VZCZCXRO4106
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #0277/01 1210632
ZNR UUUUU ZZH
P 010632Z MAY 09
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC PRIORITY 0654
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHC/DEPT OF LABOR WASHINGTON DC

UNCLAS SECTION 01 OF 02 PHNOM PENH 000277 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/MLS, EEB, DRL 
PASS TO USAID - D. WINSTON 
 
E.O. 12958: N/A 
TAGS: ECON ETRD ELAB EAID PREL CB
SUBJECT: GLOBAL ECONOMIC CRISIS HITS CAMBODIA'S GARMENT INDUSTRY 
HARD 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1. (SBU) SUMMARY:  Cambodia's garment industry has been a hallmark 
of its economic development over the last decade.  A competitive 
garment sector remains critical for the country's continued economic 
growth.  However, the garment sector is experiencing immediate 
effects from the global economic crisis.  Cambodia is losing its 
comparative advantage and must improve its competitiveness by 
addressing internal and external challenges.  The government is 
pledging to respond and is seeking to work closely with the donor 
community and the garment industry. A failure to implement emergency 
measures will likely result in a gradual decline of the industry and 
lost market share to other regional competitors.  END SUMMARY. 
 
¶2. (SBU) Cambodia's garment industry is the leader of the formal 
economy, representing 80% of export revenues and an estimated 30% of 
total GDP.  The 1999 U.S.-Cambodia Bilateral Textile Agreement 
contributed significantly to the rapid growth of the industry.  The 
Agreement granted preferential access to American markets in 
exchange for adherence to progressive labor standards. The generous 
provisions attracted foreign investment between 1999 and 2008, and 
employment grew from 90,000 to its peak of over 350,000.  Exports 
grew to $2.98 billion in 2008, with 70% shipped to the United 
States. Cambodia is one of the top ten apparel exporters to the 
United States, but its 4% market share remained significantly below 
regional leaders such as Vietnam, with 8%, and China, with over 30%. 
 On a global level, Cambodia represents on average 2-4% of the 
market. The Asian Development Bank reported that the industry's 
employees, over 95% young women, support about 1.8 million others 
(13% of the population) and many remit 30-50% of their wages to 
their families to supplement education and medical care costs.  With 
an average of less than six years of education, and with over 
270,000 people entering the job market each year, competition for 
minimum-skill positions is high. 
 
NEGATIVE IMPACT OF THE GLOBAL ECONOMIC CRISIS 
--------------------------------------------- 
 
¶3. (SBU) Statistics released by the Ministry of Commerce, the 
Garment Manufacturers Association in Cambodia (GMAC) and the 
International Labor Organization (ILO) paint a grim picture. Garment 
exports to the world decreased 23% during January and February 2009, 
and are a total of 40% below the average for the same time period in 
¶2008.  Garment exports to the United States dropped 30.2% during 
this period.  This decrease resulted in a roughly 20% decrease in 
employment in Cambodia's garment sector, which spurs a rising 
unemployment rate.  Various sources report an estimated 
50,000-70,000 workers have lost their jobs since Fall 2008, with 
33,995 jobs lost from January to March 2009 alone.  The Garment 
Manufacturers Association of Cambodia (GMAC) estimated that 70 of 
the 310 factories have already closed, of which 40 investors have 
given up completely and left the country, while others have just 
suspended production.  (NOTE:  However, some new factories have also 
been established.  END NOTE.)  According to the Ministry of 
Commerce, presently there are 258 operating garment factories in 
Cambodia.  More jobs will be shed in the upcoming months if the U.S. 
economy continues to stagnate. 
 
LOSING A COMPARATIVE ADVANTAGE - ANALYSIS OF GARMENT INDUSTRY 
--------------------------------------------- ------- 
 
¶4. (SBU) Cambodia's 23% loss in orders over the first two months of 
2009 is disproportionate to the worldwide decrease in demand of 11%. 
 The garment industry is hampered by a number of challenges.  The 
business environment is unattractive to vertical investment 
(weaving, for example) due to factors as diverse as high energy 
costs and weak labor unions.  Although Cambodia is known for its 
good labor record and the "Better Factories Program" that attempts 
to uphold that reputation, industrial relations remain complicated, 
with over 1,000 unions for fewer than 260 factories and a largely 
uneducated (and primarily male) leadership.  The education sector is 
weak and has failed to address industry needs with appropriate 
skills, leaving the industry to compete on the basis of low wages 
for garment assembly operations.  As a result, foreign-owned 
factories rely heavily on expatriates for higher skilled positions, 
which has stifled skills transfer to the poorly educated local work 
force. With lower costs and associated risks, Bangladesh has 
captured an increase of 15% of the market over the first two months 
of 2009, and Vietnam and Indonesia have seen 4% increases. China and 
Vietnam are investing heavily in infrastructure and business 
development activities to lure more garment industry investors. 
 
THE GOVERNMENT PLEDGES RESPONSE 
------------------------------- 
 
¶5. (SBU) Some small steps have been undertaken in response to the 
crisis.  The government is giving more incentives such as deducting 
 
PHNOM PENH 00000277  002 OF 002 
 
 
income tax when factories purchase training for its workforce.  The 
Royal Government of Cambodia (RGC) has also agreed to suppress 
Advance Profit Tax until 2011 and will contribute to the National 
Social Security Fund for the workers.  Energy and exports costs are 
being studied by the RGC to determine how they can be reduced. The 
RGC has agreed to strengthen relations with the International Labor 
Organization (ILO) to improve working conditions in the textile and 
apparel industry.  In the Ministry of Commerce's April 29 report to 
the Government Donor Coordination Committee (GDCC), the RGC 
indicated it plans to reduce export fees, reduce transaction costs, 
and mobilize funding to provide short-term basic skills training to 
workers who have lost their jobs. 
 
IMMEDIATE ACTION IS NEEDED 
-------------------------- 
 
¶6. (SBU) As the impact of the crisis is felt, Cambodians already 
living in poverty will face new hardships.  A recent GDCC report 
states that income opportunities and livelihoods of the poor and 
vulnerable are expected to decline. The impact of the economic 
crisis will be particularly severe for women and children, existing 
urban poor, landless and land-poor families, farming households 
receiving reduced remittances, and returning migrants. Severe job 
loss in the garment industry will likely reverse improvements in 
poverty reduction and maternal child malnutrition, and will 
certainly result in a less capable workforce.  The economic crisis 
could exacerbate a growing youth unemployment problem and increase 
the use of illicit drugs, leading to a socially destructive means of 
subsistence for many.  How the RGC and its development partners 
respond to this crisis will set the direction for Cambodia's 
developmental trajectory and the well-being of Cambodians in the 
next decade. 
 
Comment 
------- 
 
¶7. (SBU) Many of the fundamental conditions that attracted investors 
to Cambodia still exist.  While the current garment industry 
statistics seem grim, if the government and garment industry 
associations can craft and widely publicize a coherent promotion 
strategy, Cambodia could see stable growth in the longer term.  And 
while many of the factors contributing to the global economic crisis 
remains out of Cambodia's control, its urgency requires the 
Cambodian government to increase incentives for investors and 
facilitate improvements to export infrastructure and improve its 
competitiveness on productivity, quality, and faster more secure 
delivery.  SEPTEL will follow to discuss how the USG is addressing 
constraints in Cambodia's garment industry. 
 
RODLEY