GARMENT FACTORIES AND TOP BUYER GIVE CAMBODIA'S

UNCLAS SECTION 01 OF 02 PHNOM PENH 001540 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/MLS, EEB/TPP/ABT--CLEMENTS COMMERCE FOR OTEXA--D'ANDREA E.O. 12958: N/A TAGS: ECON KTEX ETRD ENRG CB SUBJECT: GARMENT FACTORIES AND TOP BUYER GIVE CAMBODIA'S GARMENT INDUSTRY MIXED REPORT PHNOM PENH 00001540 001.2 OF 002 ¶1. (SBU) Summary: Recent conversations with a senior executive from The Gap--the top buyer of Cambodian garments--and the Secretary-General of the Garment Manufacturers Association of Cambodia (GMAC) yielded different perspectives on the garment industry. Ken Loo of GMAC explained that after a strong start to the year, a dramatic loss of garment orders in October and November means that overall garment exports will remain at 2006 levels, the first time since the mid-90s that the garment industry hasn't grown by a healthy margin. Meanwhile, Gap executive Janet Rivett-Carnac told the Ambassador that Gap has increased its orders in Cambodia by 15-20% this year, though a slowdown in US consumer spending may be lowering garment orders worldwide. End Summary. ¶2. (U) Ken Loo of GMAC was decidedly downbeat in his assessment of the industry, explaining that after expanding by 15% during the first six months of the year, sharp reductions in orders will mean that overall garment production will stay flat in 2007. The garment industry has been particularly hard hit the past two months, with October 2007 orders 35% lower than October 2006, and November orders down 55% over the previous year. So far, this not yet led to more than a handful of factory closures or layoffs, but workers who normally work the maximum allowable overtime are working no overtime, and at some other factories, workers are idle. Workers rely on substantial overtime income and are frustrated by the downturn, which comes just as rising gasoline prices take a bigger bite out of their paychecks. ¶3. (U) Loo cited Vietnam as Cambodia's keenest competition, explaining that after several months of uncertainty over U.S. monitoring of textile export levels, buyers have recently begun to increase their purchasing in Vietnam as the U.S. Congress appeared to become less concerned about potential Vietnamese dumping. However, Cambodia still has an edge in labor supply, Loo said, explaining that factories in Vietnam and China are having greater difficulty recruiting workers and must now open further from cities, where there are fewer competing job possibilities. While three Cambodian factories have closed this year, 12 new factories have opened. These factories are mostly owned by Koreans who are shifting their investments from the Philippines to Cambodia. In addition, Walmart, Kmart, and Sears have all shifted some production from Bangladesh to Cambodia as political and labor unrest and natural disasters have made it difficult for Bangladeshi factories to deliver their products on time. ¶4. (SBU) Janet Rivett-Carnac, Vice President and General Manager of International Sourcing for The Gap, told the Ambassador December 17 that Gap's purchases in Cambodia had increased by 15-20% over last year, to a total of USD 400 million. When told about the dramatic slowdown in garment orders in Cambodia, the Gap executive said she suspected that there had been a significant slowdown in garment production worldwide due to lower consumer spending in the U.S. Cambodia is likely not the only country with idle factories, she said. She predicted that the percentage of products that Gap sources in Cambodia will continue to rise, though the total volume of products that Gap buys may well decrease in the coming year, potentially leading to lower absolute levels of Gap garments produced in Cambodia. The Gap also expects to increase their presence in Vietnam. ¶5. (U) While Cambodia is overall well-positioned to retain a strong stake in the global garment industry, the high cost of electricity is the biggest obstacle to garment sector expansion, Rivett-Carnac said. However, she was encouraged by news from Commerce Minister Cham Prasidh that transmission lines will bring electricity from Vietnam to Phnom Penh within the next 12 months, halving electricity costs. (Note: Although Minister Prasidh confirmed this statement to us separately, this is the first that the embassy has heard of this plan and we are working to learn more. End Note.) ¶6. (SBU) Comment: While the Cambodian economy is slowly diversifying away from its over-reliance on garments, and within the garment sector away from a strong dependence on The Gap and other American buyers, the iconic San Francisco-based retailer remains a critical player in the Cambodian economy. Their orders account for 6% of the nation's GDP and more than 15% of all garment exports. While it seems clear that Cambodia's garment industry is suffering, most likely it is sharing in the pain of a global slowdown in garment production. While there are legitimate concerns about Cambodia's long-term competitiveness, the strong performance in early 2007 and opening of new factories PHNOM PENH 00001540 002.2 OF 002 indicate that, for the moment, Cambodia remains a contender in the textile world. End Comment. MUSSOMELI