Wage Spike in China, Vietnam Could Bolster Cambodian Garment Sector

As the cost of doing business in China and Vietnam increases, basic manufacturing in garments is making a shift to countries with cheaper labor costs like Cambodia, industry analysts say.

Last year the Vietnamese government increased the minimum wage level for foreign companies operating in urban areas to VND1.34 million per month, or about $70 at the current exchange rate. And last week China followed suit when Beijing announced that it would raise the city’s minimum monthly wage by 20 percent, to 960 renminbi, or about $140.

Despite Cambodia having its own set of cost burdens – high electricity and transportation costs, poor productivity levels and longer than average delivery times – its low-salary status has its own appeal.

“And we’re not talking future tense, we’re talking present tense and even past tense,” said Ken Loo, secretary-general of the Garment Manufacturers Association in Cambodia. “It’s happening as we speak.”

“More importantly the buyers themselves will perhaps see a widening in the gap in the costs from Cambodia and China,” he said.

Mr Loo said that the number of Chinese investors turning away from their homeland to set up shop in Cambodia has increasing over the last six months as labor costs back home rise to twice those of Cambodia.

“We know for a fact that it is getting more expensive to operate in China,” he said, adding that during the course of last year’s economic crisis factories from China were among the few to continue their entry into Cambodia.

“I think there is a fair amount of interest being generated from investors and buyers,” said Tuomo Poutiainen, chief technical advisor of the International Labor Organization in Phnom Penh. “We talk to them and they tend to refer to high labor costs in Vietnam and China.”

Mr Poutiainen said that as more developed countries in the region enter into technically sophisticated markets like electronics and financial services, basic manufacturing in sectors such as garments would likely be offloaded to areas where labor costs are still cheap.

“In that situation countries like Cambodia and others can gain,” he said.

Cambodia’s wage bill might still be cheap, but domestic trade unions are currently pushing the government to increase the monthly minimum wage from $50 – which unions say is far from being enough to cover daily expenses in Phnom Penh – to about $90.

Cambodia’s poor wage rates should not be an international selling point, union leaders say.

Kong Athit, secretary-general of the Cambodian Labor Confederation, said the argument that lower wages can entice more investors should not be used as a driving force for the industry’s growth.

“It’s not only a wage issue that brings investors to Cambodia,” Mr Athit said. “Vietnam and China have very high capacity and local resources. That can also contribute to attract the investors.”

While investors from China and Vietnam might see Cambodia as an enticing, low-wage location, and such investments will add to the country’s GDP, if there are no pay rises for local garment factory workers there will be little trickle down in the economy.

According to a manager at a garment factory employing around 3,000 workers in Kandal province, who spoke on the condition of anonymity due to company policy, recent wage legislation introduced by the Chinese government has meant that the company’s China-based factories are being priced out of the market.

“We have factories in China and it’s true it is very difficult now for us to focus in China,” the manager said. “Especially in the southern part of China where the minimum wage is about $168.”

At the firm’s Cambodian based factory workers are now operating at full capacity after last year’s drop in demand during the course of the economic downturn.

“Most of the orders have been moved from China to Cambodia,” she said, adding that China’s one child policy coupled with a growing middle class from higher wages had resulted in a lack of local workforce.

“I think it is not only our company, I think a lot of them are experiencing these kinds of problems,” she said.

Simon Ho, manager at the Leader’s Industrial garment company, which has two factories in both Vietnam and Cambodia, said that Cambodia must ensure that its labor force is not only cheap, but also better trained.

In Cambodia, where the average garment worker salary with overtime ranges from $80 to $100 per month, Mr Ho said he employs about 2,500 workers to do the same amount of work as just 1,000 employees in Vietnam where staff there are paid between $100 and $150 per month.

“The cheap labor cost is the only reason we stay,” Mr Ho said. “Vietnam is more profitable because you don’t need to hire as many people.”

“If labor standards improved then the cost benefits would be better,” he said. “Cambodia has a long way to go.”

Sung Mang, manager at the Winner Knitting Factory in Cambodia, said that management at the company’s 10 factories in China are “very nervous” about the recent spike in wages in China and were currently looking into new markets to send their orders.

“To some extent [Cambodia] will benefit from China’s wage rise,” he said, but noted that Cambodia’s cheap labor force was not still not as cheap as the wage limits imposed in countries like Bangladesh, Kenya and Goa, India.

 

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