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Cambodia Faces Alarming Threat of Garment Sector Subcontracting

While Cambodia’s garment and footwear exports rose 7.3% in 2016, the number of factories registered that would have contributed those exports fell 10.4% and the amount of workers dropped nearly 3 percent.

The reason for these odd statistics? According to a new report by the International Labor Organization, one of those reasons could likely be rampant subcontracting.

“A rise in employment and production in subcontracting factories could be a concerning development if subcontracting is being used as a way to undercut regulations, including labor law and the minimum wage,” Maurizio Bussi, director of the ILO Country Office for Thailand, Cambodia and Lao People’s Democratic Republic, said in a statement.

Subcontracting is the practice of one factory, typically the one that’s vetted and aligned with a brand or retailer, contracting some of its work out to another factory, which can be one that isn’t registered or compliant, and one that the brand or retailer may not even know about.

The issue of subcontracting, sometimes called indirect sourcing, became a hot button following the Rana Plaza building collapse in Bangladesh, which drew increased scrutiny for the country’s garment sector practices and shed light on the widespread subcontracting there.

Now subcontracting could be plaguing Cambodia more than what might currently be known.

“If a larger share of the industry’s output is being produced in subcontracting factories that are not registered as exporters, this could further explain the continued strong export growth amidst the declining growth of operating factories and employment,” the ILO said.

To determine the likely level of subcontracting, the ILO looked at the registered factories listed by Cambodia’s Ministry of Commerce (MOC) and the country’s National Social Security Fund (NSSF), which registers all garment and footwear factories, whether for export or not, and includes subcontracting factories. In comparing the two lists, the ILO found that there seemed to be a growing number of subcontracting factories in 2016—and the divergence between the lists has been increasing.

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In 2014, there was just an 82 factory difference between the MOC list and the NSSF list, which includes subcontracting factories. By last year, that discrepancy reached 244 factories.

“The available evidence suggests that the rise of subcontracting factories has made an increasingly large contribution to the output of the industry, and thus to the divergence between exports on the one hand and employment and registered factory figures on the other hand,” according to the ILO.

In addition to subcontracting, the ILO said the discrepancy between good export growth and slowing factory numbers, is also owed in part to productivity growth. But if the difference in the stats is largely owed to subcontracting, those sourcing garments and footwear from Cambodia could be facing a bigger issue.

Either way, as Bussi noted, “The situation should be carefully monitored by stakeholders and relevant agencies of the Royal Government of Cambodia.”