Why Cam­bo­dia's man­u­fac­tur­ing in­dus­try needs to move to the next level

Southeast Asia Globe - - Front Page - By Paul Mil­lar

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...

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