https://today.thefinancialexpress.com.

bd/views-reviews/factories-relocating-from-china-bangladeshs-
scope-1563109978

Factories relocating from China: Bangladesh’s scope

M S Siddiqui | July 15, 2019 00:00:00

China, the European Union (EU), Bangladesh and Vietnam were the world's
top four garment exporters in 2017. Together, they accounted for 75.8 per
cent of the world's market shares - growing from 74.3 per cent a year earlier
and a substantial increase from 68.3 per cent in 2007. Globalisation has
transformed China into the "world's factory." Eighteen years ago, developed
and newly industrialised countr ies moved their labour-intensive and low-tech
industries to China. It is the world's largest exporter of apparel, with
shipments of $158.4 billion in 2018, or more than 30 per cent of the global
total.

China is gradually moving towards higher technology. I t is also under

pressure of higher wage for workers, steadily rising labour costs, mounting
compliances, social insurance commitments, stringent environmental checks
etc. Along with this, the recent US-China trade war and sanctions over
Chinese goods prompt China to re-locate factories from China to other
countries.

The onset of the Sino-US trade war prompted a growing number of foreign
companies to leave China and move to Southeast Asia. China, the "world's
factory," is losing its competitive edge. The Sin o-US trade war seems to have
accelerated the process of relocation of companies from China to the other
countries.

Foreign companies and even the Chinese can use industrial automation as a
strategy to offset high labour costs for some of the products. But the low-tech
and labour-intensive industries, such as the clothing industry, rely heavily on
skilled labour which cannot be fully automated. Low-tech and labour-
intensive industries are not complicated to set -up and its workers are easy to
train, making it feasible for a foreign company to move production to another
country.

The head of global research at Standard Chartered Bank pointed out that
according to a survey by South China Manufacturing Centre in 2015,
reportedly, 11 per cent of factories in southe rn China planned to move to
ASEAN countries, India and Bangladesh to avoid increasing costs. The fact
that these countries have a Free Trade Agreement with China under the fold
of the Association of Southeast Asian Nations (ASEAN) is an added
advantage. According to the American Chamber of Commerce in China, with
membership of more than 3,300 individuals from 900 companies operating
across China, 35 per cent of the companies it surveyed have moved or
considered moving their production bases out of China to other countries or
regions such as Southeast Asia.

Not only garments, to avoid the high tariffs imposed by the United States,
many Chinese factories are transferring their assembly lines abroad.
Taiwanese factories in China that manufacture shoes for Nike, Adidas, Under
Armour and other brands have moved their production lines to Southeast
Asia and India, according to a September16, 2018 report in the Japanese
financial newspaper Nihon Keizai Shimbun. Chinese companies that
manufacture bicycles, tires, plastics and textiles are also moving out of
China.

Kerry Logistics Network Ltd, Asia's largest shipping and Logistics Company
based in Hong Kong, is currently moving its production lines from China to
Malaysia, Vietnam, Myanmar and even Laos. An increasing nu mber of
manufacturing companies have been setting up their production lines in
Indonesia, the Philippines and Malaysia.

International trade experts and economists have said that Bangladesh

appears to gain from the trade conflict between the US and China. T he chief
economist of the Asian Development Bank (ADB) Yasuyuki Sawada
calculated that the gain could be 0.19 per cent of the GDP or $0.40 billion as
China's exports will decline following the US tariff measures and there will be
relocations of productions.

Having one of the lowest minimum wages in Asia, Bangladesh is an apparent

choice for garment exporters looking for lower production costs. Bangladesh
is one of those alternatives since labour cost is still cheap in Bangladesh.
Bangladesh is the world's second-largest apparel exporter, with a 6.40 per
cent share of the global apparel market. Vietnam comes in third at 5.80 per
cent. Wages in Vietnam are less than half of that in the big Chinese cities
like Shanghai and Guangzhou.

The expected gain would not be automatic though. Bangladesh will "need to
compete with others" since other Asian countries are apparently better
placed than it to gain out of the US-China trade war. These countries can
replace Chinese exports by expanding their exports with better l ogistics and
other services along with a Free Trade Agreement (FTA) with China thus
facilitating investment and sourcing raw materials. ASEAN and India have
FTA with EU and USA allowing their exports duty -free access to the latter
destinations.

The ASEAN countries also have low cost and unskilled workers suitable for
garment factories. But the labour is still the cheapest in Bangladesh. This is
why most investors are considering relocation of their factories to Myanmar
and Bangladesh. Some Chinese apparel p roducers also want to set up
factories under joint venture in Bangladesh as they see the country as a
competitive destination amid raging US-China trade war and rising costs in
the world's second largest economy.

US apparel buyers are also diversifying sup pliers out of China. This is why
US-bound apparel exports from Bangladesh grew 14 per cent in the last
fiscal year to $1.48 billion in the July -September period, and rose 3.0 per
cent in the year through June.

Vietnam's apparel and textiles exports are exp ected to climb 16 per cent to a
record $36 billion in 2018, according to information from a trade body.
Apparel accounts for more than 10 per cent of Vietnam's exports.

The reasons for the change in focus include a lack of skilled workforce in
Chinese textile and garment industry, rising cost of production, shifting
industrial base to industries such as IT and over -investment in Vietnam and
Cambodia where labour costs are lower.

Chinese textile and garment industry owners have invested heavily in

neighbouring Vietnam and Cambodia in the last two decades. This has
happened despite the fact that Vietnam's monthly minimum wages in 2019
varied by region from $125 to $180. The highest rates were in urban areas
like Ho Chi Minh City and Hanoi. These wages are some times half of China's
which vary by province from $143 to $348. Vietnam's minimum wage growth
is showing signs of stability. Minimum wages increased by an average of
5.30 per cent in 2019, a lower increase than in 2018 (6.5 per cent) and 2017
(7.3 per cent).

Labour costs are always the major consideration for any labour -intensive
manufacturing factory like footwear and garments. The cost to rent industrial
land ratio on a long-term lease at one Vietnamese industrial park in 2018
increased to $90 per square metre (10.76 square feet), up from $60 to $70 in
2017. And the monthly rent for existing factory buildings in industrial parks
near Ho Chi Minh City has risen to $4.0 per square metres, up from $3 last
year. Comparatively, the wages of workers in Banglades h is still below $100.

Bangladesh's wage is half of India's, and less than one -third of China's or
Indonesia's. Cambodia, Pakistan, and Vietnam are other apparel exporters
taking advantage of extremely low labour costs. The 'low -cost workers' failed
to attract reasonable foreign direct investment (FDI). Myanmar is
Bangladesh's new competitor in the garment sector.

So far, Bangladesh has not allowed foreign investment in basic apparels,

limiting the presence of Chinese and other companies in high -end and value-
added textile and garment items.

There are some investments in the garment sector in Cambodia. But the
country lacks mature management. The Chinese are thus thinking of
establishing manufacturing plants in Bangladesh with potential partners
although they have expressed concern about the higher lead time, poor
infrastructure, corruption etc. especially in the garments sector of
Bangladesh.

In order to take full advantage of this opportunity, Bangladesh should sign an

FTA (free trade agreement) with USA an d EU. Once this is complete, the
country can think about signing FTAs with China and other countries so as to
make value addition competitive for the end -buyers.

The so-called fear of loss of revenue due to FTA is a wrong, obsolete and
abandoned theory for the present globalised market. Bangladesh should also
bring about reforms in rules and policies so that these can reduce
bureaucratic obstacle and corruption and attract investments from overseas.

M S Siddiqui is a legal economist .

mssiddiqui2035@gmail.com