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Cambodia Benefits From Rising China Wages

Rahul Jacob in Phnom Penh
Monday, 7 Jan 2013 | 8:09 PM ET
Eightfish | Ionica | Getty Images

Inside a gleaming white and blue garment factory in Cambodia stand rows of second-hand Singers – weathered sewing machines transported from a plant in China, which closed last year.

The Hong Kong-based Top Form, which has 700 workers at the plant, is one of many businesses that have moved to Cambodia, mostly from China, in the past year or so to take advantage of its lower wages, which are roughly a third of those in China.

Double-digit wage increases in China and a shortage of labour for factory work have prompted several companies to move to cheaper countries such as Vietnam, Bangladesh and Indonesia.

Angie Lau, chief executive of bra-maker Clover in Hong Kong, says her company finds operating in Cambodia easier than in India where it also has a plant. She says productivity in Cambodia is rising rapidly towards levels seen in its Chinese factories.

Cambodia, a country of just 15m, is seeing its economy transformed by the influx and new factories are sprouting up around its capital Pnomh Penh and near the Thai border as investment also shifts from Thailand.

The inflow of investment picked up sharply last year as Hong Kong Chinese companies and Japanese companies sought cheaper labor. Peter Brimble, senior country economist for the Asian Development Bank, estimates that overall foreign direct investment will jump to $1.5bn in 2012, up from $850m in 2011, because of investment in manufacturing, agriculture and the finance sector.

(Read More: Chinese Workers' Salaries Rose 9.1 Percent in 2012)

Larry Kao, general manager of Medtecs, a Taiwanese company, which produces surgical suits at its 4,000-employee factory in the Kampong Cham province in the central lowlands of Cambodia near Vietnam, quips: "So many foreign companies are competing for workers we wish the population would double."

Mr Kao estimates that factory wages have risen to $110-$130 a month, compared with $85-$100 three years ago. However, that is still less than China's factory wages of $400 a month.

In addition to mainland Chinese and Hong Kong investors moving jobs from China, several Japanese companies have invested in the country in the past year, especially in the area near the Thai border.

In early December, Hun Sen, Cambodia's prime minister, attended the groundbreaking ceremony for a mall in Pnomh Penh being built by Japan's Aeon, whose president promised to invest in four more.

The languid tempo of the city's traffic is changing with many sport utility vehicles - some driven by Chinese businessmen – muscling their way through the streets. Chinese restaurants are packed with executives from mainland China.

However, with such a surge of investment comes problems; ranging from wage inflation to land grabs as industrialization proceeds apace. Medtecs saw a three-day strike last year, partly over wages but Mr Kao considers himself lucky because his factory only has two unions.

"I have heard of factories with 14 unions, which would be like having so many wives," he says.

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The rapid development and the need to clear land for factories and large plantations has led to so many disputes that in 2011 the World Bank suspended all lending to Cambodia. Protesters who had suffered forced evictions gathered round the US embassy in November, before Barack Obama's visit to the country. Near a lake that has been filled in with sand in the capital, a 72-year-old woman complains that she was beaten until her head bled and then jailed when she protested against being evicted from her home.

Like China, the Cambodian government is criticised for its human rights record. But foreign investors see it as welcoming to money from overseas and are impressed by the relatively well-educated young workforce. Mr Brimble says a Japanese small motor manufacturer, which opened a plant in Cambodia last year, told him that its plant was operating at 80 per cent of the efficiency of its factory in China. Clover's Ms Lau says while "China still has the best skill set, Cambodia is getting up to par with China".

Speaking on condition of anonymity, a couple of foreign businessmen applaud the efficiency of being able to obtain a one-year business visa in a day but say the "expediting fee" should be made a government charge so it could be paid legally.

Mr Brimble of the ADB says it is not corruption that is hobbling investors but the shortage of skills for factories, which need engineers and local supervisors, and the high cost of electricity. Electricity costs substantially more than it does in neighbouring Vietnam and is unreliable in many areas.

(Read More: India to Take 2nd Place in Manufacturing Sweepstakes)

"If you have a business that needs consistent electricity, you need a good generator," says one foreign investor.

Michael Choy, who manages Top Form's plant in Pnomh Penh, says while he would like to increase the company's workforce to 2,000, he is constrained by the need to train workers for the taxing work of making lingerie at the factory. The expensive lingerie in Top Form's range of products is still made by the company's two remaining factories in China with the workers in Cambodia limited to bras with little embroidery.

While there are few complaints of labour shortages yet, garment manufacturers say it is bound to become a constraint.

"It is impossible for Cambodia to take all the orders shifting out of China," says Ken Loo, secretary-general of the national garment manufacturers association, pointing to the country's garment exports of just $4.3bn last year. Vietnam and Bangladesh had textile and clothing exports of about $20bn while China's textile and apparel exports were $270bn in the first 10 months of last year.

"Orders shifting out of China are tens of billions. No single country in southeast Asia could take that on its own," says Mr Loo.

As work moves from China to places such as Bangladesh and Cambodia, where wages rise as a result, consumers in the west will have to get used to higher prices for garments and shoes