VZCZCXRO2545
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #1893/01 2910855
ZNR UUUUU ZZH
P 180855Z OCT 06
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC PRIORITY 7471
INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 03 PHNOM PENH 001893 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/MLS AND EB/TPP/ABT--TOM LERSTEN 
STATE PLEASE PASS TO USTR FOR ABIOLA HEYLIGER AND DAVID 
BISBEE 
COMMERCE FOR ITA/OTEXA--MARIA D'ANDREA 
 
E.O. 12958: N/A 
TAGS: ECON ETRD KTEX CB
SUBJECT: CAMBODIA'S GARMENT INDUSTRY GROWING, BUT WILL IT 
LAST? 
 
REF: A. STATE 138090 
 
     ¶B. PHNOM PENH 1693 AND PREVIOUS 
 
¶1.  (SBU) Summary.  Cambodia's garment industry grew 
impressively since the Multifiber Agreement (MFA) ended, 
expanding by 13% in 2005 and 21% in the first eight months of 
¶2006.  While this increase has translated into a growing 
number of factories and workers, neither factory owners nor 
workers have truly reaped the benefits of this growth as 
dramatically lower prices for Cambodian garments hurt factory 
profits and contributed to declining wages and increasing 
labor unrest.  Cambodian government and private industry have 
made some efforts to improve the country's competitiveness. 
There is no consensus on how Cambodia will fare once US and 
EU safeguards expire in 2008, but there is broad agreement 
that unstable labor relations, not the 2008 deadline, are the 
biggest threat to the industry.  End Summary. 
 
Garment Industry Growing, Productivity Up, but Profits Down 
--------------------------------------------- -------------- 
 
¶2.  (U) Cambodia's garment industry has stunned naysayers by 
growing rapidly since the end of the Multifiber Agreement in 
January 2005.  The value of Cambodia's garment exports grew 
by 13% in 2005 and 21% in the first eight months of 2006. 
Ken Loo of the Garment Manufacturers Association of Cambodia 
(GMAC) reported that while some small and medium-sized 
factories (i.e., up to 1,500 employees) have closed, there 
has been a net gain of 15 factories in the past year. 
 
¶3.  (U) Garment industry experts are surprised by the 
magnitude of Cambodia's success and are only able to offer 
pieces of a more comprehensive explanation.  Safeguards 
against China played a large role, as factory owners report 
that orders were largely flat in early 2005 and only took off 
once US and EU safeguards were imposed.  Proponents of 
Cambodia's unique factory monitoring organization (Better 
Factories Cambodia) point to that program, Cambodia's strong 
reputation for worker rights, and the commitment of major 
buyers--like the Gap--to supporting Cambodia's labor rights 
experiment as impetus for the increase.  During a 
USAID-funded conference on the post-MFA garment sector, 
garment industry expert David Birnbaum noted that while 
Chinese garment factories were now raising their low prices, 
Cambodian prices remain 15% below world market average, 
spurring growth.  (Comment:  However, Cambodian garments are 
subject to an average 18% US tariff, while many other 
countries have tariff-free access via CAFTA, AGOA, and other 
agreements.  End Comment.)  Ken Loo of the Garment 
Manufacturers Association of Cambodia (GMAC) notes that 
existing buyers are placing larger orders with Cambodian 
factories and a few new buyers have begun to source from 
Cambodia. 
 
¶4.  (U) In contrast to this apparent success, declining 
prices for garments have left Cambodia's garment factories 
operating on declining profit margins despite rising 
productivity.  Dr. Sok Hach, director of the Economic 
Institute of Cambodia (EIC), reported that the price of 
Cambodian garments declined by 20% from January to December 
¶2005.  Since January 2006, prices have increased slightly in 
the US market but are still decreasing in the EU market. 
However, garment factory productivity rose 50% from 2001 to 
¶2006.   Garment factory profit margins, which were 10-11% net 
in 2003 and 2004, have now fallen to 5-6%.  Ken Loo painted a 
starker picture, claiming that factories were making only 
2-3% profit. 
 
Wages Down, Labor Disputes Up 
----------------------------- 
 
¶5.  (SBU)  The working conditions and labor freedom for 
Cambodia's 336,000 garment factory workers have worsened 
slightly, and labor relations have deteriorated 
significantly.  Increased global competition is one of 
several factors responsible, along with a resurgence of 
activism after months of political and economic uncertainty, 
frustration with the arbitration process, less effort 
expended in negotiations, and increased activity among rogue 
unions.  Workers and garment buyers report increased tensions 
in the workplace and unions say that anti-union harassment 
and discrimination have been on the rise for the past year. 
There was a dramatic increase in garment sector strikes from 
February to June 2006, with working days lost per month 
reaching four times typical levels in May 2006.  In August 
 
PHNOM PENH 00001893  002 OF 003 
 
 
2006, three factory-level union leaders were found guilty of 
highly suspect charges of human confinement, the first time 
Cambodian labor leaders have been convicted of felonies. 
 
¶6. (SBU) According to the Cambodian Institute for Development 
Studies, real wages of garment factory workers have been 
falling for three years:  3.1% decline from 2003 to 2004, 
8.7% decline from 2004 to 2005, and a further 0.3% decline 
through February 2006.  Garment sector unions and GMAC are 
currently negotiating a minimum wage increase.  While the two 
sides are still far from an agreement, it seems likely that 
the minimum wage will rise from the current USD 45 per month 
to USD 50 to 55 per month over a period of three years. 
 
Competitiveness Efforts 
----------------------- 
 
¶7.  (SBU) In the past several years, the Cambodian government 
(RGC) has taken some steps to improve the competitiveness of 
the garment industry, most notably by reducing non-official 
payments in the import/export process as part of a World 
Bank-sponsored trade facilitation program.  According to a 
2005 report by the firm Emerging Markets Consulting, the 
average informal costs for importing one container of goods 
fell from $2,477 in 2003 to $673 in 2005, while export costs 
dropped from $942 to $598. 
 
¶8.  (SBU) However, economists and garment industry experts 
report that corruption costs have largely remained flat since 
2005, and may even be starting to creep up again.  Trade 
facilitation reduced corruption by reducing the number of 
people with an opportunity to seek a bribe, but those 
individuals still able to elicit bribes are now asking for 
more money per transaction, according to Jane O'Dell (please 
protect), Chief of Party of USAID's Garment Industry 
Productivity Center.  Informal costs now account for about 4% 
of production costs, (equal to about 2/3 of net factory 
profits) according to a forthcoming EIC report. 
 
¶9.  (U) Some individual garment factories have also made an 
effort to become more competitive.  Loo reports that some 
factories have set up new departments or found new 
sub-contractors to do intricate, profitable work involving 
bead or lace trim or embroidery.  Factories have also 
emphasized training and made steps towards localizing 
management, a move which reduces staffing costs and 
miscommunication.  Consolidation in the industry has led to 
the closure of smaller, less efficient factories, the 
expansion of well-run factories, and job growth.  Vertical 
integration in Cambodia is difficult as the high cost of 
electricity makes fabric production prohibitively expensive 
and there are no workers skilled in garment design. 
 
Cambodian Garment Industry Statistics 
------------------------------------- 
 
¶9. (U) Statistics requested reftel are as follows: 
 
2005: 
--Total industrial production:  USD 3,865 million 
--Total textile and apparel production:  USD 2,274 million 
--Total textile and apparel export:  USD 2,253 million 
--Textile/apparel share of host country exports:  78% 
--Textile/apparel share of host country imports:  30% 
(includes fabric used for garment exports) 
--Exports in textile and apparel to the U.S.:  USD 1,531 
million 
--Total manufacturing employment:  331,023 
--Total textile and apparel employment:  315,405 
 
January to June 2006: 
--Total textile and apparel production:  USD 1,230 million 
--Textile/apparel share of host country exports:  64% 
--Textile/apparel share of host country imports:  26% 
--Exports in textile and apparel to the U.S.:  USD 836 million 
--Total textile and apparel employment: 336,123 
--Increase in total textile and apparel exports compared to 
Jan to June 2005:  28% 
 
January to August 2008: 
--Total textile and apparel production:  USD 1,628 million 
--Exports in textile and apparel to the U.S.:  USD 1,122 
million 
--Increase in total textile and apparel exports compared to 
Jan to August 2005:  21% 
 
PHNOM PENH 00001893  003 OF 003 
 
 
 
Comment 
------- 
 
¶10.  (SBU) Without the ability to fully explain Cambodia's 
garment boom, it is impossible to predict how long it will 
last.  Expert opinions as to the post-2008 garment sector 
future range from continued growth of 10-20% to a decline of 
up to 30%, followed by a partial rebound.  There are, 
however, two areas where there is broad agreement.  First, 
Cambodia's garment sector will not collapse due to the end of 
safeguards or increased Chinese competition, though it may 
contract significantly in the worst case scenario.  Second, a 
protracted labor dispute is the one thing that could do swift 
and extremely serious damage to the garment industry.  The 
embassy will continue its efforts to promote garment industry 
competitiveness, through USAID-funded projects in labor 
dispute resolution, factory monitoring, and productivity 
improvement and through continual engagement with unions, 
manufacturers and employers.  End Comment. 
 
MUSSOMELI