For nearly two decades, Poipet was a one-trick pony, relying on the casinos huddled around its Thai border crossing for its economic fortune. But now a different type of cluster is emerging on the frontier town’s outskirts, where industrial parks are attracting predominantly Japanese manufacturers with a vision for a vast Southeast Asian supply chain network that spreads risk and capitalises on the region’s economic diversity.

Investors have chosen the location carefully. Factories in Poipet’s special economic zones (SEZs) can plug into cheap, stable energy from Thailand while tapping Cambodia’s ready supply of low-cost labour and durable tax incentives. And at 50 metres above sea level, the area is safe from the devastating flooding that ravaged Thailand’s low-lying industrial heartland in 2011.

The floods, which put factories out of production for weeks, convinced many Japanese manufacturers operating in Thailand to spread their investments across the Mekong region to mitigate risks and take advantage of varying cost formulas.

The so-called Thai+1 strategy has brought its own flood of investment to this far corner of the Kingdom, with Japanese corporations setting up auxiliary factories in Poipet to benefit from additional production capacity and far-lower labour costs.

According to one industry source, the average Cambodian factory worker earns less than $200 a month including wages and allowances – nearly half that of their counterparts across the border in Thailand.

Masahi Kono, chief representative of JETRO in Cambodia, the local arm of Japan’s trade and investment promotion agency, said Poipet is developing into an important cog in an integrated supply chain that stretches over 700 kilometres from Bangkok to Ho Chi Minh City.

Its factories typically assemble labour-intensive components, supplying industrial complexes in Thailand where a higher-skilled workforce carries out the more technical steps of manufacture.

Not surprisingly, proximity to these Thai production centres is highly advantageous.

“The merit of Poipet’s location is [that it allows companies] to import materials from Thailand and export their products back to Thailand immediately,” said Kono.

Staff and shipments can be in Bangkok in under four hours. And it is just a two-hour drive from the NHK Spring factory in Poipet, where workers stitch car seat covers for Toyota vehicles, to Toyota’s 80,000 unit per annum Gateway Plant No2 in eastern Thailand.

Peou Sambath, a board member of Sanco-Cambo Investment Group, a Japanese-Cambodian joint venture that operates a SEZ on 67 hectares in Poipet, said the industrial park provides a strategically located platform for Thai+1 investments.

“Sanco SEZ can be used as an alternative manufacturing location to capitalise on various vital elements such as competitive labour cost, attractive investment incentives and, of course, manufacturing activities which require high-labour intensive [processes],” he said.

“Simply put, manufacturing activities can be produced at a lower cost in Sanco SEZ, while essential employees, executives and suppliers can commute between the two countries easily for various business activities.”

First established in 2012, Sanco SEZ has attracted four industrial tenants, Samchai Steel, NHK Spring, SC Wado and Toyota Tsusho. Samchai Steel is a Thai steel fabricator specialised in steel piping. The other three are Japanese-owned companies with production lines geared to support Thailand’s $50-billion automotive industry, the largest in Southeast Asia.

According to Sambath, the emerging automotive cluster benefits its individual manufacturers while elevating the technical skills of Cambodia’s industrial workforce to facilitate the country’s diversification beyond low-end manufacturing.

“We believe automotive manufacturing clusters create great synergies for the manufacturing industry as well as improve the knowledge base of our labour forces,” he said.

At the heart of this cluster is Toyota Tsusho, the distribution arm of Japanese auto giant Toyota, whose $3-million “Techno Park” anchors Sanco SEZ and has set a hook to lure dozens of more tenants. The model, already successfully deployed by Toyota in India, Thailand and China, provides space and services for Japanese-affiliated auto parts manufacturers to set up operations.

“The Techno Park will provide rental factories at units of 1,000 [square metres], along with employee meals and such administrative services as general affairs, accounting, finance, and human resources. This will enable customers to focus entirely on manufacturing and lower the cost of overseas market entry by alleviating initial investment and risk,” Toyota Tsusho said in a release.

The Techno Park has rented out six of its seven available units since opening last October, with space available for expansion.Among its tenants is Sumitronics Manufacturing (Cambodia) Co Ltd, a joint venture between Japanese electronics manufacturing services (EMS) Sumitomo Corp and its Thai counterpart, Alpine Technology Manufacturing (Thailand) Co Ltd. The company’s 1,000 square metre EMS factory went into operation in December, serving automotive and consumer electronics manufacturers in Thailand.

Noriya Mifune, managing director of Sumitronics Cambodia, said the factory will initially produce electrical capacitors and resistors, and assemble wire harness modules for its clients.

“Cambodia has sufficient young labour compared to Thailand,” Mifune said on the decision to open a factory here. “Also, Poipet is a good location to work with and support our Thailand group factory geographically.”

Logistics has taken on a crucial role as manufacturers develop increasingly complex supply chains that link factories spread across hundreds of kilometres. The Japanese government and development agencies have been pouring funds into improving the road and bridge network that connects Thailand’s industrial heartland to the giant container port at Cai Mep, near Ho Chi Minh City, allowing raw materials to be shipped in and delivered, and exports to be quickly delivered to global markets.

According to Sambath, a rail link between Thailand and Poipet due to open this year would significantly boost the supply chain, reducing transport costs while improving the speed, wait times and quality of goods movements. Its operation could also provide the cost and load efficiencies necessary for a heavier manufacturing industry to develop in Poipet.

“The connectivity of railroad is extremely essential for logistical functions as it allows both sides to maximise transportation loads in terms of raw materials, semi-finished goods and finished goods, and at a lower cost than trucking,” he said.

“[This is] especially [important] for the steel or heavy manufacturing industry, where raw materials and finished goods are extremely heavy with high volumes but low value.”