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Cambodia eyes key role in electronics, auto hubs in SEA

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RMA (Cambodia) Plc plans to set up a $21 million motor vehicle assembly plant for Ford in Pursat province. RMA CAMBODIA

Cambodia eyes key role in electronics, auto hubs in SEA

Two roadmaps, part of the LDC’s economic diversification plan, were designed to see it through its migration process, but experts say the journey might be arduous, particularly in the presence of two established hubs in the region

By 2028, Cambodia hopes to have exited the least developed country (LDC) status and be on its way to achieving upper middle income status, which is planned for 2030, and a high income nation by 2050.

Early March this year, the Council for the Development of Cambodia (CDC) revealed draft roadmaps for the electronic and automotive sectors with strategies to one day turn the Kingdom into an auto hub and an integrated electronics manufacturer in Southeast Asia.

Based on the information, Cambodia hopes to complement its neighbours Thailand and Vietnam, which are established auto and electronic hubs, by plugging into the regional supply chain.

In fact, the recent news of RMA (Cambodia) Plc’s approval from Ford Motor Co to assemble its pickups and sports utility vehicles – the first vehicle assembly plant for Cambodia – only affirmed the country’s plan going forward.

Known for its garment, footwear and travel goods-led economy with a five-year strategy launched recently to ensure its sustainability, the move by Cambodia to make the two relatively small sectors priority sectors is a long time coming.

By its own admission in the draft roadmaps, the government said “up until now, there has been a lack of clarity on Cambodia’s ambition for the auto and electronic sectors”.

“The absence of a long-term sector development strategy hindered the government from taking focussed efforts to support the sectors which contributed to a lack of investor confidence in the government’s long-term commitment to the sectors,” it said.

As such, the roadmaps, which lay out the sectors’ long-term ambition and development strategies, are viewed as an important first steps in addressing this gap.

Three reasons, which outshined the attributes of the garment sector in its current state, were outlined.

They comprised the potential of developing high-value add products, integrating into the regional and global value chain and upskilling workers for future resilience.

With the help of UK-funded Accelerated Covid-19 Economic Support (ACES) programme and the Boston Consulting Group (BCG), the drafts were the culmination of 12 months of work.

The three-party collaboration involving eight ministries, the UK government and BCG is anchored by a three-tier working model headed by a steering committee that is overseen by CDC secretary-general Sok Chenda Sophea.

All of these are within Cambodia’s ambit to drive economic diversification by 2027, a year before its planned graduation from LDC status.

With less than 10 years to go, haste to get itself primed, industrialised and open to high value-add investments is somewhat apparent.

For decades, the garment, footwear and travel goods (GTF) sector has been a key export and major source of revenue for the government, thanks to the US and EU’s preferential schemes that assured tariff-free exports.

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Chart courtesy of ISEAS – Yusof Ishak Institute

In 2019, the sector represented 17.1 per cent of gross domestic product (GDP), said the World Bank in its economic update in May 2020.

Foreign direct investment (FDI) in this segment has been consistently strong, about 16 per cent of the total $3.5 billion in 2019, though real estate investments were the largest that year, having gradually expanded before the Covid-19 pandemic.

Exports in the manufacturing sector, particularly GTF recorded strong growth along with new FDI projects in 2021 and the first quarter of 2022, economists Dr Jayant Menon and David Freedman said.

This suggested that Cambodia retains a competitive advantage in the sector, according to their analysis on Cambodia, published by Singapore-based ISEAS-Yusof Ishak Institute on April 20 this year.

They, however, claimed that it is not expected to last as the advantage is likely to erode gradually because of “rising labour costs and the eventual loss of trade preferences following LDC graduation”.

In the article titled “Cambodia’s Post-Pandemic Recovery and Future Growth: Key Challenges”, the economists also noted that while the GTF sector accounted for 57.6 per cent of merchandise exports in the first nine months of 2021, non-GTF manufacturing exports have been “growing rapidly” in that time.

Indeed, the chart shared by them showed that exports such as bicycles, vehicle parts, insulated wire and optical cables, electrical parts and plywood had hit nearly $1.2 billion in 2020 from less than $1 billion in 2019.

Surging exports

To be sure, economic diversification has been on the cards for a long time, with experts repeatedly calling for the shift away from labour-intensive industries, such as garment’s, to move up the value chain and focus on value-add industries.

This led to the Industrial Development Policy (2015-2025). The draft roadmaps built on the IDP, reflect a renewed vigour to get lesser known electronics and automotive sectors off the ground.

Royal Academy of Cambodia economics researcher Ky Sereyvath agreed. He said given the idea of adding more value to the economy, “opportunity cost” should be factored in or seen as the “best way to make a decision”.

He explained that the value-added in garment production is $4 billion, but together with auto production, the total value-added can rise by $15 billion.

“Why not diversify?” he asked, advising that the two industries should not be overlooked even if the garment is doing well.

According to the data found in the drafts, electronics exports consisting of cables and motors, recorded a five-year compound annual growth rate of 27 per cent at $1.3 billion in 2020 from $400,000 in 2015.

Employing about 35,000 people, there are 79 qualified investment projects in this sector - a majority of them being Japanese and Chinese investors. Most of the exports are the US, ASEAN, China, Japan, and South Korea.

Component exports in the automotive sector, 80 per cent of that being wire harnesses grew three-fold to $200 million in 2019 from $60 million in 2015.

To expand these sectors, six sub-sectors with “ongoing opportunities” have been identified for capitalisation in the near term, or five years.

For instance, the auto sector will leverage on its “more labour-intensive and simpler” components, such as wiring harnesses, seats and less complex electronic and electrical parts, and increase backward linkages for locally assembled two-wheelers.

Using this approach enables Cambodia to expend its “competitive advantage”, such as cost-competitive labour, and strategic location next to automotive assembly hubs in Thailand and Vietnam.

In 10 years, it aims to climb the value chain to manufacture more complex and higher value-added components. In the next decade, Cambodia wants to become an auto components manufacturing hub for low-to-medium complexity parts.

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Source: Cambodia’s Auto & Electronics Cross-Ministerial Mobilisation Roadmap

“A more mature components ecosystem will also provide Cambodia with the option of scaling up to four-wheeler assembly in future,” the draft read. Similarly, manufacturing of “less complex components and sub-assembly”, like cables and connectors, and the assembly of printed circuit boards (PCB) is expected to expand in the electronics sector.

“This approach capitalises on Cambodia’s current sources of competitive advantage, such as cost-competitive, a dexterous workforce, and favourable trade agreements with key electronics export markets,” it said.

The long-term goals involve the setting up of an integrated electronics production, present throughout the value chain in design, components manufacturing, subassembly, and final assembly.

If everything goes according to plan, total exports in the two sectors should increase to $2.1 billion by 2027, with the electronics segment representing two thirds of it.

In that time, some 22,000 jobs would have been created with over 85 per cent of lower skill jobs accessible by vulnerable workers and more than 100 micro, small and medium enterprises potentially supported.

‘Make haste’

There are challenges though. The ASEC collaborators identified 21 initiatives to address the challenges and pain points.

They range from lack of skilled labour, managerial talents and engineers, sector cluster strategy, such as special economic zones (SEZs), high customs clearance costs due to slow documentation processing to expensive electricity tariffs.

The absence of cluster strategy is not new in Cambodia, given that there was no foresight in the past, therefore industries of similar disciplines are scattered around the country.

Recognising the importance of SEZs, economists Dr Menon and Freedman suggested that measures should be placed to strengthen their efficiency and competitiveness if non-GFT exports growth is to be sustained.

The measures include the use of voluntary frameworks to enhance the environmental sustainability of SEZs, improve regulation and facilitation of firms operating in SEZs, and promote industry clusters to encourage agglomeration effects.

Dr Menon is a senior fellow in the Regional Economic Studies Programme of ISEAS-Yusof Ishak Institute while Freedman is the former economics, strategy and programming head at Asian Development Bank in Cambodia from 2020 to 2021.

There is also the need to develop industry-relevant skills, whereby the government should collaborate with business associations and manufacturers to build industry skills transformation maps that can be implemented through public-private partnerships.

For Sereyvath of Royal Academy of Cambodia, vocational training on automotive-related skills should be expanded from now, so that it can put the policies into action by next year.

Content image - Phnom Penh Post
Source: Cambodia’s Auto & Electronics Cross-Ministerial Mobilisation Roadmap

“First, put technical, vocational and education training [TVET] policy into action. Develop a labour and wage policy in accordance to the duration of vocational training. Secondly, offer vocational training for garment workers who were suspended,” he said.

Granted, the collaborators have solutions, some which are policy-related like building a masterplan to resolve the SEZ issue or reviewing electricity tariffs and reliability targets with private sector input to “close the overall cost gap holistically”.

An auto and electronics labour upskilling programme featuring a skills framework, curriculum and training models will also be designed with the private sector to overcome the low participation of public-private partnership if 22,000 jobs are to be created in five years.

The good thing about the collaboration is the participation of eight ministries and the hope that they work in unison, which means some of the challenges might be resolved with ease and enable the creation of the ecosystem. But can it be resolved quickly and meet the rapidly changing industrial standards?

Sereyvath thinks so. He believes that new investments will lead to knowledge sharing.

“Once the policies are in action, the ecosystem can be adjusted to become efficient later,” he said, adding that Cambodia has a good opportunity to boost its industrial segment compared to its neighbours, thanks to its Covid-19 management efforts.

That said, would playing catch up to already established sectors in the region have its drawbacks? Dr Menon said moving up the value chain in the auto and electronics and electrical sector for a latecomer like Cambodia should be a long term objective.

“As established players like Thailand move up the value chain, new players like Cambodia get the opportunity to expand their role in the space that is freed up,” he told The Post.

Therefore, for the foreseeable future, Cambodia should be less concerned about rapidly moving up the value chain.

Instead, Dr Menon proposed, more focus should be on raising the share of its production at current and neighbourhood stages of the production process.

It should also increase the quantity and quality of jobs at a pace that is compatible with skills upgrading and technology absorption.

“The upskilling of the labour force takes time and requires investments in education at all levels and vocational training and there are no shortcuts,” he said.

Indeed, which is why Sereyvath stressed the urgency of training workers. “There must be haste to do it from now.”

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