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With the support of USAID, GIPC sponsored a study of the Cambodian industry value chain at the factory level. This is unique report, primarily the work of industry expert/cost accountant Don Feeney of Werner International, Inc., and economist/analyst Peter Minor of Nathan Associates, Inc. captures the basic cost structure for two types of garments and conveys useful insights into the structure of the industry, and its challenges.

The GIPC study confirmed that Cambodian industry competitiveness is challenged by a short value chain; only 25% of the FOB value of a typical garment originates in Cambodia. The factories have very little flexibility to meet today’s competitive challenges; only labor, and trade and transportation costs, are under a company’s control and those are not easily lowered.

Moreover, the study found that Cambodian workers have a pattern of exchanging long hours for pay rather than output. In 1988, economist Edward Packer reported a similar climate in several countries where workers felt they had no opportunity to improve their position. (Productivity, Technology and Industrial Development: Case Study in Textiles, World Bank, Washington, DC.) The result is chronic overtime, depressed incomes, inflexible costs, and an industry struggling to respond effectively to price competition.

How can Cambodia improve its competitiveness? A longer value chain, including fabric mills and other inputs, will take time and investment, and will not provide near term relief. Duty relief from the US, if it happens, can’t be expected for at least 2 years. Mr.Minor had some straightforward recommendations:

• Upgrade skills

Government commitment to workforce development; industry support for vocational training; factories training employees and implementing improved methods, and, most important, support from labor unions for skills improvements are essential.

• Increase capacity utilization to lower average fixed costs

A factory that does not ship to its full capacity incurs higher average fixed costs, as expenditures on rent, power, office staff and management are spread over fewer garments and raise per piece production costs. Government can promote full capacity utilization through good labor regulations, and strategies that maintain output. Industry can encourage management practices that link income to productivity. Factories must adopt modern management practices to maximize output, and labor must engage in responsible negotiation and use strike only as a tool of last resort. Labor unions contribute by encouraging incentive compensation to reward output and avoiding work stoppages.

These policies are not short term, either, but a factory that commits to an improvement program can see higher productivity within a matter of months.

Open file :  Value Chain Analysis of Cambodia's Apparel Industry-English (639.9 KB)