write a case analysis on the attached case

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Charles W. L. Hill

Case - Disaster in Bangladesh: The collapse of the Rana Plaza building pp. 151-153

Charles W. L. Hill, (2014) International Business, Berkshire:

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) Cases 151

isaster in Bangladesh: The Collapse of the ana Plaza Building

On the morning of Wednesday April 24, 2013, an eight- story industrial and commercial building in Bangladesh collapsed, killing over 1,100 people, most of them work- ers in one of the five garment factories that occupied six floors of the building. This was not the first high-profile accident in the Bangladesh garment industry. The prior November, a factory fire had killed 112 garment work- ers. Just days after the building collapse, a fire in another garment factory killed eight people. The spat of acci- dents led to calls for Western clothing retailers to do more to improve working conditions and safety in Ban- gladesh and other poor nations from which they source production. Some interest groups went further, arguing that Western companies should refuse to source produc- tion from countries where working conditions were so bad. One high-profile Western company, Walt Disney, had already made this decision. In March 2013, Disney removed Bangladesh from the list of countries where it authorized partners to produce clothing and other mer- chandise for Disney. Politicians in Bangladesh responded to the Disney announcement with dismay. They argued that the economy of Bangladesh was very dependent on the garment industry and that "the whole nation should not be made to suffer" because of these accidents.

THE GARMENT INDUSTRY IN BANGLADESH Bangladesh, one of the world's poorest countries, has long depended heavily on exports of textile products to generate income, employment, and economic growth. Most of these exports are low-cost finished garments sold to a wide range of retailers in the West, such as Walmart, The Gap, H&M, and Zara. For decades, Bangladesh was able to take advantage of a quota sys- tem for textile exports that gave it, and other poor coun- tries, preferential access to rich markets such as the United States and the European Union. On January 1, 2005, that system was scrapped in favor of one that was based on free trade principles. From 2005 on, · exporters in Bangladesh would have to compete for business against producers from other nations such as China and Indonesia. Many analysts foresaw the quick collapse of Bangladesh's textile industry. They pre- dicted a sharp jump in unemployment, a decline in the country's balance of payments accounts, and a negative impact on economic growth.

The collapse didn't happen. Bangladesh's exports of textiles continued to grow, even as the rest of the world plunged into an economic crisis in 2008. Bangladesh's exports of garments rose to around $20 billion in 2012,

up from $8.9 billion in 2006, making it the largest export industry in the country and a primary driver of economic growth. By 2012 the textile industry in Bangladesh com- prised some 5,000 factories which were the source of em- ployment for 3 million people, 85 percent of whom were women with few alternative employment opportunities.

As a deep economic recession took hold in developed nations during 2008-2009, big importers such as Walmart increased their purchases of low-cost garments from Bangladesh to better serve their customers, who were looking for low prices. Li & Fung, a Hong Kong company that handles sourcing and apparel manufactur- ing, stated its production in Bangladesh jumped 25 per- cent in 2009, while production in China, its biggest supplier, slid 5 percent.

Bangladesh's advantage is based on a number of fac- tors. First, labor costs are low, in part due to low hourly wage rates and in part due to investments by textile man- ufacturers in productivity-boosting technology during the past decade. The minimum wage rate in Bangladesh is currently $38 a month, compared to a minimum wage in China of $138 a month. Wage rates in the textile in- dustry are about $50 to $60 a month, less than a fifth of the going rate in China. Textile workers may have to work 12-hour shifts and can work 7 days a week during busy periods. While the pay rate is dismally low by Western standards, in a country where the gross national income per capita is only $850 a year, the pay is better than that available in many other unskilled and low- skilled occupations.

Second, there are few regulations in Bangladesh, and as one foreign buyer says, "There are no rules whatso- ever that cannot be bent." The lack of effective regula- tions keeps costs down. Another source of advantage for Bangladesh is that it has an established network of sup- porting industries that supply inputs to its garment man- ufacturers. Some three-quarters of all inputs are made locally. This saves garment manufacturers transport and storage costs, import duties, and the long lead times that come with the imported woven fabrics used to make shirts and trousers.

Bangladesh also has the advantage of not being China. Many importers in the West have grown cautious about becoming too dependent on China for imports of specific goods for fear that if there was disruption , economic or other, their supply chains would be decimated unless they had an alternative source of supply. Thus, Bangladesh has benefited from the trend by Western importers to diversify their supply sources. Although China remains the world's largest exporter of garments, Bangladesh is now second. Moreover, Chinese wage rates are now

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152 Part 2 , Cases

rising fast, suggesting the trend to shift textile production away from China may continue.

Bangladesh, however, does have some negatives; most notable are the constant disruptions in electricity because the government has underinvested in power gen- eration and distribution infrastructure. Roads and ports are also inferior to those found in China.

The demand for garments from low-cost sources such as Bangladesh has been driven by intense competition among Western clothing retailers. U.S. consumers, for example, have become accustomed to spending rela- tively little on clothing. In 2012 U.S. consumers devoted just 3 percent of their annual spending to clothing and footwear, compared to around 7 percent in 1970. One reason Americans now spend so little on clothing is that real prices have fallen significantly over the last two de- cades. Since 1990, clothing prices in the United States have risen by just 10 percent.in nominal terms, compared to an 82 percent jump in nominal food prices during the same period. Adjusted for price inflation, clothing prices have fallen. The sluggish U.S. economy and stagnant wage growth have increased pressure on clothing retail- ers by capping consumers' disposable income. At the same time, the desire to shop for fashionable new outfits remains strong. The result has been strong price compe- tition among retail apparel chains.

FACTORY COLLAPSE

The building that collapsed on April 24 was an eight- story complex called the Rana Plaza after its owner, Sohel Rana, a local politician and member of the ruling political party. The builders of the Rana Plaza only had approval for the construction of a five-story structure, but in Bangladesh rules can be bent, so the builders added three extra floors. Five garment factories occupied six floors in the building. At the time of the collapse, it is estimated that they were making clothes for some 30 Western apparel brands.

In retrospect, the building collapse should not have been a total surprise. Parts of the complex had been built on a pond filled with sand, making for an unstable foun- dation. The entire building vibrated whenever its diesel generator was working. The day before the collapse, vis- ible cracks had appeared in the building, promoting some workers to run out. Both the local police and the Bangladesh Garment Manufacturers and Exporters As- sociation warned Sobel Rana that the building was un- safe. Rana disagreed, and the complex stayed open for business. Two inspectors were in the building when it collapsed. Both died. Some survivors stated that their employers had pressured them to turn up for work as usual on Wednesday. After the collapse Sobel Rana fled. He was found and arrested four days later on the border with India and charged with criminal negligence.

The death toll from the factory collapse was initially pegged at 250, but over the following days and weeks it kept increasing. By mid-May it was clear that over 1,100 people had died in the collapsed building, making it the second-worst industrial disaster in the history of South Asia after the infamous Bhopai disaster in 1984. The Bangladesh government stated that it would pay $250 in compensation to each family that lost a member in the building collapse.

AFTERMATH

The building collapse prompted s~me soul searching on the part of Western retailers who sourced production from Bangladesh. Critics were quick to point out that desires to drive prices down may have contributed to the situation in Bangladesh. Factory owners might bid low to get business from Western companies. While these factories themselves might meet the standards required by Western companies, such as they are, it is common- place for them to outsource production to a shadow economy of subcontractors where regulations are rou- tinely ignored and workers are paid less than the legal minimum wage. Indeed, this is how they make a profit. That being said, all the factories operating in the Rana Plaza seem to have been among the country's 1,500 or so regular exporters.

Some Western companies had already taken steps to improve working conditions in Bangladesh prior to the collapse of the Rana Plaza building. In October 2012, The Gap announced a $22 million fire and building safety plan with its suppliers in Bangladesh, without identifying which factories it was using there or how many factories would be improved under the plan. In early April, in response to the factory fire the prior No- vember that had killed 112 people, Walmart pledged $1.8 million to train 2,000 Bangladesh factory managers about fire safety. Critics noted that these commitments represented a drop in the bucket. Some nongovernmental organizations estimated that it would cost some $3 bil- lion to make the needed fire safety and building improve- ments to ensure that Bangladesh's 5,000 garment factories were safe.

Three weeks after the building collapse several of the world's largest apparel retailers-including the retailer H&M, Inditex (the owner of the Zara chain), Benetton, Marks & Spencer, and Tesco-agreed to sign a legally binding agreement designed to improve safety condi- tions in Bangladesh's garment factories. Under the five- year agreement, the signatories agreed not to hire manufacturers whose factories fail to meet safety stan- dards and committed to help pay for necessary repairs and renovations. Signatories will form a governing board to oversee safety inspections of up to 5,000 factories over two years, with results being made public. The

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governing board will include three representatives from retailers, three labor representatives, and a chairperson chosen by the UN International Labor Organization. Par- ticipation will cost each company a maximum of $2.5 million each over the five-year period of the agreement.

Several major U.S. retailers, including Walmart, Gap, Sears, and JC Penny, did not initially sign the pact. Gap Inc. stated that it would not sign the pact because the language makes it legally binding in the United States, and if they failed to comply, they could be sued in U.S. courts. Instead Gap Inc. put forward an amendment call- ing for retailers to be publically expelled from the group if they fail to comply with arbitration. Walmart too cited the legally binding language as a reason for not signing the pact. Instead Walmart said that it would hire an out- side auditor to inspect 279 Bangladesh factories and publish results on its website by June 1, 2013. When fire or building issues are found, Walmart said that it would require factory owners to make necessary renovations or risk being removed from its list of authorized suppliers. Walmart stated that it would not pay for factory renova- tions, but expected the cost of improvements to be re- flected in the costs of goods it purchased. Walmart will _also set up an independent call center for garment work- ers to report unsafe working conditions. For its part, the government of Bangladesh stated that it would raise the minimum wage for garment workers in the country and tighten building and fire regulations.

Case Discussion Questions

1. From an economic perspective, was the shift to a free trade regime in the textile industry good for Bangladesh?

2. Economically who benefits when retailers in Europe and the United States source textiles from

nights Apparel

Some years ago Joseph Bozich was watching his son play in a high school basketball game when his vision started to become blurred. A day later he couldn't read. His doctor suspected that Bozich had a brain tumor, but tests revealed that the cause was multiple sclerosis. Luckily for Bozich, his vision improved, and he has not suffered another attack, but the incident left him with a desire to do something important in life-to somehow make a contribution to humanity.

As founder and CEO of Knights Apparel, a privately held company, Bozich realized he had the power to make such a contribution. A former U.S. collegiate bodybuilding champion, Bozich got his start in apparel working for Gold's Gym, selling branded clothing to outside retailers. In 2000 he founded Knights Apparel

Cases

low-wage countries such as Bangladesh? Who might lose? Do the gains outweigh the losses?

153

3. What are the causes of the weak safety record of the Bangladesh garment industry? Do Western companies that import garments from Bangladesh bear any responsibility for what happened at the Rana Plaza and other workplace accidents?

4. Do you think the legally binding agreement signed by H&M, Zara, Tesco, and others will make a differ- ence? Does it go far enough? What else might be done?

5. What do you think about Walt Disney's decision not to purchase merchandise from Bangladesh? Is this an appropriate way of dealing with the problem?

6. What do you think ofWalmart's approach to this problem? Is the company doing enough? What else could it do?

Sources

S. Banjo, "Promises in Bangladesh", Wall Street Journal, May 14, 2013; S. Banjo, "Wal-Mart Crafts own Bangladesh Safety Plan," Wall Street Journal, May 15, 2013; K. Bradsher, "Jobs Vanish as Exports Fall in Asia," The New York Times, January 22,2009, p. B1; "Knitting Pretty," The Economist, July 18, 2008, p. 54; "The New Collapsing Building," The Economist, April25, 2013; "Rags in the Ruins," The Econo- mist, May 4, 2013; K. Bradsher, "Competition Means Learn- ing to Offer More Than Just Low Wages," The New York Times, December 14, 2004, p. C1; V. Bajaj, "As Labor Costs Rise in China, Textile Jobs Shift Elsewhere," The New York Times, July 17, 2010, pp. 1, 3; S. Greenhouse, "Bangladesh Fears Exodus of Apparel Firms," The New York Times, May 2, 2013; S. Greenhouse, "Major Retailers join Bangladesh Safety Plan," The New York Times , May 13, 2013; and A. Zimmerman and N. Shah, "American Tastes Fuel Boom in Bangladesh," Wall Street Journal, May 13, 2013.

and started to build a business selling athletic clothing with college logos to universities around America. Like most organizations in the apparel industry, Bozich relied on a network of foreign suppliers to manufacture his products. The apparel industry is often accused of using sweatshop suppliers based in poor nations where pay is low, hours are long, and working conditions are awful. In 2005, Bozich wondered if it might be possible to change this-to source product from less developed na- tions but to do so in a more ethical way, paying employ- ees a decent wage and providing them with good working conditions.

After some investigation, Bozich decided to establish his own "model factory" in the Dominican Republic. He purchased a factory that had previously been used by a

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