Cambodia’s garment sector may lag behind as global manufacturing hub

Cambodia garment sector may find itself lagging behind as a global manufacturing hub as it is facing a number of challenges such as regulatory obstacles, insufficient infrastructure, an uneducated workforce and lukewarm global demand — in its quest to cultivate its industry and move up the manufacturing value chain. The country’s political atmosphere, largely undiversified economy and weak supply chain only compound its troubles.

According to the country’s Garment Manufacturers’ Association, orders for Cambodian clothing has fallen 30 percent this year and that political uncertainty has forced more than 70 factories to close or relocate.

In the early 1990s, Cambodia emerged on the global scene as a major garment manufacturer and exporter, aided by a young, inexpensive workforce, favorable investment policies and preferential access to Western markets. The surge in Cambodia’s garment industry, combined with two decades of relative political stability and economic liberalization, helped the country rebound from decades of war to build one of the region’s fastest-growing economies.

But Cambodia has not moved past its reliance on the garment industry, which supplied 70-80 percent of its export revenue over the past decade and employed a large portion of its workforce. And over time, the sector has fallen victim to the country’s many political and structural challenges.
Given the country’s heavy dependence on a single industry, it is perhaps unsurprising that labor issues are a hot-button topic in Cambodian politics. The country’s high level of unionization and the simmering enmity between its ruling and opposition parties adds fuel to the debate.

As elections in 2017 and 2018 approach and Cambodia’s political scene remains largely unsettled, opposition parties will likely keep leveraging labor. Over the past three years, repeated wage hikes have more than doubled pay for garment manufacturing jobs in Cambodia to $140 a month, putting the country on par with — or above — many of its regional competitors, including Vietnam, Bangladesh and Indonesia.

Now, opposition parties and unions are demanding that the rate increase to $177 per month. As other countries in the region, such as Myanmar and Vietnam, pursue international trade more aggressively, Cambodia’s climbing manufacturing wages will continue to erode its competitive edge in the years to come.

The problem for Cambodia is that wages in its garment industry rose too high, too quickly, at a time when the country is ill prepared to move up the manufacturing value chain or to diversify its economy.

Of the major garment exporters worldwide, Cambodia is among the most dependent on textile and clothing for export revenue, employment and investment, second only to Bangladesh. Though both countries suffer similar deficiencies in infrastructure and labor productivity, Cambodia’s industrial capacity is still well below that of Bangladesh and largely operates at the downstream end of the industrial chain. Cambodia’s garment industry, moreover, is heavily concentrated around the capital city of Phnom Penh. And unlike Bangladesh, where local entrepreneurs control much of the industrial chain, Cambodia’s garment factories are mostly owned by foreign brands, making the industry highly vulnerable to external shifts.

Nonetheless, if Phnom Penh addresses these challenges, Cambodia’s small economy, young labor force and relatively amiable relations with major regional economies such as China and Japan could work in its favor.