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