Will Cambodia remain cheap manufacturing destination!

by Textile Quotient News Desk
4 May 2019

Cambodia, neighbouring country to Thailand and Vietnam is growing swiftly in garment manufacturing which are being exported globally. With a steady economic growth of around 7 percent in recent years, which is forecasted to continue in 2019, Cambodia is on a steady path of economic improvement. The growth rate is the highest amongst the fast-growing ASEAN nations. An open investment environment, cheap labour and the close location to the largest markets in the world, along with EU patent protection- an agreement with the European Patent Organization, offering legalization of EU patents in Cambodia. EU companies can easily protect their innovations while producing in Cambodia for the Asian market.) support the investment incentives. All the mentioned, support the investment incentives.

The Cambodian Ministry of Economy and Finance projected in January that the national economy will expand by 7.3 percent in 2019 on the back of strong growth in the garment, construction, and hospitality sectors. It also predicted that GDP will expand at a rate of 7.1 percent in 2019 as a result of strong growth in exports and domestic consumption.

In 2018, the garment industry and tourism sector primarily supported the economic performance of the country. The garment industry saw massive expansion in 2018, due to earlier mishaps in a few garment factories in Bangladesh and many Chinese companies putting their units due to rising wages in China. In the first half of 2018, garment exports increased by 11 percent.

Rapid Infrastructure Development:

The infrastructure of the country is improving a fast pace. Last month, Cambodian-Thai Railroads were connected. Named ‘northern rail line’, the railroad connecting Phnom Penh and Poipet city, in the border with Thailand, was completed last year. The railroad stretches over 386 kilometres, and connects to Thailand’s Aranyaprathet district. The passengers and goods can now be able to travel from one country to the other by train. This is seen as a key element in boosting trade with Thailand, with the governments of both countries aiming at $15 million in bilateral trade by 2020.

The increasing reliability of the country’s infrastructure, especially in SEZ’s – make Cambodia interesting for manufacturing sector, not just for the garment sector, but beyond. There are over 35 SEZs in the country and the majority of investors are from Cambodia, Japan, China, Thailand and Taiwan.

Seven percent increase in minimum wages:

With effect from January 2019, the minimum monthly wage for workers in the textiles, garment and footwear industry is $182, an increase of seven percent from 2018. The garment industry is Cambodia’s largest employer, generating $7 billion for the economy each year.

The current minimum wage, at $182, is challenging for Cambodia to stay competitive, with some garment manufacturers arguing the wage hike is going to impact on their competitive pricing. “We can’t anymore say we are a cheap hub for manufacturing,” comments Kaing Monika, Deputy Secretary General of the Garment Manufacturers Association, adding that the new figure puts Cambodia on par with Vietnam for the region’s highest wage. “It will be a big test for Cambodia’s competitiveness which so far has been strongly helped by better international market access,” he added

Boost in FDI Flow in 2018

The FDI inflow increased for the fifth successive time in the last two years to US$ 832 million. Steady growth in last ten years has sustained the economy. The Cambodian investment climate is driven by the country’s open investment laws and offers a range of incentives to investors. The country represents a perfect investment opportunity with its close proximity to production facilities in Thailand, Vietnam and the Chinese market.

The country’s Special Economic Zones (SEZ) are very well laid out and well equipped to attract  foreign investments especially in border areas and for the export-based manufacturing industry. Corporate tax exemption of up to eight years and further exemption on profits, if reinvested in the country, are among attractive incentives for investors. Absolute tax and duty exemption on imports and exports for most industries are also available. In majority of the sectors, 100 percent foreign ownership of companies is allowed. The country’s investment law also favours regulations governing the protection of investments from regulated prices and nationalization.

Garment industry, an important driver of the economy in 2019

Sixteen percent of the GDP and 80 percent of the total exports, comes from the garmenting sector in Cambodia.  The ongoing US-China trade war can in some way support the local export-based economy in 2019. The sector has attracted a lot of new global brands and retailers to source garments from Cambodia due to cheap labour and other production costs along with supportive government initiatives and the preferential access to major markets like the EU and US.

However, the garment sector is now facing a few challenges, and the foremost is -the EU launched a withdrawal procedure regarding Cambodia and the “Everything but Arms” policy, in which human rights issues in Cambodia will be investigated by the EU, which is the largest garment buying country for Cambodia; it has 40% share of the total garment exports of Cambodia, followed by the US, having 30% share. However, the silver lining is that the Chinese government has recently announced that, in such a scenario, it will come forward to help Cambodia.

Presently, the energy costs are high, because it is generated through oil, coal and water, and it largely depends on the import. However, the country is now looking at renewable energy sources such as- Biogas, solar and wind power. By 2020, the government plans to connect the 24 provinces to the national grid to provide decentralized energy supply.

 

 

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