Why Cambodia's manufacturing industry needs to move to the next level
From Budapest to Baltimore, the words ‘Made in Cambodia’ are stitched through people’s lives: sitting snug around the waist, tapering in tightly at the ankle, breathing down upon the necks of millions. Once a largely agrarian economy that rose and fell with the flooding of the Tonle Sap, Cambodia has turned from sowing seeds to sewing shirts, becoming one of the major manufacturers of skirts, slacks, shoes and every manner of clothing that can be worn by shoppers in the wealthier West.
But despite maintaining solid export levels, industry figures compiled and released by the International Labour Organisation over the past two years show Cambodia’s garment and footwear manufacturing industries struggling with stagnant export prices, rising labour costs and a labour productivity level – defined as gross value added by the industry divided by the number of workers – well behind that of neighbouring export nations such as Thailand, the Philippines and Indonesia.
Between 2006 and 2015, average export prices to the US – one of Cambodia’s two primary export markets along with the European Union – fell by almost 24%. And while labour productivity was about 30% higher in 2015 than in 2003, according to
Cambodia’s National Institute of Statistics, it remains less than half that of Indonesia and the Philippines – and a quarter that of Thailand. For a sector that has seen a flatlining minimum wage abruptly rise from a monthly rate of $63 in 2012 to $153 as of July 2017 – a figure that many in the labour movement still say falls short of meeting the needs of its workers – it is a trend that has some in the industry worried that Cambodia’s reliance on garment exports is quickly becoming unsustainable.
Leaning back behind his desk in the Garment Manufacturers Association of Cambodia’s sparse new offices on the edge of the Phnom Penh Special Economic Zone, situated more than an hour outside the capital city, secretary general Ken Loo was blunt about the nation’s once-flourishing garment sector.
“As we stand, where we are today, we’re not competitive,” he said. “We’re not. And it’s obvious – you can see from the trends in our exports that we only see growth in the export markets where we have trade preference, and in markets where we do not have trade preference, where we compete with Vietnam and Bangladesh and Myanmar, we’re not winning.”
The rock upon which Cambodia has built much of its prosperity since the longawaited peace agreements in the 1990s, the garment manufacturing industry has swelled from $80m in exports in 1996 to a staggering $6.8 billion export industry in 2015. In that same year, the apparel industry alone contributed nearly two percentage points of the nation’s 7% GDP growth.
But with so much of the country’s economic hope tied up in one industry, the danger that Cambodia will be undercut on the world market by cheap labour from across the globe cannot be ignored. Miguel Chanco, the Economist Intelligence Unit’s lead analyst for Asean, told Southeast Asia Globe that Cambodia’s manufacturing sector was in desperate need of diversification.
“I absolutely think that Cambodia relies too heavily on its garment industry – not just for employment but also export revenue,” he said. “China’s transition away
from an export-led-slash-investmentled growth economy is a positive for the region in the sense that these investment and export industries have to be shipped out somewhere more competitive – and Asean is a big beneficiary of that.”
According to Chanco, a shift away from the garment sector towards light electronics such as those produced by neighbouring Vietnam would allow Cambodia to avoid being overtaken by nations such as Bangladesh and Myanmar, which have larger unskilled labour forces who cannot yet command the same wage rates that workers have fought for in Cambodia.
“Vietnam is a good example because it also used to be quite heavily reliant on textiles and garments, and now its major exports have gone into smartphones, computers, tablets, what have you,” Chanco added. “So that’s a good model for Cambodia to copy.”
But from the pitted dirt roads of Cambodia’s hinterlands to the sometimes hours-long power cuts that strip its cities of light and movement, the country has a long way to go in providing manufacturers and workers alike with the conditions needed to keep up with the world’s evolving manufacturing practices. According to Cambodian Labour Confederation (CLC) president Ath Thorn, a fundamental lack of essential infrastructure was letting the sector fall behind its competitors.
“The infrastructure has not yet been improved,” he said. “Electricity, transport, including government services to some of the factories. Cambodia needs to improve it. We also don’t have the raw material in Cambodia – we need to import it from outside, which comes at a high price.”
A 2014 World Bank report showed electricity distribution losses just under a quarter of the initial output through poor infrastructure. And although Cambodia’s domestic electricity production increased by 47% in 2015, there has been little sign of a dip in energy prices.
More immediately pressing for workers on the factory floor is the lack of investment in up-to-date technology – and the training to use it. William Conklin, country programme director for the US-based workers’ rights organisation Solidarity Centre, said that Cambodia lacked the long-term investment needed to develop the manufacturing industry into something more than a short-term profit farm for foreign investors.
“You don’t have productivity without investment,” he said. “The private sector should lead – that’s where they can move fastest, that’s where they can make the changes in workplaces. And you don’t want more investment – you want better investment. [Employers] may not be paying much in the way of tax at all, they’re not paying workers much, they’re not investing anything – really, what are they contributing? They’re giving jobs, but these are jobs of exploiting workers and doing nothing for them in the long term – not preparing them for a step up to another sector.”
CLC’s Thorn pointed to the Cambodian labour law, which outlines the responsibilities that factory operations with more than 60 employees had in terms of training up their workforce – requirements, he maintained, that were being ignored.
“The law requires at least 10% of apprenticeships to workers who join their factory – but nothing happens,” he said. “But now, one worker will spend ten years sewing only buttons. The factory owners don’t give opportunities to workers.”
GMAC’s Loo admitted that there had been a general reticence to train up workers in the past, but he said this was due to factories preferring to poach skilled workers from competitors rather than improve their own only to watch them be poached in turn. He also claimed that many Cambodian workers were not prepared to put in the effort to take advantage of better technology or education being offered.
“Think of employers in the worst way,” he said hypothetically. “We are evil people, we only do things that benefit us. There is a lack of capital investment in technology – why is this so? It’s about a cost-benefit analysis. Most employers do not see the benefit, because they don’t see the cooperation and the mindset from workers
that will be able to take advantage of this new technology. It’s about the people using the technology.”
Not all factories are afraid to invest in their workforce. Although often cited as the exception to Cambodia’s less-than-stellar record on working conditions, microfibre company Pactics is just one example of a number of manufacturers in Cambodia that have taken steps to improve the lot of its labour force.
Clustered around a series of courtyards on the outskirts of Siem Reap, Pactics’ spacious and brightly lit Cambodian factory is a far cry from the rusted furnaces and decrepit façades that so frequently appear in the world press. Offering onsite daycare, a fully air-conditioned firstaid room and mandatory training for all new employees, the Dutch-run operation is often cited as a model for the future of Cambodian factories.
Stressing that his company was doing very little not already outlined in Cambodia’s labour laws – laws that ostensibly guarantee workers the right to eight-hour work days, capped overtime, paid annual leave and a day-care centre and on-site infirmary – Pactics president Piet Holten said that services such as proper ventilation, normal working hours and a subsidised nutritious lunch had already paid for themselves in terms of workers’ productivity.
“It’s not the workers,” he said. “When you create an environment where people constantly work ten hours, where people don’t have proper healthcare, where there’s no social life, bad food – how can you expect productivity? And then don’t do anything on training, don’t give proper equipment? I don’t believe that.”
Jill Tucker, former chief technical officer at the ILO’s Better Factories Cambodia programme, argued that workers were sometimes being used as scapegoats for an industry that continued to struggle with poor production management. She said that many factory managers often lacked the training, experience and proper forecasting to run their business effectively – much less prepare their workforce for a shift to a more skills-oriented labour market.
“The worker is always the one that gets blamed first,” she said. “Nobody ever measures the contribution to productivity of the owner, the manager of the factory itself or the buyers. If you’re not going to give me the productivity rating or the productivity assessment of the manufacturer and the brand in addition to the worker, then I don’t really want to hear about the worker. Let’s be even-handed here. Everybody contributes to productivity. And you cannot tell me that every factory is managed well.”
Holten maintained that Pactics was not an NGO or a social enterprise, but a business with a bottom line just like any other manufacturer in the world – and providing good working conditions for his employees was simply savvy business sense.
“We have a factory in China that used to make exactly the same products,” he said. “And exactly the same products are now produced in Cambodia. And we have the same productivity in Cambodia that we had in China. And we have extremely detailed data to prove that.”
But Tucker said that for many factory owners across the world, the cost of improving working conditions for their employees was an expense that few were willing to take on.
“It’s still profitable to not have good working conditions too,” she said. “It’s not free to have good working conditions. It costs money. And it also takes effort. Most factories can still get their production done and they can find workers without really improving working conditions.”
Without tackling high energy and transport costs and fighting to attract more long-term foreign investment that allows workers to train and work in the conditions most conducive to productivity, the Cambodian government’s stated industrial development policy aimed at reducing garments to 50% of all exports by 2025 seems an unlikely prospect. But according to Loo, it is a target that Cambodia cannot afford to miss.
“The apparel industry is always first in, first out for the development of many countries,” he said. “Because it’s the one sector that generates huge employment
numbers – they may not be quality jobs, but a huge number of jobs. All developing countries need this kind of massive employment creation in the early stages of its economic development. But we also have to recognise that as the country matures and develops, other industries will come in to replace the apparel industry.”
As China continues to outsource its lowend manufacturing operations to mainland Indochina, the Economist Intelligence Unit’s Chanco said, Cambodia was ideally placed to pick up where the superpower left off.
“If Cambodia was to target a specific industry, I would say it would be good to maybe kick-start attracting those operations that are coming out of China in terms of low-end electronics and automobile parts manufacturing,” he said. “Cambodia has a more open foreign investor climate compared to Vietnam. The conditions are there for it to move towards that direction.”
Cambodia’s advantage lies in its demographics, with more than a quarter of its population aged between 14 and 30. And with a quarter of a million new entrants into the job market each year, Loo claimed that Cambodia could be a very attractive prospect to manufacturers in need of human resources – as long as the government played its cards right.
“I think there’s huge potential,” he said. “And there’s a lot of labour – I think this is the one factor that maybe other countries can’t lay claim to: availability of labour. Maybe [it’s] not cheap any more, but you can still find labour. Literally as much as you want, because there are no other sectors currently competing for the workforce. So I think there’s huge potential for labourintensive light manufacturing still to come.”
If not, he warned, Cambodia’s manufacturing boom could end in little more than a whimper.
“The worst case will be, Cambodia will walk down the path of Philippines – that in five years our main export will be workers,” he said. “If workers cannot find a job locally, then they will go abroad to find employment.”
Clockwise from top left: factory workers gather under trees along a road running through the Phnom Penh Special Economic Zone; a collection of shirts hangs at the Raytecs garment factory in Phnom Penh; an overhead view of the factory floor at Raytecs in Phnom Penh