Secret Cuts

I Want To Share A News From www.thedailystar.net About Bangladesh Garment Business Which Disclosed Some Secrets of This RMG Business Sector.

I thing this news will help you to understand the foreign buyer’s behavior.

Secret cuts

Is the garment business jinxed, or is it made to look so?

Fire a few days back, building collapse yesterday and workers’ vandalism over poor wage today. These are the headlines the largest forex earning sector makes, for several years now. Risky buildings can exist only when a government goes into hibernation and risky workplaces when an employer turns covertly criminal. As the government never wakes up to its task, tragedy revisits time and again. Culprit manufacturers enjoy the culture of impunity and workers continue to get killed. This sorry garment story is known to all. But stories that remain unknown are equally ominous, if not more. Syed Ashfaqul Haque with Inam Ahmed exposes the unethical face of leading garment buyers.

A good number of international buyers are raking in fortunes, investing virtually nothing for their orders in Bangladesh.

With a clause of deferred payment in letter of credit (L/C) — the formal loan agreement for a purchase — they are literally fleecing the Bangladesh garment sector and contributing eventually to the misery of the workers.

With such L/Cs, these greed merchants get products shipped out and release payments to manufacturers after months of delay.

This means they virtually get their products on credit and pay manufacturers only after selling those.

The Daily Star has obtained four such L/Cs in one of which payment was disbursed six months after shipment.

With payment being deferred, Bangladeshi manufacturers are actually forced to subsidise the buyers. Garment-makers take loan, free of interest for 90 days, against the L/C in executing orders. So, for the period beyond 90 days, manufacturers have to fork out 15pc interest.

Frustrated, yet manufacturers are ever obliging because they do not want to upset the buyers and stay without work. If shut, a small knit factory with 35 machines loses about $9,000 a day in production and $1,000 in overhead costs. For a small woven factory with 120 machines, the loss goes up to $14,000.

Since victims do not complain, the central bank and garment owners’ association choose to turn a blind eye to this unethical practice.

This newspaper has also gathered how criminalisation of the business has, over the years, gradually been nudging the world’s number-two apparel-maker down the hill.

Order worth a dollar that a buyer places actually does not add up to a dollar. On different pretexts and through underhand dealings, they take back almost 25 cents, leaving the manufacturers to complete the job with the remaining 75 cents.

With these cents, manufacturers buy fabrics and accessories, make clothes, pay establishment costs, ship out clothes, and are expected to pay workers reasonably and make good profit as well.

But profit has been hard to come by for the last few years. The way most of the big international buyers squeeze price off orders in one way or the other can only be dubbed as blatantly criminal, unethical and ruthless.

A Dhaka-based manufacture exports cotton long sleeve tops for a Spanish buyer for decades. The buyer comes back every year with repeat order, lowering the price further. Though manufacturing cost including wages doubled within this span of eight years, the price was pushed down to $2.40 a piece this year from $3.40 in 2005.

At every factory, employers and employees alike rejoice the day when L/C from the buyer arrives. It is almost like an Eid day for all. But little do they cheer about the day when payment arrives from the buyer. More often than not, the balance sheet, upon execution of order, bears the testimony of a huge loss.

Take Momtaz Uddin as our manufacturer and let’s see why his balance sheet turned horrific.

Say, for example, he has shipped out 20,000 shirts within L/C time limit and with quality checked by buyer’s men during production. The $10 a shirt price is only on paper.

The buyer deducted 5pc from L/C for expense of his offshore office in Hong Kong. Some buyers ask for it in cash and some through L/C. Like others, he too has to be party to money laundering. The purpose of an offshore office is unknown.

Still, he considers himself lucky for getting the order directly from the buyer. Had a buying agent gotten between them, he would have lost up to 5pc further.

Momtaz, as asked by the buyer, bought fabrics and accessories from his nominated suppliers. Previously, fabrics and accessories worked as price cushions for him. Through hard negotiation, he used to save at least 25pc, 15 from fabric and 10 from accessories. Now the buyer is scooping the cream off from his suppliers. He curses the buyer but keeps obliging him.

His buyer proudly advertises to his customers that all products are human body friendly. So, Momtaz had to certify the products with chemical and metal test for both fabrics and accessories. The tests were costly, and ate up 2pc.

The buyer has a small front office too in Dhaka for quality inspection at factory and correspondence back to Italy. Head of his Dhaka office discretely made it clear that he did have a share in the pie. And a modest 1pc for him keeps the manufacturer away from any trouble.

There are still more mouths to feed. Momtaz had to win favour of quality controllers and merchandisers from the buyer’s local office.

Cash, gifts and tummy-full of lunch at every visit to the factory did keep his production trouble-free. Along the way, a few thousand dollars went up in the smoke.

So, 33pc was off the price already, and the manufacturer had not started production yet.

There was time a few years back when the L/C was more relaxed. He could get payment within three days after submitting shipping documents with his bank. As the buyer now withholds payment for up to six months now, he takes loan from bank to pay workers and meet other operational costs. Momtaz further counts losses in 15pc interest on the loan.

The misery does not end here.

Once the orders are shipped, the buyers often start complaining that the product standards are not up to the mark (this they do despite the fact that they control quality). Or that business is bad and they cannot sell products.

Now that is a chiller. Because the next thing the buyers will ask for is a discount. Since they cannot sell or the product quality is not good, they will demand a price cut.

With their back against the wall, manufacturers like Momtaz look for ways to cut costs and survive.

They are left with 20pc of the price that is kept for operational and establishment expenses including wages of the workers.

So, cheap clothes and corruption combine to take its toll on workers. They are given poor wages and a cheap, unsafe place to work in.

And disasters start brewing in silence.