Cambodia's garment industry has confounded experts who predicted its demise following the abolition of quotas at the end of 2004. It is continuing to attract new investors and increase its garment exports, helped no doubt by EU and US restraints on China. There is optimism for 2009, when global textile trade opens up again.
Before the abolition of quotas on trade between World Trade Organization
members, most observers predicted that 2005 would draw a clear line between the
winners and losers in the international apparel sector.
The Cambodian garment industry, with nothing special to offer besides its reputation on labour standards (thanks to International Labour Organization audits), would inevitably be among the losers, they said.
However, Cambodia has continued to attract new investors and is increasing its garment exports.
So will Cambodia's garment industry eventually collapse in 2009 when EU and US safeguard restraints against China have both come to an end? Manufacturers, business associations, ILO and International Finance Corporation (IFC) observers in Phnom Penh all bet on a different, brighter scenario.
But first some facts
According to GMAC (Garment Manufacturers Association in Cambodia), there are now 298 factories in Cambodia employing 355,000 workers, up from 250,000 workers in 220 factories in 2004.
Every month, new garment investment projects, mostly of Chinese, Cambodian, Korean and Taiwanese origin, are being approved by the Cambodian Investment Board.
With more than US$2.1bn worth of apparel exports to the US in 2006 (up 24.7% year-on-year), for brand names such as Gap, Levi's, Banana Republic and Polo, Cambodia is the ninth largest supplier to the American market.
Exports to the EU are also rising, reaching almost US$600m in 2006. Kep Vutha of the Export Promotion Department of the Ministry of Commerce, who's responsible for promotion actions in Europe, says that in 2007 the department will for the first time participate in clothing fair in Europe, preferably in France.
Thanks to its reputation as a "sweatshop-free" country, Cambodia has successfully attracted reputation-sensitive buyers. In mid-2004, FIAS (the Foreign Investment Advisory Service, a joint service between the World Bank and IFC), surveyed 15 of Cambodia's largest US and EU customers.
The top three country-specific sourcing criteria these buyers mentioned were: labour standards, tariff preferences and access to materials and supplies.
Cambodia was outperforming competitors from China, Vietnam, Thailand and Bangladesh over labour standards and tariff preferences, but was ranking low on access to international materials and supplies and other criteria such as political and economic stability and customs efficiency.
At a factory level, leading buyers regretted Cambodia's weakness in terms of price/production costs, production capacity and the range of services offered.
However, none of the key buyers had plans to buy less from Cambodia and 60% of them said they planned to increase their garment purchases from the country. They apparently did so, as Cambodian garment export statistics for 2005 and 2006 indicate.
No big changes expected in 2009
Cambodian garment factories make a wide range of products, with the greatest concentration in cotton trousers, cotton and synthetic nightwear, and cotton and synthetic knit tops.
Dr Ken Loo, secretary general of GMAC, admits that Cambodian garment exporters are benefiting from the safeguard constraints the US and EU have put on Chinese exports.
These constraints are to expire at the end of 2008 and the end of 2007 respectively (Euratex, the European apparel and textile organization, is currently lobbying to get EU quotas on China extended, also until end 2008).
But what will happen in 2009, when Cambodia has to compete head-on with unconstrained Chinese exports?
Dr Ken Loo says: "We don't expect big changes. The exporting companies are anticipating 2009 and positioning themselves. Buyers will continue sourcing specific products from outside China, like they do today."
Derek Lu, general manager of Hung Tak Garment in Phnom Penh, a Hong Kong group which also has factories in Vietnam and Myanmar, also doesn't expect problems for Cambodia in 2009.
He says: "Cambodian products are welcome in world markets. Our big exporting companies are modernising their production capacities. Step by step, Cambodia's main handicap - the lack of local raw materials, fabrics and accessories - will vanish, as Chinese and Vietnamese suppliers will move in to invest."
According to the Economic Institute of Cambodia, the country has good prospects to develop its raw silk base. Cambodia also has a small production of cotton.
Larry Kao, general manager of Manhattan Textile & Garment Corp, in Phnom Penh, points to the numerous Chinese textile and garment investment projects in Cambodia (20 in 2006, three during the first quarter of 2007).
He says: "In the future, more Chinese and maybe also Vietnamese companies will shift production capacities to Cambodia, as they can't be sure that after 2008 the US and EU will stop undertaking actions against Chinese and Vietnamese exports."
Long Bunna, office manager of sourcing company Li & Fung Cambodia, thinks that Cambodia's increasing maturity as a garment producer and exporter, as well as its good relationships with investing countries like Korea and China, bode well for the future.
"The industry has the qualifications to survive, but the government also has an important role to play," Long Bunna insists. He refers positively to the government's proposal, in April 2007, to slash the nightshift rate from 200% (of day rate) to 130%.
Export market niche
Sector observers from international organizations in Phnom Penh (ILO, IFC) stress the enduring importance for Cambodia of an export market niche based on labour standards, combined with the normal sourcing criteria of price, quality and speed to market.
Tuomo Poutiainen, chief technical advisor of ILO's 'Better Factories Cambodia' programme, points to the fact that nearly the whole Cambodian garment industry is foreign-owned. This is great for the industry's integration in the world's strongest textile and garment cluster.
"On the other hand," warns Poutiainen, "foreign owners do not necessarily feel profound responsibility towards Cambodia's long term interests."
Karla Quizon, program manager garment sector of IFC, in Phnom Penh, observes that leading buyers like Gap, Levi's , Disney, Sears and Wal-Mart, not only consider Cambodia as a good sourcing alternative for China, but also appreciate Cambodia as an inspiring 'model' for their corporate social responsibility (CSR) policy in other production countries.
Mona Tep, Director of the USAID-funded Garment Industry Productivity Center (GIPC) in Phnom Penh, is bullish about the capacity of Cambodian garment factories to rapidly improve their competitiveness. GIPC's training courses for supervisors and managers result in an average productivity increase of 20-30%.