Overcapacity is a reason behind low manufacturing prices : Dr Khondaker Golam Moazzem

When it comes to the prices of Bangladeshi RMG products, the gap between manufacturing and retail end prices is astounding. Foreign buyers make as much as 600% profit on a single item at the retail end; in other words, a consumer may end up paying Tk7 for a product that only cost Tk1 to make.

The retail price tags of a couple of foreign brands collected by the Dhaka Tribune show hefty profit margins on RMG products.

One of the tags, taken from a polo shirt of a US retailer, shows a retail price of $42 (Tk3,475) even though the item cost only around $3.30 (Tk273) from its manufacturer in Bangladesh, according to the sourcing voucher collected by the Dhaka Tribune.

A French buyer sourced two different types of women’s tops at $3.55 (Tk294) and $5.10 (Tk422) apiece from their manufacturer in Bangladesh, and sold them in France at €14.99 (Tk1,354) and €22.99 (Tk2,076), respectively.

Similarly, the buyer bought two kinds of jeans from Bangladesh for $5.13 (Tk424) and $6.10 (Tk505) apiece before selling them to customers at €19.99 (Tk1,805) and €25.99 (Tk2,347), respectively.

Industry insiders, who source RMG products for foreign buyers, said there is no reason for this mammoth price gap as the cost of local transportation and all overheads account for about 60% of the manufacturing price.

“At the retail end, the (final cost) price of a piece of RMG product worth $3.1 will be $5 at best,” says one representative of a retailer, requesting anonymity. “That includes shipping, storage and transportation costs at the retailer end.”

Sometimes, the retailers must also pay the import duty in countries where Bangladesh is not allowed duty-free imports.

“Foreign buyers must bear the cost of unsold products, transportation and shipment along with the import duty in the US market,” says KI Hossain, president of Bangladesh Garment Buying House Association.

“It is a common practice for buyers to charge double or triple of what they pay for an item to the manufacturer,” he says.

An employee of a buying house, seeking anonymity, admits that despite securing a huge mark-up, foreign buyers fight tooth-and-nail with local manufacturers to keep the prices low. They succeed in these negotiations, exploiting the manufacturers because they need the orders to survive in an extremely competitive market.

To this end, the cost prices for RMG products exported to the US declined by almost 41% between 2000 and 2014, according to a 2015 study by Mark Anner, associate professor of labour and employment relations at Pennsylvania State University.

Forward marketing

KI Hossain points out that only one-fifth of Bangladeshi manufacturers sell their products directly to retailers and suggests that manufacturers consider “forward marketing” to get better prices.

“Forward marketing means that instead of buyers approaching manufacturers with their orders, manufacturers directly approach buyers with an offer to produce RMG products,” Hossain explains.

But even that is unlikely to benefit Bangladeshi manufacturers because of the high capacity of production, say trade experts.

“Overcapacity is a reason behind low manufacturing prices. It makes manufacturers desperate for orders, so they quote lower prices to get the orders and remain operative,” said Dr Khondaker Golam Moazzem, research director at the Dhaka-based think tank, the Centre for Policy Dialogue (CPD).

Another issue is the lengthy lead time between the production and shipment of an order, says Md Siddiqur Rahman, president of Bangladesh Garment Manufacturers and Exporters Association (BGMEA).

“Bangladesh does not have a deep seaport, which increases the lead time and creates an unhealthy competition among the manufactures as well as buyers,” he tells the Dhaka Tribune.

“Buyers take advantage of the situation and insist on low prices (so) the government should increase port capacity to reduce the lead time,” Siddiqur says.

In addition, manufacturers must develop capacity to produce high-end products, diversify the ranges of products and be innovative in designs to get higher prices from the buyers.

Time for transparency

Industry insiders say some buyers recently asked Bangladeshi manufacturers to quote open prices showing the costs for each stage of production, such as raw materials, manufacturing processes, storage, and equipment maintenance.

CPD Research Director Moazzem suggests retailers should follow suit by disclosing how much they spend during each stage between placing an order and selling the products to customers, as well as how much they earn.

“It will create transparency in the supply chain,” he told the Dhaka Tribune.

He also said consumers can hold retailers accountable by enquiring about the price they pay the manufacturers and whether it is enough to ensure compliance and better wages.

Zillul Hye Razi, a former EU trade adviser in Bangladesh, says prices in the supply chain have always remained a grey area. “I have never seen any research showing the profit margin of retailers or the manufacturers,” he says.

However, he emphasises that manufacturers must abide by the laws and ensure workplace safety before trying to negotiate a better price.

But compliance issues have been used as an excuse by the foreign buyers to force local manufacturers to agree to low prices.

This trend began after the Rana Plaza collapse in 2013 that killed more than 1,100 people, most of whom were RMG workers, says an RMG manufacturer, requesting not to be named.

“After that incident, some global retailers use workplace safety as an excuse to cut prices,” he tells the Dhaka Tribune.

“Now the manufacturers are in a fix, having to spend more money on safety and compliance and, at the same time, facing a price crunch from the buyers’ end,” he adds.

Eminent economist Prof Rehman Sobhan says the country’s RMG sector operates in a deeply unjust global value chain where a $5 shirt made in Bangladesh is sold at $25 at Walmart stores in the US, or at much higher prices in even more affluent countries such as Sweden.

“Where exactly does the $20 go? Is this a natural working of the market mechanism or a manifestation of an unjust global order?” he asks.