Ashraful Islam, Research Assistant, Textile Focus
Bangladesh and Vietnam have been the largest garments exporters to the world in the past decade after China. And the competition between Bangladesh and Vietnam is becoming intense day by day as both countries have been registering steady export growth and working relentlessly towards sustainability practices. The unprecedented growth of the two countries as a garment exporter is an aftermath of ‘China Plus One’ policy taken by the big brands operating in China deciding to establish additional manufacturing facilities outside China to cater with the increased cost of doing business in China. This article analyzes the performance and position of Bangladesh and Vietnam as a garments exporter on how they have capitalized the opportunities leaking from the manufacturing giant China.
What was China plus one?
China’s cheap land and labor, huge market, and preferential investment policies long served as the main driving force behind foreign investment in the country. However, China gradually lost its cost advantage and competitiveness in comparison to other Asian countries as their worker wage and operation cost increased significantly. As a result, many companies in China were looking to diversify their operations by adding another location of manufacturing in Asia. This strategy was known as the ‘China plus one’ model.
China Plus Who? Bangladesh or Vietnam
Bangladesh holds the 2nd largest and Vietnam the 3rd largest position in the apparel export market in the world. The difference margin between them is very close. However, the business dynamics and environment in which the two countries operate are different. Bangladesh is popular for its big capacity and ability to manufacture low-end items at the cheapest rate of the world with acceptable quality whereas Vietnam is more value-oriented with strong backward linkage and more educated workforce. A comparison between the two countries has been done here to portray their position and future potential to become the next manufacturing destination of the world.
Power and Energy Price:
One of the major driving force of the industrial sector is the availability and price of electricity. Most of the industries in Bangladesh are supplied with gas where they produce their own energy through captive power plants. Industrial
sector in Bangladesh is already suffering due to a shortage of gas supply. In terms of the garments industry, they are not a major consumer of electricity rather the textile industry in the backward linkage requires a huge amount of energy to operate. As a result the shortage of gas in the textile industry indirectly hinders the business of the garments industries significantly.
However, the power sector of Bangladesh is about to boom as huge projects including 2.4-gigawatt (GW) Rooppur Nuclear Power Plant are under construction. Addition of such power plants will increase the generation capacity of the country significantly which is at approximate 16000 MW now. Government is taking major decisions to ensure relentless supply of gas and electricity to the industrial sector which is a good sign for the textile and garments industries of Bangladesh.
Vietnam is also investing in billions in their energy sector as their government also has a national strategy to strengthen the industrial sector. In the revised Power Development Plan VII (PDP 7) of Vietnam, released in 2017, installed power-generation capacity in Vietnam amounts to 42.13 GW, of which 37.6 percent is hydropower and 34.3 percent is coal-fired thermal power. It also sets out $148 billion worth of investments to increase power generation and develop the electricity network, with $40 billion to be spent in the period 2016-2020, of which 75 percent is to be directed to power sources and 25 percent to grid development.
In terms of price Vietnam also sets out as with the lowest gas price compared with the other garments manufacturing countries. In the last decade Bangladesh has regulated gas price three times as a result the utility cost of the industries rose higher than Vietnam by some margin. Though the gas price is higher, the electricity price is still lower than Vietnam due to the huge subsidiary from the government in electricity generation. However, both in Bangladesh and Vietnam the energy costs are cheaper than China which makes them favorable destinations due to the China plus one move.
Competitiveness, Corruption & Ease of Doing Business
In the ease of doing business index Bangladesh is clearly lagging behind from other Asian countries in the last published report bought to light in 2018 December. Political anarchy, corruption, energy crisis, poor transportation and logistics are responsible for the low performance of Bangladesh in this index followed by investors worldwide. However, there is a slight improvement in the ranking compared to previous years’ as out of 100, Bangladesh scored 41.94, which is 0.91%t higher. Bangladesh has taken an action
plan to remove the barriers in doing business and to improve ease of doing business so that the rank comes down to 100 by 2021. After the Rana plaza collapse in 2014, Bangladesh managed to regain its image and confidence as a garments manufacturer which was a crucial point in the history of this business. The chart shows the respective ranking of the competing countries in terms of competitiveness, corruption and ease of doing business. According to this index Vietnam is clearly a better choice compared to Bangladesh for further business investment.
Top Export Hot Spots Up to 2023
From the statistics of McKinsey apparel CPO survey 2017, it was expressed that Bangladesh will be the top hot spots country over the next 5 years in terms of garments export. And Bangladesh shows sign of prosperity in the following year. Bangladesh earned revenue from the apparel exports amounts US$
8,618m in 2019. The market is expected to grow annually by 7.0% (CAGR 2019-2023). On the contrary, Vietnam earned revenue from apparel exports amounts to US$ 5,675m in the same period. The market is expected to grow annually by 8.8% (CAGR 2019-2023). The CPOs mainly preferred Bangladesh due to its ability to produce bulk amounts at a cheap rate. However, as the wages increased in the last five years now Bangladesh is gradually becoming as costly as Vietnam and other exporting countries. As a result, the other sourcing criteria apart from the wage is becoming key in the business decisions. The below graph from a research report presents the scenario considering 8 major sourcing criteria where 5 is the highest mark and 1 is the lowest mark.
From the graph it can be said that Bangladesh is a little bit ahead of Vietnam considering 8 important sourcing criteria. However, to remain the preferred choice of the CPOs Bangladesh has to significantly improve in all the criteria mentioned here.
Effect of TPP
The Trans-Pacific Partnership (TPP), also called the Trans-Pacific Partnership Agreement, is a defunct proposed trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States signed on 4 February 2016, which was not ratified as required and did not take effect. The agreement cuts over 18,000 tariffs. Vietnam is enjoying the reap of the fruit of this agreement in the U.S.A market though Bangladesh is not part of TPP agreement Bangladesh is enjoying duty-free access to other countries which are included in TPP except the U.S.A . So TPP agreement still hasn’t created any effect in Bangladesh apparel export. Even in U.S.A apparel market Bangladesh apparel export hasn’t fallen but Vietnam apparel export is booming in U.S.A market.
Lead Time Pictogram
Lead time is another key factor that the buyers are concern about as the garments industry is becoming more fast fashion-oriented. The following two pictograms show the average transportation time required from Bangladesh and Vietnam respectively to the major export destinations. Although the shipping time to the EU and USA are quite similar, Vietnam can end up with a quicker lead time as they are self-sufficient in textiles. On the other hand, Bangladesh is still dependent on imported cotton, yarn and fabrics (specially woven) which adds to its lead time. The average lead time from Bangladesh to EU and USA ranges from 90 to 120 days whereas from Vietnam it is 50 to 60 days which clearly puts Vietnam ahead.
Both Bangladesh and Vietnam textile industry based on importing raw material, Bangladesh major raw material sourcing countries are inching closer whereas Vietnamese raw material sourcing countries far distance. These graphs don’t show lead time, these only show the time need to ship the product from port to port, but the actual lead time is lying between 90-120 days for both countries.
Besides, all these statistics, drive for sustainability is becoming a major concern as a exporting industry due to the recent emphasize on sustainable practices from different stakeholders globally. After some major accidents, Bangladesh improved significantly in last five years and now is the leading Green factory industry in the world. The number of Bangladesh Green industry is 87 and 300 more are at the verge of achieving such a prestigious certificate. Green factory reduces energy consumption, environmental pollution, 40% reduction of CO2 emission, moreover the working condition of the green factory is much better than any other factory. On the contrary, Vietnam doesn’t have much green factory-like Bangladesh. Vietnam CO2 emission tons per capita is 2.29 whereas Bangladesh CO2 emission tons per capita is 0.59 according to a report of 2017. So in terms of sustainable practices Bangladesh is also developing rapidly and gaining confidence of buyers. Still a big challenge prevails to maintain sustainable practices in all the stages of the supply chain.
The answer of the question China plus who? Bangladesh or Vietnam is a complex one as both the nations are developing at a rapid pace and about to reach the 50 billion export mark by 2020-2021. Both the countries has taken consolidated steps to involve in sustainable practices while growing their garments and textiles industries. A challenge for both countries will be to cope up with the increasing cost of doing business and cater the energy and sustainability issues. As China is moving fast to more value added industries and leaving out low end manufacturing industries like garments, it is evident that most of the orders will be shifting to Bangladesh and Vietnam. Vietnam now has trade benefits with USA with the TPP while Bangladesh enjoys single stage GSP in EU. So the analysis shows that both the countries are pritty evens to even in terms of winning the opportunities shifting from China.