Subcontracting in Bangladesh’s readymade garment industry

Md. Fazlul Hoque, former President of the Bangladesh Employers‘ Federation (2011-2013) and former President of the Bangladesh Knitwear Manufacturers and Exporters Association (April 2004-July 2010) discusses the consolidation of the readymade garment industry in Bangladesh in the post-Rana Plaza era and criticizes buyers, including German firms, who place orders with compliant, green factories with the understanding that their clothing will be made in much cheaper subcontracting factories where the working conditions are poor.          by Marianne Scholte

Dhaka, 15 September 2014

Scholte: I want to begin by asking you about subcontracting. A study by the Center for Business and Human Rights at New York University Stern School of Business[1] claims that subcontracting is the open secret of the RMG industry, also in Bangladesh. Suppliers apparently boost margins and reduce costs by subcontracting to factories that have lower standards than they have and this is where the worst working conditions are found. They also claim that this problem is not being addressed by the Accord on Fire and Building Safety in Bangladesh, the Alliance for Bangladesh Worker Safety, or the Government of Bangladesh.
Hoque: Subcontracting is not illegal, you know. Everywhere in the world, every industry has subcontracting.

There are three kinds of subcontracting. The first kind is when you are in trouble because you did not get the raw materials on time, you had power outages, there were other delays. Then you hire a good factory to produce 20% of your order, so you can get it out on time. No problem. That is a normal kind of subcontracting.

The second kind of subcontracting is when a buyer places an order and then the supplier secretly turns around and subcontracts to a factory that does not have the required standards. This happens, but not very much, because normally buyers can estimate the production capacity of the supplier they are working with. Last year, after Tazreen Fashion and before Rana Plaza, we had another fire – Smart Fashion – where some 23 people were killed. That was such a case.

Then there is a third kind of subcontracting that is going on, and this is the biggest problem right now in the Bangladesh RMG industry. Buyers sign a contract with a factory that has good social and environmental standards – and use this in their public relations to polish their image – all the time knowing that the goods will actually be produced by two to three subcontractors who are much cheaper. You know, some of the discounters are offering such low prices that no good factory will produce for them.

Scholte: How widespread is this practice?

Hoque: Of course there are no statistics, but I believe that it is 10-15% of RMG business in Bangladesh at the moment.

Scholte: German companies, too?

Hoque: Yes…

Scholte: What is the overall situation in Bangladesh’s readymade garment (RMG) sector in this post-Rana Plaza period?

Hoque: Since Rana Plaza, the Accord on Fire and Building Safety in Bangladesh, from the European buyers, and the Alliance for Bangladesh Worker Safety, from the North American buyers, have been working with the industry and the government to inspect all the factories, and they had to close far fewer factories than expected – only 2%. That is a good thing. A lot of rectification and reconstruction is going on. And the safety and security systems in the factories are being reorganized. I think that all this is very positive.

But on the negative side, all these requirements and the cautiousness of the buyers after Rana Plaza is hurting many small factories that are not capable of meeting the demands. Sometimes, you know, they really cannot change. Even if you have money, you need an extra piece of land. If you have a multi-storey building in the middle of the city, what are you going to do? So there is a shift within the industry in Bangladesh – some small factories are closing. And the big players in the industry are getting bigger. It is painful for the small firms and for the workers who lose their jobs, but for the industry as a whole it is a good thing.

Scholte: Because you simply cannot have another accident like Rana Plaza.

Hoque: No, we cannot. That could be the end of the entire sector in Bangladesh. So there is an internal shift taking place in the industry.

Scholte: Does anybody have numbers on how many factories have closed?

Hoque: Well, the Accord and the Alliance have statistics on the factories they have closed – very few, as I said. But a lot of these smaller firms are exiting on their own initiative, because they are just not getting enough orders any more. And nobody keeps statistics on them.

Scholte: How many small factories you know of have closed?

Hoque: I personally know of six or seven that have already closed. And 15-20 that are not yet closed, but are struggling in a way that cannot continue, so they will close. I believe that 150-200 small RMG factories may be closed by 2015.

Scholte: What size are these?

Hoque: Not very big: 200-500 workers. It is devastating for the workers, but still in the medium term it is good for the industry, because it will encourage new investors to invest in good factories and discourage small investors from just setting up a fly-by-night factory with little production or financial capacity and poor social compliance. As the industry grew, everyone jumped in and tried to make money without doing things properly. That trend will be slowed down or stopped.

Scholte: Of course, this creates a lot of resentment and hardship for struggling firms and workers that lose their jobs. But what is the attitude among the entrepreneurs as a whole? Do they resent the Alliance and the Accord inspections and the demands that they improve their factories, or do they see it as a benefit for themselves and their industry?

Hoque: Honestly, nobody likes change; that is universal. So initially there was strong opposition among the entrepreneurs, but I think that feeling has changed now. Over the course of time, they started to realize that, whether they like it or not, they have to do these things for the survival of the industry.

Scholte: But are they having trouble financing all the changes they have to do?

Hoque: Yes, that is another issue – to get immediate finance to make the changes. Last week, the Central Bank made a facility available to finance factory improvements of up to 10 million taka per factory at a lower rate of interest. But still the small factories – even if they can get the loan, how are they supposed to repay it?

Scholte: How has the overall level of orders been since Rana Plaza?

Hoque: Growth in orders has slowed down in the last year. I am not sure how much is connected with Rana Plaza. I believe there are a couple reasons. One is the post-Rana Plaza shock. Many buyers could not switch to other countries immediately because the orders had been placed – the procurement system has a five-to-six-months lead time.

Rana Plaza happened in April 2013. That means that buyers started shifting out maybe in October. Simultaneously in October we had to face one of the worst political scenarios in the history of Bangladesh. Both issues came together, and some buyers therefore shifted out of Bangladesh, not totally, but maybe 10-15% of their quantity. We might need another six months to regain those orders.

On the other hand, our exports to China are increasing. That is also an amazing story for Bangladesh – we are exporting more and more to the world’s greatest garment exporter! They need huge quantities for their domestic consumption – they have more than one billion people.

Scholte: That is worth a headline! Thank you very much for your time.

Hoque: You are most welcome.

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[1] Sarah Labowitz and Dorothée Baumann-Pauly, Business as Usual is Not an Option Supply Chains and Sourcing after Rana Plaza, Center for Business and Human Rights at New York University Stern School of Business, April 2014.