Apparel Industry Faces Rising Costs, Falling Orders

After Covid-19, Cambodian garment, travel goods and footwear manufacturers and workers face new problems that threaten each other’s rice bowl

Signs of an impending recession in the United States and Europe are beginning to appear in the East, where demand and purchase orders saw “significant declines” in the second half of 2022.

The result – a quarter of the Garment Manufacturers Association of Cambodia (GMAC) plans to partially suspend operations in September or may require its workers to work fewer hours. This represents around 170 factories, although the exact number of workers is not known.

As of August 3, 2022, official data for the full year revealed that operations at around 100 factories were still suspended, affecting around 10,000 workers.

The sector as a whole, made up of more than 1,200 manufacturers of clothing, travel goods and footwear, employs around one million workers, making it the largest employment segment in the country.

According to Ken Loo, general secretary of GMAC, an internal investigation showed that some began temporarily suspending or reducing operations, causing serious concern in export orders in the second half.

The United States is Cambodia’s largest importer of garments, travel goods and footwear (GTF), accounting for almost 42% of total exports between January and July this year.

During this period, Cambodia exported 47.3% more than last year, for a total value of 5.7 billion dollars.

This signaled a recovery in the sector in the wake of Covid-19 despite the absence of the Generalized System of Preferences (GSP) for travel items, such as luggage, handbags and wallets , which has yet to be reinstated by the United States.

“We’ve been doing well since the GSP expired. However, we are currently being impacted by the economic downturn as well as a glut of inventory in the West. We hope that the SPG will be renewed soon,” Loo said.

Without the GSP (introduced in Cambodia in 1997), buyers are taxed between 10 and 30% on goods traveling to the United States. Clothing and footwear, which have never benefited from the GSP, are taxed between 13 and 19 percent.

After it expired on December 31, 2020, Cambodia lobbied the US Congress to reauthorize the duty-free trade regime.

At the time, Cambodia had just lost 20% of EU preferential treatment under Everything But Arms (EBA) due to alleged human and labor rights abuses.

However, all is not lost. “We have received a response from the US Congress indicating that it is pushing and considering the renewal of the GSP,” said Commerce Department Under Secretary Penn Sovicheat.

He said the review process not only benefits Cambodia, but also other least developed countries.

“We were told that although we are now exporting without GSP, once it is re-authorized this year or next year, the United States will refund the taxes paid up to that point,” said.

bugle call

In the meantime, there are many uncertainties about global growth, with growing risks, said economist Jayant Menon.

Citing the International Monetary Fund’s revision of global growth forecasts to 3.2% from 3.6% in July, Jayant said the IMF had warned a “gloomy” scenario was possible with growth falling to 2, 5%.

Although demand for clothing is “generally inelastic” or less sensitive to changes in income, sharp declines leading to a global recession would be felt in smaller countries, such as Cambodia.

“The multiplicity of negative factors ranging from geopolitical tensions to economic uncertainty to extreme weather conditions suggests that the next six months will be bleak for global growth and Cambodia’s garment exports to the United States and the United States. EU.

“The fact that China’s growth is expected to slow to less than 4% as it persists with its zero Covid policy suggests that investment and tourism will be slow to recover,” Jayant said.

Currently, imports of raw materials from China are stable with no disruptions at the moment, although the Chinese economy has seen some slowdown over the months.

“We cannot foresee a future disruption unless the supply chain is totally blocked. Even at the height of Covid-19, China managed to export several shipments of raw materials to replenish our stock to maintain purchase orders,” Sovicheat said.

He agreed that the outlook is bleak, as evidenced by Western purchasing power and a slowdown in buying orders, but noted that diversification of export markets and production was essential to avoid problems similar to the future.

This has been the clarion call for Cambodia. Last year, the World Bank wrote that while its growth has been remarkable, it is “insufficiently diversified” across products, markets and factors of production.

The report – Resilient development: a strategy to diversify Cambodia’s growth model – reported that clothing, footwear, rice, cassava and tourism accounted for 80% of total exports.

The EU and the United States accounted for 69% of merchandise exports, while foreign capital including foreign direct investment (FDI) and official development assistance accounted for 72% of gross fixed capital formation in 2018.

The World Bank report said the pandemic, which has disrupted cross-border flows of goods, services and capital, has seen Cambodia “poorly placed” to absorb the shock.

“[Its] the failure to diversify development through alternative products, markets and sources of finance predates the pandemic and has its roots in low and declining productivity, poor quality and weak export linkages, and high FDI but low domestic investment,” he said.

He offered three solutions: boosting business and worker productivity, diversifying exports and leveraging domestic investment.

Among his recommendations for productivity were investing in human capital and reducing operating costs.

‘Not a lot’

Skills training aside, employers lament that they are already reeling from rising operating costs stemming from so-called ‘labour costs’.

From October 1 this year, the pension scheme for private sector workers will begin negotiations on the last increase in the minimum wage (between $197 and $200) from $194, effective January 1, 2023 .

GMAC’s Ken Loo previously told the Post that the new spending is concerning, outside of seemingly high operating costs.

According to statistics, Loo said, the profit margin is “very low” considering the ratio of value added to wages and other labor costs.

Ath Thorn, president of the Cambodian Confederation of Labour, is aware of the pressure on manufacturers, but believes they “can spend” this money on the workers.

To date, he said, employers have cut public holidays and those that fall on Sundays by 15 days, meaning workers are losing $111 a year.

When the pension scheme begins, where 2% of salary is allocated by the employer and employee respectively to the National Social Security Fund, employers will contribute about $60 per year, which is “not much”, pointed out Thorn.

The pension scheme and the minimum wage are not challenges to national competitiveness, Moeun Tola, executive director of the Center for the Alliance of Labor and Human Rights (CENTRAL).

He said manufacturers should instead push the government to reconsider recommendations made by the European Parliament to address alleged systematic violations of labor and human rights.

This, he said, resulted in the partial withdrawal of the ABE and the delay in the renewal of the GSP, which would be linked to the commitment to resolve labor issues, including freedom of association and the strike right.

“These are very important, and manufacturers and the government should make a serious effort [to remedy the situation],” Tola told The Post.

He pointed out that freedom of association in the garment sector and in other sectors, as in the case of the NagaWorld protest, is about the violation of freedom of association and the right to collective bargaining.

“It’s definitely a domino effect [on preferential trade schemes] which is considered less or non-compliant with Cambodia’s obligations under the International Labor Organization.

“I think manufacturers and state actors need to address this. I don’t think the pension fund or increased wages will kill competitiveness, but corruption and high operating costs, such as utilities, transport and shipping, are what weaken national competitiveness. said the workers’ rights campaigner.

A new hope

With all of this coming to a head as the global economy shrinks, the apparel, travel goods and footwear sector – a mainstay of Cambodia’s economy – could be in for the long haul.

But there is still a silver lining, according to Lim Heng, vice president of the Cambodian Chamber of Commerce (CCC), who said last month that exports to the United States were shifting to bicycles, electrical equipment and solar panels.

He told the Post at the time that “overall exports would be largely protected by an expected sizable increase in orders for other items, particularly those from the United States for solar panels.”

In addition, new investments with the Council for the Development of Cambodia (CDC) have been made in sub-sectors other than garments, such as the vehicle assembly industry as well as agricultural and mineral processing.

“This again offers new hope for Cambodia’s export market,” he said.

Michael O. Stutler