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World Bank Study
The different situation with regard to knit and woven fabric mills can be explained by different investment requirements. A knit fabric mill, including a dyeing and finishing unit of a viable minimum economic size, requires an investment of at least US$3.5 million whereas the investment required for a similar factory in woven fabric amounts to at least US$35 million (Ahmed 2009a, World Bank 2005b). The cash incentive granted in 1994 for exports of clothing made from locally produced yarn and fabric encouraged investments in spinning and composite kni ing mills (World Bank 2005b). Other incentives, which encouraged investment in knit mills, included low (subsidized) interest rates and government support in terms of investment in land development, power, and infrastructure. Due to the larger costs of investments in woven mills a similar development did not happen in the woven segment. However, more recently investment in woven textiles has also increased, in particular through FDI and in integrated spinning and weaving mills, but the remaining demand and supply gap is still large. Becoming a competitive yarns and fabrics producer, in particular in the woven segment, is challenging. First, Bangladesh lacks local co on and man-made fiber production. Second, investments in the textile sector are more capital intensive than investments in the clothing sector, in particular in woven. The high cost of finance in Bangladesh is not supportive for such types of investments. Third, investments in the textile sector rely even more on infrastructure than the clothing sector, in particular electricity and water. The electricity-intensity of kni ing and weaving and even more spinning is much higher than that of sewing. Furthermore, fabrics need to be dyed and washed, which requires secure availability of water. The current power crisis is a central constraint for extending the textile sector in Bangladesh (see below). Fourth, some regional countries such as India and Pakistan and even more China are highly competitive in fabrics production with regard to price, quality, lead times, and availability and it will be difficult to match those countries. There are varying perceptions about the competitiveness of the local textile sector but there seem to be challenges in the area of price and quality. Thus, even though lead times and production flexibility would be enhanced by producing yarns and fabrics locally, this may not be the most cost effective means of production. Although these challenges have to be taken seriously, further backward integration, including woven fabrics, will be central to increase competitiveness with regard to lead times, production flexibility, and costs (including transport, port, and customs clearance) as well as to increase domestic value added and local linkages and spillovers. Furthermore, preferential market access to the EU requires two-stage transformations.5 The biggest advantage of local input production is lead times. For individual firms it is too costly to maintain an inventory of fabrics and, more importantly, production needs to be in accordance with the specification of buyers with regard to the type and color of fabrics. Thus, generally fabrics may be only ordered after the buyers have placed the orders, thereby increasing the total production time by several weeks. For knitwear, inputs, including local yarn, are normally available within days either locally or from India. For woven products, the majority of inputs are imported, mostly from China, India, Hong Kong SAR, China, Pakistan, and Thailand. Procurement and delivery from Asian mills outside Bangladesh typically requires three to six weeks (Arnold 2010). This is a crucial difference in a context where time has become increasingly important in buyers’ sourcing decisions. Currently, Bangladesh has long lead times compared to competitor countries. In Bangladesh lead times for clothing products vary on average between 60 to