Analyzing the backward linkage issue in rmg sector in bangladesh

Analyzing The Backward Linkage Issue In RMG Sector In Bangladesh

EXECUTIVE SUMARY Over the decades, RMG sector is the prime source of export earnings as well as the prime source of industrial employment in Bangladesh. This sector basically introduces Bangladesh positively over its boundary.

However from its inception, RMG sector still faces threats as well as some weaknesses too. Threats are basically from external sources like post MFA challenges, but weaknesses, like lack of backward linkage industry, also fuels the threats to be more devastating for the industry.

This report basically focuses on the importance of establishing backward linkage industry. By nature of business, RMG sector basically integrating commodities of some other industries like fabrics, interlinings, accessories etc. So to achieve strong growth, this sector requires sufficient internal supply of its raw materials. Backward linkage industry can do the job.

This was and still now the biggest challenge for Bangladesh in this sector. Since we did not have any strong industrial exposure in our economy, RMG sector could not get sufficient support from backward linkage industry. Most of time, we need to depend upon external sources i.e. import for its raw materials.

In such cases, though we earned substantial export earnings through this sector, but value addition to the economy was not satisfactory. Most of the earnings went back to over the boundary and more over we are loosing confidence over our production capacity in terms of timely shipment, price etc.

So we need deeply establishment of backward linkage industry which support RMG sector to sustain its growth pace as well as increase in value addition process to our export earnings. This report tries to understand the trend of RMG sector and how backward linkage can help to boost up RMG’s performance and finally explore the opportunities of setting up backward linkage industries in Bangladesh.

INTRODUCTION

Bangladesh is the fifth largest garment exporter to the European Union and the US. In the past two decades Bangladesh has emerged as a very successful manufacturer and exporter of quality ready made garments (RMG). Thanks to its competitive prices and access to US market with quota facilities, the volume of garment exports has been growing spectacularly, from one million US dollar in 1970, $31.57m in 1983 to $4.91bn in 2002-03 and $10.69 bn in 2007-08.

RMG accounts for more than 75% of Bangladeshi export earnings. Among some 24 major apparel exporting countries, none has grown faster than Bangladesh since 1980s; and since 1990, no other major Asian exporter of clothing has achieved higher growth rates. Bangladesh is the fifth largest garment exporter to the European Union and among the top ten apparel suppliers to the US. European Union (EU) countries were the major importers of readymade garments in 2007-08 worth $12.88bn, followed by the US $3.22bn, Canada $ 467 m, Japan $28.03m and Australia $21.92 m.

Some 90 countries import apparels from Bangladesh: the US is the single largest importer followed

by EU countries. Bangladesh is trying to expand its market in countries like Australia, Canada, Japan, Norway, New Zealand etc., which allow duty free imports.

However, a total phasing out of the Multi-Fiber Arrangement (MFA) from 1 January, 2005, which is designed to facilitate fire trade in textiles and clothing, will throw a formidable challenge to the least developed countries (LDCs). Preferential market access to the US market is vital for the access to the US market is vital for the survival of the industry. According to many international studies Bangladesh's RMG exports would decline.

COMPARATIVE STATEMENT ON EXPORT OF RMG AND TOTAL EXPORT

YEAR 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 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

TOTAL EXPORT EXPORT OF RMGBANGLADESH (IN MILLION US$) (IN MILLION US$) 31.57 811.00 116.2 934.43 131.48 819.21 298.67 1076.61 433.92 1231.2 471.09 1291.56 624.16 1923.70 866.82 1717.55 1182.57 1993.90 1445.02 2382.89 1555.79 2533.90 2228.35 3472.56 2547.13 3882.42 3001.25 4418.28 3781.94 5161.20 4019.98 5312.86 4349.41 5752.20 4859.83 6467.30 4583.75 5986.09 4912.09 6548.44 5686.09 7602.99 6417.67 8654.52 7900.80 10526.16

OF % OF RMG'S TO TOTAL EXPORT 3.89 12.44 16.05 27.74 35.24 36.47 32.45 50.47 59.31 60.64 61.40 64.17 65.61 67.93 73.28 75.67 75.61 75.14 76.57 75.01 74.79 74.15 75.06

2006-2007(Dec) 4730.36

6220.61

76.04

Data: BGMEA ANNUAL REPORT, 2009, page 187.

Export Promotion Bureau, Bangladesh Export performance for the Month of July-August 2010-2011 Mn. US $

1 All products

Export Performan % Change ce for of export July-Aug. performan 2009ce over 2010 export target

4 3117.2 5

5 3615.

72

6 15.99

7 2807.15

% Change of export performan ce July-Aug. 2010-11 Over July-Aug. 2009-10 8 28.80

242.00

41.14

34.46

-16.24

28.72

19.99

196.34

33.38 1.54

28.99

-13.15 11.04

23.73 1.22

22.17 40.16

-2.84 31.09

3.77 1203.95

-0.27 32.00

17.09

1012.45

30.05

-10.42

53.18

61.38

Export Target for 20102011

Strategi c Target for JulyAug. 2010 -11

2 16204.6 5

3 18500.

00

Specialized Textiles 185.97 (Chapter 58-60) a) Terry Towel (58) 157.07 b) Special Woven Fabric 8.22 (59) c) Knitted Fabrics (60) 20.68 Knitwear (Chapter 61) 6483.29 Woven Garments (Chapter 62) Home Textile (Chapter 63 Excluding 6305)

Expor t Perfor mance JulyAug. 201011

Export perform ance for JulyJune.

20092010

6013.43

9.04 22.75 7131.62 6614.77

402.49 563.50

3.87 1212.3 8 1124.5 1 95.80

1.71 3.76 1589.2 6 1316.6 7 85.82

Data : Export Promotion Bureau, Bangladesh, ministry of commerce, web info.

Export performance for the Month of July-August 2009-2010

Mn. US $

Export performa nce for 20082009

Export target for 20092010

Strategic export target for JulyAug. 20092010

Export performan ce for July-Aug 20092010

% Change of export performa nce over export target

Export perform ance for JulyAug 2008-09

2 15565.19

3 17600.00

4 3014.88

5 2808.1

6 -6.86

7 2903.78

% Change of export performance July-Aug 2009-2010 Over July-Aug 2008-09 8 -3.29

Knitwear

6429.26

7297.21

1250.01

1204.3

-3.66

1210.14

-0.48

Woven garments

5918.51

6687.92

1145.64

1011.8

-11.68

1033.2

-2.06

49.03 13.68

-18.49 -9.04

55.18 13.98

-11.15 -2.15

1 All products

5 1 7 Home textile Textile fabrics

313.51 76.32

351.13 87.77

60.15 15.04

Data : Export Promotion Bureau, Bangladesh, Ministry of commerce, web info.

The sensitivity of RMG exports to external factors became obvious after 11 September, 2001. Export to the US suffered a major setback following the terrorist attacks on the world trade centre, leading to global recession and phasing out of quota facilities there. It declined by 2.34% in 2003 and by 13.04% in the first five months of 2004.

Responding to the fears and concerns of Bangladesh Garments Manufacturers and Exporters Association (BGMEA), the government is preparing a guideline for a fund to protect the country's textile and garments industries after the phase-out MFA and current world recession. BGMEA represents over 4700 apparel manufacturing companies.

Its primary function is to protect the interest of the sector and promote trade negotiations in the international market, global trade bodies like the World Trade Organization (WTO), concerned UN agencies like International Labor Organization (ILO), and the United Nations Conference on Trade and Development (UNCTAD) etc.

The importance of the RMG sector cannot be overemphasized as it is 'the engine of growth' for Bangladesh in so many ways, including development of society as a hole. A huge local consumer market has emerged as a result of increase in the buying capacity of the RMG work force. Others to benefit from the ever expanding garment sector are banking, insurance, packaging, transport and allied industries.

The Textile and Clothing Sector in Bangladesh, predominantly consisting of the Readymade Garments (RMG) industries is currently the largest contributor to the national export earnings.

Starting in the late seventies as a minor non-traditional sector with a negligible export base, the sector has grown over the years in geometric progression and presently accounts for about 75% of the total exports of the country. In FY 2007 the sector earned US$ 14.11 billion in which the contribution of RMG alone in national export was 75.83 %.

The sector consisting of 4740 enterprises has a contribution of 10% to the GDP of the country. The sector represents 24% of all manufacturing production and employs 2.5 million people including 150,000 in backward linkage industries.

In the initial years the RMG sector was heavily dependent upon imports. Imports were as much as 80% of the export value.

In addition to yarn & fabrics, all other accessories like interlining, labels, buttons and sewing thread, some packaging materials like neck boards, backboards, plastic collar stays, tissue papers, hangtags, pins and clips, hangers and poly bags, zippers and draw strings and export cartons used to be imported.

Over the last decade, a large number of accessories industries have come up to fill in this gap to the extent of about 70% of the total requirement of the industry. While the country has more or less achieved self-reliance in supply of accessories, the progress is less noticeable in the fabric manufacturing, especially the woven fabric.

OBJECTIVES OF THE STUDIES BACKWARD LINKAGES DEFINITIONS: The relationship between a firm or industry and the suppliers of its inputs, or raw materials. An increase in the output of the firm or industry is transmitted backward, yielding an increase in the demand for inputs.

BROAD OBJECTIVE:  To know and identify the importance of establishing Backward Linkage of RMG Sector in Bangladesh.  To depict a picture on backword linkage SPECIFIC OBJECTIVES: • To know about backword linkage ● To identify the growth possibility of RMG Sector in Bangladesh. ● To find out the factors influencing towards the growth of this sector. ● To identify the demand and supply status of the supplies to produce the finished Ready Made Garments. ● To find out the weaknesses of this sector in Bangladesh. ● To identify the possible threats- Bangladesh going to face in this sector. ● To find out the scope of potential development to combat the weaknesses and threats.

OVERVIEW OF BACKWORD LINKAGE INDUSTRIES

RMG INDUSTRIES

KNIT/WOVEN/SWEATER

BONDEDWARE HOUSE

EXPORT INDUSTRY

LOCAL YARN MANUFACTURAR

IMPORT YARN

GARMENTS GARMENTS TRANSPORTATION TEXTILE GARMENTS POWER MACHINE CHEMICALS MACHINE ACCESSORIES

ELECTRICITY/GAS/FUEL EMBRPIDERY/SWEING/ C&F/SHIPPING PRINT/WASH/DYEING CIRCULAR AGENT KNIT/SWEATER FLAT CHEMICALS LOCK ETC KNIT

ALL LOCAL & FOREIGN ACCESSORIES

Questionnaire survey of the clients minimizing interruptions in their backward linkage has also been conducted. Primary data were mostly derived from the discussion with the employees & through surveys on clients. Primary data is under consideration in the following manner: •

Face to face conversation with the employees.

•

By interviewing Clients at their own office.

•

By Tele-conversation.

SECONDARY DATA SOURCES: Most of the data has been collected from the secondary sources.

The data has been collected from the publications of BGMEA, NBR, and CPD and from Web Sites.

DATA ANALYSIS AND PROCESSING: In order to analyze the data graphical presentation has been followed. In order to process the graphs MS Excel has been used.

PROPOSITIONS & HYPOTHESIS: 1.

2.

3.

4.

The industry growth is significant The backward linkage is very poor The Bonded Wear Housing Facility is a threat to establishment of backward linkage industry Lead time to import the supplies is an opportunity for the backward linage industry

HYPOTHESIS 1. The industry growth is positively correlated with the strong Backward Linkage 2. The backward linkage establishment is positively correlated with the infrastructure of the country and the government rules and policies

3. Increase of Bonded Wear Housing Facility is negatively correlated with the growth of Backward linkage 4. Longer Lead time to import the supplies is negatively correlated with the growth of backward linage industry SCOPE OF THE STUDY: The description provided in the background and objective of the project provides the seeds for delineating the scope of the proposed work.

The scope of the study of identifying the establishment of backward linkage of RMG Sector is expected to be limited to those described below. a) Collection compilation and analysis of primary and secondary information. b) Preparation of Inception report incorporating detailed work plan and methodology of the survey. c) Conduct a survey of the population who can successfully give the response about all the related aspects of establishing backward linkage for RMG sector in Bangladesh. d) Undertake processing and analysis of data and information collected. e) Prepare the draft of final report incorporating analysis and recommendation. f) Transmittal of draft report for feedback and comments. g) Finalization of the draft in the light of the feedback. h) Transmittal of the final report.

LIMITATION OF THE STUDY PROJECT: The main limitation of this study was lack of scope of communication with the officials of the garments factory. As telephone interview method was followed sometimes it was very difficult to collect necessary information. As a result all the information related to the research paper from all the garments could not be collected.

ROLE OF SERVICES IN THE READY-MADE GARMENTS (RMG) INDUSTRY OF BANGLADESH Starting in late 1970s as a small non-traditional sector of export, the Ready-made Garment (RMG) Industry has emerged as the largest foreign exchange-earner for Bangladesh. In 1997-98, Bangladesh's total exports were 5161.2 million U.S. dollars.

The RMG share was 55% of total exports and 61% of total manufacturing exports from Bangladesh.

Out of this total RMG-export, 43% went to countries belonging to The European Union (EU) and 40% went to the United States and Canada Currently; Bangladesh enjoys preferential access in these markets. The removal of Multi-Fiber Agreement (MFA) quotas in the year 2004under the Uruguay Round Agreement on Textiles and Clothing (ATC) will result in Bangladesh’s losing its Preferential access in the EU and American markets Consequently, Bangladesh will be compelled to Compete with other low-cost RMG-exporting countries of Asia and elsewhere. So the continuation of Bangladesh's present success in RMG exports will depend on her ability to reduce costs and improve the Quality of output. In the preceding sections, we have seen the crucial role of services in manufacturing production. In this section we examine the role of services in the RMG industry, particularly.

The RMG manufacturers are scattered all over Bangladesh. But those who manufacture RMG for exports only are mainly located in Dhaka and Chittagong. There are about 3,000 RMG manufacturers registered with the Bangladesh Garment Manufacturers' and Exporters' Association (BGMEA). Time and other constraints did not permit us to contact more than 100 RMG manufacturers. But because of general aversion to disclose business information to outsiders, we were able to collect information

only from 80 RMG manufacturers. Again, information from some RMG manufacturers was not comprehensive. So we finally settled for 74 RMG manufacturing units to carry out our analysis. Out of these 74 RMG manufacturing firms,54 are located in Dhaka Zone (Dhaka-Gazipur-Narayangonj) and 20 in Chittagong.

We now proceed to investigate the type of services used by RMG manufacturing firms and their level of adoption, sources of supply and method of securing these services and, finally, estimate the extent of service use in RMG manufacturing and exporting activity.

Table 1: Growth of the industry and Employment

Data : web, http://bgmea.com.bd/home/pages BACKGROUND OF BACKWORD LINKAGE INDUSTRY The major backward linkage is related with Textile Sector. The Textile sector covers both Knitting and interlinings. These are must for the garments manufacturers in Bangladesh. Therefore it is very much essential to take a look into the present condition of the Textile Industry if it is needed to identify the condition of RMG sector in Bangladesh.

Textile Sector in Bangladesh: Textiles have been an extremely important part of Bangladesh's economy for a very long time for a number of reasons. The textile industry is concerned with meeting the demand for clothing, which is a basic necessity of life. It is an industry that is more labor intensive than any other in Bangladesh, and thus plays a critical role in providing employment for people. Currently, the textile industry accounts for 45% of all industrial employment in the country.

However, although the industry is one of the largest in Bangladesh and is still expanding, it faces serious problems, principally because the country does not produce enough of the raw materials necessary, unfavorable trade policies, and inadequate incentives for expansion. As a result, Bangladesh's textile industry relies heavily on imports, and the country does not earn as much foreign exchange from its textile industry as it should.

History of the Textile Industry in Bangladesh: Traditionally, artisans working in small groups, in what are often referred to as cottage industries, produced most of the textile in the sub-continent. There were many such artisans in the area that was to become Bangladesh. In fact, from prehistoric times until the Industrial Revolution in the eighteenth century, East Bengal was self-sufficient in textiles.

Its people produced Muslin, Jamdani, and various cotton and silk fabrics. These were all well regarded even beyond the region as very skilled craftsmen manufactured them.

The material produced by the artisans of Bengal started facing vigorous competition beginning in the eighteenth century after the growth of mechanized textile mills in the English Midlands. This eventually led to a great decline in the number of Bengali workers skilled enough to produce such high quality fabrics. According to popularly held beliefs, as the region’s spinners and weavers meant competition for their emerging textile industry, the British imperialists responded by trying to force the artisans to stop production.

They were said to have sometimes used methods as harsh as cutting off the thumbs of the craftsmen so they would never be able to spin or weave again.

Not only were huge amounts of fabric produced in Bengal, the area was also a prime producer of the indigo plant, from which the indigo dye was extracted. This natural dye was widely used before the advent of chemical dyes in the nineteenth century. In fact, the rich blue color provided by the dye is still sometimes used for dyeing denim. Bengali dye masters had special recipes for producing the desired colors, just as chefs have recipes for achieving desired flavors. However, as was the case with the traditional handloom fabrics, indigo dye production also gradually declined.

The problems of the indigo industry were principally a result of two factors. First, because indigo was a cash crop, the British administrators in this part of the empire forced farmers to grow the indigo

plant in order to increase the administrators’ profits. Unfortunately, the indigo plant is nitrogen depleting and thus exhausted the soil very quickly. The farmers received little real income from the crop since the British kept most of the profits, and in times of economic hardship, such as when the indigo price fell, they were unable to survive by eating their produce, unlike farmers who grew staples such as rice or wheat.

Another reason for indigo’s gradual disappearance as a dyestuff was the unpredictable nature of the plant. Sometimes one farmer would have a good harvest, while his neighbor would not be able to produce anything. The combination of poor yields and the unpredictability of the crop gradually led farmers to cease growing the plant and moving on to other, more profitable crops.

The fabric produced and dyed in British factories flooded the Indian markets. In time, its importation became one of the points of contention in the growing Independence Movement of the Sub-Continent.

As separation from Great Britain was becoming a foreseeable reality and local production again profitable, the textile industry was reorganized as new methods of production were adopted. Water, a necessity for the chemical processes involved in processing the modern dyes now used, was abundant in East Bengal. This contributed to the establishment of mechanized textile factories in the area.

However, after 1947 and the partition of East and West Pakistan from India, most of the capital and resources of Pakistan came under the control of West Pakistanis. The textile industry thus stagnated in East Pakistan as momentum for development shifted from the eastern part of the country to the west.

The west also grew more cotton than the east, which was used as a plea for developing the industry in the west instead of in the east. The majority of all industries in the east were also owned by West Pakistani industrialists.

When Bangladesh gained its independence from Pakistan in 1971, the new government nationalized the textile industry, as it did with many other businesses in which West Pakistanis had been the principal owners. Although there were some Bangladeshi industrialists, they did not form a large or politically powerful group and thus had to surrender control of their factories to the government as well. All of the country’s textile factories were then nationalized and organized under the Bangladesh Textile Mills Corporation, or BTMC. The industry remained under the control of the BTMC until 1982-83. Bureaucratic obstacles combined with other problems such as low productivity in the labor force, lack of planning, indiscipline, lack of accountability, and poor machine maintenance and operation resulted in a lack of profits.

The government thus gradually denationalized the production of textiles. Factories were privatized, beginning with the dyeing and weaving units. Since that time, much of the industry has been privatized through auctions and other means.

The textile industry has been the catalyst for industrialization in numerous countries. For example, in England, the Industrial Revolution with the new development in coal and steel led to the establishment of a mass textile industry, which catalyzed the industrialization process in the eighteenth century. Similarly textiles played a major role in the industrialization of Japan, South Korea, Taiwan, Hong Kong, and Indonesia. The same has been true to a certain degree in this country.

After privatization, the quality of the fabrics produced improved significantly, leading to a great increase in the demand for Bangladeshi textiles in both the international market, as well as the export oriented garment industry of Bangladesh. This launched the industry into a period of rapid growth that is continuing at present.

THE PRODUCTION OF TEXTILES

The textile industry has seen the application of many new technologies over the centuries. However, the basic steps have remained the same. What is known as the textile industry includes all the steps necessary to transform fiber into fabric that is ready for stitching, sold either in the market or used in the RMG, or ready made garment, sector. These basic steps are spinning, weaving or knitting, and a combination of dyeing, printing and finishing.

SPINNING: The principal materials used in the spinning sub-sector are raw cotton and synthetic fibers such as viscose and polyester staple fibers. None of these materials, however, are produced in Bangladesh on a large enough scale to supply a significant part of the demand. The reasons for this are complex.

Cotton needs to be grown in fields, and then ginned, which is the removal of seeds from cotton. At present, the cotton produced in Bangladesh is of an acceptable standard.

However, the increased cultivation of cotton in this country is not feasible because the crop requires large amounts of land for a substantial yield. In overcrowded Bangladesh, farmers choose to grow rice over cotton. Locally grown cotton currently meets only 4-5% of the total requirement.

The remaining 95% of the cotton needed must be imported at very high prices. The production of the synthetic/man-made fibers used in the textile industry requires fairly advanced technology and investment.

Once the raw materials have been obtained, spinning is the first step in textile production. This is the process by which natural or synthetic fibers are cleaned and twisted into yarn.

The raw materials first move through the blow room where all impurities are removed, for natural fibers only and the fibers are rolled into laps. The laps then go through a carding machine, where they are cleaned further and formed into slivers, thick and loosely spun yarn. In order to produce combed yarn, the fibers need to undergo further processing in the comber machine where the short strands are removed, and the remained processed into sliver.

The sliver is then fed to the draw frame, and speed/roving frames where they are twisted to form what are called roving. The roving is finally placed in spinning frames where further twisting and drafting take place, and yarn is produced. The yarn is then spun around a bobbin or cone, using autocorners or cone winding/reeling machines, packed and marketed.

FABRIC FORMING: WEAVING AND KNITTING: Next the yarn is made into gray, the early stage of fabric processed using looms or knitting machines.

The name indicates that the material has no color at this point. These are fairly simple procedures and can even be done by hand, as they were for many centuries in cottage industries. Weaving produces cloth that has a rigid structure, such as the material used for making trousers, shirts, bed sheets, etc.

Prior to weaving the yarn is wrapped around beams and dipped in a size, an adhesive, which when dries gives the yarn a rigid and uniform structure. This yarn is then fed into the looms and called the warp. A thread of yarn, called the weft, passes between alternating warp yarn with the aid of a shuttle, air jet, or rapiers.

Knitting, however, can also be used to make gray. Instead of looms, circular knitting machines are used for knitting. These machines use needles fed with yarn those move in an up and down motion and knit interlocking arrangements of yarn. Knit fabric is much softer and more flexible than that

produced on looms, and is commonly used for producing articles of casual wear such as tee shirts, and under garments.

DYEING, PRINTING, AND FINISHING: The gray then undergoes the three steps of dyeing, printing, and finishing. I had the opportunity to learn about these processes in great depth on my various visits to textile mills. After the gray is inspected, it goes through a process called the batch method when it undergoes scouring, bleaching, and dyeing. Scouring is the treatment of gray in chemical solutions in order to remove the size, natural fats, waxes, proteins, and other impurities, and to make the fabric hydrophilic, which means it no longer repels water.

The bleaching process is next. It is essential in giving the cloth a clean white color. It is done using one of two different methods: bleaching with dilute hypo-chloride solution at room temperature, or by using hydrogen peroxide solution at elevated temperatures, usually 80 to 90 degrees Celsius. The latter method usually results in better and longer lasting whiteness, however is the more expensive of the two methods.

The scoured cloth is then dyed, and then printed on. Printing is done using perforated rollers that allows certain chemicals and colors to diffuse through the holes. After the printing has been completed, the fabric is washed, soaked in chemicals under elevated temperatures for color fixation, and then washed again.

Knitted fabrics are loaded on to a jigger machine, which performs the processes of scouring, bleaching, or dyeing. The fabric then moves on to a machine called either de-watering or de-twisting machine, which removes water from the fabric. The fabric then goes through a shrinkage tensionless drier which is designed for drying, shrinking, and relaxing the knitted fabrics.

The final process before the fabric is ready for stitching is compacting. During this step the fabric is steamed and ironed between roller assemblies. The fabric is then folded and is ready for marketing.

The Current Position of the Textile Industry in Bangladesh Today, the textile industry of Bangladesh can be divided into the three main categories: the public sector, handloom sector, and the organized private sector. Each of these sectors has its advantages and disadvantages. Currently, the organized private sector dominates, and is also expanding at the fastest rate.

PRODUCTION ACCOUNTING

PLANNING,

INPUT

PROCUREMENT,

MANAGEMENT

AND

After receiving orders from the customers, the RMG manufacturing firms carry out production planning. All firms (100%) perform production planning without any formal outside help. On the other hand, input procurement is carried out in almost 87% of the cases (64 out of 74) by the firms themselves if and when they are the direct suppliers to the foreign buyers. In 13% of the cases foreign buyers supply inputs to the RMG manufacturing firms. But RMG manufacturing firms that supply to the domestic RMG firms (for export) receive inputs from the latter in 100% of the cases.

That is, in such cases, input procurement is done 100%outside the firm. Management control and accounting are performed by almost all of the firms, and these are carried out internally except in the case of a few large and joint-venture firms where the services of external audit firms are used. Quality control is performed by all the firms, and it is done mostly internally (82%).

BANKING AND INSURANCE SERVICE

Almost all firms (98%) turn to banks for working capital against their sales orders from abroad and about 57% (42 out of 74) borrowed from banks to purchase their machines and equipment as well.

Bank loans are used invariably by all firms to buy inputs and to meet a certain percentage of running expenditure, except for a couple of partially (joint- venture) and fully foreign-owned firms. All firms use banking services in varying degree. All firms have their machines and plants insured and, additionally, all input-importers (87%) and 15%of the exporters get their imports/exports also insured.

SHIPPING SERVICE AND SHIPPING AGENT & PORT-USE Shipping service is widely used by RMG manufacturers. Shipping service is required for procuring inputs and exporting outputs. Sometimes air-freight service is also used. RMG manufacturers have to hire services of Clearing & Forwarding Agents for clearing inputs from the port/custom and loading the finished goods onto ships for export. Port-charge is a normal expenditure by all RMG manufacturers for using the port-facilities for the purpose of import and export.

TRANSPORT AND COMMUNICATION Within the country, to get the imported inputs from the ports to the plant-premise and to carry the finished goods to the ports, wheel transportation and rail transportation are the chief transport modes.

Services are also widely used by RMG manufacturing and exporting firms for moving cargo. Wheel transport service is procured by almost all firms (about 98%) from independent transport companies and, only in a few cases, from sister companies (belonging to the same parent organization). Railway service is used by 10% (8 out of74) of the firms. Of course, when a particular firm operates as a subcontractor to the exporting firm, the service-charges for wheel transport/railway transport are paid by the latter. All RMG manufacturing firms use telephone, telex, fax and courier service extensively.

All firms own telephones, and about 62% (45 out of 74) firms own telex/fax machines. Most of the firms (about 99%) use the Internet also. Of course, for maintenance of their communication equipment, all firms use external service.

ELECTRICITY All firms use electricity supplied by the Government-owned Power Development Board (PDB) Disruption in power supply hampers production in the RMG manufacturing firms. To overcome such Disruptions, about 70% firms (50 out of 74) own and use small power generators.

LEGAL SERVICE About 85% of the firms (61 out of 74) use legal service from professional legal consultants. Most medium and large firms have one or more legal consultants employed on a permanent basis and hire others(both local and foreign as per requirement) to look after the legal matters concerning the firms.

SALES AND DISTRIBUTION Marketing services, in the form of securing orders for output, are performed by the firm’s themselves except for those who work as subcontractors to the exporting firm In Bangladesh, RMG manufacturers who export to foreign countries do not normally take the service of electronic or print media to advertise their products. They do, however, organize and participate in trade fairs to display their products to and secure orders from foreign distributors. Almost all firms (99% per cent) get their products distributed in foreign markets by foreign distributors. Only one joint-venture firm in the sample was found to secure distribution of its product by its foreign-owner.

BACKWARD LINKAGE INDUSTRY IN DIFFERENT SECTOR BACKWORD LINKAGE INDUSTRY IN PUBLIC SECTOR The public sector is that portion of the industry controlled by organizations that are part of the government. The factories in the public sector enjoy certain privileges such as government funding.

However, in Bangladesh, factories in the public sector are not well supervised.

There are frequent changes in officers, and many of these officials do not have a personal interest in the factory for which they are responsible. In addition, the equipment in this sector is not well maintained, as much of the money allocated for this purpose is not spent as planned, but is wasted through corruption and poor accounting.

BACKWORD LINKAGE IN HANDLOOM SECTOR The rural group of textile producers includes operators of handlooms and a number of organizations which employ rural women, such as BRAC, or the Bangladesh Rural Advancement Committee. The Handloom industry provides employment for a large segment of the population of Bangladesh.

The industry also supplies a large portion of the fabric required by the local market. Factories in this sector are usually well looked after by the owners and are quite productive, considering the equipment available. However, the inferiority of their machinery, mostly due to their narrow width, means that the fabric production is slow, and usually falls short of the quality needed for export.

BACKWORD LINKAGE INDUSTRY IN PRIVATE SECTOR The most productive of the three categories is the private sector. This, as the term suggests, is made up of those factories owned by companies or entrepreneurs. Since the owners of such factories are directly affected by their performance, they take an active part in planning, decision making, and management. Most of these factories also have machinery that is superior to those in the two other sectors because the owners are well aware of the connection between their equipment and their profits.

DEMAND SUPPLY GAP The phenomenal expansion of the RMG industry in Bangladesh has led to a large demand-supply gap as only 16% of the total demand for yarn is met locally in Bangladesh.

Table 1: Commodity, Cotton, Import Trade Matrix Import Trade Matrix Country: 2008 Units: Metric tons Commodity: 2008/2009 Time period: Aug-Jul Imports for 2008 2009 U.S. 94000 U.S. 120000 Others Others Uzbekistan 352000 Uzbekistan 400000 Africa 59000 Africa 50000 India 139000 India 150000 Pakistan 41500 Pakistan 40000 Other CIS 40000 Other CIS 50000 Total for Others

631500

690000

Others not listed 17800 40000 Grand Total 743300 850000 Data: Global Agricultural information network, Gain Report N. BG1002, Page-8 Table 2: Commodity, Cotton, Yarn, Import Trade Matrix Import Trade Matrix Country: 2008 Units: Metric tons Commodity: Cotton Yarn Time period: Jan-Dec Imports for 2008 2009 U.S. 0 U.S. 0 Others Others India 162000 India 172000 Pakistan 8000 Pakistan 5000 Indonesia 4000 Thailand 5000 Thailand 10000 Taiwan 8000 Taiwan 6000 China 20000 China 25000 Total for Others 215000 210000 Others not listed 25000 20000 Grand Total 240000 230000 Data: Global Agricultural information network, Gain Report N. BG1002, Page-8 All sectors of the textile industry face many of the same challenges. These problems include lack of power, obsolete technology, low capacity utilization, lack of machinery maintenance, a workforce that is not adequately trained, problems with labor unrest and militancy, political unrest causing disruption such as hartals, and a lack of working capital.

The problems with electricity were evident to me on my visit to the Rahim Textile Mills; I was told that it is more efficient to power the factory continuously by a generator, instead of letting production be hampered by power failures. In addition, each of the sub-sectors faces various other problems.

SUTUATION OF BACKWARD LINKAGE INDUSTRIES BACKWORD LINKAGE INDUSTRY IN THE SPINNING SUB-SECTOR Problems related to spinning have an extremely negative impact on the textile industry. The production capacity of the spinning sub-sector is estimated at approximately 183 million kg per year.

However, only 125.16 kg, or 67.3% was produced in 1997-98.

One of the main causes of this under production in the spinning sub-sector is the fact that approximately 38% of the spinning mills in the country are more than twenty-five years old and therefore are not able to produce as much yarn as their initial capacity.

The principal reason behind the machinery being so outdated and poorly maintained is the high import duty on textile machinery and their spare parts.

Many have not been maintained or repaired as they should have been because in addition to the high cost of the spare parts, there is a shortage of technicians in this field, resulting in both very expensive and sub-standard repairs.

Other reasons for the low production figures include frequent power failures, a shortage of raw materials, a high import duty on raw materials used for local consumption, and a high percentage of wastage.

The labor productivity in the spinning sub-sector is also lower than that in competing countries. The output of labor in the industry is about 0.65 kg per man-hour.

A recent World Bank survey indicated that the number of spindles installed in Bangladeshi spinning mills could produce twice as much yarn while using only 10% of the labor force. Obviously, obsolete machinery is having an extremely negative impact on Bangladesh's textile industry.

BACKWORD LINKAGE INDUSTRY IN THE WEAVING SUB-SECTOR The shortage in supply from the spinning sub-sector also has a negative impact on the amount of gray produced. The unmet demand for yarn is filled by importing 3.15 billion meters of gray annually. In order to import gray, the subsequent sectors have to invest more in transportation, import taxes, etc., resulting in a more expensive end product.

The weaving sub-sector is plagued by a lack of organization and coordination. There are many smallscale manufacturers dispersed all over the country, which results in replication and a lack of specialization. Instead of working in organized groups, many of the small producers try to do everything on their own, leading to an end product of inferior quality.

THE HANDLOOM SUB-SECTOR: The handloom industry, traditionally an important part of the textile industry in Bangladesh, is still responsible for a very high percentage of the nation's economy. It is the second largest source of rural employment after agriculture. Even without being dependent on electricity, there are numerous problems faced by the handloom industry.

Many of the weavers cannot work steadily due to the irregular supply of the yarn, dyes, and chemicals they require. The primary reason for this is that many of these producers are located in places with poor access to transportation. Most of these weavers obtain their raw materials from brokers at their local levels.

These brokers gather money from many small scale manufacturers and travel to the urban centers to purchase the required materials, which they then take back to the weavers. Unfortunately, not all of these brokers are very experienced and some are dishonest. Those in the handloom industry are very vulnerable; even a minor problem such as a heavy rainfall might prevent them from obtaining their raw materials or selling their finished product.

Most export oriented garment factories reject a large quantity of the gray produced by the rural handlooms in Bangladesh. When I examined fabrics of similar type and patterns, one of which was produced using handlooms, and the other on power looms, the superiority in uniformity and quality of the cloth produced using the power looms was obvious. In addition, handlooms also have a narrower width than power looms, and usually cannot produce fast enough to meet the deadlines set by export oriented customers.

KNITTING/HOSIERY:

The hosiery industry produces different types of products such as undergarments, socks, stockings, and other soft apparel. These factories were originally designed for the local market, but recent improvements in quality have propelled them to enter the export market and knitting has become another rapidly growing textile sub-sector.

The Knitting and Hosiery sub-sector is faced with the lack of modern facilities needed for producing quality fabric.

There is also a shortage of raw materials in the sub-sector. However, the factor that has the most negative impact on the industry is the lack of working capital. Even though the sub-sector has to overcome some obstacles, it has been extremely successful recently. Currently the demand for knit gray can be met locally. The quality of the local knit gray is also competitive as most of the knitting units have been installed recently and the machinery is not obsolete.

DYEING, PRINTING, AND FINISHING: Dyeing, printing, and finishing, the final steps in the textile industry, are also the most complicated processes. It is the quality of this work that determines the appearance of the fabric and thus its marketability. In order to be competitive in the future, this sub-sector of the textile industry will need to expand at the same rate as the weaving sub-sector, in order to make the country self-sufficient in gray production.

The dyeing, printing, and finishing sub-sector has improved dramatically over the last five years.

However, due to a lack of modern equipment and facilities, the majority of dyeing, printing, and finishing units are still unable to meet the standard of quality demanded by the export-oriented RMG industries, or the export market.

Those that are producing fabric suitable for export are heavily dependent on imported gray. As is the case with most imported goods, they face a number of restrictions, such as import taxes, transportation, and various others. However, the successful expansion of the knitting sub-sector has made the country self-sufficient in all knit gray.

BACHWORD LINKAGE OF RMG INDUSTRY GROWTH: The RMG industry can then cut and stitch the finished product into apparel, which is then marketed.

In 1978 the RMG industry was established in Bangladesh with nine enterprises and has grown at a blistering pace since, as indicated in Chart 1. This phenomenal growth is due largely to the simple level of technology required in the industry.

The machinery is relatively inexpensive and easily available. In addition, garment producers can operate in smaller premises than those required by most of the processes in the textile industry. On top of this, Bangladesh has an abundant supply of cheap labor consisting mostly of women for whom this is one of the most suitable forms of employment.

These factors, as well as incentives such as liberal trade policies, low tariffs on imported machinery, and bonded warehouse facilities, which allow the importation of raw materials to be processed for export have done much to facilitate the growth of the garment industry. However, probably the most important factor in this growth is the benefit of reserved markets that Bangladesh enjoys under the Multi Fiber Arrangements, or MFA. The Textile exporting nations in the world fall under the trading conditions determined by the MFA, which is included in the General Agreement for Tariff and Taxation, or GATT. According to the MFA, developed nations are required to guarantee the import of a certain amount of their textile needs

from developing nations. For example, the United States may have assigned the production of a certain amount of textiles to Bangladesh.

This would mean that countries such as Bangladesh are assured a market for a specified number of yards of textiles each year. This agreement served to limit the dominance of the textile industries in the more developed world by limiting their share of the global market.

In addition, Bangladesh's garment exporters enjoy the privilege of quota-free entry into the European Union, or EU, whereas their major competitors, such as China, India, Indonesia, Pakistan, Sri Lanka, and Thailand, are subjected to the restrictions of an assigned quota. As a result Bangladesh is able to export everything that it produces, while its more developed competitors are limited to specific amounts assigned through quotas.

The RMG sector as a whole grew from US$ 867 million in 1989-90 to US$ 5.7 billion in 2003-2004; the knit sub-sector grew at a faster rate than the rest of the sub-sectors.

During the period under review, the share of knit sub-sector grew from 15.14% of the total RMG export to 38%, whereas that of the woven sub-sector fell from 84.86% to 62%. The predominant reason for the faster growth of the Knit sub-sector is the extent of backward linkage that this subsector could achieve.

A large number of composite knit garment manufacturers have emerged during this period that produce their own fabric, have their own dye houses and thus can compete very effectively in price and delivery lead time. It is estimated that currently about 70% of the knit fabric requirement is met from local production. Despite investment constraints, usage of local woven fabric also increased to about 20% in 2000 from about 5% in 1994.

Data : web, http://bgmea.com.bd/home/pages/reports

Grow th Rate of Readym ade Garment Factory of Bangladesh 4000 3500

The Growth of RMG Sector Bangladesh-AT A GLANCE

2500 2000 1500 1000 500

Year

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

1995-96

1994-95

1993-94

0 1992-93

Number

3000

of

Data : web, http://bgmea.com.bd/home/pages/reports

The graphical representation shows that the number of Ready Made Garments manufacturing unit has increased steadily in the last couple of years. This ultimately shows that the industry is a healthy one and investment for establishing backward linkage is required. It can be found from the graph that the trend of growth of export is upward, which implies that Bangladesh is earning a huge amount of foreign currencies exporting the RMG.

Growth RMG Export of Bangladesh

6000 5000 4000 3000 2000

Year

Source: BGMEA, Bangladesh.

Export Sector Performance of Bangladesh (2003-04) Jute Goods 4%

Leather 9%

Others 5%

Chemical Prod.

1% Raw Jute 1%

Apparel 77% Frozen Food 3%

Data: BGMEA, Bangladesh.

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

1995-96

1994-95

1993-94

1992-93

0

1991-92

1000 1990-91

In Million US $

(1990-1991 to 2003-04)

The linkage points in the downward supply chain of the export oriented RMG industry.

For the purpose of this study the input and service requirement of Bangladesh export-Oriented RMG industry from the downward supply chain needs to be analyzed at inter-RMG & downward supply chains and intra-downward supply linkages.

This needs examining the existing structure of the supply chain behind Bangladesh export-oriented RMG industries.

The Structure of the Downward Supply Chain of RMG Prior to analyzing the service requirements of RMG from its downward supply chain i.e., from the backward linkage industry, it would be beneficial to look once again at the basic structure of the export-Oriented RMG manufacturing units in Bangladesh which is divided into following two categories:  WOVEN RMG UNITS Source: EPB

 KNIT & SWEATERS RMG UNITS The knit & Sweaters -RMG could be further sub divided into knitting and knitwear (Sweater/Jumpers/Pullover/``V’’Neck/Cardigen/ and others) manufacturing unit.

Each category requires inputs from following 2 kinds of backward industries. These are:  Primary Textiles  Accessory Industries The accessory industries could be sub-divided into Triming/Accessories and Packaging industries.

Primary textiles include:  Processing Industry  Fabric Forming Industry  Yarn Manufacturing Industry

Processing i.e. dyeing/printing-finishing industry: Dyeing/printing-finishing processes grey fabrics into dyed/printed-finished textiles for ready consumption in the garments; but there is another type of processing industry in linkage namely yarn processing unit which process grey yarn into dyed for use directly in knitwear manufacturing units and also in weaving and in knitting.

Structure of Woven Processing Industry

From value addition point of view, woven processing is most prospective activity of the backward linkage industry. According to recently published reports, there are 300 woven processing units in the country of which 193 units are semi-mechanize having combined capacity of turning some 100 million meter per annum and 107 mechanized processing units capacity of 620 million meter. There are two types of processing unit such as:

Woven: a) Independent Woven Processing Mills: Grey Fabric Woven Processing (Input) (Dyed/printed/bleached/simonized/mercerized)

Finished Fabrics (Output)

b) Integrated Woven processing Mills:

Grey Tarn

Fiber

Weaving

spinning

weaving

Woven Processing

Woven Processing

Finished Fabrics

.

Finished Fabrics

Independent Woven processing mills: These are mostly small and medium dyeing & finishing mills are not attached to spinning mills or weaving house. Most of these are semi-mechanize having order machines. They mostly work on joborder basis and for subcontracting. About 20-30 of them round the year or occasionally work for RMG. Integrated woven processing mills: These are usually large woven processing mills (15-18), associated either with weaving mills or with spinning and weaving mills. A considerable number of these mills have complete range of lasted machinery. The ultimate buyers are the garment companies, dealing directly or through buying house with them.

Availability and Structure of knit processing industry: Knit fabric house are structurally similar to woven, processing units and they are mostly concentrated in Narayanjonj. The units exist as.

Knitting and knit dyeing unit in composite from associated either with knitting or with knitting and knit garments units. These units are usually of large in size and more organized. They (approximately 18-25 units) generally dye own fabric, but also do job orders for other companies.

There are 25-30 independent knit dyeing units. These are small and medium units located mostly at Dhaka-Narayanganj belt, starting from shampur to pagla to fatullah and further. These are mostly unorganized small units and work for knitters or knit RGMs on job order basis. They dye or compact fabrics of the knitters or RGM units.

5.1.3 Fabric forming industry i.e. weaving and knitting industry: Weaving and knitting form fabrics mostly in grey form. ď‚ś Fabric formation through weaving: Bangladesh weaving is categorized into integrated or composite weaving mills and independent weaving mills.

Yarn

Yarn

Weaving independent Weaving

Fiver

Spinning

Fiber

Spinning

Grey or Finished fabrics

Dyeing Weaving

Weaving

Finished fabrics Dyeing

Finished Fabrics

Finished Fabrics.

Backword linkage of Weaving Composite: Integrated/Composite weaving mills: These weaving mills are associated either with spinning or process mills or with both and generally have complete range of machinery including sizing & warping. The ultimate buying are the garment companies, dealing directly or through buying houses to them. These companies (15-20) do not have well organized marketing departments and sales organizations and the marketing and selling in these units are passive and work as per buyer’s instructions. They are generally members of BTMA and BGFFMEGA. Backword linkage of Independent weaving mills: These (in excess of 2000) are predominantly small and medium size weaving mills not attached to spinning mills or fabric processing. Majority of these units are members of BSTMPIA followed by BGFFMEA. Most of these units do not have required back process capacity (mostly lack of sizing and partly lack of warping) and dependent on services provider sizing units for sizing of the warp yarn.

Majority of them supply fabrics for domestic consumption in the export-oriented RGM units.

Processing house carry out the dyeing and finishing for and finishing for these fabrics on jobs-order basis.

Moreover, there are more than 350000 indigenous technology based handloom units scattered throughout the country, which serve mainly the domestic markets. A tiny number of those units in Sirajgonj are supply check fabrics for some RMG units.

On the other hand, some handloom and power loom based silk weaving units in Rajshahi area supply fabrics to some tailoring house the product of which non-formally exported with L/C or so called through. Luggage export. Some of these units supply small size order to some RMG units in cash  KNIT FABRIC FORMATION: It is worthwhile remembering that the Bangladesh knitting is categorized into:   

Independent knitting Mills Composite Knitting Mills Knitwear Mills

Grey Yarn Dyed/Bleached Yearn Grey Yearn For Knit RMG Dyed/Bleach yarn

Knitting

Knitting

Knit-Dyeing

Knitwear Manufacturers

Grey Knit Fabric Finished Knit Fabrics Finished Sweater Fabrics

Finished Sweater/Jumper

There are more than 400 knitting mills, most of which are of small and medium sizes. All these produce knit fabrics for consumption in the export oriented-RMG units. Knit were units are the factories that factories that use finished yearn for production of knit items such as sweater/jumpers.

YARN MANUFACTURING UNITS: These predominantly spin staple fibers (100% cotton, cotton-rayon or cotton-polyester bend, 100% polyester, etc.) into yarn or and a few produce thread from multifilament. AT present there are more than 180 spinning mills in the country of which about 60 better supply yarns for use in the export oriented RGMs. ACCESSORIES UNITS: These in Bangladesh happen to of be different kinds and are producing different products such sewing thread, buttons, zipper, hooks, Level/stickers, elastics, buckram, belco, etc. Depending on articles obligation is product specification all or few of these products are used for furnishing ornamentation and completion of dress requirements.

There are more than 60 units that are more producing kind of trimming items. There are about 20-30 Packaging industry generally produces carton, box, poly bag, backboard, neck board, etc. as per specific order of RMG units. These are used to pack up finished RMG items prior to shipment.

Woven RMG industry procures only 20%, Knit RMG industry procures 70-80%, and Knitwear RMG industry procures some 30% of input requirements from domestic sources

Database of the Ministry of Textiles & Jute (MOT&J) also show almost similar trend. Our recent interaction with BGMEA, BKMEA as well as selected entrepreneurs and suppliers in the relevant fields corroborates the findings on export oriented RMGs’ demand and domestic procurements.

GAP ANALYSIS: DEMAND AND SUPPLY OF GOODS PRODUCED BY BACKWARD LINKAGE INDUSTRIES Demand of Finished Fabric for the Total RMG Export (2004-05) Export Oriented Woven RMG Export Oriented Knit RMG 1,675 1,648 Source: BGMEA, ANNUAL EXPORT REPORT, 2007

Million Meters Total Finished Fabrics Req. 3,323

Supply of the Finished Fabrics by the Backward Linkage Textiles to Export RMG Industry (2004-05): Million Meters Transacted Supply Transacted Supply Transacted Supply to Embedded Supply (Currently to Woven RMG to Knit RMG Total RMG met through Import) 335 1,318 1,653 1,670 Source: BGMEA, ANNUAL EXPORT REPORT, 2007 According to Export Promotion Bureau (EPB), Bangladesh, the value of RMG export in 2003-04 was US$ 5,700 million; comprising 62% woven RMG and 38% knit Export RMG export by value.

Value of Supply of the Finished Fabrics by the Backward Linkage Textiles to Export RMG Industry and Embedded Supply (2004-05) US$ million Value of Finished Fabrics Value of Finished Fabrics Supplied by the Backward Supplied by the Backward Linkage to Woven RMG Linkage to Knit RMG Industry Industry 556 1,424 Source: BGMEA, ANNUAL EXPORT REPORT, 2007

Value of Finished Fabrics Supplied by the Backward Linkage to Export-oriented RMG Industry 1,980

Assuming Av. Price $1.66/meter for woven finished fabrics & 1.08/meter for knit finished fabrics

Value of Supply of Grey Fabrics by the Backward Linkage Textiles to Processing Industry for Export RMG Industry (2004-05) Grey Fabrics Supplied by Woven Backward Linkage Textiles Volume for RMG (Million mtr) 1,736 million meters of value US$ million 808 352

Knit Value (Million Volume US$) (Million mtr)

Value (Million US$)

447

1,149

Source: BGMEA, ANNUAL EXPORT REPORT, 2007

1,384

Assuming Av. Price $1.27/meter for grey woven fabrics & 0.83/meter for grey knit fabrics Value of Transacted Supply of Yarns by the Backward Linkage Textiles to Woven & Knitting Industry for Export RMG Industry (2004-05) Yarn Supplied by Backward Linkage Textiles for Woven RMG 299 million Kg of value US$ million 808

Woven Volume (Million Kg) 61

Knit Value (Million US$) 165

Volume (Million Kg) 238

Value (Million US$) 643

Source: BGMEA, ANNUAL EXPORT REPORT, 2007 The Value Addition in Different Stages of PT & RMG Industry (2004-05): In % Stages RMG Finished Fabrics Grey Fabrics Spinners

Woven 27 30 13 30

Knit 22 30 18 30

Source: BGMEA, ANNUAL EXPORT REPORT, 2007 FINDINGS & ANALYSIS Findings: 1. The industry growth is positively correlated with the strong Backward Linkage 2. The backward linkage establishment is positively correlated with the infrastructure of the country and the government rules and policies 3. Increase of Bonded Wear Housing Facility is negatively correlated with the growth of Backward linkage 4. Longer Lead time to import the supplies is negatively correlated with the growth of backward linage industry.

The Integration Level of the Textile & Clothing Sector in the Country: The level of integration of the textile and clothing sectors has varied differently for the knit and the woven sub-sectors. While the knit-fabric sector saw a significant degree of integration in building production capability to meet almost 70% of the requirement of the knit-garment sector, the woven fabric sector lagged far behind.

The primary reason for faster integration in the knit sub-sector was due to relatively low investment requirement and simpler manufacturing and process technology that could be adopted easily. For example, a knit fabric manufacturing, dyeing and finishing unit of a minimum economic size could be set up at a cost of about US$ 3.5 million while investment requirement for establishing a woven fabric manufacturing plant of minimum economic size with appropriate dying and finishing facilities would cost at least US$ 35 million.

As mentioned earlier, the Textile Sector in Bangladesh is dominated by the RMG industries. In June 2000 as indicated in Table 2, the sector consists of about 3000 RMG units producing 150 million dozen garments, 141 spinning mills (units) with a production capacity of 335 million kg of yarn, 117 weaving and composite mills with a capacity of 420 million meters of fabric, 282 dyeing, printing and finishing units capable of processing 677 million meters of woven fabric and 155 knitting, dyeing and finishing composite units capable of producing 225 million kg of knit fabric. Investment in the sector is gaining momentum. As many as ten spinning units and a number of composite knit fabric mills have been added to the sector in the year 2001 alone.

Table 2: Structure of the Textile industry in Bangladesh (June 2000)

According to one estimate made by the Center for Policy Dialogue, a civil society think, the gap between demand and supply of yarn in the year 2000 was about 500 million kg and that of fabric was about 2400 million meters. According to their estimate, this gap is going to increase further to about 800 million kg for yarn and 4100 million meters for fabric by the year 2010.

They estimate that to meet the capacity shortfall, Bangladesh needs to double its spinning, weaving and dyeing and finishing capacity by year 2010.

All these infrastructure buildings would require an investment of around US$ 7.5 billion. The investment requirement is quite large and investment from domestic resource is unlikely to be sufficient for the purpose. Fulfillment of this target is possible only if FDI flows into the country in this sector in the next couple of years. Judging by the past trend of FDI flow, it is unlikely that Bangladesh would be able to attain this self-sufficiency in the near future.

FACTORS CONTRIBUTING TO GROWTH OF RMG INDUSTRY: Multi Fiber Arrangement (MFA), 1973 This factor really pushed the RMG sector upwards in Bangladesh. After enactment of this agreement it was very easy for Bangladesh to collect the necessary things to produce finished goods. However, this arrangement is going to be phased out from 01 January 2005.

Initiative of local entrepreneurs.

In Bangladesh the local entrepreneurs are challenging and they used to take challenges and that is why they have succeeded in the past.

Cheap and abundant supply of labor This is another really very vital advantage of Bangladesh. Bangladesh has the comparative advantage on the cheap and skilled labor.

LACK OF DEVELOPMENT BACKWARD LINKAGE INDUSTRIES In Bangladesh there are only few textiles mills. Those, which are producing, even not close to satisfy the demand. However, this is the pick time to concentrate on establishing more Textiles, Interlinings and other accessories manufacturing concerns.

Inadequate infrastructure and supported services: A country like Bangladesh always suffers from appropriate infrastructure facility and the supported service. Bangladesh is a developing country. As a result Bangladesh has lack of resources. Therefore even if the Government wants some times it becomes impossible for them to ensure the infrastructure.

Inadequate institutional & legal reforms in the light of WTO According to World Trade Organization the legal procedure is not up to date. They think that Bangladesh needs lots of Amendment in the institutional and legal reforms of WTO. Besides these there are other weaknesses in RMG sectors. These are listed below.  Lack of capacity building  Weak and inadequate government apparatus  Lack of knowledge of Manufacturers/exporters of RMG Threats of RMG Sector: The 2005 Challenge In the year 2005, some of the international policies regarding the export of textiles and garments has changed, which may present the Bangladeshi textile industry the greatest challenges it has had to face so far.

There is much speculation at present about the situation of the RMG exporters in the post-MFA period, when the World Trade Organization, or WTO, instead of GATT will control the sector. Under the WTO all quotas will be removed, resulting in a free market worldwide.

Bangladesh's garment and textile manufacturers will have to face steep competition from countries such as India, Pakistan, China, and Thailand, from whom the country now imports fabric to meet the demands of its RMG sector. When the WTO free market is established, all these countries will be able to expand their RMG exports, now limited by quotas.

Trend of growth of the RMG sector: RMG is the driving force behind the growth of the textile sector. This sector saw astronomical growth in the late eighties. Even in the first five years of the nineties, the industry grew steadily at an average rate of 30% per year.

for Textile Industries

Factors like increased external competition, inflexibility to reduce lead time, the lack of backward linkage industries, loss of market on the eve of Sept 11th incident, apprehension about the post MFA uncertainties, the US Trade Development Act 2000, favouring other developing countries, and the accession of China to WTO affected the business and retarded the growth rate.

Phase-out of MFA quotas on January 1, 2005: Preferential market access that was given to Bangladesh by both the US and EU was the main stimulant behind the rapid expansion of the RMG sector in the last two decades.

The large level of the US quota and the preferential quota free access to the EU ensured good market penetration for the Bangladeshi RMG products in these markets. In addition, a significant part of Bangladesh’s export to the EU is covered under the GSP scheme that provides preferential tariff treatment to Bangladesh exports to the EU markets. However, Bangladeshi exporters were unable to take full advantage of this facility due to stringent EU rules of origin for GSP. In 1999, EU liberalized the rules of origin allowing imported yarn for knit-fabrics to qualify for GSP. This relaxation improved the utilization rate of the GSP facilities for the knit-RMG considerably. The rapid development of backward linkage industries in knit garments sector in the recent past was also influenced by the concession in the rules of origin given by the EU. All these advantages are eroded in 2005 when all preferential market access conditions, except perhaps the GSP facilities, will disappear as stipulated in the ATC. The big question is whether Bangladesh would be able to compete in their open market with all exporting countries put on equal footing for competing against one another.

Enactment of US Trade Development Act 2000: The Trade and Development Act 2000 more popularly known as US Trade Development Act 2000 was enacted in the USA on May 19, 2000. This act consisting of the African Growth and Opportunity Act (AGOA) and the United States-Caribbean Basin Trade Partnership Act was aimed to introduce a new trade and investment policy for Sub-Saharan Africa (SSA), expand trade benefits to countries in the Caribbean Basin Initiative (CBI), enhance the GSP and strengthen the US Trade adjustment assistance programs. The US TDA 2000 provides preferential trade access, especially in textile and apparel sectors, to the countries of Africa and Caribbean Basin.

The US Trade Development Act 2000 provides duty-free and quota-free access to 48 countries of Africa and 24 countries of the Caribbean Basin for exporting textile and apparel products to the US

market on certain eligibility criteria. It may be noted here that some of the beneficiary countries, especially in the Caribbean Basin, are Bangladesh’s direct competitors in the US apparel market.

The majority of countries benefiting from the US Trade Development Act belong to the group of Least Developed Countries (LDC). This enactment has thus created a division within the LDCs as the LDCs outside this scheme have lost their strength for bargaining duty free and quota free access, being now a small minority. It may be mentioned here that for quite some time now, Bangladesh has been actively campaigning in various multilateral forums, including the WTO, for providing favourable treatments to all the LDCs. Between the two groups of countries covered under the US Trade Development Act 2000, it is the Caribbean countries that are more important as a source of apparel import into USA. In 1999, the total value of apparel export to the USA by the CBI countries amounted to US$ 8.92 billion, accounting for 14% of the US market. There are a number of CBI countries that compete with Bangladesh in a number of apparel items of high export interest to Bangladesh. In 1999, countries like the Dominican Republic (3.74%) and Honduras (3.40%) had market shares bigger than Bangladesh (2.75%), while El Salvador (2.24%) was following very closely. Incidentally, the quota fill-in rates of these countries for a number of items were also high. Therefore, the new quota-free and duty-free regime is likely to allow them to expand their apparel exports to USA substantially. This is expected to lead to trade diversion from Bangladesh in favor of CBI countries. The effect is already visible in the last two years. The average export prices to the US market have fallen substantially during this period, indicating that the Caribbean countries are creating price pressure to take away business from Bangladesh, as indicated in Table 3. The SSA countries in the medium term may become a potential threat if they can put together the necessary production facilities. How effective these potential competitors will be will depend on the price competitiveness of their exports.

Accession of China to WTO: China is perhaps the largest supplier of textiles and clothing in the world. The accession of the country to WTO has opened up a new vista of market access for them. China has a very large production base of fabric, by using competitive and appropriate technology. China also has a very large pool of labour force for the highly labour intensive apparel industry. Both these factors ensure a very high degree of competitiveness. China’s accession to WTO has removed their major market access constraint. The high degree of integration that China already has between their textile and clothing sector would enable them to respond quickly to the demand of garment buyers. This may result in the diversion of business to China in large quantum from countries like Bangladesh.

RECOMMENDATIONS AND CONCLUSION For long the BGMEA had been pressing the government to set up a central bonded warehouse so that the exporters could meet the demands of the international buyers who had reduced the shipment of goods from 120 to 30-35 days. This issue and related matters have become even more urgent as the end of preferential market access poses a threat to the garments industry. BGMEA leaders are concerned about the nearly two million women workers who would be worse affected by the garments industry in ruins.

To protect the industry, BGMEA wants the government to take a number of important measures in this regard. These include: setting up a central bonded warehouse; establishing linkage industries with priority on dyeing, printing and finishing factories; providing loans with low interest rate to set up backward linkage industries; and doing everything to achieve global cumulating to boost export.

There is also the suggestion to extend tax holiday for RMG exports to the year 2008 and withdraw some restrictions on the tax waiver.

Though exporters fear that Bangladesh would lose the market because of sharper global competition, 'the full effect of the MFA phase-out can't be predicted with certainty', as an official of the commerce ministry pointed out. Since 'the RMG sector needs to develop strategies to deal with the changing market place after 2004', the ministry has undertaken a one-year study project to assess the global market Bangladeshi garments products in the post MFA period.

Most of the least developed countries have duty and quota free access to the US market; Vietnam, Laos and Cambodia are negotiating with the US government to get the status. Recently, US Congress tabled a bill offering duty and quota free access to 18 Muslim countries including Bangladesh.

Therefore, the BGMEA has called upon the government to make necessary diplomatic efforts to earn duty and quota free status to the US and the non-EU countries in Europe.

Once quota is phased out from 2005 competition will be stiff; only the most efficient companies and countries will be able to continue supply to the EU and US markets after 2004. As it is, international buyers want quick and efficient delivery.

If Bangladesh fails to develop backward linkage industries to face the challenge, thousands of garment workers, mostly women (they constitute 80% of the work force in the sector), will face the pinch of post-MFA regime. The government and the industry need to join forces to pursue the preferential market access issue with the US government. Some countries are striving to get access, and Bangladesh government has strong reasons to pursue the case 'quickly and aggressively'.

On the other hand, the VAT is refundable in RMG sector in Bangladesh. So it is rather wise to withdraw the VAT system and thus free the owners of RMG units from the harassment of the concerned government agencies. In China 13 per cent rebate is allowed by the government to the RMG sector but in our country, RMG owners hardly get any incentive from the government side.

In order to establish the backward linkage the government should take into consideration of developing the Textiles Sector first. In order to keep the RMG sector alive the Government should do the followings.

To aid the expansion of the textile industry in Bangladesh, the government is currently providing numerous incentives.

BONDED WAREHOUSE FACILITIES

These facilities allow export-oriented factories to import their raw materials duty free. However, the bonded warehouses privileges have not been monitored closely enough, which has resulted in them being abused. The materials imported duty free to be used for producing garments intended for export are sometimes released into the local market. The leakage of these inexpensive items into the local market cause unfair competition for local producers.

Duty Exemption Drawback Organization, or DEDO Factories which do not take advantage of the bonded warehouse facilities and import their raw materials independently can claim the duty they paid under the Duty Exemption Drawback Organization, or DEDO. Provided that the finished goods are being exported. This system is mostly applicable for the dyeing sub-sector of the textile industry.

25% export cash incentive For producers who do not use their DEDO or the bonded warehouse privilege, and utilize local materials. These producers obtain 25% cash compensation from the government for the items they export.  Tax holiday - Five to nine years of tax exemption for new factories.  Duty free importation of raw materials of export in the RMG.  Avoidance of double taxation for joint venture projects.  Income tax exemption for up to three years for foreign technicians.  Duty free import of capital machinery.

CONCLUDING REMARKS Though there is no concrete data available on investment made in the textile sector in the last couple of decades, the above dissertation of circumstantial parameters amply suggests that investment has taken place in the sector and the growth was noteworthy.

A number of factors like the existence of a large RMG export base creating a large demand for the textile, the incentive package especially the cash subsidy given by the government, and the cry of the RMG sector for local raw materials in order to be able to respond quickly to the need of the ultimate garment buyers, appeared to have boosted this growth.

There is awareness amongst the entrepreneurs to create and for those who are already in the textile sector, to enhance their capacity to service this growing demand. In addition to the capacities discussed above, many new mills and capacity expansion of the existing mills are in the pipeline in spinning, weaving, knitting and dyeing and finishing sectors.

The emergence of new labor and environmental standards and the RMG sector’s spontaneous response to implement them suggest that the RMG sector is gearing them up to cope with the emerging requirements as demanded by their customers. Under pressure of competition, they are also upgrading their technology of production, learning to cut costs and improve productivity and invest in backward and forward linkages to sharpen their competitive ability.

Though the growth is declining, new investments are taking place in RMG as a means to harness economics of productivity and production. In the process, some smaller units that are unable to cope with the changing requirement of the market may perish.

However, the increased capacity of the other more agile manufacturers is likely to compensate for this loss of capacity created by the shut down of the less capable units. Thus, the market for fabric is not likely to be affected. There is reason to believe that Bangladesh will have some preferential market access even in the post MFA era starting in January 2005. The EU recently has given duty free concessions under “Everything but Arms” (EBA) scheme to Bangladesh. Canada has also announced that from January 2003, all imports into Canada from Bangladesh including RMG shall be duty free.

Citing USTADA 2000, Bangladesh is lobbying for similar benefits from USA also. All these concessions would result in a better scope for our products in the future in these major markets.

Thus, the assured market for backward linkage industries is likely to remain robust in the years to come. However, proliferation of these industries will depend upon continuation of the government policy framework to support such development, an appropriate and enabling investment environment and availability of adequate financing for these projects at internationally competitive rates of interest and other service charge.

REFFERECES 1. Abdullah, Md. Abu Yousuf, 1997, “International Trade Implications and Future of Ready-Made Garments Sector of Bangladesh” Journal of Business Administration, Vol. 23, No. 3 & 4, Page 41-69.

2. Azim, M. Tahlil, and Nasir Uddin, 2003, “Challenges for Garments Sector in Bangladesh After 2004: Avenues for Survival and Growth” Bangladesh Institute of International and Strategic Studies Journal, Vol. 24, No. 1, Page 49-82.

3. Bhattacharya, D and M. Rahman, 2000, “Female Employment Under Export-Propelled Industrialization: Prospects for Internalizing Global Opportunities in Bangladesh's Apparel Sector”, UNRISD Occasional Paper.

4.Bhattacharya, D and M. Rahman, 2000, “Experience with Implementation of WTOATC and Implications for Bangladesh”, CPD Occasional Paper Series, Paper 7.

5. Bhattacharya, D, M. Rahman and A. Raihan, 2008, “Contribution of the RMG Sector to the Bangladesh Economy”, CPD Occasional Paper Series, Paper 50.

6. Bow, J. J, 2007, “Bangladesh’s Export Apparel Industry into the 21stCentury – the Next Challenge”, The Asia Foundation.

7. Centre for Policy Dialogue, 2000, “The Textile and Clothing Industry of Bangladesh: In a Changing World Economy”, CPD Dialog Report No. 18, Dhaka, Bangladesh, 2003, “Coping with Post-MFA Challenges: Strategic Responses for Bangladesh RMG Sector”, CPD Dialog Report No. 55, Dhaka, Bangladesh.

8. Islam, Sadequl, 2001, The Textile and Clothing Industry of Bangladesh in a Changing World Economy, CPD and The University Press Ltd. 9. Jahan, Sarwat, 2005, “The End of Multi-Fiber Arrangement: Challenges and Opportunities for Bangladesh”, WBI Policy Note.

10. Katti, Vijaya and Subir Sen, 2000, “MFA Phasing Out and Indian Textiles Industry: Selected Issues for Negotiation”, Foreign Trade Review, Vol. XXXIV No. 3 & 4, Page 102-120.

11. Mannur, H.G., 2008 (second revised edition), International Economics, Vikas

Publishing House Pvt Ltd., India.

12. Mlachula, Montfort and Yongzheng Yang, 2004, “The End of Textiles Quotas: A Case Study of the Impact on Bangladesh”, IMF Working Paper WP/04/08. .