Lower costs are an advantage for the country’s ready-made-garment industry, but challenges remain.
In 2010, China dominated European and US markets for ready-made
garments, accounting for about 40 percent of the import volume in each
region. A recent McKinsey survey, however, found that 86 percent of the
chief purchasing officers in leading apparel companies in Europe and the
United States planned to decrease levels of sourcing in China over the
next five years because of declining profit margins and capacity
constraints.
Although Western buyers are evaluating a considerable number of
sourcing options in the Far East and Southeast Asia, many chief
purchasing officers said in the survey that they view Bangladesh as the
next hot spot (exhibit). Indeed, our study of the country’s
ready-made-garment industry identified solid apparel-sourcing
opportunities there—but also some hurdles.
With about $15 billion in exports in 2010, ready-made garments are
the country’s most important industrial sector; they represent 13
percent and more than 75 percent of GDP and total exports, respectively.
McKinsey forecasts export-value growth of 7 to 9 percent annually
within the next ten years, so the market will double by 2015 and nearly
triple by 2020.
Our survey of chief purchasing officers found that European and US
companies that focus on the apparel market’s value segment plan to
expand the share of their sourcing from Bangladesh to 25 to 30 percent
by 2020, from an average of 20 percent now. Midmarket brands, which
generate about 13 percent of their sourcing value in Bangladesh, plan to
increase that share to 20 to 25 percent over the same period. While
growth in current product categories will drive some of the increase, 63
percent of the chief purchasing officers said that they want to expand
into more fashionable or sophisticated items, such as formal wear and
outerwear.
In our study, all the respondents identified attractive prices as the
most important reason for purchasing in Bangladesh. They also said that
price levels there will remain highly competitive in the future, since
they expect significant efficiency increases to offset rising wage
costs. Half of the respondents mentioned capacity as the second-biggest
advantage of Bangladesh’s ready-made-garment industry. With 5,000
factories employing about 3.6 million workers (of a total workforce of
74.0 million), Bangladesh is clearly ahead of other Southeast Asian
suppliers in this respect. It also offers satisfactory levels of
quality, especially in value and entry-level midmarket products.
Five challenges
While Bangladesh presents some distinct advantages for sourcing, our
study identified five challenges for apparel companies seeking to do
more business there.
Infrastructure
Transportation bottlenecks create inefficient lead times for garments
and delay deliveries to customers. This issue will become even more
important in the future, since buyers want to source more fashionable
products with shorter lead times.
Energy supply is a concern, too—90 percent of the more than 100 local
suppliers we interviewed rate it as poor or very poor. The government
has prioritized improvement in this area and started to upgrade power
systems over the last two years, however.
Compliance
Nongovernmental and other organizations monitor Bangladesh for labor
and social-compliance issues. While most European and US chief
purchasing officers said in the survey that standards have somewhat or
strongly improved over the past five years, they noted that suppliers
vary greatly in their degree of compliance. Environmental compliance is
just beginning to get attention.
Suppliers’ performance and the skilled workforce
Our study found that the suppliers’ productivity must improve not
only to mitigate the impact of rising wages but also to close gaps with
other sourcing countries and to satisfy new customer requirements for
more sophisticated products. Two other concerns are a lack of investment
in new machinery and technologies and the insufficient size of the
skilled workforce, particularly in middle management.
Raw materials
Bangladesh lacks a noteworthy supply of natural or artificial fibers,
and its dependence on imports creates sourcing risks and lengthens lead
times. Compounding the problem is the volatility of raw-material prices
over the past few years. The development of a local sector would
improve lead times.
Economic and political stability
About half of the chief purchasing officers interviewed stated that
they would reduce levels of sourcing in Bangladesh if its political
stability decreased. The survey found that political unrest, strikes,
and the ease of doing business are top of mind for respondents.
Realizing the potential
The three main stakeholders—the government, suppliers, and
buyers—must work together to realize the potential of Bangladesh’s
ready-made-garment market. The government’s top three priorities for
investment are infrastructure, education, and trade support.
What can European and US buyers do to secure Bangladesh as a sourcing
powerhouse? At the highest level, they should review their approach
from a full value chain perspective; for example, to increase the supply
chain’s efficiency and transparency, they ought to expand their support
for lean operations and electronic data exchange. Buyers should also
build closer and long-term relationships with suppliers and, if
necessary, rethink pricing negotiations with them. The most developed
suppliers are choosing their customers more carefully and even breaking
off ties with long-established ones.
Buyers must also improve their own operational execution. Their long
response times, the complexity of internal procedures involving the
merchandising and sourcing functions, and a high number of last-minute
changes slow down the overall process. In addition, buyers must actively
pursue compliance efforts.
The full report,
Bangladesh’s ready-made garments landscape: The challenge of growth (PDF), is available on the McKinsey & Company Web site.
