Kh. Asadul Islam is the Managing Director and CEO of City Brokerage Limited, a wholly-owned subsidiary of The City Bank Limited. Prior to his appointment as Managing Director and CEO, he held the position of Executive Vice President and Head of Brokerage of the The City Bank since July 2009. Mr. Islam was former CEO of IDLC Securities Limited and played a key role in setting up the company. He began his career with Premium Securities Limited and later moving to the renowned multinational investment bank Peregrine Capital Ltd followed by a shift to the Union Capital Limited. In 2002, he became the Director of SES Company Limited a wholly owned subsidiary of UCL. In his 16 years of work experience in Bangladesh capital market, Mr Islam carries the ability to support, encourage and motivate colleagues and investors as well as an excellent track record at generating new business and also managing high profile client relationships. Mr Islam has participated in numerous seminars and training programs related to the operations and development of the capital market at both national and international level.
Emerging Frontiers: Bangladesh is fast becoming an investment destination for garment and textile manufacturers relocating from China to take advantage of less expensive labour. How many garment factories are currently operating in Bangladesh and what is the government doing, if anything, to encourage factories to relocate to Bangladesh as opposed to either Viet Nam or Cambodia?
Kh. Asadul Islam Ripon: The garments industry is the heritage of Bangladesh for over 400 years, and currently we are the second largest garment exporter after China. Bangladesh exported apparel items worth more than USD 20 billion in FY 12-13.The sector employs about five million workers and over 80% of them are women. Bangladesh garment and textile industry has come across a long way. It was not only for `cheap labour’ or even `China plus one’. Entrepreneurship, work ethics, diversity, capacity, heritage, and policy support played a major role to get us over here. Now we design and produce for the leading brands and retailers, around the globe. This rapidly growing sector of the Bangladeshi economy offers a unique competitive edge that supports profitable expansion into new strategic markets.
The growing trend in the textile and the garments sector means that Bangladesh is perfectly positioned to appeal to foreign investors. Enormous opportunities exist in the sector for investment in exclusive economic zones called EPZ-Export Processing Zone. The list of incentives include, 10 years tax holiday; duty free import of raw materials, construction materials, machineries, office equipment & spare parts; repatriation of royalty, technical and consultancy fees; 100% foreign ownership is permissible; full repatriation of capital & dividend; foreign currency loan from abroad under direct automatic route.
In the RMG industry demand for fabric significantly exceeds local supply and so is currently being met by imports. Backward linkage is a significant trading opportunity and is supported by a government backed incentive: 15% cash subsidy of the fabric cost to exporters sourcing fabrics locally. Additionally the government has created a highly favorable policy framework for investment in these sectors through establishment of new factories, offering investors the following choices:
• Establishment of new textile/RMG mill in the private sector
• Joint ventures with the existing textile/RMG mill
• Acquisition of public sector textile mills that are being privatised
• Indirect investment through financial services and/or leasing
The most beneficial public policy of introducing back-to-back LC* and bonded warehouse facilities provide a tremendous impetus to the export scenario in Bangladesh.
Emerging Frontiers: Currently, minimum wage for garment workers is $38 per month. In Cambodia this number is $75. What are conditions like for workers surviving on $38 per month and do you see demands from workers who want a rise in minimum wage to compensate for a costlier city life as well as the more than 7.0% annual inflation rate?
Kh. Asadul Islam Ripon: The minimum wage of the RMG sector of Bangladesh is now in the process for revision under the guidance of the ‘Minimum Wage Board’. The discussion and negotiation on the minimum wage is taking place at a time when the RMG sector is in the spotlight at both local and global levels. It is worth mentioning that the Wage Board on garments in Bangladesh nearly doubled minimum wages on July 29, 2010. The minimum wage at the entry level was previously raised to BDT 3,000 a month (or about USD 38) from BDT 1,662.50 (USD 22), which became effective from November 1, 2010. Within the existing seven grades, the highest pay is fixed at BDT 9,300 (USD 119.23) per month.
Under the economic circumstances, I expect the new average nominal wage to range between BDT 5,800 to BDT 6,000 per month. Given the 5 million workers in the industry, the increase in average nominal wage from BDT 3,000 per month to BDT 6,000 per month would lead to a maximum increase in the annual wage bill of the industry by about BDT 100 billion (equivalent to about USD 1.28 billion). This is the maximum possible increase because the initial average wage of BDT 3,000 per month is based on the assumption that workers were paid the minimum wage in each grade, which generally might not be true. This maximum possible increase constitutes 5.84% of total FY13 garment exports. Data on average profit margin in the garment industry as a whole is not available. Guesstimates are that it is unlikely to be more than 8 to 10 percent of the value of exports. In the absence of any price increase from the buyers, the contemplated wage increase is therefore likely to hit profits significantly in Bangladesh’s garment and textile industry.
Just out of curiosity, I did a sensitivity analysis on the cost and pricing of apparels exported from Bangladesh and the results were fascinating. I found out that the per unit price dropped from USD 3.30 in 2001 to currently USD 2.23. Now if just 10 cents are added back to each piece of garments it will add up approximately USD 1 billion, which will ensure the new expected wage rate and a standard life for each and every labor in the industry. Adding up another 10 cents would improve safety standards by over 80% for 5 million people who stitched the cloth you are wearing right now. Add in another 10 cents and you just ensured environment friendly factory with effluent water treatment plants for a country of 160 million. Yes 30 cents makes a better world, and now it is time to question on who is responsible?
Having worked on the profitability it is also true that though the profitability would be hurt the competence would not. The reason is because, even at the expected new wage levels we will remain at par with Cambodia, over 68% lower than Vietnam, India, Pakistan, and over 200% lower than China. In addition the expected new wage rate will fulfill both (employer & labor) ends as the food inflation which constitutes over 60% of CPI is expected to remain low for another 4-5 years, as the country is self sufficient in prime food basket, and on the background of economic and export growth (nominal) rates of over 14%, will geometrically increase value on investors end.
Emerging Frontiers: Bangladesh is unique for a frontier market in that most of the pharmaceuticals it consumes are produced domestically. In fact, one of the most well-known, Beximco (also traded on AIM in London) is currently exporting pharmaceuticals to the EU. How important is the pharmaceutical industry to Bangladesh and what is being done to ensure generic pharmaceuticals become a pillar of the export market?
Kh. Asadul Islam Ripon: The pharmaceutical sector of Bangladesh, which is widely regarded as a “hi-tech” industry, as it is the most developed among the manufacturing industries in Bangladesh. Roughly 250 companies are operating in the market. According to IMS, a US-based market research firm, the retail market size is estimated to be around USD 1.40 billion, with double-digit growths over the last one-decade. The local market constitutes over 95% of the total sales, which happens to represents less than 1% of GDP as healthcare expenditures. With the backdrop of rising middle class and increased purchasing power, in addition to the increased awareness of healthcare and the government’s increased expenditure in this sector we expect healthcare expenditures to hover around 3%-4% of the GDP by 2021. Therefore the local demand will result in a CAGR of over 25% for another one decade. In addition to the local demand of generic drugs, the demand for value drugs on global arena is also on rise. A handful few number of local producers already is part of the global accreditations such as MHRA (UK), FDA (USA), TGA (Australia), GCC (Gulf Nations), ANVISA (Brazil), etc.
Given the fact that Bangladesh as an LDC is exempted from patent rights on life-saving drugs as per TRIPS agreement till 2016, this country will soon become a major global source of low-cost generic medicines and vaccines. Most of the local companies are capable of meeting part of the global demand as they have excess capacity, thanks to heavy investment by local companies in the last few years. Bangladesh’s pharmaceutical exports last year — to 83 countries in Europe, Asia, Africa and Latin America — stood at approximately USD 70 million. Bangladesh is capable of producing high-quality products as the industry employs state-of-the-art manufacturing facilities, sophisticated quality control equipment and highly skilled human resources. Over the last three years USD 700 million was invested in the sector, while another USD 1.3 billion expected in the next three years. Around 80 percent of the world’s population consumes generic products, with India and China being the major suppliers. The industry leader aims to capture 10 percent of the global generic medicine market, which currently stands at USD 180 billion. So we perceive a great opportunity for Bangladesh to be the next pharmaceutical hub in the world market.
Originally published in EmergingFrontiers: Investment news and analysis from emerging and frontier markets: THE REAL STORY OF BANGLADESH | BANGLADESH – Audacity of Hope