The Garment Sector’s Quest for New Markets
By An Sithav
Economics Today
Cambodia’s garment industry, until recently a key economic engine, has been decimated, an early casualty of the economic downturn. As the industry scrambles to cut costs and to find new markets, a desperate race against better equipped competitors is now on.
The EU and the US, by far Cambodia’s largest garment buyers, have slashed orders as cautious customers reign in spending amidst the current economic uncertainty. Since the end of 2008, most factories have scaled down production and laid off workers, some closing altogether. Tens of thousands of unemployed migrant workers have returned home.
With no prospects of a short term recovery yet evident, local garment associations’ search for new markets is becoming more urgent, but, here, Cambodia is at a disadvantage against its competitors. The US and European markets, which the kingdom quickly came to rely on, demanded free unions and improved working conditions, offering higher prices in return. But as these orders vanish, Cambodia is left with higher overheads than other garment producers, such as China and Vietnam, which do not allow unions such power.
The only route left is to compete for buyers looking for high quality, leading many to pin their hopes squarely on Japan.
ACE Apparel’s Director Timothy Yang said he plans to export to Japan despite having received no orders and admitting to Economics Today that, "I have never exported to Japan."
Mr. Loger, general manager for Hechter Cambodia Garment Factory in Kandal province is another hopeful. "My factory produces jeans and always exported to the US, but now orders have fallen," he said. "I am optimistic that my jeans are good enough quality to access the Japanese market," he hopefully added. Japanese orders could replace the US market, he claimed, as prices are similar.
However, Loger ominously stated that Hechter "cannot reduce the unit price any more if Japan buyers demand lower prices."
Soung Chanthea, a store supervisor at the Bright Sky Factory, is one of few currently exporting to Japan. He said that Japanese orders are small but a at a higher unit price than orders from the US or Canada. Still, quality is a major issue for the Japanese, Soung Chanthea conceded, opining that most local producers would be unable to meet the stringent standards.
Dreams of Japan may have already been shattered. The Garment Manufacturing Association in Cambodia (GMAC) stated in early 2009 that Cambodia’s factories were to supply about 10,000 jackets and 100,000 pairs of shoes to Japan. The deal recently went up in smoke with the announcement that Japan rejected the products as not up to standard.
"Japan is not an easy market to access because their expectation of quality is very high," said Roger Tan, general secretary of GMAC. Breaking into the Japanese market will take some time, he added, a delay that many hard pressed factory owners can ill afford.
The Price of Productivity
In addition to quality concerns, a new era of free completion with other markets, especially neighbors Thailand and Vietnam, may further undermine Cambodia’s garment sector. Cambodian productivity, it seems, is too low to be competitive in new markets.
A Garment Industry Productivity Centre (GIPC) report and GMAC experts agree that raising the productivity of workers and supervisors is vital. "Productivity in Cambodian factories was found to be low, and the difference in the wages between Vietnam and Cambodia could easily be recuperated by higher productivity in Vietnam," said the September 2007 GIPC report, titled Value Chain Analysis of Cambodia’s Apparel Industry.
"Incentive pay in Vietnam is common, and capacity utilization rates appear to be higher in Vietnam than in Cambodia, where work stoppages are common and labor is not always paid according to an output-dependent incentive system, such as piece rates," noted the same report.
Kaing Monika, GMAC’s business development manager, said that bureaucratic difficulties and Cambodia’s creaking infrastructure added to delays, lowering competitiveness even further.
Such considerations are leading buyers, often more concerned with price than workers’ welfare, to choose Vietnam. "Japan importers are switching their orders from other countries to Vietnam because … in context of economic crisis, Japanese consumers cut back on spending and shifted to cheaper products," Vitas Chairman Le Quoc An told Vietnam News Apr 29.
Further evidence of the new thrift drive can be found in the Apr 15 edition of the Japan Times, which proclaimed that: "The store and retailers have set the new standard for low-priced clothing on the recession."
Resisting the temptation to become involved in a price war to gain control of new markets is essential, said Cheat Khemera, a GMAC senior labor officer. He cautioned that careless slashing of unit prices may prove the garment sector’s death knell. "If we dare to undercut the prices of others, we will get market [access] but the question we must ask is: ‘Do we make a profit or a loss?’ If it’s a loss, the garment factories’ owners cannot survive."
Lowering costs is then the only sensible way to reduce unit prices. Reduced government taxes could help factories reduce prices, Cheat Khemera said, a comment echoed by many factory owners and experts.
Kaing Monika said that more efficient export legislation that eliminates corruption would also decrease unit prices. Reduced worker wages are another option, he added.
But Chea Mony, president of the powerful Free Trade Union of Workers in Cambodia (FTUWKC), said that simply cutting salaries is not possible. "Reducing workers’ wages means changing the law," he stated.
Restoration Through Restructuring
Stop gap solutions like cutting taxes or wages may provide only short term benefits, experts warned. Without major restructuring of the sector, long-term viability is far from assured.
"Cambodia must work very hard to compete with the rest of the world, especially the developing economies, which are also desperate for business at this time," said GMAC’s Roger Tan.
The coming months will be difficult, Tan warned. "The US and EU markets are both weak and volume is low. This is a world economic crisis and [finding] markets is not easy, especially new markets."
According to the International Finance Corporation (IFC), for the garment industry to survive in the longer term, Cambodia must act now to strengthen industry competitiveness. Measures include "building middle management capacity, promoting sustainable practices (good labor, environmental and social practices) and enhancing dialogue and information flow among industry stakeholders."
2 comments:
Well, if global economic downturn still continue, Cambodia's garment industry might be totally decimated, leaving hundreds of thousands of Cambodians jobless.
In the midst of economic downturn, there are broad array of factors in which everyone can do in an effort to mitigate the effects of tumultuous economy due to the fact that the impact is not endemic, but it is a global epidemic.
PPU
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