No doubt the vaccine’s arrival will indirectly restore manufacturing activity but industry players must make changes to adapt to a new normal in the global clothing market

Even as Cambodia’s garment customers – giant clothing chains and departmental stores in the West roil in financial doldrums, the nearly $10 billion export value sector is beginning to stitch itself together on hopes of the Covid-19 vaccine.

The sector had taken a beating after operations rumbled to a halt for the most of 2020, which according to the International Labour Organisation (ILO), resulted in an estimated 30 per cent drop in the industry’s business in Asia.

Closer to home, exports from the sector dipped 5.4 per cent to $3.8 billion in the first half of the year compared to 2019, clearly eliminating any chance of hitting previous years’ exceptional figures.

For the full 2019 year, industry exports climbed 11 per cent to $9.4 billion from 2018.

“[However] we already see promising developments regarding vaccines [hence, the reason why] I am sure the situation will get better in 2021,” said Garment Manufacturers Association in Cambodia (GMAC) secretary-general Ken Loo.

To date, he said, most shipments have been delivered and overdue payments settled.

Contributing 17 per cent to gross domestic product last year, much of the sector was in tatters in 2020, which forced the closure of hundreds of factories due to delayed or cancelled orders which resulted in massive lay-offs.

Source: General Department of Customs and Excise (National Bank of Cambodia - Economic & Monetary Statistics August 2020)

The latest data showed 110 garment factories have shut down from January to September this year, affecting more than 55,000 workers.

These figures are similar to the same period last year. The closure of factories are considered a norm, Loo indicated, saying that every year there will be new factories opening and some existing ones closing.

“We do not know of the actual number [now] but I am sure the government has measures to help as many factories as possible to survive,” he said.

End of UK brands

While recovery progress trudges along, close attention is being paid to possible impacts stemming from new developments, the latest being the debut of Covid-19 community transmissions in Cambodia.

Cases have risen by 24 to 356 since the first locally transmitted case was detected on November 28, as 49 undergo treatment. The rest have recovered.

Schools have been ordered shut, as are business outlets patronised by Covid-19 patients amid stern calls by Prime Minister Hun Sen and health officials to wear masks, maintain hygiene and avoid mass gatherings.

The government continues to stave off declaring a state of emergency which it said could devastate people’s livelihoods, commerce and the economy.

This decision, which showed control over the situation, has gained the confidence of the industry players.

“The situation is constantly changing but because the control of Covid-19 is better in Cambodia than some of our competitor countries, the industry is surviving,” GMAC’s Loo said.

He equally seemed unperturbed by the headwinds from the West where global retail clothing chains are carrying out corporate exercises to cut back losses.

One of UK’s oldest clothes retail chains Arcadia Group Ltd, whose brands such as Topshop and Dorothy Perkins were once valued around £800 million, has gone into administration.

Another British icon, 240-year-old departmental store chain Debenhams Plc, has filed for bankruptcy.

For nearly 120 years, Arcadia, owner and operator of eight brand outlets, and Debenhams held sway through two world wars, the Great Depression, and economic crises although their profits began narrowing in recent years.

Already at the edge, Covid-19 simply tipped them over after numerous lockdowns and reduced footfalls.

Similarly, Swedish-owned Hennes & Mauritz AB’s clothing line H&M and Spanish brand Zara SA, owned by Industria de Diseno Textil SA, are reducing stores globally to slash losses.

Source: General Department of Customs and Excise (National Bank of Cambodia Annual Report 2018)

European clothing emperors are large customers for garment manufacturers, representing 75 per cent of exports to the European Union (EU) in 2019.

It is a huge jump from 45 per cent in 2018 where total exports amounted to €5.4 billion, data from the European Commission (EC) showed.

The UK market constitutes 10 to 12 per cent of total orders.

Therefore, any rationalisation by retail clothing moghuls in Europe could cause an impact on the industry.

It did not help that the EU removed 20 per cent tariff on exports from August 12 this year, which might ring up an estimated €1 billion loss to Cambodia.

GMAC filed legal action against the EC at the European Court of Justice on July 16, 2020, but there has been no update.

Low wage, low value-added production

The predicament in Europe might exacerbate the negative impacts, said Japan-based Saitama University economics lecturer, Associate Prof Samreth Sovannroeun, adding that Covid-19 is already causing adverse effects on the garment sector.

“This may result in a further reduction in production activities and operations in the sector, at least in the short term,” he felt.

However, Samreth opined that the impacts can be offset by the ability of retail groups and major brands in reaching their potential consumers through alternative business models.

“This can lessen further adverse effects on the Cambodian garment sector,” he said.

Gareth Leather, senior economist in emerging Asia at Capital Economics Ltd, noted that garment sectors around the world have been hit hard by Covid-19, mainly because people are buying fewer clothes.

That being said, other factors work in Cambodia’s favour including rising costs in China and worsening ties between that country and the West.

“[This] means manufacturers will be keen to locate their factories elsewhere,” said Leather of the London-based economics research consultancy.

Source: Ministry of Industry and Handicraft (National Bank of Cambodia Annual Report 2018)

The industry hosts some 534 garment and 38 footwear factories which are actively operating as of October 5, ILO’s Better Factories Cambodia programme showed on its website.

Early this year, it was reported that Cambodia housed 1,100 factories, comprising 823 garment and textile factories, travel goods (114), footwear (132), and a total workforce of 923,313.

A majority of these factories are foreign-owned, mostly consisting of East Asians including those from mainland China, Taiwan, Hong Kong and Japan.

But this composition hinges upon the future of the industry and inclination to climb the value chain by adopting technology to compete in shifting purchasing trends and consumer behaviour.

While the pandemic has reduced purchasing power, it has also raised people’s awareness of social justice and fairness which could pressure clothing brands to meet such standards.

This could, in turn, force manufacturers to comply with their ethics code, which has been the case in the past where apparel brands allegedly accused Cambodia of lacking in workers’ rights.

Unlike its peers in the region, Cambodia is fairly focused on low-cost garments, operating at assembly stage where it employs the cut-make-trim model, essentially making it a labour-intensive sector.

Back in 2014, a study by Asian Development Bank identified weaknesses such as inadequate infrastructure, weak governance, low education and subpar skills as interrelated weaknesses that needed to be addressed.

The study on diversifying beyond tourism and garment said doing so was crucial to avoid being trapped in low wage, low value-added products and to maintain a stable political environment that is conducive to investment and commerce.

Six years on, the sector continues to face various challenges and that it needs to adjust with the current adverse effects, Samreth said.

“It is being exposed to higher competition with other prominent exporters. Cambodia needs to enhance its competitive capacity through improving, for example, its productivity.

“While Cambodia is trying to diversify its main economic sectors towards robust diversification, the productivity improvement of the sector cannot be neglected,” he added.

Not a sunset industry

Moving on, the sector is likely to correct itself, as is natural in the aftermath of any shock. This could include wind downs or even consolidations, ILO suggested.

Although barriers to entry into garment manufacturing are relatively low in some countries, the pandemic had heightened the risks and costs borne by suppliers in the sector, the UN-affiliated entity mentioned in a report entitled What next for Asian garment production after Covid-19? The perspectives of industry stakeholders.

What next for Asian garment production after Covid 19? study by International Labour Organisation, 2020

“This could discourage smaller, less professional suppliers from entering the market in the short-term,” ILO said.

In any case, sub-contracts from larger manufacturers could pose as an incentive for smaller units to rejoin the industry.

At the same time, experts believed that the pandemic could push garment manufacturers in Asia to consolidate.

Some factories, especially small- and medium-sized enterprises with less financial capital and liquidity, will not have the resources to withstand the economic and public health crisis brought on by the Covid-19 pandemic.

“[They] will shut down or be bought out, leading to consolidation of manufacturers within the industry,” the report read.

Underlying the risk to growth is also the big concern of 3D printing and greater use of robotics, said economist Leather. “This might mean it is easier and cheaper to move factories closer to their source of final demand”.

In any case, he believed that the vaccine would allow things to return to normal, saying that this will bode well for the sector.

Now, as the first round of vaccine testing rolls out in the US and UK on the back of ongoing research in laboratories around the world, hope for normal business recovery is apparent even though it would take years to return to pre-Covid 19 ways.

Like other economies, Cambodian industries are feeling the excitement as plans are made to buy vaccines which would be administered on those who are at greatest risk, including frontline workers, teachers, and armed forces personnel. To date, over $30 million has been raised through donations.

Optimistic by the promising development of the vaccine, Ministry of Commerce spokesman Seang Thay echoed GMAC’s Loo in saying that next year will be better, slightly chuffed that Cambodia handled the situation better some of its competitors.

“Our industry is surviving due to timely interventions and assistance by the government to support the sector and workers,” he said.

Integration will continue with global and regional supply chains through bilateral and multilateral free trade agreements. Its most recent bilateral FTA was with China, followed by signing of the largest multilateral trade bloc agreement, Regional Comprehensive Economic Partnership. A few more are in the pipeline including deals with the UK, South Korea and Russia.

And so, he quells the question of the garment sector being a sunset industry in Cambodia, a notion shared by Loo.

“After all, people will always need clothes,” they chimed.