Competitive Advantage in the Garment Industry - Essay Example

Competitive Advantage In The Garment Industry It has been ages since we have been hearing everyone say “if it’s cheap, it has to be Chinese”. And this statement is something which is very hard to refute. Having a population which is growing at a stagnant rate means there is plenty of labor force available in the country. And with such excess supply of labor in relation to demand, it’s but obvious that the wage rates for labor would be less than elsewhere in the world. History has shown at the Chinese have been known all over for their low cost of labor and that’s one of the core reasons why many manufacturing companies have setup their offices in China so as to benefit out of this low cost if labor. Anyone who has a slight knowledge of economics would be familiar with the concept of competitive advantage. In very simple terms, competitive advantage can be defined as that benefit which a firm has over its competitors and which allows it to make greater sales and generate greater profits. There can be many factors which allow a firm to have a competitive edge over its competitors, but most of the times such factors are related to low costs of production. Other than that, competitive advantage can be achieved by the product offering of a firm, its customer base and its distribution network. As a matter of fact the more sustainable the competitive advantage a firm possesses, the more likely it is to enjoy a stable position in the market and the more difficult it would become for competitors to compete with such a firm. For years we have known that China is the market leader in cheap made clothes. And that’s the only reason why not only major retailers from around the world, but also brands like Wal-Mart etc. set up their production facilities there so as to avail the low cost benefit. Talking in economic terms, China has a competitive advantage in the production of clothes owing to the cheap labor force in the country. However the recent years have witnessed many Chinese and worldwide clothing moving out of the country and into Bangladesh for the production of clothing goods. A textile producer in Bangladesh was quoted as saying that a few years back, only five percent of his factory’s output was for the Chinese markets. However in recent times, this figure has gone up to as much as twenty percent and analysts have forecasted that in the coming five years, the exports of Bangladeshi ready-made clothes to China would reach a figure of around five hundred million dollars. The question that now comes in mind is that what is it that has caused so many textile firms to move away from China and into Bangladesh. It is obvious that the shift has resulted as China has lost its competitive edge to Bangladesh. In the recent years, the labor costs in China have been rising steadily. This increase came about as a lot of workers were demanded by the flourishing textile industry of China, and with highly paid orders coming in, the Chinese factory owners didn’t mind passing on some of the benefit to the laborers in terms of handsome wages. Also, state laws and fierce international pressure meant that the workers could no longer be made to work at lower rates like in the past, or action would be taken against them which could be as severe as cancellation of their export and trading licenses. Statistics have shown that on average, the Chinese textile firms pay from four hundred to five hundred dollars per month to each employee. On the contrary, the labor cost in Bangladesh is way cheaper at just around seventy to a hundred dollars per month. With such huge difference in prices, it’s but obvious that the competitive advantage has now shifted in favor on Bangladesh as far as labor costs are concerned. And labor costs are amongst the most prominent costs in the production of textile related goods, thereby giving Bangladesh an overall completive advantage in the production of such goods. What has happened in recent years is that many of the Chinese firms themselves have opened up their factories in Bangladesh so as to avail the benefit of low costs of production and increase their profit margins. According to a survey carried out, the Chinese manufacturers of textiles have agreed the sourcing in clothes from the South Asian country Bangladesh can lead to the retail prices of clothes going down to as much as fifteen percent. But it is not only the low cost of labor that has given Bangladesh a competitive advantage in production of garments. Another advantage enjoyed by the exporters of garments from the country into China is that approximately ninety percent of their products, including items like shirts, jeans, trousers and sweat shirts have been allowed a duty free entry into the Mainland Chinese market. What this regulation does is that it literally puts the Bangladeshi and Chinese producers of garments on equal footing, where only the strongest shall survive. And it’s but obvious that the strongest in this case would be the one who is able to provide good quality goods at a cheaper cost. The principles of competitive advantage have stated that a country shall be able to benefit from its resources as long as it holds on to the factors which give it a sustainable competitive advantage over its rivals. And in the case of textiles, the benefit has clearly shifted from China to Bangladesh as the country is able to produce not only goods at a much cheaper rate, but is also allowed free access to export its goods into the country without having to pay any duties or taxes. And the results of this shift have been quiet obvious. Many worldwide garment retailers have now also set up their production units in Bangladesh and are enjoying low cost production of their goods. And what is interesting here is that not only normal clothing brands, but also high street brands of the likes of Ocean and H&M have moved into Bangladesh to enjoy the price benefit (BBC NEWS, 2012). But what goes up also goes down. China ruled the world market in garment exports until recently when it lost its position to the low cost Bangladeshi factories. But is it possible that Bangladesh would have to face what China went through in terms of losing its position as the top exporter and producer of garments? The answer to this a quiet complicated one. The current factor which has given Bangladesh a significant advantage over China is its labor prices, which are roughly one fourth of those in the Chinese market. However, there have been protests in the recent months by labor activist groups who have pressed for better working conditions and an increase in the wage rates. Research has also proven that the wages paid out to the Bangladeshi labor involved in garment production is amongst the lowest paid to laborers all over the world working in the garment sector. It should be understood here that Bangladesh only possesses a competitive advantage owing to its low cost of labor, which if increases, could cause its competitive position to be lost to some other country who is then able to more cheap labor. The garment factory owners in Bangladesh have been resisting the demands of wage increases from the worker rights groups and have been trying to explain them the situation at hand. It must be accepted here that even though they have increased the wages a bit to reflect that the firms care for labor rights, these raises have not been significant ones. The factory owners have tried explaining the labors that the only reason the garment industry in Bangladesh is at a boom is because they have been able to provide cheap prices owing to the low cost of labor and if they further increase the labor prices, they would lose their competitiveness, and hence some major contracts. And this would only mean that the demand for Bangladeshi garments would go down, thereby causing unemployment in the garment sector in the near future. But to retain this competitive advantage is not that an easy job as it seems on the face of it. There has been significant pressure from major global players in the garment market to provide for better wage rates and significantly much better working conditions for the work force. And some of them have also made it clear that if the situation at hand would not be handled properly, they might as well resort to cancelling their orders and giving them to firms who pay heed to the labor conditions. But it needs to be made clear here that as the country progresses to become one of the major suppliers of low cost readymade garments, it will face more and more pressure from the international players and it will have to tackle them smartly so as to not only retain its competiveness, but also grab more contracts in the coming period of time. However if Bangladesh wants to retain its competitive advantage in the field of ready-made garments, there is another very interesting factor that it will have to bear in mind. And that is of the political situation of the country. Bangladesh hasn’t been a country which has a stable political situation at hand, and this is a serious point of concern of concern for the investors. It is a known fact that investors usually tend to invest in countries where the political situation is not good as they never know what’s going to happen to their investments if the current government goes down. On the other hand, the Chinese government has been a fairly stable one and has been successfully been able to attract investments from all nook and corners of the world. This is because people know that their investments in the country won’t just go wasted. This is one significant factor that gives China an edge over the Bangladesh. To sum it all up, having and maintaining a competitive advantage is not just about controlling one, but many factors at the same point of time. Even though the lower costs of labor have given Bangladesh a competitive advantage in the garment making industry, their political situation is something which might damage all the benefit sowed without it having reaped any significant results. If Bangladesh wants to retain its current position as a garments producer and exporter, it would have to obtain a balanced mixed between low labor costs, a competitive political situation and worker rights groups. On the other hand if China wants to regain its position as the top garment manufacturer, it would have not one, but a couple of serious issues to handle. The most important of them would be how to bring down the rising labor costs within the country, which initially led the country to lose its position as a top producer. But this would not be that easy for China as it feels like it. China has already been blamed a million times for ill treatment of laborers along with really low wage rates and that’s the only reason the wage rates of the country were increased. For the country to again cut down on the labor rates would only mean increased agitation from workers and fierce uproar from the labor activist groups. To sum it up, the concept of competitive advantage is something that countries on macro a basis, and industrial sectors on a micro basis need to keep in mind if they want to thrive well in the industry and retain the position as a market leader. References BBC News (2012) Chinese factories turn to Bangladesh. [online] Available at: http://www.bbc.co.uk/news/business-19394405 [Accessed: 30 Mar 2013]. Read More