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The Ready-Made Garments (RMG) industry contributes to the Bangladesh economy in a distinctive manner. The last 20 years witnessed unparalleled growth in this sector, which is also the largest exporting industry in Bangladesh. It has attained a high profile in terms of foreign exchange earnings, exports, industrialization and contribution to GDP within a short span of time. The industry plays a significant role in terms of employment generation. Nearly two million workers are directly and more than ten million inhabitants are indirectly associated with the industry. In addition to its economic contribution, the expansion of RMG industry has caused noticeable changes by bringing more than 1.12 million women into the workforce. Hence it is quite apparent that this sector has played a massive role in the economic development of the country.
RMG’s contribution in terms of GDP is highly remarkable; it has reached 13 percent of GDP which was only about 3 percent in 1991. It also plays a pivotal role to promote the development of other key sectors of the economy like banking, insurance, shipping, hotel, tourism, road transportation, railway container services, etc.
One of the key advantages of the RMG industry is its cheap labor force, which provides a competitive edge over its competitors. The sector has created employment opportunities for about two million people of which 70 percent are women who mostly come from rural areas. Thus the industry helps in the country’s social development, women empowerment and poverty alleviation.
Currently RMG earns the lion's share of foreign exchange earnings.
The Readymade Garment (RMG) industry of Bangladesh marked the leadership of private enterprise and the country’s successful transition to a major export-oriented economy. The key products of this industry are Knit and Woven Shirts and Blouses, Trousers, Skirts, Shorts, Jackets, Sweaters, Sportswear and many more casual and fashion apparels. RMG industry has enjoyed an impressive rise from less than 50 factories in 1983 to over 3600 in 2006.
Garments sector’s continual success can be attributed to the following:
Quotas under Multi-Fiber Arrangement (MFA) in the North American market
Preferential market access to European markets
The country has a small textile industry, but the volume and quality of its output are unable to fully meet the demand of the garments industry. Most of Bangladesh’s garments exports are made from imported textiles. RMG exports have grown rapidly after extensive trade and other economic reforms were undertaken in the early 1990s.
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PORTERS FIVE FORCES ANALYSIS
A. Competitive Rivalry between Existing Players
Bangladesh is the 6th largest apparel and textile supplier in the US & EU market. It is shaping itself as a potential market player by providing the most quality with the cheapest price possible.
Whilst the market is controlled by the bigger players like China and India, the role of Bangladesh is still important. Among the very few suppliers, Bangladesh imports most of its raw materials, but utilizes other factors of production to produce in a cheaper manner. It offers investment friendly atmosphere for the brand names to outsource their production process in Bangladesh.
Bangladesh is putting up a show against other competitors like China and India. by providing available cheap labor. It has been facing tremendous growth even after the alleviation of the quota from the US market. This is due close customer relationship and quality production. Bangladesh has this advantage against its rivals.
Bangladesh is one of those countries who cannot fulfill its quota provided by the larger markets. As a result of that, many foreign companies are merging in to use Bangladesh as a hub to prepare their product by outsourcing in Bangladesh and then gaining entrance to markets which were previously unavailable to them. Bangladesh is taking advantage of this and inviting investors, and foreign companies to place orders to attain this facility. It should focus on placing more orders instead of making its export rates efficient and strong.
B. Bargaining Power of Suppliers
Bangladesh has always been enjoying the upper hand in ordering its inputs from its suppliers. Bangladesh has very few input or raw materials of its own. Most of them are imported. Although this leads to a problem in reducing the opportunity to initiate backward linkage, and thus increasing the supplier power, Bangladesh still manages to acquire the inputs at world price from its suppliers.
But the most importing aspect of Bangladesh’s export industry would always be the enthusiasm and the prospect of growth it provides to the stakeholders in terms of success and prosperity. Bangladesh’s domestic suppliers’ power is increasing in a slow but steady manner as more and more local companies are stepping up to the task. They are creating an integrated system of supply channel management by which the manufacturer’s work load is reduced. Companies are more prone to order through local suppliers who themselves apply to the task of importing raw materials and components necessary for the production process. And the favorable attitude of the government is also helping this growth. The back to back LC process was approved by the government to facilitate the growth of the industry.
Bangladesh has a good reputation in terms of timely payment to the suppliers. This reputation is helping create a longer term relationship with the suppliers (foreign) and is also giving the local firms initiative to step into the supply chain. Bangladesh gives the suppliers a large scale advantage as the industry is quite concentrated in area basis.
A good global reputation is helping Bangladesh match the price with international quoting with the suppliers both foreign and local ones. Suppliers although having a sort of upper hand over Bangladesh, also regard Bangladesh as a reliable source of repayment. This reputation has been helping Bangladesh to ensure prompt supply of raw goods.
C. Bargaining Power of Customers
Bangladeshi manufactures realize that the buyer posses more power than themselves. China’s lead and India’s march to the top keep the Bangladeshi manufacturers/ suppliers on their toes. Bangladesh is providing a large space of choice to the provider in terms of quality and cost. It is offering the lowest possible production price and also work that is best in quality.
Due to high switching opportunities for the customers, Bangladesh has to perform or allow the customers to win in many cases. Bangladesh plans to use cost-effectiveness to present itself as the best option to the buyers.
The important factor here is that many of the companies in Bangladesh are either franchises or subsidiaries. Along with them the local companies are giving Bangladesh a look of the best outsourcing place of the lot. Many of the reputed companies, brands are outsourcing their products in Bangladesh as they get the most quality in the cheapest price possible.
Buyers are also interested in the growth aspect of the Bangladeshi suppliers. Bangladesh is growing as a major player in the textile and apparel industry globally and due to the quota system it is quite an important player in the field. Bangladesh still has its quota left in the EU market where countries like China don’t have the entry. So, many countries are planning to use Bangladesh as a hub and buy the service to export under its label. That gives Bangladesh a comparative advantage against the buyers of its services. And due to immense quality assurance, Bangladesh is continuing to be the best choice for many buyers in the industry.
D. Threat of New Entrants
Bangladesh has yet to reach economies of scale in terms of production. Thus it allows potential entrants to pose a threat to its growth. But again, if we just analyze the growth of textile and RMG sector, this threat might seem negligible. Textile in Bangladesh is in a growing stage. It’s growing in a rapid pace and is posing itself as an entrant to the more established players. Thus the threat of new entrants is quite minimal to its concern.
Moreover, new entrants would have to gain an advantage against Bangladesh whose growth ratio is almost 20% per year even after the MFA. A newer entrant would thus cause fewer troubles to Bangladesh.
The greatest advantage that Bangladesh has right now is its cheap labor. Cheap labor would continue to be available until the living standards go up. Till that happens, labors will have low rates in terms wages and keep Bangladesh safe from any sort of new entrants.
One factor has to be kept in mind that, due to the unstable political scenario in recent years, investors and foreign firms are reluctant in investing in Bangladesh. Using this opportunity, countries like Sri Lanka and other small Latin American countries can steal away potential buyers from Bangladesh.
E. Threat of Substitutes
Bangladesh, in terms of substitutes, plays both the roles of an affected and an opportunist. China and India are growing their customer base at a higher pace than Bangladesh. This is due to poor country branding, and less power to influence customers. Due to these reasons, customers sometimes prefer China or India to Bangladesh.
More to add, Bangladeshi products are being substituted due to lack of supplier power and government’s reputation. Many firms, buyers, investors are now hesitating to invest in Bangladesh due to unstable political scenario. Thus the opportunity for Bangladesh is being substituted to either China or India. Also, the substitute cost is not that high for buyers to switch to a Chinese producer or even to a Sri Lankan producer.
On the other hand, due to the lower production cost, Bangladesh plays a major role in substituting the Chinese and Indian manufacturers. This opportunity has to be nurtured by the Bangladeshi industry to ensure its growth and profitability. Bangladesh posses the ultimate weapon of cheap labor and thus at times, it has to use it to substitute opportunities from its competitors.