Cambodia: SEZs in Focus
12 April 2017
China, the world’s export-oriented “factory”, has embarked on industrial upgrade and transformation in recent years with its low-end manufacturing operations becoming increasingly costly. Many China-based labour-intensive manufacturers, as well as their overseas buyers including importers and retailers, have shown a keen interest in shifting their manufacturing and product sourcing to locations outside China. Within Asia, they are increasingly finding their way to ASEAN countries, in particular the four CLMV nations – Cambodia, Laos, Myanmar and Vietnam.
Each ASEAN-CLMV country offers something different to foreign investors. For example, the ease of doing business and logistics arrangements in each of the four countries are bound to differ, not to mention the overall investment and macroeconomic environment, or the sustainability of low-cost labour provision. For now, all CLMV countries offer a low cost, youthful workforce, which could help to supplement and diversify foreign investors’ existing operations in the region.
Cambodia’s Export Boom Rides on Sustained FDI Inflows
Cambodia is relatively small in ASEAN both in terms of land size and population, but has punched above its weight in the past decade or so, specialising in labour-intensive manufacturing targeted at export markets. The Cambodian economy has expanded remarkably in the past few years, with annual GDP growth averaging more than 7% between 2012 and 2016, while FDI inflows have been steady.
An increasing number of companies are looking to relocate their factories to one or more of the CLMV countries, in the hope of achieving high returns after taking into account the various investment risks each country brings and the differences in the ease of doing business. Cambodia is well positioned to continue to capitalise on its ability to provide low-cost, labour-intensive manufacturing – especially in the garment, footwear and food-products sectors – ably competing with other CLMV countries for its fair share of FDI.
SEZs as a Preferred Choice for Factory Relocation
At present, many of Cambodia’s export-oriented factories are concentrated in industrial parks in the capital Phnom Penh and its surrounding provinces and municipalities due to better transport infrastructure and public services than elsewhere in the country. Another popular choice for foreign investors is the country’s special economic zones (SEZs), which are scattered mostly along the Greater Mekong Subregion (GMS) Southern Corridor, border towns close to Thailand and Vietnam, and some coastal cities.
First introduced in 2005, Cambodia’s SEZs tend to be privately owned and managed. The Cambodian government hopes that foreign investors will bring capital and relevant technology to upgrade the country’s manufacturing landscape. Through their investment in SEZs, foreign companies can accelerate the country’s industrialisation, building up industrial clusters and enhancing their technology applications. As the SEZ concept evolves, a variety of zones have emerged, each with different target industries.
About 30 SEZs have been authorised by the Cambodia Special Economic Zone Board (CSEZB), which operates under the Council for the Development of Cambodia (CDC), the principal government agency responsible for providing incentives to stimulate investment in the country. By 2016, 11 SEZs were reported to be operating across the country (see figure below).
Investment Incentives Plus a One-Stop Service
Cambodia offers attractive investment incentives to foreign investors. Key attractions include exemption from import duty on materials and equipment used in production, exemption from value-added tax (VAT) for exports, corporate income tax exemption of up to nine years and free remittance of foreign currency.
Within the SEZs, the Cambodian government provides a “one-stop” service, in which representatives of relevant government ministries, such as the Cambodian Development Council, Ministry of Commerce, Customs, Camcontrol, Ministry of Labour and the provincial authority, offer on-site services to process documentation required for company registration and investment licensing, export/import permits, work permits, etc. These services help investors save time in visiting multiple government agencies in Phnom Penh, thereby shortening the application process.
While foreign nationals cannot own land in Cambodia, SEZs offer up to 50 years of renewable leases to foreign investors, often allowing them to develop, sub-divide or sub-lease the plot. This gives tenants greater flexibility in organising their factory activities over a long period of time.
SEZs in Cambodia
Admittedly, comparing SEZs within Cambodia is difficult as each is unique in what it provides to its tenants in terms of the quality of infrastructure and standard of management services. Among the SEZs currently in operation, the Phnom Penh Special Economic Zone (PPSEZ) and the Sihanoukville Special Economic Zone (SSEZ) are reportedly the most popular, securing more than 80 and 100 tenants, respectively. SEZs located along the Cambodian border such as the Manhattan SEZ (MSEZ) and Tai Seng Bavet SEZ, while operating on a smaller scale, position themselves as preferred locations for manufacturers wishing to make use of the infrastructure and transport support from neighbouring countries.
Hong Kong companies wishing to establish production lines in Cambodia may consider opening their factories in one of the SEZs, taking advantage of better logistics and administrative support offered in these zones, along with investment incentives offered by the Cambodian government.
PPSEZ–prime location in Phnom Penh with Good Infrastructure
Established in 2006, the PPSEZ is located on the outskirts of Phnom Penh, about 8km from Phnom Penh International Airport. The zone is also connected to National Road No. 4, the main highway connecting the capital with the deep-sea port in Sihanoukville.
The PPSEZ has a total area of more than 350 hectares (1 ha = 10,000 sq metres) and is divided into three phases. The last phase, of about 58 hectares mainly for factory lots, is in the planning stage, with construction of its major infrastructure and facilities expected to begin this year.
As a Cambodian-Japanese joint venture, the PPSEZ is one of the most developed SEZs in the country in terms of infrastructure and other supporting facilities. In general, roads in and around the PPSEZ are in good condition and wide enough for container trucks. The zone also has its own power plant, water-purification facilities (e.g., raw-water reservoir, filtering, water tower, etc.), a sewage treatment plant with a capacity of 4,500 sq metres/day, a dry port and more than 10 companies providing internet services. The rental fees are about US$3/sq metre/month for a freestanding factory with loading bay on a five-year plus five-year lease, according to the PPSEZ.
The PPSEZ mainly attracts light labour-intensive industries, such as garment and footwear, food processing and agricultural products, mechanical and electrical products and other consumer products (e.g., pharmaceutical, and packaging). A handful of companies are engaged in support industries, including carton box, plastic package and thread and string.
As of November 2016, the PPSEZ had attracted US$470 million of FDI. At present, the zone has about 80 tenants, employing more than 15,000 workers. About half of these firms are from Japan, followed by those from Taiwan, the Chinese mainland, Singapore and Malaysia. Multinational corporations (MNCs) already present in the PPSEZ include Toyota, Yamaha, Tiffany and Coca-Cola.
SSEZ – The Largest SEZ in Cambodia
Located in Southern Cambodia, about 210km from Phnom Penh, the SSEZ is the largest SEZ in the country, with a total planned area of about 1,690 hectares – about five times the size of the PPSEZ. The zone is well situated with access to key transport links including the National Highway No. 4, as well as Sihanoukville Airport and Sihanoukville Autonomous Port, the country’s only deep-sea port, which handled more than 70% of Cambodia’s total container throughput in 2016.
The SSEZ is the first economic co-operation zone developed under a bilateral government agreement between China and Cambodia, along with other similar overseas projects supported by China’s Ministry of Commerce in 2006. The zone was jointly developed by China’s Jiangsu Taihu Cambodia International Economic Cooperation Investment Co. Ltd. and Cambodia International Investment Development Group Co. Ltd.
Managed by China’s Hodo Group from Wuxi, Jiangsu Province, the first phase of the SSEZ was launched in 2008 covering an area of 528 hectares, and is equipped with infrastructure including roads, water, power, sewage treatment, and telecom facilities.
In a recent visit, HKTDC Research observed that the roads in and around the SSEZ are fairly well maintained, with other support facilities also of high standards. The SSEZ absorbs investments mainly from China, though there are other investors from the US, Japan, the EU and Korea. At present, the zone hosts more than 100 factories, employing more than 16,000 workers.
Most SSEZ tenants are engaged in light-industry manufacturing, including garments, footwear, bags and other leather goods. For example, Hodo International Garment Co. has operated a manufacturing plant in the SSEZ since 2010. With four production lines for trousers and suits, the factory employed more than 700 local employees and about 30 Chinese managers as of December 2016.
Highlighted as a model of Sino-Cambodian production co-operation under China’s Belt and Road Initiative (BRI), the development pace of the SSEZ has accelerated in the past few years. According to the SSEZ management, they are ambitiously planning to open 300 factories by 2020, while creating up to 100,000 jobs. Given the sheer size of the SSEZ, there would be little development constraint for physical infrastructure. Regarding local employment and training, the SSEZ will also build a vocational training centre to provide business courses and Chinese-language classes, aiming to train locals to assume business administrative positions, particularly middle-managerial roles. Moreover, there are plans to construct a hospital to provide health services for workers within the zone and nearby residents.
Practical Considerations for FDI Manufacturers in Cambodia
In terms of worker recruitment, FDI manufacturers in SEZs in general face no trouble in hiring workers. However, some companies interviewed by HKTDC Research pointed out that it is difficult to retain experienced workers, and that the country’s skilled labour pool is shallow, making it a challenge to employ locals to quickly fill middle-management roles. More coverage of labour relations in Cambodia can be found at Cambodia: Manufacturing Relocation Opportunities (2).
For potential FDI investors in the semi-high-tech manufacturing sector who wish to bridge the skills gap by recruiting workers from neighbouring countries, it is worth noting that the Cambodian Labour Law limits the hiring of foreign workers to 10% of the total workforce of any company. This percentage is divided into three categories of employees: no more than 3% can be office workers, 6% skilled workers, and 1% unskilled workers. Any company wishing to exceed these limits has to apply for a “foreign quota approval” from the Ministry of Labour.
Lack of Local Supplies
Owing to a lack of domestic support industries, local sourcing by Cambodia’s garment sector is low among most manufacturers, which instead mainly import raw materials and accessories from the Chinese mainland, Hong Kong and Taiwan. In this regard, Cambodia differs from its neighbour Vietnam, which has developed strong textiles and yarn-forward capability over the past few years.
As production activities increase, demand for a wide range of industrial materials, parts and components looks set to rise further. Although some manufacturers providing fabrics, accessories and packaging materials currently operate in the country, the supply is far from meeting the demand.
Higher Logistics Cost
As Cambodia’s SEZs are primarily export-processing zones, efficient movement of raw materials and final goods to and from them is a vital consideration for foreign investors interested in setting up their export-oriented operations there. Hong Kong manufacturers wishing to expand their production businesses in Cambodia should bear in mind that the country has some of the highest logistics costs in the ASEAN region. Due to poor infrastructure, Cambodia’s export costs are about 30% higher than those of Thailand and Vietnam, according to the World Bank.
Excluding the port levy of about US$350 charged by the Sihanoukville port, the total handling cost for shipping a 20-foot container box (i.e., one TEU) from Phnom Penh to Sihanoukville port is about US$400, which includes trucking, documentation fees, export clearance fees, loading charges, certificate of origin, toll fees, agency fees, VAT and miscellaneous charges, according to the CDC.
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