Cambodia's energy costs deter investors

The Phnom Penh Post - Thursday, February 07, 2013

Cambodia's infrastructure is deterring highly anticipated investment into the production of raw materials to support its rapidly growing garment sector, experts say.

While garment exports rose 10.2 per cent to $5.48 billion last year, the increase of raw materials imported to support this growth increased about 20 per cent from $2.6 billion in 2011 to $3.1 billion in 2012, according to figures from the Ministry of Commerce.

In 2011 imports were approximately 53 per cent of export value, while in 2012 imports made up about 56 per cent of export value.

Ken Loo, secretary-general of the Garment Manufacturers Association in Cambodia, said electricity costs are the simple answer to a lack of raw material production and that this is not a new phenomenon with investors anxiously waiting for power costs come down to an accessible level.

“Fabric production is a highly capital-intensive industry, it is not labour intensive. It is highly dependant on energy, so when your cost of electricity or energy is the cost that it is today, it is not economically viable for investors to come to Cambodia and invest in fabric production.

“When the price of electricity drops to a price that is more acceptable, you will see many investors come in quickly, they have been waiting for 10 years.”

Andrew Hong, permanent secretary-general of the Association of Southeast Asian Nations (ASEAN) Federation of Textile Industries said: “Strategically of course there would be a big market for raw material consumption in Cambodia, however in order to produce a raw material like yarn or fabric, the infrastructure may not be there.”

“Basically they [investors] invest in garments as they have duty free GST [goods and services tax] to Europe that is why they are moving to Cambodia, but because infrastructure and logistics do not support raw material production, the investment is not on that part.”

Hong said that while China’s scalability driven by both export and domestic demand has made it an attractive place for garment producers to purchase raw materials, a shift is occurring driven by both costs of production and a change in buyer behaviour.

“The downside of China is that the quantity that they require is very big, that means they must have big production runs,” said Hong.

“The world is now shifting in to smaller quantities and shorter runs per style, per colour. So that is why you will see a shift from buying raw materials from China to the other producing countries in ASEAN and the rest of the world.”

Loo still sees China as a major exporter of raw materials but he too sees opportunities in neighbouring countries.

“It’s always a cost consideration, the fact that [Chinese] fabric is becoming more costly comparatively to ASEAN fabric, or rather the premium on ASEAN fabric, the cost is getting lower,” Loo said.

“It makes sense, due to proximity, due to the time it takes to get the fabric delivered to the factory its more feasible to now consider acquiring raw fabric from our neighbouring countries as opposed to getting it only from China.”