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Cambodia’s Garment Manufacturing Industry

December 12, 2017 By Management

Machica Firm, Inc. is the Philippine member practice of Dezan Shira Asian Alliance (DSA). DSA is the publisher of powerful and widely read Asia Briefing, China Briefing, ASEAN Briefing, India Briefing, and Vietnam Briefing chronicling the latest, most up-to-date business intelligence and industry-specific reports. Dezan Shira Asian Alliance is ‘Your Partner for Growth in Asia’.

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By Dezan Shira & Associates
Editor: Vasundhara Rastogi

Cambodia is strategically located in the heart of Southeast Asia. The country is bordered by Thailand, Laos, and Vietnam, and has the Gulf of Thailand to its south-west. The country is popular for providing a low-cost manufacturing base for several industries. Among the many advantages that the country offers to investors are duty-free access to some large and developed markets, a stable economy, and several government incentives. Additionally, there are several special economic zones exclusively established to promote manufacturing across the country. In this article, we briefly discuss the chief characteristics of the garment manufacturing industry in Cambodia and the advantages it offers to foreign investors.

Cambodia’s garment manufacturing industry – a key driver of growth

Cambodia’s garment manufacturing industry is largely export-oriented and highly integrated into global supply chains. The European Union (EU) represents the largest market for Cambodian garment exports, accounting for approximately 40 percent of the total manufacturing, followed by the United States ( 30 percent), Canada (9 percent), and Japan (4 percent). Many companies in the country operate as contract manufacturers for major multinational brands such as Adidas, Gap, H&M, Marks & Spencer, and Uniqlo.

In the early 1990s, the Cambodian government took various measures to boost the industry’s competitiveness in the international market, which prompted foreign investors to direct their attention to the country. Additionally, the country’s industrial development was supported by the Multi-Fiber Arrangements (MFA) quotas and other preferential trade agreements implemented by developed countries like the US and EU.

Two decades later, the garment industry continues to drive the Cambodian economy through human capital development, employment generation and foreign direct investment (FDI). Currently, the industry employees over 600,000 people, making the sector the biggest employer in the country.

Further, the garment industry accounts for 16 percent of the gross domestic product (GDP) and 80 percent of Cambodia’s export earnings. In 2016, the total number of garment factories in the country stood at 589 factories.

Cut-make-trim model

Cambodia’s garment factories are generally based on the principle of cut-make-trim (CMT) model. Under this method of production, the raw material, machinery and the design of the garments are imported from abroad, while the assembly of the product is outsourced to the labor-intensive factories in Cambodia. The CMT implies cutting and sewing of material according to the clothing brands’ specifications.

The garment industry is essentially dominated by foreign owned firms, mainly from the neighboring countries such as China, Hong Kong, Singapore, Malaysia and Republic of Korea. The association with foreign-owned garments firms or brand names provide Cambodia’s garments industry an important channel into the garments global value chain.

Low-skilled workforce

The garment industry in Cambodia is essentially based on low-skilled, labor-intensive activities. Cambodia has a significant proportion of its population living below the poverty line with low levels of education. As a result, the country has a large pool of low-cost, and low-skilled workers. The vast majority of workers employed in the garment factories are women with minimum skills. Only a small proportion of the workforce includes higher skilled workers and professionals; these are mostly managers, supervisors, or members of the operations department.

Geographical distribution

Over 60 percent of Cambodia’s garment factories are located within or in close proximity to the capital city – Phnom Penh. The finished products are transported from the factories in Phnom Penh by train to the seaport of Sihanoukville where the garments are shipped to other countries.

Other key locations of garment factories are Kompong Som, Kompong Speu, Kompong Cham, Kompong Chhnang, Svay Rieng, Takeav and Kandal provinces.

Advantages of Cambodia

Strategic location

Cambodia is strategically located in the center of the east-west corridor of the Greater Mekong Sub-region (GMS), providing access to key world markets. This helps businesses take advantage of low-cost manufacturing in Cambodia as well as huge demand for its products in Asia.

Competitive labor force

Labor in Cambodia is cheaper than most regional competitors, except Laos and Myanmar. In 2017, Cambodia’s monthly minimum wage of workers in its garment industry increased to US$153, a double of the 2012 level. Yet, the country’s monthly minimum wage remains the most competitive when compared to Thailand (US$250) or Vietnam (US$166).

Preferential market access

Cambodia is a member of the ASEAN Free Trade Area (AFTA) – a regional economic integration pact wherein Cambodia benefits from the Common Effective Preferential Tariff (CEPT) agreement that reduces or eliminates tariffs on the manufactured goods traded between the 10 ASEAN member countries. The rapidly integrating ASEAN makes Cambodia an attractive investment destination because of its low-cost manufacturing, large regional markets and easier sourcing of raw material within the ASEAN Economic Community.

Cambodia has also been a member of the World Trade Organization (WTO) since 2004; this has increased its trade integration with the US and the EU. Cambodia benefits from the EU’s ‘Everything but Arms Scheme’, which allows low developing countries such as Cambodia duty-free access to the EU’s market for all export goods.

Supportive government policies

Some of the many incentives offered by the government of Cambodia include 100 percent foreign equity ownership, tax holidays of up to 9 years, and exemption from import duty on machinery and equipment. In addition to that, Investors can repatriate profit freely and reinvestment of earnings is encouraged with special depreciation allowances

RELATED: Investing in Cambodia’s Phnom Penh

Conclusion

Over the years, Cambodia has had a steady flow of foreign investment in its garment manufacturing industry demonstrating the many opportunities that the country offers to its foreign investors. Though certain challenges remain while doing business in a developing country like Cambodia – such as infrastructural gaps, and high energy costs – the considerable competitive advantages that the country offers cannot be ignored.

The content of this article is for general information purposes only and cannot be used as a substitute for obtaining professional advice where specific circumstances warrant. The views and opinions expressed herein are those of the author and do not necessarily reflect those of the Machica Group. For comments or inquiries, kindly email us at mail@machicagroup.com.

Investing in Cambodia’s Phnom Penh

December 12, 2017 By Management

For any query or clarification about the article / news report herein cited, kindly email us at mail@machicagroup.com or message us at facebook.com/MachicaGroup.

By Vasundhara Rastogi

Phnom Penh, once known as the ‘Pearl of Asia’, is the capital and largest city of Cambodia. Located at the confluence of three major rivers – the Mekong, the Tonle Sap River, and the Bassac River -, the city serves as Cambodia’s major economic, business, and trading destination. Though the city is located 120 miles away from the sea, its proximity to the Mekong river valley makes it an ideal port – connecting the landlocked region to the South China Sea via Vietnam by the Hau Giang channel of the Mekong Delta. Phnom Penh is home to 1.5 million people, and serves as a major global and domestic tourist destination in Cambodia. Khmer, the most popular and official language of the country is the main language; English and French are also widely spoken.

Regional connectivity

Since the end of Cambodia’s civil war in 1975, the city has undergone rapid development in terms of infrastructure. The city has four main national highways and three rail lines that connect it to the main seaport at Sihanoukville (also known as Kâmpóng Saôm). The highways radiates out to other parts of Cambodia and its neighboring countries – Thailand, Vietnam, and Laos.

Phnom Penh International Airport is well connected with popular cities in the region, such as Bangkok and Ho Chi Minh City and regional hubs such as Singapore and Hong Kong. Domestically, too, it is well connected – Phnom Penh has direct and frequent flights to Siem Reap, the main tourist gateway to the ancient Khmer ruins of Angkor Wat, a UNESCO World Heritage site.

Special Economic Zones

Cambodia’s economy has grown remarkably in the past few years, with an annual growth rate averaging more than 7 percent between 2012 and 2016. This growth has been largely driven by its ability to provide low-cost, labor-intensive manufacturing – especially in the garment, footwear, and food-products sectors in its well established special economic zones (SEZs). The country houses around 30 SEZs that provide preferential incentives to investors and offer government import-export administrative support to facilitate trade. The main SEZ in Phnom Penh as well as the most developed SEZ in Cambodia is the Phnom Penh SEZ (PPSEZ). The PPSEZ currently has an estimated 80 tenants and 15,000 employees. Notable corporations already present in PPSEZ include Coca-Cola, Toyota, and Yamaha.

Some of the key incentives include corporate income tax exemption of up to nine years, exemption from import duty on materials and equipment used in production, investment protection agreements with the world’s leading economies, freedom from price control, as well as free remittance of foreign currency. Besides, export-oriented manufacturers can access preferential treatment under ASEAN’s Free Trade Agreements (FTAs) to explore Asian markets and increase competitiveness.

Since foreign nationals cannot own land in Cambodia, SEZs offer them an opportunity to develop, or sub-lease plots with up to 50 years of renewable leases. This gives businesses more flexibility in organizing their factory activities over a long period of time.

Manufacturing hub

Phnom Penh’s is the country’s economic center, accounting for a large share of the Cambodian economy. The city, along with its neighboring provinces, serve as the most industrially developed area in the country – in terms of labor force and infrastructure. Phnom Penh specializes in light labor-intensive industries such as garments and footwear, food and beverage, and consumer products.

The Phnom Penh Special Economic Zone (PPSEZ), established in 2006, holds the key to the city’s economic growth and development. The SEZ is strategically located between Bangkok and Ho Chi Minh City at the center of the East-West Economic Corridor that links Cambodia, Vietnam, Thailand, and Myanmar. The economic zone serves as a manufacturing hub for over 77 export-oriented companies that produce a diverse range of products. These include companies manufacturing mechanical and electrical products, garments and shoes, pharmaceutical products, consumer products, as well as pharmaceutical, packaging, and logistics companies.

RELATED: Import and Export Procedures in Cambodia – Best Practices

Over the years, with the opening up of its economy and a stable political environment, several other industries have mushroomed in Phnom Penh. A number of shopping centers, hotels, and commercial centers have opened up, making real estate a lucrative business in the city. Tourism is also a major contributor in the capital; Phnom Penh is a major tourist destination in the country, along with Siem Reap and Sihanoukville. Tourism accounts for approximately 18 percent of Cambodia’s economy. Among the most popular tourist areas in Phnom Penh are Tuol Sleng Museum, Wat Ounalom, Wat Phnom, and Sisowath Quay, alongside the Tonle Sap. Sisowath Quay is a long stretch of road that has several restaurants, bars, and hotels establishments.

Phnom Penh is endowed with several advantages for export-oriented manufacturing industries, such as access to cheap workforce, low-cost manufacturing, and its connectivity with several well-established foreign markets. These factors along with infrastructure development, FTAs with fast-growing economies, and its strategic location in the heart of Southeast Asia – continue to create opportunities for businesses in the region.

The content of this article is for general information purposes only and cannot be used as a substitute for obtaining professional advice where specific circumstances warrant. The views and opinions expressed herein are those of the author and do not necessarily reflect those of the Machica Group. For comments or inquiries, kindly email us at mail@machicagroup.com.

ASEAN-Hong Kong Free Trade Agreement Signed

December 12, 2017 By Management

For any query or clarification about the article / news report herein cited, kindly email us at mail@machicagroup.com or message us at facebook.com/MachicaGroup.

By Dezan Shira & Associates
Editor: Vasundhara Rastogi

On November 12, 2017, the Association of Southeast Asian Nations (ASEAN) and Hong Kong Special Administrative Region (SAR) of China signed a free trade and investment pact to strengthen economic cooperation between the two regions and stimulate economic development. The two agreements, the ASEAN-Hong Kong, China Free Trade Agreement (AHKFTA) and the ASEAN-Hong Kong Investment Agreement (AHKIA), were signed at the 31st ASEAN Summit in Manila and will come into force on January 1, 2019.

The agreements cover all aspects of trade in goods, such as tariffs; rules of origin; non-tariff measures; customs procedures and trade facilitation; trade remedies; technical barriers to trade; and sanitary and phytosanitary measures. They also include elements related to trade in services; investment; economic and technical co-operation; dispute settlement mechanism; and other areas of interests to be mutually agreed upon by the two parties. Chris Devonshire-Ellis of Dezan Shira & Associates comments: “This FTA brings Hong Kong into parity with mainland China which has had an FTA with ASEAN for several years. Hong Kong’s unique mix of China and Asian focused financial services and regional service support are a great mix with ASEAN’s overall reach and this agreement provides a much needed boost to Hong Kong’s overall attractiveness as an investment destination for Asia.”

RELATED: Corporate Establishment Services from Dezan Shira & Associates

Strong trade links between Hong Kong and ASEAN

Hong Kong holds a distinct advantage across the Asia-pacific region in terms of its unique location and strong links to the international markets as well as Mainland China. While Hong Kong is part of China, it conducts its economic and trade relations separately from the mainland and serves as a bridge connecting the Chinese mainland and Southeast Asia.

With the increasingly close economic and trade ties between China and Southeast Asia, Hong Kong plays an important role as a trade link between the two. For instance, through its Closer Economic Partnership Arrangement (CEPA) with Mainland China, Hong Kong provides preferential market access to Hong Kong service suppliers as well as tariff-free treatment for products of Hong Kong origin in China. This has therefore created a strong nexus connecting foreign businesses (mostly businesses from ASEAN) to China through Hong Kong.

Since 2012, the re-exports of goods of ASEAN origin through Hong Kong to China have risen at the rate of 6.4 percent annually on average. In 2016, 12 percent of trade between ASEAN and Mainland China, with a value of over US$54 billion, was routed through Hong Kong.

Further, in the last ten years, the value of bilateral commodity trade between Hong Kong and members of the ASEAN has increased by 72 percent. ASEAN is Hong Kong’s second largest partner in commodity trade. In 2016, the commodity trade between ASEAN and Hong Kong reached US$107 billion (HK$833 billion), whereas trade in services stood at US$15.4 billion (HK$121 billion) in 2015.

Among the individual member states, Singapore, Thailand, and Vietnam are Hong Kong’s leading trading partners, representing 38.8 percent, 15.7 percent and 15.2 percent of Hong Kong’s total merchandise trade with the region respectively.

In terms of investment, at the end of 2015, the ASEAN ranked sixth among Hong Kong’s destinations for outward direct investment, at US$ 28 billion (HK$218 billion), and also sixth among Hong Kong’s sources of inward direct investment, at US$ 71 billion (HK$555 billion).

Opportunities arising from the Hong Kong – ASEAN Free Trade Agreement

Hong Kong is among the world’s freest and most open economies. However, the customs duties imposed by ASEAN on Hong Kong goods put Hong Kong at a great disadvantage in terms of its trade relationship with South East Asian countries. The newly signed AHKFTA is set to change this.

The FTA will reduce the customs duties imposed by ASEAN and improve Hong Kong’s overall competitiveness in the international market. The AHKFTA together with the China-ASEAN FTA and the Mainland China-Hong Kong CEPA will broaden Hong Kong’s position as a hub for international trade and services.

RELATED: Singapore’s Free Trade Agreement with Turkey Comes into Force

In terms of business benefits, the agreement will offer four key advantages to stakeholders in the region, namely tariff reduction fortrade in goods; better and fairer investment protection; fewer restrictions for trade in services; and a longer stay for business travelers.

Previously, only seven of the ten ASEAN countries allowed business travelers from Hong Kong to stay in the country without a visa for up to 14 – 30 days. The free trade deal will allow Hong Kong business travelers to stay in any ASEAN country for up to 90 days, without requiring a business visa.

With regards to trade restrictions, both Hong Kong and ASEAN countries will remove barriers on foreign capital participation and the number of foreign workers employed. Foreign businesses can benefit significantly from AHKFTA as the agreement will extend Hong Kong’s network to cover all major economies in South East Asia. As all ASEAN member states are also economies along China’s Belt and Road Initiative (BRI), the closer ties established between Hong Kong and ASEAN will help foreign enterprises tap business opportunities offered by the BRI.

The content of this article is for general information purposes only and cannot be used as a substitute for obtaining professional advice where specific circumstances warrant. The views and opinions expressed herein are those of the author and do not necessarily reflect those of the Machica Group. For comments or inquiries, kindly email us at mail@machicagroup.com.

Entering the Philippine Market: Comparing Models

October 11, 2017 By Management

By Harry Handley

Under the Foreign Investment Act, 1991, which was amended in 2015, a vast majority of industries in the Philippines are completely open to overseas investment, allowing 100 percent foreign ownership in most cases. The country managed to attract over US$ 7 billion of FDI in 2016, 25 percent more than the previous year. The UNCTAD World Investment Prospects survey positions the Philippines as the 11^th most promising host country for investment over the period 2016-18. In order to best leverage the advantageous conditions, such as widely spoken English and access to the ASEAN Economic Community, the most effective market entry model must be chosen by entrants.

RELATED: Corporate Establishment Services from Dezan Shira & Associates

Entry Models

There are a range of entry modes to choose from when investing in the Philippines. Each one is governed by different rules and, as such, each is suitable for different functions and business models. Below, the four main methods of entry are outlined.

Corporations

Companies can enter the Philippines by establishing as a corporation. This means registering a new legal entity with the Securities and Exchange Commission (SEC) in the Philippines. The structure of a corporation is such that the individual assets of the owners are legally separate from those of the company. Corporations come in two forms:

Filipino corporation – minimum of 60 percent Filipino equity ownership;
Foreign-owned domestic corporation – greater than 40 percent foreign equity ownership

The distinction between the two alternatives is important when it comes to land ownership and tax-incentive programs. Corporations can operate all functions of a business, and are typically profit-oriented enterprises. According to the World Bank’s Doing Business guide, setting up a corporation is a complex and long-winded process taking at least 28 days, four days longer than the Asia Pacific average.

Foreign-owned domestic corporations serving the Filipino market require a minimum of five shareholders and at least US$200,000 of paid in capital. The paid in capital can be reduced to US$100,000 if the corporation is involved in advanced technology or employs 50 direct employees. If the corporation is an ‘export market enterprise’ – defined as exporting at least 60 percent of its goods or services – the required capital is reduced significantly to P5000 (US$ 100).

Foreign-owned domestic corporations face the same tax conditions as local corporations: 30 percent corporate income tax and 12 percent VAT on local sales. Foreign corporations can register for numerous tax incentive with the Philippine Economic Zone Authority.

Branch Office

A branch office is a profit-oriented subsidiary of a foreign enterprise that engages in the activities of its parent company in the Philippines. This is the typical structure for business process outsourcing, such as call centers or back offices for multinational firms, which located in the Philippines due to low local wages as well as the large number of fluent English speakers. The establishment of a branch office typically takes three to four weeks from the time of filing with the SEC.

Similar to corporations, the capital requirements are US$200,000 for domestic market serving enterprises and P5000 (US$ 100) for export-oriented companies. The taxation of branch offices is also similar, with 30 percent corporate income tax and 12 percent VAT on local sales. However, branch offices also have to pay a 15 percent profit remittance tax on repatriation of profits to the parent company.

Representative Office

A representative office differs from a branch office in that it is not legally allowed to derive income. The key function of a representative office is to act as a liaison between the parent company and clients or partners in the Philippines. The minimum paid in capital for a representative office is a US$30,000 remittance from the parent company, which must be used for operational expenses. The average set up time for a representative office is similar to a branch office, three to four weeks from the date of application.

Regional HQ

There are two distinct types of regional headquarters: Regional or Area Headquarters (RHQ) and Regional Operating Headquarters (ROHQ). The graphic below shows what operations are legally allowed for both RHQs and ROHQs.

Regional or Area Headquarters (RHQ) are non-income generating offices of a foreign corporation. RAHQs are not allowed to participate in any management, marketing, or sales activities on behalf of branch offices in the Philippines or the mother company. Similar to representative offices, the main purpose of RHQs is to be a coordination and communication hub for subsidiaries, affiliates, and branches in the Asia Pacific region. The minimum paid in capital is US$50,000, to be used for the running of the office. Managerial and technical expatriate staff members will be taxed at 15 percent of gross compensation, rather than using the tiered income tax system.

On the other hand, a Regional Operating Headquarters (ROHQ) is an office of a multinational typically used for back-office functions. ROHQs are allowed to derive income only from affiliates of the parent company. ROHQs are afforded a special corporate income tax rate of 10 percent on taxable net income, as opposed to 30 percent for corporations and branch offices. In addition, 12 percent VAT is payable on local sales and 15 percent profit remittance tax on repatriation of profit. Similar to RAHQs, a 15 percent final withholding tax on the income of managerial and technical employees is payable rather than the standard income tax system. The minimum paid in capital for ROHQs is US$200,000.