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RMG Industry Outlook 2019

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Mohammad Ishaque, Research Assistant, Textile Focus
Edited by Maeen Md. Khairul Akter, Managing Editor, Textile Focus

Introduction

RMG is the prime export oriented industrial sector of Bangladesh and it looks to be the prime industry in the upcoming years as well as the export stats suggests. This year amongst the total export form the country, more than 84% came from RMG exports which is together a comforting and an alarming issue. Comforting because it indicates that the export growth of RMG is steady and alarming because the over dependence of the country’s economy on one income source is becoming more evident. RMG Industry Outlook 2019 tries to put light on the statistical and strategical issues regarding this phenomenal industry in this article.

Export Status

RMG exports has contributed $34.13 billion to Bangladesh’s total export earnings this year, growing by 11.49% compared to last fiscal year. According to Export Promotion Bureau (EPB) data, the RMG sector has contributed 84.21% to Bangladesh’s total exports of $40.53 billion, growing by 10.55% in FY19. The figure-1 depicts that in last 5 years the RMG exports added additional 10 billion dollars in the export basket that means growing at a rate on average 2 billion each year. Though the growth rate is impressive it is too optimistic to reach 50 billion mark by 2021 which is the target set by the government.untitled-1

The export growth rate is 11.49% which was only 8.76% in 2017-18 indicates the upward trend of RMG export after the disastrous year in 2016-17 when the RMG export growth was the slowest in the history at 0.2%. (Figure-2) The export of knit and woven products seems evens to even growing at a similar rate, however, woven export has surpassed knit export in terms of value in the past 5-6 years. This year also the woven exports stood at 17.24 billion USD whereas knit exports stood at 16.88 billion USD.  (Figure-3)untitled-2

 

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According to Research Director of CPD, In the beginning of the year, the government projected single digit growth but there is a double digit growth which is a positive sign for the RMG sector. However, if on average 10% growth is predicted in the upcoming two fiscal years, the total RMG exports will stand at 37.54 billion in 2019-20 and 41.29 billion in 2020-21 which is shy by 8.71 billion USD compare to the ambitious target of 50 billion set by the government of Bangladesh.

In terms of textiles export however, the scenario is not pleasant.  In FY19, the specialized textile sector has had a positive growth of 28.51% to $144 million from 112.15 million while the home textile sector saw a negative growth of 3.07% to $851.72 million, down from $878.68 million in the last FY. (Figure-4)untitled-4

Among other major sectors, Jute and jute goods have contributed 21.83% negative growth to $695.52 million which was $889.74 million during the same period in the previous fiscal year of FY19 Negative growth in home textiles and jute goods is an alarming issue for the country as these industries are more value adding industries when compared to RMG. Agricultural products exports meanwhile stood at $722.73 million by 53.05% growth from $472.23 million in the last year.

Key Factors for Sharp Growth

For sharp growth of RMG export, work place safety, investment in the backward linkage industry, political stability & duty free access to the export destinations are considered as the vital factors. Unprecedented efforts have been evident from different stake holders to improve the compliance and occupational health and safety related issues in the industry in the last five-six years and the results are showing now. Now Bangladesh has the most number of green industries compared to any other RMG exporting countries. According to ED of Babylon Group, political stability and uninterrupted services and safety improvement enhance buyers’ confidence. With boosted confidence, the buyers are placing more orders here pushing up the export earnings. However, a common complaint from the green factory owners are still prevailing that they are not getting the price from the buyers which is required to sustainably operate a green factory. As a result, it is becoming very difficult for the RMG manufacturers to retain enough profit unless they have the backward linkage industry support supplying fabrics and other raw materials for production.

Production cost has increased by up to 17% due to gas crisis, devaluation of euro and price fall in EU and US markets, on the back of the US election and BREXIT.  The government, policymakers and entrepreneurs are mainly concerned with rising labour costs and export restrictions but have been overlooking few important factors vital to sustaining this growth. in such circumstances, apparel manufacturers have m to move forward for global new market explorations and product diversification along with machinery and process upgradation by ensuring quality.

Another big issue for the sustainable development of the RMG industry in near future will be the skill upgradation of the workers. As the industry is transforming to more IT intensive and automotive approach, it is mandatory for the industry to optimize and develop appropriate skills. As per Bangladesh Institute of Development Studies (BIDS) report, demand for skill labours in approximately 10 years will be as high as 122 per cent. If the skill gaps are not addressed by that time, the productivity will be hampered and Bangladesh will lose its edge with available pool of labour.

Meanwhile, US-China trade war is an another big issue for sharp rise in export earnings. The economists said, it’s an issue as the global buyers shifted their orders from China to Bangladesh for having in alternative sourcing destination which made Bangladesh’s position in the US market stronger than it was in the previous time. According to Export Promotion Bureau (EPB) data, in the fiscal year 2018-19, Bangladesh exports to the US market is $6.13 billion, grows by 14.60%, up from $5.35 billion in the previous year. According to President of International Apparel Federation (IAF), due to the ongoing trade war between US-China, China will move to Europe, which means Bangladesh will have strong competition in the EU market. In the upcoming days, Bangladesh may get some extra advantages from the China-US trade war although Bangladesh’s competitors are rapidly taking over a greater share of the US RMG market by using advantage of ongoing US-China trade war.

Exports to major Markets

The production capacity of the apparel industry has increased within producing fashionable products through adjusting Fast Trend Fashion & increases RMG export to the major markets.

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In  figure-5 it shows that In FY18, Bangladesh RMG export has increased to the EU countries to about $19.62 billion, grows by 10.58%, EU% with 63.06% market share from $17.75 billion in FY17 and USA export earning has positive growth 2.85% from negative  growth 7.48%  & Canada, grows 1.78% from negative growth 5.22%. So export to USA and Canada registered positive growth after a negetive growth in the last FY. Factors like movements of buyers to other RMG destinations, like Vietnam and India, increased facilities to the RMG sector in several Asian nations, gradual fall in prices in importing nations and internal chaos are affecting the competitiveness of Bangladeshi RMG exporters especially in USA and Canada as Bangladesh do not have any trade benefit there like GSP in EU. Out of the 34.13 billion USD exports to these three countries are in total 25.94 billion (approx. 76%) which indicates the over dependacne of Bangladesh there as exporting destinations.

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Figure-6: Visualization of Bangladesh’s top export destinations in FY19

Exports to Emerging Markets: 

Garment exports to non-traditional markets rose to $4.67 billion from $4.24 billion growing by around 10% year-on-year in the current fiscal year due to provided government policy support that awarding 4% cash incentives on export to non-traditional markets and also due to the duty-free market access in Japan & China. Apart from the traditional US, European Union and Canadian markets, all others are considered non-traditional or emerging markets for Bangladesh.untitled-7Among the emerging markets, 11 export destinations are showing potentials to accommodate more exports in the near future: Australia, Brazil, Chile, China, India, Japan, South Korea, Mexico, Russia, South Africa and Turkey.In the current fiscal year’s first six months’ garment export to non-traditional markets grew by 36.21 percent year-on-year to $2.90 billion which was $2.13 billion in the same period last fiscal according to data from EPB and BGMEA. Knit exports to non-traditional export market has risen to $2.39 billion growing by 10.98% from $2.15 billion in FY17 better than the growth of woven market.

Major Competitors Performance

According to data of 2017-18 from the World Trade Organization (WTO), Bangladesh still retains its position as the second biggest apparel producer by exporting $29 billion in the world by contributing 6.5% share of the market.

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Source: World Trade Organization (WTO)

The nonpareil China remained the largest apparel supplier position globally by $158 billion exporting. Vietnam is moving very fast and has come in third position with $27 billion export by displacing India, about 5.9 percent market share while India is in 4th position & Cambodia with 1.6% global market share. Meanwhile, Vietnam is going to pick the second position by exporting more diversified value added products which is a great threat for Bangladesh to remain it’s second position in the market.

Challenges Ahead to Sustain the Growth:

An 11.49% RMG’s export growth is very encouraging but there are some challenges for achieving the target 2021 such as poor infrastructure, inadequate supply of energy, lack of skilled manpower, bureaucratic issue and low product diversification & lack of co-operative industrialization in this export competitive markets. Bangladesh has to pay attention on specific areas like factory remediation, infrastructure development, labor productivity, innovation, train up and counselling the worker to sustain the growth.

In addition, maintaining a shorter lead time within Fast Trend Fashion is the key challenge for garment manufacturers to get more orders. According to Director of Jeanologia’s Asia Division, if Bangladesh can’t maintain a strict lead time, buyers including themselves will move to alternative destinations like Vietnam.

Meanwhile, the new imposed gas tariff is another big challenge for the RMG sector due to increasing the production cost further but buyers are not interested to pay more which makes the owner anxious. According to the Head of EU mission in Bangladesh, to reach the $50-billion target, Bangladesh would have to fight and win three battles: the battle of technology, international engagement and team spirit. Most of the exports earning of the apparel sector comes from basic goods which is a concern for industrialists. For getting better price, Bangladesh should invest in technology for value addition and foreign investment in industry.

According to the MD of Giant Group, they are going to set up the automation (4.00 industrial revolution) in our RMG industry to compete the world markets within producing value added products but it’s not possible in over-night due to lack of skilled worker. Hence, they are working to train up their workers & trying to utilize their manpower in a more effective way.

In FY19, USA is still the largest single country RMG export destination for Bangladesh by contributing 17% exports of garment products. Bangladesh has to focus on these top export destinations with creating other new destinations to achieve the target of 2021 by exporting more value added diversified products.

For achieving the target, RMG manufacturers have to also focus on an investment for ‘Branding RMG’ which has been a citable issue in recent years to make positive images of RMG industry of Bangladesh although some owners still consider that’s a waste of resources. To assuage this situation, the government & involved authorities have taken a step to set up an export target at $50 billion from textile and clothing sector including RMG, packaging and accessories and home textiles but export trend showed that US$50 billion targets by FY 21 would not be achieved alone from RMG.

However, for achieving the target by 2021, industrialists have to focus on diversified high value added production and technical textiles like agro- tech, geo-tech, medi-tech, sportswear, suit and swimming wear etc. with innovative modern technology and equipment, proceeding to automate each stage, following the trend of the industrial revolution 4.0 & also focus on co-operative relationship between university & industry to overcome the present export challenges.

Conclusion

Although the target of $50 billion export is too optimistic by 2021 still the positive growth of RMG export creates hope for better days in the upcoming future. However, issues like profitability and sustainability is a concern as business costs are getting higher and higher as industries are entering into an era of automation and more and more efforts are concentrated towards compliance and safety issues. As buyers are still not ready to pay for the extra costs it is becoming difficult specially for the small factories to survive. Again, only depending on the RMG industry can be a dangerous phenomenon for the economy of Bangladesh. So it is really important to adopt strategies to diversify the industry in terms of products and also market so that there are more solutions to offer.

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