Rising Costs Give Investors Smugglers’ Blues

Though only a medium-sized manufacturing company, Eastern Steel Industry Corporation can be seen as a barometer of foreign investments in Cambodia—and it warned this week it would have to bail out of Cambodia if the government cannot curb the smuggling that has cost the company more than $1 million in lost profits over the past two years.

The joint venture between local businessman Kong Triv and Japanese trading company Sumi­tomo Corporation has lost $1.2 million in the last two years because it cannot compete with smuggled steel goods from Viet­nam and Thailand, Eastern Steel Vice President Frank Tai­raku said Monday.

“We make no profit. We can’t compete with the smuggling business,” Tairaku said. “Without profit, we cannot survive.”

From vehicles and tobacco to raw materials and household goods, companies are becoming more vocal about the hits their businesses take from smuggling.

Other costs are mounting on legitimate businesses, including the loss of tax incentives under a new investment law and higher costs of shipping due to bureaucratic overhauls, said Raphael Thallinger, president of the French-Cambodian Chamber of Commerce.

But none of those costs affect smugglers, giving them an obviously unfair advantage and making the practice even more dangerous to legitimate businesses.

Prime Minister Hun Sen earlier this week did his best to reassure companies that the government was committed to reducing those things driving up the cost of doing business in Cambodia, including smuggling.

But the bottom line is that companies that can’t turn a profit will look elsewhere to invest.

“Smuggling is still a very important issue for existing manufacturers,” the government-private sector working group on manufacturing and distribution reported to Hun Sen at a meeting of industry and government leaders Wednesday.

“As a direct consequence of smuggling, some production lines have already stopped and the outlook for registered manufacturers does not look good at the moment,” the group wrote. “Manufacturers are struggling to maintain their businesses in Cambodia.”

Eastern Steel is a relatively small company, employing 115 people. But the message its pull-out would send would reverberate through the Japanese business community and then through international investment channels, Tairaku said—sentiments echoed by other officials and businessmen.

“It will not be good if any industry pulls out its business,” said Ith Praing, secretary of state for the Ministry of Industry, Mines and Energy. “The steel [import] industry is needed by the country and the people.”

Ith Praing said, though, that smuggling is overwhelming the government.

“I see the government issue orders to police to crack down the smugglers, but it seems not to work well,” he said. “There are too many smugglers.”

The Ministry of Industry has no mandate to stop smuggling. Rather, it is a duty that falls on the shoulders of the police and the Finance Ministry, he said.

Michiaka Takahasi, chairman of the Japanese Business Association of Cambodia, said that any sign of a Japanese company pulling its operations from Cambodia would be bad for the investment climate. “Wherever the Japanese investor puts money, that country has to [have] a proper investment system, as well as no smuggling and good laws.

“It is very true that the smuggling issue remains ongoing in this country and affects every area of investment,” he said.

Realistically, the defeat of smuggling is a long-term goal, said Deepak Khanna, country manager for the International Finance Corporation, the World Bank’s private-sector arm. Khanna has run programs in Vietnam to help encourage private business growth. There too, smuggling is an issue that comes up “every year,” he said.

So whether Eastern Steel actually leaves remains to be seen. One thing is clear, though—the competition from smugglers is fierce.

Steel smugglers save about 25 percent of the costs incurred by legitimate import companies, Tairaku said.

On top of a 10 percent value-added tax, for example, Eastern Steel must also pay a 15 percent import tariff on the steel that it imports for the manufacturing of galvanized roofing.

The competition caused by smuggling has made Eastern Steel a losing investment and, although he did not give a time limit for the company’s continued interest in Cambodia, Tairaku said if the company continues to lose money, it will have to leave.

“We are not thinking of leaving Cambodia or closing operations yet, but we want the government to crack down on smuggling activities,” Tairaku said. “Of course we want to keep in operation.”

But smuggled goods continue to take their toll on the company, despite the pleas it has made to the government in the past.

In 2001, the company asked for a break on the value added tax it was charged for its imported steel. Japanese Ambassador Gotaro Ogawa also sent a letter to Minister of Finance Keat Chhon, encouraging a tax break.

“I understand this case involves the important issue of controlling smuggling,” the ambassador wrote. “While I consider that smuggling should be tackled in [the] medium and long term, the fate of this company may affect the future prospect of investment from Japan.”

No tax break was given, but the government decided to purchase some steel roofing from the company to distribute to soldiers and other “low income class people,” according to documents supplied by Eastern Steel.

However, the business is still losing money. And now the company may follow in the footsteps of other companies. The large multi-national Nestle Corp pulled its production lines from Cambodia several months ago, as did Alain Delon cigarettes, and business leaders say privately that others are considering the same.

Kong Triv, who is the president of Eastern Steel and also a partner in British American Tobacco as well as a vice president of the Phnom Penh Chamber of Commerce, warned earlier this month that the smuggling of cigarettes was casting doubts on the future of BAT in Cambodia.

So the Eastern Steel case is not an isolated one. Not to Tairaku, certainly.

“Our business is a joint-venture, Japan-Cambodia,” Tairaku said. “It is…very special. If we leave, Cambodia will face a bad impact, [a] bad sign for new investors.

“Nobody will come,” he said.

 

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