Do you want to know more about the manufacturing industry in Cambodia?

Driven by external demand, Cambodia’s manufacturing sector is expected to achieve a significant growth rate of 9.2% in 2023, especially in the garment and non-garment manufacturing sectors.

This growth will be further supported by the country's projected economic growth, which is expected to expand by 6.6% in 2023, thanks to better trends in global demand and increased investor confidence amid an easing and controlled COVID-19 situation. Despite the positive outlook, the country's agricultural sector still faces structural challenges such as slow growth in soil and labor productivity, low commercialization, and insufficient investment in value-added processing. This article takes a deep look at the growth and challenges of Cambodia's manufacturing industry using data and insights provided by the Cambodian government.

History of Cambodia’s Manufacturing Industry

Cambodia’s manufacturing sector contributes significantly to the country’s economic development, especially the garment manufacturing sector, which is a major driver of growth. The industry’s long history dates back to the early 1990s, when the Cambodian government took steps to increase the industry’s competitiveness in international markets. Today, the garment industry continues to support human capital development, job creation, and foreign direct investment, employing more than 600,000 people, making it the country’s largest employer, accounting for 16% of GDP and 80% of Cambodia’s export earnings.

Cambodia's garment industry mainly follows the cut-make-trim (CMT) model and is dominated by foreign-owned enterprises. The industry's workforce mainly consists of low-skilled, labor-intensive activities, most of whom are women with the lowest skills. Geographically, more than 60% of Cambodia's garment factories are located in or near the capital city of Phnom Penh.

Cambodia offers several advantages to foreign investors, such as a strategic location, competitive labor force, preferential market access, and supportive government policies. As a member of the ASEAN Free Trade Area and the World Trade Organization, Cambodia has strengthened its trade integration with the United States and the European Union, providing duty-free access to exports. However, the country's poor human rights record has led the EU to initiate procedures to remove Cambodia's benefits under the Everything But Arms (EBA) program, which allows duty-free access to the EU market for all exports.

In summary, Cambodia’s manufacturing sector, and the garment sector in particular, has a rich history of development and growth and is an important source of employment, foreign investment and export revenue for the country. The sector has several advantages for foreign investors and is expected to continue to grow and expand despite challenges such as the EU’s proposed withdrawal of the EBA.

Current Situation of Cambodia’s Manufacturing Industry

According to a report by the Asian Development Bank (ADB), Cambodia's manufacturing industry is expected to continue to play a key role in the country's economic growth. The report states that Cambodia's economy is expected to grow by 5.3% in 2022 and 6.5% in 2023, driven by strong commodity exports and foreign direct investment inflows. Industry output is expected to grow by 8.1% in 2022 and 9.1% in 2023, and the Garment, Footwear and Travel Goods Development Strategy has played an important role in improving the competitiveness of the industry.

While exports of goods and services are also expected to increase, the report calls for Cambodia to diversify its economy to ensure sustainable growth. The country has benefited from diversification into light manufacturing, such as bicycles, electronic components and wiring products, to make the economy more resilient to shocks in external demand.

The reopening of the economy and high levels of vaccination rates will allow the gradual resumption of tourism, which will support demand for accommodation, food, transportation, and other in-person services. ADB is committed to supporting Cambodia's economic development and recovery from the COVID-19 pandemic, with a lending pipeline of $1.44 billion in concessional loans and $37 million in grants for 2022-2025.

Challenges facing Cambodia’s manufacturing industry

Cambodia’s manufacturing sector faces several challenges that could affect its long-term growth and competitiveness. Some of the key challenges include:

1. Competition from other countries: Cambodia faces competition from other low-cost manufacturing countries in the region, such as Vietnam, Thailand, and Indonesia. These countries have lower labor costs and more developed infrastructure, making it difficult for Cambodia to compete.
2. Lack of skilled workers: Cambodia’s manufacturing sector requires a skilled workforce, but the country’s education system does not always provide the necessary skills and training. Many workers in the industry lack technical skills, and engineers and other professionals are in short supply.
3. Underdeveloped infrastructure: Cambodia’s infrastructure, including roads, ports, and electricity supply, is less developed than other countries in the region. This can lead to delays and higher costs for manufacturers and could discourage foreign investment.
4. Dependence on a few large companies: Cambodia’s manufacturing sector is highly concentrated, with a few large companies dominating the sector. This may limit competition and innovation and could make the industry vulnerable to economic shocks or changes in the business environment.

To address these challenges, the government and industry stakeholders are taking several measures. These include investing in infrastructure, promoting skill development and training programs, and improving the business environment through regulatory reforms. The government has also established special economic zones to attract investment and support the development of the manufacturing sector.

Growth opportunities in Cambodia’s manufacturing sector

Despite the challenges facing Cambodia’s manufacturing sector, there are still several opportunities for growth and development in the industry. Some of these key opportunities include:

1. Improving productivity and efficiency: Cambodia’s manufacturing sector has relatively low productivity and efficiency levels compared to other countries in the region. By investing in technology, training, and management practices, the industry can improve its competitiveness and attract more foreign investment.
2. Expanding into new markets: Cambodia’s manufacturing industry has traditionally been concentrated in a few key sectors, such as garment and footwear production. However, there are opportunities to expand into new industries, such as electronics, automotive components and medical devices, which can provide higher value-added products and diversify the country’s export base.
3. Invest in research and development: Cambodia’s manufacturing industry has not traditionally invested heavily in research and development. By doing so, the industry can develop new products, improve existing products, and increase its competitiveness in the global market.
4. Developing a skilled workforce: By improving the education system and promoting skills development and training programs, Cambodia can develop a more skilled and productive workforce to better meet the needs of the manufacturing industry.

If Cambodia’s manufacturing sector can take advantage of these opportunities, it could become a more significant driver of economic growth and development in the country.

Summarize

Cambodia’s manufacturing industry has come a long way since its inception in the 1950s and has become a major contributor to the country’s economic growth and development. Despite challenges such as competition from other countries, a lack of skilled workers and inadequate infrastructure, the industry has continued to grow and diversify in recent years.

To ensure the continued growth and success of Cambodia’s manufacturing sector, the government and industry stakeholders must take proactive steps to address these challenges and capitalize on new opportunities. By investing in infrastructure, promoting skills development and training programs, and improving the business environment through regulatory reforms, Cambodia’s manufacturing sector can become a more significant driver of the country’s economic growth and development.