10th April, 2011

Deeper look into RMG Sector of Bangladesh: Part 1

BRAC EPL Macro Economy Series

Analyst: M M Shahnewaz Kabir Shawon shahnewaz@bracepl.com

Ready Made Garments (RMG) is the largest export oriented sector of Bangladesh and one of the major drivers of countrys economy. It has seen tremendous growth over the last three decades and dominated the industrial sector of the country since the early 1980s. In the FY 2009-10 RMG export was 13% of the GDP and total export was 17% of the GDP while in 1991-92 RMG export was 4% of GDP and total export was 6% of GDP. In fact, RMG export accounted for 78% of the total export of Bangladesh in FY 2009-10. In this report we try to explain the structure of the export-oriented garments sector of Bangladesh.

Table 1: RMG, Export and GDP

1991-92 2009-10

Background of RMG in Bangladesh: The RMG industry in Bangladesh is only thirty years old since the first Garment exporting unit took the first step in clothing export market in 1978. Currently Bangladesh holds more than 4 percent share in the global clothing export-market and positioned itself as 3rd largest garment exporting country in terms of value after China and Turkey. The total earnings from clothing exports were USD 12.6 billion in FY 2009-10. RMG products are of two major types: Knit garments and Woven garments. Knitted fabrics are made of one long continuous thread worked into interlocking loops. Woven Fabrics are composed of two sets of yarns. One set of yarns, the warp, runs along the length of the fabric. The other set of yarns, the fill or weft, is perpendicular to the warp. Woven fabrics are held together by weaving the warp and the fill yarns over and under each other. Historically Bangladesh focused on producing Woven garments but in recent times Bangladesh is more successful in Knitwear production as well. Recently Bangladesh has grabbed the position of second largest knitwear exporter in terms of volume in 2010 only behind China. The knitwear and woven garments export volume has grown at 43% and 30% respectively year over year during the October-December period of 2010. The phenomenal growth of clothing sector can largely be attributed to the simple level of technology needed by the industry, supply of cheaper work force, supply of cheaper energy, and policy support by the government. Most significantly the benefits of reserved markets by MFA (multi-fiber agreement) quota helped the rapid growth of RMG in the early years. As the export quota system phased out in 2005 many experts thought Bangladesh would lose its competitiveness. However, the strength of the garments sector has been already proven as the export volume has continued its growth after MFA was lifted and also during global recession. Currently Bangladesh as an LDC is getting access in all developed countries under the Generalized System of Preference as shown in table 2. Recently EU relaxed its rules of origin under the Generalized System of Preference Scheme which has become applicable from January 1, 2011. Bangladeshs RMG market share in EU is expected grow significantly (see our earlier report Generalized System of Preferences: Potentials in the EU market). Sector Composition: The clothing and textile sector of Bangladesh consists of more than 4000 Garments and Garments accessories manufacturers including knit garments manufacturer, woven garments manufacturers and their backward linkages. More than 95% of those firms are locally owned with

Export to GDP RMG as % of total Export RMG as % of GDP

6% 59% 4%

17% 77% 13%

Source: Bangladesh Bank, January, 2011

Table 2: Market access of Bangladesh

EU Relaxed rules of origin YES GSP Scheme Yes Non-EU Developed Nations No Yes

10th April, 2011

Deeper look into RMG Sector of Bangladesh: Part 1

Figure 1: Major Cotton Suppliers

Uzbek istan, 17% Other s, 22% China, 23% Singa pore, 2%

some foreign owned firms located in EPZ. The backward linkage is composed of spinning, weaving and knitting, dyeing and painting and finishing sectors and accessories. Bangladesh is far from being selfsufficient in cotton and almost 99% of the cotton is imported. Although the backward linkage in knitwear sector is quite good, the case is not the same for woven garments. And also the relaxed rules of origin by EU effective since January 1, 2011 will slow down the growth of the backward linkages. Bangladesh imports cotton, yarn, and fabrics mainly from China, India, Uzbekistan and Pakistan. During the July-December period of 2010 Bangladesh imported cotton and yarns from China (23%), India (33%), and Uzbekistan (17%) as shown in figure 1. Bangladesh could not import from Pakistan during this period as production of the latter was decreased due to flood.
Figure 2: Export figures in Million USD

India, 33%

Source: Bangladesh Bank, January, 2011

14000 12000
10000

8000 6000 4000 2000 0

1992-93 1995-96 1998-99 2001-02 2004-05 2007-08

Woven

Knit

Total RMG

Source: Bangladesh Bank, January, 2011

Figure 3: Major Export Destinations

Recent export data: Garments products have seen steady growth over the years evident from figure 2. In 1984 garments export totaled only USD 31.57 million which increased to USD 12.5 billion in 2010 financial year. During the July-Dec period of the 2010-11 financial years RMG export stood at USD 8 billion and accounted for almost 77% of the countrys total export. Initially the RMG export was dominated by only woven garments. But in recent years knitwear has grown faster than woven and accounts for 52% of total RMG export and 40% of total export in 2010. At present Bangladesh exports RMG to around 90 countries in the world which include USA, Canada, Germany, UK, France, Italy and Turkey. European Union countries and USA are the major destination of Bangladesh RMG export. From figure 3, we can see during the October to December period of 2010 major importer of Bangladeshi RMG were USA (26%), Germany (18%), France (9%), UK (9%) and Canada (4%). Due to cost advantage over China, export to Japan is increasing in recent times.

Canada , 4%

Others, 19%

U.S.A, 26%

EU, 51%

Source: Bangladesh Bank, January, 2011

10th April, 2011

Deeper look into RMG Sector of Bangladesh: Part 1

Bangladesh focuses mainly on low cost basic items and lags behind major competitors such as China and Vietnam in terms of product diversification. Different items produced in Bangladesh include suits, jeans, embroidery cloths, shirts, trousers, children wares, sweaters, knitwear etc. However, major portions of Bangladesh's exports are shirts, blouses, T-shirt, pullovers and these products are produced mainly to cater to middle and lower market segments of US and EU. It is notable that Bangladesh produces very limited categories of expensive and fashion oriented garments. As Bangladesh mainly focuses on the basic products, Bangladesh is less affected by the economic cycles. The fact was evidenced by the Wal-mart effect that RMG products of Bangladesh experienced during the global economic crisis of 2008-09. The export volume did not decline due to mainly being low cost basic products Impact on economy: The rise of RMG has major economic impact on Bangladesh. Currently RMG employs about 5 million workers and about 50% of them are women from rural areas. RMG export boosted trade balance of Bangladesh along with remittance. The RMG sector also supported the banking and financial sector of this country. Despite many difficulties like inefficiency of port and transport, low supply of electricity and gas and rising cotton price, Bangladesh has continued to show strong growth in the RMG export. RMG market is a very much buyer-driven market and the growth of this countrys RMG export will sustain as long as it stays competitive and can cater to the needs of the buyers.

Deeper look into RMG Sector of Bangladesh: Part 1

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Aminul Haque Md. Monirul Islam Parvez Morshed Chowdhury Ali Imam Asif Khan Khandakar Safwan Saad Aasim Tajwaar Matin M M Shahnewaz Kabir Shawon Head of Capital Markets Research Analyst Research Analyst Investment Analyst Investment Analyst Research Associate Research Associate Research Associate amin@bracepl.com monirul@bracepl.com parvez@bracepl.com imam@bracepl.com asif@bracepl.com safwan@bracepl.com shahnewaz@bracepl.com 01730317802 01730357150 01730357154 01730357153 01730357158 01730357779 01730727918

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