RMG production cost skyrockets, but prices take a dive

Prices of 20 major Bangladeshi readymade garment products – exported in a year since April 2020 – have dropped on average by more than 5% although orders from major export destinations have increased during the period.

Bangladesh, the second largest readymade garment exporter in the world, is now receiving a comparatively higher number of orders from major export destinations as they gradually recover from the onslaught of the Covid-19 pandemic.

But RMG industry leaders – who are among the ones hit hardest by the crisis – say apparel makers are not getting fair prices despite a boost in orders since last month. The production cost has skyrocketed, but product prices are taking a dive, insiders have said.

Failing even to recover production costs, most factories are taking orders at lower rates just to keep their losses at a minimum. Refusing such orders will force apparel makers to pay their workers without any actual work, which in turn will compound the losses.

Quoting recent data from the National Board of Revenue (NBR), the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) said prices of these 20 products dropped nearly 4.5% on average in the last five years from May 2016 to May 2021.

BGMEA analysis also reveals that in these five years, prices of 16 of the 20 RMG products have dropped while those of four increased.

Apparel makers pointed out that their production cost has gradually gone up too in the last five years. There are a myriad of reasons why the costs have increased, such as hiking workers' wages, yearly increments, and climbing prices of utilities including gas and electricity.

BGMEA data says the apparel sector's overall production cost has gone up by 28% in these five years and wages increased by 30%, and costs related to utilities, transportation, bank charges and lab tests rose by 25%.

The unusual price increase of main raw material cotton and rising shipping costs are putting an extra squeeze on the apparel makers. On paper, the importing companies must bear any additional costs, but in reality, most of this "price pressure" is falling on the shoulders of Bangladeshi exporters, insiders have said.

The RMG industry also had to navigate through the devastating Covid-19 pandemic for the last one and half years. In a bid to save their business and survive the crisis, the entrepreneurs are being forced to take out an increasing amount of loans. 

As part of their recovery effort, many are trying to boost production by installing modern machinery at their factories. 

Managing Director of Mayc's Garments Md Ashikur Rahman Tuhin, who exports clothing items such as trousers, said, "Clothing item prices began to take a dive around the last four years. The cotton prices have increased in the past few months, which in turn caused the price of fabrics to go up too.

"Besides, in some cases, the overall shipping charges including freight have gone up ten times. Importers are supposed to pay such additional costs, but this is currently far from reality."

Providing a detailed explanation, Tuhin said, "For example, a retailer sells a t-shirt for $2. Consumers are supposed to bear the additional cost arising from the increase in cotton and shipping prices. Considering these factors, the t-shirt should be sold for $2.20.

"But our buyers are refusing to charge their customers additional prices under the current situation. So, the burden of additional costs is falling on the exporters."

Centre for Policy Dialogue's (CPD) Research Director DrKhondakerGolamMoazzem – also an expert on the RMG sector – confirmed the apparel makers' dilemma, saying, "The RMG owners are not getting fair prices due to their factories' overcapacity.

"To recover from this crisis, the industry should focus on boosting production, product diversification and manufacturing higher-end clothing items."

Meanwhile, wishing to be anonymous, the country office chief of a UK-based clothing brand – a major importer of Bangladesh's RMG products – told The Business Standard, "No one in this supply made a profit in the last one and half years due to the Covid-19 crisis.

"Stores also counted losses for a year. However, we are paying the apparel makers extra to compensate for the increase in cotton prices in recent months. For comparatively expensive clothing, we are paying an additional $0.40-$0.50 for each item, and $0.10 for other items."

A European clothing brand representative on condition of anonymity said they too have not slashed the rates for clothing items as yet.
 
Drop in clothing prices

Bangladesh usually exports 20 types of clothing items in the global market, including six types of trousers including pants, two types of t-shirts including polo shirts, three types of sweaters, two types of MMF oven coats commonly known as jackets, and shirts for men.

These items make up 70% of Bangladesh's clothing export basket. 

In May 2016, the average export price for per kilogram of trouser-type clothing item was $14.36, which dropped to $13.17 this may, indicating a more than 7.5% decrease in prices. 
Similarly, during this period, the price of polo and t-shirts has dropped by around 3.25%, sweaters by 15% and shirts by 10.5%. Only jacket prices have increased by 1.88% since May 2016.

On the issue, BGMEA Director and also Managing Director of Laila Styles Ltd Md Imranur Rahman said, "Moreover, competition among the exporters in Bangladesh is also a reason behind the unfavourable export rates. We are dropping the prices ourselves in a bid to get orders through competitive rates. 

"There is no easy way to solve this problem. Those with bigger factories are facing greater losses. Someone who has to spend Tk8 crore per month to keep his factory running will have to accept all orders to prevent total losses. This is why we are accepting orders at much lower rates."
 
Surviving on loans

Many RMG factory owners are navigating through this precarious situation by taking out bank loans. 

Addressing the matter, CEO of Fatullah Apparels in Narayanganj Fazlee Shamim Ehsan said, "We have installed a few expensive machinery at the factory, which have boosted our overall production. But most entrepreneurs' bank loans have increased amid the crisis."

Reiterating the same, Managing Director of Mayc's Garments Md Ashikur Rahman Tuhin said, "We are spending $12 for making a product, but exporting it for $10. We are covering this gap by boosting production using new machineries and by cutting overhead costs.

"The addition of pocket joining and cutting machines removes the need for helpers. My bank loans have gone up after importing these machines."
 
How big are recent orders?

Export orders have increased since the last month.  Especially, the orders for MMF Oven type clothes have gone up by 15%-20% compared to the same period last year, according to apparel exporters. 

Sparrow Group of Industries Managing Director Shovon Islam, who is one of the largest oven type clothing exporter in Bangladesh, said, "We are witnessing a nearly 25% rise in such clothing items compared to 2020. But the order volume is still far lower than the pre-Covid times.

"We managed to resume all of our production lines. If such orders keep coming, we may have to complete some work through sub-contracts."

Shovon believes that Bangladesh is getting a bigger number of orders because foreign buyers have shifted from India and Myanmar due to the devastating impacts of Covid-19 and establishment of a military government respectively.

Besides, more people are currently leaving their homes to engage in outside activities in Europe and the USA, he added. The managing director however said they are getting less lead time from the buyers, orders are coming in smaller volumes and the prices have dropped. 

Noted apparel exporter DBL Group's Vice Chairman and a former vice president of BGMEA MA Rahim Feroz reiterating the same.

Responding to a query, The senior official from a UK-based RMG buyer's Dhaka office said, "My brand has increased the order of clothing items such as t-shirts and polo shirts by 20%-30%."

The number of utility declarations (UD) coming from exporters also points towards an increase in orders from abroad. UD signifies the availability of raw material against an export order. According to the BGMEA, the volume of UDs has increased by 65% in May this year compared to the same month in 2020.

Bangladesh is only behind China as an apparel exporting country. In the 2019-20 Fiscal Year, Bangladesh had exported apparel items worth $27.96 billion. In the first eleven months of the current fiscal year, RMG exports stood at $28.56 billion.

The country had exported RMG goods worth $34.13 billion in FY2018-19.