From the heights of 1999/2000, when the total Ready Made Garment (RMG) export was about NRs 12 billion, to the lows of 2011/2012, when it was a mere NRs 4.05 billion, Nepali RMG industry has been continuously losing international markets to African and South Asian manufacturers.
The history of a formal garment industry in Nepal dates back to late 1970s. By late 1990s, the garment industry had flourished to gain new heights. The industry recorded significant growth and became one of the major export industries of Nepal, garnering the largest portion of foreign exchange earnings and providing employment to about 76,000 people directly or indirectly. The garment industry also greatly benefitted from the Multi-Fiber Arrangement (MFA) that governed the world trade in textiles and garments, whereby duty free quotas were allocated on the amount developing countries could export to developed countries.
The quota of garment products allocated to Nepal played a significant role for the unprecedented growth of the country’s garment industry, and many entrepreneurs ventured into this field and focused on enhancing their capacity to respond to global demand. However, the export market was concentrated in the United States. The trouble for garment industry started with USA’s adoption of the Trade and Development Act, 2000, which had a provision to give full tariff rebates to garment products coming from least developed African and Caribbean countries, given that they are WTO members.
Furthermore, the garment industry was the only major manufacturing industry that was not subject to the rules of the General Agreement on Tariffs and Trade (GATT). However, the Uruguay Round of WTO meeting decided to phase out the MFA quotas, with the quota system expiring on January 2005. The phase-wise dismantling of MFA meant that Nepal would lose its competitive position in the garment and textile sector, since this labor intensive industry’s output price depended heavily on the availability of cheap labor which was abundantly found in Bangladesh, India, and China.
Studies showed that Nepal’s cost of production is 9 to 20 percent higher than that of other South Asian countries, and Nepali garment workers produce around 120 pieces per day, whereas workers of Bangladesh and Vietnam produce 190 and 250 pieces per day respectively, as of 2010/2011. The resultant impact was the decline in export volume. Out of the 1,067 registered companies operating in 1995, only 25 were operating by the end of 2005. The exports of RMG from Nepal declined sharply during this period, i.e. NRs 12 billion in 2002/2003 to NRs 6.7 billion in 2004/2005, with almost all the decline in the US market.
To sustain, Nepali RMG industry searched for other markets where it enjoyed preferential treatment. Japan, Canada and the EU markets were the places to go. All these markets gave preferential treatment to the garment exports from Nepal. However, the industry must be cautious in terms of serving these markets. Japan and Canada could be just another USA. On the other hand, EU policies are quite resistant to changes. In addition, the EU gives special treatment to Nepal, along with Laos, through the derogation facility—the products need not fulfill the stringent criteria of rules of origin in order to get duty-free access to the market. Another advantage of putting a lot of effort in this market is the sheer size of it—population of over 500 million.
Nevertheless, the industry should take the treatment as only the stepping-stone to these markets. In order to sustain and grow in the market, the industry has to build its core competency and build its competitiveness as soon as possible. To expand in the new market, information collection on the market demand is necessary. Another key point in the successful entry and sustenance is the establishment of efficient supply chain management, starting from timely and consistent quality raw material to cost effective delivery systems in collaboration with other producers.
One of the most important features of this industry is that it can provide the quality preferred by the customers at the lowest prices. Another major advantage is that the customers trust Nepali manufacturers over their South Asian counterparts due to past experiences.
In order to make an impact in the European market, the RMG industry has to be able to collaborate with bigger retail chains and deliver their large orders—running to millions of pieces.
A key point in the successful entry and sustenance of RMG is an efficient supply chain management.
But due to regular load-shedding, requirement of large labor force which would give rise to stronger unions flexing their muscles, irregular raw material supply, and no standards on quality of end products, which result in rejection of orders after they are shipped to the markets, the garment producers haven’t been able to accept and deliver large orders.
Strengthening the existing association—Garment Association of Nepal (GAN) in order to share risks and opportunities among members should be able to solve the issues. GAN should act as a virtual company with the members acting as its satellite plants. The volume of raw material from the suppliers would be massive if the members acquired from GAN, which in turn would be purchased from the suppliers. This would increase the bargaining power of the purchasers and thus the timely delivery of materials with consistent quality would be possible.
In addition, taking huge orders from the European retailers would be possible, with GAN dividing the orders among the members as per their competency. Developing quality standards for the products and the production process by the association would remove the possibility of the customers rejecting the orders after they have reached Europe. In addition, collaborative shipping would be possible. Huge volume of shipments would also mean lower costs via the concept of economies of scale.
These activities would sharpen the core competency of the industry, i.e. to provide quality at lowest prices. This will not just enable the industry to sustain in the European market, but also grow there and in other markets, reviving the lost glory of the industry.
The authors are MBA students at KUSOM