The new minimum wage and its implications for the industry

by Apparel Resources

23-October-2018  |  10 mins read

minimum wage
Image Courtesy: Apparel Resources

After a long wait, workers employed in Bangladesh’s readymade garment sector have something to cheer about! The country’s wage board after a long-drawn exercise, which witnessed several upheavals with stakeholders proposing diverse range of minimum wage —and even the NGOs and international rights’ bodies joining in to heat up the atmosphere —ultimately decided to fix the new minimum wage, expected to be implemented from December this year.

In 2013, the minimum wage was fixed at Taka 5,300 (US $ 69) per month, which was an increase from Taka 3,000 (US $ 37), adopted in 2010 and now it is Taka 8,000 (US $ 96). Despite worker unions’ demand for Taka 12,020 (US $ 142) and employers’ proposal to seal the deal at Taka 6,360 (US $ 75), the Government felt it feasible to strike a balance between the two and settle for Taka 8,000 (US $ 96) as the new minimum wage. Though a much-needed initiative, a 51 per cent increase in wage rates (over a five-year period), may have some implications upon the industry, considering the current state it is in.

Considered to be a cheap sourcing destination vis-à-vis many of its competitors, buyers made a beeline for Bangladesh, which however, may change considering the changing dynamics now. As per experts, with the current hike, Bangladesh has reportedly surpassed many of its competitors in terms of minimum wages. This increase in wages, which will have a direct bearing on the overall production cost, would have to be borne by someone but who would it be other than the manufacturers? After all, in today’s age of globalisation, buyers would always go for the cheapest sourcing destination as they have to maintain their profitability as well.

Perhaps sensing the same, the apex garment manufacturers’ bodies BGMEA and BKMEA, during the deciding stage of the new minimum wage, had reportedly sought cash/tax incentive from the Government to counter the emerging scenario. At a meeting held between the leaders of the associations, many reportedly claimed that a minimum wage surpassing the amount suggested by the owners’ representative to the wage board would be a threat to the survival of the country’s readymade garment sector. The owners’ representative to the board, Md. Siddiqur Rahman, also the President of the BGMEA, reportedly proposed Taka 6,360 as minimum wage.

“If we saw increase in salary in 2010 and 2013, then increase in salary in 2018 is okay. However, I feel the decision has been taken a bit early and I think it’s due to the upcoming elections, as after a few months, the present Government will not be able to take a decision on this officially. If seen from the workers’ perspective, it’s a good move for the workers and their families. But, if you look at it from another angle, it will impact the FOB prices and exporters will start increasing the same. Many are also preparing to ask up-charges for the delivery. So, it’s a very complicated situation for buyers and buying agent like us. If FOB price increases then other countries will become more competitive in terms of price and buyers might have to move to those countries,” maintained Akhilesh Kumar Singh, Country Manager, Francis Wacziarg Agencies Pvt. Ltd. to Apparel Resources.

Roshan Withanage (Managing Director of CJ International) maintains, “Looking at the increasing cost of living and the welfare of the workers, I have to agree to the salary increase as rationale. But, I feel that this will have an adverse impact on the Bangladesh apparel industry at least in the short run as the unique selling point for the industry so far has been the low-cost factor and not value addition. The consumer on the other hand puts pressure on the retailers to push for compliance and fair wages but they are unwilling to pay a reasonable price for the items they buy. Currently, a cup of coffee in Europe would cost the same as a cheap T-shirt. If we can move from low price being our unique selling point to value addition as in countries like Sri Lanka, then we have a much better chance for a sustainable growth. At the same time, the consumers’ mindset also needs to undergo change when it comes to buying apparel, for this maybe, they should be informed of the value chain. Given the current scenario, at the end of the day, local factories will have to improve their productivity and efficiencies, plus go for automation which would help them to cut down on worker dependence.”

If buyers are worried, apparel manufacturers are a more worried lot!

The newly announced minimum wages for the workers at Taka 8,000 will put up a big challenge for the country’s readymade garment sector, making it tough to remain competitive in the international market, reportedly maintained former BGMEA President, Faruque Hassan, while speaking to the media explaining that prices being stagnant and cost of business going up, would put the sector under tremendous pressure.

“We want to pay our workers more but first of all, we have to remain competitive. If the sector loses its competitiveness, employment generation will be hit hard. Within a few months of the implementation of new wage, its impacts will become evident,” reportedly warned Hassan.

Adds Md. Ehsanuddin Khan, Chief Operating Officer of Sonia & Sweaters Limited, “In assessing whether the new minimum wage of readymade garment workers to be implemented from December of this year has been a rational increase, several factors relevant to the stakeholders need to be taken into serious consideration. At the heart of the issue lie two most important realities, that of the business landscape in which we operate and of the human component that drives the industry. It is a well-known fact that price attractiveness is amongst the foremost reasons for sourcing out of Bangladesh. The global sourcing paradigm, in its evolving form, is constantly forcing to streamline the fashion value-chain, thereby resulting in lower prices and consequentially diminishing margins for manufacturers at large. Though there have been much needed improvements in workplace safety standards over the past few years, it has come at significant expenditure for a majority of the industry participants. In addition to the forecast, increased costs of production attributable to the workers’ wages, the industry must also plan for increase in raw materials and other manufacturing expenditures over the next few years.

From the human component perspective, the grim reality is that the cost of living is becoming increasingly unmanageable for low-income earning groups. For the majority of workers, savings from their earnings are virtually impossible, and that would hold true even with the newly increased minimum wages. The inflationary pressures on daily essentials, coupled with the lack of any structured mechanism whereby workers are provided subsidies for food, housing, healthcare, or children’s education by the Government or the relevant trade bodies has lent momentum to the push for an increase in the minimum wages of this proportion. The immediate business implications of an increase in minimum wages of this proposition would be felt harder by the smaller and medium-sized factories with greater constraints on their financial capabilities. In a market where it is becoming increasingly difficult to negotiate better prices from buyers/customers, the predominant segment of manufacturers still positioned in entry-level mid-market clothing items would definitely struggle in absorbing the incremental wages costs component of manufacturing.”

With increase in overhead costs, raw materials and now the labour wage, there’s no doubt the manufacturers would have to walk the tight rope to balance things out.

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