Cambodian Economy Defies Global Trend But Challenges Remain

Some of the world’s leading economies are seeing a slowdown in growth – dragging down the global economy with them.

But here in Asia, Cambodia – which goes to the polls on 28 July in a general election – is one country that has been defying the trend.

The South East Asian economy saw its growth pick up speed in 2012 and the Asian Development Bank (ADB) has forecast “further robust growth, with trajectory expected to steepen slightly in 2014”.

According to the ADB, Cambodia’s economy expanded at an annual rate of 7.2% in 2012, up from 7.1% in 2011 and 6% in 2010.

Cambodia, like many other countries in Asia, has for many years relied on its export sector to be a key driver of growth.

Low cost of labour has seen the country become a key manufacturer and exporter of garments and footwear to markets such as the US and European Union (EU).

Economic problems in those markets have dented consumer confidence, and in 2012 Cambodia saw the pace of growth of its exports decline – but , according to the ADB, domestic consumption jumped by 9.5% and is expected to rise further in the coming years. And as conditions in the US and EU improve, exports are likely to rebound.

“European demand for Cambodian garments and footwear is expected to maintain good growth, supported by duty-free access to the EU,” the bank said in a report on the Cambodian economy published in April.

“Shipments to the US will likely be subdued this year but should pick up after that,” it added.

‘Destination of choice’

Another key driver of Cambodia’s growth has been the surge in foreign direct investment in the country, which jumped by 75% last year to $1.5bn (£1bn).

Along with traditional sectors such as garment manufacturing, foreign money has also been used to help fund new industries such as auto-parts manufacturing and agricultural products processing.

Low labour costs and Cambodia’s proximity to key markets such as China and other emerging economies in South East Asia are attractive to foreign investors.

And with wages in countries such as Thailand and China on the rise, Cambodia is likely to become even more attractive.

“This trend is only going to get stronger with more companies looking to set up operations in Asia,” says Rajiv Biswas, chief economist for Asia-Pacific at IHS Global Insight.

“Given its competitiveness and the current economic environment, Cambodia is going to increasingly become a destination of choice for foreign investors.”

‘Skill mismatch’

But there have been protests in recent months with workers demanding an increase in their wages.

And critics say for the country to take the next step in its growth cycle, it needs to diversify into high-end manufacturing on a bigger scale.

But Cambodia may find it tough to do so, not least because of the skill level of the majority of its labour force.

“A key restraint to growth is the skill mismatch, or the lack of adequately skilled labour in the high-end industries,” says Srinivas Madhur, director of research at Cambodia Development Resource Institute.

“The enrolment rate in tertiary education is only 14%, which means the pool of skilled people is very small.”

Mr Biswas says that the inability of Cambodia to move into advanced manufacturing is a “great vulnerability”.

“What is crucial now, is that they need to develop their education sector and they need to build partnerships to bring more advanced education into the country, especially vocational training,” he says.

Poverty concerns

Another key area of concern is that Cambodia remains one of the poorest countries in Asia.

Its per capita income in 2012 was $946, according to the World Bank. That compares with $5,474 in Thailand and $3,557 in Indonesia.

The ADB has quoted the World Health Organization as saying vitamin and mineral deficiencies alone cost Cambodia’s economy $146m each year.

The bank says 55% of under-fives were anaemic in 2010.

And malnutrition and poor health stunt the growth of up to 40% of Cambodian children.

Economic growth has seen poverty levels come down – but critics say the country needs to do much more to ensure the benefits trickle down to the poor.

“Inclusive growth”, they say, is a much better claim to fame than “robust growth”.

Source: BBC News | July 25, 2013 | By: Puneet Pal Singh

Wary of China, Companies Head To Cambodia

Tiffany & Company is quietly building a diamond-polishing factory in Cambodia, a country popularly associated more with killing fields and land mines than baubles.

Some of Japan’s biggest manufacturers are also rushing to set up operations in Phnom Penh to make wiring harnesses for cars and touch screens and vibration motors for cellphones. European companies are not far behind, making dance shoes and microfiber sleeves for sunglasses.

Foreign companies are flocking to Cambodia for a simple reason. They want to limit their overwhelming reliance on factories in China.

Problems are multiplying fast for foreign investors in China. Blue-collar wages have surged, quadrupling in the last decade as a factory construction boom has coincided with waning numbers of young people interested in factory jobs. Starting last year, the labor force has actually begun shrinking because of the “one child” policy and an aging population.

“Every couple days, I’m getting calls from manufacturers who want to move their businesses here from China,” saidBradley Gordon, an American lawyer in Phnom Penh.

But multinational companies are finding that they can run from China’s rising wages but cannot truly hide. The populations, economies and even electricity output of most Southeast Asian countries are smaller than in many Chinese provinces, and sometimes smaller than a single Chinese city. As companies shift south, they quickly use up local labor supplies and push wages up sharply.

While wages and benefits often remain below levels needed to provide proper housing and balanced diets, the manufacturing investment — foreign direct investment in Cambodia rose 70 percent last year from 2011 — is starting to raise millions of people out of destitution. “People along the Mekong River are being lifted out of poverty by foreign investment inflows driven by higher Chinese wages,” said Peter Brimble, the senior economist for Cambodia at the Asian Development Bank.

Only a smattering of companies, mostly in low-tech sectors like garment and shoe manufacturing, are seeking to leave China entirely. Many more companies are building new factories in Southeast Asia to supplement operations in China. China’s fast-growing domestic market, large population and huge industrial base still make it attractive for many companies, while productivity in China is rising almost as fast as wages in many industries.

Foreign investment in China nonetheless slipped 3.5 percent last year, after rising every year since 1980 except 1999, during the Asian financial crisis, and 2009, during the global financial crisis. Still, at $119.7 billion, foreign investment in China continues to dwarf investment elsewhere.

By comparison, investment in Cambodia rose to $1.5 billion. But last year was the first time since comparable recordkeeping began in the 1970s that Cambodia received more foreign investment per person than China.

“People are not looking for exit strategies from China, they’re looking to set up parallel operations to hedge their bets,” said Bretton Sciaroni, another American lawyer here. Among Japanese makers, Sumitomo is making wiring harnesses for cars, Minebea is assembling parts for cellphones and Denso is about to start production of motorcycle ignition components.

Foreign investment also jumped last year in Vietnam, Thailand, Myanmar and the Philippines.

As companies compete for employees, working conditions in the region are improving. Pactics, a Belgian-run company that is the world’s largest maker of microfiber sleeves for luxury sunglasses, has introduced employee benefits that were previously rare in Cambodia, like medical insurance, accident insurance, education allowances and free lunches.

Because costs are extremely low in Cambodia, where a visit to the doctor may cost only a couple of dollars, overall compensation for each worker is still less than $130 a month. At the company’s factory on the outskirts of Shanghai, workers doing the same tasks earn $560 to $640 a month, including government-mandated allowances, said Piet Holten, the company’s president.

Cambodian workers sew 15 to 30 percent fewer sleeves per day than their Shanghai counterparts, but productivity in Cambodia has been catching up.

“I will never get it up to China, but the cost is less than a third of China’s, and China only gets more expensive,” Mr. Holten said.

Overall monthly compensation for industrial workers has increased as much as 65 percent in the last five years in Cambodia, although from such a low base that workers here remain among the poorest in Asia. A decade ago, workers flocked to newly opened factories in Phnom Penh that posted hiring notices, but “today, you put a notice on a factory and you don’t have anybody come,” said Sandra D’Amico, the managing director of HR Inc. Cambodia, a human resources company.

Strikes this winter temporarily crippled numerous Taiwanese-owned garment factories in eastern Cambodia producing simple garments like bathing suits after Japanese factories moved in to make more sophisticated products like business suits and gloves — and offered higher pay and benefits.

At the Phnom Penh Special Economic Zone here in central Cambodia, Minebea is trying to attract workers by building a modern, four-story dormitory for 2,000 people with six beds to a room and a large recreation hall — a big change from the plywood houses with thatched roofs in which millions of Cambodians still live. The Laurelton Diamonds unit of Tiffany has already driven pilings for a modern, 95,000-square-foot factory across the street to polish small diamonds, and is seeking international “green building” accreditation for the project.

Employment at the zone is doubling this year, to 20,000 workers, and is projected to redouble to 40,000 in the next several years, said Hiroshi Uematsu, the zone’s managing director.

Skeptics like David J. Welsh, the Cambodia representative of the A.F.L.-C.I.O.’s Solidarity Center, say that rising food and housing costs prevent many workers from fully benefiting from rising wages. Ken Loo, secretary general of the Garment Manufacturers Association in Cambodia, said that his industry needed to resist workers’ demands for further pay increases to preserve international competitiveness.

Tatiana Olchanetzky, a manufacturing consultant to companies in the handbag and luggage industry, said that she had analyzed the costs in her industry of moving operations from China to the Philippines, Cambodia, Vietnam and Indonesia. She found that any savings were very small because China produces most of the fabrics, clasps, wheels and other materials required for the bag trade, and these would have to be shipped to other countries if final assembly moved there.

But some factories have moved anyway, at the request of Western buyers who fear depending exclusively on a single country.

While moving to a new country with an unproved supply chain is a risk, Ms. Olchanetzky said, “They think there’s a risk in staying in China, too.”

Source: The New York Times | April 8, 2013 | By: Keith Bradsher

Footwear Sector To Have Running Room

Cambodia’s footwear industry has experienced significant growth over the past five years, with the number of factories doubling, according to data from the Ministry of Commerce. Meanwhile, the International Labour Organisation (ILO) has announced it will monitor and report on footwear factories.

As of November, 45 factories exported footwear with a combined value of $268.7 million, according to estimates of the Ministry of Commerce.

Nearly 50 per cent of the products were shipped to the European Union, the top export destination for footwear and garments since the Everything But Arms regulation that gives Cambodia duty-free and quota-free shipping to all EU countries. The second largest destination was Japan, which imported 34.7 per cent of Cambodian footwear, followed by the US at 27.03 per cent.

In 2012, most footwear factories were Taiwanese owned (26), while only six were Cambodian and five Chinese. Other manufacturers were Korean, Japanese, Thai, Canadian, Australian and from Hong Kong, according to ministry data.

Of the 69,184 workers in the footwear industry, more than 90 per cent are female.

ILO’s Better Factories Cambodia (BFC) program recently published a Footwear Pilot Program report, saying the Cambodian footwear industry is expected to grow gradually.

“Many factories [act] as remote production facilities for existing factories in Vietnam. Cambodia is considered too small to support a large footwear industry”, such as those that exist in China, Vietnam or Indonesia,  the report said.

It added: “Nonetheless, because of wage increases and labour shortages in Vietnam, factories are looking to produce in Cambodia.”

The vice-president for production of a US footwear brand, who asked not to be named, confirmed. “Given the pressure on labour costs in the region and the increasing difficulty of recruiting workers in the Ho Chi Minh City area, I do see more factories going to Cambodia. Some factories will opt to move to Northern Vietnam as well, but overall Cambodia still has some running room and I think footwear factories will take advantage of that.”

With that mind, the ILO has now expanded its monitoring and reporting on footwear factorys’ compliance with national law and international standards for the first time.

“Since assessment of working conditions in footwear factories is not mandatory as are BFC’s assessments of export garment factories, BFC worked with nine select factories on a pilot footwear factory assessment program between March and December 2012,” the organisation wrote, stating that it found safety and health challenges, especially chemical safety, in the industry.

Source: Phnom Penh Post (March 13, 2013)