Photo by: Tracey SheltonCambodia’s lack of competitiveness has compounded the effects of plummeting global demand for garments, say analysts.
Written by Nathan Green
Friday, 12 June 2009
In a major meeting in Phnom Penh today, industry figures will have a chance to discuss how to escape the financial crisis, but it’s not just the downturn that has caused the industry to suffer
GARMENT sector representatives are to meet in Phnom Penh today to develop a national strategy for the industry against a backdrop of drastically falling exports, factory closures and mass layoffs.
Figures from the Commerce Ministry's Trade Preferences Systems show garment exports fell 26.41 percent year-on-year in the first quarter to US$534.6 million, while Stephan Guimbert of the World Bank office in Phnom Penh estimates that at least 63,000 workers have been laid off as factories have closed, taking into account that many have been reabsorbed as some new factories opened.
The smart money is on worse to come. Van Sou Ieng, president of the Garment Manufacturers Association of Cambodia (GMAC), said he was surprised exports had not fallen more.
"Cambodia is less competitive than Bangladesh and Vietnam in regards to production, and less competitive than Indonesia because we don't have fabrics," he said. "For that reason, last year I predicted a drop of 40 to 50 percent in the first six months of this year."
In contrast, others are surprised the losses have been as pronounced. Paul Gruenwald, ANZ Bank's chief economist in Asia, said low-end clothing and textiles usually held up relatively well in economic downturns.
"On the garments, I'm a bit surprised by the severity of the downturn," he said. "Some of the other markets for garments - we understand - are doing a bit better."
He suggested something else was going on to affect the country's competitiveness, singling out the country's high level of dollarisation, which served as a de facto peg to the dollar. "The dollar has been rising so this is hurting competitiveness," he said in Phnom Penh this week.
These are the issues attendees at a garment industry conference organised by the Garment Industry Productivity Centre (GIPC), the garments wing of the Cambodia Skills Development Centre (CSDC), will be grappling with when they meet in Phnom Penh today, said GIPC Director Mona Tep.
While she acknowledged the impact of the global downturn on the sector, she said the competitiveness, or lack thereof, of Cambodian exporters was also a contributing factor.
"[Declining garment exports are] a combination of a lot of elements," she said. "One of the main elements is the drop-off in the global economy, that's for sure. But there are other elements in our control that we can take action on."
Without wishing to prejudge where conversation at the forum would head, she identified workforce development, industrial relations, electricity supply, customs issues and offshore marketing as areas where improvements could be made.
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In a declining market, only the most competitive make money... how does Cambodia position itself to be more competitive?
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She said the conference was an opportunity for the sector to discuss findings from a May 27 forum in which buyers and investors put forward a wish list for changes to the sector.
"This was not about compliance at all," she said, referring to the International Labour Organisation's controversial Better Factories initiative. "We have all the workers initiatives in place already. What they were expecting is more in terms of quality, productivity, delivering on time and, of course, price."
Labour compliance is a major buzzword in the Cambodian garment sector, and an increasingly sore point for factory owners, employer groups and the government.
Speaking at the May 27 forum, Minister of Commerce Cham Prasidh warned buyers the government could be forced to revisit its labour-linked trade policy "if the result of the support of ILO labour compliance means less purchasing orders and less business for Cambodia".
He acknowledged that the country had seen commitment from a number of customers, but urged others to embrace the initiative more fully and resist the temptation to source from countries who could make cheaper garments as a result of poor labour standards.
"Time has proven that we were right to promote [corporate social responsibility (CSR)], but time has proven also that, in dire circumstances in which prices are falling, CSR could be relegated to the back stage," he said.
Van Sou Ieng said he hoped this government pressure would encourage buyers to "put their money where their mouths are" and reward Cambodia for its commitment to the programme, which he said raised costs and made Cambodia less competitive than countries like China, Bangladesh and Vietnam, none of whom had been hit as hard as Cambodia by the crisis.
"If they want to see Better Factories survive they have to pay for it, and place orders," he said. "Buyers who talk about Better Factories but only put $1 million or $2 million in orders into Cambodia and hundreds of millions into other countries are hypocrites."
But Jane O'Dell, a consultant for Nathan Associates Inc, an economic development consultancy, and the former head of a USAID project that set up the GIPC in 2005, said compliance with labour standards was essential for market access. However, productivity and costs also needed to be addressed. "You can't ignore your business model on the strength of your labour standards," she said. "Much as the buyers appreciate the compliance, if they can't get their goods or they can't make a profit on them, it makes it very difficult even if they want to place more orders."
Cambodia had good manufacturing capacity, she said, but severe weaknesses in other areas, including infrastructure, workforce productivity, utility costs and trade facilitation were costing exporters.
This was also the finding of a recent UN Development Programme report on Cambodia's competitiveness in the global economy that placed the country last among ASEAN nations and among the worst-performing countries worldwide.
"Increasing Cambodia's competitiveness is a necessity, not a choice, if the country is to sustain economic growth, reduce poverty and keep pace with its ASEAN neighbours," the report warned.
Van Sou Ieng agreed. "I think the most important thing to survive the crisis is to improve our competitiveness and capture more of the value chain," he said, referring to developing the capacity to produce raw materials, which make up to 70 percent of the value of finished products.
He also called for massive government investment in infrastructure and skills, an urgent reduction in the cost of utilities and a labour union law to reduce proliferation of unions and create an industrial relations landscape not marred by strikes. Equally importantly, he called for the government to take measures to facilitate trade, or at least reduce the bottlenecks and high costs at customs that were an all too common complaint across the sector.
"Cambodia has no raw materials so we have to import everything, and it has no domestic market so we have to export everything," he said. "Imports and exports are the core of our industry, but administration costs have crippled it."
Investors lost
He said these issues were behind a decision by a major Japanese buyer who had looked to invest between $45 million and $50 million in Cambodia to go elsewhere. "At the end of the day, the Japanese invested in Bangladesh, despite coming to Cambodia 10 times," he said. "First, the cost of utilities was too expensive, second was the number of strikes, and third was the high costs of imports and exports.
"They didn't even look at the Better Factories programme. We spent six months lobbying, and we lost."
Jane O'Dell said she hoped today's conference will help focus attention on the critical issues afflicting the sector and help lead to a nationwide strategy for the future of the sector agreed to by government, exporters and the unions.
"In a rising market, everybody makes money. In a declining market, only the most competitive make money. The question is, How does Cambodia position itself to be more competitive?" she said.
"I don't have a crystal ball or anything like that but the thing that, I would worry about is that other people who are more focused are going to be taking market share and Cambodia is going to be losing - losing jobs and losing opportunity."
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