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The Japanese Taica Corporation’s factory in the Phnom Penh Special Economic Zone
The Japanese Taica Corporation’s factory in the Phnom Penh Special Economic Zone. Hong Menea

Wage increases ‘will not put off Japanese firms’

Sharp rises in labour costs this year are doing little to deter Japanese companies looking to do business in the Kingdom, with experts predicting the flow of investment from Japan to remain steady.

A 28 per cent increase in the garment sector minimum wage, from $100 to $128, has set a benchmark for many industries in Cambodia and sparked fears of a decline in foreign direct investment.

But while Japanese businesses need to factor a rising wage bill into their future planning, analysts say there are other factors in the global economy still in the Kingdom’s favour.

Hiroshi Suzuki, chief economist for Business Research Institute for Cambodia , said that Japanese companies such as Panasonic, Daikin and Sharp had been relocating some of their production back to Japan because of increasing business costs in China and Thailand and the depreciation of the yen. But Cambodia has been an exception.

“Even after the increase of the minimum wage, the difference between the cost in Japan and Cambodia is still large,” Suzuki said. “I suppose that investments [from Japan] using the international supply chain in the Mekong region would continue even under these conditions.”

Cambodian workers at the Japanese-owned Taica Corporation’s factory
Cambodian workers at the Japanese-owned Taica Corporation’s factory. Hong Menea

Investment figures from the Council for Development of Cambodia’s Japan desk show that Japanese investment in Cambodia between 1994 and July 2014 was $822 million. While investment from 1994 to 2010 was only $236 million, that figure more than doubled over the past three and a half years as Japanese businesses have poured $586 million into the Kingdom’s economy.

Taro Tanzaki, who is a project formulation adviser for the Japan International Cooperation Agency and works at the CDC’s Japan desk, said Japanese investment in Cambodia has increased steadily and that there are 246 small Japanese companies registered at the Ministry of Commerce.

He added that the Thai-plus-one trend – where parts and components are produced in Thailand to supplement Japanese production elsewhere – could cross over to Cambodia this year as costs rise in Thailand. Cambodia would benefit from the establishment of special economic zones, especially along the Thai border, Tanzaki said.

“Some big companies plan to increase their investment this year in the Phnom Penh Special Economic Zone,” Tanzaki said. “They are concerned about the minimum wage, but they say it is a small issue.”

“Even though the minimum wage in Cambodia is increasing every year, it is still relatively competitive compared to Thailand,” he added.

Masashi Kono, in charge of the research section at the Japanese External Trade Organization and the Japan Business Association in Cambodia, said that the number of JBAC member businesses had reached 191 by the start of this year. That tally includes companies from sectors as varied as manufacturing, construction and real estate, and financial and insurance services.

“These companies could become the benchmark for Cambodian companies,” he said. “More and more Japanese companies are starting manufacturing operations in Cambodia, so this trend will continue.”

But with new regional competitors emerging and predictability needed when it comes to minimum wage hikes, not everyone shares this level of confidence.

Hiroshi Uematsu, chief executive of Phnom Penh Special Economic Zone, told Post Weekend that Cambodia had improved its efforts to attract foreign direct investment, but the increase in the minimum wage and a sharp depreciation of the yen had caused potential Japanese investors to hold off on their plans to invest in the Kingdom.

“When a company makes a mid- and long-term business plan, the predictability of the cost factors is very important,” he said.

Myanmar is now a possible threat for Cambodia, according to Uematsu, as the Thilawa SEZ in Myanmar is being developed by a Japanese consortium, including Sumitomo, Marubeni, Mitsubishi and JICA, suggesting that some amount of investment is being directed there. 

“More Japanese companies are visiting Myanmar now,” Uematsu said. “It would be necessary for Cambodia to show the predictability and stability and adopt a step-by-step wage increase in order to provide reliability to investors.”

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