Published: Tuesday, Mar 28, 2017
Posted : 28 Mar, 2017 00:00:00
Why footwear could be the next RMG
Saeba Ruslana Abedin
Footwear exports are steadily approaching the one billion dollar mark, having rapidly risen to $714 million in the fiscal year (FY), 2015-16. Only export of jute goods ($746 million) and home textiles of the readymade garments (RMG) family ($753 million) match these volumes. But footwear exports are ahead of the others having clocked average growth rates above 20% for the past 10-15 years. The striking similarities between footwear and RMG in respect of their global markets and production structure gives reason and hope that footwear could become our next RMG. So policy attention to this sector is warranted as part of the strategy for export expansion and diversification.
The fact that 90% of its exports are manufactured goods bears testimony to Bangladesh's strength in mass manufacturing and cost competitiveness, though this superior performance is overshadowed by the fact of export concentration in one product group - RMG. With over four million jobs and 80% of export earnings from the RMG sector, too much of the nation's fortune is riding on this one sector. Export concentration in readymade garments makes the economy, jobs and income, extremely vulnerable to external shocks arising from changes in global demand for RMG.
Export diversification has therefore become a national imperative and poses a major policy challenge for the economy. The government has correctly set export diversification as the cornerstone of its export policy for several years now. But progress has not been encouraging so far, as RMG exports continue to grow at a faster pace than non-RMG exports, resulting in even more export concentration. Footwear, a labour-intensive product just like apparels, is one such sector that shows enormous potential given its labour intensity, past export performance, and vast export market globally. The global market (demand) for shoes is estimated to reach US$371 billion by 2020 which has kept pace with demand for apparel and growth of global incomes. Therefore, there is no dearth of global demand for footwear, leather and non-leather varieties. Can we not take a leaf out of the RMG book and transfer the knowledge and experience into the footwear sector?
The apparel and footwear industries are most often considered as two separate industries, however they frequently overlap and global companies most often sell goods in both categories. Their consumer demand profiles are similar, in that both clothing and footwear are basic necessities, but are also discretionary to a certain extent. These industries identify two types of consumers: the practical buyer and the fashion-conscious consumer. On one hand there are apparels and shoes sold in Walmart, Target, Sears, etc. that cater to lower income consumers, and on the other, Bloomingdale, Macy's, etc. that cater to higher income consumers.
During times of economic downturn, consumers are more cautious with spending their money on apparel and footwear, and are most likely to buy lower priced items. Demands for products are also affected by population growth in that demand for apparel and footwear rises along with the number of people. Global demand for both products is stable and rising, unlike other commodity markets (e.g. petroleum, food grains, industrial inputs like copper, iron ore, etc.) which are subject to wide fluctuations. The apparel and footwear industries are highly competitive and fragmented due to low barriers of entry. These days, consumer demand is driving industry trends that affect apparel and footwear manufacturers.
These trends relate to the size of the various demographic groups, their particular wants, shopping patterns, and spending power. Industry trends include shorter cycles, price deflation, offshore sourcing, diversifying to survive, and following the demographics. In order to survive, companies must constantly come up with new designs, new product line extensions, or even new product lines. Markets of both the products are dominated by global brand names, for apparels, H&M, Gap, Levis, Calvin Kline, Carrefour, Uniqlo, etc. and for footwear, Nike, Adidas, Reebok, Puma, Converse, New Balance, etc. Corporate headquarters of all these companies are in the member-countries of the Organisation for Economic Cooperation Development (OECD) countries. They own copyrights, research and innovate designs, manage retailing to consumers, but do not own factories, outsourcing all production to cheap labor countries instead.
The major consumers of apparel and footwear products are in North America, the European Union (EU), East Asia and emerging markets. As a consumer product, footwear is a complement to apparel in a household's consumption basket. Like RMG, footwear had humble beginnings and little or no share in Bangladesh's exports prior to 1990. Though small compared to RMG exports, annual growth rate recorded since FY2001 has averaged over 20%. Bangladesh has huge reserves of labour looking for employment and given the labour-intensive nature of both the products, modest training can produce vast armies of RMG workers as well as footwear workers.
Gaining a small piece of the global markets will open millions of job opportunities for low- and semi-skilled workers. This will be the labour force to employ over the next 10 years or so. An already established RMG sector means that there are dynamic entrepreneurs available who possess the knowledge and experience of export markets and import-export trade. As low investment per factory is required for both footwear and RMG, capital requirements for both can be met from domestic financial/banking system. Duty-free import of raw materials and income tax rebate for export are available for both the industries.
However, the footwear sector unlike the RMG sector has quite a way to go in terms of holding a dominant position in Bangladesh's exports. It therefore makes sense to also look at those differences in production structure and policies between the two industries which can help one understand what needs to be done. From a global context, fashion and design changes are more frequent in apparel industry, compared to footwear. Footwear designing and manufacturing also requires more skills and more innovation. Growing preference for customized and specialized products (e.g. increase in demand for athletic footwear providing increased functionality and lightweight athletic shoes for running & jogging for both women and men) has led manufacturers to invest in research and development (R&D) activities to come up with quality and reliable products.
In the domestic arena, the footwear industry is met by discriminatory fiscal and non-fiscal policies that serve as disincentive for exports. The privileges given to RMG sector can easily be extended to all export sectors, which is not being done. The RMG sector has more voice and lobbying rights than other sectors. RMG was set up as a 100% export-oriented industry where as the footwear industry is also geared towards the domestic market in addition to global market. Special Bonded Warehouses are provided to all RMG firms but selectively to footwear manufacturers and the back-to-back letters of credit (LC) system is only available to RMG firms. Unduly high protection via high tariffs and para-tariffs on footwear imports is accorded to footwear products for domestic sale.
Effective Rates of Protection (ERP) calculations, based on firm level data, reveal domestic effective protection estimates rising up to 250% with protective tariff on shoes at 88.5%, while input tariffs average under 10%. ERP for exports approach zero or are mildly negative (-20% to +20%). This creates substantial anti-export bias, discouraging production for exports, as tariff-induced profitability from domestic sales is so much higher than exports. RMG, being a 100% export-oriented sector, does not suffer from such anti-export bias of incentives. Bangladesh Bank (based on Japanese International Cooperation Agency or, JICA funds) has special financing available at 6.0% for refurbishing/remodeling of RMG factories. Similar facility is not available to other industries. Cash incentives on FOB export for RMG is upto 4.0% to 10% for RMG industry but 15% for the footwear industry. The import duty on fire-safety and fire-fighting equipment ranges from 27% to 60% for the footwear industry but is 1.0% for RMG firms. The cut-off time for shipment of export goods is much higher for the footwear industry compared to the RMG industry.
Foreign direct investment (FDI) in RMG sector outside Export Processing Zones (EPZs) has been kept at bay by a deliberate policy, first through an official ban on such investments (until 20014), and later through de facto policy of Bangladesh Garments Manufacturers & Exporters Association (BGMEA) to discourage such FDI. While such a policy may have had deleterious implications for RMG growth albeit not enough to prevent the industry from becoming a global leader, application of this to the footwear industry will not bode well for the future growth, if it seeks to grow into a multi-billion dollar export industry in the near future. Meanwhile, Vietnam ($15 billion) and Cambodia ($2.0 billion) are vigorously capturing China's share of global markets thanks to large flows of FDI into their footwear sectors. Should Bangladesh be lagging behind?
By all accounts, footwear remains one of the most promising manufacturing sectors in Bangladesh. It is a leading thrust sector under the Industrial Policy of 2010 and the government's Seventh Five Year Plan. In most forward-looking assessments of the Bangladesh economy, the prospects of the footwear sector are recognized, often as potential as RMG, in terms of employment and export growth. Bangladesh's RMG export has been able to flourish due to many of the export-oriented policies provided by the government in order to boost the industry. The same treatment needs to be extended to the footwear industry.
Reforms in discriminatory fiscal and non-fiscal policies need to be carried out. Domestic incentive policies will have to be so balanced that incentive for exports is at least as great if not greater than domestic sales. It is crucial that targeted thrust sectors like footwear have access to low cost credit. These sectors should also be able to invite FDI inflows (EPZ or domestic, without restrictions) to attract capital, achieve technological upgradation, build effective supply chains, develop skills, and open markets and creating jobs. In terms of global challenges, gaining market access in a fiercely competitive global economy takes a lot of strategizing and efficiency enhancements to gain and keep markets.
While the government, particularly the Ministry of Commerce, Ministry of Finance, the Planning Commission, and Ministry of Foreign Affairs have a major role to play in gaining market access, and they have demonstrated their interest and commitment over the years in partnership with the private sector, private entrepreneurs engaged in export trade have a lot do in learning more about the rules of international trade and seizing the opportunities of preferential or multilateral access as they arise, while rising up to the challenge of complying with ever stricter international standards. If these challenges at both the domestic and global level are overcome, there is no stopping the footwear industry from becoming the next RMG.
[The author is a Senior Research Associate at Policy Research Institute (PRI) of Bangladesh and can be reached at email@example.com]