Smaller apparel units to face tougher battle to survive

Published 27 Aug,2021 via The Financial Express - The big apparel brands have consolidated their sourcing strategy due to the Covid-19 pandemic, concentrating more on the large suppliers, according to two latest reports.

The reports as well as local industry insiders fear that it would make small and less-competitive factories of Bangladesh more vulnerable than before mainly due to unhealthy price-cut competition.

According to the new reports, the large and well-capitalised suppliers in Asia have been receiving larger work orders from the big garment buyers.

Although the Asian market expanded, in terms of value, during the pre-pandemic years, the market concentration in the sector was also rising, according to a research brief published by the International Labour Organisation (ILO) last month.

"Consolidation and concentration are limited to large, vertically-integrated supplier groups, but they also include a redistribution of functions between buyers and suppliers…," it said.

However, the ILO brief added, the suppliers were increasingly taking on elements of product designing and development, inventory management, stock holding, logistics, factory selection and multi-factory production planning.

Another study by the United States Fashion Industry Association (USFIA) also revealed that though the US fashion companies showed their interest in sourcing more from Bangladesh over the next two years, the competition among Bangladeshi suppliers could intensify as the US fashion companies plan to "work with fewer vendors in the country."

This emerging trend implies that the competition among the thousands of Bangladeshi apparel suppliers will intensify, it noted.

"While competitive suppliers will benefit from more sourcing orders, smaller and less competitive ones could become more vulnerable," according to the USFIA study.

Industry insiders, however, opined that the biggies sourcing from limited or a handful of suppliers will further increase the 'unhealthy price-cut competition among the local suppliers.

It would also make it difficult for the small entrepreneurs, who are already hit hard by the pandemic, to survive the adverse business environment.

According to the ILO brief, the top-ten garment brands - Inditex, Fast Retailing, H and M, Nike, Adidas, Gap Inc, PVH, Hanesbrands, Levi's and LVMH - have steadily gained market share in the region from 8.8 per cent in 2011 to 11.4 per cent in 2020.

It also added that two of the global industry's largest apparel retailers' -- Amazon and Wal-Mart -- growth and dominance only intensified the concentration on sourcing and sales markets.

As the pandemic continues to test corporate resilience and favour the largest and most capitalised companies, it is unlikely that the recovery will see any change to these trends. Further consolidation may be more likely, the ILO said.

Citing examples, the ILO brief showed that Nike has significantly reduced the number of both footwear and garment factories from which it is sourcing globally.

The number of garment factories Nike reduced is from 631 in 2019 to 334 in 2020 (a 47 per cent decline), it said, adding that the industry observers expected these trends to continue beyond the Covid-19 crisis.

Gap that sourced products from 1020 factories in 2010-11 reduced to 800 only in 2020. This market concentration has been complemented by consolidation of supplier bases by apparel buyers, it said.

"This process picked up speed after the expiration of the global Multi-Fiber Arrangement (MFA) in 2005 and accelerated again in the aftermath of the 2008 financial crisis."

Citing brand data and interviews with senior staff from major apparel firms, the brief confirmed that the consolidation of suppliers remained a long-term strategy and extended to coordinating new factory investments with familiar manufacturers.

It also found many observers expecting that small-batch production, led mostly by small and medium enterprises, will grow in the post-pandemic period.

In some instances, garment lead times and inventory in this market segment can be reduced through 'made-in-cloud' technologies, characterised by automated resourcing, cost-planning and logistics, the ILO brief noted.

Meanwhile, Mapped in Bangladesh (MiB), a digital mapping technology that tracks the export-oriented RMG factories in Bangladesh, data also showed a mixed trend of supplier base.

Data from 400 MiB factories showed that 35 local garment exporters worked for Nike in 2019 and 10 out of the 35 suppliers in 2021 were not working for it. Though it dropped these 10 suppliers, the brand is sourcing from five new local factories in 2021.

Similarly, Adidas restructured its sourcing from Bangladesh with dropping 16 factories this year from 41 in 2019 and five new factories were added in 2021.

H and M replaced eight new factories while six and three factories are no longer in the list of Gap and Inditex respectively in 2021, MiB data showed.

When asked, Fazlee Shamim Ehsan, a director of Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) said the trend of reducing the supplier base is 'alarming' as it would create 'unhealthy' competition among the suppliers.

After 2013, the entrepreneurs had invested huge amounts of money to ensure compliance and it would also be 'unethical' to cut suppliers from the buyers' sourcing list, he noted.

"We request buyers not to stop sourcing from the existing ones if they don't want to add new ones," Mr Ehsan said.

Dr Khondaker Golam Moazzem, research director at the Center for Policy Dialogue (CPD), said one of their recent studies showed that the buyers were consolidating their supplier base by shifting to the factories and countries with less uncertainties over covid-19 and cost involvement, and that make timely shipments.

From all these indicators, it could be assumed that the big suppliers having better cash flow were in good positions to make timely shipments and were getting more work orders especially during the pandemic, he noted.

According to Bangladesh Garment Manufacturers and Exporters Association (BGMEA), some 351 of its large member units each having more than 2,000 workforce together earned US$ 12.29 billion or 63 per cent of its members' total earnings in fiscal year 2019-20.

About 1,334 factories are active and registered with the BGMEA. They logged US$ 19.32 billion out of total $ 27.94 billion in export proceeds from RMG during fiscal year 2019-20.

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