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Viewing cable 08PHNOMPENH1022, CAMBODIA: ECONOMIC DOWNTURN HIGHLIGHTS REMAINING

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Reference ID Created Released Classification Origin
08PHNOMPENH1022 2008-12-24 09:28 2011-07-11 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Phnom Penh
VZCZCXRO4411
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #1022/01 3590928
ZNR UUUUU ZZH
P 240928Z DEC 08
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHINGTON DC PRIORITY
INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY
UNCLAS SECTION 01 OF 04 PHNOM PENH 001022 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/MLS, DRL/IL 
DOL FOR ILAB 
 
E.O. 12958: N/A 
TAGS: ELAB ECON PGOV PHUM CB
SUBJECT: CAMBODIA: ECONOMIC DOWNTURN HIGHLIGHTS REMAINING 
GAPS BETWEEN UNIONS AND MANAGEMENT 
 
REF: A. PHNOM PENH 503 
     B. PHNOM PENH 934 
 
SENSITIVE BUT UNCLASSIFIED 
 
1.  (SBU) SUMMARY: Given the bleak global economic outlook, 
labor union leaders, garment manufacturers and other 
stakeholders are concerned that Cambodia,s critical garment 
sector may face factory closures and possibly more layoffs in 
coming months.  Labor union leaders complain about 
difficulties in effectively applying their understanding of 
Collective Bargaining Agreements (CBAs) with management. 
Illegal strikes, union rivalry and discrimination, and weak 
law enforcement continue to plague the sector.  These 
factors, along with still nascent attention paid to 
productivity, will potentially dampen Cambodia,s ability to 
effectively compete with its neighbors in the garment 
industry in 2009 and beyond.  END SUMMARY. 
 
FACTORIES CLOSING AND ORDERS DECLINING? PERHAPS 
--------------------------------------------- --- 
 
2.  (SBU) Factory closures have been the hot topic of the 
garment industry for the past several months, with local 
media providing added attention and spin.  According to Cheat 
Khemara, Senior Labor Officer of the Garment Manufacturers 
Association of Cambodia (GMAC), eleven GMAC member factories 
have closed down and ten others have suspended production 
this year.  He further warns of another 30 potentially 
closing down in the first quarter of 2009 due to the global 
economic crisis and downturn in orders.  The closures, 
however, only tell one half of the story.  The perhaps less 
headline-grabbing truth is that there have been 21 new 
factory openings in 2008 according to the Ministry of 
Commerce, exactly equaling the number of closures and 
suspensions documented by GMAC. 
 
3.  (SBU) Koy Tepdaravuth, Director of the Ministry of Labor 
and Vocational Training,s (MOLVT) Labor Dispute Department 
agrees that the number of factory closures and openings is 
more or less equal.  He and others attribute some of the 
closures to legitimate bankruptcy; however he stated that 
some factories also shutter only to reopen under a new name 
once the time period for tax incentives expires in order to 
once again take advantage of the benefits received by a new 
company.  According to Tepdaravuth, this practice is 
widespread due to the ease of movement (typically the space 
and equipment is rented), coupled with the ability to obtain 
a new investment license in one to seven days.  Furthermore, 
in order to attract investment, the government provides huge 
investment tax incentives for new companies which can last up 
to eight years (nine for special economic zones) from the 
year the project derives its first profit.  Such incentives 
include corporate and export tax exemptions and non-taxation 
on the distribution of dividends or profits. 
 
4.  (SBU) Economists, manufacturers, government officials and 
labor unions all agree that the global financial crisis will 
affect Cambodia, which is economically dependent on a garment 
sector that accounts for up to thirty percent of its GDP (Ref 
B).  Mr. Khemara of GMAC predicts that thousands of garment 
workers will be laid off in coming months due to a steep 
decline in orders from international buyers.  According to 
Khemara, buyers traditionally place the most orders between 
October and April.  The first two months of this period have 
already seen a decline in orders of approximately thirty to 
forty percent in some factories.  However, a random sampling 
of a dozen factories which export to Target, Wal-Mart, 
Children,s Place, H&M, Mark Spencer,s and others conducted 
by PolOff revealed that numbers have yet to decline, with 
most managers stating they have adequate orders for the next 
6 months.  Of more immediate concern may be the high prices 
of raw materials and the panic created by the global economic 
crisis.  Some factory owners stated they have purchase orders 
in hand, but cannot finance raw materials because banks are 
no longer providing credit. 
 
5.  (SBU) Some factories, however, are reportedly running at 
less than full capacity.  Chun Momthol, President of the 
pro-government Cambodia Labor Union (CUF), estimates that at 
least 20,000 of his members have been laid off due to the 
slowdown in production.  While reftel described spot labor 
shortages due to stagnant wages and soaring inflation in the 
first half of 2008, indicators point to a labor surplus in 
the second half.  Wages remain the same; however inflation - 
which determines whether a young laborer stays on the farm or 
comes to live near the city factory - has declined to 
 
PHNOM PENH 00001022  002 OF 004 
 
 
approximately 15 percent, down from an unofficial high of 36 
percent in May of this year.  Furthermore, factory closures 
or relocations and decreased levels of operation to counter 
falling orders have resulted in more successful recruiting of 
workers to meet factory output requirements.  All told, the 
number of garment workers is about 327,000 at the end of 
2008, which is 6,880 less than the official number from the 
same period last year (NOTE: the official number from the 
Ministry of Commerce does not include subcontractors, which 
can add between three to ten thousand additional workers. 
END NOTE). 
 
PRODUCTIVITY PLEASE 
-------------------- 
 
6.  (SBU) Chea Mony, brother of slain labor leader Chea 
Vichea and president of the Free Trade Union (FTU), 
Cambodia,s largest trade union, feels Cambodia will be able 
to ride out the economic crisis due to the fact that the 
garment sector caters to some of the low-end merchandisers, 
such as Wal-Mart and Sears, which Americans turn to in times 
of financial woe.  Furthermore, the wages for garment workers 
remain relatively low in comparison to neighboring countries 
such as Vietnam, Thailand, and China.  However, the 
conclusion of U.S. and EU safeguard measures on Chinese 
textile exports at the end of the year, coupled with the 
strong emergence of other low-wage countries such as 
Bangladesh, pose additional threats to Cambodia,s garment 
industry.  Garment stakeholders recognize that in order to 
remain competitive in an increasingly crowded market, more 
attention needs to be paid to improving labor productivity 
and to diversification. 
 
7.  (SBU) Currently, only a handful of Cambodian factories 
devote the necessary time, space and financial resources to 
training.  The Garment Industry Productivity Center (GIPC) is 
a USAID program which trains factory supervisors and mangers 
in the skills they need to increase productivity including 
time studies, line balancing and production controls.  Since 
its inception in 2005, GIPC has worked with approximately 15 
percent of Cambodia,s factories and has been able to show a 
35-100 percent increase in productivity, equaling a 400 
percent return on investment.  Although many factories now 
employ Cambodians in middle-management positions, the numbers 
are still low and often the positions hold little authority. 
The vast majority of factory owners, line supervisors and 
middle-managers are foreigners, mainly from China, Taiwan, 
Hong Kong and Korea, who see change as risky and have been 
difficult to engage according to GIPC.  The foreign 
manager,s goal is simply to maintain production levels 
determined by headquarters, which are generally at a lower 
level than their actual potential.  However, given the 
current economic climate, more discussion and emphasis has 
been placed on productivity and improvements to the garment 
sector, and experts believe it is bound to infect even the 
most resistant factories.  Additionally, GIPC and other 
industry specialists maintain that with higher productivity 
and a well trained and skilled workforce, Cambodia can move 
up the value chain and begin to produce higher-quality and 
higher-value garments. 
 
8.  (SBU) Stakeholders have also realized the need to expand 
into new markets in an effort to wean Cambodia from 
dependence on the United States, which accounts for 70 
percent of Cambodia,s textile exports with the EU accounting 
for a further 24 percent.  At the government,s request, a 
delegation consisting of GMAC, the Council for the 
Development of Cambodia (CDC), Commerce Ministry officials, 
and union representatives traveled to Japan in late November 
to explore market options.  They succeeded in securing orders 
for jackets and shoes for early 2009, and plan to further 
expand into Chinese and Russian markets in the future. 
Additionally, Cambodia hopes to cut into China's niche in the 
shoe industry.  While the total value of garment and textile 
exports has remained more or less stagnant since 2005, the 
total value of shoe exports has doubled, with the majority 
being exported to the EU and Japan. 
 
STRIKES INCREASING 
------------------ 
 
9.  (SBU) Yet another aspect of industrial productivity is 
the need to improve worker-factory relations in order to 
decrease the number of short term, wildcat strikes.  There 
were 102 strikes in the first eleven months of 2008, up 
approximately 40 percent from the same time period last year. 
 Moreover, there was an 11 percent increase in the number of 
 
PHNOM PENH 00001022  003 OF 004 
 
 
working days lost due to strikes.  All 102 strikes were not 
technically in compliance with the labor law and therefore 
were considered illegal.  Chea Mony, whose FTU held the most 
strikes in 2008, stated the unions had to resort to such 
measures because they cannot rely on the MOLVT when they have 
a dispute with factory management.  Several other unions, 
including the independent Coalition of Cambodian Apparel 
Workers Democratic Union (CCAWDU), accused MOLVT officials of 
being inactive and corrupt.  Mony maintains that the MOLVT,s 
labor inspectors and conciliators, weak enforcement or 
inaction in relation to the labor law stems from the 
officials' allegiance to management, from whom they routinely 
receive under-the-table payments.  Mr. Tepdaravuth of the 
MOLVT denied such allegations, accusing union leaders of 
inciting workers to hold strikes rather than waiting for 
results from conciliation, mediation or arbitration.  Som 
Aun, president of the National Alliance Chamber of Cambodia 
(NACC) which is comprised of 14 union federations, agreed 
that some of the union leaders did not use all available 
means to resolve the disputes between workers and management 
before resorting to strikes.  In November, the situation 
escalated until it reached the level of the Prime Minister, 
who appealed to unions to call off all strikes during this 
period of economic uncertainty. 
 
COLLECTIVE BARGAINING - MISTRUSTED AND MISUNDERSTOOD 
--------------------------------------------- ------- 
 
10.  (SBU) The International Labor Organization (ILO) and 
American Center for Labor Solidarity (ACILS), with support 
from USAID, have invested a significant amount of time and 
energy into training both employers and union representatives 
about Most Representative Status (MRS), whereby one union 
which represents 51 percent or more of the workers can 
negotiate on behalf of all workers, and can enter into 
Collective Bargaining Agreements (CBAs) with employers.  To 
date, approximately 311 union federation and factory-level 
union leaders have received training, along with 60 factory 
management staff members.  According to a Senior Program 
Officer at ACILS, union trainees seem enthusiastic about MRS 
and CBAs, but lack the education and capacity necessary to 
fully take advantage of the concepts.  Many factory owners 
are able to understand the concepts, but voice concern that 
MRS and CBAs will not be respected.  GMAC recently sent a 
letter to the Chairman of the Working Group on Industrial 
Relations stating that "minority unions will more than likely 
disrespect the authority of MRS," and that they have "no 
confidence that the CBAs will be enforceable." 
 
11.  (SBU) The future of MRS is hopeful, but given the lack 
of understanding on the part of the unions and concerns 
voiced by the employers, the potential for wider adoption of 
CBAs is still shaky.  Thirty-four unions have received MRS 
since the education campaign began earlier this year, and 
over 90 are in the process for 2009.  However, there are 
still only six active CBAs in the garment sector.  ILO and 
ACILS focus their efforts and training on unions which have 
received or are about to receive MRS.  A quick analysis of 
ILO training and GMAC strike data shows that only 3 strikes 
were conducted by MRS unions in 2008, showing that the 
presence of a MRS union in principle reduces intra-union 
competition and is a stabilizing force for Cambodia,s 
garment sector. 
 
12.  (SBU) However, there are still currently over 1300 
unions in the garment sector, amounting to approximately 
three per factory.  Union leaders are finding it increasingly 
difficult to work together, with some unions created simply 
to collect dues from members or to extort money from 
employers rather than advocate for workers rights.  Chea Mony 
of FTU told Poloff that more than twenty FTU-affiliated 
factory-level union leaders have been dismissed, and three 
others beaten by members of pro-government unions this year. 
Although the beatings were reported to police, no one has 
been arrested for the crimes.  Mony himself was the recipient 
of an anonymous death threat emailed to him in August. 
 
13.  (SBU) COMMENT: 2008 has been a tumultuous year for the 
garment industry in Cambodia.  High inflation caused some 
workers to find alternate employment during the first half of 
the year creating spot labor shortages in some factories, 
only to be reversed in the second half of 2008 with lower 
inflation, fear of diminishing orders, and fewer factory 
jobs.  Throughout it all, endemic problems within the 
Cambodian labor movement persist, namely union rivalry, 
discrimination against independent unions and union leaders, 
weak labor law enforcement, and low worker and union 
 
PHNOM PENH 00001022  004 OF 004 
 
 
capacity.  At the same time, while MRS unions are growing, 
the acceptance of CBAs is slower than desired.  The problems 
taken as a whole have created increasingly poor relations 
between unions and management, resulting in more strikes. 
Both unions and management have yet to adequately focus on 
the elephant in the room related to the survival of 
Cambodia,s garment sector: productivity.  Continued poor 
productivity and strained industrial relations will have 
significant consequences for the competitiveness and 
sustainability of Cambodia,s garment industry.  Although 
industrial relations have improved modestly in recent years, 
more dialog, time and training will be needed in order to 
move to the next level.  END COMMENT. 
RODLEY