Why Bangladeshi RMG manufacturers struggle to negotiate prices with intl buyers

Stockholm-based company Hennes & Mauritz AB, better known as H&M, has decided to support higher wages for workers in Bangladesh by raising the prices it pays suppliers for clothing made in the country. 

The company told its garment providers in Bangladesh that it would "absorb the increase of the wages in product prices," after the government agreed to raise the minimum monthly wage by 56% to 12,500 taka ($113) in December.

On 26 November BGMEA president Faruqe Hassan confirmed to The Business Standard that four more brands also pledged to increase the price of their product, although he didn't mention the names of the brands. 

Dutch fashion brand G-Star Raw, meanwhile, committed to offsetting "any additional cost of our suppliers" during a recent interview with TBS.

In an interview given to Reuters on November 9, Stephen Lamar, chief executive of the American Apparel & Footwear Association (AAFA) also confirmed that they would raise the purchase price of their product. 

Manufacturers in the country had feared the salary hike would eat into their profit margins as fashion retailers continue to pay the same prices for orders. Mohammad Hatem, Executive President of BKMEA lauded the these recent moves saying, "We appreciate H&M on their responsible buying practices. It would be great if other brands and fashion retailers also came forward with such support."

Echoing him, Asif Ibrahim, a director of BGMEA said, "The commitment of H&M to increase their purchase price from Bangladesh is encouraging. It would be good if other global fashion retailers in Europe and North America also made such commitments. It will be further reassuring if the purchase price increase lasts beyond the upcoming season for price negotiations."

In October, more than a dozen large fashion brands urged the government of Bangladesh to settle on a minimum wage that would cover garment workers' basic needs, including some discretionary income and take into account the country's persistently high inflation. The companies included Adidas, American Eagle Outfitters, Gap Inc, Hugo Boss, Levi Strauss & Co, Lululemon, Patagonia, Puma, Calvin Klein owner PVH Corp. and Under Armour. 

None of them has publicly pledged to raise prices. In an interview given to Sourcing Journal, Mostafiz Uddin, managing director of Denim Expert, a denim manufacturer in Bangladesh said,  "From my 25 years of experience in the clothing industry, I have never seen any buyers send a letter transparently and openly, except H&M."

"This is the third occasion on which H&M has increased prices following an increase in the minimum wage. The company also did the same after previous minimum wage increases in 2013 and 2018," he added. 

Hatem informed that BKMEA and BGMEA officially sent joint letters to the buyers and fashion retailers to increase the prices, especially for the current orders. "The orders we have now are priced according to the previous salary range. So if they do not step forward to cooperate with us in this changing situation, it would be really difficult for the companies to continue," he added.  

According to Hatem, in the past when the worker's salary was increased, the buyers were not ready to adjust the prices. Instead, they tried to lower the prices every season. Now that the international platforms are talking about sustainability and ethical and responsible buying practices, maybe they will come forward with a better price, he believes.

"Everyone is asking us about the workers' situation in Bangladesh, but no one is holding the buyers responsible. We want the buyer's participation so that they pay us a reasonable price. For example, if a brand sells a tee-shirt for $10, it pays us a maximum of $1 or $1.5 - only 10-15% of the retail price. If a brand buyer agrees to pay us 20-25% of what a consumer pays for the product, I will have no problem paying my workers more. They want compliance from us, but they are not ready to pay more," he added. 

In 2018 the workers demanded a raise in minimum wage, and it was increased. But back then the situation was not this bad; there were more orders, and international business conditions were better.  Now the condition of RMG business is much more susceptible to international and local fluctuations. 

"In this situation, if the buyers do not come forward, 80% of the factories will not be able to continue their business and pay the workers the current wage,"  Hatem said.    

"Workers are asking for Tk23 thousand, I have no problem paying them Tk25 thousand if I get the money from my buyers," he said.

Price negotiations are done by individual manufacturers with their buyers and brands. But in the international market, if a brand or buyer does not like the price, they can easily look to some other factory in some other country, Hatem feared. 

Why can't we negotiate better with the buyers?

Of the 202 LEED-certified green factories of Bangladesh, 73 are platinum-rated, 115 are Gold and 10 are silver-rated. Besides, 13 out of globally top 15 LEED green factories are in Bangladesh. 500 more factories are in the process of obtaining LEED certification.

"We have an advantage when it comes to safety in Bangladesh. We maintain a high standard of compliance, better than China. We are in a better position to bargain. But the problem is most of our factory owners do not have the capacity to bargain with buyers," Mohammad Hatem said.  

"First of all - most of our factory owners are bad at communicating in English. Also, the most notable disadvantage is that currently, the factories have 40-50% fewer orders than the total production capacity. As a result, they do not have much choice to refuse." 

"The buyers have many other options - if I do not accept the offer price, some other local company will at a much lower price. This is unethical, but they are putting pressure on us to comply with that price. And then in the international market, there are fewer orders at this moment," Hatem added. 

Asif Ibrahim explained how different departments of a brand are involved in determining the prices of the product, based on compliance, design and quality, making the negotiation process difficult.

There are three separate teams from the buyers' side and they have separate departmental agendas and separate KPIs. First, the compliance team ensures that the vendor complies with all the social, legal, ethical, national and international norms or guidelines. Secondly, the design and the quality team ensures that the vendor produces the product the way the designer envisioned it. Their technical team will be in the factory the entire time to make sure they get the right quality. Finally, the buying team has a 'Target Buying Price' (which they reduce every season, at every opportunity), which ensures their 'margins'.  

"What we have seen so far is that the price that Bangladeshi vendors get is one-fifth to one-eighth of the brand's retail price (depending on the product category and the brand). That means a product sold by a Bangladeshi vendor at $3.60 may be sold at a retail price of $16.41," Ibrahim said.  

"Unfortunately, we, the Bangladeshi vendors, don't have any bargaining power as we are generic manufacturers with huge production capacity (which is very expensive to be kept idle), hence we accept any price. Although, as a country, we have enough bargaining power, due to lack of commitment and character, we failed to capitalise on that strength," Ibrahim observed. 

As a vendor we have nothing in our control - salary, utility price, interest rate, exchange rate - all fixed by authorities; the compliance requirements are set by local and international authorities and are changing all the time. 

Moreover, labour and other efficiencies at the national level are much less than international standards, the price is determined by buyers and competition, while raw material prices are set by international demand and supply.  In addition, there are numerous hurdles in everyday operations. This makes it absolutely difficult to be a viable business.

"The orders placed in Bangladesh through Free on Board (a term used to indicate that the ownership of goods transfers to the buyer when the products are shipped) have shown a clear declining trend for more than a decade. On the other hand, all input prices including wages have gone up significantly. A prudent short, medium and long-term strategy is required for the industry to survive in Bangladesh," he concluded.