Why garment owners desperate to lease out factories

It's now a battle for survival for garment and textile factories as they are finding it hard to stay afloat with the harsh reality of diminishing orders, high energy price and mounting bank liabilities amid a challenging economic climate and ongoing war. In the face of impending losses, owners are now considering an alternative solution: leasing out these factories.

Insiders have said this strategic move to survive the declining demand in Western markets is turning into frustration as the owners are struggling to find anyone willing to lease or purchase these factories.

For instance, Mahfuzur Rahman, owner of Rose Garden, an Accord-approved medium light woven garments factory with six production lines located on Birulia Road in Savar, has been trying to sell the factory for the past eight months. Despite reducing the selling price by 25% to Tk3 crore, he is yet to find a buyer.

In Narayanganj, a 12-storey factory launched just two years ago during a period of rapid recovery from the Covid-19 pandemic, is now desperately seeking a lessee to stem losses.

Some owners have been advertising in national newspapers to either sell or lease out their factories. 

In early May, a spinning mill with 63,120 spindles located in Vannara of Mouchak in Gazipur advertised a monthly rental price of Tk3.10 crore, but has failed to attract any lessees.

These are just a few examples among dozens of garment and textile factories that are seeking to sell or lease out their operations as they struggle to survive during these challenging times, according to sector insiders. Some owners have even been forced to close their factories and lay off workers, they said.

Take, for instance, the case of Dird Group, a global conglomerate of garment, textile, engineering, software, and agriculture companies. In recent months, they have shut down three factories, with the most recent closure occurring just a few days before Eid-ul-Azha, resulting in over 8,000 workers losing their jobs.

Industry players said although they do not have the exact data on the number of factories that want to sell or lease out, it has now become a common query that they receive every day.

"Many factory owners want to rent or sell their facilities, but there are no buyers because almost every manufacturer and exporter, be they big or small, is struggling for survival," said Fazlul Hoque, managing director of Plummy Fashions, one of the country's top green factories, and former president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA).

He further noted that the number of active factories in the woven and knitwear sector has dwindled to approximately 2,000, down from 4,500 in previous years.

Syed M Tanvir, managing director of Pacific Jeans Group, which has managed to weather the ongoing challenges better than many other factories, also confirmed getting calls from factory owners desperate to sell or lease.

"Renting out factories is often the first step before closure. Even factories in export processing zones are reducing production lines and laying off workers. It's an alarming situation," Tanvir told The Business Standard.

Mohammad Hatem, executive president of the BKMEA, highlighted that it is not only small factories looking to lease out or sell their operations, but some previously thriving large factories are also seeking lessees.

Shahidullah Azim, vice president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), pointed out that the declining orders have severely impacted the sector with no new job creation over the past few months.

Faruque Hassan, president of the BGMEA, admitted that the overall business situation is gloomy as the global market has been in a downturn for a prolonged period. 

He emphasised that when factory management fails, owners attempt to lease or sell the unit, but bank liabilities often present a major obstacle for entrepreneurs.

Why this situation?

High inflation in Western markets amid the growing geopolitical tensions and the Russia-Ukraine war are major reasons behind the decline in orders, according to exporters.

Garment exports to some key markets plummeted in fiscal 2022-23. For example, exports to the USA which is the largest market for Bangladesh, went down by over 5% to $7.7 billion year-on-year in the July-May period of the just concluded fiscal year, according to BGMEA data. 

During the same period, apparel exports to Germany, the second biggest market for the country, went down by 7.22% and in Russia by 29%.

Also, the screw was further tightened by the government's decision to significantly increase gas prices earlier this year. The sudden jump, ranging between 88% and 179% depending on the industries and their sizes, has been the final nail on the coffin for some entrepreneurs, prompting them to consider exiting the industry altogether. 

For example, U-Sun Knit Composite Mill in Sonargaon upazila under Narayanganj district has been shut down recently after failing to pay gas bills. As the bank liabilities balloon, any buyers are leery to take over the mill, said BKMEA Executive President Mohammad Hatem who had shown interest in buying the mill but changed his mind afterwards.

Shahidullah Azim of the BGMEA said apparel makers' overhead cost has gone up and is pushing them out of the business because of a hike in utility prices, especially for gas and electricity.

Also, there is an energy shortage, which is affecting the industry's ability to meet on-time delivery commitments. Consequently, exporters are being compelled to ship by air as an alternative solution.

On top of this, buyers are insisting on discounts, taking advantage of the difficulties faced by manufacturers and exporters, he added.

Why there's no interested lessee or buyer

According to industry insiders, one of the primary obstacles to the sale of garment and textile factories is the substantial loan and interest liabilities with banks. This factor drives away potential buyers or leads to minimal response. 

Even Chinese buyers who initially showed interest ultimately withdraw their consideration upon seeing the balance sheets.

Mohammad Hatem informed TBS that he had initially expressed interest in acquiring the U-Sun Knit Composite Mill in Narayanganj primarily because of its existing gas connection. However, upon further investigation, he discovered that the mill had a big chunk of bank liability amounting to Tk126 crore, which greatly exceeded his valuation of the mill at Tk45 crore. As a result, he did not proceed with his decision.

BGMEA President Faruque Hassan highlighted the complications that arise when bank liabilities exceed the value of assets for entrepreneurs. 

He stated that during challenging times like the present, banks typically attempt to share some of the losses to provide a way out for factory owners. However, when the market situation is unfavourable, the risk of investing in such factories becomes unattractive to potential investors.

Faruque also emphasised the absence of an exit policy in Bangladesh to navigate such complex situations. 

He noted that the implementation of an exit policy by the government would greatly assist entrepreneurs facing these challenges.

When things may improve?

AK Azad, managing director of Ha-Meem Group – one of the largest exporters in the country, has recently visited the USA, the number one export destination of Bangladesh.

Speaking to TBS, he expressed a sense of concern, indicating that the situation may not show signs of improvement until the middle of the next year.

"Factors such as the ongoing war, high inflation, and rising interest rates are taking a toll on consumers in the US," he said.

Syed M Tanvir from Pacific Jeans echoed the sentiment of uncertainty in the industry.

He mentioned that previously they could predict the situation in around 95% of cases for the upcoming months, but now the scenario has become entirely unpredictable. With the added complexity of an election year and the potential threat of visa restrictions imposed by the US, buyers are becoming hesitant and unsure.

Tanvir shared his perspective on the recovery timeline, stating that it will require some time for the industry to rebound. He believes that improvements may start to happen from the last quarter of this year.