Cambodia – A Rising Force in Light Manufacturing?

Date: January 8, 2014

Cambodia – A Rising Force in Light Manufacturing?

Although Cambodia has long been synonymous with deep and seemingly intractable developmental challenges – to say nothing of the tragic “Killing Fields” chapter of its history – the country could soon be on the verge of achieving a much more positive degree of notoriety:  as an emerging center for manufacturing.

While the labor-related protests now unfolding in Phnom Penh are deeply regrettable for the blood that has been shed, they are actually reflective of how rapidly the demand for factory labor has been increasing. And although distressing, this civil discord is unlikely to fundamentally alter Cambodia’s favorable overall trajectory.

A number of factors, both within and beyond Cambodia’s borders, are fueling the country’s burgeoning competiveness as a regional hub for manufacturing. Most obviously, China’s three-decade run as the world’s preeminent low-cost manufacturing center is now winding down.  Rising wage rates, a less abundant labor pool, and a slow but steady appreciation in the value of the Yuan have all served to undercut China’s attractiveness as a platform for low-cost manufactured exports. This, along with China’s continued ascent up the value chain, and the central government’s professed desire to shift away from an export-led development model, is helping to create a significant market opportunity.

With an estimated tens of billions of dollars worth of production being shifted out of China, Cambodia is well positioned to capture an increasing share of the most price-sensitive segments of China’s  manufacturing industry – especially in the garment sector.Cambodia is able to offer wage rates that are roughly one-third of those in China, along with favorable tax incentives, and duty-free access for garments to large developed world markets such as the US and the EU. Adidas, GAP, and H&M are just a few of the major global clothing brands that have moved production to Cambodia.

Of course, none of this is to suggest that China will be abandoned as a manufacturing hub at any time in the foreseeable future. But an increasing number of companies are finding it strategically prudent to diversify a portion of their manufacturing out of China. Cambodia is increasingly becoming the logical “one” for companies seeking to employ a “China plus one” manufacturing strategy.

But manufacturing in Cambodia is by no means a “China only” story. Japanese producers of everything from cell phones to automotive products have also discovered Cambodia, and Korean firms were among the first foreign investors to establish production facilities in and around Phnom Penh. The three largest foreign investors in Cambodia – Korea, China, and Japan – have staked out significant positions not only in the garment sector, but also in toy manufacturing, furniture, electrical equipment. And the pace of foreign investment is rapidly increasing according to the Asian Development Bank.

At the same time, Cambodia is rapidly “coming into its own” as a small but high-revving engine of growth, averaging impressive annual GDP increases of almost 10% from 1998 to 2008. The global financial crisis interrupted this decade of double-digit growth, but Cambodia has since settled into consistent growth levels in the 6-7% range.

While the size of Cambodia’s domestic market is relatively modest (roughly 15 million citizens), this decade-plus of high-octane growth has been propelling an increasing portion of the population into the middle class. The accompanying increase in levels of purchasing power and discretionary income have further fueled demand for the variety of products being churned out by the Kingdom’s growing manufacturing sector.

Cambodia’s attractiveness as a manufacturing base has also been boosted by growing regional integration.  With the 10 members of ASEAN set to establish a so-called “ASEAN Economic Community” (AEC 2015) by the end of 2015, multinationals from within and beyond Asia are looking to establish a production footholds to service the entire market. Although the AEC is unlikely to create anything approaching an actual economic community, it will certainly facilitate greater integration and enhance access to the region’s population of 600 million and combined GDP of over $ 2.3 trillion – which would make ASEAN the third largest economy in Asia.

While Cambodia has made impressive strides and there is ample reason for optimism, it would be a mistake to underestimate the magnitude of the challenges the country continues to face.  Infrastructure deficiencies head the list. Electricity issignificantly more expensive than in neighboring countries such as Vietnam, and the reliability of the grid leaves much to be desired. Roads, bridges, and ports are also lagging behind many ASEAN neighbors, especially Thailand. 

Greater demand for factory workers has put upward pressure on wages, and the large-scale garment worker demonstrations for more pay will heighten that pressure. Productivity levels in Cambodia – although rising – still trail behind China, and serve to offset at least somewhat its cost competitiveness edge. And of course, the simple fact of the matter is that Cambodia faces competition. Myanmar, Bangladesh, and Vietnam all compete to varying degrees with Cambodia for a share of the manufacturing sector, especially in the garment sector. 

These challenges notwithstanding however, Cambodia is well-positioned to continue to establish itself as an attractive base for regional manufacturing. With China entering a fundamentally new chapter in its economic development, and Western markets unlikely to return to robust growth any time soon, the attractiveness  of the ASEAN market – with its young demographic profile and rapidly growing middle class – is becoming more prominent on the radar screen of an increasing number of multinationals. As these trends continue, Cambodia will warrant a closer and closer look as a competitive potential base for manufacturing.

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