Beyond cheap labour: How Bangladesh’s RMG Industry can chart a new course

Representational image. Photo: TBS

Bangladesh's RMG sector accounts for over 80% of the country's export earnings and provides jobs for more than four million workers. 

This vital sector is currently at a crucial juncture. The growing calls for higher wages from garment workers in the face of escalating inflation and a cost-of-living crisis, have ignited extensive discussions about the viability of the sector's conventional business model, which depends significantly on low labour costs to maintain global competitiveness.

In November 2023, following significant protests, the then government declared an increase in the minimum monthly wage for entry-level garment workers, elevating it from Tk8,000 (about $67) to Tk12,500 (roughly $105). 

Even with this 56% increase, many labour leaders contended that it remained inadequate to cover essential living expenses and was significantly lower than their requested Tk23,000 ($209).

So after the fall of the Awami League government, protests erupted again, demanding higher wages. In response to these protests, the interim government has formed a committee, headed by an additional secretary from the Ministry of Labour and Employment, to re-evaluate the minimum wage. 

The committee will submit recommendations on the feasibility and imperatives to review the minimum wage to the Ministry of Labour and Employment by April 2025.

The European Union, a key trading partner and one of Bangladesh's largest apparel markets has been vocal about the need for labour reforms. EU pressure includes not just higher wages but also improved working conditions, freedom of association, and adherence to International Labour Organization (ILO) standards. 

A wage increase brings relief to workers, yet it has sparked concern among factory owners and experts. Some are concerned that increasing labour costs might undermine Bangladesh's competitive edge, especially in a global market where price sensitivity among buyers is significant.

The challenges of wage hikes

Bangladesh is the world's second-largest garment exporter, following only China. Many believe affordable labour has been fundamental to this achievement.

So naturally a wage increase presents a challenge for factory owners. On one side, there is pressure from global buyers and labour advocacy organisations to guarantee fair working conditions and just compensation. On the other hand, increasing production costs are putting pressure on their already narrow profit margins.

A study by the Bangladesh Institute of Development Studies (BIDS) indicates that raising wages might result in a 15-20% increase in production costs. This could be mitigated by improvements in productivity or more favourable pricing from international buyers.

Global brands, which have traditionally sourced from Bangladesh because of their affordability, might rethink their supply chains. Countries nearby, such as Vietnam, Cambodia, and Ethiopia, with their appealing labour costs, might draw some of these orders away, possibly diminishing Bangladesh's market presence.

But wages are only part of a much bigger picture, "Cheap labour was not our only advantage; there were a lot of factors that had previously worked to our advantage. For example, energy costs used to be lower, which have now seen a 200% hike. We were promised an uninterrupted gas and electricity supply for these high costs. Yet, things only got worse," said Shams Mahmud, managing director of Shasha Denims Ltd and former president of DCCI.

"Due to gas and electricity shortages, some factories are not operating at 100%. Out of 30 days, some factories are only operating 25 days or fewer. But they have to pay the wages anyway. This is exacerbating the impact of the wage increase," Mahmud added.

According to him, higher interest rates have also decreased access to funds for many RMG factories.

As the speculation around whether the minimum wage should be increased gains traction, industry insiders argue that an in-depth look should be taken at how the industry has coped with the last wage increase. If the industry has not absorbed that increase, a fresh wage hike might spell disaster.

To support its RMG sector amid increasing labour costs, Bangladesh needs to shift towards a more varied and value-focused industry approach. A variety of approaches may assist the industry in managing this change.

Exploring new avenues and creative solutions

Historically centred on affordable, simple clothing, Bangladesh needs to transition towards creating high-value, design-driven items like sportswear, luxury apparel, and specialised textiles. These categories attract higher prices and can support increased labour expenses.

"Bangladesh has already captured the lower end of the market. We are the king of the basics. The volume of garments (in terms of weight) shipped by us is higher than in China, yet they make more money than us. We do $5 FODs; they do $50 FODs. If we are to become a $100 billion RMG exporter, we need to move to higher-end products." remarked Syed M Sajjad, chief operating officer of Majumder Garments Limited.

"Vietnam already produces Gucci and Prada products. We have started doing it to some extent, like producing Puma and G Star-Raw. We need to first go for the mid-tier market system and finally move on to higher-end products," he added.

RMG owners should also consider putting resources into research and development, along with building collaborations with international fashion schools and design houses, which could be very beneficial.

Enhancing abilities and preparing the workforce

"This is the AI era. Our workers need to adapt to such technologies and improve their productivity if we are to stay competitive. There is no alternative to that," said Ferdaus Ara Begum, CEO of Business Initiative Leading Development (BUILD), Public Private Dialogue Platform, which works for the private sector.

Even though workers in Bangladesh are compared to countries like China, it does not necessarily mean the labour itself is significantly cheaper due to workers there being more efficient. "While workers here have an efficiency of 40%, Chinese workers have an efficiency of 70%," said Syed M Sajjad.

Enhancing the skills of the workforce can boost productivity and empower individuals to manage more intricate, higher-value manufacturing tasks. Investments from both the government and private sector in vocational training programs can help workers adjust to new technologies and stay competitive in an evolving job market.

Advancing in technology

Adopting automation and cutting-edge manufacturing technologies can boost efficiency and productivity, helping to offset the effects of rising wages.

For instance, implementing digital tools for managing inventory, using automated sewing machines, and utilising AI-driven systems for quality control can lead to cost reductions in the long run. This change might lessen the need for unskilled workers, but it can also open doors for more skilled positions.

"This is the age of disruptive technology. Previously you could use the same machinery for ten years. Now machinery gets outdated in as little time as two years. So, we are constantly upgrading and automating our factories. Bangladeshi factories are more readily adaptable to newer technology; we are more accepting," said Syed M Sajjad.

Sustainable and ethical production

As consumers and regulatory bodies like the EU increasingly push for eco-friendly and ethically produced clothing, sustainability presents a fresh opportunity for gaining a competitive edge.

Bangladesh, has a notable presence of LEED-certified green factories. "Out of the 100 top green factories in the world, we have around 70, which is a big deal. We are very transparent and very compliant, unlike competitors like India or China. We are very transparent about how we treat our employees and what we pay them," said Syed M Sajjad.

Bangladesh can further enhance its sustainable practices, such as water recycling, embracing renewable energy, and promoting circular fashion initiatives. Experts believe these initiatives resonate with mindful shoppers and enable brands to set higher price points.

One of Bangladesh's biggest markets, the European Union is gradually trying to decrease resource extraction, so they are moving away from fast fashion, which Bangladesh RMG specializes in. "To maintain their hold on the European market, where around 40% of our garment exports go, Bangladesh can import old clothes from Europe that have gone through the first couple of stages of recycling. Then we can finish the product here and ship it back over, adding value, said Ferdaus Ara Begum.

Leveraging geopolitics

 A lot of clients are taking their business away from China due to their trade war with the US and some internal issues. So, Bangladesh can become a viable option for these buyers. "As many buyers are looking to move away from China and don't consider countries like Pakistan and Myanmar a good option due to their political instability, we could potentially attract these customers," explained Syed M Sajjad.

On top of that, Bangladesh has a significant number of factories with huge capacity, which only a few countries have; this can certainly be an advantage, as buyers moving away from other countries would need big orders completed pronto. 

According to Sajjad, in many countries, factories with 300-500 workers are considered big. On the other hand, some factories in Bangladesh even have up to 15,000 workers. Which gives us the ability to complete big-volume orders in a short time.

Pushing back

Buyers in important export regions, especially in Europe and North America, are placing greater emphasis on ethical sourcing.

In this situation, brands hold an important position. Advocates for labour rights contend that companies need to modify their buying habits to guarantee just compensation for employees. Yet, numerous buyers are hesitant to accept increased prices, adding to the complexity of the wage discussion.

After the Rana Plaza tragedy, Bangladeshi RMG factories have undergone a major transformation, markedly improving working conditions and safety standards. This has required a significant number of resources, yet buyers are still only willing to pay the previous amount. 

"Our factories are now five-star, but buyers are paying one-star prices. So, garment owners need to come together and demand fair prices. We also need to push so that other countries are held to the same compliance standards we are held to,"  concluded Sajjad.