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Garment sector confronted by rising costs, falling orders

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Minimum wage discussions are expected to bring benefit to garment workers starting next January. Hong Menea

Garment sector confronted by rising costs, falling orders

After Covid-19, Cambodia’s garment, travel goods and footwear makers and workers are faced with new issues that threaten each other’s rice bowl

Signs of an impending recession in the US and Europe are starting to show in the East, where demand and purchase orders have seen “significant drops” in the second half of 2022.

The result – a quarter of Garment Manufacturers Association in Cambodia (GMAC) are looking to partially suspend operation in September or may require their workers to work less hours. That’s roughly 170 factories, though the exact number of workers are not known.

As of August 3, 2022, official data for the whole year revealed that operations in some 100 factories are still suspended, affecting around 10,000 workers.

The entire sector, consisting over 1,200 garment, travel goods and footwear manufacturers, employs about one million workers, making it the largest employment segment in the country.

According to Ken Loo, GMAC secretary-general, an internal survey showed that some have started to temporarily suspend or reduce operations, sparking a serious concern in export orders in the second half.

The US is Cambodia’s main importer of garment, travel goods and footwear (GTF) sector, representing nearly 42 per cent of overall exports between January and July this year.

In that period, Cambodia exported 47.3 per cent more than last year, for a total value of $5.7 billion.

This was indicative of a recovery in the sector on the heels of Covid-19 despite the absence of the generalised system of preferences (GSP) for travel goods, such as luggage, handbags and purses, which has yet to be reinstated by the US.

“We have been coping well since the expiration of the GSP. However, we are currently impacted by the economic slowdown as well as an inventory glut in the West. We hope that the GSP will be renewed soon,” said Loo.

Without the GSP (introduced in Cambodia in 1997), buyers are taxed between 10 and 30 per cent on travel goods to the US. Garment and footwear, which have never benefitted from GSP, are taxed between 13 and 19 per cent.

Following its expiry on December 31, 2020, Cambodia has been lobbying the US Congress to reauthorise the duty-free trade scheme.

At the time, Cambodia had just lost 20 per cent of EU’s trade preference treatment under the Everything but Arms (EBA) due to alleged human and labour rights violations.

However, not all is lost. “We have received some response from the US Congress that they are pushing and reviewing the GSP renewal,” said Ministry of Commerce under-secretary of state Penn Sovicheat.

He said the review process benefits not only Cambodia but other least developed countries as well.

“We have been told that although we are exporting without GSP now, once it is reauthorised this year or next year, the US will refund the taxes paid until then,” said.

Clarion call

In the meantime, there is a lot of uncertainty over world growth, with rising risks, opined economist Jayant Menon.

Citing International Monetary Fund’s revision of global growth forecast to 3.2 per cent from 3.6 per cent in July, Jayant said the IMF had warned that a “gloomy” scenario was possible with growth falling to 2.5 per cent.

Although demand for garments is “usually inelastic” or less sensitive to changes in income, sharp drops resulting in a global recession would be felt in small nations, such as Cambodia.

“The multiplicity of negative factors ranging from geopolitical tensions to economic uncertainty to extreme weather patterns suggests that the next six months look bleak for global growth and Cambodia’s garment exports to the US and EU.

“The fact that China’s growth is likely to slow to below four per cent as it persists with its zero-Covid policy suggests that both investment and tourism will be slow to recover,” Jayant said.

Presently, imports of raw material from China are steady with no disruption as yet, although Chinese economy has been experiencing some slow down over the months.

“We can’t forecast a future interruption unless the supply chain is totally blocked. Even in the peak of Covid-19, China managed to export several shipments of raw material to replenish our stock to maintain purchase orders,” Sovicheat said.

He agreed that the outlook is grim, as reflected by the Western purchasing power and a slowdown in purchase orders, but noted that diversification of export market and production were key to avoid similar problems in future.

This has been the clarion call for Cambodia. Last year, the World Bank wrote that while its growth has been remarkable, it is “insufficiently diversified” in products, markets, and factor inputs.

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Source: World Bank, 2021

The report – Resilient Development: A Strategy to Diversify Cambodia’s Growth Model – listed garments, footwear, rice, cassava, and tourism, as accounting for 80 per cent of total exports.

The EU and the US represented 69 per cent of merchandise exports, while foreign capital comprising foreign direct investment (FDI) and official development assistance made up 72 per cent of gross fixed capital formation in 2018.

The World Bank report said the pandemic, which disrupted cross-border flow of goods, services, and capital, saw Cambodia being “ill-positioned” to absorb the shock.

“[Its] inability to diversify development through alternate products, markets, and financing sources predates the pandemic, and has its roots in low and declining productivity, low quality and weak export linkages, and high FDI but low domestic investment,” it said.

It proposed three solutions – enable the productivity of firms and workers, diversify exports and harness domestic investment.

Among its recommendations for productivity were human capital investment and the reduction of operating costs.

‘Not much’

Skills training aside, employers lament that they are already reeling from the rise in operating costs flowing from alleged “labour-related costs”.

From October 1 this year, the pension scheme for private sector workers will start amid negotiations on the latest hike in minimum wage (between $197 and $200) from $194, effective January 1, 2023.

GMAC’s Ken Loo has previously told The Post that the new expenses are worrying, apart from apparently high operating costs.

According to statistics, Loo said, the profit margin is “very low” in view of the ratio of value added versus wages and other labour-related costs.

Ath Thorn, president of Cambodia Labour Confederation, is cognisant of the stress on manufacturers but felt that they “can spend” that sum for workers.

To date, he said, employers have cut 15 days of public holidays and those that fall on Sunday, which means workers lose $111 a year.

When the pension scheme begins, where two per cent of the salary is allocated by the employer and employee, respectively, to the National Social Security Fund, employers would be contributing around $60 a year, which is “not much”, Thorn pointed out.

The pension scheme and minimum wage are not challenges to national competitiveness, Moeun Tola, executive director of Centre for Alliance of Labour and Human Rights (CENTRAL).

He said manufacturers should instead push the government to reconsider the recommendations made by the EU parliament to resolve the alleged systematic labour and human rights abuse.

This, he said, resulted in the partial EBA withdrawal and the delay in the renewal of GSP, which is allegedly linked to the commitment to fix labour issues, including the freedom of association and right to strike.

“These are very important, and manufacturers and the government should make a serious effort [to remedy the situation],” Tola told The Post.

He stressed that the freedom of association in the garment sector and in other sectors, as in the case of the NagaWorld protest, is about the violation of freedom of association and right to collective bargaining.

“It is definitely a domino effect [on preferential trade schemes] which is seen as less compliant or non-compliant to Cambodia’s obligations under International Labour Organisation’s.

“I think manufacturers and state actors must address these. I don’t think the pension fund or wage increase will kill competitiveness but corruption and high operating costs, such as utility, transportation and shipment, are the ones that are weakening national competitiveness,” the labour rights activist said.

New hope

With all these coming to a head as global economy contracts, the garment, travel goods and footwear sector – a mainstay of Cambodia’s economy – might be in for the long haul.

But there is a sliver of hope yet, according to Lim Heng, Cambodia Chamber of Commerce (CCC) vice-president, who said last month that exports to the US are shifting to bicycles, electrical equipment and solar panels.

He told The Post then that “overall exports would be largely shielded by an expected appreciable uptick in orders for other items, especially those from the US for solar panels”.

In addition, new investments with the Council for the Development of Cambodia (CDC) have been in non-garment sub-sectors, such as vehicle assembly industry along with agricultural and mineral processing.

“This offers yet another new hope for Cambodia’s export market,” he was quoted as saying.

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