* Western retailers gradually returning to Bangladesh
* Factory owners say thin margins being squeezed further
* Automation one tool being used to cut costs
By Rajesh Kumar Singh and Ruma Paul
DHAKA, Feb 26 (Reuters) - Bangladesh’s clothing exports are booming, defying fears that recent killings by Islamist militants might prompt Western brands to go elsewhere to source their garments.
Along with relief among manufacturers, who are the mainstay of the South Asian nation’s economy, comes the reality that already slim profit margins are being eroded further, as pressure for cost savings and improved safety intensifies.
“It’s fast becoming a business where only the fittest can survive,” said Atiqul Islam, one of Bangladesh’s biggest garment exporters, whose clients include H&M.
It could have been worse.
For months, executives from Western retailers who source cheap clothes from Bangladesh avoided visiting the country, worried by rising violence, including the murder of two foreigners.
Meetings with suppliers were held in Dubai, New Delhi and Singapore. M. Shafiqul Azim, general manager at an apparel exporter, had to hire private guards to convince an Italian technician to travel to Dhaka last year for a plant inspection.
The World Bank warned militancy could derail Bangladesh’s path to becoming a middle-income country.
For now, though, the concerns appear to be easing, and recent figures show the $26 billion garment export sector is growing faster than many had dared predict.
“It was a temporary setback,” Islam told Reuters. “After two to three months, the visits resumed.”
A Western diplomat in the capital Dhaka attributed the change to a swift response from the government and the support provided by local police.
After the killings last year, Dhaka deployed paramilitary soldiers on night-time patrols in the diplomatic quarter and issued a nationwide ban on people riding pillion after two attacks were carried out by masked men riding motorbikes.
Between October and January, Bangladeshi factories exported garments worth $9.3 billion, up about 14 percent from a year ago, government data showed. Exports to the United States saw a 16 percent annual jump in December.
Azim, who supplies to Wal-Mart, says his order book is up 15 percent. Buoyed by strong demand, his firm - r-pac - is investing $10 million to set up a new factory.
Bangladesh’s resilience boils down to a combination of the world’s lowest wages after Myanmar and Sri Lanka, the right skills and the fact that China has become less competitive in recent years.
The minimum monthly wage for garment workers in Bangladesh is $68, compared with about $280 in mainland China, which nevertheless remains the world’s biggest garment exporter.
In a global survey of leading apparel producers last year, consultant McKinsey predicted 7-9 percent annual growth for the sector over the next five years.
Still, garment exporters worry about profit margins being squeezed due to increased compliance costs in the wake of the 2013 Rana Plaza factory collapse in which more than 1,100 people died, and a push from buyers to further reduce costs.
Islam estimated that most of Bangladesh’s garment exporters were operating with a profit margin of just three percent.
He added that firms like his are also spending an average of $700,000 on upgrading facilities to meet safety compliance standards, but buyers are not ready to bear the cost.
Adding to the strain, garment exporters are under pressure to further reduce prices to retain customers.
“Every year they ask for a 2-3 percent price cut,” Islam said.
To protect margins, some manufacturers have invested in automation.
At Azim’s factory, for example, machines are already doing the bulk of the work, while Islam has just spent $500,000 to import 70 new machines from Italy.
H&M declined to comment for this article.
Walmart’s spokeswoman, Marilee McInnis, said the company was making investments through an inspection group led by the North American brands, the Alliance for Bangladesh Worker Safety.
H&M is a signatory to the Accord on Fire and Building Safety in Bangladesh, a mainly European grouping.
“Bangladesh is an important sourcing market for the industry,” said McInnis, director of international corporate affairs at Walmart. “It is important that investments in Bangladesh continue.” (Additional reporting by Serajul Quadir in DHAKA, Anna Rinsgstrom in STOCKHOLM and Siddharth Cavale; Editing by Mike Collett-White and Paritosh Bansal)