Friday, January 25, 2013

Nepalese RMG Industry: Reviving the lost glory

From the heights of 1999/2000, when the total RMG export was about NRs 12 billion to the lows of 2011/2012, when the total RMG export was NRs 4.05 billion, Nepalese RMG industry has continuously loosing international market to African and the South Asian manufacturers. One of the major damage was due to the removal of duty-free and quota-free access to its market by the then largest importer of Nepalese RMG – USA in 2004. Add to this, USA gave special preference to RMGs from African nations. 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.
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To sustain, Nepalese RMG industry searched for other markets where it enjoyed preferential treatment. Japan, Canada and the EU market were the places to go. All these markets gave preferential treatment to the garment exports from Nepal. But, 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 very less subject to changes. Also, the EU gives special treatment to Nepal, along with Laos, through the derogation facility – the products needn’t fulfill the stringent criteria of rules of origin in order to get the 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.

But, 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. One of the most important features of the industry is that it can provide the quality preferred by the customers at the lowest prices. Another major advantage is that the customers trust Nepalese manufacturer 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 partner with bigger retail chains and deliver their large orders – running in millions of pieces. But, due to regular load shedding, requirement of large labor force which would give rise to stronger unions flexing their muscle, 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 the 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 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. Also, 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. Also, 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 article is based on the research done by a group (named Kanzen) of MBA 3rd term students of KU School Management, as per the requirements of their course – Global Business Management)

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