Cambodia’s Garment Industry: What the Future Holds

By Hor Hab, Economics Today

The golden age of Cambodia’s garment industry began in the 1990s, when Cambodia was given trade privileges from the United States and the European Union. Some of the privileges included a tariff-free treatment from the United States. In 1996, garment exports to the United States amounted to about US$ 2.4 million only.

According to the Ministry of Economy and Finance (MEF) latest statistics, the exports of garment products totaled US$ 2.8 billion. The figures show a very small increase, only 1-percent increase, in exports between the fourth quarter 2006 and the fourth quarter 2007.

This growth slowdown has sparked worries among analysts and union leaders that the value of garment exports will decrease in 2008 and can affect the overall economy. The garment sector is the largest contributor to GDP and exports. It represented about 16 percent of GDP and more than 80 percent of exports in 2007.

International competition and poorer productivity affect the competitiveness of Cambodian garment sector. After a strong performance in the last few years, economists and government officials predict a less rosy future for the industry in 2008. Will Cambodian garment industry “golden age” come to an end?

Performance in 2007: Up or Down?

“Cambodia exported $380 million worth of clothing in the last quarter of 2007, a drop of $ 320 million over the same period in 2006,” Ken Loo, Secretary General, GMAC, told The Cambodia Daily, January 30, 2008.

Cambodia garment exports plummeted 46 percent in the fourth quarter of 2007. An economic downturn in the United States and continuing labor disputes contributed to the plunge, Van Sou Ieng, Chairman of GMAC told Agence France Presse.

However, official statistics from the MEF’s Customs and Excise Department indicate a slight increase. In the fourth quarter of 2007, exports of clothing only totaled US$ 702 million, while in the last quarter of 2006, they reached US$ 695 million, up by one percent.

In that same period, garment exports to the US market decreased about five percent, according to the same source. This figure worries analysts as about 70 percent of Cambodia’s garment gets exported to the US market.

According to many economists and industry’s stakeholders, they say that there are two main reasons for

this falling performance: 1) lack of productivity that results from poor industrial relations and 2) US economic slowdown.

In fact, Cambodia’s garment exports increased from US$ 2.6 billion in value in 2006 to about US$ 2.8 billion in 2007. More than US$ 1.8 billion of garments in 2006 and US$ 1.9 billion of garments in 2007 went to the US market, according to data from the Custom and Excise department, Ministry of Economy and Finance (MEF).

But the increase was only 8.2 percent from 2006 to 2007, while it was 19.4 percent from 2005 to 2006. Moreover local media recently reported that Cambodia’s garment exports dropped by 46 percent in value in the fourth quarter of 2007 compared to the fourth quarter of 2006.

Currently, Cambodia has 298 garment factories that employ 355,000 workers, according to the Garment Manufacturers Association of Cambodia (GMAC) records. But this figure can be about 60 to 70 percent higher if sub-contractors and small factories are included, according to the Ministry of Industry.

Labor Disputes & Strikes

In the last few months, garment workers went on strikes in the surrounding Phnom Penh factories. Labor disputes resulted in the closing of one of the garment factory, Phnom Penh Garment City Factory.

Van Sou Ieng, Chairman of GMAC said “deteriorating labor relations are also weakening the sector,” in addition to the economic downturn in the US, reported news agency Agence France Presse. Frequent illegal strikes have cut into productivity and also driven away foreign buyers, he added.

However for union leader Chea Mony, President, Free Trade Union of Workers of the Kingdom of Cambodia (FTUWKC), the lack of productivity is not only due to labor conflicts, but mainly because of low salaries.

“Inflation will affect workers’ health and productivity,” Chea Mony told Economics Today. FTUWKC was founded in December 1996 and has over 78,000 members in 162 union’s affiliations.

Another factor contributing to the industry slowdown is inflation. Factory workers complained to Chea Mony that the price of food and basic necessities has drastically increased, as a result of increasing oil price. Due to this high inflation, FTUWKC President pleaded for a 5-dollar increase from the current minimum wage (US$ 50) to adjust to the rising market prices.

He argued that the workers’ current wage cannot meet their household expenses because of the increasing price of food and gasoline, and housing.

However, industry stakeholders are concerned that higher labor costs, adding to high energy and administrative costs will make foreign factory owners operating in Cambodia to pick-up and move to cheap-labor countries. This would pull Cambodia’s competitiveness further down at a time when competitors are taking off and the global economy is slowing down.

According to AFP, Van Sou Ieng said the outlook for 2008 “surely was not good.” “Definitely some factories will close, some people will lose their jobs.”

The Affect of US Economy & Recession

The depreciation of US dollars has a major impact on employees who receive fixed income paid in US currency. Thus, purchasing power decreases. Most products trading in Cambodia market are imported from Thailand, the depreciation of dollars results in high price of consumer goods.

The fluctuation of US economy is a big concern for Cambodia. “US economy recession does affect Cambodian economy because US is the biggest market for Cambodian garment exports, the industrial sector’s main contributor to economic growth,” said Chan Sophal, president of Cambodia Economic Association. He said, “It may see less demand for garment from Cambodia unless Cambodia’s garment becomes more competitive.”

According to economists, the purchasing orders on Cambodia’s garment products might fall because the purchasing power of US citizens is declining. They may spend less on clothes.

But Dr. Supote Sephon Prasertsri, Dean, Faculty of Education at Pannasastra University, disagrees. Americans will continue to spend their money on clothes, he said, adding that Americans may spend less on luxury commodities such as cars or houses.

Garment Industry Prospects-2008

The US is the largest market that provides business opportunities for Cambodia to rebuild the country and sustain economic growth. Some observers are concerned that the current US recession may affect Cambodia’s garment industry because 70 percent of Cambodia’s garments are exported to the US.

“I am concerned that our garment sector would face some problems,” Commerce Minister Cham Prasidh told Associated Press. “Now that the U.S. economy may head into a decline, purchasing orders from U.S. retailers may also decrease.”

“If nothing changes, I believe Cambodia garment industry will collapse,” said Chea Mony, who is aware that salary increase will badly affect the ability of factories to sell and make profit.

But local economists are optimistic. The Economic Institute of Cambodia (EIC) predicted in its latest publication that the garment sector will remain strong in 2008, with a projected 8.9 percent growth. But it will grow at a slower pace in the next few years due to strong competitors such as Vietnam and China.

According to the World Economic Forum report on competitiveness, Cambodia lags far behind China and Vietnam in terms of international competitiveness.

According to statistics from the US Department of Commerce in January 2008, Cambodia textile and garment exports to the US show a month-to-month increase of 7.8 percent. Textile and garment exports

totaled US$ 186.2 million in December 2007 and US$ 200.7 million in January 2008.

The report shows Cambodia was ranked 9th exporters of textile products in the US, behind China (1st) and Vietnam (3rd) as of January 2008.

The Industry’s Growth Through Investments

Cambodia has the potential to develop 15 Special Economic Zones (SEZ) to boost both internal and external trade and restore trade balance, private investors hope.

The future for Cambodia’s garment industry is expected to be brighter when all SEZs operate to their full potential.

According to English-language newspaper The Cambodia Daily, the Phnom Penh SEZ reached agreements with 50 factories to set up in its premises in its first phase. In addition, eight factories have also signed agreements with the Kampot SEZ, the Daily reported.

But analysts rather bet on fostering Cambodia’s current niche market.

“To sustain long-term growth, Cambodia should further promote its labor friendly image to gain niche

markets to be competitive,” wrote Chan Sophal in an email.

Lately, French development agency AFD signed an agreement to fund € 950,000 (about US$ 1.5 million) to support Better Factories Cambodia, an ILO monitoring program. The fund will contribute to build a socially responsible industry, with improved working conditions. Better working conditions are expected to boost workers’ productivity, the key aspects for Cambodia to be competitive and a supplier of choice for garment buyers.

Labor Standards Is Key to Market

Better Factories Cambodia (BFC) was introduced by ILO in 2001 after the agreement between the US and Cambodia, giving Cambodia access to the US market in exchange of respect of good labor standards. BFC is funded by the US Department of Labor, USAID, French Development Agency, the Garment Manufacturers Association in Cambodia, the Royal Government of Cambodia and international buyers.

BFC program is conducted to train and improve working condition and workers’ productivity. The program has been successfully applied. Also, there are several training programs provided to supervisors and workers to increase the productivity, flexibility, and the quality of products.

The training centers include GMAC’s Cambodia Garment Training Center (CGTC), International Labor Organization’s Better Factory Cambodia (ILO-BFC), the Garment Industry Productivity Center (GIPC), and other private training centers.

For the industry’s major actors, the trainings bear fruits. “I can say that workers are productive,” said Chea Mony. “Some of them have more than ten years of experience.”



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