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McKinsey Outlines Threats to Bangladesh RMG and What Will Drive Next-Level Growth

Bangladesh’s garment sector has experienced an “unprecedented blooming” over the past decade, a new report says, yet a one-two punch of pandemic pressures and sourcing shifts means the country is up against steep challenges and must “innovate, upgrade and diversify” more than ever to stay competitive.

Ten years since McKinsey & Company published its last major report on the South Asian country’s “ready-made garments landscape,” Bangladesh has undergone a transformation, one driven in part by a series of tragic workplace accidents, including the 2012 Tazreen Fashions fire and the 2013 collapse of Rana Plaza, which collectively killed more than 1,200 people and injured and maimed thousands more.

These disasters, according to “What’s Next for Bangladesh’s Garment Industry, After a Decade of Growth,” which was published Thursday, highlighted “massive problems in working conditions,” leading some international buyers to stop sourcing from the country and prompting the United States to withdraw preferential tariffs. But brands, retailers, suppliers and trade unions for the most part rallied in the aftermath, launching the Accord on Fire and Building Safety in Bangladesh, the Alliance for Bangladesh Worker Safety and ultimately the RMG Sustainability Council.

These measures, the report’s authors wrote, resulted in the closure of hundreds of unsafe, bottom-tier factories and scaled up safety remediations in many others, restoring Bangladesh’s attractiveness in the apparel-sourcing market and catalyzing a “decade of rapid growth.” Garment exports from Bangladesh have notched compound annual gains of 7 percent, doubling from $14.6 billion in 2011 to $33.1 billion in 2019.

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But Saskia Hedrich, senior expert at McKinsey’s apparel, fashion and luxury group and co-author of the report, says Bangladesh hasn’t captured the full potential the consultancy predicted in 2011. “Some apparel brands and retailers have reached a tipping point to the volume they can source from Bangladesh,” she told Sourcing Journal. “These are starting to diversify volume from Bangladesh to other countries to avoid overdependency and manage supply-chain risks.”

Even before the pandemic, other countries, most notably Vietnam, were closing the gap. Some of the nation’s export figures also showed negative growth in the second half of 2019 compared with 2018. Then Covid-19 hit, prompting order cancelations, payment delays, term renegotiations and upending all semblance of supply-chain normalcy. A number of smaller, less financially robust factories shuttered and as many as 357,000 workers lost their jobs. All of this had a knock-on effect; the value of Bangladesh’s garment exports tumbled 17 percent in 2020, representing revenue losses of up to $5.6 billion.

“Factories with lower financial health are [being] hit hardest,” Hedrich said. “The pandemic [continues to] accelerate the consolidation toward more progressive, larger players.”

Though Bangladesh remains a “potent” sourcing destination, the report said, other factors could compound the challenges wrought by the pandemic. Data from European and U.S. imports indicates that Vietnam likely surpassed Bangladesh in 2020, possibly usurping its position as the second-largest garment-exporting country in the world after China. And while the sector has made progress in diversifying and upgrading its offerings—such as improving its capacity to manufacture garments made from synthetic fibers or more complex products like outerwear and lingerie—many of its factories have not yet made the transition or prepared investments to do so. As such, basics like T-shirts, trousers and sweatshirts, which face the biggest discount pressures, remain Bangladesh’s biggest exports.

The sector is participating in initiatives tackling climate change and circularity. More than 1,500 Bangladeshi companies are certified by the Global Organic Textile Standard, the second-highest number in any country in the world. But there is still room to scale.

“Global best-practice factories in Bangladesh have continuously invested over the last decade into sustainability, new technology and efficiency improvements,” Hedrich said. “However, a large group of suppliers still follow a traditional cut-make-trim model. These will be threatened most to lose competition in a market [that] is looking for more efficient, flexible and sustainable production.”

Other gaps abound, including a gender gap and a worker empowerment gap. Progress has been slow on both, with Covid-19 “highlight[ing] and perhaps exacerbat[ing] the precarious position” of many of Bangladesh’s workers. Infrastructure is another challenge. To thrive, Bangladesh’s garment sector will need to strengthen its transport, energy and digitization infrastructure, the report said.

“Hard infrastructure issues, like road congestion and lack of a deep seaport, persist, as [do] some soft infrastructure issues with export processing,” Hedrich said. Several projects, currently underway, she added, could “significantly” ameliorate these problems, including the Padma bridge, which is scheduled to open this year and the Matabari Port, which is expected to open in 2025 with a new container terminal.

Bangladesh’s garment sector has “every prospect” of remaining one of the world’s top apparel manufacturers, the report noted, but it needs to take “decisive action in several areas if it is to prosper,” particularly with the impending loss of its preferential trade access as it graduates from a least-developed country to a developing one in 2024.

Bangladesh needs “to move to shorter lead times and increase flexibility, [implement] further investments into a vertically integrated supply chain as well as [make] efficiency improvements [where they] are needed most,” Hedrich said.