The Wall Street Journal
written by Syed Zain Al-Mahmood in Dhaka, Bangladesh, Christina Passariello in Milan and Preetika Rana in New Delhi
Friday May 3, 2013
As foreign retailers embraced Bangladesh's cheap and speedy garment-making prowess, Bazlus Samad Adnan sensed there was a moment to be seized.
"There's money in the air," friends of the entrepreneur recall him saying. "You just need to know how to grab it."
Mr. Adnan and a friend set up a small garment factory, New Wave Style, behind a slum outside Dhaka in 2006, just as foreign clothing giants swept into Bangladesh, enticed by rock-bottom labor costs. Within a few years, his company was doing work for top international brands, such as Italian retailer Benetton Group SpA.
By then, New Wave Style had moved to the sixth and seventh floors of Rana Plaza, one of myriad factory buildings to sprout amid the nation's once-in-a-generation economic flowering.
Today, Mr. Adnan is in jail and at least 500 people are dead after last month's collapse of the eight-story Rana Plaza—one of the worst industrial accidents the world has seen. Bulldozers on Friday pushed at the rubble, uncovering more corpses.
Pressure is now mounting on some of the biggest purchasers from Bangladesh, including Swedish retailer Hennes & Mauritz AB HM-B.SK +1.63% and Wal-Mart Stores Inc. WMT +1.01% of the U.S., to scale back their exposure to the nation.
Benetton was one of New Wave Style's latest customers. It was a relatively small client, but in March, just before the building collapse, New Wave Style had completed a Benetton order for 185,000 or so cotton shirts, according to numbers from Benetton and one of its Indian suppliers.
At first, the Italian company denied having any relationship at all with New Wave Style. That initial confusion exposes the complexities of a global supply chain in which retailers assemble sprawling networks of contractors and middlemen—Benetton, for instance, has 700 suppliers, an executive said—to sew their clothes and seek an edge over rivals. These vast networks give retailers flexibility for last-minute orders and lightning-fast turnaround, which are imperative in a fast-fashion era where the latest look can rocket from the runways of New York or Milan to the factories of Asia in no time. The tangled networks also make it difficult to assess blame when something goes wrong.
This account of Benetton's dealings with New Wave Style in the months before the accident is based on interviews in Bangladesh, India and Italy, as well as from documents recovered by workers' groups at the scene of the Rana Plaza collapse.
Mr. Adnan has been arrested and jailed on suspicion of criminal negligence, but not charged with wrongdoing. He couldn't be reached for comment. His lawyer declined to comment. Surviving company officials declined to comment on Mr. Adnan's arrest.
In an emailed statement, Benetton's chief executive, Biagio Chiarolanza, said Benetton is working with the International Labor Organization to improve working conditions. "This is such a tragedy that no one in the industry should feel above it," he said, adding that the company will make funds available to aid victims.
Separately, a senior Benetton executive said that company officials had made several unannounced visits in the eight months New Wave Style was doing work for them. Earlier this year, before the collapse, the executive said, Benetton had decided not to use the company further.
Bangladesh in a matter of years has become the world's third-largest exporter of clothing, after China and Italy. Garment exports came to $20 billion last year, 80% of Bangladesh's total exports, and up a quarter from 2010.
Workers' representatives say the growth has come at the expense of safety. Some 800 garment-industry workers have perished in fires and other accidents in Bangladesh in the previous decade, excluding the latest disaster. More than 5,000 factories have sprung up in Bangladesh, many of them in buildings like Rana Plaza, whose owner allegedly flouted safety laws.
A preliminary report by a government inquiry committee found that Rana Plaza had been built on the site of a filled-in pond without proper precautions. The committee also said several large generators installed on upper floors caused vibrations that could have contributed to structural instability.
Local authorities have taken action in the wake of the tragedy. On Thursday, authorities suspended a mayor who allegedly allowed the construction of Rana Plaza without safety permits. Neither he nor his lawyer could be reached for comment.
Last week Rana Plaza's owner, Sohel Rana, was arrested for allegedly constructing the factory without safety permits. The owners of New Wave and three other factories in the building were arrested on allegations that they had forced employees to return to work after an earlier evacuation due to a crack appearing on an exterior wall. None have been charged.
Mr. Rana and the other factory owners couldn't be reached for comment. Lawyers for all the men declined to comment.
When foreign brands first started to pour into Bangladesh a decade ago, they opted for modern, low-slung factories on their own compounds. Many are located in Ashulia, a special economic zone northwest of the capital, Dhaka.
As business grew, those factories couldn't always keep up. So they would instead subcontract out to a new breed of factories—smaller places, like New Wave Style.
Set up in 2006 by Mr. Adnan and his friend, Mahmudur Raman Tapash, their original factory got its start only after Mr. Adnan obtained a small sum from his father, a retired bureaucrat, as seed money, friends said. Bangladesh's garment industry was taking off around that time after the phaseout of a system in which developed countries imposed quotas on garment exports from developing nations. Flashy cars, driven by garment-factory owners, began appearing on the streets of Dhaka, one of Asia's poorest and most chaotic cities.
In 2009, Mr. Adnan's company got a big break when a larger factory, which had a long-standing contract with Canadian retail giant Loblaws Co., L.T +2.10% was unable to fulfill an order. It handed the subcontract to New Wave, according to people involved in the order.
The next year, New Wave Style expanded to a 40,000-square-foot space in Rana Plaza, located in Savar, a former agricultural area on Dhaka's outskirts that was fast becoming a garment-industry boomtown. On its website, the factory said it could produce 6,000 items of clothing a day. It detailed safety precautions such as keeping 24 fire extinguishers and 11 smoke detectors on hand.
Rana Plaza was built in 2007 by Mr. Rana, a 37-year-old local businessman, as a multiuse building to accommodate factories as well as shops. Mr. Rana, who is in police custody, couldn't be reached. His lawyer declined to comment.
He was known locally as an ally of Refayet Ullah, the longtime mayor of Savar, according to several people with knowledge of the matter. The mayor signed permits for new factories in the area. In an interview before his suspension from office on Thursday, Mr. Ullah said the area was booming and he didn't have time to seek mandatory safety clearances from a municipal body in Dhaka.
The year New Wave Style moved in to Rana Plaza, 2010, was a good one for Bangladesh's garment industry. Exports totaled almost $16 billion, a threefold jump on a decade earlier.
Retailers were attracted by entry-level wages of $40 per month, a quarter those of China's. The environment has become tougher since then. Last year, the industry was convulsed by rolling garment-factory strikes after a labor leader who had been calling for higher wages was murdered. No one has been charged in the killing.
New Wave began to struggle. It missed shipments and repayments of debt taken out at 18% interest to pay for the move to Rana Plaza, according to interviews with bankers and members of the local garment-manufacturing association who know Mr. Adnan. The Benetton order, placed last September after the fabric had arrived from India, was viewed by the owners as a lifeline, according to New Wave officials who survived the collapse.
As for Benetton, the company has been fighting back stiff competition from so-called fast-fashion brands including H&M and Zara. H&M slashed costs, making its clothes more affordable than Benetton's, and a big part of that strategy was Bangladesh. H&M currently is the largest buyer from the country, followed by Wal-Mart, according to the Bangladesh Garment Manufacturers and Exporters Association.
Benetton's sales were stuck at 2 billion euros in 2011, unchanged from a decade earlier. In May last year, on announcing disappointing earnings, Benetton said in a statement that it would "act with determination to achieve maximum efficiency of production processes and sourcing."
Bangladesh was one place where Benetton could put that into action. On top of the low wages, the company benefited from an agreement by which Bangladesh, as one of the world's poorest countries, can export to the European Union without paying duty.
Benetton first produced clothes in Bangladesh about a decade ago. Today, a dozen factories in the country churn out 4% of the company's global garments production, up from 2% five years ago. Three years ago, Benetton opened an office in Dhaka.
Last summer, Benetton also turned to Shahi Exports Ltd., a large Indian garment firm that previously had used only their own factories in India to supply Benetton. "They asked us—for the first time—to manufacture the order out of Bangladesh," said J.D. Giri, a vice president at Shahi. "Why Bangladesh? Because of duty-free access. It's highly cost-efficient."
The senior executive at Benetton disputed that, saying that Shahi was unable to fulfill an order and that Shahi suggested subcontracting to Bangladesh.
Mr. Giri said the Bangladeshi factories that Shahi had used previously for subcontracting work not involving Benetton were busy. So employees scouted other locations, drawing up a list that included New Wave.
Last summer, Benetton employees from India and Hong Kong began an assessment to ensure New Wave had the capacity to fulfill an order and deliver it on time, according to the senior Benetton executive. Shahi carried out its own check, Mr. Giri said, which included ensuring compliance with labor laws and safety standards.
It is common in the industry for foreign retailers to order a separate, third-party safety audit of prospective manufacturers. The Benetton executive said the Italian company didn't order a third-party safety audit because it had placed only a first, small order with New Wave.
There is a database of factory audits that many retailers use. It contained the report of an earlier audit conducted by the Brussels-based Business Social Compliance Initiative on behalf of a retail client.
In March of last year, those auditors failed New Wave during an audit because items were missing from the first aid kit, a doctor or nurse wasn't on hand, and workers didn't have sufficient training on machine safety, according to Lorenz Berzau, BSCI managing director. Mr. Berzau, in an interview, said his audits aren't designed to investigate the structural soundness of factory buildings, only factory-floor issues.
In September, Benetton put through its first order with New Wave for 145,000 garments, according to documents reviewed by The Wall Street Journal. Shipments were late and sometimes incomplete, raising concerns about the factory's management, according to the person close to the situation.
In December, the shipment was delivered to Benetton logistics sites in Treviso as well as Shenzhen, China, before being sent to markets such as the U.S., Mexico and Russia, according to the documents.
Benetton then put in a second order in January for 40,000 pieces, according to the company. It was delivered at the end of March, just before the building collapse.
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