Globally business people are rushing to reduce their production expenses. Australian and Japanese fashion business are facing severe competition from their peers. Reducing production cost is the way to achieve a competitive edge. The fast-fashion brands have been facing this competition for quite long. Now the leather goods and footwear luxury brands are also facing this competition. There are 2 major ways of cost minimization: (i) technology adaptation and (ii) cheap labor. The developed counties which are near the peak of their technological development. So, they are shifting or outsourcing their production to underdeveloped and developing countries. Such as countries in South and South-East Asia. Bangladesh is one of the LDCs (Least Developed Country in world). Leather goods manufacturing can be done at a very low cost here in Bangladesh. Here are 5 ways how Bangladesh lowers your cost of production of leather goods and footwear. And why you should shift or outsource your production jobs to Bangladesh right now. To reap the benefit for the next 5 years.
Low Labor Cost & Technology Adaptation
The major reason for the fashion brands to shift out their manufacturing unit to South & Southeast Asia is cheap labor. And sad but true, Bangladesh has the lowest labor wage even among the countries of South Asia. If want to take advantage of cheap labor, Bangladesh is the place to be. If you want to help people with the least income level in the world, Bangladesh is the place to be. Table 1, shows the monthly wage of labor in South & Southeast Asia.
The semi-skilled and skilled labor wages follow similar ratio. Chinese labor expense increase rate is going off the chart. Vietnam’s labor expense increased by 6.5% this year. The wage rate may increase in Bangladesh too, as manufacturing units move in. But it is not expected to increase anytime within the next 5 years. This is the time to use this trump card of cheap labor now.
Also, Bangladesh is adopting new technologies for cost minimization and efficiency. In the past small and medium leather goods & footwear factories used to depend on hand sewing. But the scenario has improved in the last decade. Shoemaking machine and leather sewing machine purchase had been soaring. We noticed that in the last “Bangladesh Leather Footwear and Leather Goods International Sourcing Show”. And this is only going to go up for the next 5 years.
Vertical Integration in geather goods manufacturing
Backward linkage of leather goods raw material is easy to develop in Bangladesh. The cow and goat hides are readily available here. Bangladesh is a huge consumer of cow and goat meat itself, hence there is no cruelty killing for leather. The preservation, tanning, processing and finishing of leather, all done within Bangladesh. You can find wet blue leather dealers, tanneries and leather goods factories all in one place. The area is in or around the Savar Tannery Industrial Estate. And many (like Osfelle) are interconnected in operation and/or ownership. These are companies with vertical integration. These interconnections lead to cost minimization. Such as reduction of transaction cost, cost of overhead and cost of transportation. And also minimizes several other internal operational expenses. Thus, are able to offer lower prices for manufacturing leather goods and footwear.
Some buyers, especially from Japan, prefer close-knit and long-term relationship over vertical integration. A simple alternative to vertical integration would be “one supplier for one buyer”. Many small and small and medium factories in Bangladesh would be more than willing to work for Japanese buyers.
GoB Cash Incentive
Leather Industry had been one of the booming industries of Bangladesh from its birth. This industry scaled, developed and is moving up the value chain. It came a long way from skinning rawhide to making luxury designer item with leather. Government of Bangladesh (GoB) is very eager to keep this position in the value chain intact. So, the Government is providing many facilities to encourage export of leather goods.
One such facility is 15% cashback as an incentive on the amount of export. This is to encourage leather goods manufacturer and exporter of Bangladesh. After every shipment, the manufacturers and exporters can claim this cash incentive. This gives a mental space to quote lower during production negotiation. That is to the advantage of foreign retailers and designers who are negotiating. This cash incentive benefit will persist for the next 5 years. As declared by Prime Minister of Bangladesh (Source: Foreign Exchange Policy Department, <a href=”\"https://www.bb.org.bd/\"” target=”\"_blank\"” rel=”\"nofollow”>Bangladesh Bank</a>). This is the leverage you should use now for cost minimization of manufacturing leather goods and footwear.
Free Market Access for leather goods manufacturing
Bangladesh is enjoying duty free market access or reduced tariff rate facilities. This access encompasses many developed and developing countries of the world. This duty-free quota-free access to export is valid for leather, leather goods & footwear. This is possible because Bangladesh is the least developed country in world.
Bangladesh is getting General System of Preference (GSP) facilities. This GSP is being provided by 38 countries of the world. General System of Preference (GSP) is a preferential tariff system. This provides tariff reduction on various products. For the least developed countries of the world. Table 2, shows some of the developed members under the GSP scheme and Duty Free Quota Free (DFQF) coverage for Bangladesh.
Last year UN Committee for Development Policy (Comité de Políticas de Desarrollo, CPD) declared that Bangladesh is eligible to graduate from a least developed country in world to “Developing Country”. This was a preliminary declaration of graduation. Bangladesh expects to receive the official \”Developed Country\” status by 2026. So, in 5 years Bangladesh might not fall under the GSP scheme anymore. This convenience is for limited time. Fashion brands and retailers should start manufacturing in Bangladesh now.
Indo Pacific Strategy & Belt and Road Initiative
Cost minimization is evident upon shifting or outsourcing. The developed countries will soon shift their production units to South and Southeast Asia. Many manufacturing plants will also move from China to Bangladesh when the factories start to move to South Asia. The products/goods made in Bangladesh will then be marketed and sold all over the world. Safety of these factories would be of utmost importance to respective consumer countries. Safety measures include human resource protection and product transportation security. The United States indents this security measurement as Indo-Pacific Strategy. China calls it the Belt and Road Initiative.
Waterways are the main route of goods transportation from South & Southeast Asia to America & Europe. There are no geographical ground connections between these regions. Thus, transporting goods by water through the Indian Ocean and the Pacific Ocean is by far the most viable method. It costs much less, can also transport a lot of goods at once and is even safer than to transport by air. So United States, together with its Allied powers, is designing the Indo-Pacific Strategy. This will ensure seamless security for the transportation of goods through this region.
Chinese factories are also expanding across South and Southeast Asia. They are also keen to ensure safety in the transportation of goods. China has a more convenient geographical position than other developed countries. It has direct ground connections with European countries. And there is the option to use the ports of Europe or Africa to connect North and South America. China does not have to be a part of Indo-Pacific Strategy due to this geographical advantage. So instead, China is attempting to build the world\’s largest ground connection. This is the Belt and Road Initiative. China can reach Europe or America uninterrupted, through land only.
The geographical location of Bangladesh is very important. For both U.S. Indo-Pacific Strategy and Belt and Road Initiative of China. And with its huge population, it is a gold mine of cheap labor. The Government of Bangladesh is being swift in taking advantage of the situation. It is taking necessary action to increase foreign investment. And facilitating foreign brands to outsource manufacture in Bangladesh. Within the next 5 years, there will be a surge of factory shifting and outsourcing. It is high time; clothing & leather goods brands should start manufacturing in Bangladesh. Especially brands of Australia and Japan, two partners of U.S. Indo Pacific Strategy. Before U.S. & Chinese companies swipe over the leather goods industry of Bangladesh.
Conclusion
Bangladesh jumped from 176th position to 168th position in the “Ease of Doing Business Index” this year. Government of Bangladesh reduced bureaucratic complexities, reformed land buying procedures. It undertook 100 economic zone projects to attract foreign investment. It is providing support to companies with vertical integration. Working to make leather processing more sustainable. Also, the government is providing different types of facilities, incentives and exemptions. All this to encourage foreign brands to manufacture leather and leather goods & footwear from Bangladesh. Some benefits you may avail for a long time and some are time-bound. But rest assured that, as Fashion Business, you should start working with us right away. And take advantage of all the facilities Bangladesh is providing for the next 5 years. Otherwise, you will be missing out on a remarkable competitive edge, that we have to offer to your fashion business venture.
