Identifier
Created
Classification
Origin
09PHNOMPENH277
2009-05-01 06:32:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Phnom Penh
Cable title:  

GLOBAL ECONOMIC CRISIS HITS CAMBODIA'S GARMENT INDUSTRY

Tags:  ECON ETRD ELAB EAID PREL CB 
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VZCZCXRO4106
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #0277/01 1210632
ZNR UUUUU ZZH
P 010632Z MAY 09
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC PRIORITY 0654
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHC/DEPT OF LABOR WASHINGTON DC
UNCLAS SECTION 01 OF 02 PHNOM PENH 000277 

SENSITIVE
SIPDIS

STATE FOR EAP/MLS, EEB, DRL
PASS TO USAID - D. WINSTON

E.O. 12958: N/A
TAGS: ECON ETRD ELAB EAID PREL CB
SUBJECT: GLOBAL ECONOMIC CRISIS HITS CAMBODIA'S GARMENT INDUSTRY
HARD

SENSITIVE BUT UNCLASSIFIED

UNCLAS SECTION 01 OF 02 PHNOM PENH 000277

SENSITIVE
SIPDIS

STATE FOR EAP/MLS, EEB, DRL
PASS TO USAID - D. WINSTON

E.O. 12958: N/A
TAGS: ECON ETRD ELAB EAID PREL CB
SUBJECT: GLOBAL ECONOMIC CRISIS HITS CAMBODIA'S GARMENT INDUSTRY
HARD

SENSITIVE BUT UNCLASSIFIED


1. (SBU) SUMMARY: Cambodia's garment industry has been a hallmark
of its economic development over the last decade. A competitive
garment sector remains critical for the country's continued economic
growth. However, the garment sector is experiencing immediate
effects from the global economic crisis. Cambodia is losing its
comparative advantage and must improve its competitiveness by
addressing internal and external challenges. The government is
pledging to respond and is seeking to work closely with the donor
community and the garment industry. A failure to implement emergency
measures will likely result in a gradual decline of the industry and
lost market share to other regional competitors. END SUMMARY.


2. (SBU) Cambodia's garment industry is the leader of the formal
economy, representing 80% of export revenues and an estimated 30% of
total GDP. The 1999 U.S.-Cambodia Bilateral Textile Agreement
contributed significantly to the rapid growth of the industry. The
Agreement granted preferential access to American markets in
exchange for adherence to progressive labor standards. The generous
provisions attracted foreign investment between 1999 and 2008, and
employment grew from 90,000 to its peak of over 350,000. Exports
grew to $2.98 billion in 2008, with 70% shipped to the United
States. Cambodia is one of the top ten apparel exporters to the
United States, but its 4% market share remained significantly below
regional leaders such as Vietnam, with 8%, and China, with over 30%.
On a global level, Cambodia represents on average 2-4% of the
market. The Asian Development Bank reported that the industry's
employees, over 95% young women, support about 1.8 million others
(13% of the population) and many remit 30-50% of their wages to
their families to supplement education and medical care costs. With
an average of less than six years of education, and with over
270,000 people entering the job market each year, competition for
minimum-skill positions is high.

NEGATIVE IMPACT OF THE GLOBAL ECONOMIC CRISIS
--------------



3. (SBU) Statistics released by the Ministry of Commerce, the
Garment Manufacturers Association in Cambodia (GMAC) and the
International Labor Organization (ILO) paint a grim picture. Garment
exports to the world decreased 23% during January and February 2009,
and are a total of 40% below the average for the same time period in

2008. Garment exports to the United States dropped 30.2% during
this period. This decrease resulted in a roughly 20% decrease in
employment in Cambodia's garment sector, which spurs a rising
unemployment rate. Various sources report an estimated
50,000-70,000 workers have lost their jobs since Fall 2008, with
33,995 jobs lost from January to March 2009 alone. The Garment
Manufacturers Association of Cambodia (GMAC) estimated that 70 of
the 310 factories have already closed, of which 40 investors have
given up completely and left the country, while others have just
suspended production. (NOTE: However, some new factories have also
been established. END NOTE.) According to the Ministry of
Commerce, presently there are 258 operating garment factories in
Cambodia. More jobs will be shed in the upcoming months if the U.S.
economy continues to stagnate.

LOSING A COMPARATIVE ADVANTAGE - ANALYSIS OF GARMENT INDUSTRY
-------------- --------------


4. (SBU) Cambodia's 23% loss in orders over the first two months of
2009 is disproportionate to the worldwide decrease in demand of 11%.
The garment industry is hampered by a number of challenges. The
business environment is unattractive to vertical investment
(weaving, for example) due to factors as diverse as high energy
costs and weak labor unions. Although Cambodia is known for its
good labor record and the "Better Factories Program" that attempts
to uphold that reputation, industrial relations remain complicated,
with over 1,000 unions for fewer than 260 factories and a largely
uneducated (and primarily male) leadership. The education sector is
weak and has failed to address industry needs with appropriate
skills, leaving the industry to compete on the basis of low wages
for garment assembly operations. As a result, foreign-owned
factories rely heavily on expatriates for higher skilled positions,
which has stifled skills transfer to the poorly educated local work
force. With lower costs and associated risks, Bangladesh has
captured an increase of 15% of the market over the first two months
of 2009, and Vietnam and Indonesia have seen 4% increases. China and
Vietnam are investing heavily in infrastructure and business
development activities to lure more garment industry investors.

THE GOVERNMENT PLEDGES RESPONSE
--------------


5. (SBU) Some small steps have been undertaken in response to the
crisis. The government is giving more incentives such as deducting

PHNOM PENH 00000277 002 OF 002


income tax when factories purchase training for its workforce. The
Royal Government of Cambodia (RGC) has also agreed to suppress
Advance Profit Tax until 2011 and will contribute to the National
Social Security Fund for the workers. Energy and exports costs are
being studied by the RGC to determine how they can be reduced. The
RGC has agreed to strengthen relations with the International Labor
Organization (ILO) to improve working conditions in the textile and
apparel industry. In the Ministry of Commerce's April 29 report to
the Government Donor Coordination Committee (GDCC),the RGC
indicated it plans to reduce export fees, reduce transaction costs,
and mobilize funding to provide short-term basic skills training to
workers who have lost their jobs.

IMMEDIATE ACTION IS NEEDED
--------------


6. (SBU) As the impact of the crisis is felt, Cambodians already
living in poverty will face new hardships. A recent GDCC report
states that income opportunities and livelihoods of the poor and
vulnerable are expected to decline. The impact of the economic
crisis will be particularly severe for women and children, existing
urban poor, landless and land-poor families, farming households
receiving reduced remittances, and returning migrants. Severe job
loss in the garment industry will likely reverse improvements in
poverty reduction and maternal child malnutrition, and will
certainly result in a less capable workforce. The economic crisis
could exacerbate a growing youth unemployment problem and increase
the use of illicit drugs, leading to a socially destructive means of
subsistence for many. How the RGC and its development partners
respond to this crisis will set the direction for Cambodia's
developmental trajectory and the well-being of Cambodians in the
next decade.

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


7. (SBU) Many of the fundamental conditions that attracted investors
to Cambodia still exist. While the current garment industry
statistics seem grim, if the government and garment industry
associations can craft and widely publicize a coherent promotion
strategy, Cambodia could see stable growth in the longer term. And
while many of the factors contributing to the global economic crisis
remains out of Cambodia's control, its urgency requires the
Cambodian government to increase incentives for investors and
facilitate improvements to export infrastructure and improve its
competitiveness on productivity, quality, and faster more secure
delivery. SEPTEL will follow to discuss how the USG is addressing
constraints in Cambodia's garment industry.

RODLEY