Small garment factories struggling to stay afloat

The dearth of work orders from international retailers and brands to small and medium-sized garment factories is so acute that many entrepreneurs are looking for buyers to sell units and exit the industry for good.

The fallouts of the coronavirus pandemic have brought the SME garment units to their knees as orders collapsed with the global drop in sales.

The units of the apparel industry, considered the lifeline of Bangladesh’s economy, had faced abnormal delays in payment from buyers, order cancellations and suspensions and non-availability of loans from the stimulus package.

However, the large garment factories in this top export earning sector are faring better to some extent when it comes to getting orders, thanks to better coping mechanisms stemming from their large production facilities and ability to make shipments on time.

During the pandemic last year, 300 SME units which are also members of the BGMEA had to shut down, said Rezwan Selim, a director of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), citing the trade body’s data.

Of them, nearly 20 factories have reopened and some are struggling to reopen as they did not receive work orders and were not able to manage funds, said Selim, who looks after labour affairs and closed factories.

The flow of work orders is not good even for the big factories, he added.

A majority of the factories, particularly the SMEs, are running at 40 to 50 per cent capacity because of the lockdown in major export destinations due to the second wave, he said.

Since the inflow of orders in big units is slow, the SMEs are not getting the associated subcontracting orders, Selim said.

Nearly 50,000 workers lost jobs for the closure of the factories, he said.

Seeking to remain unnamed, a garment factory owner in Gazipur said he was looking for a buyer for his factory built in 2017 on 22 bighas of land.

He had 1,400 workers in his factory before the pandemic hit the country in March last year. Six months later in September, he had to shut the factory, leaving his workers without a job.

The entrepreneur partially reopened the factory to cater to the domestic market. Now 70 workers are employed at his factory.

The over-60-year-old investor lost Tk 12 crore as one of his American buyers declared bankruptcy due to the Covid-19.

As production came to a halt, raw materials worth Tk 20 crore lay unused on his factory floor and at the port.

“I had been struggling to revive my business even before the pandemic as I spent a lot of money to comply with the factory safety recommendations of the Accord,” he said.

The Accord on Building and Fire Safety in Bangladesh had referred factory safety improvement plans. In Bangladesh, more than 70 per cent of garment factories are small and medium-sized.

About 10 per cent of the factories said during the ongoing business slowdown, 50 per cent to 100 per cent of the work orders did not cover costs, yet those had to be accepted.

They did so just to keep their business afloat, according to a recent study of the Centre for Policy Dialogue (CPD).

So far, retailers and brands have reinstated 90 per cent of the cancelled and suspended orders worth $3.18 billion, but they are delaying making payments, dealing a blow to the SME units.

Yet in its study, the CPD found that only 44 per cent of factories were certain about orders in the six months to April.

The rest 56 per cent have different levels of uncertainty. Of them, 11 per cent had a high level of uncertainty on orders. These factories are mainly small.

In his heyday, the Gazipur-based garment factory owner used to export garment items worth nearly Tk 70 crore annually and he would pay Tk 1.70 crore in wages to workers every month.

“I owe Tk 70 crore to banks,” he said.

He could not qualify for the soft loan from the government-sponsored stimulus fund because of stringent conditions. And he could not repay bank loans from the incomes of garment business.

“I have to sell my factory and the land to repay the bank loans. And the repayment of the bank loan would be the end of my 18 years of business life,” he said.

But in the last 18 years, he ran the factory with a hope to establish a business empire. But the fallouts of Covid-19 have shattered his dreams.

This fate of the garment owner is also reflected in the garment export data.

Between July and January, the first seven months of the current fiscal year, garment shipments declined 3.44 per cent year-on-year to $18.40 billion.

This correspondent spoke to at least 10 exporters having small and medium-sized garment factories and industry leaders to know about the fates of the SME units.

They said the situation had been improving after the first wave of Covid-19 had passed but it started deteriorating with the onset of the second wave as fresh lockdowns were introduced in major export destinations in Europe and the US.

“I have been able to recover 75 per cent of the business. I could not recover 100 per cent because of the second wave,” said Mostafiz Uddin, managing director of Denim Expert.

Buyers prefer placing orders with a big unit to ensure deliveries are made on time and as the big units have the room to negotiate prices, he said.

The entrepreneur requested that the government come up with a flexible policy so that all factories, especially the SMEs, can benefit from the stimulus package.

Md Ehterab Hossain, managing director of Base Fashion, and Md Emdadul Haque, general manager of Dynasty Sweater (BD), shared stories of order cancellations and reductions and discounts.

“Orders worth $2 million were stuck and finally I had to agree to settle it at a 15 per cent discount,” said Hossain. Base Fashion ships T-shirts and polo shirts worth $1 million every month.

“I am struggling to keep my business afloat as the number of orders has plunged,” he said.

The abnormal price hike of yarn has just added further woes to the SMEs. The prices of yarn went up by more than $1 per kg over the last three months, said industry operators.

Small and Medium Garment Factories Lack Support

BGMEA Director Selim said many of the SMEs did not get the stimulus fund because they themselves were not directly making exports.

The closed SMEs used to export one or two consignments and largely worked in conjunction with a big unit through subcontracting.

Rubana Huq, president of the BGMEA, said the SMEs were the worst-affected when it comes to managing finance and business since they worked for buyers having relatively smaller turnovers.

When asked whether there was a gap when it came to a single policy serving both the big units and SMEs, she said, “Absolutely yes.”

“Therefore, they require different policy measures to survive in this crisis period,” she said.

The government has provided an additional working capital scheme for the SMEs during the pandemic, she said.

However, the working capital loan support was difficult to access as far as readymade garment factories are concerned because of stringent processes requiring due diligence, she said.

Another factor is the nature of business and the modality of financial assistance required for the RMG enterprises which differ from any other sector, she added.

“For the immediate term, special assistance to SMEs with regard to accessing finance to turn around and reconstruct themselves would be critical for continuing the growth journey of the industry and economy at large,” said Huq.

Mohammad Hatem, senior vice-president of the Bangladesh Knitwear Manufacturers and Exporters Association, said apparel exporters faced harassment in availing stimulus loans because of stringent conditions and bureaucratic tangles.

Many of the SMEs could not avail the loan at all although they needed it the most, he said.

Some circulars of Bangladesh Bank are unjust for the SMEs, he said.

Only bigger units had been entitled for availing the loan from the stimulus package, Hatem said.

However, after negotiations with the central bank and the finance ministry, the conditions were eased to a bit, he added.

Selim said many of the SMEs did not get the stimulus fund because they were not directly making exports.

KI Hossain, president of the Bangladesh Garment Buying House Association, said most of the SMEs were dependent on subcontracting but now it was not available due to inflow of fewer orders from international retailers and brands.

Khondaker Golam Moazzem, research director of the CPD, said the government’s Tk 1,000 crore technological upgradation fund should be spent in its true sense to improve online sales of small and medium units so that they can ride out the difficult times.

Nazneen Ahmed, senior research fellow of the Bangladesh Institute of Development Studies, said a price war in the global garment business was ongoing.

Since the bigger units have a competitive edge, they can absorb the losses. But small and medium-sized units can not afford that, she said.

Both Moazzem and Ahmed said orders for big factories had not been fully restored. Small suppliers that were used to catering to small buyers and retailers were in trouble.

“The government needs to ensure that the small and medium-sized units receive soft loans from the stimulus packages. Their loan repayment period should be extended,” said Ahmed.