According to the head of the Japan External Trade Organization in Cambodia, as labour costs rise in China and Thailand, Cambodia could benefit as companies outsource more of their production to the ASEAN region. But if the Kingdom wants to get on board, it will need to make long-term changes.
Ito Takamato, senior investment advisor at JETRO, said Cambodia stands to benefit from increasingly popular “China plus one” or “Thailand plus one” supply chains, especially with Japanese companies.
Under this model, manufacturers may not completely eliminate their Chinese or Thai factories but rather shift some production to countries like Cambodia to take advantage of cheaper labour costs.
“[Cambodia’s] labour cost is very low. [In China], costs have increased three times and in Thailand, nearly three times in ten years,” Ito said. “Labour costs have increased; some products are not profitable, so [production] shifts to lower countries, like Cambodia, Myanmar and Bangladesh.”
Two Japanese firms are already following this strategy in Phnom Penh’s Special Economic Zone, according to Ito. Japanese auto parts maker DENSO makes small parts for motorbikes, while Japanese-owned Minebea factory makes iPhone components.
The components are sent to Japan for processing before they are sent to Apple factories in China. (Over 1,000 parts in the iPhone 6 came from Japanese companies, according to the Nikkei Asian Review).
Cambodia is not the only country, though, that may be a potential destination for China or Thailand plus one production. While a 2014 McKinsey survey found that “19 per cent of ASEAN businesses themselves plan to shift investment or business from China into their own region”, they were eyeing a number of countries besides Cambodia, including “Indonesia, Laos, Myanmar, and Vietnam”.
Ito said that while Cambodia attracts investors with its low labour costs, it still struggles with quality of labour. Many employees lack basic education skills, including full literacy or knowledge of mechanics, according to Ito’s observations.
Japanese factories, however, have attempted to remedy the situation by providing Khmer language classes to workers teaching Khmer writing and reading. Japanese NGOs also offer Japanese language courses for workers hoping to move up the ladder.
Companies also struggle with corruption costs, which make it difficult to justify to investors back in Japan.
This may explain why only 19 of 246 Japanese companies registered in Cambodia are manufacturers.
They are dwarfed by import/export firms (99) and tourism (26). Some Japanese companies, like UNIQLO, also choose to produce their products at Korean or Chinese-owned factories, rather than run their own factories in Cambodia.
Despite the challenges, though, Japanese investors still seem to be confident in Cambodia.
But despite these challenges, Ito said investors are still confident in Cambodia’s future. State news agency Agence Kampuchea Presse reported on July 31 that Cambodia had attracted some $700 million in Japanese investment capital, including $280 million in Phnom Penh’s special economic zone.
“Many, many Japanese investors are paying attention to Cambodia. Five years ago, nobody was interested in Cambodia. Now, these three or four years, many Japanese investors [are] interested in this country. JICA provides support for register, bridge or infrastructure also their interest to support this country,” he said.