Diversification of RMG/ Knitwear Exports

In the last decades the labor-intensive clothing and textile sector (RMG and Knitwear) has been one of the fastest growing segments of world trade. RMG and Knitwear are among the first manufactured products from an industrializing economy but their significance decreases as workers wages increase. As a result, RMG and knitwear trade relations are dynamic: countries like Japan, Korea, Hong Kong, Malaysia and Taiwan were highly competitive in this sector, but now Bangladesh, China, India, Indonesia, Pakistan and Vietnam have taken over due to low labour costs. Several studies argue that even China is losing its comparative advantage in the sector. In this context, an important precondition for a sustained growth of Bangladeshs clothing sector will be its ability to respond to the changes in global RMG and Knitwear supply and demand.

Why diversify of export destinations are required?

Several cross country studies have shown that greater diversification is correlated with more rapid growth of per capita income1. Diversification makes countries less vulnerable to trade shocks by stabilizing their export revenues. It also has spillover effects in the economy - it creates learning opportunities that lead to new forms of comparative advantage.

Countries diversify by increasing the number of trade partners they have (breadth), and/or by exporting new products to old markets (depth). While deepening relationships with existing markets is key for export growth, geographical diversification is found to be of great significance for low income countries such as Bangladesh for example the East Asian Tigers achieved well over 300% gains in this area between 1974 and 2003. More recent analysis suggests that the opportunities for many countries to further exploit geographical diversification are enormous.

The global downturn, which ensued in the develop economies like the US and the EU countries, forced to cut down both the demand and prices of local apparels to those markets. Bangladesh is facing tremendous price pressure from the buyers, and Bangladeshi manufacturers have left a large quantity of export offer in the recent times due to the price factor. Following this Bangladesh has started losing its presence in the US and EU markets facing tough completion from its competitors like China, India, Vietnam and Cambodia, according to the local garments exporters. Moreover, availing various government supports the nations are also executing export orders in cheaper price than Bangladesh. As a result the countrys apparel export to the US market plunged by nearly $200 million and Germany, the largest garments importer in the EU declined by $ 34.27 million during the July-April period of just

concluded fiscal year, as per the Export Promotion Bureaus (EPB) data. With shipments valued over $3.5 billion, the USA was the single largest market for Bangladeshi garments and the EU countries imported nearly 60 per cent of Bangladeshs garments, valued at nearly $8 billion last fiscal year. As a chain affect many of small and mid-level garment units, used for sub-contracting to large- scale factories, have faced closure. Besides, many of the large-scale factories having huge production capacity are lying idle due to the inadequate export order. The industry is now unable to utilize the maximum production capacity due to the inadequate export orders and such situation has prompted the search for new export market.

However, government has announced a five per cent cash incentive for discovering new export markets that also encouraged the garment exporters. The market dynamics of global garment trade is changing rapidly so it is urgent to protect the industry from any kind of external shock and as part of the strategy we need to widen our playing field. At present more than 25 per cent production capacity is remaining unutilized that means the industry has the ability to export more $3.0 billion apparels to the global market.

Bangladeshs US$9 billion RMG industry is export-driven and already the major source of national foreign exchange earnings. Improvement of this sector is required as it has opportunity to access to new markets but it is under-utilizes and thus loosing existing export opportunities. As shown in Table 1, Bangladeshs RMG is over-dependent on a limited number of markets in North America and Europe. Exports to the rest of the world are negligible and increasing at a very slow pace. Moreover, Bangladesh RMG depends on a limited number of export products. According to ITC indicators measuring the export performance of the clothing sector in 184 countries, Bangladesh lags behind major competitors such as China and Viet Nam in terms of product diversification. According to ITCs relative unit value indicator, apparel exports from Bangladesh are also below the world average unit value, which reflects the dominance of low quality apparel exports from the country.

In todays severe global economic downturn, such commodity and market dependence increases the countrys vulnerability to industry-specific external shocks. It is expected that the accumulated market knowledge will facilitate future entry of new products and players and will create employment opportunities for the poor.

Possible New Destinations for Export

In 2007 Bangladeshs share in world RMG exports was 3.46% for knitted apparel and 3.05% for woven article4. The dynamic nature of the global Rmg and knitwear trade flows opens up potential for Bangladesh to expand its export market margin.

However, differences in current market penetration call for different diversification strategies. Now we are describing some established markets like Canada and the new market opportunities such as Japan and China.

1) China:

China, the world's largest apparel supplier, has become a major export destination for Bangladesh as Chinese manufacturers are now reluctant to produce basic RMG items. The Chinese manufacturers have recently shifted from basic readymade garment (RMG) items to high-end apparels. A significant number of garment factories that made basic RMG products earlier faced closure in China recently. As such, Bangladesh and other competing countries are now exporting RMG products to China.

According to Export Promotion Bureau (EPB), Bangladesh exported knitwear products to China worth $3.071 million in fiscal 2007-08 against $0.76 million in the previous fiscal year, posting a staggering 400 percent growth. In fiscal 2007-08 the country exported woven garments to China worth $6.691 million against $6.323 million in fiscal 2006-07. The total export to China from Bangladesh amounted to $106.946 million against the import of around $3.0 billion in fiscal 2007-08.

In 2007, Bangladesh exported cotton T-shirts, singlets and other vests worth $0.79 million against $0.57 million in 2006. China imported such kind of apparel items worth $976.890 million in 2007 and $926.330 million in 2006 from the rest of the world. It clearly shows that China itself imports apparel items of a significant amount. Aggressive marketing drive by Bangladesh can grab a chunk of such import of China, experts say.

2) Canada:

Imports from Bangladesh to Canada have achieved a spectacular growth since Canadas elimination of duties and quotas in 2003 on most apparel made in LDCs. With USD$527.7 million worth of RMG exports

to Canada (2008), Bangladesh is currently its second largest garment supplier after China. Bangladeshs share in Canadas total imports of knitted and woven apparel is more than 6%.

Bangladesh-Canadas is a stable trade relationship and Bangladesh has achieved a relatively good market penetration. In this case deepening of the trade relationships will be achieved by product diversification (higher value RMG and non-RMG) and better adjustment to Canadian market demand. More importantly, improved RMG export performance will require some combination of productivity improvements (to lower costs) and quality improvements (to differentiate products). This is an important route to higher growth for instance, China is found to export advanced high-productivity products that are normally associated with countries that have per capita incomes three times higher than it.

3) Japan:

As mentioned above, the ability of Bangladeshs RMG sector to establish and deepen export relationships beyond the EU and North America needs to be improved. With knitted and woven apparel imports worth US$22,598 million (2007), Japan is the fourth largest clothing importer in the world. RMG imports originating from Bangladesh are tariff-free, yet Bangladeshs share of Japans imports in 2007 is only 0.07% for knitted apparel and 0.2% for woven clothing. The scope for deepening of the trade relationship and for product diversification is significant.

Bangladeshi exporters are also looking to the Japanese market as the hottest new export destination. Apparel exports to Japan started to pick up after the Japanese government announced the China+1 strategy in 2008. Japan is eager to reduce its dependence on China, the largest supplier of apparel items globally. The China+1 policy promote shifting production from China to other nations, such as Bangladesh. Being a member of the least developed countries' group, Bangladesh has duty-free access to Japan for woven product (under the generalised system of preferences, or GSP). Knitwear faces a duty of 17 percent, as Japan clings to its aging knitwear industry.

Being a member of the least developed countries' group, Bangladesh has duty-free access to Japan for woven product (under the generalised system of preferences, or GSP). Knitwear faces a duty of 17 percent, as Japan clings to its aging knitwear industry. The Japanese government has recently invited the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) leaders to discuss about dutyfree access for knitwear. Earlier, the association leaders had asked Japan to relax rules-of-origin for knitwear items. If Japan allows duty-free knitwear, it will be a great opportunity for Bangladesh. In fact,

Dhaka's decision last year inspired exporters with a cash incentive of 5.0 percent of each apparel shipped to Japan. Manufacturers need separate production lines for the Japanese customers, as they never compromise on quality. On the other hand, Japanese buyers can afford to pay for high quality.

Garment exports to Japan maintained roughly a 175 percent growth rate in between 2008-10, according to the EPB. Even with the duty, Bangladesh registered a 231 percent rise in knitwear exports to $60 million in the first 10 months of the past fiscal year; and earned $90 million from woven garment exports -- 121 percent growth over the same period a year earlier.

The Japanese textile and clothing investors are also coming to Bangladesh. Big entrepreneurs like Maruhisa, Yokohama Tape TM Textiles etc. have decided to invest a significant amount of money here. Three related companies -- NI Teijin, CHORI and FVG -- have opened liaison offices in Dhaka, and two companies opened quality-control inspection centres (PQC and K2) to meet Japanese national standards.

4) Latin America:

Bangladesh Garment Manufacturers and Exporters Association (BGMEA) delegation visited some Latin American countries a few days ago to assess, explore and prepare for current and future potential of Bangladesh's garment exports. During the visit, tremendous responses were received from importers and buyers of those countries. Rough reckoning says Bangladesh can fetch US$400 million from apparel exports to three Latin American countries in the next three years. These countries are Brazil, Mexico and Chile.

The main obstacle to raising garment exports to Latin America is the absence of Bangladesh missions in those countries. If government missions are opened in the countries, then it would be convenient for Bangladesh exporters to catch market there, textile experts say.

Brazil's readymade garment import amounted to $ 767.072 million last year, of which $303.631 million knitwear and $463.441 million woven, while Bangladesh's export to that country was $50.287 million ($ 33.599 million knitwear and $16.688 million woven).

Mexico's import totalled to $1,947.85 million last year, ($982.58 million knitwear and $965.27 million woven), of which Bangladesh shared $114.01 million ($61.76 million knitwear and $52.25 million). Out of Chile's total RMG import to the tune of $ 1,074.83 million last year ($517.39 million knitwear and $557.44 million woven) Bangladesh took a part of $7.47 million ($ 5.26 million knitwear and $2.21 million).

The Mexican government has agreed to allow any Bangladesh businessman holding a US visa to visit that country. Although Chile has agreed to reduce its tariff from 8 per cent to 6 per cent it is noteworthy to mention that high tariff persists in Brazil at 35 per cent and Mexico at 30 per cent.

5) Russia:

The Export Promotion Bureau (EPB) has started peddling different products of the country, especially RMG products, to discover new export destinations in the wake of the recession. EPB arranged a fair in Moscow where nine local companies have participated in the Moscow Consume Export 2009 as part of the diversification processes.

According to EPB statistics, Bangladesh exported woven garments worth $5.350 million and knitwear items worth $7.374 million to Russia in the 2007-08 fiscal year.

6) Others Markets:

Bangladesh is also demonstrating export vigour in South Africa. In the same fiscal year, the country exported woven products worth $16.977 million and knitwear products worth $12.211 million to South Africa.

India could be one of the largest export destination for the local garments of Bangladesh as it has more than $28 billion local market, which is growing on an average 18 per cent per year.

What is needed to be done:

This trend is confirmed by data about Bangladesh export penetration in other top non-EU non-North American importers of RMG globally. Moreover, Bangladeshs RMG needs to be able to respond to the enormous changes in the structure of world demand as incomes in large emerging countries such as Brazil, China, and India grow at fast rates.

Bangladeshs weak performance in new market penetration is related to insufficient knowledge about consumer preferences, business opportunities, quality and technical requirements in foreign markets. RMG exporters with relatively low productivity and a low profit margin are unable to survive if they have inadequate information about the costs of exporting a product to a particular market.

Moreover, firms in developing economies tend to underinvest in market research, because it can benefit their competitors. It is important to regularly generate, update, and disseminate relevant information about new markets with export potential.

To help correct information asymmetries in a sustainable manner, GTZ and Bangladesh Government is jointly running a project named PROGRESS which is enhancing the capacity of the research cells of BKMEA and BGMEA, and the Export Promotion Bureau under the Ministry of Commerce. They in turn will support export market diversification of the RMG industry in Bangladesh. Markets we currently focus on include Japan, Brazil, Argentina, Mexico, South Africa, China and India.

Export promotion activities such as country image building and marketing also have a strong impact on exports it has been suggested that the effect calculated of an additional US$1 of export promotion agencies budget in developing countries is around US$60 of additional exports. So it is necessary to enable associations, chambers and government agencies to provide marketing services to the industry, including development of advertising and promotional materials, export guides, matchmaking, strategic communication, marketing plans, and event management.

However, sustainable and rapid export growth in low-income countries tends to be hampered by both market and government failures. Diversification thus requires suitable backbone services, working export support institutions, and a conducive business regime. That is the reason why development of a coherent and unified Apparel and Textile Trade Strategy is needed. As current efforts in this area still lack adequate coordination, the program facilitates stakeholder dialogue and discussion. The public sector along with leading industry associations and civil society actors will contribute to the formulation of the strategy.

Concluding Remarks:

RMG buying houses, both local and foreign, are now growing rapidly in Bangladesh, as the country has become a lucrative place for RMG outsourcing on the appreciation of Chinese currency against the greenback. As part of their business expansion, foreign buying houses are eying to set up more liaison offices here. The buying houses including MandS, Adidas and Tesco have already published advertisements in newspapers to recruit experienced merchandisers for such liaison offices to collect RMG products at a competitive price from local garment units.

There is no denying that the country's export witnessed a significant growth during the last two decades due to growing competitive strength of the local exporters, mainly the RMG exporters, against their rivals from countries like India, China, Vietnam and Pakistan. Among other factors, efforts of the private entrepreneurs and the provision of cash incentive played a significant role in export growth. Cash incentives offered by the government also helped to build up many backward linkage industries and generated employment.

The garment industry has now emerged as a prime industrial sector in the country. More than five million people are directly and indirectly employed in the sector. Also, the local apparel industry is facing stiff competition in the world market. There is a need for developing forward linkage industries for sustaining in the competitive markets. Overall situation in the garment sector is much better now. But still, there should be more improvements in the social sector where workers' living conditions are conspicuously tagged.