The long-awaited tariffs on Chinese footwear imports took effect at the beginning of September, and U.S. brands are desperately seeking production respites in other countries that aren’t bogged down by extraneous duties.
One such option steadily rising to prominence is Cambodia. The country is well-positioned to staunch the bleeding of business from China that hasn’t been able to find a place in Vietnam.
Long lauded as the preferred destination for footwear sourcing outside of China, Vietnam has reportedly reached capacity when it comes to footwear production.
“Cambodia has to be the biggest recipient of spillover from Vietnam because of proximity,” said Matt Priest, President and CEO of the Footwear Distributors and Retailers of America (FDRA). “For about a decade, we’ve heard that Vietnam’s capacity is tapped out. It still seems to keep growing, but the pressure relief valve for that is Cambodia on the back end,” he explained, adding that the country has become an increasingly attractive location for the production of footwear in recent years.
Geography has paid off for Vietnam’s neighbor to the west. “There’s a lot of production in Southern Vietnam and the access to Cambodia is there, as well as the access the Vietnamese ports. It’s not unlike having two states situated next to each other like in the U.S.,” Priest said.
According to the FDRA, Cambodia’s overall footwear production jumped 19 percent in 2018, marking the fourth straight year of double-digit increases. The country’s exports surged to a record $1.041 billion for the year.
Meanwhile, shipments to the U.S. are up 456 percent over last five years, and the country is on track to post a record 1.8 percent U.S. import share in 2019.
Priest believes a confluence of factors has driven that growth.
For one, Cambodia’s footwear and garment sector has been the backbone of the country’s economy for two decades. The skill set and the infrastructure are there, he said, and American brands have taken notice. Underscoring that assertion is the fact that U.S. footwear imports from Cambodia have shot up from “essentially none” in 2005 to more than 32 million pairs in 2018, making the country America’s fourth largest foreign supplier.
A side-by-side comparison of the types of footwear being produced in Cambodia and Vietnam reveals similarities: both countries specialize in shoes for men, women and children with rubber outsoles and leather or synthetic uppers. Vietnam’s largest footwear export is “sports” footwear, or athletic sneakers, while Cambodia’s most lucrative category is casual, rubber-soled sneakers with leather uppers for women and children.
To accommodate the overflow of business from Vietnam, the country has benefited from an influx of investments from Chinese, Taiwanese and Korean manufacturing groups. American footwear sourcing executives who may have been reticent to move their manufacturing operations out of China have found assurance in the fact that they can explore sourcing in Cambodia with their long-term partners.
“Nine out of 10 times, if a brand is moving into a new country, it’s with current sourcing partners,” Priest said. “They will consider going to Cambodia, Bangladesh or Ethiopia if current sourcing partners headquartered in Taiwan or Taichung are willing to operate in these places,” he said.
Brands will commit to provide orders so their partners will have the “economic certainty they need to invest in the creation of capacity,” he said, noting that building up new operations depends on both time and sizable investment.
The flow of those investments into the country is strong, and shows no signs of drying up any time soon. In 2018, the Cambodian government approved 117 new projects from foreign investors worth $5.2 billion. The footwear sector accounted for 10 of those projects, worth $55 million—or 1.1 percent of the total.
Whether those efforts will pay off long-term, and whether Cambodia has staying power as a Vietnam runner-up is yet to be seen.
“When you look at it on paper, there’s not anything that necessarily stands out,” Priest said of the country’s benefits. “It’s not that it’s duty free or that we have some kind of special trade relationship with them. It’s still the same duty rate we pay coming from Vietnam, and up until Sept. 1, what we had paid coming out of China.”
In fact, FDRA data shows that the average duty rate of shoes imported from Cambodia is 12.1 percent—higher than the average worldwide duty rate of 11.3 percent. The average duty per pair on U.S. footwear imports from Cambodia reached a ten-year high of $1.22 in 2018, comparable to the average duty cost globally.
That’s a factor the group believes has the potential to “crimp [Cambodia’s] competitiveness.” Still, outside of China, Cambodia has the lowest average duty cost per pair among America’s 10 largest suppliers. And should the tariffs on Chinese goods continue to pummel the footwear sector, the country could stand to see substantial gains.
Cambodia currently employs around 113,000 in its footwear factories, and “with a population of 16.5 million and a median age of 24.3 years, the country’s people are young, vibrant, increasingly urban, and poised for continued growth,” Priest said.