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China Trade War Fuels Return to Sourcing in Bangladesh, Despite its ‘Weakest Link’

Whether the U.S.-China trade war has been the principal catalyst or not, companies are increasing their garment sourcing in Bangladesh, and the country has the capacity to expand even further to accommodate what likely will be a major ramp up of manufacturing there.

Now that new tariffs are sending the cost of sourcing in China higher than the long rising labor rates had taken them, U.S. brands and retailers are giving Bangladesh a bigger piece of their product manufacturing pie—even those that may have pulled back after tragic workplace accidents sent them fleeing over safety concerns in recent years.

But as trade tensions and punitive duties force companies to further consider emerging Asian nations for their garment manufacturing needs, capacity constraints have become a factor. No one country can take on the manufacturing China has forgone, but some, like Bangladesh, may be better equipped to do so.

“In terms of capacity to grow, Bangladesh has quite a lot of ability to expand. The population is there, the ecosystem is there,” said Francois de Maricourt, CEO of HSBC Bangladesh. “We see some new factories being set up, and you can see some factories with 5,000 workers, 10,000 workers. The country has the ability to increase the capacity quite substantially. The main thing will be around infrastructure.”

Infrastructure remains Bangladesh’s “weakest link,” de Maricourt admitted, but there have been investments in roads and ports, and the country has also started importing energy in the form of liquified natural gas to increase the availability of electricity. And while land access had been an issue because of the system in place to purchase it, de Maricourt says that is improving, too, and that companies are keen to invest in capacity.

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What’s perhaps the biggest boon for Bangladesh, however, is that its reliance on China for inputs is minimal compared to some sourcing countries, and this verticality becomes increasingly key when tensions have made trade relations sensitive and subject to change at a tweet’s notice. It’s also critical for supply chains that live and die on how quickly they can get product to customers.

“The dependence on China is not huge in terms of imports…The vast majority of producers in Bangladesh are actually local companies—and local companies that are growing,” de Maricourt said. “You have companies that are owned by some Chinese groups, and more investments from Chinese groups…there’s quite a lot of interest to invest more in terms of production in Bangladesh, which was not traditionally the case.”

Exports of textiles and apparel from Bangladesh to the U.S. increased roughly 12 percent in 2018, according to HSBC, and already for 2019, that growth is around 10 percent.

Bangladesh is the sixth-largest supplier of textiles and apparel to the U.S. after China, India, Vietnam, Pakistan and Mexico, according to data from the U.S. Office of Textiles and Apparel (OTEXA). Its growth in market share, however, has been in the double digits, while China’s continues to slip.

“Clearly, we see some interest in U.S. buyers to increase the quantity of the goods they are buying in Bangladesh,” de Maricourt said. “I am not sure if the U.S.-China trade tensions are the main reason to change the production…[but] the new duties have been perhaps a little bit of a trigger to force people to be out of their comfort zone to say ‘OK, now we have to act.’”

For those that had their eyes on Bangladesh pre-trade war, it was rising costs in China that sent them there. And for some of those same companies, the Rana Plaza factory collapse that killed upward of 1,100 people in Bangladesh in 2013 either sent them packing or made them gun shy about expanding production there.

“The cost of production is much, much higher in China than it is in Bangladesh,” de Maricourt said. “The know-how is also higher, but Bangladesh has made some good progress in terms of compliance and production.”

The Rana Plaza tragedy, de Maricourt explained, forced companies in Bangladesh to become much more compliant and install new fire doors and systems, and the process weeded out factories that couldn’t raise their safety standards to an acceptable level.

“Some factories had to close and I think it was a good thing for the industry because the small players who could not invest didn’t make it,” he said. “But the level of compliance has increased, which is not only in terms of working conditions, but also in terms of green initiatives.”

These are some of the factors that led HSBC, in its “The World in 2030” report released last September, to peg Bangladesh as likely to be the biggest mover in the global GDP rankings by 2030. The report put Bangladesh among the top-six countries for projected growth, a cohort that also includes India, Pakistan, the Philippines and Vietnam.

“We have done some forecasts looking at the world in 2030, and we have identified that Bangladesh has been the fastest in the world [for its pace of growth],” de Maricourt said. By 2030, HSBC expects Bangladesh will be the 26th largest economy in the world.

In the same report, HSBC said China will be the world’s largest economy by 2030, noting that its push toward robotics could mean “higher productivity and even faster GDP growth.”

And that could simply mean China’s days as the world’s factory will continued to be numbered, while rising players like Bangladesh will benefit from a more robust garment manufacturing industry.

“In terms of countries that can really absorb an increase in capacity, Bangladesh can do it,” de Maricourt said. “Opportunities would be even higher if the infrastructure was better, but we expect an increase in garment exports in the coming year.”