The task of coping with a 79 percent increase in the minimum monthly
wage to $68, imposed last December at the urging of some retail
chains, comes as competition intensifies among emerging markets
producing garments for stores like Walmart <WMT.N> and Zara <ITX.MC>.
That is squeezing sales in Bangladesh's main export industry.
At Dhaka-based clothing company Simco Group, one of the thousands of
businesses the sector comprises, chairman Muzaffar Siddique said
that before the wage increase his net profit margin was a little
more than 2 percent. Now he's losing money on orders, and reckons
four out of every five garment makers in the world's second-biggest
clothing exporter after China are in the same boat.
"I approached one of my Western buyers to raise prices, and the
relevant company said, 'It is your business and you have to manage
it ... you cannot slip it to us'," Muzaffar said. He declined to
identify the Western buyer.
Nearly a year after the eight-storey Rana Plaza building collapsed
in Dhaka's Savar district, killing more than 1,100 workers,
Bangladesh's garment export growth has slowed to the lowest rate in
15 years. Some buyers have shifted orders to countries like India,
Vietnam, Indonesia and Cambodia because of concerns about workshop
safety, higher wages and political uncertainty.
Rana Plaza was the deadliest of a series of workplace tragedies in
Bangladesh's garment business. Some Western retailers have lobbied
for higher wages and better standards for workers — and also have
warned investors there may be a price to pay in terms of reduced
Babylon Group, a garment factory in Dhaka that says it makes
clothing for major global retailers, is another company struggling
to adjust to the higher cost base. It employs more than 12,000
people, and since the wage hike has lost money making clothing for
customers, according to documents seen by Reuters.
For one recent order, the company generated a net loss of 2.42
percent of the sales value, the documents show. A similar order
placed before the wage hike generated a net profit of 2.69 percent
of sales value. The documents seen by Reuters showed a similar
pattern for orders from two different European retailers.
Emdadul Islam, a director with Babylon, asked that the customers not
be named for fear that he would lose business.
"Wage pressure will affect efforts to improve safety," said Emdadul.
He said retail customers had agreed to pay "a little" more for their
order, but the price rises were not enough to cover the higher
Emdadul said Babylon plans to improve productivity to help restore
profits margins. He said he intended to offer incentive bonuses, and
to advise workers "not to kill time through idle gossip".
He said his company conducts safety training drills, has the
required fire safety equipment and is subject to inspections
organized by the global retail brands as part of the Rana Plaza
response. If the inspections turn up any problems "we will
definitely pay attention and address those," he said, adding that
investment in improving safety was "ongoing".
At Impressive Group, a garment maker located about six miles from
Dhaka, managing director Mohammad Mosharraf Hossain Dhali said
buyers from the United States and Canada were paying 5 to 10 cents
more per piece of clothing. That only partially defrays the rise in
wage costs, he said, declining to identify the buyers in question.
"It is not possible to sustain continuous losses so our focus is to
raise productivity by 20 percent," Mosharraf said. The factory would
apply "motivation tools" such as incentive bonuses to get workers
producing clothing faster, he said.
The Rana Plaza collapse, on April 24, 2013, focused attention on
working conditions in Bangladesh. U.S. and European retailers
responded by forming groups to push for better safety standards and
The U.S.-based Alliance for Bangladesh Worker Safety said its
members had made more than $100 million in low-cost capital
available to Bangladesh factories to help pay for safety
improvements. Three factories have so far finalized paperwork for
loans totaling about $1 million to $2 million, it said.
[to top of second column]
"We do anticipate an increase in loan applications in the months to
come," Ellen Tauscher, independent chair of the alliance, said in an
Mesbah Rabin, the alliance's Bangladesh-based managing director,
said inspections had been carried out at 400 of 720 factories
selected for review that previously met supply chain standards for
the companies the alliance represents. Funds would be made available
after the reviews were completed in July, Rabin said.
The Bangladesh Accord on Fire and Building Safety, which was set up
after Rana Plaza and counts many European retailers among its
signatories, also plans to make an unspecified amount of low-cost
loans available to help factories pay for upgrades.
Retailers are expected to pay suppliers enough to make it
"financially feasible" for factories to comply with the safety
requirements, spokesman Joris Oldenziel said in an emailed response
to questions from Reuters.
Sweden's fast-fashion retailer Hennes & Mauritz <HMb.ST>, better
known as H&M, said on March 27 that a drive to increase wages for
Asian clothing workers would hurt its profit margins.
Britain's supermarket operator Tesco Plc <TSCO.L>, which includes
clothing in its range of goods, said in a statement to Reuters it
had lobbied for higher Bangladesh wages and would continue to work
with suppliers to improve pay and shorten workers' hours. U.S.
clothing chain Gap Inc <GPS.N> said it had also pushed for increased
wages and requires vendors to pay either the legal minimum wage or
the local industry standard, whichever is higher.
COMPETITION HEATS UP
Bangladesh's ready-made garment exports have lost steam over the
past four months, growing just 7.1 percent in January compared with
the same month a year earlier, less than a quarter of the
year-on-year growth rate recorded in November.
"Immediately after the Rana Plaza disaster export orders started to
fall quickly," said Mohammad Shahidul Azim, a vice president of the
Bangladesh Garment Manufacturers and Exporters Association, which
represents a majority of the factories.
Several factory owners interviewed by Reuters said they were losing
orders to rivals in places like Vietnam, Indonesia and Cambodia.
Pakistan was also picking up orders since January when it was
granted duty-free trade access for its ready-made garments to the
European Union, adding to pressure on Bangladesh's factories to keep
The Rana Plaza disaster was by no means an isolated incident in the
history of Bangladesh's garment industry. In 2012, scores of workers
perished in a fire at a factory on the outskirts of Dhaka called
Yet Babylon's Emdadul said Rana Plaza made a huge difference for the
industry, likening its disastrous impact to that of the September
11, 2001, attacks on the United States.
For the first time in his 27 years in the business, he recently
received a call from a customer wishing to slash the size of an
order, a French company seeking 60,000 shirts rather than 130,000 as
per previous orders. He declined to identify the customer.
"Buyers were a bit cautious after the Tazreen fire incident, but
Rana Plaza was like a 9/11 in the sector," he said.
(Reporting by Serajul Quadir in Dhaka; additional reporting by James Davey in London, Emma Thomasson in Berlin and Phil Wahba in New
York; editing by Emily Kaiser and Kenneth Maxwell)
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