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McKinsey Study: Avoiding Bangladesh Wishful Thinking

Bangladesh’s unabated success following the disastrous Rana Plaza factory collapse is powerful evidence that price and production capacity are the twin pillars of apparel production, trumping factory safety and labor conditions.

A new study issued by the consulting firm McKinsey & Co. forecasts even greater Bangladeshi dominance of global sourcing, beating smaller rivals like Cambodia and Vietnam and potentially stealing market share from China. Currently, Bangladesh’s garment business tops a staggering $20 billion annually.

Even after garment factory catastrophes historically unprecedented in scale, and withering criticism from labor unions and human rights groups, Bangladesh’s economic success marches on. Achim Berg, a partner on McKinsey’s German office, observed, “Bangladesh is still number one. Recent events present a challenge for everyone, but there’s no alternative for doing big production volumes.”

Bangladesh’s competitiveness is largely a function of two factors: massive production capacity and comparatively low wages that allows it to handle colossal orders at bargain basement prices. Bangladesh boasts more than 5,000 factories while Vietnam has approximately 400.

Still, significant public pressure has weighed upon Bangladesh to improve factory safety and modernize often perilous working conditions. Retailers like H&M, Wal-Mart, The Gap and Inditex   have grappled with a pressing problem: how to continue to take advantage of Bangladesh’s uniquely attractive business climate while also pushing it towards greater levels of compliance.

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And Bangladesh now suffers from a welter of new problems as well. The government, under the freight of persistent international encouragement, seems committed to raising the minimum wage. Also, lately Bangladesh has been plagued by disruptive worker strikes, causing costly delays in production schedules.

Some retailers openly pine for alternatives to Bangladesh, worried that another factory collapse could make it all but impossible to maintain the status quo. According to the McKinsey survey, some are rooting for Myanmar to step up, now that is slowly beginning to open its markets to foreign investment. Berg, however, says this desire amounts to little more than “pure desperation and hope” versus a serious prediction regarding Myanmar’s short term viability as a sourcing destination. Vietnam and Cambodia, however, while far behind Bangladesh in production capacity, have real potential to develop significantly over the next several years. Other future competitors, like Haiti and Ethiopia, still represent pure potential, too underdeveloped to wager on, or even to be the proper objects of optimistic projection.

China remains the industry juggernaut, the undisputed global leader in garment production, clocking $150 billion in annual exports. Problematically, China’s economy is in tumultuous transition, beset by slowing growth and an increasingly worrisome credit crunch. It is also considerably more expensive than Bangladesh, with minimum wages four times as dear. Of the twenty-nine American and European retailers surveyed by McKinsey & Co., 80 percent expressed an intent to significantly reduce its sourcing to China over the next five years, creating an opportunity for Bangladesh to magnetize that newly available business.