Cambodian Textiles & Garment Industry

Transcription

1 PHNOM PENH SECURITIES PLC. No. 32, Monivong Bld, Phnom Penh, Cambodia Tel: Fax: Website: In this Paper: Overview Page 01 Cambodian Textiles and Garment Industry Page 02 Textiles and Garment Export Page 02 Markets for Cambodian Textile & Garment Products Page 02 Garment Factories by Countries Page 04 Economic Effects of the Garment Industry Page 04 Consumer Pressure Page 05 SWOT Analysis on Garment Industry in Cambodia Page 05 Conclusion Page 07 OVERVIEW The global textiles and garment industry forms an important component of world trade flows, particularly for some developing and least developed countries where clothing accounts for large proportion of export. Trade pattern in textiles and garments are similar although textiles tend to be a capital-intensive business, while garment-making is labor-intensive and usually relies on a low-cost workforce. EU is the biggest exporter of textile product, followed by China. However, India, Turkey, Pakistan, Indonesia, Thailand and Mexico all rank among the top 15 textile exporter whereas the developing countries such as Bangladesh, Vietnam, Cambodia, Indonesia are among the top exporters of garment products. On January 1, 2005, the quota restraints of the Multi-Fibre Arrangment (MFA) expired, finally bring to an end four decades of restriction on trade in textiles and garment among World Trade Organization (WTO) members. Trade in these products is now governed by normal WTO rules which promote free trade agreement among the members. Cambodia is one of the least developed countries who benefited from Generalized System of Preference (GSP) from many developed and developing countries who are members of WTO. For instance, Everything But Arms initiative that allow all exported products from Cambodia to EU with duty free and quota free except armaments. In this brief report, the market and the significance of export value of the textiles and garment products will be illustrated, then the ownership by nationalities of garment factories are demonstrated. Economic effects and consumer pressure for garment industry come afterward and end up by SWOT analysis of the industry.

2 CAMBODIAN TEXTILE AND GARMENT INDUSTRY Textiles & Garment Export Special Report The Economic Institute of Cambodia (EIC) projected Cambodia s GDP growth of 6.2% as on July 2012, the same figure as in previous prediction this year in January. In which, the industry s growth rate was revised at the lower rate to 8.8% from the previous projection of 9.3% growth rate earlier this year. Decelerated economic growth in the US and debt crisis in European markets led the demand on Cambodian Textiles & Garment, which is the main subsector of the Industry, to drop. And its growth rate was revised on July 2012 at 8.6% from 9.4% projected in January 2012, according to EIC (see Figure 1). However, year-on-year Textiles & Garment export increased by 14% to about US$1.4 billion during the first 4 months of 2012, according to data from the Ministry of Commerce s CAMCONTROL Department. This growth pace was much slower than 44% recorded over the same period last year (see Figure 2). Figure 1: Cambodia GDP Projection 2012 JUL-12 JAN-12 CHANGE GDP 6.2% 6.2% 0.0% AGRICULTURE 4.6% 4.5% -0.1% INDUSTRY 8.8% 9.3% 0.5% TEXTILES& GARMENT 8.6% 9.4% 0.8% SERVICE 5.4% 4.9% -0.5% Source: EIC Figure 2: Textiles & Garment Export from Cambodia (USD Mil.) Jan Feb Mar Apr 4M-12 4M-11 4M ,396 1, Source: Camcontrol/MoC In addition, the textiles & garment subsector forecast to grow at another single digit 9.9% in 2013 due to persistent of weak demand from EU and the US markets; production cost increased, for instance: the appreciation of Chinese renminbi against the US dollar would make fabrics imported from China become more expensive; increasing minimum wage; and higher electricity cost. These constraints led to lower competitiveness of Cambodian Textiles and Garment industry and ultimately decrease its export to the main affluence markets. Markets for Cambodian Textiles & Garment Products The United States is the prime market for Cambodian garment products, and followed by European, Canada and Japan market.

3 The total export to the US in 2011 grew 13% to about US$2 billion, compared to the same period in Moreover, garment export to European market had dramatic increase by 69% to US$1.17 billion in 2011 due to Everything But Arms initiative, which is the new GSP granted by European Union to LDCs (see Figure 3). And this accounted for the robust growth of garment export to EU since January Last year in addition, Canada and other markets imported Cambodian garment-product which grew year-on-year by 39% and 94% respectively. Yet, during the first six months of 2012, the growth of garment exports to foreign markets has dropped mainly because of the persistent debt crisis in European market and slow recovery of the US market. Figure 3: Market for Cambodian Textiles & Garment Products USA ,123 1,272 1,565 1,906 1,999 1,988 1,508 1,820 2,055 EU ,171 Canada Others Total 1,157 1,344 1,610 1,983 2,190 2,652 2,866 2,981 2,419 3,008 4,034 Source: GMAC Investment Project Approval in Garment Sector The amount of total fixed assets of investment projects approved by the Council for the Development of Cambodia (CDC) during the first quarter of 2012 increased by 46% to US$409 million, according to EIC special issue July The increase was mainly driven by the investment projects approved in agriculture and industry sectors, particularly in agricultural activities, besides rubber and agroindustry, and in garment. Moreover, investment application related to garment industry were approved for 23 projects (against 11 projects during the same period last year) and worth US$139 million in fixed asset terms. (See Figure 4) Figure 4: Investment Project Approvals (US$ millions, fixed assets) M2012 Agriculture Agro-industry Rubber Other Agricultures Industries , Energy Garment Mining Construction Other Industries Services 9,970 4,312 1,191 3, Services 1,

4 Telecommunication Hotel Tourisms 8, Other Services Total 10,891 5,860 2,692 7, Source: CDC Factories by Countries Special Report Among all garment & textile factories, Taiwan represented the top owner by foreign nationalities, and followed by China, Hong Kong, Korea, and other countries as illustrated in the below graphic (see Figure 5), according to GMAC Report At the ASEAN-EU Business Summit in April, Van Sou Ieng claimed a new garment or shoe factory opened in Cambodia about every 10 days, according to the Phnom Penh Post issued on July 23, So, foreign investors eye the Kingdom as the best location for garment manufacturing thanks to its well-known cheap labor cost and the pro-investment government. However, there is still concern over the workers strike for wage increased. That would harm the garment production or delay the operation and as a result many garment factories will lose their customer satisfaction and led to disrupt their business operation in Cambodia. Consequently, they will have to look for other markets with a lot of potentials and cheap labour cost within the region, such as Myanmar, due to its newly political and economic reforms in the country Figure 5: Textiles & Garment Owned By Foreign Nationalities Source: GMAC, January 2011 Economic Effects Garment export accounted for 85% of total exports from Cambodia and that amount increased to 95% if included footwear produces exported. Besides, garment manufacturing contributed by 16% of the country s Gross Domestic Products (GDP). Also, the garment subsector employed 45% of its manufacturing workforce, according to South East Asia Textile Business Review As of January 15, 2011 according to the Ministry of Commerce 262 garment factories employed 319,313 workers and 36 footwear factories employed 56,643 workers. Importantly, the garment workers have supported their family in rural area with their saving from salary to improve

5 their family s living condition. Growth in garment export accounted for a bulk increase of outgoing shipment via Sihanoukville Autonomous Port (SAP). Consumer Pressure Many companies, especially international brands such as Levi s, H&M, Gap, take into consideration Corporate Social Responsibility (CSR) program for their business. Ethical standard, workplace condition, and child labor are also seriously considered. Although, garment factories find them costly to implement, they have to apply them into their operation. Or, they will face the orders rejected from their clients. In addition, international audit are carried out to ensure compliance on a range of health, safety, environmental issue, for instance: International Labor Organization (ILO) s involvement in Better Factories Cambodia (BFC) scheme. The project monitors and reports on working condition in Cambodian garment factories according to national and international standards. Hence, garment factories could improve working conditions and productivity by working with the government and international buyers to ensure a rigorous and transparent cycle of improvement. The project grew out of a trade agreement between the United States and Cambodia. Under the agreement, the US promised Cambodia for better access to US markets in exchange for improved working conditions in the garment sector. Textile and Garment Industry Analysis SWOT Analysis The analysis used to study strengths, weakness, opportunities and threats (S.W.O.T) in Cambodia s garment industry. - Strengths: access to world s major markets on a duty-free and quota-free basis. Several developed and transition economies, which are the major markets for least-developed countries (LDCs), have granted duty-free and quota-free market access for all or almost all export from LDCs in which Cambodia was classified. Everything But Arms (EBA), a new GSP granted by the European Union, under which all import to the EU from the LCDs are duty free and quota free, with exception of armaments; Canada s Least- Developed Countries Tariff (LCDT) program had committed to eliminate tariffs and quota on 99% of Canada s tariffs lines except dairy, poultry and eggs; Japan s GSP on everything but rice, salt, leather and footwear; the Global System of Trade Preference of Republic of Korea on 75% of its tariff lines; the US GSP Scheme in which Cambodia is benefiting from DFQF for only over 6,000 tariff lines (60%) while the rest of tariff lines are still under MFN rates;

6 China s Special Preferential Tariff (SPT) comprising of 98% of China s Tariff Lines; India s DFQF on 94% of India s Tariff lines; Brazil s DFQF granted on 80% of Brazil s tariff lines. Last but not least, Association of South-East Asia Nation (ASEAN) is another market composing of more than 600 million of its population for Cambodia s export products. Due to ASEAN Free Trade-Area (AFTA), there will be duty free tariff applied after 2018 on exported products among ASEAN s members. In addition to abundant of cheap labor, Cambodia is the only country in the world where the International Labor Organization (ILO) independently monitors and reports on working conditions in clothing factories according to national and international standard. Hence, it is one of the incentives that leading brands such as Levi s, Gap, Sears, Wal-Mart, Disney keep buying from Cambodia. Importantly, Cambodia government has adopted a lot of regulations to attract foreign investments. Among all, granting 100% foreign-ownership is highly attractive for foreign investors. Moreover, any the investment projects comprising of investment in garment industry which are granted Qualified Investment Project (QIP) status is to benefit from many incentives such as tax on profit exemption up to 9 years, and custom duty exemption on production equipment and other inputs. - Weakness: Cambodia s garment and textiles sub-sector has endured lack of skilled workers, very demanding in producing fabrics, so that the country imports all fabrics from foreign markets such as Mainland China. The appreciated value of Chinese renminbi (Yuan) made the imported fabrics from China become more expensive. Moreover, high fuel costs led to rising electricity and high transportation costs were other bottlenecks for the country s garment industry. Currently, the Kingdom strongly depends on the most developed countries for her garment export markets. However, the government and especially the garment firms have diversified its market toward China and other countries in the region. More ongoing projects of hydro power dam and coal powered plant would provide the country to access to low cost of electricity and ultimately lower the production cost which is the most critical point in maintaining competitiveness of garment and textile produces. - Opportunities: Cambodia has strengthened trade relationships with all major partners including EU, USA, China, South Korea and Japan and other emerging markets to ensure a broad market access. These markets have granted duty-free and quota-free access for almost Cambodian products. Moreover, rising production costs in China would provide Cambodia having low labour cost with an opportunity to attract more Chinese investment into the Kingdom. Importantly, we would never forget the ASEAN s market that house 617 million people with a total GDP of US$3.5 trillion. Moreover,

7 Cambodia has chaired ASEAN summit in 2012 and this drew a lot of attention from the rest of the world over the open economy in the Kingdom and its pro-business policy of the government. - Threats: Strong reliance on US and EU markets for exporting produces makes Cambodian economy vulnerable to the fluctuation of their economy especially during the period of debt crisis in Europe and sluggish growth in the United States of America. Moreover, fierce competition stemming from low cost producing countries such as Vietnam and Bangladesh is another concern. Economic reforms in addition in Myanmar would attract many FDIs and the existing investors in the Kingdom to eye investment there, in the newly reformed country, particularly in manufacturing sector. Also, frequent strikes demanding for wage increased and as well as low worker productivity afflict the industry. According to the Garment Manufacturing Association of Cambodia (GMAC), Chinese worker produces shirts per hour, a Vietnamese worker makes shirts per hour, and a Cambodian worker produce shirts per hour. Hence, Cambodian workers are less productive compared with others in the region. CONCLUSION Currently, Cambodia strongly depends on the manufacturing sector in which Garment and Textiles plays an important role in absorbing a lot of labor forces. Also, the growth of the sub-sector contributes into poverty reduction which the government needs to pay a lot of attention. The globalization of the trade has challenged the growth of Garment & Textiles in the Kingdom. So, remaining competitiveness is what the government, private sectors particularly garment factories should take into consideration. To do so, it is recommended to diversify the market; promote cooperation among firms, industry association, and government to develop a coherent strategy for the sector; increase more worker productivity providing that training is always necessary. Strong reliance on US and EU markets for garment and textiles products make Cambodia economy vulnerable to their economic condition. To cope with it, the government and private sector especially garment factories have negotiated with other countries such as China and other ASEAN countries for the market diversification. The electricity cost remained a bottleneck for the industry, yet it will be offset as Cambodia currently come up with many projects on hydro power dam and coal power plant which is expected to oversupply.

8 Contact PHNOM PENH SECURITIES PLC. No. 32, Monivong Blvd, Phnom Penh, Cambodia Tel: Fax: Website: Copyright Phnom Penh Securities Plc. All rights reserved. Disclaimer The information contained herein, including any expression of opinion, is based upon sources carefully considered and believed to be reliable at the time of publication, but their accuracy and completeness are not guaranteed. Opinions, estimates, and projections expressed in this document are fair and reasonable in the circumstances prevailing at the time, but are subject to change without notice. The use of this document shall be solely risk of the users. Directors, associates, employees and affiliates of PPS accept no liability for any damage caused by using this paper. This document may not be copied, reproduced, published or redistributed by any person for any purpose without the express consent of an authorized representative of PPS. Please cite sources when quoting. 06 August P a g e