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More price rises ahead as Bangladesh riots continue

High street retailers including H&M and Marks & Spencer could face longer lead times and further price hikes as riots over pay threaten to cause more factory closures in Bangladesh.

Rioting in the capital Dhaka and impending wage rises are putting pressure on retailers to spread their production more widely to offset delays and production cost rises.

All factories in Ashulia, a textile manufacturing zone on the outskirts of Dhaka, were forced to close for a day last week as workers staged violent protests over the minimum wage rate, which at 1,662 taka (£15.93) a month is one of the lowest in Asia.

They only reopened under police protection but retailers played down the impact of the disruption.

A H&M spokeswoman said: “Some of our suppliers were affected by the unrest in the Ashulia region, [but] as far as we know the production of garments for H&M has not been affected.”

An M&S spokesman said three of the 39 factories it sources from in Bangladesh were affected but added: “As the factories were only closed for a short time we do not expect it to effect our supply.”

However, supply chain experts have warned that riots could continue for months. Michael

Flanagan, chief executive of clothing sourcing consultancy Clothesource, said: “The violence is not going to go away for a long time, so garment buyers have to factor that in and add significant lead times of at least two weeks to the manufacturing process.”

Value retailers and supermarkets would likely be worst hit by further riots because the majority of garments produced in Bangladesh are low-cost, high-volume styles.

“Rioting over pay has been going on since April when Bangladeshi ministers promised workers that the minimum wage would be trebled by the end of July,” said Flanagan. “It won’t be possible to implement this rise across more than 4,000 factories within a month.”

Bangladesh is also suffering an oil and gas crisis that has forced the closure of some factories and is currently understood to be causing a 20% loss in capacity, which could push prices up further as demand exceeds supply.

The country has been one of the fastest-growing zones of production over the past two years, as retailers moved manufacturing there when other Asian countries, particularly southern China, became more expensive.

“A similar wage battle took place in China and pay went up about 30% this year,” said Grant Liddell, key account development director at logistics company Uniserve. “A lot of retailers moved to Bangladesh but the problem has followed them.”

With wage increases and further factory closures looking likely in Bangladesh, retailers are faced with limited low-cost alternatives and are being forced to diversify production more widely across Asia.

“Lots of retailers are desperate to get out of China but there are problems in every country,” added Liddell. “There is a move to new areas such as Cambodia and Laos but these are not mature markets so retailers are spreading the risk rather than moving all their production there.”

Continued rioting in Bangladesh has caused some retailers to put the brakes on plans to shift further production there from Sri Lanka ahead of the reimplementation of a duty on exports from the country on August 15.

Michael Wolff, managing director of high street supplier Fielding Group, said: “Lots of retailers were poised to move production in Bangladesh to compensate but now they can’t so they are panicking. They are running out of reliable options. They have to develop a long-term policy with several irons in the fire across at least half a dozen Asian countries.”

While labour costs look set to rise in Bangladesh sooner than in other Asian countries, supply chain experts agree there is no obvious alternative for retailers looking for a cheap option.

In China, wages have risen and capacity has fallen as domestic demand squeezes exports. There have also been labour shortages caused in part by workers not returning to the country after the Chinese New Year holidays, which Liddell said caused “eight-week backlogs in some factories”.

There are also barriers to producing in India, which has seen a shortage in warehouse space and upward evaluation of the rupee, and Thailand, where there were delays following the closure of air and sea ports due to political unrest.

While European retailers continue to shift production to escape rising labour costs, those same retailers are in part responsible for driving costs up by lobbying Asian governments for fair rates of pay and working conditions to ensure they meet UK companies’ ethical policies.

Retailers including H&M and Tesco signed a letter last year to lobby the Bangladesh Government over minimum wage increases.

“European retailers can’t have it both ways,” said Wolff. “They’re stoking the fire by demanding ethical sourcing from their supply chains but refusing to pay the higher prices that come with it.”

Retailers determined to pay a fair wage have the option of implementing their own pay structures for the factories from which they source.

Dan Rees, director of the Ethical Trading Initiative, said: “We have supported our member companies sourcing from Bangladesh to lobby the Government on several occasions to raise wages. Several member companies have also started to develop ground-breaking projects in selected factories that are resulting in higher wages and increased productivity.”

New Look has been working with its factories in Bangladesh on projects to increase pay and improve conditions since 2006. A spokeswoman said: “We started working with our largest Bangladesh supplier and achieved a 40% increase in take-home pay, from 2,626 taka (£25.07) to 3,682 taka (£35.16) for the lowest paid workers.”

A spokesman for M&S added: “We are in the process of rolling out our Ethical Model Factories progra-mme, which has proven wages can be raised in Bangladesh by educating workers and better management practices.”

The threat of labour cost rises in Bangladesh became even more pertinent last week as UK retailers were given confirmation of a VAT rise to 20% in the Chancellor’s emergency Budget, presenting them with the choice of raising prices from January 4 or taking a hit on margins, which chains including Asda and Hobbs said they intended to do.

But regardless of retailers’decisions on VAT rises, an increase in cost to consumers appears inevitable. The price of raw materials including cotton, leather and metal components continue to rocket, freight costs are rising as demand continues and backlogs build up and a weak sterling makes exchange rates poor for the majority of retailers who buy in dollars - all of which leaves retailers with even less room for manoeuvre on labour costs.

Monthly wage rates

Bangladesh 1,662 taka (£15.93)

China 687 yuan (£67.53)

India 4,238 rupees (£61.28)

Indonesia 972,604 rupiah (£71.73)

Sri Lanka 5,046 rupees (£29.67)

Thailand 4,368 baht (£90.06)

 

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