Cambodia Processing and Building Industries
Processing industry
Due to high energy costs and a small number of skilled workers, the clothing industry remains the most important branch of the manufacturing industry in Cambodia. A good 700,000 seamstresses (90% women) work in the 1,500 factories, who generated exports of 10 billion US dollars in 2018 (an increase of 24% compared to the previous year). The clothing industry is likely to have peaked in the near future – but only if the cost increases can be offset by productivity gains (which, according to the World Bank, were only 0.9% per year between 2007 and 2014) and trade facilitation persists.
The annual increases in the industry minimum wage, which has been US $ 190 a month for a full-time position with 48 hours per week since January 1, 2020, will be increased to US $ 192 as of January 1, 2021 (it was still US $ 61 in 2012), successively endanger Cambodia’s competitiveness. This is because almost all export-relevant factories are foreign-owned and the sewing machines can be dismantled in one country and rebuilt in another within a few weeks. In addition, only final assembly has always taken place in Cambodia, as all raw products, from fabrics to buttons and zippers, have to be imported.
Labor disputes have become less frequent in the past two years following the dramatic events of January 2014, although the fragmentation of the union landscape (there are more than 3,000 in existence, few of which are independent labor advocates) and the lack of collective bargaining mechanisms remain problematic. In this context, many national and international organizations criticize the working conditions and the often inadequate observance of employee rights. In March 2015, Human Rights Watch criticized the grievances in many factories, pointing out the responsibility of the government and the major shoe and textile brands that manufacture in Cambodia.
Although Cambodia threatens to lose its status as a low-wage country in the medium term in view of further wage increases, which are considered extremely likely, the textile and clothing industry is still considered secure, at least for the next few years, as leading international fashion and sporting goods companies want to continue to produce in Cambodia. Nevertheless, the Cambodian government is already planning a fundamental transformation “from a labor-intensive industry to a skill-driven industry” by 2025, which should involve gradual diversification. This is to be financed almost exclusively through the acquisition of foreign direct investments.
According to Hyperrestaurant.com, the steadily growing bicycle industry, which has only existed since 2006, is a prime example of both the country’s potential and the still great challenges it faces. Although Cambodia rose to become the largest bicycle exporter to the EU in 2017 with a good 1.4 million units sold, the alleged success story is based almost exclusively on the trade facilitation under the “Everything But Arms” regulation. As in the clothing industry, there are no relevant national companies. The predominantly Taiwanese manufacturers have only relocated the final assembly to Cambodia in order to export duty-free to the EU. The working conditions are usually significantly worse than in the clothing industry, at the same time manufacturers have to struggle with numerous challenges.
So this location question also remains questionable in the medium term. And even if the preferential treatment of Cambodian products by EBA is largely secured beyond August 2020, a lack of productivity and excessively high wage costs could further impair the competitiveness of the textile sector.
Building construction
Cambodia’s economic growth is probably most visible in the countless construction projects not only in the capital, Phnom Penh. While the construction sector still had sales of 5.22 billion US dollars in 2018, a year later it was 9.35 billion US dollars (up 79%). Even if some investors deliberately set the capital requirement for their construction projects far too high and not all of the 4,446 approved construction projects are likely to be implemented: The risk of a real estate bubble has been discussed for years, since residential and business space is created far beyond the need – at the same time social housing (still) not a priority. Although the demand does not keep up with the rapidly increasing supply, rental prices in Phnom Penh in particular have continued to rise in recent years.
The reasons for Cambodia’s unprecedented construction boom are to be found beyond the country’s borders: As a rule, these are international investors, primarily from China, South Korea and Japan, who can save taxes through construction activities in their home countries, some simply use Cambodia’s real estate sector in view of the lack of control capacities Money laundering. In addition, the persistently low interest rates in the EU and the USA are likely to play a role, albeit an indirect one. However, even slightly changing global economic conditions can mean that new construction projects may not be realized after all.
In addition, a number of harrowing house collapses have raised questions about the poor quality of many buildings constructed in recent years and the competencies of the regulatory authorities. A particular tragedy occurred in January 2020 in the coastal town of Kep, where the collapse of a shell building cost the lives of at least 36 people. Unfortunately, political ramifications are just as unlikely as any hope is unfounded that the Kep tragedy will be the last of its kind.
