adv-06

Value Addition in RMG Explained

adv-07

Mohammad Ishaque

The global market is becoming versatile day by day & Bangladesh have to come out of the vicious circle of traditional items. Bangladesh requires a sound strategy and policy to build a sustainable dependence free, diversified industry that will help Bangladesh to become a prestigious country in the textile & RMG sector. Bangladesh is suffering a lot now because of the COVID-19 crisis, as a result, most of the order has been canceled about $3 bn where only $1 bn order has been confirmed. According to experts suggestion, one way of sustaining the competitive market can be through focusing on Value Addition.

Bangladesh is considered as one of the major suppliers of readymade garments to the world market with around 6% market share & RMG is the prime export-oriented largest industrial sector of the country’s export earnings.In the fiscal year 2018-19, the country’s earnings from apparel exports stood $34.13 bn with registering 11.49% growth, contributed over 84 percent of the country’s total export earnings by contributing 13%  in the total GDP whereas from Knitwear items earned $16.88 bn with 11.19% growth  & Woven items earned $17.24 billion with 11.79% growth.

With the emergence of globalization, competitive atmosphere, and quality consciousness, observed a gradual rise is in consumer demands & has reached a fresh mark. And to reach up to that mark, manufacturers have to add something different to their products to get some extra value for their products from the buyers. This urge to come up with something novel to earn an increased profit, have a larger market share that could probably be termed as value addition to the Textiles & RMG.

So Value Addition is the process where we enhance the aesthetic look of the product by adding some incentives to it that describes the full range of activities that are required to bring a product from the conception through the different phase of production which helps the producer to make a higher margin between costing & pricing. The key aspect of value addition is outrageous price, uniqueness, attractiveness, and focusing a business more closely.

Meanwhile, in the financial year 2018-19, Gross value addition from the country’s RMG export has increased slightly from the financial year 2017-18. According to the Bangladesh Bank data, the overall import value of RMG raw materials stood at $12.17 bn against $34.14 bn export earnings in FY19 that defines the gross value addition from the readymade garment sector stood 64.33 per cent where the import value represents about 35.68% of the total RMG export earnings.

Bangladesh Bank calculated this value addition considering the import price of raw materials including raw cotton, synthetic/viscose fibers, synthetic/mixed yarn, cotton yarn, and textile fabrics and apparel accessories. During the period ranging from FY 13 to FY 19, the value addition of the sector remained between 61 per cent and 64 per cent showing a mixed trend.

01The chart-01 shows that the country gross value addition stood 64.33 per cent in the last financial year from 60.94 per cent which represents a positive growth of RMG value addition.

According to officials, the import price of raw materials in the July-December period of FY 19 stood at $6.28 bn which is 36.77% of total export earnings from the RMG sector of $17.08 bn in the period that means local value addition is calculated at 63.23 per cent.

02The chart-02 shows that, in FY19, the import value of raw materials is $12.17 bn against $34.13bn total earnings which were $11.95 bn against $30.61 bn by registering 39.06%  of the total export earnings in FY18.

From the beginning of the last year, RMG export value showed a negative streak for a month on a month growth% basis that represented an anxious situation though exports returned to its positive growth 2.89% on December 19.

03In chart-03 shows mixed trends are in FY20, the country RMG export growth returned to 2.89% in December from negative growth -10.7% in November 2019. It represents a positive growth in ending the year apparently, but the overall trend still defines a tough time ahead for the RMG industry.
According to official data, more than 250 garments factories have been shut down in last fiscal year reporting continual losses in their business because of not unable for making enough profit to continue business and the rise of costs for the utility, transportation, raw material prices & worker wages, etc. in doing business in the recent times.Meanwhile, RMG products unit price is declining globally, the last four years, Bangladesh lost 1.62%-unit value of its apparel items, based on the compound annual growth rate that refers our miserable efforts to grab and fulfill the demands for high value-added products.

According to President of BGMEA. “It signifies Bangladesh’s lack of capacity in value addition, whereas the priority is to go for the high-end market,” However, Vietnam is going to pick Bangladesh’s position as the world’s second-largest apparel supplier by concentrating on value-added diversified products & so value addition is a leading option to sustain this competitive global market. Although even so, Bangladesh is ahead of Vietnam in apparel exports that’s Bangladesh earned $34.13 bn with only 2.73 per cent export growth in the last financial year from FY18 whereas Vietnam earned $32.64 bn,7.30 per cent growth.

Even after four decades, Bangladesh’s garment sector is still trapped in basic items (T-shirts, Polo-shirts, trousers, sweaters, formal shirts and jackets, etc.), almost 75 per cent of shipments. Still lagging in the production of technical, functional, and smart clothing items. That’s why we could not tap into the global market of protective clothing, school uniforms, and armed forces which are the business worth billions of dollars.

But in the longer run, if measures and necessary changes are not gripped as soon as possible, the situation is becoming more and more out of control due to the downturn of the global economy of late. The rise of BDT value against USD represents as a reason for making low or no profit of business stakeholders. Another fact that the export figure doesn’t show to the actual net earnings, it represents the total revenue, not the profit whereas manufacturers have to spend a major portion to import raw materials. And so they’re not getting enough money in hand through exporting & that makes a barrier to invest in spreading out or developing their business to the next level in the global markets.

So in this circumstances, if Bangladesh wants to pick a strong position in the global apparel market even wouldn’t lose its second position to Vietnam, Bangladesh should focus more on innovation and value addition in the industries that can be the lifeline of the textile and apparel industry in the upcoming days.

It includes value-added diversified products rather than basic, traditional products & being match up with Fast Trend Fashion strategy as well as the MediTex, AgroTex, GeoTex, AeroTex, etc. that will help Bangladesh to make the business sustainable in the terrific competitive markets.

Value addition can be easily explained through one accounting equation that represents how to calculate a higher marginal profit of a business.

04From this equation, we can see that for making a profit, industries need to increase their revenue or reduce costs. So Revenue can be increased by increasing sales volume by grabbing more orders and increase their productivity as well as doing market innovation that helps to claim better prices. Another option of enriching profitability is the reduction and optimization of costs by optimizing existing resources & processes through ensuring better planning and coordination as well as using different tools & techniques. Meanwhile, the existing value addition in the RMG industry is 64.33%) which is the highest in last six years. However, there is still huge scopes to add more value.

And Fabric is one of the major portions where higher value addition is possible. Value addition is slower or the same in some areas of the woven segment, compared to that of knitwear & it depends on the capacity of backward and forward linkage industries. The local textile industry can meet the entire demand for knitwear fabrics, but it lags in producing woven fabrics. According to data, the value addition rate of knit items is around 90 per cent but the situation with woven products is entirely reverse, around 55 per cent for export-oriented industry. If Bangladesh wants to increase the ratio of value addition of woven items, they have to concentrate to develop fabrics in the woven sector as backward linkage like the knitwear sector which helps to ensure more than 80 per cent value addition. Even after four decades, the sector is significantly dependent on imported raw materials and accessories that indicate some basic weaknesses about the development of backward linkage industries.

So experts recommended that they have to raise investment in both backward and forward linkage industries as well as technological up-gradation to increase the value addition of the RMG sector. It ensures the local value addition can reach 70-75 per cent if we can produce high-quality fabrics.

But the local investors are least interested in such ventures, it is highly capital intensive. In such a situation, the most viable option is seen that country can offer an opportunity to attract foreign investors for investing in these sectors that will be a great option to raise the value addition in apparel exports. The important thing of this backward linkage industry is the making success of local sourcing that also reduces the lead time of shipments.  Most of the RMG items of Bangladesh, exported to different countries of the world, are cotton-based, almost about 74.14 per cent of the total exported.

According to the CPD Additional research director, “the sector is largely dependent on cotton-based items but they are not up to the mark in producing non-cotton fabrics and man-made fabr ics so that there are poor efforts to grab and fulfill the demands for high value-added non-cotton based garments,”

In recent years, the use of non-cotton fiber has increased in the consumer market So Economists recommended more investment in manufacturing non-cotton products to grab the high-end global market demand. And so the textile and apparel sector people have to give more attention to producing other items like lingerie, swimwear, sports item, functional fabric, functional textile, etc. that is imperative to get a healthier price, which ultimately would support the sector to sustain in the global trade.

Besides, BGMEA has identified 51 readymade garment products for export having enormous demand in the global market. Although Bangladesh produces these products but in very small quantity. Among the 51 items 31 are cotton based and the rest are non corron products.  BGMEA data shows, the global market size of the 31 products is about $132 bn and Bangladesh earned $7.16 bn by exporting these items & the rest 20 items are $54 bn and Bangladesh earned only $1.2 bn by exporting these items in last year.

In denim sector, once the country fully depended on imported denim fabrics but now the country has made significant progress in denim fabrics that 50 percent of the denim fabrics produced locally that are being exported with an average 73 percent value addition. Bangladesh’s performance has been very strong having already overtaken China and capturing 21.8 per cent of the market share in the global market even in European markets, Bangladesh exports over $1 billion-worth denim products in a year and one out of every three jeans being worn is from Bangladesh.

And this is a great scope for the denim manufacturer because Denim products have a huge opportunity for value addition through the various washing processes. In addition, once the RMG industry depended on the imported packaging and accessories materials. But now the local industries can meet up to 90 per cent demand for packaging & accessories for the export-oriented RMG industry. Meanwhile, Designing and product development section would be a magnificent value addition as well as product branding, marketing, and retailing is another scope of value addition.

Moreover, Bangladesh needs to think differently about the textile & RMG industry, they need more attention to establish research and development units for every company to create the new design and develop value-added products rather than only copy-paste the buyer’s designs wherein copy-paste has very less scope to claim better prices. So a dedicated and strong R&D team could give owners the surety in the long-term business policy that helps to increase the ratio of value addition.

Bangladesh can focus on an idea, innovation, research & development of the semi-heavy industry for reducing dependence from a foreign country that is the prime mover of a sustainable industry. If the stakeholders of Bangladesh are committed to upholding rigorous growth in the domestic and international arena, they must emphasize on upgrading in the apparel value chain to make sure more value addition.

Usually, four ways can be used to upgrade  the Value Chain:

1. Process upgrading

2. Product upgrading

3.Functional upgrading

4.Chain (or inter-sectoral) upgrading

By understanding its unique proposition, Bangladesh should set its strategy that defines how the country can ensure further value addition by upgrading in the value chain with indigenous design capability and technology. By following that strategy, Bangladesh will have an opportunity to upgrade the current technologies offered and acquire innovations that make a strong position in the world & it carries the leadership over the other competitors. So by upgrading the value chain, they can add value to their products (Functional textiles, Fashion & Style, Operational performance & Sustainability features) that help the manufacturers to claim the better price for their products.

Afterward, industrialists have to gradually invest & develop more indigenous capabilities to produce eco-friendly products that match the latest global fashion strategy such as fast fashion, compassionate fashion & circular sustainable fashion, as there is a huge demand for it in the consumer market. And they should focus on making their retailer brand in the global market that will help them to claim prices according to producer interests.

However, the value addition is a perception where productivity represents a key factor so they have to work to increase their productivity if they want to be more competitive globally because most of the factories in Bangladesh operate their production at 45 to 55% efficiency which is below par.

05From this chart, we see that Bangladesh’s per hour productivity was valued at $3 where average minimum annual wage $798, compared to $4.1 & $4.7 for Myanmar & Vietnam.                                                                                                And Sri Lanka leads the region at $15.9, a 460% higher labor productivity than Bangladesh.

Still, they’re not good enough in productivity compared to their competitors. But there is still a huge scope to improve productivity and though many of the industries are working to improve their productivity and adopting innovative solutions like industrial engineering, planning, monitoring & controlling and lean manufacturing, etc. The industry can obtain more efficiency through implementing efficient management practices, technology selection, as well as workers, train up regularly.

The country’s garment sector has the potential to grow in terms of value addition if they can engage owners to raise awareness about how to concentrate more on value addition, capacity building on product & market diversification and better negotiation as well as branding & marketing by resolving present hindering of the industry growth such as lack of suitable policy support, insufficient infrastructural development, deficient gas, and energy supply, underprivileged port condition, unskilled manpower, So by producing Value-added sustainable products, Bangladesh can attract more international retailers & brands and grab more of the global market share that will help to make their business more sustainable in this competitive world market then accomplish the target of Bangladesh’s RMG exports value will not be a utopian thing.

failed

We send out weekly newsletter.It's free!

Our intelligent team curate fresh news & updates to entertain our valued audience

You are almost done. Please check your inbox or spam folder to confirm your subscription.