4 years ago

Restoring snapped supply chains: Diversification or nationalisation?

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An emergent million-dollar Covid-19 question: should the supply chains snapped by the outbreak, lockdowns, and quarantines be restored or replaced, given the climbing breakdown costs? With its dominant ready-made garment (RMG) sector facing this plight head-on, Bangladesh faces this dilemma in its most pernicious form, starkly boiling down to whether its RMG-dominant economy must continue downgrading and diversify, if only to cut future costs. As the much-touted but scarcely-prioritised diversification option promises economic restructuring, must Bangladesh seize this Covid-19-driven opportunity? Diversification could be merely lip service or a second-string (backup) option, but restructuring extant industrial infrastructures during the Covid-19 outbreak, dampens costs than under a routine business climate.

How China unleashed its massive low-waged labour pool from the 1980s helped global supply chains to grow massively. Whether it was with the electronics, pharmaceuticals, or metals industry, or consumer and industrial products, China transformed from a backward country into a global economic powerhouse through supply chains, now facing vulnerability from Covid-19-driven supply chain production migration. By specifying China's three facilitative factors, Willy Shah proposes strategies to copycat countries ("Is it time to rethink globalised supply chains?" MIT Sloan Management Review, March 19, 2020): tradability (lowering transportation costs and locating markets within the product's perishable life); sub-contracting (company's 'fanning out' capacity, that is, expanding supplier-tiers); and surviving 'black swans' (in this century alone, a string from the 2002 severe acute respiratory syndrome outbreak, to the Great Recession, China's export quotas, Japan's earthquake and tsunami, Thailand's flowing, and China-US tariff war), all before this Covid-19 outbreak. That ambitious, imperative track awaits Bangladesh. 

How might Bangladesh's RMG sector fare? Given 'risks' and 'vulnerabilities', Shah identifies three dimensions worth cultivating:  regionalisation capacities (for import commodity diversification); supplier diversification; and rethinking scale and product mixes (in essence, creating product-specific manufactures for global consumers).

Taking Bangladesh's RMG sector as a test case, the key supply chain commodity becomes cotton, the economic backbone of RMG export. With China as a major Covid-19 springboard, China's cotton supplies and production closures squeezed Bangladesh's factory production. Opportunity cost considerations demand expanding lesser sources, such as from Central Asia, India, and Pakistan. As China begins recovering, our export markets across West Europe and the United States have begun closing, as the pandemic leaps from Asia's eastern shores towards the northern Atlantic zones. That also cripples Bangladesh's bread-and-butter industry, demanding an expeditious Plan B.

In other words, single-country input dependence, as is growing with China's cotton, and possibilities of RMG export-destination countries automating low-waged RMG import dependence (upon countries like Bangladesh) to promote their own restructuring plans, look too ominous for Bangladesh to not do anything.

Bangladesh's RMG plight typifies the threat other industries and other countries face. Restructuring appeals to them too. Based upon Shah's prescription, three options emerge: (a) returning to the status quo, (b) nationalising production input industries, or (c) diversifying industries. To return to the status quo means we will have forgone the opportunity to learn, whatever the costs or benefits; but it will be the least-costly option since industrial infrastructures (or contents) with little expected change. Businesses prefer quick profits, and the BGMEA (Bangladesh Garment Manufacturers and Exporters Association) clout can thwart any sudden shift from the status quo. Besides, since the Covid-19 aftermath will be costly and time-consuming, the appetite to change productive contents and infrastructures will be weak. But it will be instantly rewarded, given the shortening inter-pandemic duration in this century (see the March 31 Scopus piece), meaning, given the multiple viral outbreaks already, many more will quickly come.

The second option of nationalising input production may become more globally viable if the Covid-19 aftermath becomes prolonged. For Bangladesh, it promotes domestic cotton production, if necessary amending soil conditions, although the bottom line remains the paucity of land available to even make this option viable. Bangladesh cannot tiptoe a nationalistic industrial line elsewhere. Just to strengthen non-nationalistic pathways, Bangladesh may have to campaign for them globally, itself necessitating opening other extant nationalised sectors to the private sectors. This will be costly, directly and indirectly, but more beneficial than nationalism.

A better option is the third: diversify industries. We have even taken the first steps, in fits and starts. For example, our low-wage labour pool is beginning to attract higher-valued ICT (information and communications technologies) products and serving in ICT service sector businesses (such as call operators); and even the more controversial environment-scavenging shipbuilding yards have begun alluring foreign contracts, based on our low-wage labour. In other words, we have cokes in the diversification fire that can be revved up. Yet, these have no RMG connections, and clearly not alternatives to that industry. Exiting the RMG business need not even happen, since Bangladesh holds a very competitive RMG position for at least a decade or so more (for ensuring a smooth transition), holding other factors constant.

Do we ditch it now and move up the value chain in order to claim a developed country identity?  With nationalising input industries being the least attraction option, diversification cannot be avoided, not necessarily through RMG doors, but just as long as business-as-usual remaining economically feasible. The post-Covid-19 challenge becomes (a) push RMG diversification through automation, the sooner, since profitability remains; and (b) initiate restructuring before it is too late: free a large part of the 4.0 million RMG workers for climbing the value chain by shifting to a larger ICT workforce with ample training costs borne by the government. Introducing robots and other forms of artificial intelligence (AI) would fill in for the workers, in both RMG and non-RMG sectors, our RMG diversification attention could shift from industry-level changes to supplier multiplication, as aforementioned.

How long the expected recession will last will probably determine how industry will respond between returning to the status quo, turning to nationalised production, or diversifying: the longer it is, the more restructuration becomes feasible, enhancing diversification; but the shorter the crisis, status-quo retention becomes automatic. According to think-tank Trivium China (Gordon Watts, "China's economy rushed into intensive care," Asia Times, March 30, 2020), if businesses return to normalcy by the end of June 2020, global GDP (gross domestic product) growth is likely to be reduced to only 2.9 per cent (given the 20 per cent contraction at the end of March 2020); if only 90 per cent of normalcy is attained, the growth rate will be pulled down to 1.0 per cent; and if it is 80 per cent of normalcy, then GDP growth will become negative (-3.6 per cent). Should the third-quarter end with only 80 per cent of normalcy attained (by September end, that is, the GDP growth-rate will collapse to -7.4 per cent,

A lot is at stake; and 2020 carries potent seeds of change.  With supply chain at crossroads, either Bangladesh becomes more efficient globally by restructuring, or fades behind protectionist policies and old, increasingly costly industries.

Dr. Imtiaz A. Hussain is Dean (Acting), School of Liberal Arts and Social Sciences (SLASS) and Head, Global Studies & Governance Program Independent University, Bangladesh

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