The textile industry was already going through a rough patch before the COVID-19 disruptions.
Increasing competition from peer countries, lack of technological innovation, poor infrastructure, rising utility costs, push for higher wages and inadequate port capacity had already slowed down the growth momentum of the industry. Going into the first nine months, from July 2020 – March 2020, exports fell by 7.1% to USD 24.1bn from USD 25.9bn in the same period of 2019.
Now, the pandemic situation has created further disruptions on both the demand and supply chain of the textile industry. The country went into a complete lockdown from 26th March, where RMG factories had to be shut till 26th April until the lockdown was partially lifted. During this time, 1,150 factories reported order cancellation/suspension of USD 3.18bn which impacted around 2.28mn workers in the industry. In the last three months, from March 2020 – May 2020, RMG exports fell by 54.8% to USD 3.7bn from USD 8.2bn over the same period of 2019. In the 11 months of FY’20, the industry’s export stood at USD 25.5bn against USD 31.3bn in the same period of FY’19. We expect total apparel export to reach ~USD 27.0bn in FY’20 against yearly target of USD 37.4bn. In addition, we expect exports in FY’21 to deteriorate further as we brace to go through a full year of economic disruptions.
Government Stimulus for the Textile Industry- A host of financial stimulus dedicated to the exportoriented industries which mainly comprises of the textile industry.
A stimulus package of BDT 50bn for the purpose of payment of salaries of employees engaged in export-oriented industries. This stimulus will be available in the form of loan at 0% interest and 2.0% one-time service charge for a 2-year period with 6 months’ grace period.
Bangladesh Bank’s EDF has been increased by UDS 1.5bn (BDT 127.5bn) to facilitate import of raw materials under back to back LC. Under the revised rated, exporters can avail funds from EDF at 2.0% interest instead of six-month LIBOR plus 1.5%, which equates to nearly 3.0% interest rate. BB has also enhanced the loan ceiling for exporters from USD 25mn to USD 30mn.
A new credit facility of BDT 50bn as ‘Pre-shipment Credit Refinance Scheme’ has been introduced by BB where exporters can avail funds at 6% interest for a 3-year period on a revolving basis.
The above policies are meant to provide a temporary relief to the industry in the form of providing cheap financing to ride out the pandemic disruptions. However, if the crisis on the demand side and international trade disruption to persist beyond 2020, the stimulus packages would not be enough to support the industry.
Way Forward into the Post COVID-19 World
Bangladesh textile industry is likely to go through a number of game changing dynamics in its major export destinations, competitive strengths and supply chain model; which may result in new opportunities or permanent loss of competitive advantage of the industry if not addressed prudently.
Deteriorating trade relation between the U.S. and China has created new opportunities– Since 2018, president Donald Trump has been setting tariffs and other trade barriers against China with the goal of forcing it to make favorable trade agreements. As a result, market share of Chinese apparel exports to the U.S. declined from 33.0% in 2018 to 18.3% in March 2020 (YTD).
It should be noted that long before COVID-19, U.S. fashion brands and retailers have begun to reduce their exposure to sourcing from China, especially since October 2019 due to concerns about the USChina tariff war. China’s lost market shares have been picked up mostly by other Asian suppliers, particularly Vietnam (18.9% YTD in 2020 vs. 16.2% in 2019) and Bangladesh (9.4% YTD in 2020 vs.7.1% in 2019). Going forward Bangladesh has the opportunity to aggressively fill the vacuum left by China.
Source: WTO Source: Eurostat.
Demand slump is likely to be lower for Bangladesh relative to peers- As Bangladesh is predominantly a producer of basic low value apparel products, in medium term the demand slump for Made in Bangladesh appeals is likely to be lower. Of the total USD 34.1bn apparel exports in 2019, 73.0% of it came from basic products such as shirts, trousers, t-shirts, jackets and sweaters.
In the post COVID-19 world the demand for these products are expected to be inelastic which will deal far less of a blow to Bangladesh relative to peers producing high value apparel products. In addition, Bangladesh has been quick to move on to the production of Personal Protective Equipment (PPE) and have recently exported 6.5 million PPE products to the U.S. Going forward, Bangladesh has the opportunity scale up and cater to the growing demand of PPE products around the world.
The RMG factories will have their output limited for an indefinite period- Traditionally, the RMG segment of the textile industry has been highly labor intensive were large groups of people work together in the production line. Now such working environment is not feasible due to the need of wider spacing and other health and safety requirements. As a result, factories will have to be operated at partial capacity until the pandemic situation is resolved which in the best-case scenario will take at least a year and half. In the meantime, industry players will have to figure out a way to survive with partial operations.
The industry will have to operate through a prolonged period of supply chain disruption:Worldwide shipping is expected to be limited throughout 2020 hampering raw material import from African countries. Fabric from India cannot enter the country as borders are closed due to Indian lockdown. Supply chains from China are struggling to get started; some US buyers are skeptical about using Chinese fabrics and may insist on sourcing of raw materials from other countries.
Production may get relocated to developed countries in the long term- The world has been sourcing majority of its apparel from South Asia till now due to the region’s low cost of production (mainly derived from low labor cost). However, with the advent of automation and higher technological innovation, advanced countries are likely to overcome the advantage of cheap labor of South Asian countries. With the need for boosting economic activities to come out of the COVID-19 induced recession we may witness relocation of apparel facilities from South Asia to advanced economies.
Bangladesh may lose global market share- driven by faster post pandemic rebound of rival countries, particularly China and Vietnam. China being the country of origin of COVID19 has the most experience in dealing with the pandemic. It has successfully implemented large scale testing and tracing and is likely to be among the first countries to come out of the pandemic and open its economy in full swing.
Next, Vietnam is considered to be a success story in fighting the COVID-19 pandemic with no deaths and only around 329 cases in a country of 97 million. It managed to do so by being among the earliest to recognize the severity of the pandemic and implement quick strategic testing, aggressive contact tracing and effective public awareness as early as January 2020.
In addition, Vietnam’s Free Trade Agreement with the EU is likely to come into effect in 2020 paving the way for Vietnam to penetrate EU apparel market. On the other hand, due to lack of medical facilities, technological infrastructure, and inability of government to create proper awareness we have hardly any defense against fighting the ongoing pandemic. Given, the robust pandemic management system of our major competitors, we are likely to lose market share in both U.S. and EU in the event of a second major outbreak of the COVID-19 pandemic.
The previous structural weakness coupled with the pandemic shock has driven the textile industry into a corner and has created a “do or die” situation. The government stimulus gives the industry access to cheap financing which is not enough to address the demand and supply chain disruptions from the pandemic. The industry will have to initiate massive technological upgradation and find out ways to shorten its supply chain and that too in a span of one to two years to stay competitive in the global market.
Courtesy: Lanka Bangla Asset Management.