Subcontracting RMG factories’ heyday

In recent months, subcontracting factories have mushroomed in Bangladesh thanks to growing work orders for the export-oriented readymade garment sector.

Stakeholders say local manufacturers have been receiving substantial work orders, particularly since July last year, partially because of China’s power shortage, its trade conflict with the West, Myanmar’s political crisis and Vietnam’s Covid-19 situation.

Apparel makers recorded more than 20 per cent rise in export orders in 2021 year-on-year, indicated by the surging number of Utilisation Declaration permissions issued by the Bangladesh Garment Manufacturers and Exporters Association (BGMEA).

Last year, apparel exports rose to $35.81 billion, posting a 30.36 per cent growth compared to the year before ($27.47 billion), according to the Export Promotion Bureau.

Currently, around 1,100 subcontracting apparel factories are in operation, helping to earn foreign currencies and creating jobs for about 5,00,000 people, according to BGMEA. The subcontracting factories have mainly been set up in Dhaka, Savar, Gazipur, Narayanganj and Chattogram.

Around $5 billion worth of apparel items are sourced from subcontracting garment factories, Shahidullah Azim, vice-president of the BGMEA told The Business Post.

How much investment needed?

Setting up a subcontracting knitwear factory with twenty machines requires an investment of around Tk 18 lakh to 20 lakh to build up working capital, rent space, purchase machinery, and pay workers’ salary, insiders told The Business Post. Providing more details, one of the owners of AL Karjan garment Md Jamal said, “I invested around Tk 16 lakh, and hired forty plus workers and employees to run my factory. Besides, my three brothers and I are working here without any salary.”

A number of such owners said they spend major portions of their investment to pay the advance for renting space, purchase machinery and pay salaries. But exporters provide the subcontracting factories with production materials, and also support them in paying wages on time.

Types of subcontracting factories

Industry insiders said that there are four types of subcontracting factories.

Some take orders from other factories to continue production. Some take support from other factories to meet shipment when facing overlapping. In some cases, when a factory starts operation, it takes orders from other factories to run.

Another type of subcontracting factory is set up by RMG officials or new entrepreneurs who buy a few machines and hire workers to start production. Most of these factories do not maintain compliance. They are not even eligible to become BGMEA members.

Before the Rana Plaza collapse, Bangladesh had more than a thousand subcontracting factories that employed around a million workers.

But when Accord and Alliance were formed to ensure workers’ safety in the RMG sector, most subcontracting factories had to shut down. Every factory had to improve the workplace environment, which needed huge investments.

How do they get paid?

Industry insiders said most of the subcontracting factories do have not a letter of credit (LC). They receive orders verbally and get payment by cash or cheque. However, some of the factories maintain paper documents of their business transactions.

Industry insiders claimed that sometimes a factory damages goods, or fail to meet the shipment deadline, causing untoward incidents. They however added that such occurrences are rare.

“We hide the actual shipment deadline from subcontracting factories to avoid missing the schedule,” a provider of subcontracts told the Business Post.

Md Khosru Chowdhury, managing director of Nipa Group, said, “I provide subcontracts to factories that maintain compliance. I believe the subcontract system is profitable for both parties, and it helps create new entrepreneurs.”

Profit margin quite low

On a subcontract module, a factory owner gets only a small portion of the profits. They sometimes even face losses if they fail to estimate the manufacturing cost accurately.

Industry insiders pointed out that such a factory’s profit margin depends on the owners’ bargaining skill, and the skill of their workers.

“Before receiving an order, at first I need to calculate per hour production and earning costs. If I fail to include profit margin while accepting orders, I will have to suffer losses,” one such entrepreneur Atikur Rahman said.

Another subcontracting factory owner claimed that it is very difficult to make a profit above one to three per cent.

Timely payment of wages an issue

Subcontracting factories are dependent on contract providers, and many such establishments fail to pay wages on time maintaining labour laws. From time to time, workers also take to the streets demanding due wages.

On the issue, Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) Executive President Mohammd Hatem said, “It is a big problem. When workers take to the streets, newspapers make headlines, which impacts to our industry.

“Those are not any listed factories, but buyers put pressure on us about such issues.” Nipa Group’s managing director Md Khosru Chowdhury said, “To set up a subcontracting factory, a factory owner must keep enough funds in hand to cover salaries for a minimum three months. Otherwise, he is in the danger zone.”

Subcontracting factory owners, however, said factories listed in the BGMEA and BKMEA also suffer from the same issue, so it is not a big deal.

“We are doing subcontract work because of we are not eligible for opening LCs or receiving orders directly. But we have invested all our assets in this business, so we make a serious effort to maintain our reputation,” an entrepreneur said on condition of anonymity.

Need strong monitoring

Industry insiders said that hundreds of subcontracting factories that mushroomed recently do not maintain government rules and regulations like fire and workers’ safety.

Some do not pay wages timely, forcing workers to hit the streets that blemish the whole sector.

“There are hundreds of factories who do not have fire licenses and are not listed with any association. Even the government is not monitoring them. They are a little bit threat to our sector and country,” Mohammad Hatem, executive president of BKMEA, told The Business Post.

BGMEA’s Faruque said they felicitated subcontracting factories that follow compliance rules and buyers know about them.

“Every factory should maintain the rules,” he added.

Md Nasir Uddin Ahmed, Inspector General of the Department of Inspection for Factories and Establishments (DIFE), said they monitored subcontracting factories. “When a factory is set up, our inspectors go there and monitor everything,” he said. “If they find any issue, they give recommendations and a specific period to address them.”

Non-compliant subcontracting factory owners said they want to be listed with associations and welcomed government monitoring. But to be listed, BGMEA and BKMEA fixed some criteria, and most of the subcontracting factories are unable to meet them, they claimed.

“For example, I cannot become a BGMEA or BKMEA member since I have 36 machines. But I cannot increase machines (because of fund crunch),” a subcontracting factory owner told The Business Post. 

Another subcontracting factory owner claimed that it was not easy to get clearance from the government, saying, “When DIFE officials visit us, they do not cooperate unless we bribe them.”

DIFE chief Ahmed rejected allegations of non-cooperation and bribery.

“The factory owners can complain to me. We’ll take actions against our inspectors if they are found involved in irregularities,” he said.

BGMEA President Faruque said the government should address the issues and ensure compliance. “If those factories get government clearance, then they will be able to get more work orders directly.”

“Currently, some Asian buyers are interested to submit work orders to Bangladesh and their first choice is small factories. So, it is a big opportunity for them,” he said.

Not all factories mainiating compliance

Many former RMG officials are setting up subcontracting factories to take advantage of the windfall.

Atikur Rahman, one such entrepreneur, worked as a mid-level manager in the RMG sector for around a decade. In August last year, he quit his job and set up ZEX apparel at Konabari of Gazipur. With 120 sewing machines and 240 workers, the factory is trying to maintain compliance to get direct orders and avoid government punishment.

“In 2014, I tried my luck but the situation was difficult after the Rana Plaza collapse and I lost my investment. But during the Covid-19 recovery period, I saw opportunities to run factories on subcontract basis,” he told The Business Post.

He said he had been getting works from several factories. “The profit is marginal but if I can survive for another six or seven months, I’ll able to get direct orders.” But not all small factories are maintaining compliance. Jahidul Islam (name changed), for example, set up an RMG factory in Gacha, Gazipur, by renting a 2,000 sqft area with 25 sewing machines and 40 workers. Although this factory pays workers on time, it is lagging in compliance issues.

“I don’t have enough money to rent a big space where I can maintain the code. I’ll make sure to follow the rules once I have adequate funds,” he said.

BGMEA President Faruque Hassan told The Business Post that getting lots of work orders after a long time and many new entrepreneurs investing in the apparel sector was encouraging. “Some Asian buyers are showing interest to place orders at such factories which helps them survive,” he said.