To Integrate and enhance engagement in regional markets, the Kingdom is exploring new avenues of connectivity
The past decade has been witness to quantum changes in the nature of the Cambodian economy. The nation no longer relies solely on traditional mainstays such as garment manufacturing, agriculture, tourism and construction. New industries are booming. Exports of electronics and automotive parts, for instance, have more than quadrupled from 2015 to present, albeit from a low base.
One major reason for this development is Cambodia’s attractiveness as a location for satellite manufacturing hubs, primarily for companies already established in the region and looking to implement a “Country Plus One” strategy. Geopolitical headwinds such as western countries’ de-coupling strategies from China, and a growing number of extreme weather events brought on by climate change, are forcing companies to rethink how they structure their supply chains. By diversifying the locations in which they produce, they are spreading the risk. Cambodia, with its low cost of labour, business-friendly policies, and highly strategic location between Thailand’s Eastern Economic Corridor and the industrial suburbs of Ho Chi Minh City, is proving itself to be a very appealing destination for regional manufacturers.
Thanks to these and other factors, Cambodia is leveraging itself into the more labour-intensive elements of supply chains. The country’s ambition to gradually move into more advanced economic activities – the path to development taken by many other Asian nations from Taiwan to Thailand – is increasingly dependent on its further integration into the regional economy. The more time and money consumed in transporting goods to and from the country, the less appealing the country’s comparative advantages are to investors.
Cambodia’s logistics costs are still some of the most expensive in ASEAN, according to World Bank figures. The high cost of customs clearance procedures is a primary cause, with informal payments and the involvement of middlemen serving to balloon the costs even further. The unpredictability in the overall logistics system forces companies to stockpile inventory and industrial inputs, further driving up carrying and administrative costs.
On the right track
Hun Manet’s new administration has moved rapidly to make Cambodia cost-competitive in the logistics space.
“I think they are on the right track, and we can feel the push from the top,” said Suy Bunthan, head of operations at DHL Express Cambodia and chairman of EuroCham Cambodia’s Transport and Logistics Committee. “The new prime minister has good intentions and good strategies and good mechanisms to get a new regulatory framework out as soon as possible. I think if this was something the prime minister could do just by himself, the reforms would happen overnight.”
On 13 November 2023, Hun Manet announced that customs processing fees would be entirely removed for goods worth less than 1,000 USD and reduced by almost half for goods over 1,000 USD. Whereas previously a scanning fee was required for every container entering the country, regardless of whether or not it was being screened, a scanning fee will now be owed only for those containers actually screened. The government has plans to develop a legal framework enabling e-documents to be used for official paperwork, and to reduce hard-copy paperwork and face-to-face meetings with customs officers to a minimum.
The single largest change to the “soft infrastructure” of Cambodia’s logistics ecosystem has been the introduction of pre-arrival processing for customs declarations. Now, companies importing goods into the country will be able to digitally submit and receive approval for their declaration documents well before the cargo reaches the border, enabling the goods to clear customs the same day even if they need to be inspected.
There is real potential for reforms and increased transparency in the customs process to rapidly and significantly cut down the high logistics costs that have long bedevilled the Cambodian economy. The simple act of eliminating middlemen from the process enabled the Phnom Penh SEZ to reduce its logistics costs by as much as 50 percent for its clients.
However, it is one thing to announce changes and another to effectively implement them. The country’s last attempt at major customs digitisation, ASYCUDA, ended with importers still being forced to print out digitally entered material, then go desk-to-desk to receive multiple stamps and signatures from an assortment of customs officials. The end result is that, while hopeful and very happy about this newfound governmental enthusiasm for tackling the roadblocks to cross-border trade, industry players are still hesitant. They are taking a wait-and-see approach to determine how the recently announced reforms will play out in practice.
Transportation overhaul
Linked to these reforms has been a concerted effort to overhaul Cambodia’s transportation infrastructure. The Phnom Penh-Sihanoukville expressway has been completed and reduced travel times to the coastal port by 70 percent; a new expressway connecting Phnom Penh and the Vietnamese border is under construction with negotiations for an extension to Ho Chi Minh City underway; and plans are in development for another running from Phnom Penh to the Thai border by way of Siem Reap.
Feasibility studies for upgrading the existing northern and southern rail lines, with the aim to double their maximum speed from 80 kph to 160 kph, are in process or completed. A new rail link with Thailand was launched midway through 2023, with a new rail line to Vietnam under consideration.
This transformation is not limited to land-based transport. Phnom Penh’s river port has been expanded and cold-storage facilities were added to facilitate trade in agricultural products. A new port has been built in Koh Kong and another 1.5 billion USD seaport is under construction in Kampot. When completed, it will be the third largest commercial port in the country.
The 1.7 billion USD Tonlé Bassac Navigation Road and Logistics System Project, also known as the “Funan-Techo Canal,” is expected to hold a groundbreaking ceremony in the fourth quarter of 2024, according to a press release by the Ministry of Public Works and Transport. It stretches 180 km from the Mekong River’s Prek Takeo and passes through four provinces, including Kandal, Takeo, Kampot and Kep.
Ground broke in 2023 on the first stage of an expansion of Sihanoukville’s port, to quadruple capacity and enable it to handle much larger ships. The Japanese government has pledged financing of 430 million USD for the project over the coming years. The channel into the port, too shallow for 82 percent of currently used large container ships, will be dredged to improve access.
Distribution hub
The two halves of this logistics renaissance come together at the Sihanoukville port. There the results of a years-long collaboration between the Cambodian and Japanese governments are bearing fruit. Aeon Mall (Cambodia) Logi Plus Co. has been brought on to operate a new logistics centre in a free trade zone bordering the port. It is the first to offer nonresident inventory management, enabling businesses to use the port as a regional distribution hub without legally establishing a corporation in Cambodia. It also has the first bonded warehouse in the Kingdom: Here, companies may store industrial products without having to pay customs duties until they leave the zone, freeing up capital for other uses.
Six months into its operations, the logistics centre is already seeing significant use from manufacturers in the automotive, electronics, garment and footwear sectors looking for a more streamlined way to import industrial inputs. At least one company (a supplier to manufacturers of electronic parts) has made the decision to use the port as a regional logistics hub.
It is here, according to Marisa Haruta, chief representative for the Japan External Trade Organisation (JETRO), that Cambodia’s logistics sector shows the most promise. “Many of the companies that are doing research on potentially expanding to Cambodia already have factories in Thailand and Vietnam, and are trying to connect all their factories in the Mekong region,” Haruta said.
While port expansion is critical for enabling larger ships and containers to be brought to Cambodia, helping to reduce logistics costs to a regionally competitive level, the presence of services such as bonded warehouses is equally essential.
“Even if the port terminal is expanded, without access to services like bonded warehouses and storage for non-resident companies, interest from international investors in expanding their operations in Sihanoukville would be limited,” said Tsuboya Masayuki, managing director of Aeon Mall Cambodia.
