Post MFA Prospects of Knitwear Exports from Bangladesh

IntroductionIntroduction1.1 Background

With the integration of MFA into GATT, Bangladesh is bound to experience a few changes. These changes are likely to take place at various levels in various forms. One of the changes has been the rise in the export of knitwear of Bangladesh. Keeping this in mind and for the requirement of the VMP Program of Citibank’s Corporate Banking, a research has been conducted which studies the impact of quota withdrawal on the Knitwear section of the RMG industry.

The initial secondary research process had identified that the even though the quota phase out may cause the RMG industry to face certain difficulties, the knitwear section is likely to have a greater rate of growth in the post-MFA era. Hence, the problem statement for this paper is, ”

1.2 Objectives

Broad Objective No. 1: Identify the source and level of growth that will be

created in the knitwear export.

i. Identify the number of firms in the export oriented knitwear sector.

ii. Identify the knitwear exports value that is likely to be achieved in the post MFA period.

iii. Identify the number of firms likely to come up during the post MFA.iv. Identify the factors that will lead to the growth of knitwear in the

post MFA periodv. Identify the number of firms likely to close downvi. Identify the additional services that the existing companies are going

to avail.

vii. Identify the total prospect for financial companies.

Broad Objective No. 2: Identify the opportunities for knitwear and the

linked industries

viii. Identify and assess the measures that would help the firms to

grow

ix. Identifying the opportunities and threats for knitwear firms in post-

MFA period

x. Identifying trade agreements that might affect the export growth

xi. Finding out about the regulations that might affect the scenario

xii. Finding out the type of linked industries that might be affected

1.3 Scope

1. The survey sample frame is limited to the factories situated in Dhaka.

This excludes those located inside the EPZ and in other places like

Chittagong.

2. The factories surveyed either manufacture knit garments only or

both woven and knitwear. This is because the research deals with the

effect on the export of knitwear garments only.

3. Only the effects of the three months in the post MFA period have

been studied. Hence, other factors that may arise after the period

has not been considered.

4. The report is restricted only on the prospects of knitwear industries

and only a small study has been done regarding impact on Citigroup

The project was assigned only to find out the prospect of knitwear

industries.

RMG are mass-produced finished textile products of the clothing industry.

1.4 Methodology

1.4.1 Type of study

The study took place in two stages. In the first phase exploratory research

has been undertaken to gain better understanding of the dimensions of the

problem. This research was carried out by going through secondary

research materials. I have also spoken to Mr. Abdus Samad Azad, Senior

Research Executive, BKMEA, to get the appropriate picture of the situation

and also to prepare the questionnaire.

The second phase of the research involved a descriptive research. The

study tried to find out the effect on the knitwear industry after January 1,

2005, and the opportunities that are coming up. To analyze this, an

intensive research was made. The techniques and results of the result are

presented in this report.

1.4.2 Intent of study

The intention of this study is to determine the extent of impact on the

knitwear industry after the MFA has been lifted. It looks at the impact from

the perspective of the industry and the perspective of the owners. The

economic impact has been focused on, as the study was carried out with

the instructions of the Head of Corporate Banking, Citigroup to analyze the

opportunities of the bank to take part in the process.

1.4.3 Definition of population

For the purpose of the research, two sets of population have been

considered. The first set consists of experts. They are mainly those people

who have carried out or are carrying out researches on the RMG sector and

are in a position to know the actual situation prevailing in the industry.

The second population set consists of owners of knitwear garments. While

there are a total of 848 knitwear garments in the industry, the number of

owners is much less because one factory owner usually has one or two

more, especially if it’s a large firm.

1.4.4 Sample design & techniqueA non-probabilistic sampling technique was used to collect respondents for

its survey purposes.

For the first sample frame, convenient sampling was used to pick its

respondents. This was the only the respondents could be collected as

majority of them have a busy schedule and often cannot spare time. Some

respondents chosen for the purpose like Mr. Kutubuddin Ahmed, Present

Chairman of MCCI & Former President of BGMEA, and Mr. Fazlul Haque,

President of BKMEA could not give the time needed. Hence through

convenience sampling the following people have been interviewed:

Name Name of

company

Designation Address Contact

Number

Rumana

Akhtar

BKMEA Executive (R&D),

BKMEA

National

Plaza (4th

floor), 1/E

Free School

Street,

Sonargaon

Road

9673337

Mohammad

Abdus

Samad Azad

BKMEA Senior Executive

(R&D), BKMEA

National

Plaza (4th

floor), 1/E

Free School

Street,

Sonargaon

Road

9673337

Quazi Zasim

Uddin

BGMEA Additional

Secretary

BTMC

Bhaban, 7-9,

Karwan

Bazaar

0189-

245543

Farzana BGMEA Sr. Executive, BTMC 8115751

Table 1.1: Designation & contacts info of Experts

Shirin Research Cell,

BGMEA

Bhaban, 7-9,

Karwan

Bazaar

For the second sample frame, i.e. the owners of the knitwear companies,

we used a mixture of snowball sampling and convenient sampling.

Name Name of

company

Designation Address Contact

Number

Siraj ul Islam MBM Asst. Vice

President

M19 & M14,

Section 14,

Mirpur, Dhaka

1206.

8011157,

ext-12

Md. Alamgir

Hossain

Square Knit

Fabrics

Limited

General

Manager,

A&F

Mascot Plaza

(11th-12th floor),

Plot # 107/A,

Sector #7,

Uttara Model

Town

0171-

593455

Md. Azizul

Islam

Alif Group Chairman &

Managing

Director

21/22, Babar

Road, Block-B,

Mohammadpur,

Dhaka-1207

9115124,

8115218,

9110065,

8118457

Mr. M&J Group Manager, Concord Tower, 8814048,

Table 1.2: Contacts info of Garments Factory Owners

Riazuddin

Ahmed

Accounts Mohakhali C/A,

Dhaka 1205

8826247,

8824356

Mr. Abid

Hassan

Khan

Floret

Fashion

Wear

Managing

Director

315/B Tejgaon

Industrial Area

8825099

1.4.5 Data collection method

The data collected are from both primary and secondary sources. The

secondary sources included the various national and international

newspapers, journals, websites and also published material supplied by

some of the respondents.

The primary data were collected through surveys. Beside a fixed

questionnaire, in-depth interviews of a few experts were taken to help

understand the situation better and from different angles.

1.4.6 Questionnaire

The questionnaire was prepared two times. Initially a test questionnaire

was prepared for the experts. Initially, the questionnaire was prepared

based on the research questions and then finalized based on the interviews

taken of the experts.

There were 2 sets of questionnaires – 1- Pre-test and Re-set questionnaire

for the Experts 2- Pre-test and Re-set questionnaire for the Owners. These

questionnaires have been provided in the Appendix.

1.4.7 Analysis

Techniques

Various analysis techniques have been used to analyze data in order to

fulfill the objectives of the report. Some of these techniques are described

below:

Trend analysis – This was used to find out the extent of growth in the

number of firms and the volume of exports of the knitwear industries in the

post MFA era. The trend was created using the data of the knitwear growth

of the first quarter of the year 2005.

Frequency – Frequency tables are used quite a number of times in this

report, e.g. to identify reasons behind the growth of individual firms. It

allows the reader to easily understand the rate of recurrence of a particular

option. Using this technique we were able to identify the reason most likely

to have affected the growth for the owners employees.

SWOT Analysis – Since the total impact of the removal of MFA is still to be

seen in the days to come, and the impact global competition is yet to be

felt, there is need to analyze certain opportunities that may open up or

threats that may need to be faced. The Knitwear sector also has certain

strengths and weaknesses which will decide how it will fare in the face of

these opportunities and threats. The SWOT was done on basis of research

and as well as factors cited by experts and owners.

Overview ofOverview of

2.1 Citigroup

Citigroup is the renowned global financial services company with over 200 million-customer accounts in 104 countries across six continents. It is the first financial services company to bring together banking, insurance and investments under the same name. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, insurance, securities brokerage, and asset management. Citigroup, ranked one of the world’s 10 most respected companies, has the most diverse array of products and the greatest distribution capacity of any financial firm in the world.

Citigroup generated revenues of $86.2 billion in 2004, which produced net income of $17 billion. The equity base increased 13 percent to $115.5 billion (including Trust Preferred Securities) and the balance sheet reached $1.5 trillion. It reported record net income for the first quarter of 2005 of $5.44 billion, or $1.04 per share, both increasing 3% from the first quarter

of 2004. The first quarter results include a $272 million after tax charge for repositioning costs comprised of $151 million in corporate and investment banking, $95 million in global consumer, $22 million in global wealth management and $4 million in asset management. Globally, there were 300,000 employees in 2004.

The major brand names under Citigroup's trademark red umbrella include Citi Cards, CitiFinancial, CitiMortgage, CitiInsurance, Primerica, Diners Club, Citigroup Asset Management, The Citigroup Private Bank, and CitiCapital.

It was voted the most respected financial services company in the world in a recent survey of 1, 000 CEOs across 25 countries, conducted by the Financial Times and PriceWaterhouse Cooper. It was ranked 8th overall among all companies, up from 31st place last year. It also ranked 12th in the categories of good corporate governance and corporate social responsibility.

2.2 Citigroup, Bangladesh Citigroup started its operation in Bangladesh during 1987, by opening of a representative office. The main function of the bank at that time was limited to correspondent banking, L/C confirmation, credit appraisal of

Our goal for Citigroup is to be the most respected global financial services company. Like any other public company, we’re obligated

to deliver profits and growth to our shareholders. Of equal importance is to deliver those profits and generate growth

responsibly.

- Chuck Prince, CEO Citigroup

Citigroup has shown durability, stability and continuous growth over the decades, and is now the most global company in the world.

- The Financial Times

companies for Citigroup Hong Kong, Singapore, India etc. Based on the strengths with respect to global network, expertise in financial services and technology based delivery capabilities, Citigroup Bangladesh had been able to establish as one of the largest overseas correspondents for the nationalized banks in Bangladesh. Full-fledged operation of Citigroup started on June 24, 1995. Citigroup is a 100% owned branch office of Citibank, New York. Then on June 18, 2000 a new full service branch was opened in Chittagong, the commercial capital of Bangladesh. The branch is now operating business in a commercial hub of the city side-by-side most of its other counterparts. A third branch of Citigroup has started functioning Gulshan, Dhaka.

In this very short span of time, and with limited human resource of 93 permanent employees, Citigroup has been able to make a place for itself. In the year 2004, the bank’s net profit was Tk.38 crore. The operation of Citigroup in Bangladesh is still conservative and limited to serving financial needs of the leading business and corporate houses (through treasury operations, cash management, lending etc) although the bank has a plan to go for consumer banking in near future.

2.3 Bangladesh: As a Part of Citibank’s Global Market Citigroup worldwide is structured in two divisions: GRB (Global Relationship Banking), which includes all the markets in the developed world and deals with those MNCs that are Citibank’s clients all over the world; and EM (Emerging Markets), which basically includes the markets in the developing world. Emerging Market is again divided into three geographic segments: Latin America, Asia Pacific and CEEMA (Central and Eastern Europe, Middle East and Africa).

Bangladesh is one of 74 countries that fall under the head of Emerging Markets. Bangladesh belongs to the region, CEEMEA (Central Eastern Europe Middle East Africa), which includes 38 countries. In each of such regions, countries belong to different clusters; a cluster forms with 4/5 geographically close countries and the representative from the largest country in the cluster is chosen to be the Cluster Head. The cluster in which Bangladesh belongs to also includes India, Nepal, Sri Lanka and Bangladesh. The regional head office of Citigroup Bangladesh is located at Mumbai, India.

2.4 Structure of the Bank

The bank is structured according to the four product divisions: Corporate Banking, Financial Institutions, Cash Management and Treasury. There are also four other departments that can be termed as support and these are Operations, Credit Administration, Financial Control and Human Resource. An organogram is included overleaf for better visual clarity.2.5 Corporate BankingCorporate Banking in Citibank is divided into two main segments:

GRB (Global Relationship Banking), in which the RMs basically deal with the clients (multinational companies in Bangladesh) with whom Citigroup has global relationship. There is a single Parent Account Manager (PAM) in the country of origin of that MNC who is responsible for looking into the credit relationship between Citibank and the company worldwide. Any credit extended to the company has to be approved by the PAM.

TTLC (Top Tier Local Corporate), as the name suggests is the segment in which only the top performers (basically the first three ranked companies) of any industry are approached to be Citibank’s clients. The VMP program involving the RMG industries is part of this sector.

Citibank provides both deposit products and loan products to its corporate clients. The loan products are of varying tenor and purpose. Citibank Bangladesh also provides structured finance products. The main activities involved in Corporate Banking division of the bank include: communication with customers and calls. The RMs (Relationship Mangers) try to establish contact with key CBG customers; know about the status of their capabilities. The next step is to collect customer information and make a detailed analysis of the needs of the client matched with what the bank can offer. After agreement of both parties, the bank gets approval from the lending unit. Once a company has become a client with credit relationship, the RMs then have to monitor the performance of the company and ensure that no classification of credit occurs. Every year, Citigroup, Bangladesh has to submit to the cluster head the macro-economic indicators of the country and also the performance of the sub-sectors, and based on these, the portfolio is revised as to how much Citigroup can get involved in each sector.

The Products Offered by the Corporate Banking Division

Corporate FinanceCorporate finance and other credit products constitute the core of commercial banking services. Citibank offers a full range of financing options that are tailor-made to each of the circumstances of each client. The lending products are customized based on purpose, tenor, currency and other criteria. The products and services offered are:

Credit Structures enhanced by Export Credit Agencies Commercial Paper or Fixed Income Securities Syndicated Loans Project Finance

Working Capital FinanceThis is basically the funding provided for financing of a particular working capital need, which can either be short-term loan or overdrafts. Some common forms of working capital finance are financing of inventory or raw material purchase, receivable financing for both export and domestic etc. The products and services offered are:

Pre-export and Import FinanceReceivable Financing

Trade FinanceCitigroup has another major business with its business community, which is Trade Services. With its online system available globally, Citigroup Bangladesh can offer its customers swift processing service, which is crucial to any trade customer of a bank. Besides customers can open, amend, and transmit L/Cs online from their own premises using Citibanking system.Major trade finance products and services are:

Letters of Credit Export L/C Advising & Transfer Guarantees: Bid, Performance, Financial Discounting / Refinancing of Acceptances and L/C L/C Confirmation Documentary Collections / Negotiations

2.6 Financial InstitutionsThe Financial Institutions department caters for the need of various banks and non-bank financial institutions as well as NGOs, not-for-profit organizations and diplomatic missions. The core product is the correspondent banking services. Besides there are various electronic banking services, which enable FI, clients perform large domestic and international transactions efficiently and safely.

With presence in more than 100 countries in the world, Citibank N.A. is one of the largest correspondent banks for international trade services. Citibank N.A. is one of the leading global correspondent banks of financial institutions operating in Bangladesh. The FI customers include the largest nationalized commercial banks, which account for approximately 50% share of the country’s financial market, as well as top tier private sector commercial banks.

Citibank is a member of CHIPS and the largest processor of US dollar payments in New York. There are more than 28,000 US Dollar accounts of financial institutions and corporates maintained in Citibank, NY. On average, Citibank NY transfers funds worth $500 billion per day to beneficiaries all over the world. Customers can avail a variety of account services such as payments processing in US Dollar and other currencies, check collections, investment of funds in overnight or long term money market products, view / download daily account statements etc.Primary Activities of FI DepartmentFI department mainly facilitates international trade conducted by Citibank , Bangladesh. Citibank does L/C advising, confirming, transferring, guranting

and negotiating and reimbursing. In order to do so the FI department of the bank provides the local banks direct facilities or credit lines that includes OSTBT (Ordinary Short-term Banking Transaction), Local bill discounting, CTC credit line etc. Credit line for treasury purpose includes PSR facilities. Like the CBG Department, the FI-RMs also try to establish contact with FI customers. After that, the RMs collect customer information and make a detailed analysis of the needs of the client matched with what the bank can offer. After agreement of both parties, the bank gets approval from the lending unit.

Major FI products and services are:US Dollar Demand Deposit Account with Citibank NY

With this NOSTRO account FI customer can check the daily statements of transactions. The statement lists all debits, credits and the closing balance and also contains pertinent details necessary for immediate reconcilement. The statements are downloaded electronically by Citibank, Dhaka from overseas branch office’s system and printed on hard copy and delivered to customer’s office. In response to the customers’ needs Citibank is also in a position to maintain additional accounts in other currencies (EURO / ACU).

Sweep and Investment Services / Overnight Investment FacilityOvernight Investment facilities are provided for any balance with Citibank, NY in excess of USD 50,000. This facility enables the customers to earn interest in their operating accounts.

Automated Funds Transfer FacilityWith state-of-the-art technology (SWIFT interface) available to Citibank, the bank is able to pass on customers’ instructions to transfer FCY funds and

inter-bank FX settlement to its overseas branch where NOSTRO account is maintained.

Reimbursement Authority ProcessingThe reimbursement facility is linked to the customer’s proposed NOSTRO account. The LCRA (L/C Reimbursement Authority) instructions are picked up from the designated branch of the customers and pre-processed in Dhaka and Chittagong offices and transmitted to overseas unit where NOSTRO account is maintained. The Dhaka and Chittagong offices of Citibank N.A Bangladesh coordinate with the branches and the overseas counterpart to resolve the issue in order to provide superior services to the clients.

Letters of Credit Advising / Advising With the aid of test-key arrangement, SWIFT Key exchange and/or exchange of authorized specimen signature booklet, Citibank’s global network is available for advising L/C. Citibank also provides L/C amendments service.

Pre-Debit AdviceA pre-debit advice is also provided on daily basis at free of cost for funding customers’ accounts smoothly once they start using the account for reimbursement purpose. Customers receive pre-debit advice through SWIFT directly from Citibank New York.

Electronic Banking / e-BusinessCitibank e-Business offers the customers an innovative approach to domestic, cross-border and regional banking solutions. In Bangladesh Citibank primarily offers Paylink, Citibanking, and CitiDirect as e-solutions.

2.7 Cash ManagementCash Management deals mainly with deposit collection i.e. is involved in liability management of the bank. For this, the team has to go out on calls to bring about customer deposits and get companies to open account with Citibank. Cash Management team works closely with the Corporate division and with FI department (For NGOs, NBFIs, Insurance Companies and Diplomatic mission). The products and services offered from this department include:

Online fund transfer between Dhaka and Chittagong. Efficient collection mechanisms at different outstation points. Secured electronic payment mechanism at over 100 locations across

the country. Innovative and competitive deposit products. Web-based electronic banking services. Prompt distribution of inward remittance at competitive rates. Mobile banking.

Citibank is in a position to offer customized services with the help of state-of-the-art technology to support high volume of payments and collections. The Citibank products such as Worldlink enable effective payment in more than 40 currencies through drafts or wire transfers. Simultaneously, the strong relationships of Citibank , Bangladesh with the nationalized commercial banks within the country enables payments to reach virtually to all the corners of Bangladesh.

On the collection side, the New York based automated check processing capability of Citibank assists in obtaining proceeds of clean checks with the minimal of turn-around time. With well-structured courier arrangement

and relationships with other banks, Citibank is capable of substantially reducing transit time for local collections and thereby, assisting in better management of funds.

Besides, Citibank is playing an important role in facilitating fund remittance by expatriate Bangladeshi workers. In collaboration with Saudi-American Bank (SAMBA), Agrani Bank and Islami Bank as local counterpart, Citigroup Dhaka office introduced new products called Speed Cash and Safe Draft to facilitate quick funds transfer for the Bangladeshi expatriates working in K.S.A. Citigroup, Bangladesh is now exploring the opportunities of extending similar services to other parts of the globe, especially in Middle East countries Great Britain and Malaysia where the number of Bangladeshi workers are high.Major cash management products and services are:

Account Services Domestic and International Payments & Collections Outstation Check & Cash Collections Cash Pick-up & Delivery Travelers’ Cheques Worldlink Paylink Speed Cash Safe Draft

2.8 TreasuryThe treasury of Citibank Bangladesh meets all the foreign exchange related requirements of the valued corporate customers. Citibank Bangladesh Treasury has been giving excellent and innovative services to the clients since its inception in 1995. These clients can establish direct contact with

the treasury for their foreign exchange requirements. Their local and global strength in treasury products enables them to offer the most competitive foreign exchange rates for Spot and Forward transactions. Apart from competitive foreign exchange rates Citibank has other value added treasury services:

The products and services offered by this department include: Foreign Exchange

Ready & Spot Forward Currency Swaps Deposits for Various Maturities Bills Discounting Inter-bank Term Deposits

Money Market Overnight Deposits Term Deposits Discounted Securities

Citibank is also a very active player in the country’s Swap Market. They are always working very closely with Central Bank and other regulatory organizations to offer their local and international expertise for the development of new products and markets.

2.9 Other Departments

Credit Admin

This department deals with credit risk or market risk of projects. Other responsibilities of the department include monitoring credit facility, checking the credit approvals prepared by the Relationship Managers, monitoring the Relationship Managers’ activities relating to plant visits. The Head of this unit reports to the Country Risk Manager (in case of Citibank, Bangladesh, it is the Chief Country Officer). Financial ControlThe activities of this department include managing the financial books of the bank; checking all entries of the book are according to standards, preparing daily reports for Bangladesh Bank, revenue appropriation and calculations, setting the internal pricing rates etc.

Operations, Technology & ICU (Internal Control Unit)

The Operations department of the bank deals with account opening, deposit management, loan booking, L/C opening etc; the Technology part involves processing of transactions and maintenance; and ICU is involved in reconciliation of Nostra accounts and also making sure that every day the suspense account balance is 0.

Human Resource

The responsibilities involved in the Human Resource department include recruitment, selection, employee performance evaluation etc. Being a multinational bank, besides Citigroup policies, certain US laws are applicable to the operation of Citigroup in Bangladesh; anti money laundering and adhering to such general compliance issues of the bank are other major responsibilities of this department. Although compliance and

human resource are two different sides, in Citigroup Bangladesh, both are headed by one individual.

Citigroup’s Vendor Marketing ProgramCitigroup’s Vendor Marketing ProgramThe Vendor Marketing Program of Citigroup N.A. offers short term Trade Finance & Services to qualified apparel exporters in Bangladesh.

Although in the year 2004 Citigroup has approved of term loan facility of maximum US$ 2.5 million with a maximum tenor of three years under the program, considering the forthcoming post MFA scenario, it had proposed to hold the term loan facility till there is a clear picture of the garments export scenario of post MFA.

At present the companies that are under the program are: 1- Sajid Apparels 2- Matexport Ltd. 3- MBM Garments 4- Sunman Sweaters 5- Pacific Jeans 6- Shanta Garments 7- Opex Sweaters 8- Giant Garments 9- BSF 10- Siam Superiors 11- Columbia Apparels3.1 Target MarketCitigroup has taken a niche approach in selecting vendors and buyers with additional controls, whereby limiting the facilities only to those vendors with long track record and having a long term survival outlook, while on the buyer side limiting to those financially strong buyers (D&B rated 1-2, selectively 3) or Citibank’s GRB relationship.

The facility offering is mainly limited to the trade cycle of the client with tenor of 180 days.The program limit is being renewed at existing level of $25 million. While Citigroup has introduced the risk return criteria in last renewal, the existing target market criteria of the program remains unchanged, which are:

- The target will have to be 100% ready-made garments manufacturers & exporters with group exports greater than US$ 10 million. This must be confirmed through BGMEA data, bank report or audited financials. Citigroup has proposed to continue with the existing minimum target level of US$ 10 million. At present, there are approximately 50-60 vendors who have annual sales of US$ 10 million and above. Citigroup has lending relationship with 10 of them.

- The present facility is expected to be more or less utilized by the existing clients.

TM includes only those vendors who are dealing with reputed buyers and also will be subject to obtaining positive3.2 Import Citibank opens Back to Back Import LC/amendments against Export LC under lien to it. Import bills under such Import LCs are scrutinized and applicant is informed about arrival of documents and both applicant & beneficiary are informed if any discrepancies arise. Import Loans are also offered if necessary if export funds are not realized, for making Import bill payments on maturity. Customers can also open Import LCs under EDF (Export Development Fund) offered by Bangladesh Bank. In a situation where the imported goods reach Bangladesh port before arrival of original import documents, Citigroup may issue a shipping guarantee (bank indemnity) in favor of the shipping line / agent for release of goods without endorsement of the Original Bill of Lading.

3.2.1 Import Back-to-Back LC issuance and amendmentCitigroup receives LC opening or LC amendment application at its counter. The LC opening application is made in the bank-prescribed format and signed by authorized signatory of the customer. The application is time

stamped and signature on application/Pro-forma Invoice/Indent/LCA/IMP is verified by designated Citigroup employee at the branch. Any alteration needed is to be duly authenticated by the customer.

The full set is then received by the OIC, Trade for his/her perusal. The application set is subsequently scanned and images authorized in CI and taken up by E-Serve for processing. E-Serve completes scrutiny of the application against checklist provided to them and passes the necessary entries through Trade Engine. The LC/amendment is transmitted through swift to overseas bank and customer copy of LC text & debit advice generated through TE (Trade Engine) is delivered to customer. A Fortnightly report for LC/amendment issuance is made to Chief Comptroller of Import & Export (regulatory body) and Monthly report of LCA and IMP reported to Bangladesh Bank. 3.2.2 Import Bill Scrutiny

Import documents are delivered by courier and received at Mail Desk. The document is time stamped and reviewed by OIC Trade. A unique reference is assigned by the branch. The document is scanned in CI and taken up for scrutiny by E-Serve. A detailed checklist is provided to E-Serve for scrutiny. After completion of scrutiny, a presentation memo is generated through TE which includes the document arrival notice and list of discrepancies (if any). Overseas bank is also advised of acceptance or declining of document.

3.2.3 EDF (Export Development Fund)Export Development Fund is a source of funding for financing foreign exchange import requirements of 100% export oriented industries for their imported inputs. The fund is owned by the Government of Bangladesh and managed by Bangladesh Bank. Bangladesh Bank uses EDF to refinance foreign exchange credits given by scheduled banks to eligible exporters. Under this arrangement, VMP customers may request for opening import Back to Back LCs on “Sight” basis.

A monthly reporting to BBK needs to be done on LCs issued under EDF. A letter for re-financing has to be sent upon execution of payment of import bill. Accordingly, BBK provides a loan to the Bank for the bill amount for a maximum tenor of 180 days. Upon realization of export proceeds, the BBK loan is liquidated for principal + interest. All IBBS entries for booking and liquidation of EDF loans are passed by E-Serve.

3.2.4 Shipping Guarantee

Customer letter and customer’s counter indemnity (duly signed by authorized signatories) is received at counter and time stamped, with signature verified. Customer provides acceptance of any and all discrepancies on original documents. Copy Invoice and Copy B/L is provided for Citibank’s perusal.Branch processes the guarantee by completing checklist for guarantee issuance. Necessary entries are passed/authorized in IBBS by Branch.

3.3 Export

Export Bills submitted by customer at Citibank’s counters are either negotiated or sent on to overseas bank on collection basis. Upon realization of export proceeds, b/b LC payments, Packing Credits, EDF Loans are settled first and remaining balance credited to customer’s account as per their instructions.

3.3.1 Export Bills under Collection

Export Document is received at counter, time stamped, and signature verified. A cover letter in the bank’s prescribed format is attached with the document. As per customer instruction, document is negotiated if document is clean or else negotiation is done with approval from BCC. Otherwise, document is sent under collection basis. For negotiation of discrepant documents, Trade Operations confirms continuation of the cross border exposure covering the import payment (if import liability is paid off from the proceeds of the negotiation) till receipt of the export proceeds at Citibank’s counter.

The full set of document is scanned in CI and taken up by E-Serve for processing after images authorized by branch. The document is scrutinized as per checklist available to E-Serve. Necessary entries are passed by E-Serve in IBBS if document is negotiated by the branch. The full set of document is dispatched through DHL by the branch.

The duplicate of the Export form is duly filled and submitted to BBK within 14 days of shipment.3.3.2 Export proceeds realization and utilizationExport proceeds are received through Citibank’s Nostro. The fund is immediately parked in a customer specific sundry account. Upon settlement of import bills, packing credit etc. the remaining balance is transferred to customer’s current and FCY RTN Quota account as per customer instruction.

Monthly BBK reporting of the triplicate copy of the EXP form is done upon realization of proceeds.3.3.3 Packaging Credit (Pre Shipment Finance) Packing Credit is the working capital finance towards the credit required for manufacture of export order in local currency other than the financing by the bank for import of raw and packing materials through issuance of back to back letter of credit. The credit is liquidated when the exporter ships and presents documents in order to avail post shipment credit or upon realization of export proceed against documents sent on collection.

3.4 Risk identificationThere are several types of risks that are analyzed before going for extending Citibank’s services to the vendors. These are:

Credit Risks Commercial Risks Operational Risks Country Risks Documentation Risks Funding Risks

All obligors under this program will have been assigned Obligor Risk Rating (ORR), derived from DRM (Debt Rating Model). Citigroup rates the program based on the average probability of default of the obligors (multiplied by the limits of obligors), under the program.

The credit risk here is largely dependent on “performance risk” as the vendor may not have the ability to perform according to the requirements of the buyer. Whether the export order is placed via a PO or a LC, the ultimate risk is whether the buyer will approve the final product. Therefore, the buyer/vendor relationship is a critical element in analyzing performance risk.

Even though such risk will exist, the mitigating factor here is the PRAC done, i.e selection of vendor and approval of his buyer, checking the years of relationship of buyer with the exporter and positive reference on the buyer.

3.4.1 Commercial Risk

Commercial risks occur when Vendors, Buyers and Banks have disputes over conditions and rules governed by the operative L/C document under UCP 500 and local requirements .These risks can be controlled through the proper selection of Vendors and L/C issuing banks, for which Citigroup has a

set rules.

3.4.2 Operational Risk

Buyers can refuse to pay identifying discrepancies that have been overlooked by Citibank. Operations will use a detailed checklist to facilitate the process and meet compliance requirements. Adequate resources in the Trade Processing Unit will ensure that Operations processing will continue to demonstrate high quality as a mitigant.

3.4.3 Country Risk

This program will operate within the country cross border limits. Export Bills with discrepancies, Import LCs and FX pre-settlement will be earmarked against country cross border limits. 3.4.4 Documentation Risk

Necessary documentation is to be taken per local standard bank forms. Individual RMs for respective VMP clients is responsible for obtaining all documentation prior to utilization. Country credit administration will check documentation prior to draw-down.Citigroup Bangladesh, offers VMP products to its 100% Export oriented RMG (Ready Made Garments) clients. The products offered under this program can be divided into the following categories:

3.4.5 Vendor Selection:

Vendor selection is accomplished by the credit filters and facility provided commensurate to level of experience with the Bank. This includes Pre-screening and trade feedback. Owners commitment to the business is also a key ingredient in analyzing vendor risk, which can be judged through site

visits and talking to people from the same trade. This would also give an idea of the reputation of the vendor amongst the suppliers and the market.3.4.6 Banks Selection:

In general Buyers delinquency is covered by L/C issuing banks (Rated 5- or better), for the Pre-Export finance once performance per term of the L/C is completed. Banks with ORR of 5 or better would qualify automatically. 3.4.7 Buyer Selection

In case of a GRB buyer, Citigroup will insist satisfactory payment history. For others Citigroup is taking reference check. In any case, as per law of the land, taking buyer reference from an acceptable agency (Citigroup take from D&B or from other Citigroup branches having relationship with the buyer) is mandatory. 3.5 Account Maintenance Process & MIS

VMP Sponsor/Manager will provide program management support and individual RM (Relationship Manager) looking after individual VMP clients will be responsible for obtaining proper documentation.

CPC Mumbai will handle all trade-related transactions, while DRUBR, Shipping Guarantees and Drafts/TTs will be handled by the Dhaka/or Chittagong Trade Dept.

VMP Sponsor as well as individual RMs will be responsible for periodic monitoring of outstanding and also loan maturities.

Revenue monitoring shall be handled by the Financial Control Unit.

A&P shall be used for operating procedures and ops matters, while the GCIB rules shall govern credit related matters.

Direct write off method will be used for loans DPD 180 days. No losses under the program to date. No losses are anticipated for 2004.

Policies and Procedures Documentation Documentation will be standard across all customers.

Funding Strategy Funding will be from the local US$ deposit base and shortfalls will

be covered via borrowings from other regional Citigroup Treasuries (e.g. Bahrain). Funding will be managed by the Treasury Unit of the Branch.

Export Development Fund (EDF) from Bangladesh Bank 3.6 Key Success Factors for Vendors

For Vendors:The garment export trade starts with the buyer placing an order with the seller (vendor). Therefore it must be noted that if the vendor is unable to secure orders from buyers, he is out of business. In order for the vendor to be successful in securing orders continuously he must consistently make delivery in the right quality, at the right time and at the right price. To maintain these attributes and standards (Price, Quality and Delivery) the vendors will be required to consistently upgrade their production facilities, increase productivity and have a strong management team.

Therefore in identifying a quality vendor one must look for the following:1. Experienced: who has been in business for a considerably long time

(>+5yrs for group), 2. Reputed: who has long-term buyer relationship, and has secured

business consistently from reputed buyers,

3. Successful: buyers are willing to place continuous orders,4. Good Management with Farsightedness: experienced and committed

management focused towards consistent upgrading and improving production facilities,

5. Financial Strength of the Group: who may sustain in the cut-throat price war situation,

6. Buyer Diversification: who has diversified based on buyer as well as destination,

7. Adherence to International Labor Standards: with buyers becoming more and more demanding about the quality of life being given to garments workers, manufacturers have to ensure that they adhere to stringent labor laws, factory construction standards etc. Most of the large buyers have their own inspection team and standards certification process before they procure from sellers.

3.7 Credit ProcessThe following tables show the different criteria that the vendors must fulfill to be eligible for Citibank’s services

Parameter Requirement 1. Apparel exports of the Group Min USD 10MM

2. Registration with BGMEA* Yes

3. Bangladesh Bank’s Defaulters list

Clean Report

4. SDN check Not on SDN list

5. Export of the Group to GRB & D&B 1-3 rated client (s)

>=50% of group turnover

6. GRB Client Reference and/or D&B Rating

Positive

Table 3.1:Pre- Screening Criteria

7. Length of relationship with GRB client

Min 2 years

Parameter1. Years in Business (for Group) >=5 yrs

2. Apparel Export Turnover of Group

Min USD 10 MM

3. Profitability1 Positive for last 3 yrs

4. Financial Ratios for companyInterest Cover

LeverageCurrent Ratio

>= 2<= 1.5>= 1.1

5. Trade Reference Check Positive

6. Visit to site No adverse comment (waived for stand alone PSE facility)

7. Single buyers concentration Maximum 40%

8. GRB & D&B checking covering minimum

40% of sales of the units to be financed by us

Positive

9. Minimum Yearly Revenue Category A = USD 25 MCategory B = USD 40 MCategory C = USD 50 M

(waived for stand alone PSE facility)

Leverage calculation excludes L/C / acceptance liabilities from the payable. However, including Acceptance, leverage cap is 2.50

Table 3.2: CUSTOMER SELECTION CRITERIA

In addition:While Citigroup does not seek any recourse from the buyer for its vendors financed under this program, Citigroup will use the following criteria judgmentally for selecting a buyer/ GRB buyer:1. Satisfactory payment history as confirmed by exporter 2. No adverse comment on company from overseas PAM/CitiVision if a

GRB buyer3. Willingness of the buying office to support the program by providing

details on their operations/ references on the vendors

FacilityPre Screening Yes

Standard Documentation Yes

Personal guarantees from Directors / owners

Yes

Max. tenor of Facility 360 days (360 day for OD only which amounts maximum of USD 100million 180 days while shipping

guarantee tenor is 18 months

Table 3.3: PRODUCT RISK ACCEPTANCE CRITERIA (PRAC)

Level of Facility

- Unit / Group Level (maximum of 40% of

group VMP export or the limit mentioned,

whichever is lower)

% of export to GRB Buyers and or to D&B rated 1-3

buyers

Limit within the total facility

To negotiate discrepant docs

(Only GRB buyers)

CATEGORY A CATEGORY B CATEGORY C

GroupTurnover>USD 25MM

Group Networth> USD

4MM

No. of years in business > 7

GroupTurnove> USD 15MM

Group Networth> USD

3MM

No. of years in business > 6

GroupTurnover (TO)> USD10MM

Group Networth> USD

2MM

No. of years in business > 5

US$7MM

50%

US$5MM

50%

US$ 1.5MM

50%

(US$ 800M) (US$ 500M) (US$ 300M)

Maximum Finance (% of Master L/C)

90% (Usance/Sight B/B L/C-75% plus Packing Credit/Overdraft-15%)

Security Hypothecation of stocks & receivables

* Max allowable limit for B/B L/C set by the central bank is 75% of the Master L/C. If that reduces, Citigroup will also have to reduce the maximum finance limit for B/B L/C.

Overview of RMG IndustryOverview of RMG IndustryBangladesh is the twelfth largest garments manufacturing nation in the world. The garments sector is divided into the textile and the readymade garments (RMG) segments. The textile segment is sub-divided into a number of activities, which include: spinning, weaving, and fabric processing; and the RMG segment includes knitwear and woven items.

Since the late 1970s, the RMG industry started developing in Bangladesh primarily as an export-oriented industry. RMG now accounts for 77% of the total merchandise exports of Bangladesh and 94% of the RMG export is dependent on the quota-restrained markets. The direct contribution to GDP is relatively small about 5% (IMF working paper). The sector reflected an average annual growth rate of 22% (EPB, 2000), and between the years of 1990 and 1997 exports of apparel grew by 200% in terms of volume and 370% in terms of value. This is one of the highest achievements within the major garment exporting countries worldwide. (Syed Azim, UNDP).

The knitwear sector has performed particularly well over time. The sector’s share in total RMG has grown from about 17% in 1995 to 40% in 2003 (IMF working paper). The knitwear sector has already exceeded woven garments export volume, 1099 million pieces vs. 1,085 pieces (Jabbar, Financial Express). The magic behind the success of the knitwear section is the low lead-time, the factor being competitiveness both in terms of price and

quality. This has been due to the self-sufficiency in the fabric knitting, where around 80 percent of the yarns, used in knitwear factories, are produced locally.

4.1 Products

The product range manufactured by the industry is relatively narrow, concentrating on basic garments such as ‘T’ shirts, polo shirts, pajamas, woven shirts, trousers, shorts, undergarments, anoraks, and parkas. Some production of higher value items have been introduced, however it is the low cost, low margin items that are the most prominent (Ibid).

The RMG sector has not made much attempt to diversify into more complex products that are less sensitive to either quota or price. Product development does not seem to form a part of the Bangladesh firm’s structure, with design and fabric selection often being chosen by the buyers and customers.

The composition of knitwear export is shown below. The main components of knit sector are T-shirts and sweater. The contribution of T-shirts was huge last year, with 49.45% share.

Table 4.1: Composition of Knitwear Export (million US$)

Components 2001-2002 2002-2003 2003-2004

T-Shirts 546.28 642.62 1065.72Sweater 517.83 578.38 618.41Others 395.14 432.83 471.2Total 1495.25 1653.83 2155.33

Source: BKMEA4.2 EarningsRMG has rapidly attained high importance in terms of foreign exchange earnings and employment. The export earnings of this sector have risen dramatically from about $7 million in 1981 to $5.7 billion in 2004 (Shahiduzzaman, Financial Express). The export of knitwear brought US$ 1.4 billion during the July-December period of 2004. (BKMEA).

4.3 The Trade Associations The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) has approximately 3,992 members, approximately 2000 of these garment units are located in Dhaka. The Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) have 792 full members, making a total of over 4,000 companies in the RMG sector (Syed Azim, UNDP).

It is estimated that approximately 95% of the Ready Made Garment companies are entirely owned by Bangladeshi companies or families. Most of the foreign owned companies are located in the Export Processing Zones (EPZs).

The RMG industry categorizes the companies based on the number of machines each possess. According to the BGMEA, firms with less than 200 are classified as small, between 200 and 400 are medium-sized and those above 400 are categorized as large industries.

4.4 Employment

The RMG industry has created a huge number of employment opportunities for the people of Bangladesh. The total number of workforce employed in this sector is presently 2 million (BGMEA), which is almost half of the total industrial workforce of the country.

Beside this, more than 15 million people work in related industries from button-makers to truckers to insurance underwriters (The Daily Star, 2004).

4.5 Growth of RMG Exports

When the MFA first came into place, foreign investors, who were restricted under the quota regime in their own country, set up factories in Bangladesh. This, and a guaranteed access to the largest market, attracted a lot of domestic entrepreneurs to set up export-oriented factories themselves.

This sector saw astronomical growth in the late eighties. Even in the first five years of the nineties, the industry grew steadily at an average rate of 30% per year. The growth started to decline from FY 96 and came down to as low as 7.28% in FY 00 (Quasem, 2002).

Table 4.2: Trend in Employment in the RMG industry in 1990s

RMG export grew at 18% as compared to overall export growth rate of 16% during first 7 months of the last fiscal. EU exports were the drivers for growth while US exports declined. Export growth of knit garments was higher (26%) than that of woven garments’ (12%) during the same period. 31% of garment exports are to USA while over 50% to EU. Over 70% of US

exports are under quota while the EU exports get indirect quota protection (quota free only for LDCs). Canada and Australia have also granted quota/duty free access to Bangladesh but the share is currently only 4%.

Figure 4.1: Growth of RMG Exports from Bangladesh

Figure 4.2: Growth of apparel sector

Source: BKMEA

4.6 Reasons for growthBangladesh has been able to reach its current position due to several factors. The government has provided fiscal and financial support such as duty drawback facilities, tax holidays, cash assistance, income tax rebate facilities, zero tariff on machinery input, rebate on freight and power rate, bonded warehouse facilities, provision of import under back-to-back L/C, credit at concession rate, export credit guarantee scheme, and retention of foreign exchange earned by the exporters, all of which facilitated the growth of this sector. (Anik, 2004)

But the major factors behind this explosive growth have been both General System of Preferences (GSP) and Multi-Fiber Agreement (MFA), which allowed Bangladesh to export to EU and the USA, respectively. These two market accounts for more than 94% of total garments exports from Bangladesh and the export volume to other markets is negligible.General System of Preferences (GSP) General System of Preferences (GSP), introduced in 1971, gave Bangladesh generous access to European Union (EU) and allows her to enjoy incentive schemes and duty benefits. Originally the GSP was dependent on yarn and fabric manufactured in Bangladesh for the production of readymade garments. Recently, this has been extended to cover textile and clothing products manufactured in Bangladesh using yarn or fabric that has been imported from the ASEAN, SAARC or other countries in the Lome` Convention.Multi-Fiber Agreement (MFA)

During the MFA period (1974-1994) international trade in textiles and clothing has been characterized by the establishment of bilaterally agreed and/or unilaterally imposed quantitative restrictions by developed countries on imports of textiles and clothing coming from developing countries. This provided the basis on which industrialized countries have been able to restrict imports from developing countries.

The MFA has been imposed on Bangladesh in the 80’s; extended five times and came eventually to an end in 1994 since these arrangements were restricting the volume of trade and were not in conformity with the existing GATT rules. For example, it imposed quantitative restrictions on imports and discriminated suppliers based on the country (Rahman, BMI). Thus in the GATT Uruguay Round it was agreed that MFA would be gradually phased out in four stages over a 10-year period, setting the stage for a quota-free world on 1 January 2005. (Anik, 2004)

The first stage began in January 1995 and the WTO members were required to integrate not less than 16% of their 1990 imports of textile and clothing products. In the second stage, starting January 1998, not less than further 17% was to be integrated, and in stage three, from January 2002, a further 18%. Finally, on 1 January 2005, all remaining products (amounting to a maximum 49%) are to be automatically integrated. (IMF working Paper)

4.7 MFA and RMG sectorThe MFA was introduced as a short-term protection measure for the textile and clothing industries in developed countries against the low-priced apparel manufacturers from developing countries. According to the MFA, every year countries agree to the quantities of specified items which can be traded between them.

After introduction of the MFA, Asia has become the world's foremost exporter. A lot of production had been initially done in Europe. However, with automation and the sub-contracting process, direct production is contracted out to countries where wages are lower. Initially production was concentrated in the East Asian countries such as Hong Kong, but by the middle of the 1980s other Asian countries such as Bangladesh, Cambodia, etc emerged as major exporters of garment manufactures. Hence, only 25-30% value is added to the value of woven exports in Bangladesh (North-South Institute, 2000), while almost 70% for knitwear (The Bangladesh Observer, 2004).

Bangladesh benefited greatly from quota restrictions offered by the MFA as it gave Bangladesh generous access to European Union, Canada, and US markets. Within ten years, RMG had overtaken the country's leading exports of jute, tea, shrimp and leather. The sector earned $5.7 billion in 2004. (Shahiduzzaman, Financial Express).

As an LDC, Bangladesh will continue to enjoy GSP concessions from EU but is expected to lose out the US market after the MFA phase out starting

Figure 4.3: Stages of Integration of MFA into GATT

Sources: Adapted from IMF (2002)

January 1, 2005. Bangladesh needs to prepare itself to respond flexibly to opportunities and threats in the post MFA era. Trela and Whalley (1988) estimated that if all developed countries' restrictions on textiles and clothing were removed, exports of these products from Bangladesh could increase by 70%. The welfare effects for Bangladesh of removing the MFA quotas were estimated at US$0.223 billion. However it can be mentioned that even if Bangladesh fails to expand, it should try to maintain its present share of 2.6 % of this expanding market (Smith, 1998).

The overall adverse effect can be substantial because a large part of the manufacturing is dependent on RMG. MFA withdrawal is expected to cause several small and medium units to close down. Many of the workers might lose their jobs, and those who will still have them might be offered lower wages with fewer working facilities than now. The net fall in receipts from woven RMG exports is the major current concern regarding Bangladesh’s exports. Thus, considering the impact of full phase-out of the MFA for Bangladesh, there is urgency to comprehensively review the textile and RMG related issues to undertake focused measures.4.8 Current Constraints for the RMG SectorA number of stated concerns specific to the garments sector have been identified and some are broadly classified as follows:

Phasing out of quota (MFA) Disruption at the sea port located in Chittagong The potential inclusion of China into the WTO The lack of a mature textile industry that could supply more domestic

product to the RMG sector

A lack of design and product development Long lead times Low efficiencies, quality problems, low use of computer based

information technology, CAD, and CAM. Over dependence on imported raw materials Lack of development of backward linkage industries Inadequate infrastructure and supported services Lack of knowledge of manufacturers/exporters of RMG Corruption is pervasive and costly High levels of non-performing loans reduce the capacity of banks to

lend at reasonable rates, especially to small and medium sized enterprises.

4.9 Possible threats and opportunitiesAfter 2004, the MFA has been completely integrated with WTO, under which agreement, the developed countries (USA and Canada) would not be able to impose further restrictions on the apparels from developing nations. This is expected to bring about competitiveness among the various exporting countries, leading, in turn, to quality products and lower price for consumers. However, problems in the prevailing system and structure of the Bangladesh RMG sector combined with quota withdrawal is expected to pose some threats to exporting companies of the country. Some of these threats, based on previous research are discussed below.

While, Bangladesh exports to 31 countries (Absar, 2001) in total, the US is currently the largest market for RMG exports for Bangladesh, if the EU states are counted separately, and the second largest with the EU states combined. The US buyers mainly buy from 40 markets, of which CR5 is 61% while CR10 is 85%. This is a relatively high concentration ratio. However,

with the MFA withdrawal, competition is likely to intensify. This is likely to push the other small suppliers out of the ring, while the top five or ten suppliers dominate the market (Bhaumik, 2004). US imports from Bangladesh has started to decrease due to quota phase out. However, in the longer term it may increase depending on certain compliance issues, such as workers access to trade union, working environment of the factories, law & order situation etc.

According to the US Department of Commerce, major buyers are likely to reduce the number of countries they source from by half during 2005-06, and another third by 2010 (Shefali, 2003). Moreover, US buyers are likely to concentrate on countries that are politically or financially stable (Selim, 2004). These factors put Bangladesh in a precarious position, since it is the 6th largest garments exporter to the US (Absar, 2001) and traditionally instable. However, according to a study done by Citigroup, global sourcing may be narrowed down to a smaller number of countries, perhaps 10 to 15 and Bangladesh should remain the ‘supplier of choice’ in many categories and rank among the top 5 exporting countries.

With China’s accession into WTO, it has been given the country access to one of the largest market in the world. According to the US International Trade Commission (USITC) report 2004, it is expected to be the supplier of choice for most apparel companies and retailers. However, the textile specific safeguard provisions contained in China’s WTO accession protocol (Selim, 2004), may prevent from China creating a monopoly in the US market. Moreover, importers will continue to maintain relationships with other suppliers to minimize risks of sourcing from only China (Ibid).

The American Textile Manufacturers Institute (ATMI) had previously cautioned that the country would lose a market share of $1.05 billion by 2006. However US retailers, such as Wal-Mart, one of their largest retailers, say that they are likely to expand sourcing from the South Asia region as an alternate source of supply (Ahsan, 2004).

With quota withdrawal and a resulting oversupplied market, it is expected that prices would go down significantly and bring about deterioration in the terms of trades of developing countries. Already, buyers are offering just US $12-13 as CM charges to Bangladeshi exporters compared against $30-45 in 2002. There has been a gradual reduction of workers in factories and downward pressure on the wage levels as producers try to reduce the cost of production (Shefali, 2003). With even a 10% reduction in employment level, the number of unemployed is likely to be as high as 180,000 (The Independent, 2004). However, some exporters see the quota withdrawal as a blessing. Exporters who until now had been denied access to the US market because of the quota restriction, claim that they are now procuring orders from buyers for export after 2004 (Ibid).

Reputation for quality service and on-time delivery, existing business networks (supply chain linkages, good relationships with US customers), flexibility and variety in products, and lead-flexibility are important factors too. These factors will make or break post-MFA RMG firms. Availability of cheap skilled labor, compensation rates, and the availability of qualified managers and middle management will provide important competitive advantage (Selim, 2004).

On the positive side, garment exporters have gradually moved up-market in recent years and are increasingly exporting sophisticated items like high quality suits, jackets and brand items. Exporters have also been able to penetrate Japan’s extremely quality conscious market. As a result, merchandise exports, led by the garments industry grew at an average annual rate of 17% in US dollars, between 1990/91 and 1997/98 (Secretariat, 2000).

The first three months of the post-MFA has shown positive scenario whereby it has been stated that Bangladesh's garment sector is sailing comfortably in the post-MFA era as its export orders surged by up to 47 per cent in February 2005. (The Financial Express, 2005) The orders received by local knit manufacturers are on the rise even outside of the peak period - July-October.

4.10 Knitwear: post-MFABangladesh Knitwear Manufacturers and Exporters Association (BKMEA) is surpassing the government set export target in the current fiscal year, is confident that there will be no pressure as the post-MFA era has ended. Within the next five years, Bangladeshi knitwear exporters are expecting to export T-shirts even to China, the giant of the World’s textile industry. (The Independent, 2005)

Even though the woven garments exports were lower by 21.34 % in January 2005, raising fear that the RMG was starting to be hit by the quota removal, the knitwear exports had remained stable. However, the fear was overcome by the export figures of February that

showed a surge of 38% increase in woven garments, while the export of knitwear rose 47%, with February alone marking 82 percent boost. (T&G – Supply: http://www.tg-supply.com/welcome.do?page=2002) The orders for knitwear are on the rise even outside the peak period of July-October, according to the President of BKMEA, Mr. Fazlul Haque. (The Financial Express, 2005)

In the US market, even though the orders on the woven garments have been falling because of huge increases in Chinese exports, the orders on denim have increased in recent months.

On the other hand when compared to the rise in garments exports of foreign competitors this value does not seem significant. It has been outpaced by Asian competitors like China, Cambodia, India and Qatar. The exports of T-shirts to the US market, which constitute 60% of the total knitwear exports in Bangladesh, from China in the month of January (immediately after the lifting of quota) rose by 158 %, Cambodia by 206%, Qatar by 331% and India by 122%. (New Age, 2005). BKMEA executives have agreed that they are being beaten due to price wars. Bangladesh is lagging behind in price competition, especially in the larger orders. However, they still keep substantial hope because US market comparatively new as most of the knitwear were being exported the EU market until recently; .so it might take some more days for the real picture to evolve.

But there are still areas where the knitwear industries should focus on to keep up with the global competition. Like the huge cheap labor pool on which the industry more or less depend upon, should be upgraded in terms of skill and knowledge. This is required for the raising the quality of

products. Then there are the social and environmental standards that are to be maintained to ensure substantial number of foreign buyers. Currently, out of the country’s 600 knit factories, only 50 to 60 have social compliance while none of the factories meets environmental compliances. (New Age, 2005)

In the year 2005, the compliance issue has become important as international buyers are beginning to put pressure to meet social compliance criteria including workers’ wage, health and workplaces. Mr. M.A. Baset, an executive member of BKMEA said that by this year 50% export oriented knit factories would be able to meet the social compliance. He also hopes that knitwear will be fetching $3 billion in exports in 2004-2005 fiscal. Measures are being taken as well, like The GTS, a German agency for technical cooperation has partnered with the private sector to help the knitwear sector meet the social and environmental compliances and stay competitive.

According to Japan External Trade Organization representative in Dhaka, Mr. Sotaro Nishikawa, Bangladesh has overcome the initial speculated shock of the withdrawal of quota facilities and at present it has the potential of adding value up to 75% by satisfying the rules of origin. There are certain other constraints like knitwear manufacturers who are being compelled to buy local yarns, for the support of local textile industries, in prices much higher than international competitors. Bangladeshi manufacturers pay $ 0.7 per kg of yarn more compared to Indian manufacturers. This causes the cost of production of local knitwear manufacturers to increase by 20%. (The Bangladesh Observer, 2004)

According to Mr. Fazlul Huq, the President of BKMEA, buyers may switch to other competitors’ products even with an edge of 1 %. This effect has been enhanced by the ‘undervalued currency’ strategy of China and India to capture the international market of knitwear. China has been able to reduce the price of its knitwear by 70%, capturing 28% of the market. Even then BKMEA thinks that China is not a competitor of Bangladesh because it is not involved in low-priced knitwear; India seems to be much bigger competitor in that aspect.

However, there are chances that the Chinese exports to the US and EU will be restricted due to the surge that has taken place during this year. Both the American Manufacturing Trade Action Coalition (AMTAC) and the European Commission (EC) have called for considering possible action to safeguard the local manufacturers of textiles. Therefore, even though Bangladesh is doing substantially well in the knitwear sector and the trend is showing acceleration in exports, it is not void of vulnerability to external factors. To keep up the trend, the knitwear manufacturers need to improve in terms of the quality of products, marketing of its products and price competitiveness. Therefore the potential of knitwear depends on both the industry of Bangladesh itself and the external environment fluctuations.

Analysis of Knitwear Industry in Post-MFAAnalysis of Knitwear Industry in Post-MFA

5.1 What are the factors influencing the growth of Knitwear industries?

Before investigating the level of growth that will occur in the knitwear

sector, it is essential to find out the factors that is causing and will

determine the growth of the sector in the post MFA period. The following

SWOT analysis given below gives one an idea of the position of the

Knitwear sector and how this might fare in the coming years.

Strengths

1. Cheap Labor – Labor cost is only 5% of production cost in

developing nations whereas in industrialized nations it is 75%

(www.cleanclothes.org). This enables the knitwear manufacturers

to supply Quality Products at Lower Price. (BKMEA)

2. Duty drawback scheme – “The RMG sector benefits from a duty

drawback scheme for raw materials whereby import duties paid

on these materials are reimbursed to the importer upon

execution of an export order” (Mlachila and Yang, 2004).

3. Reduced income tax rates – “The government during the FY04

budget reduced the corporate income tax rate for RMG industries

from 30 to 10 percent for the period up to June 30, 2006. At the

same time, income tax rates for textile manufacturers were

reduced from 30 and 35 percent to 20 percent for the period up

to June 30, 2006.” (Ibid)

4. Cash incentives – “The government operates a Cash

Compensation Scheme (CCS) through which domestic suppliers to

export-oriented RMG units receive a cash payment equivalent to

10 percent of the value added of exported garments. In the past

three years cash payments have averaged about Tk 6 billion. (Ibid)

5. Backward Linkage – More than 75 percent of the raw materials

needed for knitwear industries are provided by the local suppliers.

(BKMEA)

6. GSP facilities in EU Market – Bangladesh, through satisfying the

Rules of Origin, gets preferential access to the EU market. This has

created a huge market for the country. The growth is seen in

these markets specifically.

7. Less Lead time – The fact that the raw materials can be acquired

from local suppliers gives knitwear a less lead time and therefore

the time space between receiving the order and supplying the

products to the buyers is comparatively less. (BKMEA)

8. Industrialization – The rapid industrialization of the RMG sector

has added to the strengths. Even if in the woven sector, owners

have easily gained the know-how related to knitwear

manufacturing.

Weaknesses

1. Low productivity of labor (Mlachila and Yang, 2004)

2. Outdated equipment (Ibid)

3. High interest rates - “High levels of nonperforming loans reduce

the capacity of banks to lend at reasonable interest rates,

especially to small and medium-sized enterprises”. (Ibid). China

subsidizes its industries, where the firms have a negligible lending

rate offered to them of around 1 percent. In India it is around 3-4

percent. (BKMEA) Whereas in Bangladesh this is almost 13-14

percent. Moreover, Bangladesh Bank is planning to further

increase the rate.

4. Inadequate electricity supply – “About 70 percent of companies

rely on back-up generators that supply electricity at a cost

typically 50 percent higher than the price of power from the

public grid”. (Ibid)

5. Inefficient port facilities – “the port of Chittagong, is very slow in

handling containers due to lack of cranes.” (Ibid)

6. Corruption – “It often manifests itself in excessive regulation,

leading to extortion and bribery. Companies rank it as a severe

obstacle to business”. (Ibid)

7. Policy induced weakness

a. restrictions on FDI in the sector – “foreign investors bring

superior technology and managerial skills” (Ibid) and due to

restricted RDI, RMG has not been able to grow more

competitive.

b. a requirement to have back-to-back letters of credit (LCs)

before imports can be approved

c. “a requirement to reserve 40 percent of export cargo for

domestic vessels” most of which are inefficient.” (Ibid)

8. Lack of market diversification – 94% of our exports are

dependent on the quota restrained markets of EU. (Ibid)

9. Failure to meet Compliance Standards – Currently, out of the

countries total knit factories only 50 to 60 have social compliance

while none of them meets environmental compliances. (New Age,

2005) In the year 2005, the compliance issue has become

important as international buyers are beginning to put pressure to

meet social compliance criteria including workers’ wage, health

and workplaces. The recent fire and building collapse accidents

have caught the attention of the buyers and may become a major

issue if not dealt with properly

10.Local yarns are highly priced - Bangladeshi manufacturers pay $

0.7 per kg of yarn more compared to Indian manufacturers. This

causes the cost of production of local knitwear manufacturers to

increase by 20%. (The Bangladesh Observer, 2004) According to

Mr. Fazlul Huq, the President of BKMEA, buyers may switch to

other competitors’ products even with an edge of 1 %.

Opportunities

1. Abolition of quotas will create a more level playing ground -

Quota allocation in Bangladesh is administered under the Textile

Trade & Quota Administration Rules (1991). About 95% of the

quotas are allocated to existing firms on the basis of past

performance. This system is inefficient and favors large and well-

established firms at the expense of newer, potentially more

innovative firms. Although quotas are supposed to be free,

sometimes the large companies “sell” their quotas to the SMEs at

a very high price. This increases the SMEs cost of production.

Abolition of quotas will help all firms in competing in a level

playing ground.

2. Sub-contracts from China - Although China is more efficient in the

manufacture of RMG products, there is a probability that China

will not be able to handle all the orders it will get. It might give

sub-contracts to other countries and Bangladesh, having a long

experience in this sector, is very likely to get majority of the sub-

contracts from China. Moreover, the export oriented firms of

China is not being able meet the local demands of its people. So,

Bangladesh exporters are expecting to export T-shirts even to

China within the next five years. (The Independent, 2005)

3. Use of the textile specific safeguards provisions contained in

China's WTO accession protocol (Daily Star, Selim, 2004). U.S.

importers would want to minimize risks of sourcing from China

alone. Moreover, the recent restrictions being put on China by the

US and EU due to the huge surge in imports from China, will cause

the buyers of US and EU to minimize the risks by diversifying the

import source. Both the American Manufacturing Trade

Association (AMTAC) and European Commission (EC) have called

for considering possible action to safeguard the local

manufacturers of textiles.

4. The overall apparel trade will increase - The reduction in price of

apparels will increase the demand for RMG. As a result, the global

market will expand and Bangladesh can take advantage of

expanded market.

5. Preferential Market Access – “Canada has also announced that

from January 2003, all imports into Canada from Bangladesh

including RMG shall be duty free”. EU has also given duty free

concessions under “Everything But Arms’ (EBA) scheme to

Bangladesh. (Quasem,2004) Moreover, recently Mexico has

announced duty free access of all Bangladeshi RMG products.

6. U.S. Retailers - US buyers are considering Bangladesh one of the

major source as JC Penny, Wall Mart, GAP, K -Mart and other big

buyers are coming to Bangladesh and setting up offices. (NewAge,

2004). In the quota free regime exports in US market may

increase. This is because during the post-MFA period, a restriction

was put on the volume of exports to US market.

Lifting of those restrictions would enable knitwear firms in

Bangladesh to export as much their capacity allows them to.

Bangladeshi knitwear firms, though has always focused on the

European markets due to GSP facilities, should explore the US

market, which provides a substantial customer base. (BKMEA)

Threats

1. Constriction of market access – “The US Department of

Commerce in its report to the Congressional Caucus, reveals that

major buyers will reduce the number of countries they source

from by half of it during 2005-6 and by another third by 2010”

(Shefali, 2003)

2. Capture of Market by China and India – “Jennifer Hillman, vice

chairman of the US International Trade Commission, said a recent

study done by the trade panel showed world textile production

making a very large shift into China when the quotas end”. (The

Independent, 2004)

India is also becoming a major supplier due to more efficient

production facilities. For example, even if Bangladesh has its own

yarn factories, the cotton to produce those yarns has to be

imported from India. On the other hand, India is self sufficient in

producing all raw materials ranging from cotton to dying agents.

This gives India a cost advantage over Bangladesh. (BKMEA)

3. Bilateral agreements for political reasons – The U.S. might

choose other countries over Bangladesh for political reasons.

(Selim, 2004)

4. Non-tariff barriers – Bangladesh might not be able to meet “non-

tariff hurdles such as labor standards, social accountability and

environmental clearance requirements”. (Selim, 2004)

5. Preferential Trade Access - US Trade Development Act 2000

enacted in the USA on May 19, 2000 provides preferential access

to countries in Africa and Caribbean Basin. This will lead to trade

diversion from Bangladesh. (Quasem, 2004)

5.2 What is the Effect on Knitwear industry?

The table below shows that the knitwear exports are rising in composition of Bangladesh RMG exports, with its share rising from just over 15% in 1990 to over 29 percent 2000. The rate of increase of knitwear exports has accelerated during the last 2 years. The market penetration in EU has been drastic. Since 2000-2001 the growth has been 101.19 percent. This is due to the 74.63 percent growth in the FY 2003-2004 itself. On the other hand there is declining trend in US market. In the FY 2003-2004, the market experienced a negative growth of 32.47 percent over the last FY.

Figure 5.1: Trend of knitwear export growth in major markets

As the previous figure shows the steep rise in the knitwear export during the last two years has been due to the European market. The knitwear exports have always been concentrated in the EU market due to the GSP facilities through the fact that they meet the Rules of Origin Criteria. The

Table 5.1 Changing commodity composition of Bangladesh RMG export

exports have surged in the current fiscal year and are expected to continue in this manner, as stated by the BKMEA experts and owners.

When the export data of knitwear for the past three years was analyzed the following trend was obtained for the next three fiscal years from 2005-2006 to 2007-2008.

Trend: Yearwise Export of Knitwear

0

1000

2000

3000

4000

5000

6000

02-'03 03-'04 04-'05 05-'06 06-'07 07-'08

Year

Expo

rt Va

lue

in M

illio

n US

$

BKMEA has stated that the export value of the current fiscal (2004-2005) would surpass US$ 3000. Using this value and the values from previous years, it shows that by the end of the year 2007-2008, the export value could reach over US$ 5000.

Figure 5.2 Trend analysis of Year-wise Export of Knitwear

Figure 5.3: Trend analysis of Number of Knitwear Firms

As the export volume is seasonal, therefore a month-wise prediction could not be done. However, a month-wise trend analysis for the number of firms coming up shows that by the end of this fiscal year, the total number of knitwear firms is likely to be 925 and is likely to surpass the 1000 mark by the end of 2006.The first three months of the post MFA period has shown a drastic increase

in the export volume. As the table below shows, the overall increase has

been over 38 percent compared to the previous period.

2004 2005 % Change

January 192.92 221.74 14.94February 108.32 196.06 81.00March 166.99 231.41 38.58Total 468.23 649.21 38.65

Trend Analysis: Knitwear Firms

0

200

400

600

800

1000

1200

Dec Mar-05 J une Sep Dec Mar-06 J un Sep Dec

Months

Num

ber o

f Kni

twea

r firm

s

Table 5.2: Comparison: Month-wise Knitwear Export

5.3 What Measures are going to keep up the Growth of the Knitwear Industry?

As the table shows, importance was given most to Marketing

improvements and Penetrating US Market. These alternatives were

suggested by 80 percent of the experts surveyed. Therefore, experts think

that these are the best alternatives to keep up the competitiveness of the

knitwear sector in future.

5.3.1 Marketing Improvements:

Measures Frequency(out of 5)

Percentage

Cash Incentives 3 60%Ensuring competitively

priced yarn3 60%

Marketing Improvements 4 80%Loans 2 40%

Checking price of dyes 2 40%Penetrate US market 4 80%

Figure 5.4: Comparison: Month-wise Knitwear Export

Table 5.3: Measures to keep the competitiveness of knitwear industries

These are necessary for attaining efficiency; although this importance is not

felt as yet, the intense competition that Bangladesh will have to face in the

Post-MFA era will most probably force the garments to take up these steps.

This is indicated by the following secondary findings:

The most important point to remember is that Bangladesh should try to

diversify its product base and develop new and higher value-added

products. It is these products, which attract little or no non-price

restrictions and hence hold better promise for penetrating into the

developed country markets. (Rahman, 1995)

This low importance given to the marketing improvements is seen to be

a major weakness for the future of RMG sector.

The modus operandi of the RMG sector has not changed significantly since

1978, so that it continues to be mostly dependent on buyers and buyers’

agents giving orders to garment manufacturers for their stitching capacities

….. Most RMG companies have no marketing activities and no pro-active

selling. Consequently, companies have little alternative but to accept the

prices offered to them. The number of companies, world-wide, offering

stitching capacities in other LDCs is increasing, so that more companies are

competing in the same bottom market segment as most Bangladesh

producers (Stuart-Smith & Shefali, 2003).

5.3.2 Penetrating the US Market:

A trend has been created in the Bangladeshi RMG industry that the woven

sector focuses on the US market and the knitwear sector focuses on the EU

market. This has been created due to the MFA facilities provided in the US

market for the past so many years. On the other hand, the knitwear has

focused on the EU market due to the duty free access through compliance

of the rules of origin. However, as trade restrictions are being lifted, the

number of RMG suppliers has drastically increased with, specifically with

countries like China and India coming in.

Therefore, the market that Bangladesh knitwear focused on has to be

expanded and because US provides a huge consumer base, that should be

focused on. Recently exports of knitwear to US market have fallen, as

shown in the trend diagram previously. BKMEA is, however, trying to take

up measures to initiate marketing programs in order to face the global

competition. The following excerpt posted on a website by SEDF is an

example of the steps that are being started with the help of Development

Agencies and Consultancy & Marketing firms to take up the work.

Market Development Program to the USA for Bangladesh Knitwear Manufacturers REQUEST FOR EXPRESSION OF INTEREST (EOI)

The SouthAsia Enterprise Development Facility (SEDF) is a multi-donor funded initiative that supports the establishment and growth of private small and medium enterprises (SMEs) in Bangladesh, Bhutan, Nepal and North East India. SEDF is managed by the International Finance Corporation, the private sector arm of the World Bank Group.

The SouthAsia Enterprise Development Facility (SEDF) in collaboration with Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) propose to undertake a Market Development Program to New York City and its environs in order to establish market and secure business for a range of Bangladesh knitwear products. The specific objectives of the program are to:

• identify and select an appropriate number of Bangladesh products, manufacturers/exporters with export potential to North America • carry out in depth market investigations in the target market, including the test marketing of selected Bangladeshi products; • establish current trading practices and procedures and identify non-tariff barriers affecting trade in selected items; • establish commercial contacts with prospective importers, agents, wholesalers and retail stores in the target market; • secure trial and initial orders through a Sales Mission of industry representatives to the target market; • prepare a strategic marketing report and develop a comprehensive follow-up programme for the development of Bangladesh knitwear exports to North America

For this assignment, consulting firms should have the following experience: • Proven knowledge of the US apparel market, specifically NYC and its environs. Thorough understanding of the requirements of the marketplace for knitwear products. • Experience in undertaking similar market development programs with manufacturers from developing countries to the US. • Expertise in market research, particularly in the apparel industry. • Experience in leading sales mission of manufacturers to target markets. • Experience with apparel sector in a developing countries. • Knowledge of production processes of knitwear products. • The consulting team should have a minimum of 5 years experience.

SEDF now invites eligible firms or consultants to indicate their interest in providing their services. Interested firms must provide information indicating that they are qualified to perform the services (brochures, description of similar assignments, experience in similar conditions, availability of appropriate skills among staff, etc). Consultants may associate to enhance their qualifications. (…continued next page)

(Source: http://www.dgmarket.com/eproc/np-notice.do~954513)

5.3.3 Ensuring Competitively Priced Yarn:

‘Higher purchasing price of local yarn coupled with stalled cash incentives

from the government for the last two and a half years, the knitwear

manufacturers are likely to face stiff competition in the quota free world.’ –

Md. Fazlul Huq, President, BKMEA

This measure has been stated by 60 percent of the experts. In the present

situation, local knitwear manufacturers need to buy one kilogram of yarn at

2.8 dollars while Indian exporters in 2.1 dollars. Bangladeshi manufacturers

pay 0.7 dollar more for per kg yarn compared to Indian manufacturers. It

increases the production cost of local knitwear manufacturers by 20 per

cent. (BKMEA) According to Mr. Huq, buyers may switch to other

competitor's products even with an edge of one per cent. Therefore, it has

become essential to keep the price of yarns low.

(…continued from previous page) From Expressions of Interest must be delivered (preferably by email) to the below address by May 15, 2005. It should be labeled “EOI Market Development Program Knitwear”.

Specialist , Business Enabling Environment SouthAsia Enterprise Development Facility United House, 10 Gulshan Avenue Dhaka 1212, Bangladesh Telephone: +880 2 9861711-20 Ext. 134 Fax: +880 2 9894744 E-mail: wwerner@ifc.org

It becomes difficult for local yarn sellers to keep the prices low because the

cotton has to be imported from countries like India. Moreover, the land

port through Benapole has been more or less closed by the government to

restrict border smuggling. This would have otherwise enabled the garment

and knitwear manufacturers will be able buy yarn at international prices.

Cash Incentives

60 percent of the experts surveyed stated at least 15 percent cash

incentives for the next three years to be an appropriate measure for the

future prospect of knitwear. Cash incentives from the Government have

been stalled for the past 3 years and according to Mr. Huq releasing the

stalled cash incentive is essential to stay competitive in the international

market. The High Court had already accepted the writ of knitwear and

terry towel manufacturers regarding delay in releasing the government's

cash incentive to the sector. (The Bangladesh Observer, 2004) According to

BKMEA, there should be at least 15 percent cash incentive for knitwear

exporters for 3 years.

BKMEA believes that a possible setback might occur in this growing sector

because of stiff competition from India. India has offered nearly 13 percent

export incentive in the name of duty drawback or other facilities. It has also

raised a US$30 billion Technological Upgrade Fund (TUP) to assist its

businessmen investing in the textiles sector in the five years to come.

(BKMEA)

Bangladesh has becomes 24 percent less competitive than India and in

addition to that India there is the fact that it India produces cotton and

manufactures dyes, chemicals and machinery which Bangladesh does not.

Bangladeshi exporters, on the other hand, have to pay 11 percent more

than their competitors for importing these items.

The proposal set out by BKMEA is as follows:

15 per cent cash incentive on export earnings for using local yarn

10 per cent incentive for the exporters who use imported yarn and

5 per cent cash incentive on export earnings for those who use imported

fabrics in their production.

Checking Price of Dyes & Loans:

40 percent of the experts surveyed stated these factors as alternatives for

the future prospects. At present, the prices of dyes-chemicals have shot up

to 300-400 percent of the original in the local market. This has caused

increase in the cost of production. So whatever savings the knitwear does

in terms of cost of labor, is partially offset by the price hike of the raw

materials. India on the other hand have their efficient dying and finishing

facilities, which though started much after the development of Bangladeshi

factories, have drastically improved, keeping the post MFA period in mind.

According to Mr. Md. Abdus Samad Azad, Senior Executive, BKMEA,

Bangladesh has failed to take the appropriate steps and the opportunities.

The experts have also suggested soft loans for knitting and dying industries

for the establishment of a more efficient backward linkage. The interest

rate should be kept lower and the increase in lending rates is going

adversely affect any such attempts unless special consideration is given to

the sector.

5.4 What are the Opportunities and Threats for Knitwear firms in the Post MFA era?

The opportunities and threats for a knitwear firm were obtained from pre-

testing questionnaire for owners and experts. The experts were then asked

to scale these opportunities and threats, in terms of their impact on firms in

the post-MFA period. The following results were obtained according to the

cumulative score for each opportunity/threat.

Opportunities Score Threats ScoreChina will concentrate on

higher value items15 China & India may

capture market15

Increase in exports to US market

15 Currency undervaluation by China and lower

interest rates in other countries

14

New GSP schemes more favorable

14 Non tariff barriers 9

Restrictions on Chinese exports

16

Total Score 60 Total score 38

Table 5.4: Scores of opportunities vs. threats (experts)

The score shows that the cumulative opportunities have exceeded the

cumulative threats by a score of 22. On an average, each expert scored the

opportunities {(60/4) – (38/3)} 2.33 higher than the threats. The experts

surveyed believe that after MFA period there will be greater chances of

opportunities (like outsourcing and increased demand) overtaking the

threats (like Chinese dominance and non tariff barriers). That is in the end

post-MFA will be more of an opportunity than threat.

When the owners were asked to state their opportunities and threats that

they will face in post-MFA era, the following list was obtained.

Opportunities ThreatsChina will focus on higher valued

itemsDeficiency in advanced

technologyNew GSP schemes will be

favourablePort congestions

Industrialization will help to gain buyers

High interest rates

Overall apparel trade will increase Political instabilityNon-tariff barriers

China will focus on higher valued items: As the above two tables show that

both the owners and experts thought that China focusing on the higher

value items would be an opportunity for Bangladeshi knitwear to export in

a less competitive market. In doing so India becomes the greatest threat.

China does not produce categories of knitwear that are produced in

Bangladesh. Bangladesh is even hoping to export T-shirts to China. The

recent deal that has been signed to export to Singapore market has been

Table 5.5: Opportunities & Threats (Owners)

stated to be the first step to catch up with China by Md Fazlul Huq,

President of BKMEA. (The Independent, 2005) Moreover, even though it

dominates the world apparel market, it imports apparel products to meet

its local demand. China also wants to relocate some its industries in the LDC

countries and Bangladesh remains a high contender for the purpose of this

investment.

New GSP Schemes will be Favorable: The next common opportunity stated

by both is the possibility of the new GSP schemes that are to be

implemented from the middle of this year. Under the new scheme garment

exports from Bangladesh to the EU will not only continue to enjoy duty free

status but also become free from complying certain minimum local value

addition requirement. It refers to a zero value addition requirement at the

lower end at the national level. A collective SAARC regional cumulation of

value will replace the existing value addition criterion at individual national

level to facilitate regional group to make better use of the new GSP

scheme. (BSS, 2005)

The new scheme has been expected to multiply Bangladesh’s apparels

exports to the EU market at a time when China will be losing preferential

entry facilities. India is also near the threshold of risking losing the 3.5 per

cent duty rebate once its growth in market share exceeds 12.5 per cent

level. Increase in the export to US markets: This has been explained earlier

in the measures section. If the measures are taken properly, US may

become a huge market for Bangladesh knitwear.

Restrictions on Chinese Exports: this has also been explained previously. EU

and United States have already taken measures to restrict imports from

China to save the local industries. Therefore, countries like Bangladesh may

benefit from it as the buyers wiould want to diversify the supplier base to

avoid risks of only Chinese imports.

The threats have been discussed earlier and needs no elaboration here.

Even thought these have not

created drastic problems as

yet; however, if proper

measures are not taken to

counter these, it may become a hindrance to compete in global market.

5.5 Which Linked Industries are going to be affected the most?

From primary research it has been found that the three most correlative

industries with the knitwear sector are:

Spinning

Dyeing

Accessories

From the above table it can be seen that the industries affected most are

the spinning and dyeing industries. They have a mean of over 3.5, meaning

their chances of being affected are high. So if the knitwear can continue the

Type of linked industry mean Percentage

Spinning 3.75 75Dyeing 3.7 74

Accessories 3 60

Score 1 to 5 showing the degree of effect

1 – hardly affect; 2 – slightly affect; 3 – somewhat affected; 4 – very affected; 5 – extremely affected

Table 5.6: Types of linked industries

present trend in growth, then these industries are likely to flourish as well.

Moreover, as the value addition in the knitwear sector is 70 percent, the

backward linkage industries are going to get a major boost, and as the

experts have quoted, ‘Industrialization is happening and will continue to

happen’.

Recommendation

Based on the findings and its interpretation, the following

recommendations can help the knitwear industry and its constituent firms

remain competitive in the global market.

Increase Efficiency - Cost minimization will have to be the primary

objective of most firms in the post-MFA. Cost reduction should be

achieved through increasing productivity, and enhancing technical

efficiency. For this, the government should provide facilities to train

workers at very low cost.

Infrastructure Development – This is a must for RMG industry to be

competitive in world market. The government has to prioritize,

activate and initiate new ports, roads, gas connections, power

outages, telecom costs.

Market Diversification – Bangladesh should identify other potential

market segments to capture market share. It should try to promote

trade relationship with other countries and try to outsource for those

countries to reduce dependency on US and EU markets.

Pro-active Strategies – Companies should implement new business

strategies in order to become more competitive in the export

markets, be pro-active in selling products rather than stitching

capacities and thereby, be in control.

Build relationship - The companies need to improve their level of

contacts as well as marketing skills. It is very important to enhance

the forward linkage of RMG, since this will bring firms closer to the

markets and help them to develop relationships with retail buyers so

that they can become ‘preferred suppliers’. The government should

provide firms with a market database to raise their market

awareness and knowledge

Compliance Standards – The recent tragedies in the RMG industries

have claimed many workers’ lives. These would become a decisive

factor for buyers to choose suppliers with the stringent global

compliance policies. Firms should take into account the safety and

regulatory standards in order to face the global arena. Any action

taken against failure to comply with the standards could be drastic

for Bangladesh RMG industry.

Strategic Partnerships: Bangladesh could gain immensely from the

technology transfer with any country like Taiwan as it becomes a

global leader in high-quality synthetic or man-made fabrics through

the use of state-of-the-art technology and research. More value

addition could be possible through forging strategic partnerships

with this type of country. (Jabbar, 2004)

Conclusion

With the first five months of the post-MFA period gone, the RMG sector

has not drastically deteriorated, as most previous studies had predicted.

Even though the initial shock of the post-MFA competition has had only a

little impact on the woven sector, knitwear sector has shown unexpected

growth rate. If the trend continues, it is going to be the major export earner

of the country.

With the backward linkage that the woven sector does not have, knitwear

is becoming a more competitive sector. With positive responses from the

experts and the owners alike, the knitwear sector is likely to have more

opportunities in the future, which they are likely to use to overcome the

threats.

However, if proper measures are not taken, it may face difficulties, like

competition from India. Even a few years back India lagged behind

Bangladesh in terms of the production facilities. Now, with the support

from the government, the manufacturers over there are able to produce at

a lower cost, compared to Bangladesh. Therefore, the knitwear sector

should get adequate support measures from the government, as well make

a coordinated effort to be able to fight in the global arena.

As it is not upto the required standard in terms of efficiency and

technological equipment, proper measures should be taken to build up the

infrastructure to be able to be as competitive as possible. The knitwear

holds a bright prospect, but only if measures are being taken properly will it

continue to contribute the way it has in the last 6 months of the current

fiscal year.

LimitationsLimitations

While the research has been quite extensive and thorough, it isn’t without

a few limitations. These are given below:

5.1 Sampling limitations

For the information collected from sampling to be reliable, it should

be tested for repeatability and internal consistency. While the

information was checked for internal consistency by asking various

question to get the same answer (e.g. the opportunities for knitwear

in owner questionnaire), this could not be tested for repeatability

because the experts and owners do not have the time to spare for

extra questioning, let alone asking the same questions over again.

Most of the owners are indifferent to the Pre-MFA and Post-MFA

scenario. They have not been able to clearly make out the reasons

for growth Thus, to get responses from them and thus reduce non-

responses error, they had to be probed. This may result in

interviewer bias, thus giving us inaccurate pictures.

5.2 Information limitations

While the growth of knitwear sector in the Post-MFA has been

gaining attention of experts and business people alike, there has

been no extensive study done as yet, whether qualitative or

quantitative. Therefore, the information provided by the experts is

mostly based on their opinion of what they have experienced rather

than backed up by research.