Risks and rewards next door
Businesses that pick the right segments in Cambodia can tap into low wages and generous incentives, but weak infrastructure and transparency are challenges. By
Cambodia has made exceptional strides since it began crawling from the wreckage left by the Khmer Rouge three decades ago. Today it is recognised as one of the world’s most business-friendly countries, though it still has a long way to go.
The country remains poorer than most of its Asean peers, and is still in the early stages of development with weak infrastructure and a lack of skilled workers. However, investors can prosper if they pick the right business segments and tap low labour costs, a youthful workforce, a rising consumer class and attractive incentives offered by the government.
However, considerable risk factors remain, as do hidden costs that businesses need to be aware of.
“Prime Minister Hun Sen has been very supportive of foreign investment and he is in favour of businesses in all sizes and in all sectors,” Jiranun Wongmongkol, the Thai minister counselor (commercial) based in Phnom Penh told Asia Focus recently.
The country of 15 million has been growing at an average of 7% annually, but foreign direct investment (FDI) has been rising by 25% a year and surpassed US$1.5 billion last year, according to SCB Economic Intelligence Center (EIC).
Having been immersed in the Cambodian market for over a decade, Ms Jiranun says the government offers many incentives to foreign investors to make it financially viable to do business in the country.
One of the most attractive incentives is a repatriation law, which permits investors to purchase foreign currencies through the banking system and use funds to remit abroad to pay loans, management fees, remit profits and repatriate invested capital.
“The government has no restriction on remitted capitals and has made it very convenient for foreign investors to transfer money back to their home bases,” she said.
In addition, Cambodia still qualifies for low import tariffs under the Generalized System of Preferences (GSP) granted by the United States and the European Union to the poorest of developing economies.
Tax breaks are generous as well. The Council for the Development of Cambodia (CDC), the highest decision-making body for investments, offers profit tax exemptions for up to nine years for a Qualified Investment Project (QIP).
QIPs are divided into domestic, export and supporting industries. The list of qualified projects is a long one — ranging from food and beverages to leather products, metal, electrical appliances, motor vehicles, chemicals, and modern trade centre construction.
Other notable incentives include 100% foreign ownership of companies and a 99-year maximum leasehold period for land.
TOP SECTORS
Siriporn Nurugsa, executive director at the Thailand Board of Investment (BoI), said that manufacturing was one of the most attractive sectors given that Cambodia still relied heavily on imports from its neighboring countries.
According to statics from SCB EIC, the top imported products in 2013 were petroleum (25%), motorcycles (16%), food and beverages (5%) and cigarettes (5%). Export products were led by clothing and textiles (55%), shoes (3.9%) and bicycles (3.9%).
While textiles and garments remain the country’s strength and generate 80% of its export revenue, there are other attractive business sectors worth looking into.
“The government is aiming to produce and manufacture more products to boost exports while lowering the number of imported goods,” said Ms Siriporn. “Manufacturing will also create employment and allow the country to add more value to local products.”
In the agricultural sector, the country has abundant resources such as the Tonlé Sap or “Great Lake” which is the largest freshwater lake in Southeast Asia, but local people generally are still making only the most basic of goods for sale.
“Now I can see only simple products such as dried fish,” said Ms Siriporn. “A lot of Thai businesspeople have expertise in adding value to agricultural products but there hasn’t been much involvement of Thai investors in this sector yet.”
With its stunning Angkor temples, historical sites, beautiful tropical beaches and abundant natural attractions, Cambodia is also becoming a tourist magnet. Foreign arrivals have been rising by about 12% annually and reached 4.5 million last year.
Given Thailand’s strengths in tourism, Cambodia is a natural destination for Thai investors, added Ms Jiranun. Aside from the hospitality and service businesses, there are other areas to explore.
“Local souvenirs from Cambodia are very difficult to find and almost unavailable. ... Most products are not very unique and can be found in Thailand and other countries,” she said.
“Thai people are very creative and if we could bring that creativity to Cambodia, the potential to sell to both local residents and tourists will be very high.”
Ms Siriporn of the BoI added that while Cambodia has many players active in tourism, businesses that will help facilitate the growth of the tourism and service sectors also hold potential.
“Print, media and advertising businesses are still needed in the country as not many players have been involved in the market yet. ... There are many more opportunities to grow in this segment,” she said.
Ms Jiranun pointed out that amid a rapid rise in construction of buildings, houses, hotels and infrastructure, the demand for cement rose to around 5 million tonnes from 4 million a year earlier.
“A lot of construction requires imports of raw materials from Thailand, so businesses related to raw materials and capital goods are another attractive sector that Thai people should be looking into,” she said.
Complementary services such as interior design and creative decoration are also witnessing a boom in demand.
“Cambodians trust the ideas and designs of Thai people as they believe in the similarity of cultures and lifestyles, so I see it as a very favourable opportunity for Thais,” she said.
The recent improvement of Cambodian economy has resulted in a better quality of life among the local population. Poverty is dropping steadily with a significant rise in the middle-income (defined as those who earn $2,000 per month) and consumer classes.
Business related to consumer goods, warehousing and logistics are other areas with strong potential to prosper along with the development of the economy
RISK FACTORS
Despite all the opportunities, weaknesses in physical infrastructure including telecommunications, will continue to be a challenge for some businesses.
“Though the government is very encouraging to foreign investment, many things need to be established before those investments can happen. ... Thai businesses can fill in a lot of gaps in what Cambodians are lacking,” said Ms Siriporn.
According to a report released by the US Department of State, investment incentives from Cambodia have not been able to attract significant US capital due to various factors including the inadequate infrastructure and high energy costs, high levels of corruption, a limited supply of skilled labour and a lack of transparency in the government approval processes.
Though wages remain among the cheapest in Southeast Asia, investors have to factor in the business impact of labour unrest. Strikes have been frequent, particularly in the garment industry which has witnessed some violent confrontations over wages.
The higher cost of electricity at about 25 US cents per unit (kilowatt/hour) — double the rate in Thailand — should also be taken into consideration.
Ms Siriporn added that the cost of doing business with local players as well as the government remains difficult to calculate because of transparency problems. Laws and regulations are still being developed, so it is crucial to obtain a comprehensive understanding and strictly commit to following best practices.
“There are always challenges in doing business in foreign countries,” she said. “The strategy to enter Cambodia is to go in a cluster as a larger group will have better negotiating power.”
“Print, media and advertising businesses are still needed in Cambodia as not many players have been involved in the market yet. ... There are many more opportunities to grow in this segment”
SIRIPORN NURUGSA Thailand Board of Investment