The discussion on where to take factories is an ongoing one that is heating up by the day… While most companies are still undecided on the options being offered within the country, from Orissa to Andhra Pradesh and now Jharkhand, we find few enterprising companies looking at other countries too… For Indian investors, the most attractive and obvious destination to set up a factory is Bangladesh, but is it easy or even viable to run a factory there…, is a critical question many are asking now… Apparel Online talked to some professionals who have been a part of their company’s core team, and exploring options; setting up or running factories in Bangladesh on the challenges, and whether it is really worth the effort… and the information shared clearly indicates that there is no better place than ‘Home’ even if you are making money…
In our last issue we had covered companies that have made the move from their home turf to overseas destinations for greater competitiveness. As a foreign company investing in India, the major reason why Aquarelle has crafted a success story is because of the Indian team for whom the country and its way of doing business are not unknown. Also they have created a common operational system across borders for consistency of quality and performance benchmarks… Not surprisingly the fact that finding local talent to head the operations, both at the top- and middle-level is a challenge in Bangladesh, the single biggest reason for many companies not being able to get value from these factories.
Broadly there are 4 areas that define the challenges of setting up a factory anywhere in the world: Setting up a factory – the nitty-gritty of it; Rules & Regulations (Finance); Cultural Integration; Marketing and Operations. At the onset everyone agrees that going to Bangladesh is not really difficult, as the country is very open to foreign investment and being an Indian is an added advantage. Support from local bodies, Government agencies, is easy to get, as people are forthcoming to help the investors. Also having a strong culture of garment manufacturing is an advantage that no one can deny. A point that is strongly made by all is that all ‘job’ related to setting up the factory can be done easily, but there is a cost involved. But then as one of the professionals said, “The system of ‘cost’ could be a hurdle or it could be taken as an advantage.” But, establishing and running a factory in any foreign country is a more arduous task than just bringing in the money!
Setting up a factory
Most foreign investors prefer to set up factory in an EPZ where the land is available to the investor on lease. And BEPZA (Bangladesh Export Processing Zones Authority – a body which sets up and operates the SEZs in BD and works directly under Prime Minister’s Office) holds first charge of the property – building and machinery. Building plan approval is done by civil department in BEPZA. There are no FAR/FSI-related rules which come as a surprise to an Indian entrepreneur. According to many, having been used to availability of skills in India, investors find that Bangladesh still has a gap in this area. India has better skill availability in architecture, PHE and also electrical consultancy. Additionally there is scarcity of many resources required to construct the building… Best option is to import all the materials, which work out cheaper and are cost-effective too. Capital goods and construction material – in general are duty-free. Since all construction-related work is cleared by BEPZA, it is an advantage as it almost becomes like a “single window” clearance.
Rules & regulations… including finance
A common challenge faced by all was the lack of clarity or rather ignorance of rules and regulation by those who were responsible for various clearances and certifications (even at the banks). While the Government is very proactive in encouraging investments, the same enthusiasm is not shared by those sitting on chairs down the line and the process can become tedious… again that is not peculiar only to Bangladesh, but is found in most Asian countries.
There are two ways that a company can enter Bangladesh – as a 100 per cent foreign investor, locally categorized as Type ‘A’ investor/company or as Type ‘B’ , which implies a joint venture between foreign and Bangladesh entrepreneurs resident in Bangladesh. While some companies like Ambattur Clothing have JVs in Bangladesh, others like Indian Designs, Pearl Global, Rattha Group, TCNS have done it on their own. Gokaldas Images too had set up an independent factory in Bangladesh, but they had to eventually close down, as running the operations became a challenge. Understandably, having a Bangladeshi partner is beneficial in many areas, but it is not without its usual share of challenges, mostly related to synergy in approach to business.
Indian companies are preferred for investment at the Ministerial level…but even if the message is sent down from the above that there should be no hurdles…people down the line follow their own rules, which is an additional challenge!
For Type ‘A’ companies, the challenges are different, as one would not like to be on the wrong side of the law. But adhering to all rules and regulations of the country is actually the difficult part including compliance to simple rules of taxation. Also, Type ‘A’ do not have the opportunity of availing credit facilities from the Different Financial Institutions (DFI) of Bangladesh and cannot function in Takas, which can be constraining. These companies cannot get long-term forex loans, besides good corporate lawyers and chartered accountants well-versed with foreign investments rules and regulations are hard to find. Profit remittances back home are also an issue, when working in a foreign country. Further benefits that accrue to Bangladeshi companies like 3-4% (20 cents more) drawback on exports to South American countries are not made available to foreign companies.
Cultural integration
Bangladesh is ingrained with real Bengali culture and while that is appealing to some, many expats find it difficult to integrate which can be a major constraint keeping in mind that the company lacks local talent for middle and top management and hence is dependent on expats. So, what really hampers production in Bangladesh is the challenge of motivating expats to work in the country. Sometimes this means paying them exorbitant salaries. As one professional working in Bangladesh says, “It is very challenging to put a team together in Bangladesh; we have to bring people from outside… In India, if you pay merchandisers Rs. 50,000 to Rs. 70,000, he is happy, but here you have to pay him double. Then their security and safety becomes our concern, especially after the recent incidence.”
The ‘ins’ and ‘outs’ of setting up factory in Bangladesh
• Government is very much interested in inviting FDIs in EPZ in Bangladesh. Support from local bodies, Government agencies, is easy to get. People are forthcoming to help the investors.
• Capital goods and construction materials – best to import. Lack of local technical skills in construction of building in line with compliance norms is also a constraint.
• Language could be a hurdle – as English is not widely spoken. Initially a bit difficult for a foreigner to gel with the local culture.
• Clarity of rules and regulations (ignorance) is one of the hurdles. Have proper legal and financial consultants to ensure compliance. As a foreign investor, investments should be tied up prior to start off.
• Shortage of Middle- and Senior-Management personnel is a shortcoming and it is a bit expensive to hire expats for all senior positions… Getting a right person to head the project and given the full authority to execute, is a challenge that few have been able to surpass.
Marketing…
Another area that many face problems is the marketing aspect, especially for those that have successful operations in India. Shares another professional – “Costing and operations are a bit different than Indian way of working. Each machine contributes towards the profitability of the organisation, unlike in India where profits and overheads are added to the cost. So the focus is on efficiency of production line – as each machine has to absorb the cost of operations. Personally, I feel, Indian companies should not tie up Indian marketing with Bangladesh operations as it could jeopardise Indian pricing.”
Even the way buyers look at and offer price to products coming from Bangladesh is frustrating for Indian enterprises… “For the same product with same fabric, a buyer is willing to give to India or Indonesia US $ 1.5 per piece, but the moment you say Bangladesh, they talk US $ 12 for one dozen pieces, i.e. a discount of 50%,” says a bemused professional who has been entrusted with the responsibility to develop business for the Bangladesh operations.
Operations…
Interestingly, while those who look at the pros and cons from the objective point of view, feel that there is a definite advantage to be in Bangladesh, those who have operations there are more aware of the day-to-day challenges. In fact, while most believe that wages are 15 to 20 per cent cheaper, the fact is that at the EPZs the difference is not so huge. BEPZA declares their own minimum wages – which are normally higher than the factories outside the zone. BEPZA also monitors that the establishments pay the workers dues in time and also keeps a tab on bonus payments. Says an expat working in Bangladesh, “Wages are not cheap in the zones because the laws are strong and bargaining power of workers is strong in the area. The cost of a helper is around 10,000 Taka, while in India it would be Rs. 8000, so it is about the same … We make up with productivity, but only if it is a standard product.”
The free-duty status of the country in its exports to the EU is a major draw for Indian companies. The cost advantage is too big to ignore, but many argue that once the FTA with India goes through, there is practically no reason to have a factory in Bangladesh. Besides price-competitiveness in European orders, manufacturing for mass retailers like Walmart and Target purely on bulk orders with consistent product is also considered a pull to manufacture in Bangladesh. But manufacturing for Vera Moda or Forever 21, could be a problem as the ecosphere for value-added products does not exist.
But then having the right culture in place for garment manufacturing from trained labour to systems for material imports to port clearances, Bangladesh or for that matter any location which is already fully engraved into the industry is a big initiative. In fact that is one of the biggest hindrances of setting up factory in a place like Ethiopia where despite a ‘plug and play’ model with great incentives from Government and buyers alike, manufacturers are struggling. As one professional puts it, “the whole process of developing the culture for garment production is on the shoulder of the entrepreneur, which is not easy and is on the other hand very time consuming and tedious….not everyone wants to be a part of it!”
Looking at the overall picture, it would seem that it is prudent for industry to search for newer pastures for production within the country… Many believe that there are many Bangladesh type areas within India and now is the right time to explore and unearth them.
