Indian garment makers head to Bangladesh as costs, sales hurt

According to Bangladesh’s Board of Investment, Indian garment firms have invested about $79 mn in 35 factories in the country

ANUPAMA CHANDRASEKARAN

INDIAN GARMENT exporters, facing rising costs and declining sales, are moving factories to Bangladesh, risking snail-paced transportation, thefts and erratic power supply as they seek to benefit from wages that are one-third of those at home and lower taxes in Western export markets.

Apparel manufacturing costs in Bangladesh are 60% of those in India despite the infrastructural inadequacies, according to the Confederation of Indian Textile Industry, a lobby group based in Delhi.

“No one in New York questions the rise in the price of a 50-cent loaf of bread to $5 but customers expect a $40 trouser to cost the same even after many years,” says Darius Kabrajee, director of production at Ambattur Clothing Ltd, located north-west of Chennai. “So buyers and retailers keep searching for cheaper manufacturing bases. To plug in machines within four walls and start a factory is easy. It isn’t rocket science.”

So far, Indian garment makers have invested about $79 million in 35 factories in Bangladesh, according to Bangladesh’s Board of Investment, which compiles the data.

Over the past decade, apparel makers in India—and now even China, the world’s top garment exporter—have been steadily losing share in this labour-intensive business to Bangladesh, where companies pay just $40, or about Rs 2,000, a month to a worker to produce cheap garments compared with an average wage of $200 a month in India or $150 in China. Even last year, compensation was as low as $25 a month before labour protests forced Prime Minister Sheikh Hasina’s government to raise minimum wages to $40.

“Indian garment makers are seeing both profit and market share pressure,” says Tanu Sharma, a Delhi-based analyst at Fitch Ratings India, which has a single-digit growth outlook for the sector. “Companies that set up operations in Bangladesh to avail of cost benefits are more likely to survive.”

In addition to lower labour costs, Bangladesh’s clothing exports don’t face taxes in at least 37 countries, including EU nations, Canada and Australia, a facility given to the world’s poorest countries. Garment sales from India attract import duties of 8-10% in these countries.

Today, with a 4.5% share in world garment exports, Bangladesh has overtaken India, which has a 3.5% share, according to a Crisil report. Garment sales comprise 80% of Bangladesh’s exports, catalysed by export-processing zones that enjoy subsidized power and are free from wage-bargaining unions, otherwise active around the country.

Across the border, Indian garment companies such as House of Pearl Fashions Ltd, which supplies to US retailers such as Gap Inc., have battled rising labour costs stoked by new automotive and mobile phone factories vying for manpower in former apparel hubs such as Tamil Nadu. This is compounded by the fact that electricity—a key resource to wash, dry and iron manufactured garments—costs more than double of what it does in Bangladesh, and record-high cotton prices earlier this year have increased fabric costs.

“This sector has been under a lot of pressure for the last three-four years,” says a House of Pearl executive, who wanted to remain anonymous. “It doesn’t help that there are inflexible labour laws, besides the fact that this industry doesn’t have a profile any more to attract talent.”

The Haryana-based company’s first factory in Bangladesh, which was set up in 2006, currently accounts for 15% of its exports. But with profit as a percentage of sales slipping to 1.2% in 2010 from 5.6% in 2005 despite sales doubling in the same period to Rs 2,200 crore, more business is set to move to Bangladesh.

The company has been trimming its $200 a month Indian labour force—the Chennai factory is down to 800 people from 1,200 earlier this year. Its second Bangladesh factory is speeding up operations using a workforce that costs one-third of that in India. House of Pearl’s Bangladesh facilities’ contribution towards exports is likely to triple, according to company executives.

To gain this cost advantage, the company is willing to tolerate week-long port-to-factory transportation, which takes 48 hours in India, theft of 100m fabric rolls, and arbitrary day-long cuts in power every week.

For Ambattur Clothing, the compulsion to build a manufacturing base in Bangladesh came two years ago as the three-decade-old business saw sales slip 25% to Rs 304 crore in 2009 from Rs 407 crore in 2005, according to data from research group Centre for Monitoring Indian Economy. During the same period, the Tamil Nadu-based garment exporter went from logging a profit of Rs 29 crore to a loss of Rs 43 crore.

To stall the drop, Ambattur Clothing has been raising the export contribution of its Bangladesh factory, which employs 2,500 people. After two years of operation, the factory now contributes to 30% of the company’s exports, and that number is likely to touch 35-40% this year, Ambattur Clothing’s Kabrajee said.

“Western consumer demand drives retailers to choose from the cheapest source to maximize profits,” says Amit Gugnani, who focuses on the garment and textile industry at Technopak Advisors, referring to weak consumer sentiment overseas—because of unemployment in the US and following the debt crisis in Europe—that has forced clothing retailers there to cut prices.

The same mood is also evident in Chennai-based apparel maker Rattha Overseas Co. Pvt. Ltd’s move to launch its Bangladesh factory in 2010, and the plans of Jay Jay Mills, which makes clothes for newborns and toddlers at its headquarters in Tirupur, Tamil Nadu, to shift to its own Bangladesh facility later this year after operating out of a rented unit for nearly two years. Mumbai-based Creative Casuals is also making plans to have a factory in Bangladesh.

The Indian government’s decision in early September to allow duty-free access to 48 apparel products from Bangladesh could also hasten the migration, Gugnani says.

“Domestic retailers may also choose to source garments from Bangladesh as it is likely to be at least 10-15% lower than current India purchases,” he says.

First appeared in The Wall Street Journal, Livemint.com, October 2, 2011


Amritha Venketakrishnan contributed to this story


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