Bangladesh – next sourcing hotspot?

China dominates the European and US markets for ready-made garments with about 40% of all imports from the Asian region. But a recent McKinsey survey has found that 89% of buyers in Europe and the US are looking to reduce their buying from China because of declining profits and capacity issues.

While many of the buyers are considering a range of Southeast and Far Eastern nations for the manufacturing of their garment including Vietnam, Indonesia and Cambodia, the #1 continues to be Bangladesh as the place to source apparel in the next 5 years.

The key facts about Bangladesh are:

History:

• Europeans created trading posts in the 16^thCentury
• Britain dominated the nation
• In 1947 West Pakistan and East Bengal separated from India to form Pakistan
• Bangladesh seceded from Pakistan in 1971
• In elections in 2008 Sheikh Hasina Wajed was elected prime minister

Geography:

• 98% Bengali, 2% tribal
• Muslim 89.5%, Hindu 9.6%
• Population 161,083,804
• Median age 23.3 years
• Major cities include Dhaka (capital), Chittagong, Khulna, Rajshahi
• Literacy rate of 47.9%

Economy:

• 5-6% growth per year
• $282.5b GDP
• GDP per capitia $1,700
• Labour force in industry 30%
• Unemployment rate 5%
• Population below the poverty line – 31.5%
• Exports $23.86b
• Garment exports $12.3b
• About a third of the nation floods annual and this hampers economic development

With such a large part of exports (around 13% of GDP and 75% of exports) in the garment sector there is already knowledge, skills and experience in this within Bangladesh.

Pricing is also another factor. Low costs are attractive but there is also an expectation of significant efficiencies in the future that will offset rising wages.

A further reason is capacity. There are 5,000 factories today employing 3.6 million workers which means that Bangladesh is well ahead of other Southeast Asian suppliers.

Key purchasers from value and mid-level brands have indicated that Bangladesh will continue to be a key buying spot based on these indicators and the satisfactory levels of quality for this section of the market.

McKinsey have identified 5 challenges for firms wanting to buy apparel out of Bangladesh. These include:

#1 Infrastructure

Transportation can bottleneck in Bangladesh leading to delays in stock landing. As more fashionable items have a shorter lead time this can affect buying decisions. Energy supply remains a concern as well. It is rated as being poor-very poor. The Government has recognised this as the #1 issue for growing GDP and have started upgrading power systems.

#2 Compliance

There are a number of labour and social compliance issues when dealing with Bangladesh. In terms of corporate social responsibility this can really affect a brand, similar to the Nike and Adidas issues in the past. Green environmental issues have started to gain attention as well. This needs to be a major consideration for every brand.

#3 Suppliers’ performance & the skilled workforce

Suppliers productivity must improved to counteract rising wages so that Bangladesh remains competitive against other SE Asian nations. Issues around investing in infrastructure and technology remain.

#4 Raw materials

Bangladesh lacks raw materials, so most product is imported. This can lead to delays. Development of a local sector would minimise this risk.

#5 Economic & political stability

Most buyers have indicated that if the political system destabilises that they would not source from Bangladesh. Most buyers are concerned about political unrest, strikes and the ease of doing business.

The three main stakeholders – the government, suppliers and buyers – must continue to work together to drive the change and potential of the Bangladesh garment industry.

As with any buyer-supplier relationships buyers should work with the suppliers closely to review the full value chain to ensure it is lean, rethink pricing negotiations that can lead to investment in technology and automation and ensure that they are dealing with factories that support CSR and will not have a negative affect on the brand.

Building long term sustainable relationships with the suppliers in Bangladesh can only lead to sustainable pricing, better delivery and quicker turnaround.

Cheers Michael