The Ready-made Garment or RMG industry, which started its journey four decades ago, is now the powerhouse of Bangladesh’s economy. Almost 80% of Bangladesh’s total export earnings comes from this sector. In the fiscal year 2020-21, Bangladesh earned 31.45 billion USD from RMG exports.
Besides its contribution to generating foreign revenue, this sector also employs millions of people in the country. In 2015, there were more than 4 million RMG workers in Bangladesh; by 2020, that number rose to more than 4.2 million. Amongst these, more than 1.8 million workers are male, and 2.5 million are female.
History of the RMG Industry
The journey of the RMG sector dates back to 1960, along with the Reaz store in Dhaka. Later in 1973, they changed the store name to Reaz Garments Ltd.
In 1978, for the first time, Reaz Garments started expanding the apparel industry in Bangladesh by exporting 10,000 pieces of shirts in Paris for 13 million francs. During that time, only nine garment manufacturing units were operating in the country, including both large and small. As a result, the export income from these factories was only a few million dollars. However, in addition to exports, these factories also sold products in the local market.
Although the journey of the RMG industry in Bangladesh was through Riaz Garments, the late Mr. Noorul Quader Khan was known to be the pioneer of this industry. In 1979, he set up Desh Garments, Bangladesh’s first 100% export-oriented clothing factory, at the cost of 1.3 million USD. Desh Garments has played a significant role in the development of the RMG industry in Bangladesh. Mr. Qadir had the vision to train the youth of the country for the future business leadership role. In the same year, 130 trainees were sent to South Korea’s Daewoo Corporation’s Pusan plant for training to form a skilled labor force to make ready-made garments. After six months of training, they returned to Bangladesh and formed the core human resource base of its RMG industry.
At present, Desh Garments has six lines, 600 employees, and the facility of producing 5 million pieces of garment per year. Until 1980, jute and jute products, known as the golden fiber of Bangladesh, were the largest export sector in Bangladesh, accounting for more than half of the country’s total export earnings. But as exports in the RMG sector began to increase, they surpassed jute and jute products exports after the ‘80s. Since then, RMG Industry has been dominating Bangladesh’s export sector.
In 1980 Youngones Corporation of South Korea and Trexim Ltd. of Bangladesh jointly set up an apparel factory called Youngones Bangladesh, of which Trexim Ltd owned 51%. In December, the business exported their first batch of products (padded and non-padded jackets) to Sweden.
During the same time, several other entrepreneurs set up their factories, including Akhtar Mohammad Musa’s Bond Garments, Mohammad Humayun’s Paris Garments, Azim Engineer Mohammad Fazlul Azim’s Azim Group, retired Major Abdul Mannan’s Sunman Group, M Shamsur, Rahman’s Stylecraft Limited, and AM Subid Ali’s Aristocrat Limited. In the early 1980s, the Bangladesh government issued a license to import duty-free garment machinery to manufacture export products. As a result, the number of garment factories in Bangladesh started increasing very rapidly. In 1984-85 there were 632 factories in Bangladesh, whereas in 1999 the number increased to about 2900.
Of which most of the factories are located in Dhaka and Chittagong. By that time, Bangladesh ranked 123rd as an exporter of garments globally, the 6th biggest supplier in the US market, and the 5th largest T-shirt supplier in the EU market.
In the Fiscal Year 2000-2001, the RMG industry’s exports were just 4.8 billion USD, by the year 2010-2011, they increased to almost 18 billion USD, representing a growth of nearly 14% annually. According to a report in 2019, the country’s government established an EPZ, which offers foreign investors a 10-year tax vacation, duty-free importing of machinery, raw materials, bonded warehouses, and initiatives such as back-to-back LCs have played a vital role in 100% export oriented garment facilities. These are the reason behind the country’s such growth in exports. At the same time, more than 5,000 garment manufacturers dotted the country, employing more than 3.5 million people. Between 2005 and 2010, Bangladesh’s RMG business received an average of 871 million dollars in foreign direct investment.
In July 2009, two garment workers were killed in a clash leading Hameem Group, the country’s largest garment manufacturing company, to lose Rs 100 crore. A fire at the Tazreen factory in 2012 killed at least 112 people injuring over 200 more. In the same year, the Rana Plaza building collapsed, killing over 1,100 people and injuring over 2,500 more. Following such an incident, many foreign buyers pulled back and halted their orders of Bangladeshi garments. The United States also suspended Bangladesh’s preferential tariff benefits.
Factory owners spend more than a billion dollars on remediation initiatives to avoid such catastrophic accidents. In addition to forming the Accord on Fire and Building Safety, the Alliance for Bangladesh Worker Safety, and the National Initiative of the Government of Bangladesh, hundreds of factories should be shut down to solve factory structures’ problems, fire control, and other issues. By 2018, Bangladesh has been able to achieve 84.1 percent remediation by significantly improving workplace safety.
The country’s RMG sector received a boost as a result of these initiatives, and export volume doubled. In the Fiscal Year 2011-2012, the RMG sector’s export earnings stood at 19.08 billion USD, while in the Fiscal Year 2020-2021, it increased to 31.45 billion. As a result, Bangladesh has more green garment manufacturers than any other country in the world at the moment.
Reasons Behind the Growth
In the 1970s, developed countries initiated outsourcing from developing countries. As a result, large retailers in the EU and the USA continue to order from Bangladeshi entrepreneurs on the condition that they meet certain export criteria.
Low Labor Cost
As Bangladesh is a developing country, labor costs are lower in any manufacturing or industrial industry. Bangladesh has a large workforce of unskilled workers in particular. Due to low production costs, you can get the Bangladeshi garments product at a competitive price. As a result, despite having a big garment production capacity, Bangladesh has developed a competitive market with nations such as India, Vietnam, and China. This is one of the primary reasons why foreign retailers prefer to import items from Bangladesh.
Low Investment Cost
International buyers helped the country’s RMG industry in a variety of ways, including technological and marketing assistance. For example, they provide back-to-back LC, or letter of credit, services to Bangladeshi exporters to help them handle their working capital issues. Exporters can also build up factories in the country with a low capital investment in this way. On the other hand, Bangladeshi entrepreneurs are also interested since international buyers are responsible for marketing, and garments is a low-investment and low-tech industry.
According to the revised Import Act of 1993, back-to-back LC cannot be more than 80% of mother LC. This means that the foreign currency required to purchase Intermediate RMG Manufacturing Materials to export goods cannot exceed 70 percent of export earnings. This results in net foreign exchange earnings accounting for 30 percent of total export volume.
For the development of the RMG industry in Bangladesh, the government of Bangladesh adopted an import policy in the 1980s and offered bonded warehouse facilities instead of a duty drawback system for 100% export-oriented garment factories.
The duty drawback system was basically to refund the duty fees and taxes that had to be paid on the imported goods, which would later be re-exported as unused or finished goods. 100% export-oriented garment factories, on the other hand, can easily import the essential fabrics and accessories in the duty-free system using the bonded storage facility system. In addition, the competitiveness of the RMG industry has been further enhanced by reducing production delay time and greatly reducing bureaucratic complexity.
Diversified Export Destinations
One of the causes for the RMG sector’s success in Bangladesh over the last decade has been diversification in export destinations. However, 62% of Bangladesh’s RMG exports are still going to European countries, and 18% to the US market. As a result, Bangladesh’s dependence on the American market is declining along with the increase in exports of non-traditional markets. If Bangladesh’s apparel products can continue to export to these new markets, it is possible to maintain the country’s RMG industry growth.
Free Trade Agreement
From 1974 to 2004, the World Trade Organization’s Global Trade Agreement or Multi-Fiber Agreement (MFA) boosted the growth of the RMG industry in Bangladesh. According to the MFA agreement, the number of garments that developing countries can export to western developed countries is determined by quota.
There were no Cautious restrictions in Bangladesh until 1986, which led to many quota-restricted countries, especially some South Korean entrepreneurs, connecting with Bangladesh via joint venture and subcontracts. At the same time, the Bangladesh government also launched a few initiatives to attract foreign buyers and investors. This helped Bangladesh to keep a monopoly and hold a captive market in the RMG exports to many other countries, notably the United States. However, it was assumed that the cancellation of the Multifibre Arrangement would be Severely damaging for the RMG sector’s growth and competitiveness. As a result, according to 2004 research on Bangladesh’s economic impact, eliminating the quota system would cut the RMG sector’s exports by 8%, and the country’s GDP will fall by 0.54 percent. But, during that time, Bangladesh’s RMG industry was still capable of recovering from such a setback. According to the Export Promotion Bureau, Exports climbed by 19 percent on average over the first six months of the quota-free period. Furthermore, the EU’s GSP facility played a vital role in the growth of Bangladesh’s RMG business.
Role of BGMEA
In 1983 Bangladesh Garment Manufacturers and Exporters Association (BGMEA) was established to encourage and maintain the interest of RMG manufacturers and exporters in Bangladesh. It is a leading trade organization in Bangladesh. And it is playing a big role in the country’s industrial growth through policy advocacy of the government, provision of services to members, empowerment of garment workers, and social compliance in factories.
Besides this, the organization is working on collaborating with local and international brands, development partners, and stakeholders. Starting with only 12 members, currently, BGMEA has about 4000 factories registered under them.
40% of the factories enlisted under BGMEA manufactures knitwear and sweaters, and the remaining 60% manufactures woven garments. The member factories export only woven garments as well as 95% sweaters. In addition, these factories export about half of the country’s light knitwear items.
However, the BGMEA University of Fashion and Technology offers students graduate and postgraduate degrees in fashion design, knitwear technology, and apparel merchandising. But there is still a shortage of skilled employees, especially in mid-level positions. Therefore, universities should initiate in setting up departments and include RMG sector courses besides regular studies in their curriculum, to develop the country’s youths as well the skilled manpower in this industry.
Challenges in the RMG Industry
Lack of Product Diversification
Lack of Product Diversification is one of the biggest challenges in this industry. Although Bangladesh has been exporting garments products for almost four decades, the items in the low-priced segment are more. On the other hand, competing countries like Cambodia, Vietnam, China, and India are producing premium segment products. In addition, only five low-price items occupy more than 80% of the total production capacity of Bangladesh. Items like T-shirts, trousers, and sweaters dominate the list of total export items.
At present, Bangladesh can make fabrics from synthetic fiber as well as complex products like outerwear, tailored items, and lingerie. However, most of the factories in the country do not yet have the necessary equipment to make such products, and the factory owners don’t seem much interested in providing such facilities.
Bangladesh’s RMG sector continues to lack adequate support for backward linkage. As a result, in most cases, we have to import raw materials from external sources such as foreign countries. For example, Bangladesh is still dependent on China for accessories like woven fabrics, laces, etc. While Bangladesh is ahead in terms of exports and export revenues are coming in, the sector’s value addition is still insufficient. However, the vast majority of export money is spent on importing these accessories and supplies, which is undermining the confidence of exporters and manufacturers.
On the other hand, competing countries like Cambodia, Vietnam, China, and India have strong backward linkage. Apart from circular knits, Bangladesh is still lagging in terms of backward linking.
Lack of Efficiency & R&D Section
Bangladesh’s biggest drawback in the RMG industry is the lack of efficiency and infrastructural development.
Because one has to face bureaucratic complications in setting up a new factory in the country and seeking permission for utility connections like gas, electricity, etc. Moreover, efficient workforce development is also a big challenge.
In addition, most of the factories in Bangladesh do not have an R&D section. In Bangladesh, factories take 3 to 4 months from product development design and sample making, whereas China can complete the same process in just 15 to 30 days. Other competing countries also have quality R&D units. Strong R&D facilities will significantly boost the growth of the country’s RMG industry, and companies will be able to produce at a larger capacity in a shorter period of time.
Concerns the Status of Preferential Trade Facilities
Bangladesh may lose preferential trade facilities in the EU and other countries if it moves from a least developed to a medium country. According to research by BGMEA in 2020, since 61% of Bangladesh’s duty-free export shipments are delivered to the EU region, there will be a loss of $4 billion if these duty-free exports are halted. Bangladesh has to keep pace with the competing countries in order to overcome this challenge. For this, the RMG plants in the country must place focus on productivity, digitization, automation, and sustainability.
Bangladesh is currently in second place in terms of RMG exports, while in 2020, Vietnam was in second place for a while, with a market value of 29 billion, leaving Bangladesh behind with 6.4% of the global apparel market. Bangladesh had the third biggest market share at the time, with a market value of 28 billion dollars and a market share of 6.3%
According to BGMEA, the ongoing lockdown during the Corona epidemic is responsible for this. In addition, Vietnam has been trying to overtake Bangladesh since 2015. However, from January to July 2021, Bangladesh surpassed Vietnam as the second-highest apparel exporter, with over 1.94 billion in export earnings.
At that time, Bangladesh’s export revenues were 18.8 billion dollars, while Vietnam’s were 16.86 billion dollars. However, to stay ahead of Vietnam, the government, BGMEA, and the garment industry must implement significant legislative changes.