23 Jan 2017
Production in Bangladesh: Industrial Transformation through Relocation
- Photo: Ms Ngan showcases products from Mainland Headwear Holdings Limited.
- Photo: Pauline Ngan with her Bangladeshi business partner, Mr Shah Samsul Anam.
- Photo: Production lines in Mainland Headwear’s factory in Dhaka.
- Photo: Mainland Headwear’s factory in Shenzhen.
- Photo: Sub-optimal road conditions commonly found on the outskirts of Dhaka.
- Photo: Mainland Headwear’s new production premises.
- Photo: Workers show off their ‘goodie bags’.
- Photo: Management staff visit a worker’s home.
- Photo: Machinery with up-to-date technology is used in the factory.
- Photo: Computerised operations are adopted to provide real-time status of all stocks.
- Photo: Production process of each production line is tracked in real-time through the ERP system.
- Photo: Laser-printing machines in the factory.
- Photo:The factory is located inside a jungle on the outskirts of Dhaka.
- Photo: The township near the factory remains simple.
Established for 30 years, Hong Kong company Mainland Headwear Holdings Limited is the largest headwear manufacturer in Guangdong Province. As is the case with other manufacturers in the Pearl River Delta (PRD) region, Mainland Headwear has been faced with ever-increasing labour cost in recent times. The company’s business operation is highly labour-intensive as its production processes involve many manual elements. The unit in Shenzhen has been subject to significant financial pressures, with average labour costs rising to more than RMB6,000 per month. Unsurprisingly, given the circumstances, Pauline Ngan, Managing Director of Mainland Headwear, began to look into the company’s wider options three years ago.
Production Diversification to Bangladesh
Previously, Mainland Headwear had considered relocating to one of China’s inner provinces, including one area in Central China where preliminary degree of research had been undertaken. However, the company found this and other Chinese locations far from ideal, as labour costs in the inner provinces were also increasing swiftly as the availability of workers became an issue. Following on from this, Ngan sought an overseas location in which Mainland Headwear could establish a long-term production base. After assessing various possibilities in Asia, the company decided in favour of Bangladesh, a country in South Asia where the company could be sure of a sustainable supply of low-cost labour.
Bangladesh is 147,000 sq kilometres in size and is home to 160 million people. It covers an area similar to Fujian, the coastal Chinese province north of Guangdong where many Hong Kong factories are situated. However, the population of Bangladesh is almost four times the size of that of Fujian. The cost of labour of Bangladesh is around US$100-120, which is only a small fraction of the labour cost of Mainland Headwear’s operation in Shenzhen.
Speaking to HKTDC Research, Ngan suggested that a number of the production relocation and diversification hot spots in Southeast Asia, including Vietnam and Cambodia, would not provide sustainable low-cost labour in the long term. She also indicated that hiring staff could prove to be problematic as the population levels in these countries were relatively low when compared with that of Bangladesh. In her view, while these territories might be suitable for handling some outsourced orders, they fell short of Mainland Headwear’s requirements when it came to setting up a long-term production base.
Furthermore, Ngan was hopeful that China’s Belt and Road Initiative, introduced in 2013 as a major regional co-operation measure, would improve the conditions of doing business within Bangladesh. In particular, the investment and assistance that the Chinese government is providing for the development of Bangladesh’s infrastructure is very much in accordance with her company’s investment in Bangladesh. She noted that the completion of an enhanced highway from Dhaka to Chittagong, with technical and financial aid from China, has reduced the time it takes to send products to the port by 50%.
Setting Foot in Bangladesh
When first establishing themselves in a new country, many manufacturers seek to set up a production plant within one of its special economic zones (SEZs) or export processing zones (EPZs). Designated for foreign investors for this very purpose, the zones offer companies a high degree of convenience including, for instance, single-window assistance. Mainland Headwear, however, took a rather unconventional route, after concluding a business arrangement with a Bangladeshi manufacturer that had a small operation that was not based in any of the SEZs or EPZs.
In 2013, following an expedited negotiation and due diligence process, Mainland Headwear started its production line in Bangladesh by forming a majority-owned joint venture with a local manufacturer. HKTDC Research was subsequently told that the production premises owned by the Bangladeshi partner were located on the outskirts of the capital city Dhaka, beyond the EPZ.
Drawing on its wealth of industry experience, stable customer order base and strong financial position, Mainland Headwear’s execution of the relocation plan was swift, with the local partner playing a useful role in easing the process. On-the-ground issues - such as negotiating with the nearby village on waste disposal and road enhancement - were handled by the local partner, leaving Ngan to focus on managing factory production.
HKTDC Research was subsequently informed that the scale of production at the Bangladeshi unit, over the brief period since it has been established, has quickly eclipsed that of the Shenzhen operation. This has helped the company achieve an industrial upgrade and transformation, which was also part of its long-term development plan.
During the first few months following the launch of its Bangladesh unit, Mainland Headwear had production lines operated by around 200 workers, manufacturing just 50,000 pieces per month. Swift expansion followed, not just in terms of hiring, but also with regard to the acquisition of an additional plot of land not far from the first factory, in order to develop a new, multi-storey factory building. After three years, the factory has rapidly grown into a productive operation, with 3,200 workers making 1.8 million pieces per month. According to Ngan, the Bangladesh operation has already developed a particular speciality in handling small, highly customised orders without much disruption to production flow.
The Bangladesh factory currently accounts for around 60% of the group’s overall output, having overtaken the Shenzhen unit’s output by late 2015. The medium-term plan is to increase Bangladeshi output to no less than 75% of the group’s total output. Meanwhile, the Shenzhen operation has been downsized and now employs around 1,600 workers. In the future, the number of workers is expected to be scaled down even further in order to be compatible with the company’s transformation and upgrade strategy. To enhance its global competitiveness, Mainland Headwear has increasingly focussed its Shenzhen operation onto such areas as product design, research and development and the manufacturing of high-end products.
Overcoming Challenges to Kick-start
As discussed in a previous article - Production in Bangladesh: Overcoming Operational Challenges - operating a business in Bangladesh presents many challenges. Mainland Headwear faced many of these difficulties, including cultural differences, communication issues, poor transportation networks, an unstable power supply and Bangladesh’s humid climate, the latter of which is often overlooked by foreign investors making only short prospective visits. The company managed to overcome these various challenges through learning on the job, backed up by the determination of senior management and a level of cohesive teamwork that involved both local and foreign supervisors.
Mainland Headwear mainly provides quality products for the high-end US and European markets. In order to ensure that product quality did not suffer once the Bangladeshi operations assumed an increased share of group production, Ngan insisted that all new workers had to be properly trained and that, over time, labour productivity would be raised through close supervision.
The factory, Ngan says, is situated within a jungle, with the workers coming from the immediate vicinity. As recruitment requirements expanded, increasing the headcount 15-fold, more and more workers were sourced from villages further afield. The factory now employs frontline workers from the villages, most of whom are illiterate and speak only Bengali, the local language that is also spoken in the eastern part of India.
Initially, as Bangladeshi farmers were so accustomed to an agrarian lifestyle, there were a number of obstacles to raising productivity. Redeployed as factory workers, many of them were not accustomed to the routine processes that produce standardised end-products. Furthermore, it is very difficult to recruit managerial staff in Bangladesh. This makes communication and training even harder, with supervisory teams needed to be brought in from overseas. In this regard, Mainland Headwear relies heavily on the dedication of many of the supervisors relocated from its Shenzhen factory in order to facilitate the smooth running of its new Bangladesh setup.
Undoubtedly, the work culture of Bangladeshi employees is very different to that of their Chinese counterparts. Bangladeshi workers in general show little long-term commitment to formal employment, which is something new to the majority of them. The agrarian lifestyle remains attractive to many, with some intending to quit their factory jobs once they have saved enough money, only to re-enter the workforce once these earnings have been spent. Furthermore, Mainland Headwear employs a large number of female workers to operate its sewing and stitching machines. Female workers often quit the labour force at an early age due to family obligations. As such, Mainland Headwear has found it very difficult to train and retain workers.
Building a ‘Care for People’ Culture
Ngan believes that the key factor needed in order for Mainland Headwear’s Bangladesh production line to survive and thrive is the retention and upgrading of the workforce. She feels that this can be achieved through the establishment of a disciplined workforce and a ‘care for people’ culture. In achieving this, Mainland Headwear has launched a series of initiatives, all designed to engage its workers.
Overall, a ‘carrot and stick’ approach has been introduced by Mainland Headwear’s management. Above all, the company is committed to providing reasonably decent compensation for its workers. HKTDC Research was told that the factory offers higher-than-average wages to its staff. Extra cash is also allocated to a long-term service fund. In order to boost productivity, bonuses are offered to workers for good performance and rewards are given for full attendance. Conversely, the company tries hard to encourage its employees to report for duty daily, while frequent absence is penalised with the deduction of bonuses and ultimately the cancelling of work contracts.
Mainland Headwear also works proactively to infuse a strong sense of belonging among its workers. Morning assemblies and team-building leisure activities are organised as a means of strengthening team spirit. As many of the workers come from villages where they suffer sub-standard and sometimes appalling conditions, their families often run short of basic necessities, such as cooking oil, soap and rice. With this in mind, Mainland Headwear’s distribute ‘goodie bags’ filled with these necessities during festivities to demonstrate its care for the workers. Management staff at the factory also conduct regular home visits in order to develop a better understanding of the workers’ lifestyles and needs.
Over time, a sense of loyalty has been established among workers as Mainland Headwear has proved itself to be a benevolent employer, one providing stable income and care for its staff. Many people have been attracted by these good job opportunities and have settled in the village near the factory. This has turned the nearby area into a much bigger community than it was before Mainland Headwear arrived in Bangladesh.
Lean Production with Good Utilisation of Technology
With the objective of turning its Bangladeshi factory into a long-term production base, Mainland Headwear spares no expense when it comes to capital goods and training. Initially, the factory in Bangladesh used machines relocated from the Shenzhen factory. Once production was well established, however, Mainland Headwear invested in new high-quality machines from Japan. Furthermore, additional hardware - such as computers, barcoding devices and tracking devices - has been installed in order to facilitate full implementation of the Enterprise Resources Planning (ERP) system and achieve ‘paperless operations’ in the factory. The ERP system, first developed in its Shenzhen plant, has evolved over time with input from Bangladeshi IT experts.
Bangladesh is a relatively undeveloped country with a largely uneducated workforce. Nevertheless, workers are not opposed to technology and are quick to adapt to manning machines and to producing high-tech products. HKTDC Research saw for itself the extensive use of the ERP system within Mainland Headwear. This system allows the group and its customers to have real-time access to production status and product locations. However, the degree to which the ERP system is utilised can vary from location to location. In Shenzhen, where management and workers are familiar with long-practised operation routines, the utilisation level of the ERP system is much lower.
By contrast, the ERP system was introduced to the Bangladeshi production lines three years ago, with specific modifications being made over time to cater for local operations. This has resulted in leaner production processes in Bangladesh and a virtually paperless operation. Day-to-day factory operations and worker training are both closely tied to the ERP system. It is notable that Bangladeshi workers are willing to learn and incorporate technology into their work, making the transfer of skills and knowledge a far smoother process.
Manufacturing as Vocation
Hard work and perseverance are required to manage any factory, let alone the setting up of a new production plant in a developing country. To that end, the immense determination of Ngan and her supervising team has been vital in driving forward the enormous leaps in productivity made at the Bangladeshi plant.
Over the past three years, Ngan has spent half of her time in Bangladesh in order to oversee the factory’s operations, constantly rolling out new initiatives designed to raise productivity. The supervising team - mainly personnel from the Chinese mainland - are stationed in the new Bangladesh plant and dormitory complex. However, it is not easy working in a rural area with humid weather, substandard transport linkages, poor water quality and inadequate electricity provision.
Members of the Mainland Headwear team recall that, when they first arrived, it would take three or four hours to ride on bumpy roads from Dhaka airport to the factory, with hygiene conditions in the vicinity very poor indeed. As the village only had a limited supply and choice of food, the team had to bring its own food supplies, including pickled vegetables. With the local economy gradually growing stronger over time, living conditions in the factory and nearby villages have begun to improve.
Operating in such a challenging environment requires great reserves of determination. In this regard, Ngan sees manufacturing as a vocation rather than just a business. As she recalls, the moment she arrived in Bangladesh, she realised that local people were in desperate need of jobs in order to improve their living conditions.
Ngan believes that FDI factories can offer a multiplier effect to the villages and drive the local economy upwards. Furthermore, as Bangladeshi women are of relatively low social status in the country, especially in the rural areas, Ngan notes that her Bangladesh factory can empower female workers through economic independency and thereby imbue a stronger sense of self-worth beyond family duties.
Where There is a Will…
The story of Mainland Headwear’s relocation to Bangladesh is not the most common or conventional one amongst prospective foreign investors in the country. Management resolve and proactivity, alongside a genuine wish to help the Bangladeshi people, especially female workers, have been the foundation of Mainland Headwear’s success in Bangladesh. Not all businesses, however, have such strong industry knowledge, a competent local partner and an enviable financial position when it comes to considering relocation. Nevertheless, Mainland Headwear’s experience does cast a light on some of the ways to successfully set up a factory outside an EPZ, an eventuality that usually compounds the practical challenges of overseas relocation.