CAMBODIA'S GARMENT INDUSTRY GROWING, BUT WILL IT

UNCLAS SECTION 01 OF 03 PHNOM PENH 001893

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS AND EB/TPP/ABT--TOM LERSTEN
STATE PLEASE PASS TO USTR FOR ABIOLA HEYLIGER AND DAVID
BISBEE
COMMERCE FOR ITA/OTEXA--MARIA D'ANDREA

E.O. 12958: N/A
TAGS: ECON ETRD KTEX CB
SUBJECT: CAMBODIA'S GARMENT INDUSTRY GROWING, BUT WILL IT
LAST?

REF: A. STATE 138090


B. PHNOM PENH 1693 AND PREVIOUS


1. (SBU) Summary. Cambodia's garment industry grew
impressively since the Multifiber Agreement (MFA) ended,
expanding by 13% in 2005 and 21% in the first eight months of

2006. While this increase has translated into a growing
number of factories and workers, neither factory owners nor
workers have truly reaped the benefits of this growth as
dramatically lower prices for Cambodian garments hurt factory
profits and contributed to declining wages and increasing
labor unrest. Cambodian government and private industry have
made some efforts to improve the country's competitiveness.
There is no consensus on how Cambodia will fare once US and
EU safeguards expire in 2008, but there is broad agreement
that unstable labor relations, not the 2008 deadline, are the
biggest threat to the industry. End Summary.

Garment Industry Growing, Productivity Up, but Profits Down
-------------- --------------


2. (U) Cambodia's garment industry has stunned naysayers by
growing rapidly since the end of the Multifiber Agreement in
January 2005. The value of Cambodia's garment exports grew
by 13% in 2005 and 21% in the first eight months of 2006.
Ken Loo of the Garment Manufacturers Association of Cambodia
(GMAC) reported that while some small and medium-sized
factories (i.e., up to 1,500 employees) have closed, there
has been a net gain of 15 factories in the past year.


3. (U) Garment industry experts are surprised by the
magnitude of Cambodia's success and are only able to offer
pieces of a more comprehensive explanation. Safeguards
against China played a large role, as factory owners report
that orders were largely flat in early 2005 and only took off
once US and EU safeguards were imposed. Proponents of
Cambodia's unique factory monitoring organization (Better
Factories Cambodia) point to that program, Cambodia's strong
reputation for worker rights, and the commitment of major
buyers--like the Gap--to supporting Cambodia's labor rights
experiment as impetus for the increase. During a
USAID-funded conference on the post-MFA garment sector,
garment industry expert David Birnbaum noted that while
Chinese garment factories were now raising their low prices,
Cambodian prices remain 15% below world market average,
spurring growth. (Comment: However, Cambodian garments are
subject to an average 18% US tariff, while many other
countries have tariff-free access via CAFTA, AGOA, and other
agreements. End Comment.) Ken Loo of the Garment
Manufacturers Association of Cambodia (GMAC) notes that
existing buyers are placing larger orders with Cambodian
factories and a few new buyers have begun to source from
Cambodia.


4. (U) In contrast to this apparent success, declining
prices for garments have left Cambodia's garment factories
operating on declining profit margins despite rising
productivity. Dr. Sok Hach, director of the Economic
Institute of Cambodia (EIC),reported that the price of
Cambodian garments declined by 20% from January to December

2005. Since January 2006, prices have increased slightly in
the US market but are still decreasing in the EU market.
However, garment factory productivity rose 50% from 2001 to

2006. Garment factory profit margins, which were 10-11% net
in 2003 and 2004, have now fallen to 5-6%. Ken Loo painted a
starker picture, claiming that factories were making only
2-3% profit.

Wages Down, Labor Disputes Up
--------------


5. (SBU) The working conditions and labor freedom for
Cambodia's 336,000 garment factory workers have worsened
slightly, and labor relations have deteriorated
significantly. Increased global competition is one of
several factors responsible, along with a resurgence of
activism after months of political and economic uncertainty,
frustration with the arbitration process, less effort
expended in negotiations, and increased activity among rogue
unions. Workers and garment buyers report increased tensions
in the workplace and unions say that anti-union harassment
and discrimination have been on the rise for the past year.
There was a dramatic increase in garment sector strikes from
February to June 2006, with working days lost per month
reaching four times typical levels in May 2006. In August

PHNOM PENH 00001893 002 OF 003


2006, three factory-level union leaders were found guilty of
highly suspect charges of human confinement, the first time
Cambodian labor leaders have been convicted of felonies.


6. (SBU) According to the Cambodian Institute for Development
Studies, real wages of garment factory workers have been
falling for three years: 3.1% decline from 2003 to 2004,
8.7% decline from 2004 to 2005, and a further 0.3% decline
through February 2006. Garment sector unions and GMAC are
currently negotiating a minimum wage increase. While the two
sides are still far from an agreement, it seems likely that
the minimum wage will rise from the current USD 45 per month
to USD 50 to 55 per month over a period of three years.

Competitiveness Efforts
--------------


7. (SBU) In the past several years, the Cambodian government
(RGC) has taken some steps to improve the competitiveness of
the garment industry, most notably by reducing non-official
payments in the import/export process as part of a World
Bank-sponsored trade facilitation program. According to a
2005 report by the firm Emerging Markets Consulting, the
average informal costs for importing one container of goods
fell from $2,477 in 2003 to $673 in 2005, while export costs
dropped from $942 to $598.


8. (SBU) However, economists and garment industry experts
report that corruption costs have largely remained flat since
2005, and may even be starting to creep up again. Trade
facilitation reduced corruption by reducing the number of
people with an opportunity to seek a bribe, but those
individuals still able to elicit bribes are now asking for
more money per transaction, according to Jane O'Dell (please
protect),Chief of Party of USAID's Garment Industry
Productivity Center. Informal costs now account for about 4%
of production costs, (equal to about 2/3 of net factory
profits) according to a forthcoming EIC report.


9. (U) Some individual garment factories have also made an
effort to become more competitive. Loo reports that some
factories have set up new departments or found new
sub-contractors to do intricate, profitable work involving
bead or lace trim or embroidery. Factories have also
emphasized training and made steps towards localizing
management, a move which reduces staffing costs and
miscommunication. Consolidation in the industry has led to
the closure of smaller, less efficient factories, the
expansion of well-run factories, and job growth. Vertical
integration in Cambodia is difficult as the high cost of
electricity makes fabric production prohibitively expensive
and there are no workers skilled in garment design.

Cambodian Garment Industry Statistics
--------------


9. (U) Statistics requested reftel are as follows:

2005:
--Total industrial production: USD 3,865 million
--Total textile and apparel production: USD 2,274 million
--Total textile and apparel export: USD 2,253 million
--Textile/apparel share of host country exports: 78%
--Textile/apparel share of host country imports: 30%
(includes fabric used for garment exports)
--Exports in textile and apparel to the U.S.: USD 1,531
million
--Total manufacturing employment: 331,023
--Total textile and apparel employment: 315,405

January to June 2006:
--Total textile and apparel production: USD 1,230 million
--Textile/apparel share of host country exports: 64%
--Textile/apparel share of host country imports: 26%
--Exports in textile and apparel to the U.S.: USD 836 million
--Total textile and apparel employment: 336,123
--Increase in total textile and apparel exports compared to
Jan to June 2005: 28%

January to August 2008:
--Total textile and apparel production: USD 1,628 million
--Exports in textile and apparel to the U.S.: USD 1,122
million
--Increase in total textile and apparel exports compared to
Jan to August 2005: 21%

PHNOM PENH 00001893 003 OF 003



Comment
--------------


10. (SBU) Without the ability to fully explain Cambodia's
garment boom, it is impossible to predict how long it will
last. Expert opinions as to the post-2008 garment sector
future range from continued growth of 10-20% to a decline of
up to 30%, followed by a partial rebound. There are,
however, two areas where there is broad agreement. First,
Cambodia's garment sector will not collapse due to the end of
safeguards or increased Chinese competition, though it may
contract significantly in the worst case scenario. Second, a
protracted labor dispute is the one thing that could do swift
and extremely serious damage to the garment industry. The
embassy will continue its efforts to promote garment industry
competitiveness, through USAID-funded projects in labor
dispute resolution, factory monitoring, and productivity
improvement and through continual engagement with unions,
manufacturers and employers. End Comment.

MUSSOMELI