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Japanese manufacturers are still finding room to grow

A worker checks manufactured shoe parts at a Japanese manufacturing plant in the Phnom Penh Special Economic Zone in 2014.
A worker checks manufactured shoe parts at a Japanese manufacturing plant in the Phnom Penh Special Economic Zone in 2014. Hong Menea

Japanese manufacturers are still finding room to grow

Japanese manufacturers are continuing to invest in Cambodia, establishing factories in special economic zones (SEZs) to capitalise on the Kingdom’s cheap yet increasingly skilled labour force.

by David Hutt

Only a few years ago, Poipet was known for two things: bawdy casinos and border crossings. Today, it is becoming recognised as one of Cambodia’s main manufacturing hubs, thanks largely to the opening in 2014 of the Sanco Poipet Special Economic Zone (SPSEZ), a joint Japanese-Cambodian venture.

Among the industrial park’s first occupants was NHK Spring Cambodia, a subsidiary of Japan-based NHK Nippatsu, one of the world’s largest spring manufacturers. Another was Toyota Tsusho, the distribution arm of Japanese automobile giant Toyota, which celebrated the opening of its own factory rental operations in December.

The “Techno Park Poipet”, located within the SPSEZ, is one of seven sites the firm controls in Asia that rent factory space to manufacturers. Presently, four Japanese firms and one from Thailand have agreed to open operations within the park, which boasts high international standards, especially for manufacturers of small electronic components.

While Thailand remains the “centre of Japanese manufacturing” in Southeast Asia, Cambodia is one of several nations that can benefit from the so-called “Thailand Plus One” investment model, according to Ear Sophal, associate professor of diplomacy and world affairs at Occidental College at Los Angeles.

Under this model, manufacturers active in Thailand retain their operations in the country but transfer some elements of it into neighbouring Cambodia to make use of cheaper labour costs. Cambodian workers are paid on average almost half of their Thai counterparts. And because Poipet is a little over 230 kilometres from Bangkok, goods produced there can be transported to factories near the Thai capital in less than four hours. Thailand’s deep seaport at Laem Chabang is roughly the same distance away.

The company behind the Phnom Penh Special Economic Zone (Phnom Penh SEZ), a 357-hectare industrial park on the outskirts of the Cambodian capital, is currently in the process of developing its own special economic zone (SEZ) near Poipet for this exact reason.

Hiroshi Uematsu, CEO of Phnom Penh SEZ, says he expects investment from manufacturers in Thailand, “especially Japanese companies that have operated factories in Bangkok for decades”.

Content image - Phnom Penh Post
Employees pack manufactured goods into boxes at a Japanese-owned factory in the Phnom Penh Special Economic Zone. Hong Menea

Optimism in the “Thailand Plus One” program has only been heightened further since Cambodia and Thailand signed the double taxation agreement (DTA) last September. Economic commentators think this will result in even more Japanese manufacturers shifting some parts of production cycle to Cambodia now that investors know taxation laws in both countries have been streamlined.

Poipet’s manufacturing future is an indication of Cambodia’s rich commercial relationship with Japan, which is arguably only rivalled by Cambodia’s ties to China, said Anthony Galliano, CEO of Cambodian Investment Management.

Japanese foreign direct investment in Cambodia was worth $822 million in 2016, making it the third-largest investor, though the first nine months of last year saw a blip in the number of exports to Japan, which only increased by 2 percent compared to the same period the year before. This marked the first time in almost a decade that Japan bound exports failed to record a double-digit year-on-year growth rate, according to data from the Japan External Trade Organisation (JETRO).

Some analysts speculated at the time that this might have been a result of a dip in investment from Japan. Others thought it a consequence of economic conditions in Japan. The country’s GDP only grew by 0.5 percent last year, almost half of economic forecasts, according to preliminary official figures released this month.

“So far, Cambodia’s exports to Japan have increased as a result of Japanese manufacturers that operate in Cambodia and which produce goods to export back to Japan,” Mey Kalyan, senior adviser to the Supreme National Economic Council, told The Post in August.

Uematsu, of Phnom Penh SEZ, thinks increasing wages in Cambodia is one of the biggest concerns for Japanese companies investing, especially those engaged in export industries.

“Cambodia is losing competitive advantage compared to Vietnam and that’s the main reason for [the slowing down] of Japanese investments in recent years,” he said.

Between 2012 and 2017 the minimum wage of garment workers increased by more than 150 percent, rising from $61 to $153 per month – this year it increased to $170 a month. The same period has also seen wages swell in many other manufacturing sectors, though not as quickly.

Some analysts reckon foreign investors could now be tempted to move operations to Vietnam or Myanmar where wages are lower. But there has yet to be a palpable flight of Japanese investors from Cambodia. And there are indications that investment by some Japanese manufacturers is increasing, albeit at a gradual pace.

Minebea Cambodia, the largest Japanese-owned firm in the Kingdom, boosted its local operations late last year with a $24 million investment that will further develop its pharmaceutical and medical equipment manufacturing capabilities. This financial outlay will grow its operations at Phnom Penh SEZ and could create more than 1,000 new jobs.

Content image - Phnom Penh Post
The factory of a Japanese company operating in Phnom Penh SEZ is seen in this photo taken in 2014. Hong Menea

Denso Cambodia, which opened its first plant in Phnom Penh SEZ in 2013, also plans to expand. The Japanese-owned auto parts manufacturer recently received approval to build a $21.4 million factory in the SEZ, adding another 400 workers to its Cambodia operations.

Instead of countries that merely offer the lowest wages, what Japanese investors are actually looking for are those with the “most advanced infrastructure and workers’ skills”, said Galliano.

On this front, Cambodia is making progress, though most economic analysts acknowledge a good deal more needs to be achieved.

The high cost of electricity is one problem, but some Japanese manufacturers have resolved this issue by opening factories near the Thai border, namely Poipet, where they can access cheaper and more reliable energy supplies from Thailand.

Infrastructure is another problem, but there is again steady momentum in the right direction. Plans are underway to build a four-lane expressway connecting Phnom Penh and Sihanoukville, Cambodia’s chief port.

The Japan International Cooperation Agency (JICA), a governmental provider of development assistance, last year agreed to provide Cambodia a $209 million concessional loan that will go towards developing a container terminal project in Sihanoukville, an additional boon for exporters.

Higher wages, moreover, are an indication of Cambodia’s desire to move up the value chain, away from low-skilled production to higher-end manufacturing.

“Cambodia, right now, is moving toward skill-based [manufacturing] rather than plain labour-intensive production,” Uematsu said.

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