Cambodia’s garment exports will see tough competition in 2008

By Lang Hokleng | Published on May 1, 2008

PHNOM PENH – A weak U.S. economy will not be a long-term threat to Cambodia’s garment sector, but the removal of the textile restrictions imposed on China, which are set to expire at the end of this year, and Vietnam’s recent accession to the World Trade Organization (WTO) will offer tough competition for the industry, says Hang Chuon Narong, Secretary General of the Ministry of Economy and Finance.

“Our challenges involve the removal of safeguards on China and Vietnam’s new membership of the WTO,” he says. “There will soon be tough competition as, at the end of this year, safeguards on China will be removed.”

Garment exports increased by 12 percent in 2006 and 8 percent in 2007, with an export value of US$2.9 billion in 2007. According to Hang Chuon Narong, 70 percent of garment exports went to the U.S., 4 percent to Canada, and the rest to European countries. However, the fourth quarter of 2007 saw garment exports from Cambodia fall 46 percent, owing to the economic downturn in the U.S.

Nevertheless, he says, garment exports are still expected to be up this year, even if by less. “We project that garment exports will increase by 6-7 percent in 2008 because the garment market is only being slightly affected by the weak U.S. economy – people are still buying clothes to wear.”

A report issued by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) in April 2008 agreed that the growth rate of the Cambodian economy would decline to 7 percent in the current year. The Asian Development Bank (ADB) has predicted that Cambodia’s GDP growth will slow to 7.5 percent in 2008 and 7 percent in 2009.

The ADB attributes this in part to a slump in the garment sector, saying that the garment industry will suffer as a result of lower demand from the U.S. and Japan. “The prolonged economic expansion is forecast to slow, both this year and next, in large part reflecting reduced external demand for domestically-made clothes,” says the bank’s annual report, which is in contrast with government claims that the U.S. downturn will have little effect on the industry.

Duorng Kakada, Senior Researcher at the Economic Institute of Cambodia (EIC), agrees that garment exports will see serious competition in 2008. However, he says, based on cheap wages, steady increases in productivity owing to the long-term experience of workers, WTO membership, internationally recognized good labor conditions, and compliance from buyers in the U.S. and EU, “we are still optimistic that the garment sector will grow, even if safeguards are removed from China in 2008.”

Nevertheless, officials from the Garment Manufacturers’ Association in Cambodia (GMAC) have warned that the end of U.S. restrictions against China, as well as greater productivity and cheaper utilities in Vietnam, is likely to erode Cambodia’s position. “It is well known that Cambodia has lower productivity when compared with competitors such as Vietnam and China,” says Ken Loo, Secretary General of GMAC. Vietnam’s recent entry into the WTO poses a significant threat to Cambodia, as the two countries tend to attract the same pool of investors. Vietnam is generally credited with having higher productivity and a better infrastructure than Cambodia.

Ken Loo claims that the garment sector faces many other new challenges for continued growth. One of these is the presence of too many unions. “We currently have too many unions, especially too many unions within each factory. This leads to confusion for the workers as well as the management and leads to problems when the unions make use of the factory as a battleground to compete for members.” He adds that this disrupts production and leads to losses for investors. Industry officials estimate that 1,100 separate unions are operating in 300 garment factories.

Chea Mony, President of the Free Trade Union (FTU) of Workers of Cambodia, says that the unions benefit the workers and disputes the number of unions. “Currently, there are 22 unions and federations of workers within the Cambodian garment industry,” he says. “The unions help educate workers about the Labor Law and about their legal rights as workers. The minimum wage for a garment worker used to be US$50 per month, with 48 hours of work each week. In late March, a raise of US$6 was granted in response to high inflation.” Unions were very much involved in the discussions leading to this raise.

According to Ken Loo, in addition to these issues, there is still a high level of corruption and considerable bureaucratic obstacles in Cambodia, which generally means that the cost of doing business in the country is high.

Cambodia’s garment sector, now a major engine of the national economy representing 90 percent of the country’s exports, first took off in 1994. At that time, about 20 state-run factories were transformed into garment factories manned by state-employed workers. The industry has made strong progress since 1997, in spite of political tensions of the time. Today, about 400 factories operate with approximately 355,000 workers; 85 percent of the workers are poor women from the countryside working to support their families, says Ken Loo.

Duorng Kakada says that the garment industry not only has directly benefited garment workers, but also has created jobs for many more people. A number of small industries and individuals are sustained by the larger garment industry, from the hordes of vendors who spring up around the garment factories to taxi drivers who shuttle garment workers to their jobs and back. “One garment worker indirectly creates another job. Almost half of [the] indirect jobs are concentrated in the service sectors, such as transportation, trade, restaurants and other small services,” he said.

The ADB and ESCAP both agree that Cambodia needs to diversify its export base. An ESCAP press release about the organization’s recent report says that “Cambodia’s export growth is fragile due to its concentration in the garment industry.” According to Duorng Kakada, in order to diversify exports, rather than entirely depending on garment production, Cambodia should also focus on tourism and the production of organic rice, cashew nuts, rubber, and silk.