Japanese Investment Grows; Hurdles Remain

Japanese investment in Cambodia is steadily increasing as a result of sharply rising wages in China and other Southeast Asian nations. But experts warned this week that for sustained investment growth—and to avoid driving Japanese companies to other attractive investment destinations such as Burma —the government must address the country’s skilled labor shortage and reduce electricity costs.

Japanese investment in Cambodia reached $75 million last year, up from about $35 million in 2010 and about $15 million in 2009, according to the Japanese Embassy.

This year, however, investment by Japanese companies will reach $300 million thanks to the $205-million Aeon Mall development in Phnom Penh, construction on which begins this month.

“The biggest advantage of Cambodia is the low cost of labor; Japanese companies made very big investments in China, Vietnam and Thailand, [where] labor costs are increasing rapidly,” said Hiroshi Suzuki, CEO and chief economist at the Business Research Institute for Cambodia.

Restrictions on foreign-owned businesses, especially in China and Vietnam, also contrast with Cambodia’s “free economic system” and minimal taxes, Mr. Suzuki said, adding that in Vietnam, companies must be 50 percent owned by Vietnamese nationals and have a board of directors that is also half-Vietnamese.

Although Japanese firms in Cambodia have historically been garment manufacturers, since 2010, new investments have been shifting to labor-intensive parts manufacturing, such as small motors, automotive parts and wire harness systems (compactly bundled electrical wires), Mr. Suzuki said.

Meanwhile, Japanese clothing makers here are focusing on high-end products such as silk kimonos and leather products, which is a shift from the traditional characteristics of the local industry, Mr. Suzuki said.

“Cambodia’s garment sector is mainly low-priced items sold in supermarkets in the U.S.,” he said.

Takeharu Mizukoshi, chairman of Forval (Cambodia) Co. Ltd., a Phnom Penh-based software maker and I.T. consultant to dozens of Japanese companies in Cambodia, said that close cooperation between the governments of Cambodia and Japan, which is Cambodia’s single largest aid donor, is also encouraging Japanese investment.

Through a bi-annual forum co-hosted by the Council for the Development of Cambodia and the Japanese Embassy, Japanese firms now have an opportunity to air their grievances directly with government officials and bring up the issues they feel are hindering their business potential, Mr. Mizukoshi said.

At the last such meeting, the main issue was a shortage of skilled local labor.

“We do know there are so many [workers] in the younger ages, but when new industries are coming to Cambodia, they are having difficulties to find good resources and good workers,” Mr. Mizukoshi said.

“We are asking for some kind of support from the Cambodian government to provide more skilled workers,” he said.

Efforts are being made to rectify this problem, Mr. Mizukoshi said, but the initiatives are organized by the companies themselves. Forval, 37 of whose 40 employees are Cambodian, trains its consultants over the course of several months by having them shadow more-experienced staff, he said.

In Phnom Penh’s Toul Kok district, Mr. Nagano said, Japanese companies offer early-morning lessons in mathematics and English for their staff before the start of work.

The Ministry of Labor announced in September that despite a variety of jobs available to university graduates, young Cambodians prefer clerical work with NGOs and government offices, leaving the country’s factories short on technicians.

The other major drawback to doing business in Cambodia is electricity, Mr. Suzuki of the Business Research Institute said.

“Power structure is a very big weak point in Cambodia…. If there are some industries that need a high amount of power, they would be hesitant to come to Cambodia,” he said, adding that plastic manufacturing was one such industry.

Mr. Suzuki warned that although in its nascent stages of modernization following decades of military rule, Burma is the most obvious rival to Cambodia when it comes to attracting foreign investment like that of Japan.

“I suppose Myanmar could be the one that could be a strong competitor to Cambodia. But very fortunately, Myanmar just started opening to the market,” he said, adding that the transportation of goods out of Burma, which reopened to outside investment earlier this year, is “very difficult” compared to Cambodia’s more established ports.

And although experts declined to speculate as to whether Japanese investment will continue to grow at the same rate next year, signs of further growth are there.

Michelle Zhang, head of international marketing at the Sihanoukville Special Economic Zone, said the zone currently hosts just two Japanese companies—both electronics manufacturers—of a total of 24 businesses. However, 32 new Japanese firms have expressed interest in opening factories in the zone and 10 companies are actively in negotiations to do so.

“We have several Japanese investors in negotiations right now,” Ms. Zhang said, who declined to disclose their names.

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