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Production in Bangladesh: Recent Development and Opportunities

Map: Location of Bangladesh
Map: Location of Bangladesh

Bangladesh is a manufacturing powerhouse in South Asia. Despite its rather small size of 147,000 sq kilometres (similar to Nepal and somewhat smaller than Cambodia), it is the world’s eighth most populous country, home to some 160 million people. The country has maintained robust economic growth in the past decade, with GDP growth optimistically projected at around 7% over the next few years.

With a per-capita income of about US$1,300, Bangladesh has highly competitive wages and is regarded by many as one of Asia’s final production frontiers. Since the early 2000s, Bangladesh has evolved into the world’s second largest clothing exporter after China, accounting for about 6% of global clothing exports.

Chart: World’s Top Clothing Producers in 2015
Chart: World’s Top Clothing Producers in 2015

Compared to Southeast Asia, Bangladesh is a relatively less explored production base for Hong Kong manufacturers. Against the backdrop of rapidly increasing labour costs in China, and to a lesser extent in Southeast Asia, HKTDC Research recently undertook a trip to Bangladesh to examine the country’s recent development and its appeal as an alternative production base.

This article provides a broad outline of Bangladesh’s recent manufacturing developments. Upcoming articles in this series will provide more in-depth intelligence on manufacturing operations in the country, covering both export processing zones and other industrial zones.

Photo: Dhaka’s city centre.
Dhaka’s city centre.
Photo: Dhaka’s city centre.
Dhaka’s city centre.
Photo: Overlooking the Dhaka city from Gulshan area
Overlooking the Dhaka city from Gulshan area.
Photo: Overlooking the Dhaka city from Gulshan area
Overlooking the Dhaka city from Gulshan area.

Wages Remain Highly Competitive for Labour Intensive Industries

Above all, low labour cost is Bangladesh’s strongest comparative advantage in manufacturing. Many manufacturers in China’s Pearl River Delta Region (PRD) are exploring production relocation or diversification possibilities under the pressure of soaring wages and difficulty recruiting workers. Among the manufacturing relocation ‘hot spots’ in South Asia and Southeast Asia, Bangladesh’s labour cost is one of the lowest. With a huge labour supply of almost 80 million people, approximately half of the country’s population, Bangladesh is well-positioned for absorbing the relocation of labour-intensive industries from elsewhere in the region. The figure below compares the labour costs among major manufacturing bases in Asia:

Table: Labour Cost Comparison between Bangladesh and other Production Bases
Table: Labour Cost Comparison between Bangladesh and other Production Bases

Evolving Readymade Garments Industry

Bangladesh’s clothing, or ‘readymade garments’ (RMG), industry is a crucial contributor to the economy, accounting for some 80% of the country’s total export earnings. After more than 30 years’ development, Bangladesh’s RMG industry is considered a fairly mature sector, with well-established buyer-supplier relationships, industry knowledge and compliance.

The RMG industry of Bangladesh has a strong advantage in exports, currently, enjoying duty-free access to major markets including the European Union, Canada, Japan and China. Further, foreign buyers from the US and Europe have maintained close working relationships with Bangladeshi suppliers, and some have set up buying offices in the capital, Dhaka. 

Chart: Development of Bangladesh’s RMG Sector
Chart: Development of Bangladesh’s RMG Sector

Unlike many South-East Asian alternative production bases, such as Cambodia and Vietnam, where foreign-invested companies dominate the manufacturing industry, Bangladesh’s RMG sector has a considerable level of local company participation. Bangladeshi RMG manufacturers are also articulate and competitive operators, with rich experience in doing business with international buyers.

After the Rana Plaza collapse in Dhaka in 2013, with a death toll of more than 1,000, a host of measures to ensure work safety were adopted, including the EU-ILO-Bangladesh Global Sustainability Compact. Textile and RMG companies and business associations that HKTDC Research interviewed in Bangladesh invariably noted that the operational environment has made good progress over the past three years.

Chart: Development of Bangladesh’s Manufacturing Oversight and Compliance
Chart: Development of Bangladesh’s Manufacturing Oversight and Compliance

Government Keen to Diversify Industries

Apart from textiles and RMG, Bangladesh is trying to give a stronger push in the development of other industries to diversify its manufacturing portfolio. Priority sectors include leather and leather goods, automotive, agribusiness and pharmaceuticals. In addition to its labour advantage, Bangladesh’s leather processing and leather goods manufacturing may benefit from the country’s local leather supply.

Bangladesh produces more than 50 million head of livestock per year[1]. Leather is the largest by-product of livestock and this steady supply has helped support a leather industry with annual exports of around US$1 billion. During the Eid al Adha (Festival of Sacrifice) held in September each year, more than 1.5 million livestock are slaughtered in just one week.

Apart from finished and semi-finished leathers, Bangladesh’s leather exports are gradually shifting to higher valued-added items, such as leather goods and footwear. Like their counterparts in the RMG sector, Hong Kong companies engaged in leather goods and apparel accessories may consider manufacturing relocation or diversification in Bangladesh. Manufacturers can source leather directly and more cheaply in the country as well as conducting export-processing there to save transportation costs.

Economic Zones Development Accelerated

Intended to further promote manufacturing, the Bangladesh Economic Zones Authority (BEZA) is tasked with developing economic zones (EZs) throughout the country for industry development. Currently, 56 government-owned EZs and 10 private owned EZs are listed.

BEZA aims to develop up to 100 EZs with a total area of 30,000 hectares (or 300 sqkm, about one-fourth the size of Hong Kong) throughout the country by 2025 for the use of both local and foreign investors. BEZA leads the development of sites, especially in aligning infrastructure provision, while encouraging public-private partnership (PPP) for EZ development.

Bangladesh continues to face the dire need for upgrades to its infrastructure and utilities in order to facilitate further industrial development. Even in Dhaka, there are few well-paved four-lane highways. Traffic in the city is immensely congested. An extensive network of expressways and highways are needed to connect the EZs under development with sea ports.

Infrastructure and Utilities Projects in the Pipeline

Located at the estuary of the Ganges Delta with many branches flowing into the Bay of Bengal, 80% of Bangladesh is a floodplain area. Currently, most exports are transported to Chittagong Port from other parts of the country by truck. It would take about 7-8 hours to transport goods from Dhaka to Chittagong Port. The Bangladeshi government is planning to upgrade the roads to shorten the transport time to 3-4 hours. A few years back, it would take almost twice as much the time to cover the same distance due to very poor road conditions.

It should be noted, however, that, many roads in Dhaka, not to mention the less developed areas in Bangladesh, are not supplemented with satisfactory drainage systems. Flooding problems in the city and nearby areas can be easily compounded by a lack of proper draining and discharges during the monsoons season. All this would add to the lead time required for sending finished products for export.

Photo: Traffic congestion is common in Dhaka.
Traffic congestion is common in Dhaka.
Photo: Traffic congestion is common in Dhaka.
Traffic congestion is common in Dhaka.
Photo: Road conditions to be improved.
Road conditions to be improved.
Photo: Road conditions to be improved.
Road conditions to be improved.

When HKTDC Research travelled within Dhaka, high-rise factories remained a prime feature, aside from traffic congestion and roadsides filled with people. Most of the factories and important buildings are built with elevated platforms, and the second floors of many buildings are deliberately left under-occupied for the purpose of moving goods and property from the ground or first floor during floods.

The World Bank and Asian Development Bank have provided both technical and financial assistance to a series of water management, flooding and disaster management projects in Bangladesh. While the country would be prone to periodical floods due to its natural setting, the disturbances and damage brought by floods are expected to be reduced over time.

Photo: Plains periodically flooded in Bangladesh (1).
Plains periodically flooded in Bangladesh (1).
Photo: Plains periodically flooded in Bangladesh (1).
Plains periodically flooded in Bangladesh (1).
Photo: Plains periodically flooded in Bangladesh (2).
Plains periodically flooded in Bangladesh (2).
Photo: Plains periodically flooded in Bangladesh (2).
Plains periodically flooded in Bangladesh (2).

Limited availability of electricity poses another persistent constraint to industrial operations. Presently, Bangladeshi people do not have full access to electricity through the public power grid, and stability of electricity supply needs to be further improved. As HKTDC Research observed during country visit, power outage was common and happened many times in a day. Manufacturers operating in Bangladesh informed HKTDC Research that virtually all factories have installed their own power generators as backups to mitigate disruption.

The Bangladeshi government is well aware that sub-standard infrastructure and utilities are big hurdles to further economic development. The Power Division of the Bangladeshi government has set out the target of nationwide full electricity access and total power generation of 24,000 MW by 2021. A wide range of infrastructure projects to develop and upgrade national highways, railways, power plants, the Dhaka Metro and sea ports are already under construction or in the pipeline. Yet progress in different projects varies.

Bangladesh: a Key Belt and Road Partner

Under the Belt and Road Initiative championed by China, Bangladesh is an important partner on the envisaged Bangladesh-China-India-Myanmar (BCIM) Economic Corridor. As Bangladesh’s largest trading partner, China has been keen to assist Bangladesh in developing the latter’s infrastructure, helping out in building and upgrading some roads and bridges in the country. In October 2016, China and Bangladesh signed 40 agreements, including loan and investment deals of more than US$20 billion on infrastructure alone. Under the strategic partnership, China offers not only financial assistance but also technical expertise in infrastructure development. Plans are underway to further enhance the BCIM road section from Sylhet to Dhaka in Bangladesh.

Map: Route of the BCIM Economic Corridor
Map: Route of the BCIM Economic Corridor

Ease of Doing Business Needs Further Improvement

In terms of ease of doing business in a country, emerging economies in particular, excessive administrative procedures and red tape are commonplace. To Hong Kong manufacturers, Bangladesh offers a mixed-bag of attractive labour costs and challenging operational issues. Bangladesh is ranked 139 out of 168 in the Corruption Perception Index by Transparency International, which is worse than most of the emerging Asian countries[2]. In the World Bank’s Ease of Doing Business (EODB) Survey, Bangladesh’s overall score is ranked among the lowest, with scores on individual categories found to be close to the bottom, such as getting electricity, registering property and enforcing contracts.

Myanmar, which is often regarded as the other final production frontier offering cheapest labour in Southeast Asia, is ranked similarly in the EODB. Despite registering low scores in many categories, Bangladesh scores best in starting a business compared with other Asian counterparts. The challenge is not so much in identifying Bangladesh as a low-cost production base, but tackling the practical difficulties that affect daily operations after factory opening. The low ranks in trading across borders and getting electricity reflect that substandard infrastructure and related services are big hurdles to doing business. The table below compares Bangladesh’s EODB rankings with other Asian counterparts:

Table: EODB 2017 Rankings of Bangladesh and Other Asian Countries
Table: EODB 2017 Rankings of Bangladesh and Other Asian Countries

To tackle the challenging operational environment faced by manufacturers, the Bangladeshi government has recently set up a new unit, the Bangladesh Investment Development Authority (BIDA). After inheriting the previous Board of Investment under the Prime Minister’s Office, BIDA is commissioned to promote Bangladesh as an investment destination and to assist private investment and FDI through investment facilitation services and policy advocacy. BIDA is currently developing a one-stop online platform for simplifying business registration procedures. Further, the online platform is launched to minimise human intervention in the business registration process so as to reduce red tape and the risk of bribery. 

BIDA also acts as the agency for streamlining issues, such as obtaining utilities and premises. Along with the infrastructure projects in the pipeline, the ease of doing business in Bangladesh is expected to improve, though this will predictably take quite some time before progress can become visible.  

Summary

As one of Asia’s final production frontiers, Bangladesh’s cheap and abundant labour offers good potential for labour-intensive industries. The labour cost advantage is strong and rare in Asia, yet like other emerging countries, the business operation environment is far from ideal. In upcoming articles, HKTDC Research will examine the challenges confronting FDI investors and how they might overcome them.


[1]  Bangladesh Economic Review 2014, Ministry of Finance of Government of Bangladesh

[2]  India, Indonesia, Myanmar and Vietnam are ranked 76, 88, 147 and 112 respectively in the Corruption Perception Index.

Content provided by Picture: Kenix Lee
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