The article originally published in The Apparel Digest on February 2022 issue.
Professor Mustafizur Rahman, Distinguished Fellow, Centre for Policy Dialogue (CPD), Dhaka, Bangladesh
It is indeed a welcome news that Bangladesh’s export-oriented RMG sector has been able to make an impressive turnaround in recent months. In FY2019-20 the growth rate of exports of apparels was negative, at -18.1 per cent, with some recovery in FY2020-21, with a positive growth rate of 12.6 per cent (compared to the respective preceding fiscal years). In contrast, in the first seven months of FY2021-22 (July-January) growth of export earnings was a robust 30.3 per cent compared to the corresponding period of FY2020-21 (US$ 23.98 billion against US$ 18.40 billion). While the relatively low base of FY2020-21 (with exports growing at -3.4 per cent in the first seven months compared to FY2019-20) is a factor to keep in mind, the very high growth in the first seven months of FY2021-22 is by any reckoning quite phenomenal. As a matter of fact, the export earnings in this period were also significantly higher (by about 16.2 per cent) compared to the strategic target set for the corresponding period by the Bangladesh Export Promotion Bureau.
A decomposition of RMG export performance in the first seven months of FY2022 shows that the growth rate of knit-RMG (with its relatively larger domestic value addition of about 55-60 per cent of gross export earnings) was higher compared to that of the woven-RMG (with relatively lower domestic value addition of about 35-40 per cent of gross export earnings). Growth of earnings from knit-RMG export during the aforesaid July-January period of FY2021-22 was 32.9 per cent as against 27.2 per cent in case of the woven-RMG. This is a good sign since it indicates higher net export earnings from the RMG sector, underpinned by the knit-RMG with its higher domestic export value retention.
While the performance of the RMG, the leading export sector of the country accounting for more than four-fifths of her total export (81.2 per cent to be more precise), is highly encouraging, the current high growth of export earnings from the sector actually conceals some disquieting underlying causes.
It needs to be noted that growth of export earnings originate from the combined contributions of price effect and volume effect. Thus, it is important to know what is driving the present growth of RMG exports: is it the price effect or it is the volume effect, or it is a blend of both the factors and, if that be the case, what is the relative contribution of these two in the growth of export earnings.
To answer this question, we have decomposed the growth in apparels earnings in the US and the EU markets. Analysis of the contributing factors indicates that, in the US market, the growth in export earnings from apparels (US$ 3.89 billion) during July-December period of FY2021-22 (latest available data from the USITC website), was about 40.6 per cent compared to the corresponding period of FY2020-21. The growth in earnings was indeed mostly driven by growth in the volume of exports. Export volume (in dozens) in this period rose by 31.8 per cent over the corresponding period of FY2020-21. In contrast, the rise in price of apparels (per dozen) was by only about 9.4 per cent. In case of the woven-RMG, the predominant export to the US market (accounting for about 61.1 per cent of total exports to the country), export earnings rose by 32.1 per cent – the rise in volume was by 26.7 per cent while rise in price was by only 3.8 per cent compared to the matched figures of FY2020-21. In case of knit-RMG the trend is somewhat better – export earnings rose by a significant 56.2 per cent, with the volume rising by 35.2 per cent and the average price by 15.8 per cent.
The aforesaid scenario of volume-driven export growth is also corroborated by export performance in the EU market, Bangladesh’s most important market for RMG (export was US$ 6.43 billion during the July-November, 2021 period according to latest available data from the EUROSTAT website). Average growth of export earnings in this period was also mostly accounted for by the rise in volume rather than that of price. In the first five months of FY2021-22 (compared to the corresponding months of 2020) export earnings from the EU market rose by 18.1 per cent, in the backdrop of the rise in volume (in kgs) of 15.3 per cent as against the rise in the price (per kg) of a mere 2.4 per cent. Export growth of the major export item, the knit-RMG (which accounted for 67.0 per cent of total RMG exports to the EU) was 23.6 per cent, with the rise in volume and price (per kg) being 18.3 per cent and 4.4 per cent respectively. In case of woven-RMG, export growth was 8.3 per cent with the volume rising by 8.7 per cent, and the price (per kg) actually falling by 0.4 per cent.
To note, the share of the aforesaid two markets (US and EU) is more than 70.0 per cent in the global RMG exports of Bangladesh.
The above analysis shows that in case of both the markets the robust performance of RMG exports was underpinned primarily by rise in the volume; the rise in unit price was more subdued. The trend of volume-driven growth is more prominent for the woven-RMG compared to the Knit-RMG. In case of unit price, growth in per unit price was higher for knit-RMG compared to the woven-RMG, for both the markets. It will be appropriate to draw the conclusion that where domestic value addition is higher (as in case of the knit-RMG), competitive strength and profit margins tended to be, to that extent, stronger.
In this backdrop, it is pertinent to recall here that the price of cotton in the global market has increased considerably in recent times. This was, on average, USD 2.5 (per kg) in the July-December 2021 period compared to USD 1.6 (per kg), on average, over the corresponding period of 2020. As would be expected, this sharp rise of 50.3 per cent in cotton prices had a knock-on effect in the form of significantly higher prices of yarn and fabrics as well. If the cost of cotton is taken to account for about 30.0 per cent of total cost of f.o.b. value of exports from Bangladesh, the rise in cotton prices alone would push total production cost by about 15.0 per cent (other things remaining the same).
The above analysis of export earnings, volume of export and average unit-price indicates that brands and buyers had only partially absorbed the rise in the cost of apparels production (on account of rise in price of cotton, the key input, as also of yarn and fabrics). The burden of the consequent increase in production costs was shifted to, and had to be borne primarily by, Bangladesh’s RMG entrepreneurs. To what extent this reflects the weak bargaining capacity of Bangladesh’s exporters of apparels and/or to what extent this originated from prices having been negotiated earlier with the brands and buyers (prior to the hike in the prices of the key inputs – cotton, yarn and fabrics) needs to be investigated further. However, the fact remains that the robust growth of export earnings was predominantly volume-driven, and not price-driven, although the cost of production had meanwhile increased significantly. This was likely to have a number of implications including, and mainly, in the form of falling profit margins of Bangladesh’s entrepreneurs. If the prices of the key inputs have risen at such a high pace, and prices of finished items rose at a significantly lower pace, this would mean that profit margins of Bangladesh’s RMG exporters have come down in a tangible manner. Profit is being made primarily on scale and volume, and not in prices. This is also likely having implications for workers who are having to meet higher production targets than was the case earlier. Thus, although in recent times Bangladesh’s apparels sector has further consolidated and strengthened its competitive position in the global market, as indicated by phenomenal growth of earnings from export of apparels, this has been achieved to a large extent through higher volume of production. Orders have shifted to Bangladesh mainly from China, and, perhaps to a lesser extent also because of Ethiopia’s loss of duty-free access to the US market and on account of production disruption in Myanmar. The key message is that the large part of cost escalation had fallen on the shoulders of Bangladesh’s RMG producers and exporters. This also has important implications for future wage fixation and the capacity of entrepreneurs to accommodate higher minimum wages when the time for the next round of wage negotiations comes.
The discussion above once again reveals the predominant power of brands and buyers in terms of price setting in the predominantly buyer-driven value chain in the global market for apparels. It is true that shipping costs have risen significantly in recent times, cutting into the profit margin enjoyed by brands and buyers. But this doesn’t explain the whole story. Indeed, the weak bargaining capacity of Bangladesh’s exporters are increasingly being exposed in recent times. In view of this, it is reckoned that Bangladesh’s entrepreneurs will need to think as to how best to deal with the emergent situation. They should strategically plan to get into the forward linkage segment of the apparels value chain, through development of their own brands and investing in retail business in major export markets. This will lower dependence on the various intermediate agents, and also help negotiate better price, enhance competitive strength, increase profit margins and also raise capacity to pay better wages to workers. This will also raise the share of domestic value retention component (net exports) in the gross earnings from export of apparels. Bangladesh’s policymakers should start to think of incentivising exporters and entrepreneurs of apparels who want to venture into the forward linkage segment of the RMG global value chain. In the end, the net export is what matters for Bangladesh.
The need for a rethink in the above connection has become even more necessary and urgent in view of the anticipated loss of preferential market access enjoyed by Bangladesh’s exports of apparels in view of the country’s LDC graduation, to be effective in 2026 (preferential access is to end in 2029 in the EU market). The exporters’ associations, BGMEA and BKMEA, should also think strategically as to how to enhance the bargaining capacity of domestic exporters vis-à-vis major brands and buyers. Some Bangladeshi exporters are now calling for developing a collective and coordinated country-specific stance in this regard. The sector leaders have recently come up with a plan to explore options to enable them to strengthen their bargaining strength, perhaps by setting item-specific minimum export price. They may think of starting with a few items such as basic T-shirts, jeans, polo shirts in which Bangladesh is the global leader. As it is, a few major buyers and brands exercise a quasi-monopoly power in the global apparels market. Time has come for Bangladesh’s producers and exporters to explore options as regards the collective stance, and try to strengthen and exert influence in the areas of price-setting for key apparels items. Higher prices will also allow them to better deal with the justified demand of workers for minimum living wages (as against the US$ 95.0 per month that they are getting as minimum wage at present) which is anticipated to be put on the table in the near-term future.