As the garment industry experiences healthy growth in exports, Cambodia’s competitive advantage with other countries is more evident than ever. But garment factories warn that the growth may not translate into straight profits.
Garment exports increased nearly 40 percent in the first two months of the year to almost $590 million compared the same period in 2010. Exports to the EU increased by 44 percent after the 27-member trade bloc in January granted duty-free status to Cambodian-made garments.
And exports to markets like Japan and Canada also saw increases of 99 and 60 percent, respectively.
However, with oil and cotton prices both riding high, garment factories say that profits are being squeezed even as they enjoy a rise in the number of orders.
“Last year, we just broke even. This year I am hoping the situation of orders is better, but we are concerned about the oil,” said Robert Hwang, president of Direct International, which owns a factory in Phnom Penh’s Sen Sok district with more than 600 employees. “This price is very high and it will cut out of our profit.”
He said if cotton and oil prices do not come down—currently cotton expenses amount to 60 percent of the cost of producing apparel—then factories would struggle to make a profit this year.
Cotton prices doubled on the Intercontinental Exchange in New York in the last year, reaching a record high of $2.02 a pound in March, though the price had decreased to $1.78 a pound for the July delivery at Thursday’s close.
Light sweet crude for May delivery settled at $108.11 a barrel on the New York Mercantile Exchange on Thursday, significantly higher than the price a year earlier, when a barrel reached just above $80. With political uncertainty in the Middle East continuing, economists say oil prices should stay high.
Ken Loo, secretary-general of the Garment Manufacturers Association in Cambodia, said that rising labor costs in other countries, particularly in China, has diverted more factories to Cambodia, with 30 setting up shop in the last 12 months, bringing GMAC’s ranks to 272 factories.
“New investors are coming in. They do it because they feel that coming here is more attractive than where they currently are, and that they may lose more where they currently are,” he said, blaming rising commodity prices.
The Asian Development Bank earlier this month warned that higher-than-assumed oil prices “could hurt the prospects for Cambodia’s tourism and clothing exports and push up inflation.”
In an industry with typically low profits, passing on the costs to buyers will just hurt competitiveness.
“The problem is that it has been a buyers market for the last 30 years, stemming from the fact that there is more supply than demand, so we are not in a position to bargain,” Mr Loo said.
Peter Brimble, senior country economist for the ADB, said that Cambodia must continue producing more higher value products in order for the sector to grow, but that overall there are positive signs.
“The challenge is still there, you have to build up skills, go up the value chain,” he said, “I think there’s no choice. Cambodia’s labor rates are not cheap like Bangladesh or Africa anymore.”
Despite recent gains in commodity prices, Mr Brimble said there are signs that Cambodia is beginning to diversify its product base.
“Our guys aren’t the only people who are going to face that challenge, and in the end people are going to buy clothes, right?” he said.
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