Added convenience and opportunities for closer cooperation with regional neighbours have spurred the growth of new industries in Cambodia
After more than 10 years, the Cambodian government’s efforts to diversify its manufacturing sector are beginning to bear fruit.
An upcoming guidebook on Alternative Manufacturing and Special Economic Zones (SEZs) in Cambodia, prepared by the European Chamber of Commerce (EuroCham) on behalf of German development agency GIZ, highlights a promising start to efforts to branch out from the nation’s traditional mainstay of garment production.
The garment industry has long dominated manufacturing in the Kingdom: 80 percent of exports in 2022 came from the sector. While a major driver of economic growth and the single largest source of formal sector employment in the country, its predominance has left Cambodia’s manufacturing sector vulnerable to volatility in the global garments market. Without diversification, any downturns in global demand have an outsized impact on the country’s economy.
Diversification breeds economic resilience. Cambodia is well positioned geographically to take advantage of opportunities to integrate into manufacturing supply chains in Thailand and Vietnam. A “Thailand Plus One” or “Vietnam Plus One” strategy, in which firms locate labour-intensive manufacturing processes inside the Cambodian border to take advantage of cheaper labour costs, remains the most viable option for attracting foreign companies to invest in alternative manufacturing sectors. Along the borders of Thailand and Vietnam, SEZs often are not only the most convenient option, but the only viable one.
“If you do a greenfield investment at the Thai border you have to be very courageous,” said GIZ Business Scout for Development Christoph Janensch. “You need infrastructure, you need electricity, and if that’s not there, investing in the countryside could be unnecessarily risky compared to choosing an SEZ.”
Poipet has emerged as an early centre for this sort of “plus one” manufacturing. The first investments based on this model were launched around 2012 by Japanese automotive manufacturers, who imported wire to be assembled into electrical cable harnesses that were then shipped to Thailand for assembly in vehicles. Other firms, manufacturing automotive components and electronics, moved in later to take advantage of the cheap SEZ labour and easy access to the Thai transportation infrastructure.
Even away from Cambodia’s borders, industry in the country’s SEZs remains far more diversified than outside them. The Phnom Penh SEZ includes companies ranging from family-owned recycling firms to major multinationals like Coca-Cola and Toyota. Indeed, unless a company has a specific local partner whose facilities it plans to use – or a need to locate itself in a particular area that lacks an SEZ – it is difficult to imagine a reason a manufacturer wouldn’t start operations in an SEZ, noted Janensch.
The close-knit communities of companies, across a wide variety of sectors that form within the SEZs, have also proven appealing. They can open up new avenues for collaboration and sharing of costs on joint initiatives, such as installing renewable energy sources. Janensch observed that in the Phnom Penh SEZ, the Japanese business community – which accounts for 40 of the 100 companies operating in the zone – is especially tight-knit.
“They really enjoy having a business community in Cambodia that understands them, where they can work together very well,” he said. “Because they come from the same background, they’re used to the same business practices.”
There are concerns that these SEZs are insufficiently linked to the rest of Cambodia’s economy, as they often purchase their inputs and sell their outputs abroad. But they remain Cambodia’s best bets when it comes to breaking into new manufacturing sectors. “As the country looks to diversify and upgrade its industrial base, SEZs will continue to be at the forefront of these efforts,” the GIZ report notes.