Small factories in big troubles

12:00 AM, September 13, 2020 / LAST MODIFIED: 02:34 AM, September 13, 2020
Refayet Ullah Mirdha
Small garment factories in Bangladesh are finding it tough resuming operations following the prolonged Covid-19-induced layoff even though work orders from international buyers are slowly making a comeback, according to industry insiders.

“I finally reopened my factory on August 20 after closing it down in April due to financial constraints,” said Tariqul Islam, managing director of All Weather Fashions.

“I started sub-contracting and now hope to receive direct work orders,” he added.

Attempting to curb the spread of the coronavirus, the government directed all manufacturing plants to run their operations while maintaining social distancing.

Previously, it had brought about a two-month nationwide shutdown, suspending nearly all types of economic activities, public transportation and public gatherings.

These conditions made it difficult for most businesses, particularly small companies, to register a decent turnover, forcing many to shutter their operations due to capital shortages.

Also garment factory owners and trade unions are yet to reach consensus regarding the reopening of some factories. These factories had not cleared dues of workers when they had suspended operations.

The owners are solely for a resumption of operations of those factories while the unions demand that the dues be paid first.

Meanwhile, certain units have not received work orders directly from international retailers or brands due to their poor compliance with regulations.

As a result, most factories which have already resumed operations or are in the process of doing so are relying on bigger units for work orders on a sub-contractual basis.

About 300 small and medium garment factories were closed down due to the coronavirus fallouts, causing a $1 billion loss in the sector’s annual export value while 50,000 workers lost their jobs, according to data from the Bangladesh Garment Manufacturers and Exporters Association (BGMEA).

The Daily Star approached five separate small factory owners for comments but they all refused to elaborate on the matter.

One of them, asking not to be named, said apart from the Covid-19 fallout, the most important factors to consider were the sector’s cash crunch, lack of consistency in incoming work orders, poor prices and “barriers” created by trade unions.

Smaller units, which employ about 500 to 600 workers each, could not avail low interest loans from the government’s stimulus packages owing to their poor transaction records or reputation.

However, banks are gradually taking the risk of allowing certain enterprises to borrow from the fund.

“Most of those factories used to operate on a sub-contractual basis before they were closed,” said Md Rezwan Selim, a BGMEA director who mainly monitors the labour issues and factory closures.

Besides, factories are only denied disbursements from the stimulus packages if they are noncompliant or cannot fulfil the contractual obligations to securing a loan from the Tk 20,000 crore fund, he said.

Many of the factories that closed down are unable to resume operations at this point, said Selim.

Some of these factories are owed money by their international business partners, who usually delay the payments.

Typically, local suppliers sell goods to foreign buyers stipulating that dues must be cleared within a 90-day timeframe as per the letter of credit.

However, importers are now demanding payment deferrals of up to 210 days and abnormal discounts from their suppliers.

As a result, small factory owners are not being paid in a timely manner, leading to a liquidity shortage.

Meanwhile, other factories that do not have strong financial backing have been unable to resume operations as the country’s banks are uninterested in financing them.

The demand for unusual discounts also puts the local suppliers in a tight spot.

For instance, Debenhams, a multinational retailer based in London, asked for a 90 per cent discount on their orders even though the suppliers had previously agreed upon 25 per cent.

Likewise, almost all foreign retailers that source their products from Bangladesh have demanded major discounts.

“Asking for one per cent discount is acceptable but the rates international retailers and brands are demanding are totally absurd,” said Shams Mahmud, president of the Dhaka Chamber of Commerce and Industry (DCCI).

“We normally do business at a very marginal profit and so, if they demand such abnormal discounts, we will die out,” he added.

The price of apparel items has declined over the years while the Covid-19 fallout has only worsened the woes of garment suppliers.

While almost all factories are facing difficulties, those that are truly suffering can survive with the help of banks, Mahmud said.

According to the DCCI president, the demand for huge discounts is troubling the sector, with small and medium enterprises being the biggest victims.

Nazma Akter, president of the Sammilito Garment Sramik Federation, a platform for garment workers, said trade unions had never wanted to bar the reopening of some factories, rather always tried to be helpful towards businesses.

However, many of the factories that had shut down had not paid workers their dues, which is a breach of regulations.

These factories should clear their dues before being allowed to reopen as international retailers and brands have been coming to Bangladesh again with a lot of work orders, Akter told The Daily Star over the phone.

It is not possible for the government to support the factories for a prolonged period, said Ahsan H Mansur, executive director of Policy Research Institute (PRI).

Over the last 10 to 15 years, many factories have been shut down or sold to others for many reasons, such as familial issues and financial challenges.

Similarly, the coronavirus is just another reason why many small factories had to shut down.

And so, consolidation in the sector will come about, Mansur said, adding that genuine sufferers survive through various means, such as by availing help from the government, banks, buyers or suppliers.

The government should help genuine factory owners while sub-contracting factories should not be brought under the VAT net or other tax hassles so that they can grow, he said.

Sub-contracting created a lot of successful entrepreneurs in the country, Mansur added.