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W O R L D B A N K

Bangladesh

Diagnostic Trade Integration Study

Volume 3: Sector Studies


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2013 The International Bank for Reconstruction and Development / The World Bank1818 H Street NWWashington DC 20433Telephone: 202-473-1000Internet: www.worldbank.org

1 2 3 4 15 14 13 12

This work is a product of the staff of The World Bank with external contributions. The findings,interpretations, and conclusions expressed in this work do not necessarily reflect the views of The WorldBank, its Board of Executive Directors, or the governments they represent.

The World Bank does not guarantee the accuracy of the data included in this work. The boundaries,colors, denominations, and other information shown on any map in this work do not imply any judgment onthe part of The World Bank concerning the legal status of any territory or the endorsement or acceptance ofsuch boundaries.

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iii

Contents

Acronyms and Abbreviations ........................................................................................................................ x

9. Assessment of the Shipbuilding Sector in Bangladesh: Capabilities and Future Potential........ 1

1 Sector profile ............................................................................................................................................. 1

2 Market Perspective .................................................................................................................................... 3

3 Capabilities and Competitiveness of the Shipbuilding Industry in Bangladesh ........................................ 7

4 Key Success Factors ................................................................................................................................ 13

5 Future Development Potential and Challenges........................................................................................ 16

6 Conclusions ............................................................................................................................................. 18

References ........................................................................................................................................................ 20

10. Light Engineering: Bicycles ........................................................................................................... 21

1 Sector Profile: Bicycles and Bicycle Parts .............................................................................................. 21

2 The Bicycle Industry in Bangladesh ........................................................................................................ 25

3 Value Chain Analyses: Bicycles and Bicycle Parts ................................................................................. 31

5 Key Market Drivers and Options for Growth .......................................................................................... 446 Improving Competitiveness: Policy Options ........................................................................................... 48

7 References ............................................................................................................................................... 49

11. Light Manufacturing: Diversified Jute Products ......................................................................... 50

1 Sector Profile: Production, Consumption, and Exports ........................................................................... 50

2 New Market Drivers and Opportunities for Growth and Diversification ................................................ 60

3 Institutional and Regulatory Environment, Market Structure, and Supply Chain ................................... 63

4 Sector Policy ........................................................................................................................................... 65

5 Integrated Value Chain Analysis for Diversified Jute Products ............................................................... 66

6 Conclusions and Recommendations ........................................................................................................ 73

7 References ............................................................................................................................................... 74

Annex A. Potential Jute Sector Classifications ................................................................................................ 75Annex B. Potential Diversified Jute Product Classifications ........................................................................... 76

Annex C. Comparative Profile of the Jute Sector in Bangladesh and India, Annual Data,200710 ................................................................................................................................................... 77

Annex D. Support Institutions and Their Activities ......................................................................................... 78

12. Light Manufacturing: Non-Leather Footwear ............................................................................. 81

1 Sector Profile ........................................................................................................................................... 81

2 Key Market Drivers and Options for Growth .......................................................................................... 89

3 Institutional and Regulatory Environment, Market Structure, and Supply Chain ................................... 92

4 Integrated Value Chain Analysis for Non-leather Footwear ................................................................... 95

5 Policy Recommendations ...................................................................................................................... 102

6 References ............................................................................................................................................. 103Annex A. Footwear Classifications ................................................................................................................ 104

Annex B: Bangladesh Footwear, All Categories, FY 2011/12 ....................................................................... 106

13. Value Chain Analysis for Polo Shirts........................................................................................... 107

1 Sector profile: the Apparel Industry in Bangladesh .............................................................................. 107

2 Integrated Value Chain Analysis for Polo Shirts ................................................................................... 114

3 Global Apparel and Cotton Markets ...................................................................................................... 123

4 Conclusions and Recommendations ...................................................................................................... 134

5 References ............................................................................................................................................. 136


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iv Contents

Annex A. Bangladesh Export Processing Zones: Location, Physical Size, and UtilityInfrastructure ......................................................................................................................................... 138

Annex B. Support Institutions and Their Activities ....................................................................................... 140

Annex C. The Value Chain Analysis ............................................................................................................. 141

Annex D. Apparel Classifications .................................................................................................................. 143

Annex E. Private Sector Mills Capacity ......................................................................................................... 144

Annex F. Capacity of Textile and Garment Units in Bangladesh................................................................... 145

Annex G. Productivity of Manufacturing Polo Shirts in Bangladesh ............................................................. 146

Annex H. The Apparel Sector in China, Ethiopia, and Vietnam .................................................................... 151

14. The Pharmaceutical Sector in Bangladesh ................................................................................. 160

1 Profile of Pharmaceutical Sector in Bangladesh ................................................................................... 160

2 Export of Pharmaceuticals ..................................................................................................................... 162

3 Trade Policy for Pharmaceuticals .......................................................................................................... 164

4 Regulatory Framework and Standards .................................................................................................. 164

5 TRIPS and Bangladesh Pharmaceuticals ............................................................................................... 166

6 Prospects................................................................................................................................................ 167

7 Policy Options ....................................................................................................................................... 167

8 References ............................................................................................................................................. 169

Annex A. Action Matrix ................................................................................................................................. 171

15. Accelerating the Development of Information TechnologyEnabled Services ........................ 172

1 Sector Profile: ITES-BPO ..................................................................................................................... 172

2 The Supply Chain .................................................................................................................................. 177

3 Supporting Institutions and Policies ...................................................................................................... 179

4 Value Chain Analysis: ITES-BPO ........................................................................................................ 183

5 Conclusions and Recommendations ...................................................................................................... 196

6 References ............................................................................................................................................. 197

16. Least-Developed Countries Services Waiver and Market Access for Services Exports

from Bangladesh: Opportunities and Challenges ...................................................................... 1981 Introduction ........................................................................................................................................... 198

2 The LDC Services Waiver: A Brief Overview ...................................................................................... 199

3 Prospects in IT-BPO and Labor Services: Secondary Sources .............................................................. 200

4 Primary Evidence on Prospects in Selected Services and Modes of Supply ......................................... 209

5 Roadmap for Promoting Services Exports from Bangladesh in the Conext of the LDCServices Waiver ..................................................................................................................................... 219

6 Concluding Thoughts ............................................................................................................................ 224

7 References ............................................................................................................................................. 225

Annex A. Services in Bangladeshs Economy: Trends and Key Features ..................................................... 227


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Contents v

Boxes

Box 9.1: Khan Brothers: The Upcoming ......................................................................................................... 7Box 9.2: Chinas Shipbuilding Industry: Technology Transfer through Joint Ventures............................... 12Box 9.3: Vietnams Shipbuilding Industry: FDI for Quality Improvement................................................... 13Box 9.4: A Spotlight on the Republic of Korea: Hyundai Heavy Industries ................................................. 15

Box 9.5: Trends in Bangladeshi Shipbuilding ............................................................................................... 17Box 10.1: The Importance of Lead Times in the Bicycle Industry ................................................................ 29Case 10.1: SME Bicycle Parts Manufacturer Suffering from Imports from China and India ....................... 41Case 10.2: SME Frame Assembler ................................................................................................................ 43Box 11.1: Sector Definition ........................................................................................................................... 52Box 11.2: The Green Fashion Industry .......................................................................................................... 62Box 11.3: Incentives for the Jute Industry in Bangladesh .............................................................................. 66Box 12.1: Lack of Proper Product Classification for Non-Leather Footwear in Bangladesh ........................ 82Box 12.2: Cork: A Study in Footwear Innovation ......................................................................................... 91Box 13.1: Export Processing Zones in Bangladesh ..................................................................................... 109Box 13H.1: Fabric Shortage for Garment Manufacturers in Ethiopia ......................................................... 155Box 15.1: IT-Enabled Services Product Segments ...................................................................................... 174Box 15.2: Growth Phases of Indian BPO Industry ...................................................................................... 176Box 15.3: BPO Service Models Under Rising Performance Expectations .................................................. 176Box 15.4: Increased Duties for Optical Fiber Cables in Bangladesh ........................................................... 183

Figures

Figure 9.1: Ship Types and Sizes Built at Yards in Bangladesh (as of 2008) ................................................. 2Figure 9.2: Global New Shipbuilding Deliveries 200111, and Expected Deliveries 201220

(million GT) ............................................................................................................................................... 3Figure 9.3: Global Demand Forecast for Very Small Vessels, less than 2,000 dwt (201221) ....................... 4Figure 9.4: Global Demand Forecast for Small Vessels, 2,00010,000 dwt (201221).................................. 4Figure 9.5: Global Forecast for Midsize Vessels, 10,00050,000 dwt (201221) .......................................... 5

Figure 9.6: Number of Inland and Coastal Vessels Produced in Bangladesh (200111) ................................ 6Figure 9.7: Perceived Importance of Key Buying Factors for Different Ship Types ...................................... 6Figure 9.8: Qualitative Rating of Shipbuilding Capabilities by Industry Experts, Bangladesh

and Comparators ...................................................................................................................................... 11Figure 10.1: World Bicycle and Passenger Car Production, 19502007 ....................................................... 22Figure 10.2: Bicycle Trips as Share of Total Trips in Selected Countries, 200809 (percent) ..................... 23Figure 10.3: Bicycle Manufacturing Sector Supply Chain, Bangladesh........................................................ 28Figure 10.4: Hybrid/City Bike ....................................................................................................................... 32Figure 10.5: Technical Parts of a Bicycle ...................................................................................................... 33Figure 10.6: Bicycle Value Chain Analysis, Bangladeshi OEMs .................................................................. 34Figure 10.7: Bicycle Steering Column Value Chain Analysis, Bangladeshi SME ........................................ 39Figure 10.8: Top 10 Most Dense Urban Areas Worldwide, 2012 (population over 500,000)....................... 46

Figure 11.1: From Jute to Diversified Products ............................................................................................. 53Figure 11.2: Jute Goods Production, Bangladesh and India, 200710 .......................................................... 54Figure 11.3: Historical Spot Market Prices for Jute, 200111 ....................................................................... 54Figure 11.4: Producer Price of Jute in Major Producing Countries, 2005-2009 ............................................ 55Figure 11.5: FEED Fashion Tote Bag ............................................................................................................ 62Figure 11.6: Promotional Shopping Bag ........................................................................................................ 62Figure 11.7: Institutional Support and Supply Chain Structure for Diversified Jute Products in

Bangladesh .............................................................................................................................................. 65Figure 11.8: Examples of Jute Bags and Totes .............................................................................................. 67Figure 11.9: Example of Jute Shopping Bags, Design Features, Two Styles ................................................ 68


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Figure 11.10: Value Chain Diagram for Dyed and Laminated Jute Shopping Bag inBangladesh .............................................................................................................................................. 69

Figure 11.11: Production Process and Cost Build-Up for Fabrication of Jute Shopping Bag inBangladesh .............................................................................................................................................. 69

Figure 12.1: Global Footwear Revenue by Product Segment, 2010 .............................................................. 83Figure 12.2: Bangladesh Footwear Exports, FY 200812 ............................................................................. 86

Figure 12.3: Bangladesh Exports of HS640419, HS640520, and HS640590 (includingEspadrilles), FY 2008/12 ......................................................................................................................... 87

Figure 12.4: Institutional Support and Supply Chain Structure for Non-leather Footwear inBangladesh .............................................................................................................................................. 94

Figure 12.5: Sample Espadrille Styles ........................................................................................................... 95Figure 12.6: Comparing Jute Soles of Different Quality ............................................................................... 96Figure 12.7: Espadrille Shoes and Features ................................................................................................... 97Figure 12.8: Value Chain for Basic Shoe (Espadrille) ................................................................................... 98Figure 13.1: Bangladesh Garment Industry Factories and Employment, FY 1983/84 to FY

2010/11 .................................................................................................................................................. 108Map B13.1.1: Bangladesh Export Processing Zones ................................................................................... 109Figure 13.2: Supply Chain Structure, Bangladesh Apparel Manufacturing ................................................ 111

Figure 13.3: Bangladeshs Cotton-to-Garment Processing Road Map. ....................................................... 112Figure 13.4: Polo Shirt Features and Technical Specifications ................................................................... 114Figure 13.5: Polo Shirt Exports Value Chain, Savar, Bangladesh ............................................................... 117Figure 13.6: Polo Shirt Exports Value Chain, Guandong, China ................................................................ 117Figure 13.7: Polo Shirt Exports Value Chain, Addis Ababa, Ethiopia ........................................................ 118Figure 13.8: Polo Shirt Exports Value Chain, Hai Duong, Vietnam ........................................................... 118Figure 13.9: Manufacturing Polo Shirts in Bangladesh ............................................................................... 120Figure 13.10: Monthly Minimum Wages in Selected Countries, 2012 (US$) ............................................. 121Figure 13.11: Bangladesh Apparel Exports, July 2008-June 2012 .............................................................. 125Figure 13.12: Five-Year Price Volatility of Cotton, October 2007 to October 2012 .................................. 130Figure 13H.1: Cotton-to-Garment Market and Institutional Support Structure, China ............................... 152Figure 13H.2: Ethiopias Cotton-to-Garment Market and Institutional Support Structure ......................... 154

Figure 13H.3: Ethiopias Cotton-to-Garment Processing Road Map .......................................................... 156Figure 13H.4: Vietnams Cotton-to-Garment Processing Road Map .......................................................... 158Figure 13H.5: Vietnams Cotton-to-Garment Market and Institutional Support Structure ......................... 159Figure 15.1: Worldwide IT and BPO Expenditures (US$ billion) ............................................................... 173Figure 15.2: ITES-BPO Sector Supply Chain, Bangladesh ......................................................................... 178Figure 15.3: Value Pyramid of BPO Services in Bangladesh ...................................................................... 184Figure 15.4: Sample ITES-BPO Service Process ........................................................................................ 185Figure 15.5: Image-Processing BPO Service Exporter, Value Chain Analysis, Bangladesh ...................... 186Figure 15.6: Invoice Processing BPO Service Exporter, Value Chain Analysis, Bangladesh ..................... 192Figure 15.7: Network Latencies, Bangladesh Telecommunications Company Ltd., 2012 .......................... 194Figure 15.8: Structural Engineering BPO Service Exporter, Value Chain Analysis,

Bangladesh ............................................................................................................................................ 196

Figure 16.1: Average Salary at Entry Level and Five Years of Experience, Bangladesh andComparators, 2011 (US$ thousands) ..................................................................................................... 203

Figure 16.2: Average Office Rental in Central Business District, Bangladesh andComparators 2011 (US$) ....................................................................................................................... 204

Figure 16.3: Potential Savings on a 25-Seat Development Center, Bangladesh andComparators 2011 (percent) .................................................................................................................. 204

Figure 16A.1: Annual Growth Rate of Sectors in Bangladesh, 19912010 (constant 2005prices, percent) ...................................................................................................................................... 228

Figure 16A.2: Trade Balance in Services in Bangladesh, Selected Years (US$ million) ............................ 233


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Figure 16A.3: RCAs for Goods and Services Exports in Bangladesh and South Asia, SelectedYears (percent) ...................................................................................................................................... 234

Figure 16A.4: Number of Bangladeshi Workers in Overseas Employment, 19762000 ............................ 235Figure 16A.5: Remittances by Bangladeshi Workers Overseas, 19762010 (US$ million) ....................... 236Figure 16A.6: Overseas Employment in Major Countries, 19762010 (percent) ....................................... 236Figure 16A.7: Remittances from Major Countries in 2010 (US$ million) .................................................. 237

Figure 16A.8: Trends in FDI Inflows by Sector, 200009 (US$ million) ................................................... 238

Tables

Table 9.1: Uncertainties in the Bangladeshs Shipbuilding Industry and Possible Reponses....................... 17Table 9.2: Seven Areas for Shipbuilding Development--Policy Action by Bangladeshs

Government ............................................................................................................................................. 19Table 10.1: Leading Producers of Bicycles by Value, 200711 (US$ 000)................................................. 22Table 10.2: Top 10 Exporters of Bicycles by Value and Quantity, 2011 ...................................................... 24Table 10.3: Leading Export Markets for Bangladesh Bicycles by Value, 2008/09 to 2011/12

(US$) ....................................................................................................................................................... 24Table 10.4: Top 10 Importers of Bicycles by Value and Quantity, 2011 ...................................................... 25Table 10.5: OEM Bicycle and Bicycle Parts Sector Profile, Bangladesh, 2012 ............................................ 26Table 10.6: Cottage Bicycle and Bicycle Parts Industry, Bongshal Market, Dhaka, 2012 ............................ 27Table 10.7: Comparative Lead Times, Bicycle Exports, Bangladesh vs. China, 2011 .................................. 30Table 10.8: Common Bicycle Types and Categories ..................................................................................... 31Table 10.9: Bicycle Categories Produced by Bangladeshi OEMs ................................................................. 32Table 10.10: Availability of Bicycle Parts and Components in the Local Market, Bangladesh,

2012 ......................................................................................................................................................... 35Table 10.11: Comparative Labor Costs, Bicycle Industry, Bangladesh and China, 2012 (US$) .................. 36Table 10.12: Transaction Costs and Procedures in Bangladesh, Input Importation, 2012 (per

shipment) ................................................................................................................................................. 37Table 10.13: Overhead Costs, Bicycle Assembly, Bangladesh, 2012 ........................................................... 37Table 10.14: Bicycle Imports to United States, 200711 (US$ 000)........................................................... 38Table 10.15: Survey of SME Parts Manufacturers, Bongshal, Dhaka: Share of Raw Materials

and Profit Margins by Part, 2012 (percent) ............................................................................................. 40Table 10.16: Survey of SME Part Manufacturers, Bongshal, Dhaka: Price Ranges ..................................... 41Table 10.17: Cost of Waste, Steering Tube Manufacturing, SME Dhaka, 2012 ........................................... 42Table 10.18: Survey of SME Parts Manufacturers, Bongshal, Dhaka: Machinery and

Workforce, 2012 ...................................................................................................................................... 43Table 10.19: Profile of Typical Workers in Parts and Components SMEs, Bongshal Market,

Dhaka....................................................................................................................................................... 44Table 10.20: Selected Bicycle Promotion Initiatives around the World ........................................................ 45Table 11.1: Top 10 Producers of Raw Jute by Quantity, 2010 ....................................................................... 51Table 11.2: Top Five Consumers of Jute, Kenaf, and Allied Fibers, 2010 ..................................................... 55Table 11.3: Global Consumption of Jute Goods, 2006 and Projected ........................................................... 56Table 11.4: Bangladesh Exports of Raw Jute, Jute Yarn, and Jute Fabric, 2007 ............................................ 57Table 11.5: Top 10 Exporters of Raw Jute by Value and Quantity, 2011 ....................................................... 57Table 11.6: Bangladesh Raw Jute Exports, FY 2002/03 to FY 2011/12 ........................................................ 58Table 11.7: Top 10 Export Markets for Bangladesh Raw Jute, FY 2010/11 to FY 2011/12 .......................... 59Table 11.8: Primary Export Destinations of Bangladesh Jute Products ......................................................... 60Table 11.9: Select Public and Private Sector Jute Milling Operations in Bangladesh 2012 .......................... 63Table 11.10: Looms in Jute Mills in Bangladesh 2012 .................................................................................. 63Table 11.11: Supply Chain Stakeholders and Their Activities for Diversified Jute Products in

Bangladesh .............................................................................................................................................. 64Table 12.1: Top 10 Footwear Producers Worldwide by Quantity, 2011 ....................................................... 83


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Table 12.2: Top 10 Footwear Consumers by Quantity, 2011 ........................................................................ 84Table 12.3: Top 10 Footwear Exporters by Quantity, 2011 .......................................................................... 85Table 12.4: Top 15 Footwear Exporters by Value, 2011 ............................................................................... 85Table 12.5: Top 10 Export Markets for Bangladeshi Non-leather Footwear, Select Categories,

FY 2011/12 .............................................................................................................................................. 87Table 12.6: Global Footwear Imports by Continent, 2011 ............................................................................ 88

Table 12.7: Top 10 Footwear Importers by Quantity, 2011 .......................................................................... 88Table 12.8: Top 15 Footwear Importers by Value, 2011 ............................................................................... 89Table 12.9: Footwear Manufacturers in Bangladesh EPZs, 2012 .................................................................. 93Table 12.10: Specific Support Institutions and Their Support Activities for Footwear ................................ 94Table 12.11: Supply Chain Stakeholders and Their Activities ...................................................................... 95Table 12.12: Wage Comparisons, Selected Countries (US$) ........................................................................ 99Table 12.13: Textile Production Capacity in Bangladesh ............................................................................ 100Table 12A.1: Harmonized Commodity Description and Coding System for Footwear .............................. 104Table 12A.2: Non-leather Footwear Classifications .................................................................................... 105Table 13.1: Bangladesh Export Processing Zones: Investment, Employment, and Export ......................... 110Table 13.2: Snapshot of the Apparel Sector in Bangladesh, China, Ethiopia, and Vietnam ....................... 111Table 13.3: Raw Material Input Cost Comparison in Polo Shirts, Bangladesh, Ethiopia, and

China ..................................................................................................................................................... 116Table 13.4: Cost of In-House Knitting......................................................................................................... 119Table 13.5: Efficiencies in Capacity Utilization, Waste, Rejects, and Absenteeism (Percent) ................... 122Table 13.6: Comparative Business Environment Competitiveness Rankings ............................................. 123Table 13.7: Global Apparel Retail Sales by Region, 2011 .......................................................................... 123Table 13.8: Comparative Prices for Select Categories of Knit Apparel, China and the World,

200911 ................................................................................................................................................. 124Table 13.9: Top 10 Apparel-Exporting Countries, 2011 ............................................................................. 125Table 13.10: Major Apparel Items Exported by Bangladesh (US$ million), Select Years ......................... 126Table 13.11: Annual Apparel Exports of Bangladesh, FY 2000/01-2010/11 .............................................. 126Table 13.12: Top Bangladeshi Apparel Export Markets, FY 2011/12 ........................................................ 127Table 13.13: Top Bangladeshi Apparel Export Products, FY 2011/12 ....................................................... 127

Table 13.14: Bangladeshs Leading Export Partners, HS610910 Including Polo Shirts, FY2011/12 .................................................................................................................................................. 128

Table 13.15: Comparative Exports, HS610910 Including Polo Shirts, 2011 .............................................. 128Table 13.16: Stock of Top Cotton Producers, Ranked by 2011 Production ................................................ 131Table 13.17: Top 10 Cotton Millers, 2011................................................................................................... 131Table 13.18: Top 10 Exporters of Cotton, 2011 .......................................................................................... 132Table 13.19: Top 10 Importers of Cotton, 2011 .......................................................................................... 132Table 13A.1: Bangladesh Export Processing Zones: Location, Physical Size and Utility

Infrastructure ......................................................................................................................................... 138Table 13B.1: Support Institutions and Their Activities ............................................................................... 140Table 13D.1: Apparel Classifications .......................................................................................................... 143Table 13E.1: Private Sector Textile Mills in Bangladesh ............................................................................ 144

Table 13F.1: Number and Capacity of Textile and Garment Units in Bangladesh ..................................... 145Table 13G.1: Benchmarking Key Variables for the Production of Polo Shirts ........................................... 146Table 13G.2: Procedures, Fees, and Time Lapse during Input Import Process ........................................... 148Table 13G.3: Cost of Transportation and Related Services from Chittagong to Dhaka (Import) ............... 150Table 13G.4: Cost of Transportation and Related Services from Dhaka to Chittagong (Export) ............... 150Table 13H.1: Export Volume and Number of Enterprises in Chinas Apparel Sector, 2009...................... 151Table 13H.2: Employment Statistics for Ethiopia Apparel Sector .............................................................. 152Table 13H.3: Apparel Production and Trade Statistics, Ethiopia, 2009 ...................................................... 153Table 13H.4: Summary of Licensed Textile and Garment Investment Project, by Investment

Type and Status, 1992-September 30, 2010 .......................................................................................... 155


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Table 13H.5: Enterprises in the Apparel Sector in Vietnam, 2010 .............................................................. 157Table 14.1: Size and Growth of Bangladeshs Pharmaceutical Market, 200712 ....................................... 162Table 14.2: GDP and Healthcare Expenditure in Bangladesh, 200510 ..................................................... 162Table 14.3: Pharmaceutical Exports from Bangladesh, FY 2005/06 to FY 2011/12 ................................... 163Table 15.1: Overview of IT and ITES-BPO Industry in Bangladesh, 2011 ................................................ 175Table 15.2: Third-Party Service Delivery Trends of Multinationals in the Philippines .............................. 179

Table 15.3: Status of ITES-BPO Captives in the Philippines ...................................................................... 179Table 15.4: BASIS Institute of Technology and Management .................................................................... 180Table 15.5: ICT Policy 2009, Bangladesh ................................................................................................... 181Table 15.6: Sample Employee and Trainer Profiles, Graphic Design SME, Dhaka .................................... 186Table 15.7: In-House Training of Staff, Graphic Design Skills, Bangladesh .............................................. 187Table 15.8: The Scope and Cost of Graphic Design BPO Services in Bangladesh (US$) .......................... 187Table 15.9: Benchmarking Literacy and Enrollment Rates in Bangladesh and Comparator

Countries, 2011 (percent) ...................................................................................................................... 188Table 15.10: Benchmarking Compensation Costs in Bangladesh and Comparator Countries, 2011

(US$)...................................................................................................................................................... 188Table 15.11: Benchmarking the Quality of Education and Training Services in Bangladesh

and Comparator Countries, 2012 ........................................................................................................... 189

Table 15.12: Benchmarking ICT Development in Bangladesh, 2008 and 2010 .......................................... 189Table 15.13: Internet Service Prices in Bangladesh, 201013 (US$) .......................................................... 190Table 15.14: Benchmarking ICT Network and Overall Infrastructure in Bangladesh and

Comparator Countries, 2012 ................................................................................................................. 190Table 15.15: Benchmarking Office Space Rental Prices, Bangladesh and Comparator

Countries, 2012 ...................................................................................................................................... 191Table 15.16: Benchmarking the Quality of Electricity, Bangladesh and Comparator

Countries, 2011 ..................................................................................................................................... 191Table 15.17: Invoice Processing Full Service Value Chain Earning Potential, Bangladesh ....................... 193Table 15.18: Reported Certification Costs, Invoice Processing BPO, Bangladesh, 2012 ........................... 194Table 15.19: Benchmarking Availability of Engineers and University-Industry Collaboration

in R&D, Bangladesh and Comparator Countries, 2012 ........................................................................ 195

Table 16.1: Exports of Software and ITeS in Bangladesh, FY 200510 (US$ million) .............................. 202Table 16.2: Domestic Constraints to the Development of Bangladeshs IT Industry (percent).................. 205Table 16A.1: Trends in Bangladeshs GDP and Sectoral Composition, 19802010 (US$

million) .................................................................................................................................................. 227Table 16A.2: Average Annual Growth Rate by Sector in Bangladesh, Selected Years

(percent)................................................................................................................................................. 228Table 16A.3: Share of Sectors in GDP in Bangladesh, Selected Years (percent) ....................................... 228Table 16A.4: Trends in Subsectoral Services Output in Bangladesh, 19802010 (percent) ....................... 229Table 16A.5: Share of Employment and Labor Force by Occupation and Sector, 19992009

(percent)................................................................................................................................................. 229Table 16A.6: Disaggregation of Service Employment in Bangladesh by Sector (percent) ......................... 230Table 16A.7. Value and Share of Exports for Different Service Subsectors in Bangladesh,

Selected Years (US$ million and percent) ............................................................................................ 231Table 16A.8: Value and Share of Imports for Different Service Subsectors in Bangladesh,

Selected Years (US$ million and percent) ............................................................................................ 232Table 16A.9: RCAs in Services, Bangladesh, Selected Years (percent) ..................................................... 234Table 16A.10: Skill-wise Breakdown of Bangladeshi Overseas Workers, 19902011 (number

of workers) ............................................................................................................................................ 237Table 16A.11: Value and Share of FDI Inflows in Selected Sectors, Selected Years (US$

million and percent) ............................................................................................................................... 238


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x

Acronyms and Abbreviations

ACI Advanced Chemical Industries LimitedADB Asian Development Bank

ADM application development and maintenanceAEO Authorized Economic OperatorsAFL-CIO American Federation of Labor and Congress of Industrial OrganizationsAGOA African Growth and Opportunity ActAMTAC American Manufacturing Trade Action CoalitionAPEC Asia-Pacific Economic CooperationAPIs active pharmaceutical ingredientsAPTA Asia-Pacific Trade AgreementASEAN Association of Southeast Asian NationsASHA Office of American Schools and Hospitals AbroadASYCUDA Automated System for Customs DataATAB Association of Travel Agents of Bangladesh

ATPA Andean Trade Preferences ActATPDEA Andean Trade Promotion and Drug Eradication ActBASIS Bangladesh Association of Software and Information ServicesBB Bangladesh BankBBS Bangladesh Bureau of StatisticsBCC Bangladesh Computer CouncilBCCI Bangladesh Chamber of Commerce and IndustryBCSL Bangladesh Cable Shilpa LimitedBEPZA Bangladesh Export Processing Zones AuthorityBEST-BFQ Better Work and StandardsBetter Fisheries QualityBEST-BQI Better Work and StandardsBetter Quality InfrastructureBGMEA Bangladesh Garment Manufacturers and Exporters Association

BIDS Bangladesh Institute of Development StudiesBIFT BGMEA Institute of Fashion & TechnologyBIMSTEC Bay of Bengal Initiative for Multi-Sectoral Technical and Economic CooperationBITM BASIS Institute of Technology and ManagementBIWTA Bangladesh Inland Water Transport AuthorityBJMA Bangladesh Jute Mills AssociationBJMC Bangladesh Jute Mills CorporationBJSA Bangladesh Jute Spinners AssociationBKMEA Bangladesh Knitwear Manufacturers and Exporters AssociationBMET Bureau of Manpower, Employment, and TrainingBoARDs Bureaus of Agricultural and Rural DevelopmentBOI Bangladesh Board of Investment

BPO business process outsourcingBQSP Bangladesh Quality Support ProgramBR Bangladesh RailwaysBSCIC Bangladesh Small & Cottage Industries CorporationBSTI Bangladesh Standards and Testing InstituteBTB back-to-backBTMA Bangladesh Textile Mills AssociationBTRC Bangladesh Telecommunication Regulatory CommissionBTTB Bangladesh Telegraph and Telecommunications BoardBUET Bangladesh University of Science and Technology


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Acronyms and Abbreviations xi

BUILD Business Initiative Leading DevelopmentBWH bonded warehousesCAFTA-DR Dominican RepublicCentral America Free Trade AgreementCBI Caribbean Basin InitiativeCBTPA Caribbean Basin Trade Promotion ActCCIE Chief Controller of Exports & Imports

CGE computable general equilibriumCGFNS Commission on Graduates of Foreign Nursing SchoolscGMP current good manufacturing practiceCIF cost, insurance, and freightCMR Convention on the Contract for the International Carriage of Goods by RoadCMT cut-make-trimCNC computer numerical controlCNG compressed natural gasCPD Centre for Policy DialogueCRR centralized risk registryCSIC China Shipbuilding Industry CorporationCSR corporate social responsibility

CSSC China State Shipbuilding CorporationCTS Council for Trade in ServicesCD customs dutiesD-8 Developing 8 GroupDANIDA Danish International Development AgencyDEDO Duty Exemption and Drawback OfficeD/C documentary collectionDCCI Dhaka Chamber of Commerce and IndustryDGDA Directorate General of Drug AdministrationDTIS diagnostic trade integration studydwt dead weight tonnesEBA Everything But Arms

EDF Export Development FundEEF Equity Entrepreneurship FundECF export contract financeECGS Export Credit Guarantee SchemeEIAP Earned Import Allowance ProgramEPAs export promotion agenciesEPB Export Promotion BureauEPZ export processing zoneERP effective rate of protectionERS Export Refinancing SchemeETGAMA Ethiopian Textile and Garment Manufacturers AssociationEU European Union

EWOE Expatriates' Welfare and Overseas EmploymentFAO Food and Agriculture OrganizationFBCCI Federation of Bangladesh Chambers of Commerce and IndustryFCPA Foreign Corrupt Practices ActFDI foreign direct investmentFE fixed effectsFERA Foreign Exchange Regulations Act 1947FOB free on boardFPIPPA Foreign Private Investment Promotion and Protection ActFTA free trade agreement


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xii Bangladesh: Diagnostic Trade Integration Study. Volume 3: Sector Studies

FVO Food and Veterinary OfficeFY fiscal yearGAFTT Global Alliance for Fair Textile TradeGATS General Agreement on Trade in ServicesGHERS Greater Harvest and Economic Returns from ShrimpGIS geographic information system

GMP good manufacturing practiceGSO General Statistics OfficeGSP General System of PreferencesGSP+ General System of Preferences +GT gross tonesGTFP Global Trade Finance ProgramGTLP Global Trade Liquidity ProgramGTSF Global Trade Supplier FinanceHACCP hazard analysis and critical control pointsHELP Haiti Economic Lift ProgramHOPE II Hemispheric Opportunity for PartnershipHS Harmonized Commodity Description and Coding System

IAF International Accreditation ForumIAF International Apparel FederationIAB Investing Across BordersICB Investment Corporation of BangladeshICC International Chamber of CommerceICCB International Chamber of Commerce BangladeshICP International Comparison ProjectICSID International Centre for Settlement of Investment DisputeIJSG International Jute Study GroupILAC International Laboratory Accreditation CooperationIP intellectual propertyIPO Import Policy Order

IPR intellectual property rightsISIC International Standard Industrial ClassificationISLFTA IndiaSri Lanka Free Trade AgreementISO International Standardization InstitutionsIT information technologyIT-BPO information technologybusiness process outsourcingITES-BPO information technology enabled servicesbusiness process outsourcingITC International Trade CentreIELTS International English Language Testing SystemITES IT-enabled servicesJICA Japan International Cooperation AgencyKPO knowledge process outsourcing

kWh kilowatt hourL/C letter of creditLCS Land Customs StationsLDC least-developed countryLDCI Least Developed Country InitiativeLFMEAB Leathergoods & Footwear Manufacturers & Exporters Association of BangladeshLPI Logistics Performance IndexLPO legal process outsourcingLIS land information systemMBCCI Malaysia-Bangladesh Chamber of Commerce and Industry


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Acronyms and Abbreviations xiii

MCCI Metropolitan Chamber of Commerce and IndustryMFA Multi Fibre ArrangementMFN most favored nationMIGA Multilateral Investment Guarantee AgencyMNCs multinational companiesMoARD Ministry of Agriculture and Rural Development

MoC Ministry of CommerceMoCB Ministry of Capacity BuildingMoE Ministry of EducationMoI Ministry of InformationMoPT Ministry of Post and TelecommunicationsMoSICT Ministry of Science and ICTMoTI Ethiopian Ministry of Trade and IndustryMOU memorandum of understandingMPV multipurpose vesselMRA mutual recognition agreementNABL National Accreditation Board for Testing and Calibration LaboratoriesNBR National Board of Revenue

NDP National Drug PolicyNFCD Non-Resident Foreign Currency DepositNIP National Industrial PolicyNIPFP National Institute of Public Finance and Policy, IndiaNORAD Norwegian Agency for Development CooperationNPR nominal protection rateNSB National Standardization BodyNTB non-tariff barrierOBM original brand manufacturerODM original design manufacturingODYs off-dock yardsOECD Organisation for Economic Co-operation and Development

OEM original equipment manufacturerOIC Organization of the Islamic ConferenceOPIC Overseas Private Investment CorporationOTRI Overall Trade Restrictiveness IndexOTS Operative Tariff SchedulesPFF Public Finance FoundationPIC/S Pharmaceutical Inspection Convention/Pharmaceutical Inspection Co-operation SchemePJEPA Philippines-Japan Economic Partnership AgreementPRI Policy Research InstitutePRICE Poverty Reduction by Increasing Competitiveness of EnterprisesPSDSP Private Sector Development Support ProjectPSI pre-shipment inspection

PTB German Metrological InstituteRD regulatory dutyR&D research and developmentRDBs regional development banksRJSC Registrar of Joint Stock CompaniesRMG ready-made garmentRoO rules of originSAARC South Asian Association for Regional CooperationSAFTA South Asian Free Trade AreaSBC Sadharan Bima Corporation


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1

C H A P T E R 9

Assessment of the Shipbuilding Sector in

Bangladesh: Capabilities and Future Potential

9.1 The shipbuilding sector in Bangladesh has recently shown increased activity and potential as afuture growth area. The objective of this chapter is to assess the current situation of the industry andBangladeshs possibilities for development, keeping in view competition from other shipbuilding nations.In particular, we assess how the country can increase exports and employment by enhancing its currentproduction capabilities from small-scale vessels mainly for the domestic market towards higher-value andmore sophisticated ships for export. This assessment was based on existing reports as a starting point,complemented by in-depth analysis through further desk research; consultation with experts from the

Germanischer Lloyd network; and interviews with ship owners, and European shipping and shipbuildingexperts with experience of Bangladesh shipbuilding. These sources have been complemented byconsultation with local shipyards and banks and the government in Bangladesh. The development ofBangladeshs shipbuilding sector will also be compared to that of Vietnam, China and South Korea,

9.2 The analysis presented in this chapter highlights that as international demand has dried up and willmost likely not recover until 2015, Bangladesh has to rely on domestic demand over the next few years,with demand for additional tonnage evolving from domestic and coastal trades. This represents anopportunity for yards to deepen experience with classed vessels and broaden their capability base.However, for benefits of this demand to be fully realized, it will need to more closely resembleinternational demand, for which enforcing of vessel standards and safety procedures are critical. Also,higher technical requirements on domestic vessels, more closely resembling class standards, will help

bridge the standards between the domestic and international markets and also improve the safety andoverall performance of domestic vessels. Another area of opportunity lies in expansion of maintenance andrepair services, which are more stable and labor-intensive businesses than building new ships. Since bothlarger and smaller vessels ply Bangladeshi waters, there is a general opportunity to benefit from this trafficand expand maintenance and repair facilities for larger vessels as well, which would require establishingfurther appropriate sites/dry docks beyond the existing Chittagong dry dock with its maximum capacity of20,000 dwt.

1 Sector profile

9.3 The story of building seagoing vessels for export in Bangladesh began with Ananda Shipyards andSlipways Ltd. in Dhaka, currently the second biggest shipyard in the country. In 2005, after participating inan international tender, the yard was awarded an order for two multipurpose vessels (MPVs) with 2,900

dead weight tonnes (dwt) each from Danish Stella Shipping. The yard already had some experience withbuilding tugs, pontoons, and ferries under classthat is, vessels adhering to the design, building, andquality requirements of a shipbuilding classification society. After Ananda, Bangladeshs Western MarineShipyard in Chittagong followed, building on its experience in ship repair and maintenance of classedvessels. Western Marine entered the newbuilding market in 2008 after having attended the Shipbuilding,Machinery and Marine Technology (SMM) International Trade Fair in Hamburg. The first orders fromStella Shipping were followed by orders for larger MPVs from European owners such as Komrowski,Wessels Reederei, and Grona Shipping. Although several of these orders were cancelled, more than 20vessels have been delivered by these two shipyards to date, with an export value well above US$100


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2 Bangladesh: Diagnostic Trade Integration Study. Volume 3: Sector Studies

million. Although Bangladesh has demonstrated capabilities to build different types of vessels (see figure9.1), only MPVs and ferries have been exported up to now.

9.4 In 2008, international ship owners were facing a steep upturn of the shipping cycle with increasingfreight demand and subsequently increasing order activity at shipyards across the world. With limitedcapacity, the Republic of Korea and Chinathe biggest players in the international marketwere going

for orders of larger vessels to utilize their yards in the most economical way. An opportunity also existedfor other countries to enter the stage, especially in the segment of small, less sophisticated vessels such asMPVs. Bangladesh already had a basic yard industry and availability of skilled workers. The experience ofbuilding bigger ships existed but was not, however, formalized. The yards were not able to show a trackrecord, facilities were not fully ready, import of steel and components posed a major problem, and exportincentives were nonexistent. Nevertheless, owners started ordering ships from Bangladesh. Certainly, ithelped that the increased demand was driving up prices for new buildings, making owners willing to go fora venture at a new yard with moderate pricing. At that time, even many yards in China that had never builta ship before received new build orders.

Figure 9.1: Ship Types and Sizes Built at Yards in Bangladesh (as of 2008)

Source:Fairplay, expert interviews.

9.5 This development was a stretch for Bangladeshi yards not only on the commercial side but also onthe technical side. Production of classed ships for export follows different standards from domesticshipbuilding. This skills gap was closed with engineers and other technical staff with internationalexperience, especially Bangladeshis who had worked in Singapore and Dubai and were able to transfer

knowledge. Technical assistance for the building process was largely supported by the owners. It includedtraining programs conducted by the Danish International Development Agency (DANIDA) at the yard,extensive hands-on teaching by classification societies, and advice from overseas experts who were hiredon a project basis. However, previous experience with classed vessels through repair and maintenance jobswas the basic enabler, as yards were already familiar with certain regulations and quality standards.Shipbuilding is a complex process, but a big advantage is that technology can be unpackaged.Sophisticated components may be bought and assembled without the support of industries in thecomponent supply chain.

9.6 However, shipping and shipbuilding markets are in a poor condition at the moment. This will notchange significantly over the next few years. Against this background, the question is how Bangladesh can

Ship types and sizes built at yards in Bangladesh

Cruise

Gas carrier

Specialpurpose

Tanker

Container

10,000

Bulker

MPV

Small ferry

Tugs

400,00050,000

Sophisti-

cation

Size [GT]

Sizes across worldfleet

Sizesbuilt in Bangladesh


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Chapter 9: Assessment of the Shipbuilding Sector in Bangladesh: Capabilities and Future Potential 3

further build up its capabilities, broaden the shipbuilding value chain, and establish its shipbuilding sectoras an important part of the economy. Stable and growing domestic demand will help the sector improve itsquality and productivity. In a more positive market situation and with improved competitiveness,Bangladesh could increase the volume and quality of its exports in the long term. This chapter aims to findout which vessel segments may provide opportunities for Bangladesh based on the current strengths, supplysituation, and impediments such as bottlenecks. By learning from competing countries that have developed

a shipbuilding sector over the last decades, we derive Key Success Factors for the industry. Finally, bymapping capabilities with key success factors and bottlenecks, the chapter will prioritize improvementareas that need to be worked on in the future, and develop future scenarios and a policy roadmap.

2 Market Perspective

9.7 Due to size and infrastructure restrictions of the yards, Bangladeshs market focus is on smaller andrelatively simple vessel types, such as MPVs, bulkers, and tankers. In the following discussion, long-termcontracting demand forecasts will be presented (Clarkson Research, 2012). These forecasts are based onassumptions on tonnage increase requirements and capacity replacement requirements, which are in turnderived from scrapping age assumptions.

2.1 International Demand

9.8 In line with global economic development and global trade, demand for shipping and shipbuildinggrew significantly during the last decade. The financial crisis of 2009 brought growth to an abrupt halt.However, order books of the yards were still full and deliveries of new vessels continued into the crisis,thus adding even more transport capacity. Ordering activities in the main ship segments, includingcontainer, bulker, and tanker, almost dried up, leaving shipyards with significant overcapacities. It willmost likely take several years for markets to regain a healthy balance between supply and demand.Contracting is expected to stay low for several years, and yearly deliveries are projected to decline 43percent between mid-2012 and 2015 (see figure 9.2). Medium to long term, contracting will slowlyincrease again, but likely not to pre-crisis levels. The most significant catalyst for this moderate growth willbe bulk carrier and container ship contracting, of which the strongest development is projected for largercontainer vessels.

Figure 9.2: Global New Shipbuilding Deliveries 200111, and Expected Deliveries 201220 (million GT)

Source:Clarksons, The Shipbuilding Forecast Club.

13

1618

19

19

20 15

9

21232423

222123

30

333432

29

26

211918

15141312

99

88

88

12

16

18

15

1212

0

10

20

30

40

50

60

70

80

90

100

200320022001

Korea

Rest of World

2004 2005 2006 2007 2008 2009 2010 2011 20202012 2013 2014 2015 2016 2017 2018 2019

Japan

China

2 2 4 57 8

11 1422

37 39 3831

23 21 22 2427 29 30

8

7

7

6

7

7

9

10

8

9 9 10

7

55

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48

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42

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38

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9.9 For the very small vessel segmentthe types and sizes that could potentially be served byBangladesh now or in the futureglobal demand is also expected to stay low (figure 9.3). It is a ratherfragmented segment that includes tugs, MPVs, bulkers, tankers, dredgers, drill vessels, and passengerferries. Of these, tugs represent by far the largest portion of the fleet with close to 35 percent. Smallervessels tend to stay in service longer than larger vessels, with an average age of 26 years (compared tolarger vessels with 1024 years depending on type). Old vessels are often replaced with larger vessels. But

there continues to be a positive outlook for small MPVs and passenger vessels. This is due to an increase inintracontinental service in Southeast Asia, where only a few trading arrangements justify large vessels.

9.10 The size cluster 2,00010,000 dwt consistsmainly of small tankers, general cargo vessels,MPVs, and small feeders. Consolidation in themarket, especially in Europe, will keep orders lowfor MPVs (figure 9.4). Some replacement demand islikely to continue to be apparent. However, thedemand is expected to fall by 3 percent per year inthis segment until 2021. The feeder container fleetwill come under significant pressure due to the trendby operators to upsize small, aged vessels and gaingreater economies of scale, especially on theintraregional routes. The outlook for the generalcargo and mini-bulker sector is bleak, with decliningdemand due to the shift to other ship types (MPVand container) and general upsizing.

Figure 9.4: Global Demand Forecast for Small Vessels, 2,00010,000 dwt (201221)

Source: Clarksons, The Shipbuilding Forecast Club

9.11 Contracting for larger MPVs is expected to remain at very low levels in the short term, due tooversupply in both the bulk and containership market, which absorb the transport demand. However, mid-

to long term, significant scrapping activity should produce considerable replacement demand. Thehandysize bulk fleet (10,00040,000 dwt) is projected to decline as elderly tonnage is increasingly notreplaced. Growth in transport of minor bulks is likely to be served by more economical handymaxes(40,00050,000 dwt) due to upsizing pressure (figure 9.5).

0

20

40

60

2021201720132012

Feeder


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Figure 9.5: Global Forecast for Midsize Vessels, 10,00050,000 dwt (201221)

Source: Clarksons, The Shipbuilding Forecast Club.

9.12 Midsize container vessels are showing robust growth as box volume increases on intraregionaltrades. However, this growth will be in the segment of 2,0003,000 20-foot equivalent unit (TEU) (25,00040,000 dwt), rather than in the segment that would benefit Bangladesh more, 1,000 TEU (12,500 dwt).Demand is expected to be stagnant in the latter segment. Demand for small- to midsize tankers will stayrelatively stable in the future, supported by developing Asian demand on intraregional trades.

9.13 In summary, demand for very small vessels (less than 2,000 dwt) will be stagnant but comparablygood, especially for MPVs and passenger vessels. The size segment just above this (12,500 dwt) is hithardest across vessel types and thus will provide limited growth opportunity. In the midsize segment,prospects are a bit better, particularly for the larger vessels closer to 50,000 dwt.

2.2 Domestic Demand

9.14 Sources are limited for forecasting the demand for domestic shipping in Bangladesh. Therefore,assumptions have been based on past developments as well as influencing factors, such as Bangladeshseconomic outlook, and trends on regulatory policies and infrastructure projects.

9.15 Domestic demand has been constantly growing over the last decade, with average growth rates of25 percent by number of vessels 1(figure 9.6). Larger vessels are usually more complex and require more

capabilities. In addition to the general economic growth forecasted at around 57 percent (IMF 2011), theBangladeshi government and private investors have initiated infrastructure projects that create an additionaldemand for domestic water transport. Several fuel power stations are being built across the country. Inorder to transport the oil to these plants, 60 tankers of approximately 2,000 dwt have been planned and areunder construction. Furthermore, two inland container terminals are already built to handle container trafficon inland waterways, which is currently transported overland. The government has assigned 32 licenses forcontainer vessels of 140 TEU (2,000 dwt) to various parties to operate on container lines in the country. Itis expected that another 32 licenses will be granted soon. Both vessel types, tankers and container vessels,need to be built under class, which makes them export quality. However, as the Bangladeshi shipbuildingindustry is not able to deliver sophisticated vessels in sufficient quantities, it is expected that half of thesevessels need to be built in China.

1Although this is the officially reported number, and shipbuilding at unregistered yards (of the approximately 200shipyards in Bangladesh only 124 are registered) might have a significant share, it can be expected that the number forlarge vessels above 200 GT is fairly exact.

0

100

200

300

400

2021201720132012

Handysize bulkers

Product tankers

Container feeder

No.

1997-2011 average


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Figure 9.6: Number of Inland and Coastal Vessels Produced in Bangladesh (200111)

Source:Department of Shipping 2012.Note:GT = gross tonnes.

Overall, domestic demand in Bangladesh will likely be detached from international shipping markets. Soliddomestic growth rates will provide good opportunities to further develop the sector. Besides oil tankers and

container vessels, demand for inland passenger vessels could increase. Due to high accident rates, safetyregulations for these vessels could change. Experts predict there will be demand for 300400 smaller shipsover the next 10 years.

2.3 Key Buying Factors

When selecting a yard for building a vessel, owners consider different factors along three majordimensions: Price, Quality, and Delivery Date. These factors change with the market. In buyersmarkets, where building spots are readily available,price and quality dominate, whereas in sellers markets,timely delivery becomes more important and buyers are willing to compromise on price and quality. Thereare also differences among vessel types as shown in figure 9.7. In relative terms, price is more importantfor simpler vessel types, whereas quality becomes more important with sophisticated vessels. Thus, in thecurrent market situation, it is important that Bangladesh compete in terms of both price and quality.

Figure 9.7: Perceived Importance of Key Buying Factors for Different Ship Types

Source:FutureShip Expert Survey 2011.Note:Importance is indicated by total of 10 points distributed among factors by industry experts.LNG = liquefied natural gas; LPG = liquefied petroleum gas.

1,000

0

200

2011

201

0

2009

2008

2007

2006

2005

2004

2003

2002

2001

400

600

800

1,200


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3 Capabilities and Competitiveness of the Shipbuilding Industry in Bangladesh

9.16 Export shipbuilding in Bangladesh is considered a success story and has significantly improvedover the past decade. Nevertheless, the industry is still in its infancy. The production of the vast majority ofBangladeshi shipyards is still directed towards the domestic market. Total output is estimated to be around250,000 gross tones (GT) per year, of which 185,000 GT are for the domestic market (registered

production) (Department of Shipping 2011). To date, of around 200 shipyards total (of which 124 areregistered) in Bangladesh, only 2 yards have produced export quality vessels of up to 7,000 dwtWesternMarine Shipyards and Ananda Shipyards and Slipways. Production conditions have improved significantlysince the mid-2000s. In particular, Western Marine Shipyard has achieved the reputation of a quality playerthat delivers good ships on time. In addition, a number of yards have export shipbuilding capabilities but nodemand; they include Highspeed Shipbuilding & Engineering, Khan Brothers Shipbuilding, KhulnaShipyards, Meghna Shipyard, and Narayanganj Shipbuilders. Many remaining yards in Bangladesh lack theinfrastructure, reputation, and experience to move quickly into the export segment, but the entry barrier isnot insuperably high if enough capital is invested upfront.

3.1 Status and Capabilities of the Industry

3.1.1 Shipyards

9.17 Major vessel types produced at Bangladeshi shipyards nowadays include MPVs, small containervessels, bulkers, and tankers, as well as passenger ferries and tugs. Only MPVs and ferries have beenexported so far.

Box 9.1: Khan Brothers: The Upcoming

Yard Khan Brothers is an example of a shipyard that was basically built from scratch. In 2008, the founders divertedfunds from their bagwear business to acquire land and set up a shipyard. In the same year they attended theShipbuilding, Machinery and Marine Technology (SMM) International Trade Fair in Hamburg with just a banner anda layout plan. This led to several serious negotiations with international ship owners, although no contracts wererealized afterwards. Nevertheless, the yard was built and became operational in 2011. Now the Khan Brothers have

several vessels under construction, including oil tankers, tourist vessels, and ferriesall for domestic use.

Source:Khan Brothers.

3.1.2 Technology

9.18 Exporting shipyards have equipment and shops for computer numerical control (CNC) machining,bending, welding, and shot blasting, as well as heavy lifting. These are prerequisites to operate steelworksand assemble the components for larger vessels at a quality required by international owners. However,these basic facilities are only present at a few yards in Bangladesh.

3.1.3 Sites

9.19 With the current spatial limitations of the sites and the low river draft across the country, it is onlypossible to build ships of up to 15,000 dwt. This is comparatively small by international standards.Realistically, Western Marine Shipyards could currently build 510 vessels of such sizes per year on itscurrent sites. Ananda Shipyards, employing fewer staff, has a capacity of less than 5 vessels. With furtheryards estimated at a maximum of 5 vessels, currently Bangladeshs annual capacity is estimated at 20 orless export-standard vessels.


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3.1.4 People and Employment

9.20 The actual number of people employed in the shipbuilding industry in Bangladesh could be under100,000. The number for semiskilled and skilled employees of Bangladeshi shipyards often quoted inpublications is 150,000 to 200,000. However, this results in a high average figure of 750 staff at each of the200 yards with a total production volume of 250,000 GT. The largest yardsWestern Marine Shipyards

and Ananda Shipyardsemploy around 3,000 and 2,000 people respectively, whereas smaller yardsemploy less than 100 people. As a comparison, in 2008 China employed 400,000 people in 2,000 shipyardsand related industries, with a production volume of 14 million GT; in 2010 Vietnam employed 110,000workers for a production volume of 600,000 GT.

9.21 Although the availability of labor has often been rated good, industry stakeholders report scarcityof good welders and engineers. Especially for higher quality and more sophisticated vessels, the industryfaced a shortage of high-caliber staff. These shortages have negatively influenced the delivery time ofvessels and productivity in the past.

9.22 The successful track record of building vessels for export has strongly relied on support fromforeign experts and Bangladeshi staff with international experience. Going forward, it is crucial forshipyards to acquire and retain such employees, especially as they can transfer knowledge to other staff.Furthermore, proper management is one of the success factors missing at most yards.

3.1.5 Training and Education

9.23 Training is conducted mostly by informal, hands-on teaching directly at the shipyards. WesternMarine Shipyards and Khulna Shipyards are the only yards that operate proper training institutes or trainingprograms to educate skilled workers. There is a Naval Architecture and Marine Engineering Department atthe Bangladesh University of Engineering and Technology, currently educating 30 engineers per year. Inaddition, the Marine Academy offers a curriculum in Marine Engineering. The quality of these curricula isperceived as sufficient. However, this number of graduates is too low to develop the sector, especially asgraduates often leave the country for better job opportunities abroad.

3.1.6 Forward and Backward Industry Linkages

9.24 In Bangladesh, the ship design industry is developing slowly. It currently focuses on domesticvessels such as small oil tankers designed for the home market. Often, the work consists of refining existingdesigns within a frame of limited capabilities. Ship design is a task requiring solid to sophisticatedengineering capabilities. Foreign ship owners mostly bring their own designs, which gives Bangladeshidesigners limited opportunities to add improvements. A viable way of enhancing design capabilities inorder to develop proprietary designs over the long term is time-limited employment of Bangladeshi staff inmore developed countries.

9.25 Due to lower quality requirements, domestic demand for ships is higher than for exports. Localmaterials and equipmentmay include steel plates, angles, winches for mooring, anchor windlasses, chaincables of 1015 millimeters diameter, furniture, upholstery, kitchen utensils, electric cables, switch boards,and power transformers. Against international standards, Bangladesh is also currently able to produce

steelworks and minor items, such as electrical cables, furniture, and welding electrodes. However, enginesinstalled in Bangladesh-built vessels originate exclusively from foreign suppliers. Capabilities in themaintenance sector are sound, but expansion of activities is limited by the lack of dry-dock facilities forlarger vessels above 20,000 dwt.

9.26 Therefore, the value chain has much potential for broadening. The share of value creation besidesactual buildingif produced for the domestic marketis up to 25 percent; but it is only 1 percent forexport ships.2 The main reasons why no linkage industry has grown around shipbuilding are the

2Western Marine Shipyards, procurement department.


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comparably small size of the market and, especially, the unavailability of skills and technology. Thetechnological threshold of building high-quality and certifiable components is high. However, there arepotential areas where the linkage industry could be developed, especially with help of foreign producers.Over the short to medium term (up to five years), steel, pipes, flanges, and paint could be developed. Overthe medium to long term (up to 10 years), generators, purifiers, compressors, and valves seem possible.

3.2 Investment Climate

9.27 A general shortage of suitable land in Bangladesh makes it difficult for shipyards to expand.Infrastructure around shipyards has been rated rather problematic by many stakeholders. Reliable road andrail connections do not exist for many shipyards, making transportation of supply goods difficult.Furthermore, the supply of power, gas, and water is not reliable. Existing sites are sufficient to maintainlevels of production for small vessels, but growth and scaling up is hardly possible. The Ministry ofIndustry estimates that about 2,000 acres of land needs to be declared as shipbuilding zones to attainsignificant growth of the sector. Furthermore, the depth of waterways and clearance of bridges puts anatural cap on ship size.

9.28 Foreign direct investment (FDI) in the shipbuilding sector is close to zero at present. Reasons oftenmentioned are the poor infrastructure, absence of proper management structures, no critical mass for

shipbuilding products in the domestic market, lack of a skilled workforce, and widespread corruption(Transparency International 2011). Bureaucratic and nontransparent decision making, including allegationsof corruption at the top, has also turned away foreign investors. In past years, Bangladesh has conductedefforts to attract more FDI with the help of the International Finance Corporation and in partnership withthe U.K. Department for International Development and the European Union.

3.3 Competitiveness

3.3.1 Cost Position

9.29 To assess the competitiveness of Bangladeshs shipbuilding industry, a comparison of the costposition against reference countries was conducted. China and Vietnam were chosen as references for threereasons. First, both Asian nations share with Bangladesh comparable cost structures and limitations to their

share of domestic value creation. Second, both have shown a fast development trajectory from similarstarting points. Third, both have experienced strong governmental and institutional steering in strategicplanning and tactical plan implementation of their respective shipbuilding industry segments.

9.30 For merchant shipbuilding, materials represent the largest cost position (57 percent, includingcomponents), followed by overheads (27 percent including financing, indirect labor, and other costs), anddirect labor (17 percent) (Stopford 2009). In developing countries, which often have a labor cost advantage,the cost structure will lean further towards materials, and less towards labor. In order to understand theoverall relative cost positioning of Bangladesh against China and Vietnam, each of the cost groupsmaterials, labor, and finance costs are reviewed.

9.31 Bangladesh has little local supply and is largely dependent on importing both raw materials andcomponents. This also holds true for Vietnam, but to a lesser extent. China, on the other hand, now has

significant own capacities for both steel and marine components, with substantial competition amongnational and international suppliers. Basic commodities such as iron ore and coal are traded on the worldmarket and are similar for all buyers, but China enjoys abundant availability through its sheer size.Therefore, it will remain difficult for Bangladesh to create a beneficial position for the most importantsingle cost position, materials.


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9.32 Compared to China, Bangladesh has significantly lower nominal labor cost, but also lowerproductivity, which levels out some of the labor cost benefit.3Vietnam has better productivity levels thanBangladesh, and comparable nominal labor cost. Bangladesh presently has an effective labor costadvantage over China, and a disadvantage compared to Vietnam; but total effects range in the lower singledigit percentage, as shipbuilding is a material/component rather than a labor-intensive business.Nevertheless, a positive outlook can be sketched. Bangladeshsmodern shipbuilding industry is still in its

infancy and is making fast progress on the learning curve. Therefore, productivity is likely to increasefaster than nominal labor cost, resulting in a more favorable position in the future.

9.33 Bangladesh has a disadvantage in terms of cost of financing, as commercial banks currently lend atinterest rates of 15 percent on average. In addition, for imported raw materials and components, it isnecessary to open import letters of credit (L/C), with fees of up to 8 percent. Furthermore, bank guaranteesare a topic for concern, as they add additional cost to ship owners. These guarantees are issued on advancepayments made by the owner, as confidence in capabilities and commitment to strict delivery schedules islacking. Because guarantees from Bangladeshi banks are not accepted, counter-guarantees from foreignbanks are needed. Shipbuilders in China and Vietnam can finance their working capital at significantlylower rates, often supported by governmental guarantees and state funding. Out of total ship costs,financing conditions in Bangladesh cause a cost disadvantage of approximately 2 percent.

9.34 Export shipbuilding is exempt from all tariffs and has been granted full green channel customssupport, but domestic shipbuilding is subject to import duties for almost all sorts of materials andcomponents. These duties range from 3 percent for sophisticated components and steel to more than 100percent for components that are easy to manufacture. However, this has to be seen in relation to importduties for complete vessels, which is at a rate of 12 percent for most vessel types. Although there are notariffs on material and components for export vessels, customs clearance of shipbuilding componentsrequires improvements, as it reportedly represents a bottleneck to the industry.

3.3.2 Quality Position

9.35 While there is a broad quality range of ships manufactured, classification ensures elevated qualitylevels and low variation. The spectrum ranges from classed, reasonable quality vessels for export marketsand an increasing number of partly classed4domestic oil tankers, down to nonclassed, low-quality vessels

built from recycled scrap without any standards for domestic markets. Classed vessels follow technicalrules and guidelines of an independent bodythat is, a classification society (class). Classified vessels areboth designed and produced under supervision and rule application of the class society. Moreover,personnel have to be qualified and trained and components have to meet class-established criteria. Mostowners that have bought ships in Bangladesh attest to good vessel quality, as do class surveyors. However,as only short-term experience exists, long-term quality cannot be judged properly.

9.36 Smaller domestic vessels are often built without application of international (class) or nationalstandards (such as Bangladeshs Domestic Vessel Code5), for several reasons. International classificationis expensive and legally not required for inland waterway and coastal vessels. Furthermore, most yards donot have the skill to produce under class standards. These vessels must adhere to local standards, which areenacted and enforced by the government. However, local rules and standards are low quality and in many

cases they are not even enforced. According to government officials, only three surveyors are taking care ofdesign approvals and supervision tasks for the entire domestic fleet in Bangladesh at present. As a result,domestic nonclassed vessels generally have quality levels that are low and that vary greatly depending onthe executing yard.

3The labor cost position has two components: nominal labor cost (US$/hour) and productivity (CGT/hour).4Domestic oil tankers currently under construction have hull class only.5Published in 2001 in accordance with Inland Shipping Ordinance, 1976.


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3.4 Buyers View and Implications

9.37 The main strengths of Bangladeshs shipbuilding are steelworks, overall cost position, and businessenvironment. In spite of this, perceived excellence is scarce and benchmark nations surpass Bangladesh inmost criteria (figure 9.8). Ship design has recently started in Bangladesh for smaller domestic vessels, but itis difficult to quickly progress to export designs as the field builds up mainly on experience. This is also the

reason why design is still done mainly in developed European countries, in Korea, and in Japan. However,China is investing heavily in this field by buying competency from abroad. In terms of technicalcapabilities, Bangladesh is competitive for steel works, at least in the export-oriented yards. Most of aships equipment, outfitting, and electronics are still produced by manufacturers in developed countries orby licensees in China. To close the gap with other competitors, it is essential to broaden the value chainwith help from abroadfor example, through joint ventures (see box 9.2). Processes at Bangladeshsexport-oriented yards are rated competitive. However, in terms of productivity Bangladesh is surpassed byits competitors.

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