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Cambodia: Southeast Asia’s Green Manufacturing Capital?

The European Chamber of Commerce in Cambodia (EuroCham Cambodia) and the Garment Manufacturers Association in Cambodia (GMAC) have agreed to foster closer cooperation between the two organizations and, in so doing, better support European fashion brands that source apparel and footwear from the Southeast Asian nation.

The signing of a memorandum of understanding Wednesday, they said, will help promote Cambodia’s ambitions of becoming a green garment-manufacturing go-to for brands such as Adidas, H&M and Zara, boosting the country’s attractiveness as a partner despite the revocation of its European Union trade benefits under the Everything But Arms scheme for least-developed nations in 2020. The loss of the privileges, which occurred in the wake of Prime Minister Hun Sen’s crackdown on political opponents, added a 12 percent tariff to Cambodia clothing exports to the bloc and an 8 percent to 17 percent one for shoes.

Still, there are many reasons to recommend Cambodia over some of its rivals, said Massimiliano Tropeano, a sustainability expert who splits his responsibilities between EuroCham Cambodia, which represents business interests in the country, and German developmental agency GIZ’s FABRIC initiative. The majority of the nation’s manufacturing sector, for instance, involves cut-and-sew, meaning there are few dyeing and weaving facilities to wreak heavy pollution. Cambodia is more politically stable than Myanmar, whose post-coup “spiral of violence,” as the United Nations High Commissioner for Human Rights recently put it, has sent buyers clamoring for alternatives. Unlike Vietnam, the pandemic didn’t result in widespread production outages or create a scramble for workers.

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Another point for Cambodia, whose 800,000 workers generate a third of its gross domestic product, is its potential for growth. “Vietnam is completely at full capacity,” Tropeano told Sourcing Journal, noting that the latter is looking to diversify its sources of income beyond garment manufacturing, which could further limit room for future orders.

But the nation still has challenges to surmount, among them a dearth of renewable energy infrastructure that would draw in brands with ambitious climate commitments, Tropeano said. Last year, the government reversed a decision to triple the amount of coal-fired power after companies such as Gap, Puma and Nike warned that this would put future orders at risk. Even so, resistance from certain quarters persists. Overhauling the grid will require significant investment, though a number of international development agencies have expressed an interest in chipping in. The ROI on solar can also take several years, which is an impediment to the risk adverse because the garment industry “is so volatile,” he said. “Look what happened in Myanmar. Look what happened in Ethiopia.”

It’s Tropeano’s hope that the upcoming five-year development strategy for the sector, due to be unveiled in a few weeks, will mention solar energy, which would mean a “crack in the government’s wall.” Cambodia currently imports most of its energy from Laos, which causes “dollars to flow out of the country” rather than into it. Laos also derives most of its power from hydroelectric dams that scientists say could irreversibly damage the Mekong River ecosystem. The power may be technically renewable, he said, but it’s certainly not green. Neither is the forest wood that one in three GMAC-registered factories admit they use to stoke their boilers, contributing to Cambodia’s high rate of deforestation. One recent study estimates that the nation’s garment industry burns the equivalent of 810 to 1,418 hectares of forest every year.

With the MOU, GMAC is signaling its alignment with EuroCham Cambodia, whose recently formed garment and manufacturing sectorial committee will make renewable energy advocacy one of its core priorities, Tropeano said. Creating more high-value skilled labor through increased training initiatives is another bullet point on the agenda, as is helping Cambodia’s European buyers navigate existing and impending mandatory human-rights and environmental due diligence laws in Germany, France, the Netherlands and the broader European Union. “Working together for a greener Cambodia garment sector is essential for both of us,” he added.

Something EuroCham Cambodia won’t be addressing, at least in the short term, however, is living wages, a contentious issue that the pandemic has made more acute amid a recent $2 pay bump that workers say is better than nothing but is still insufficient. The Industry We Want, a new multistakeholder initiative, estimates that garment workers worldwide face, on average, a 45 percent wage gap between minimum and living wages. The divide is wider in Cambodia, which has a 53 percent wage gap, meaning workers are receiving less than half of what they need to maintain a decent living for themselves and their families. Factory owners have claimed that any further pay increases will make doing business untenable because they’re also being squeezed by rising costs and pressure from customers to narrow margins.

Europe, Cambodia’s biggest customer, receives roughly 40 percent of the country’s garment exports, which rose by 15.2 percent year over year to $11.38 billion in 2021 as the sector caught a spillover of orders from Myanmar and Vietnam, according to the department of customs and excise. Cambodia, per United Nations Comtrade data, has also bolstered its share in most of its export markets, helping alleviate the pain of EU sanctions.

Cambodia’s minister of economy and finance Aun Pornmoniroth credited the bounceback to the success of the country’s national vaccination campaign, which has allowed all manufacturing activity to return to pre-pandemic levels. Roughly 14.76 million people, or 92.3 percent of its 16-strong million population, have received at least one shot, the health ministry said.

“With the success, Cambodia’s economy is projected to grow at a better-than-expected rate of 3 percent in 2021 from a 3.1 percent contraction in 2020, propelled by a swift rebound in [the] garment sector and [the] non-garment sector as well as agriculture,” he said in February. “For 2022, the economy is predicted to grow at a higher rate of around 5.6 percent, buoyed by the expected rise of global demand and foreign investors’ confidence.”

There are other signs that the country is set for boom times ahead. H&M Foundation, the Hong Kong Research Institute of Textiles and Apparel, GIZ and The North Face owner VF Corp. are planning to deploy a “Green Machine” plant capable of recycling cotton-polyester blends in Cambodia at scale. On Friday, the Council for the Development of Cambodia approved a $6 million investment to help Red Mars Garment (Cambodia) Co. establish a new garment factory in Kampong Speu province that will create more than 1,600 new jobs. The Cambodian Garment Training Institute is also advertising courses to upskill workers in areas such as CAD pattern drafting, apparel merchandising and value-stream mapping.

“Cambodia and the European Union have been main trading partners,” GMAC chairman Kong Sang said in a statement. “The success and exponential export growth of our industry can be attributed in large part to the preferential market access of the European Union granted under the EBA scheme. It’s important to continue to maximize the economic benefit through more growth potential. The MOU…is an invaluable partnership to further strengthen the industry’s competitiveness through capacity building in many areas and joint advocacy to influence relevant policies.”

Tropeano said all this is just the beginning of their bilateral collaboration, which, through GIZ, could also extend to tackling financial literacy, digital wages and automation, as well as the use of more sustainable wood. Change, he said, never happens because development agencies get involved but rather where a business case can be made with money involved. “Things get solved when the private sector gets in,” he added.