HOW GARMENTS (RMG) SECTOR OF BANGLADESH SURVIVED DURING GLOBAL RECESSION

The RMG industry of Bangladesh has expanded dramatically over the last three decades. The export composition changed
dramatically since then; readymade garments (RMG) comprising knitwear and woven apparel products emerged as the principle
export items of the country while jute export stalled. The country achieved remarkable success in export expansion, mainly because
of the stellar performance of the RMG industry. The demand for a countrys exports depends on the import proposition of the
people of other countries. Such propositions are predicted to be influenced by their economical growth. The recession that ravaged
much of the world, especially the western world, during 2008 and 2009 had profound implications for export efforts, and hence
economic growth, of the world. As the western economy moved in the negative growth zone, their imports plummeted.
Consequently the exports of the rest of the world also plummeted.
The Ready Made Garments (RMG) industry has been the main source of growth in Bangladeshs export market and also the
foremost employment generator. Though the direct contribution to GDP from this sector is relatively small (11%), but the industry
plays key role in employment and in the income provision to the low income group of Bangladesh, employing directly about 2.5
million people, which is about 48% employment in the manufacturing sector. In this sector about 80% of the total employees are
women. The industry also supports indirectly over 12 million people of the 145 million people of the country. This is also the major
export revenue earning sector of the country. In 2007-08, RMG accounted for 75.83% of all of Bangladesh exports in terms of
value. The export-oriented Bangladesh RMG industry has thus far concentrated mainly on US and EU markets. About 32% of
Bangladesh RMG exports are to the US, another 60% is to the EU and the remaining 8% goes to other countries.
The readymade garments sector in Bangladesh started its journey in late 1970s as a small non-traditional export sector. The RMG
boom in Bangladesh initiated in the early 1990s, when free-market oriented government policies and a variety of incentives to
RMG producers enabled entrepreneurs to invest widely in the sector. Throughout 1990s, the RMG industry grew steadily, from 759
RMG factories at the start of the decade to 2,726 by 1998. With the growth of RMG sector there is an increase in the number of
firms producing RMG in Bangladesh. In 2008 the number of RMG factories in Bangladesh stands at 4,740. The global recession
following the events of September 11, 2001 had a distinct impact on the Bangladesh RMG industry, leading to the closure of several
non-performing small RMG firms. The exports of RMG suffered as well, recording a 7% decrease in that period. However, the
industry was able to stabilize and continue growing throughout 2002, resulting in a 13% growth in exports in 2003. In the period
1990-2004, Bangladeshs market share in total world exports of clothing has only increased from 0.46% to 1.07%. Over the past one
and half decade, RMG export earnings have increased by more than 8 times with an exceptional growth rate of 16.5% per annum.
However, China has recorded a spectacular growth of market share, from 7.95% in 1990 to 21.04% over the same period. Thus
China has grown extremely competitive in global markets. India is also another competitor in this market. However, Indias market
share is not as large as China. This is not due to weaknesses in Indias RMG industry rather, Indias already diverse export
portfolio is not as reliant on the export of RMG as Bangladesh although their market share has grown, from 2.22% in 1990 to 3.33%
in 2004. Prior to 2005, all predictions indicated that the Bangladesh RMG industry would suffer acutely in the face of open
competition from India and China. Experts seemed unanimous that the end of the MFA would provide a severe shock to the
Bangladesh RMG industry, and that such a shock would make it difficult for our RMG factories to continue their impressive growth
trend. In the post-MFA era, Bangladeshs RMG exports have not declined, rather, have continued to grow. In 2005, RMG exports to
the US grew by US$ 392 million, a growth of 18.8% over the previous year. This provides a monthly average of US$ 231.4 million
worth of exports. In 2006, 49.13% of our total RMG exports were to EU countries and in the same year RMG sector earned 33.1%
of its export revenue from US market. The exports grew steadily in this period for other countries. In 2006, 17.64% export revenue
was earned by exporting apparel products in other markets and the percentage increased to 18.43% in the following year.
Bangladesh's exports to the USA grew by almost 5 percent in 2007. But the export volume in the US market did not increase that
much compared to EU market. This research noted that, due to the US recession, the manufacturers of Bangladesh experienced
some drop in the number of orders from the US buyers in the latter half of the year 2007. Bangladeshs RMG exports to the world
market reached an all time high value of over USD 9.35 billion in the end of 2007. Woven apparel exports and knitwear exports
stood at USD 4.61 billion and USD 4.74 billion respectively. In 2007, the RMG sector experienced a growth of 4.67%. While this
growth rate is not as impressive as the one achieved in the previous years, the relative position of Bangladesh compared to most
regional competitors in the two main export markets remains strong. An additional highlight for 2007 is that for the first time in the
sectors history knitwear exports exceeded those of woven apparel. In spite of having a strong and growing RMG sector, new threats
and global challenges are upon Bangladeshs RMG sector.
Both the major export markets of Bangladesh have started experiencing recessions in their own economy from the second quarter of
the 2007-2008 financial years. The US and EU economists are concerned about the fact that various economic indicators are
showing an upcoming recession in both the economies. The ongoing recession in the major export markets of RMG is posing as a
new challenge for Bangladeshs RMG sector. The effect of the recession might adversely affect the RMG sector in the coming

years. Focus should be put on the measures that the other competing RMG exporting countries are taking, especially the measures
of the Chinese and Indian Economy. Bangladeshs competitiveness at this challenging time also needs to be analyzed. An insight is
required on how this global recession, especially in the major buying nations, is likely to affect the RMG industry of Bangladesh.
Since all the previous analyses shows that there has been an ongoing recession in the US economy and the US imports of RMG has
also been affected, it is of utmost importance to find out if there is a fall in Bangladeshs export of RMG to USA. Table 1 show that
Bangladeshs export of RMG to USA has experienced fluctuation in the studied period from January 2006 to September 2008.
However, it is evident from the data and the trend of export is that in the period when USA is going through a recession,
Bangladeshs export volume to USA has not been very adversely affected. Since May 2008 there has been a gradual rise in exports
of RMG form Bangladesh to USA. Thus, Bangladeshs RMG export has remained steady in spite of decrease in total RMG imports
from the world by USA. US dollar (USD) is the most commonly used and accepted currency in international trade. As a result, the
value of the buyers/vendors currency against the USD plays a pivotal role in sourcing decisions. An appreciation 3 against the USD
means an increase in the cost of production for the manufacturers, but a decrease in the effective purchasing price for the buyers.
The USD is currently in a process of realignment, depreciating 4 in value against many major currencies. The causes behind this
trend have been identified as speculations about the countrys growth prospects, weak equity markets, and a large current account
deficit (ADB 2002). RMG sector of Bangladesh has experienced tremendous growth during the last two decades due to growing
demand in developed countries. Exchange rate therefore has a huge influence over the international competitiveness of the RMG
products. Bangladesh government started floating exchange rate at end-May 2003. Since then the exchange rate steadily depreciated
against US dollar up to 2005. The currency depreciated by almost 17 % during the period. As a result, the Bangladeshi RMG
products became artificially cheap to foreign buyers and more orders were made for procurement.
In 2006 Taka (BDT) appreciated a little. But the Taka has remained virtually constant against the dollar in the 2006-2008 periods.
But many of its competitors (e.g., China, Vietnam and India) have witnessed a rise in their cost of production due to their currencies
appreciating strongly against the USD. In China, the Yuan (RMB) appreciated about 7% last year, and another 3% in the first two
months of this year. The Indian Rupee (INR) has gained about 11% in 2007. In Vietnam, the Dong (VND) gained 1.07% in the
central banks exchange rate and 5% in the unofficial market against the USD since last December. This is another reason behind
Bangladeshs strong export performance against its competitors. As discussed earlier, the US dollar devaluation has been going
around for a considerable amount of time and by now every RMG owners is very much concerned about this fact. This US dollar
devaluation is not only affecting their profit margin but also affecting their current production cost. As noted by the 14 interviewees
that the changing dollar value is decreasing profit margin while the remaining 4 conveyed that their profit margin is still unchanged.
Moreover, most of interviewees (17) think that their cost of production is increasing due to the changing dollar value.
The RMG sector is expected to grow despite the global financial crisis of 2009. As China is finding it challenging to make textile
and foot wear items at cheap price, due to rising labor costs, many foreign investors, are coming to Bangladesh to take advantage of
the low labor cost. According to the Asian Development Bank (ADB) Bangladesh may face slowing economic growth in fiscal
2008-2009, hurt by a slowdown in the export-based industry and decline in remittance as the financial crisis is panning out across
the world. The first wave of the world recession raced to Bangladesh with good intentions for the RMG sector or so it seemed at the
time, as more and more buyers were moving away from china. However after six months, the effects started to go bankrupt or faced
financial/economic problems due to the recession led to canceling of ongoing production and other reacts. This resulted in stacking
up of stocks worth of millions of US dollars in the local factories, many of which to be closed down or trimmed to fit the demand
meanwhile the Chinese government prepared packages to keep the prices from going over the top as they were facing circumstances
similar to us, and the price from going over the top as they were facing circumstances similar to us and by now they have been able
to control the prices, hence the buyers are now going back to china. The companies in Bangladesh, who have been lucky enough to
see through the first blow, now have other problems to take care of such as buyers becoming more aggressive and unsettling, as they
are also frightened of being wiped out of existence. So they are becoming very aggressive with prices, quality and time of delivery.
The quality which was sought for even six months ago has become unacceptable to some of the buyers and which has caused
companies to ship the orders at discount prices and short shipments, causing the companies huge losses. Hence many cannot pay
off their loans to the Banks in time or the LC is not being respected, either by the buyer or supplier which is happening for many
reasons. These instances altogether has a knockdown effect on the Banks mentality for which they are not ready to help out a lot of
business in this sector, which are in dire need of loans with low or no interest.
Apparently it seems that the countrys RMG sector is still experiencing growth despite the global recession. However, reviews
reveal that the profitability has decreased marginally as the selling price of clothes has gone down while on the other hand
production cost has gone up sharply owing to various reasons. This research tried to get an insight into the overall scenario
prevailing in the sector at present and tried to analyze whether the global recession has created any negative impact on the overall
profitability of the industry. The factors considered are i) Order Book Situation, ii) Profit Margin, iii) Competitiveness, and iv) Shift
in Mode of Payment (From Back to Back LC5 to Direct Contract).