Cambodia Has Manufacturing Relocation Opportunities
Cambodia: manufacturing relocation opportunities
As Chinese wages and operating costs surge, many manufacturers are seeking to relocate or diversify labor-intensive production activities to areas with lower labor costs.
Asean countries, particularly the lower-cost CLMV blocks (Cambodia, Laos, myanmar and Vietnam), have drawn the attention of many foreign manufacturers because of the abundant supply of workers and relatively competitive wages.
In addition to cost considerations, manufacturers are also attracted by emerging trends in a broader regional approach by overseas buyers and importers.
This includes leveraging supply chain integration across asean in order to best leverage the specific benefits offered by each country.
Cambodia is located in the heart of southeast Asia, adjacent to Thailand, Laos and Vietnam, southwest of the gulf of Thailand.
Its main advantages of factory relocation include duty-free access to major developed countries and regions, including Japan and the European Union, stable economic performance and generous incentives to attract foreign direct investment (FDI).
On the other hand, the lack of adequate infrastructure tends to offset Cambodia's attraction to foreign investors, making them hesitant about building production facilities in the country.
In the past few years, the rapidly rising minimum wage has partly narrowed the gap with nearby countries, weakening its "low cost" advantage.
To assess Cambodia's suitability as an alternative production base for light manufacturing, the HKTDC research centre recently visited the Cambodian capital and major economic hub phnom penh, as well as sihanouk city, the country's only deep-water port.
Garment manufacturing is the main growth driver in Cambodia
For more than a decade, Cambodia has made remarkable achievements in adopting the "Asian factory" growth model.
Construction and industry, particularly clothing and footwear manufacturing, have contributed significantly to employment and economic growth.
As the country grew, services played a bigger role in the overall economy, while agriculture declined.
Cambodian garment exports have been growing steadily, thanks in large part to the ministry's decades-long collaboration with the international Labour organization (ILO), which manages better factories in Cambodia (BFC) with projects in the country's garment industry, as well as government, employers' associations and unions.
The BFC project was originally set up in 2001 and stems from the us-cambodia trade agreement, under which Cambodian garment exporters would have better access to the us market in exchange for improved working conditions in the clothing sector.
The BFC project is also supported by international apparel buyers.
According to the Cambodian garment manufacturers association (GMAC), garment exports in Cambodia continued to rise in 2016, with an estimated increase of about 9 percent in 2015.
Cambodia has an open and free foreign investment system, a fairly favourable legal and policy framework for investors, and incentives from the government to attract foreign investors.
Not surprisingly, most of the country's apparel companies are foreign, mainly from mainland China, Taiwan, Hong Kong and South Korea.
These export-oriented factories mainly operate on the cut-make-pack (CMP) business model and engage in the production of low-value-added basic garments.
When HKTDC conducted a research visit to phnom penh, the industry participants interviewed said that design and other production planning decisions were mainly made at the headquarters of overseas procurement companies, and that technology spillovers were relatively limited.
Since Cambodia lacks local support industries, most manufacturers must import most of their raw materials, such as fabrics, wires and accessories, from CMP arrangements in China, Hong Kong, Taiwan, Japan and Vietnam.
And South Korea
For export destinations, the eu is the largest market for Cambodian clothing exports, accounting for about 40 per cent of the total, followed by the us (30 per cent), Canada (9 per cent) and Japan (4 per cent).
Multinational brands purchased from Cambodia include adidas, Gap, H&M, Marks&Spencer and uniqlo.
Trade privileges as a key investment attraction
Cambodia's favorable trade status with major developed countries and regions such as the United States, Japan and the European Union is a major attraction for foreign manufacturers considering setting up production lines in China.
Cambodia is one of the few countries to enjoy the trade benefits of all GSP schemes maintained by developed countries.
Cambodia is classified as a least developed country (LDC) and is entitled to additional preferences under which more of its products can enjoy import tariffs as low as zero.
As far as the eu is concerned, Cambodia enjoys the trade bloc's "everything except arms" (EBA) preference, which gives it duty-free access to the eu's clothing and footwear markets.
At the same time, certain Cambodian apparel and footwear products can enter the Japanese market duty-free and quota-free, thanks to Cambodia's status as a least developed country.
As for the United States, while most textile and apparel projects are outside the GSP scheme, Cambodia still benefits from special trade preferences for other products offered to the least developed countries, a privilege not enjoyed by Vietnam, another major apparel exporter to the CLMV.
This was seen as a major impetus for Vietnam's participation in the trans-pacific partnership (TPP), a partnership backed by the Obama administration but abandoned by US President Donald trump after taking office in January 2017.
New preferential trade enters the U.S. tourist goods market
In July 2016, the United States expanded its GSP program to allow travel items made in Cambodia, such as suitcases, backpacks, wallets and other travel items, to enter the U.S. market without paying import duties.
The relocation of Cambodian tourist goods, which previously faced tariffs of 3 to 20 per cent on us imports, is widely seen as helping to boost the country's export-oriented tourism industry.
Currently, the U.S. travel goods industry is estimated to be worth $10 billion annually, with China a major exporter, accounting for about 60 percent of the U.S. market.
While Cambodia's share of the U.S. tourist goods market is less than 1 percent, it has grown significantly over the past few years.
In 2015, Cambodia's exports of tourist goods to the United States increased to $50.4 million, more than double the $21 million reported in 2014 .
GMAC estimates that the revised GSP program could boost exports to $200 million a year over the next few years, adding 100,000 new jobs.