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Rising Costs, Riots Squeeze Bangladesh

Apparel manufacturers are facing political unrest, frequent strikes and rising prices on top of the continued outcry over working conditions.

General strikes and violence in Bangladesh are due in part to a political clash between the ruling government, led by the Awami League, and the opposition, led by the Bangladesh Nationalist Party.

The Bangladesh apparel industry — and the retailers that source from it — are under growing pressure.

This story first appeared in the April 10, 2013 issue of WWD.  Subscribe Today.

The dilemma facing retailers became more apparent Tuesday when Wal-Mart Stores Inc. said it would donate $1.6 million toward improving fire safety standards in Bangladesh. Labor rights groups immediately criticized the size of the donation, saying the world’s largest retailer wasn’t doing enough. Wal-Mart is the second-largest exporter of apparel from Bangladesh after H&M.

Apparel manufacturers in Bangladesh are facing political unrest, frequent strikes and rising prices on top of the continued outcry over working conditions. All of this is combining to create a sense of foreboding in the $20 billion sector, the world’s second-largest apparel exporter after China.

The sector, which has more than 5,500 companies, has been in the throes of change with increased inspections and regulations as global companies press for greater worker safety standards and compliance. The government has instituted more compliance checks in the last two months, responding to international calls after the Tazreen Fashions Ltd. fire in Dhaka in November, in which more than 111 people were killed, and a subsequent fire at Smart Fashions, where more than seven people died and dozens were injured.

Meeting these new standards has come at a cost to factory owners, and prices for production in Bangladesh have been rising in the last few weeks. Wal-Mart’s $1.6 million donation, to the Institute of Sustainable Communities, a U.S.-based non-governmental organization, will help establish the Environment, Health and Safety Academy in Bangladesh. Sida, the Swedish International Development Cooperation Agency, is also a partner in providing support for the new academy.

Apparel destined for Wal-Mart was found in the ashes of the Tazreen factory, although the retailer said it was unaware its clothing was being produced there. It subsequently terminated the contractor that had subcontracted the work to Tazreen.

“At Wal-Mart, as we work to raise standards in the global supply chain, we continue to actively seek out partnerships with government stakeholders, nonprofits and NGOs,” said Rajan Kamalanathan, the retailer’s vice president of ethical sourcing. “That’s why we are partnering with ISC, which is known for combining expertise in leadership, institutional development and community capacity building to improve people’s lives and the earth’s ecosystem. The EHS Academy is an important part of our ongoing commitment to improve fire safety standards in Bangladesh and we are proud to partner with ISC to address the critical need for training around fire safety, health and workplace safety.”

The retail giant in January issued a “zero tolerance” policy for suppliers of any violation of its global policy. “Zero tolerance” went into effect on March 1. Two weeks later, there were reports that Wal-Mart might be considering slowly pulling its business out of Bangladesh.

The donation revealed Tuesday was immediately met with criticism from labor organizations.

“Considering the relative money needed to address the grievous fire safety issues in Bangladesh, it is a pittance,” Scott Nova, executive director of the Worker Rights Consortium, said of Wal-Mart’s pledge. “Wal-Mart [uses] hundreds of factories in Bangladesh and many of them will need hundreds of thousands of dollars or more to be repaired and retrofitted to [become] minimally safe. Wal-Mart has claimed for years that it has carried out effective education and training programs on fire safety in Bangladesh. We know that’s inadequate because people continue to die. The primary problem is that factory buildings are unsafe. No amount of education and training can enable workers to escape a burning building that does not have proper fire exits.”

“It’s more of the same,” Judy Gearhart, executive director of the International Labor Rights Forum, said of Wal-Mart. “The brands and retailers want to invest in auditors and training, and things related to the technical side of things, but they don’t want to have a fundamental change to the way we approach the problem.”

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The ILRF is part of a coalition sponsoring meetings in Washington with government officials and garment worker Sumi Abedin, who survived the tragic Tazreen fire, as well as Kalpona Akter, executive director of the Bangladesh Center for Worker Solidarity. They plan to meet with Rep. George Miller (D., Calif.), ranking member of the House Education & the Workforce Committee, and other lawmakers on Wednesday to discuss fire safety in Bangladesh’s garment industry, as well as alleged widespread abuse of worker rights. The coalition plans to meet with officials from the Labor and State Departments on Thursday.

In the wake of fires and alleged worker rights violations, a hearing on March 28 was held to consider whether to revoke or suspend trade benefits to Bangladesh under the General System of Preferences, which is designed to promote economic growth in developing countries and territories. “We want to see the administration’s decisions after the GSP hearing,” said Akter. “Fire safety issues in Bangladesh are really horrible. We lost 112 workers [in November]. This is a very appropriate time for Western brands and retailers to sign the existing fire safety memorandum of understanding.”

The Bangladesh Fire and Building Safety Agreement would establish a two-year program to enact in-factory enforcement, develop a process for worker complaints and mechanisms to report health and safety risks, set up independent inspections, publicly report on the inspections, establish a central role for unions and create a binding contract between brands and worker representatives. So far, only two companies — PVH Corp. and German retailer Tchibo — have signed it. The agreement will not take effect until at least two more major companies sign on.

Gearhart said the coalition invited Wal-Mart and other brands to participate in an April 15 international forum in Geneva on fire safety concerns in Bangladesh. It’s pressing brands and retailers to pay into a fund to help injured workers and families of the victims. Wal-Mart has not responded to the invitation, she said.

Adding to the pressure on manufacturers in Bangladesh has been a turbulent political situation, with a series of strikes, or hartals as they are referred to locally, that have severely impacted normal operation in different parts of the country, especially Dhaka, the capital.

Speaking at the Ha-Meem Group factory in Ashulia last week, U.S. Ambassador to Bangladesh Dan W. Mozena cautioned that despite the great potential of Bangladesh, investments by global companies may get diverted to Vietnam and Cambodia in the face of continued political uncertainty.

He pointed out that Bangladesh needed to keep strikes and protests at bay to remain an important investment destination and underscored the need for dialogue to resolve political uncertainty in the interest of the economy.

Ha-Meem Group has an annual turnover of about $300 million and manufactures for several global companies, including H&M and Zara. A.K Azad, chief executive officer of the group, told WWD that investors had canceled trips to Bangladesh because of the strikes and that was becoming a concern. “The textile industry is facing so many issues with workers being on strike, price rises and so on. But the political situation and the ensuing hartals are causing much damage. I don’t see this being easily resolved in the short run, although all of us are pressing for dialogue to solve the problem,” he said.

The problem is no longer just about the protests by garment workers demanding compensation for victims of the fires in two factories in November and January, or about better government standards for the apparel industry. The violence and general strikes are part of a political clash between the ruling government, led by the Awami League, and the opposition, led by the Bangladesh Nationalist Party. Arrests and protests have led to a burst of violence with more than 88 people killed in the last two months, according to a United Nations report. There has also been a rise in attacks on the Hindu population and Muslim minorities by Islamic elements. Through all this, much of the garment industry has continued to operate, but with difficulty.

“Of course production is affected,” Kutubuddin Ahmed, chairman of the Envoy Group, told WWD. Envoy has an annual turnover of more than $220 million and employs 15,000 people in businesses ranging from apparel and textiles to hospitality and real estate. “We keep factories running despite a strike, but it is a supply chain,” said Ahmed. “We need fabrics to reach the factory. The products have to reach the port and be cleared. And workers are afraid of commuting to the factory.”

It is creating an increasingly difficult situation for one of Bangladesh’s key industries. “Bangladesh is at a very mature stage as far as the garment industry is concerned. Manufacturers here understand what garments are all about and how production should work, and the management side of it is improving. But with the political situation and compliance issues both adding up to additional pressure, people like us have become something of a sandwich — under pressure from both sides,” said Dr. Iqbal Masud, owner and ceo of Unnati Sourcing Bangladesh. “We are not getting enough support and can see that the industry is being affected. The political unrest has had a very negative effect on the industry and is impacting the garment industry as a whole.”

He said that although his factories, like many others, continued to function during many hartal days, production could not really continue as normal. With local transport shut down on days of protest, workers struggle to reach work. Those who show up are incentivized with additional working hours, but then there is the next day to contend with.

There are also problems with delivery amidst the chaos, since transport stops running. Companies are forced to pay a penalty on delayed shipments, according to the terms of their contracts with global companies, adding to their costs. Third, foreign delegations and company officials have been canceling their visits over the last month, resulting in a loss of business.

The government appears helpless in this situation. “International companies are worried and justifiably so as the production gets affected as well as the transport,” said a senior government official who requested anonymity.

A concern for global buyers has also been the increase in prices for ready-made garments. The price advantage over China has been a key reason for global brands to source from Bangladesh, as well as more flexibility in terms of order minimums.

“The prices have gone up because there appears to be no other option,” said Sulav Chowdhury, secretary of the Bangladesh Knitwear Manufacturers and Exporters Association, or BKMEA. “The cost of production has increased — electricity prices have gone up; cotton prices are not steady even for a single day, and then global companies are demanding more compliance issues. If you want quality, the price has to go up.”

He said that prices have gone up by 10 to 20 percent, depending on the negotiating skill of the companies, and some by even 30 percent.

Yet he has confidence that companies will not stop doing business with Bangladesh. “I would like to see the situation from a different perspective. We have been growing at a steady 6 percent GDP, and no other country other than China can match what we are offering,” he contended.

Shafiul Islam Mohiuddin, former president of the Bangladesh Garment Manufacturers and Exporters Association, or BGMEA, believes that it is “not a major crisis.”

“Definitely we are concerned with the political situation in Bangladesh, but we have experienced similar situations in the past. The business community and the politicians are trying to find a consensus,” he said.

He agreed that the issues were complex — for example, that mobility is hampered — but as far as sending cargo is concerned, he said that most companies “have been finding ways around it, for example, escorted by the police department.”

He said compliance diktats from global companies are another issue. “Global companies have to treat Bangladesh as their partner and not to be talked down to.”

The BKMEA’s Chowdhury noted that compliance issues have been improving over the last few years, with an improvement of more than 35 percent. He said that as global companies have imposed stricter and more unyielding demands regarding compliance issues, manufacturers have been mobilizing themselves to find new markets that make them less dependent on the U.S. and Europe.

“Bangladesh is not completely dependent on H&M and Wal-Mart. We are seeing that our markets are not only from Europe and the U.S. Russia, Japan, Malaysia, Ecuador and Argentina are all strong growth markets, and we have been exploring the growth potential from here. As we diversify our markets, a stand by companies such as Wal-Mart will not impact our industry,” said Chowdhury.

He observed that the industry is “gathering its courage.” As export orders from the U.S. appear to decline, especially with Wal-Mart appearing to be more cautious in its orders from Bangladesh, Chowdhury observed that the industry needed to have faith in its own capacity and “should not be that kind of afraid.”

Masud concurred. “People are very scared about the future of the garment industry in Bangladesh. We are very anxious about how things are going to go and are trying to keep the optimism up,” he said.