From rags to riches

Books have been predicting the collapse of China for decades but it’s the Chinese supply chain that is now supposed to be on the brink of disaster, after being torpedoed by the trade war and quarantined by the coronavirus.

Some of that view is shaped by a changing outlook on globalisation, especially that China’s grip on much of the world’s manufacturing could be set to loosen. Commentators are also on the lookout for the early beneficiaries of Chinese misfortune, with Bangladesh’s garment trade making headlines as one of the winners from the supply chain sclerosis. The theory is that the world’s clothing brands are looking for alternatives and that Bangladesh is well placed to pick up new business.

Yet there’s a strong argument that it’s not a zero-sum game in the apparel trade. Changes in commercial priorities should see both China and Bangladesh benefiting from the shifts in the landscape as well.

The strains in the supply chain started in the slipstream of Beijing’s tariff row with Washington, with new duties imposed on a range of textiles and clothing from China. Some of the tariffs were dropped or reduced as a result of the ‘phase one’ deal in January but the experience was chastening for the biggest buyers of apparel, persuading brands like Under Armour, Uniqlo, Calvin Klein and Tommy Hilfiger to review their sourcing options.

Since then the coronavirus has wreaked a new round of havoc, suffocating the supply lines and forcing the same firms into a further evaluation of whether they are too reliant on China.

In fact the Chinese had been surrendering some of their stitching and sewing – mostly in ready made garments like T-shirts, trousers and sweaters – to nations like Bangladesh long before Trump’s tariffs and the chaos of Covid-19.

Yet they were still the dominant force in the clothing trade in 2018, selling almost a third of the world’s apparel exports. Bangladesh was in second place with 6.4%.

However, any talk of the epidemic as an unrivalled opportunity for Bangladeshi firms to grab a bigger share overlooks their reliance on Chinese suppliers for many of their shipments of yarn and fabric. Bangladesh’s factories buy a high proportion of their equipment from the Chinese as well – another reason why it runs a major trade deficit with China (imports worth $13.6 billion in the most recent fiscal year, versus exports of just $831 million).

The throttling effect of the virus on Bangladesh’s largest export sector was immediately apparent, with imports of Chinese raw materials falling a fifth in tonnage terms over the first six weeks of this year.

“We are losing the orders as well as the supply of raw materials. We can’t even take orders from the buyers – much less bargain with them,” Mashiul Azam Sajal, vice-president of Bangladesh’s Garment Manufacturers and Exporters Association, warned media last week.

One of the ways to dial down the dependence is vertical integration, including the construction of more mills that make fabric and yarn. The supply crunch will have underlined the point, although consolidation in the garment sector would help in creating larger, better capitalised Bangladeshi manufacturers.

Once that happens at scale more closures of Chinese clothing and textile businesses seem inevitable. Yet it’s a sacrifice that China’s policymakers seem prepared to accept as part of the bid to upgrade their manufacturing sector at large. Less sophisticated parts of the garment trade are seen as ready for retirement and ripe for replacement by newer businesses.

This suits the Bangladeshis, of course, who have set targets of $50 billion in readymade garment exports by the end of 2021 (between January and November last year it was $30.1 billion).

Industry bosses there bristle at allegations of sweatshop labour, arguing that their factories rely on skilled workforces which their newest competitors (primarily in Africa) can’t replicate. That’s not to say that cheap labour cost isn’t an attraction for investors (including more than 500 Chinese firms) the country’s leading business association said this week. Bangladesh is the world’s eighth most populated country with 165 million people, which feeds through into a minimum wage for garment workers of about $95 a month, about half of Vietnam’s and a third of China’s.

Investors are being wooed from a series of special zones where firms are allowed to import raw materials and machinery at minimal tax rates, with similar concessions for the exports of the finished goods.

The strategy looks pretty similar to the export processing zones in Guangdong that kick-started China’s economic miracle in the 1980s: start out with an export-driven model in industries like clothing and light goods, then broaden into more value-adding sectors.

There are already signs of success in handset assembly, where Samsung opened a plant two years ago, joining local manufacturers like Walton and Symphony. Chinese brands Transsion, Vivo and Oppo have built production capacity as well. Two-thirds of locally purchased phones were put together in Bangladesh last year and a jubilant business press is predicting that the entirety of domestic demand is going to be met by local plants by the end of this year, when some factories will start exporting handsets.

There are cluster benefits on show as well, the media says, as factories gear up to make associated goods like phone batteries, protective cases and chargers.

In the meantime some of the biggest challenges for Bangladesh’s firms are the bottlenecks in transport and logistics. Getting materials and goods shipped to and from the factories takes a lot longer than in rival markets. Intermittent power failures are another expense, eating into the savings from lower wages.

The Chinese are on hand for support here as well, often through infrastructure investment under the Belt and Road Initiative. At least $45.9 billion of work was contracted by the end of 2018, with $22.6 billion completed by that time, Bangladesh’s Ministry of Commerce says. The list of projects is a long one, including new capacity at Chittagong’s port, a $3.7 billion road and railway crossing of the Padma River and the construction of power plants in places like Chittagong and Payra.

Indeed, investment at this level has made Bangladesh the biggest recipient of Belt and Road finance after Pakistan, alarming those who warn against so-called ‘debt-trap diplomacy’ (see WiC423). Borrowers in other countries such as Malaysia have cried foul on the terms of some of the earlier loans, but Bangladeshi officials reject the claim, saying that relatively modest interest rates and longer payback periods make the debt manageable, especially as the economy is growing strongly.

Yet the government in Dhaka has been careful not to get too dependent on China’s backing. It turned down a proposal for a deepwater port in Sonadia in favour of an alternative project built with the Japanese just a few miles away, for instance. It has also courted India adeptly, preferring to cooperate with a range of partners rather than becoming reliant on any single one.

Looking ahead (and well beyond the garment trade) the Chinese will have an eye on Bangladesh as a much bigger market for their goods. That’s part of the quid pro quo for Belt and Road loans – boosting the economies of the recipient nations should bring subsequent benefits for Chinese exporters.

Bangladesh has a few advantages of its own in this regard, including millions of women coming into the paid workforce for the first time, which is bringing down births (more than six children per woman in 1980 to barely two today) and improving saving and spending rates.

Chinese brands will be watching closely, counting on Bangladesh’s consumption story to pick up pace. There’s a glimpse of that in how the phone brands have been setting up factories but the prize is bigger: only a fifth of Bangladeshis have fridges, for instance, while ownership rates of other white goods are even lower.

What does this say about changes in the supply chain and the trading relationship between China and Bangladesh? In areas like ready made garments Chinese firms are going to cede more share to rivals in Bangladesh as time progresses. But that won’t extinguish each and every chance of specialisation and profit in the apparel sector, especially higher up the value chain.

Changes in the relationship will also bring a new focus to how the two trade together over the longer term, helped by the investments in transport and power, which will buoy Bangladesh’s economy and open new doors for cross-border commerce. And in that kind of context supply chains are more likely to be spreading than splintering.

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