Logo of Phnom Penh Post newspaper Phnom Penh Post - ‘Segmentation, not integration,’ will cascade industries up the value chain



‘Segmentation, not integration,’ will cascade industries up the value chain

Content image - Phnom Penh Post
Grant Knuckey, CEO of ANZ Royal, speaking at the ASEAN and the Greater Mekong Outlook event. Photo supplied

‘Segmentation, not integration,’ will cascade industries up the value chain

As the ASEAN Economic Community opens up at the end of this year, ANZ experts believe that it could spur a dynamic regional transformation, allowing the frontier economies of the Mekong Basin to quickly cascade up the value chain as manufacturers look for more affordable destinations for investment.

Noting key economic indicators like the slowdown in China’s growth and the rising cost of production, coupled with the young demographics of Mekong frontier economies, low wages and a global pivot towards Asia, Glenn Maguire, ANZ’s chief economist for ASEAN, predicts that there will be a southern migration of manufacturing based on market segmentation and specialisation.

“This segmentation will lead to what we call the great migration south, as wages in northern countries continue to rise. Factories will shift from China, South Korea and Japan, from the more expensive economies to the more youthful and cheaper economies of ASEAN,” he said at a presentation of ANZ’s publication ASEAN: The Next Horizon, last week in Phnom Penh.

Content image - Phnom Penh Post

Market segmentation into areas like higher value-added garments, electronics and light manufacturing could result in Mekong frontier economies cascading up the value chain as the AEC takes effect.

“We believe that this segmentation, not integration is the key to the extension of supply chains and developing the region,” he said. But the extension revolves around economies occupying a comparative advantage in relation to the region.

“No economy has been able to successfully transition from low-income to high-income without positioning itself in terms of its comparative advantage,” he said.

Looking towards Vietnam’s shift into electronics, Maguire explained how this provides an insight into how the comparative advantage is likely to evolve across the Mekong basin, especially as the AEC enables global supply chains to extend further and deeper into the region’s economies.

He said that as Thailand and Vietnam continue to produce higher value goods, it will create the space for the Kingdom to diversify its industrial base.

But while Cambodia’s economy has benefited from the rise of garment manufacturing, for the Kingdom to diversify its industry base and fragment the value chain, it must strategically position itself into a regional context.

“Cambodia needs to align itself with the most proximate neighbouring supply chains – for example auto in Thailand and consumer electronics in Vietnam – by providing a compelling proposition for those production platforms to further fragment the value chain,” said Grant Knuckey, the CEO of ANZ Royal.

But the challenge, Knuckey explained is that “this would mean understanding the needs of those disaggregated chains in terms of labour cost and skills; logistics and trade processes; and then seeking to meet those at the right economic level.”
“This is a difficult challenge and will require long-term vision,” he said.

Content image - Phnom Penh Post

While ANZ’s latest Mekong Quarterly Outlook stated that Cambodia’s comparative advantage for the foreseeable future will remain concentrated around the garment industry, which is dependent on low wages, the industry is currently facing difficulties, Knuckey explained.

“The current challenge is that we are both less productive and more costly than some competitors in these labour-intensive industries – less productive than Vietnam for example . . . and more costly than, say Myanmar.”

According to Maguire, harnessing a comparative advantage is something that has been repeatedly replicated in Asia as industrialisation has taken hold and countries have moved to higher value production. He added that this trend has accelerated and the time it takes for a country to modernise has shortened.

“It took Japan 30 years. It took the newly industrialised economies like South Korea 25 years and China 15 years. The proposition we are making is that it is going to take the Mekong countries something closer to 10 to 15 years. It is going to be one of the fastest and modernising advancements in Asian economic history,” he said.

One of the key drivers in the ANZ prediction on ASEAN growth, which places the region as becoming the world’s fifth largest economy by the end of this decade, has been the fact that Southeast Asia, for the last two consecutive years, has drawn in more foreign direct investment than China, reflecting a marketable shift in expectations. And Maguire believes the trend will continue to the Mekong frontier economies.

Content image - Phnom Penh Post

“Economically active labourers in the ASEAN will be the most active in Mekong countries, predominantly Cambodia and Laos. So that is one reason we think that Cambodia will be an FDI magnet. Mekong countries have the most to benefit from the AEC,” he said.

But this trend can be undercut by the lack of public investment in education, he explained.

“The economy that gets the skills and vocational training right will be able to perform, while those that do not will lag behind.”

“The main impediment [for developing Cambodia’s industrial base] is the education and skills gap. At present, this is being bridged in isolated cases by the private sector investing heavily in worker skill development at a very micro-level, as for example some Japanese companies have done here,” said Knuckey. He added this is not a replicable model on a wide scale, nor is it sustainable because it raises the cost of production.

“The public sector needs to play a bigger role – alongside the private sector – in developing an education system and vocational training that provides a skills match for private sector needs,” he said.

MOST VIEWED

  • Prince Norodom Ranariddh passes away at 77

    Prince Norodom Ranariddh, the second son of the late King Father Norodom Sihanouk and former First Prime Minister of Cambodia, has passed away in France at the age of 77. “Samdech Krom Preah Norodom Ranariddh has passed away this morning in France just after 9am Paris-time,”

  • General’s gun smuggling ring busted

    The Military Police sent six military officers to court on November 22 to face prosecution for possession of 105 illegal rifles and arms smuggling, while investigators say they are still hunting down additional accomplices. Sao Sokha, deputy commander of the Royal Cambodian Armed Forces and commander of

  • More Cambodians studying in US

    The number of Cambodian students studying at US colleges and universities in 2020-21 increased by 14.3 per cent over the previous year despite the Covid-19 pandemic, according to a recent US government report. The 2021 Open Doors report on International Educational Exchange showed that 848 Cambodian students studied

  • Cambodia, Thailand to discuss border reopening

    Cambodian authorities from provinces along the Cambodia-Thailand border will meet with Thai counterparts to discuss reopening border checkpoints to facilitate travel, transfer of products and cross-border trade between the two countries. Banteay Meanchey provincial deputy governor Ly Sary said on November 22 that the provincial administration

  • Banteay Meanchey gunfight sees 15 Thais arrested, three officers injured

    The Banteay Meanchey Military Police have arrested 15 Thai suspects and their accomplices after a gun battle between two Thai groups caused injuries to three police officers in the early hours of November 21, local authorities said. National Military Police spokesman Eng Hy said that according to

  • Locally-trained commercial pilots to lift Cambodia’s aviation standard

    The Kingdom is boosting its civil aviation sector with the establishment of a flight school with a local airline to meet growth demands once air travel recovers At 22, First Officer Reachta Lim is the youngest commercial pilot in Cambodia. He flies with the national flag