Low wage, low value-added production

The predicament in Europe might exacerbate the negative impacts, said Japan-based Saitama University economics lecturer, Associate Prof Samreth Sovannroeun, adding that Covid-19 is already causing adverse effects on the garment sector.

“This may result in a further reduction in production activities and operations in the sector, at least in the short term,” he felt.

However, Samreth opined that the impacts can be offset by the ability of retail groups and major brands in reaching their potential consumers through alternative business models.

“This can lessen further adverse effects on the Cambodian garment sector,” he said.

Gareth Leather, senior economist in emerging Asia at Capital Economics Ltd, noted that garment sectors around the world have been hit hard by Covid-19, mainly because people are buying fewer clothes.

That being said, other factors work in Cambodia’s favour including rising costs in China and worsening ties between that country and the West.

“[This] means manufacturers will be keen to locate their factories elsewhere,” said Leather of the London-based economics research consultancy.

The industry hosts some 534 garment and 38 footwear factories which are actively operating as of October 5, ILO’s Better Factories Cambodia programme showed on its website.

Early this year, it was reported that Cambodia housed 1,100 factories, comprising 823 garment and textile factories, travel goods (114), footwear (132), and a total workforce of 923,313.

A majority of these factories are foreign-owned, mostly consisting of East Asians including those from mainland China, Taiwan, Hong Kong and Japan.

But this composition hinges upon the future of the industry and inclination to climb the value chain by adopting technology to compete in shifting purchasing trends and consumer behaviour.

While the pandemic has reduced purchasing power, it has also raised people’s awareness of social justice and fairness which could pressure clothing brands to meet such standards.

This could, in turn, force manufacturers to comply with their ethics code, which has been the case in the past where apparel brands allegedly accused Cambodia of lacking in workers’ rights.

Unlike its peers in the region, Cambodia is fairly focused on low-cost garments, operating at assembly stage where it employs the cutmake-trim model, essentially making it a labour-intensive sector.

Back in 2014, a study by Asian Development Bank identified weaknesses such as inadequate infrastructure, weak governance, low education and subpar skills as interrelated weaknesses that needed to be addressed.

The study on diversifying beyond tourism and garment said doing so was crucial to avoid being trapped in low wage, low value-added products and to maintain a stable political environment that is conducive to investment and commerce.

Six years on, the sector continues to face various challenges and that it needs to adjust with the current adverse effects, Samreth said.

“It is being exposed to higher competition with other prominent exporters. Cambodia needs to enhance its competitive capacity through improving, for example, its productivity.

“While Cambodia is trying to diversify its main economic sectors towards robust diversification, the productivity improvement of the sector cannot be neglected,” he added.

Not a sunset industry

Moving on, the sector is likely to correct itself, as is natural in the aftermath of any shock. This could include wind downs or even consolidations, ILO suggested.

Although barriers to entry into garment manufacturing are relatively low in some countries, the pandemic had heightened the risks and costs borne by suppliers in the sector, the UN-affiliated entity mentioned in a report entitled What next for Asian garment production after Covid-19? The perspectives of industry stakeholders.

“This could discourage smaller, less professional suppliers from entering the market in the short-term,” ILO said.

In any case, sub-contracts from larger manufacturers could pose as an incentive for smaller units to rejoin the in

dustry.

At the same time, experts believed that the pandemic could push garment manufacturers in Asia to consolidate.

Some factories, especially small- and medium-sized enterprises with less financial capital and liquidity, will not have the resources to withstand the economic and public health crisis brought on by the Covid-19 pandemic.

“[They] will shut down or be bought out, leading to consolidation of manufacturers within the industry,” the report read.

Underlying the risk to growth is also the big concern of 3D printing and greater use of robotics, said economist

Leather. “This might mean it is easier and cheaper to move factories closer to their source of final demand”.

In any case, he believed that the vaccine would allow things to return to normal, saying that this will bode well for the sector.

Now, as the first round of vaccine testing rolls out in the US and UK on the back of ongoing research in laboratories around the world, hope for normal business recovery is apparent even though it would take years to return to pre-Covid 19 ways.

Like other economies, Cambodian industries are feeling the excitement as plans are

made to buy vaccines which would be administered on those who are at greatest risk, including frontline workers, teachers, and armed forces personnel. To date, over $30 million has been raised through donations.

Optimistic by the promising development of the vaccine, Ministry of Commerce spokesman Seang Thay echoed GMAC’s Loo in saying that next year will be better, slightly chuffed that Cambodia handled the situation better some of its competitors.

“Our industry is surviving due to timely interventions and assistance by the government to support the sector

and workers,” he said.

Integration will continue with global and regional supply chains through bilateral and multilateral free trade agreements. Its most recent bilateral FTA was with China, followed by signing of the largest multilateral trade bloc agreement, Regional Comprehensive Economic Partnership. A few more are in the pipeline including deals with the UK, South Korea and Russia.

And so, he quells the question of the garment sector being a sunset industry in Cambodia, a notion shared by Loo.

“After all, people will always need clothes,” they chimed.