market access. Textile and garments manufacturers in the developed countries not only fighting to retain the existing restriction to market access from Third World, but also get full support from first and second line Third World manufactures to maintain current restrictions in the developed countries.

As a result countries like Bangladesh, India, Pakistan, Indonesia, Turkey fear Chinese onslaught .They believe that one day China will take over the entire garment export market. To some degree their fears are justified. Vast proportion of garments produced by Third World factories are of different quality The author in March this year visited a number of department stores in Melbourne and observed that most of the T-Shirts made in Bangladesh have been placed in the “On Sale section” indicating either poor quality or cheap products, whereas Chinese products attract most customers indicating high quality at reasonable price.

It is believed that when Chinese supply line is exhausted, only then western buyers move elsewhere. Therefore, for Asian suppliers the future looks bleak. Trade liberalization is impacting from both sides of the global garment manufacturers. In recent years garments exporters from industrialized countries have been pressing Third World countries hard to reduce their duties on garments imports. Industrialized garment manufacturers have been aware that there is an insatiable market for imported branded garments from developed countries. As such giants like CK, Tommy Hill, Donna Karan, Ralph Lauren are providing branded products to vast young customers in the Third World, replacing the domestic producers.

It is not just high-end labels trying to get into the Third World. Mexico, the neighbouring state of the US emerged as a big supplier of moderately priced garments to US customers. The loss of tariff as well as import from brand producers created havoc in the domestic market of the Third World.

It is any body’s guess how long Asia’s retail market will take to normalcy. The scenario reveals that garments producers who previously thrived on high profits from domestic markets now find themselves reduced to near bankruptcy. In the coming years the once booming domestic markets in each Third World countries will face two assaults:-

(i) Present suppliers to local wholesalers and retailers will have to compete with foreign competition for their existing customers. Trade liberalization will disrupt local retail market. Previously loyal customers might not be loyal anymore as they have the scope to choose from foreign products at the domestically priced products.

(ii) New retail companies will open who have little interest to buy from local suppliers rather they would prefer foreign suppliers.

Third World governments have yet to recognize the peril facing the garment producers. If the governments want to develop a successful competitive garment industry it must create an environment that will encourage industrial development. As such a coordinated policy must be drawn. Let us start with those investments that can make Third World country like Bangladesh competitive in the global economy. Investment in education, science and technology, energy efficiency, attract foreign companies to set up factories, promote investment by local companies, encourage Research and Development (R&D), efficient port operation. However, unfortunately instead of opening up to global realities isolation attitude remain very much in the Third World. In house training by factories is an important step forward particularly with regard to increasing skills and expertise of the workers.

A recent study undertaken by BIDS reveals that RMG sector in Bangladesh has more than 60 percent skill gap among employees especially the machine operators. For sustainable growth the sector needs job specific training for employees through the skills for Employment Investment Program (SEIP), professional bodies of employers. A wide skill gap will appear while attempting to meet the new forms of demand form customers. Most employees want training related to employees’ roles while some opted for gender related training especially managers and supervisors.

In Bangladesh no factory is large enough to have its own in house university. So it is the responsibility of the governments in the Third World to provide facilities for tertiary education. Absence of educated people marks a country unacceptable for investment or for a long term strategic relationship.

Lack of educated technicians, researchers and scientists is a bar to the development of competitive garment factories in the Third World. Our investment in education needs an improved knowledge based education in the fastest growing garment sector that requires scientific and technological skills. Investment in education, science and technology are key areas that would go a long way in making our RMG more competitive, although none of these three key areas would yield results over night.

Investment in R&D would cost money. Better fuel efficiency would reduce macro cost. If we fail to act now our current competitive position would decline. Once we invest in these areas, our economy would be less vulnerable to economic disruption, improve our balance of trade. At the same time technological innovation would accelerate and workers would be in a stronger position to adapt to the global economy.

Since mid-eighties we have been asked to allow formation of labour union in garment factories. However, nothing concrete has been done except formation of welfare association. This issue will be prominently picked when Bangladesh will enter into middle income country and seek for GSP Plus facilities from European Union. In this respect business groups are of the opinion that once labour union is allowed, unionized workforce would rob the economy of flexibility and its competitive edge.

In a more competitive global environment unionized workers are to cooperate with the employers as long as they(workers) have their fair share of wages. Government policies could boost workers wage without hurting the competitiveness of the factories. Further the action programs as outlined below will help in achieving competitiveness:

Go for advanced production process—Acquire advanced technology—Go for technology up -gradation—Support for R&D—Better Labour management—Develop backward Linkage—Ensure fuel efficiency and uninterrupted supply of electricity.

Once all these are properly implemented, competitiveness will automatically be achieved.

The writer is former Director General, EPB