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Originally published April 16, 2013 at 9:00 PM | Page modified April 17, 2013 at 7:04 AM

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Foreign companies shifting to Cambodia

Foreign companies are flocking to Cambodia for a simple reason: They want to limit their overwhelming reliance on factories in China.

The New York Times

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PHNOM PENH, Cambodia — Tiffany & Co. is quietly building a diamond-polishing factory in Cambodia, a country popularly associated more with killing fields and land mines than baubles.

Some of Japan’s biggest manufacturers are also rushing to set up operations in Phnom Penh to make wiring harnesses for cars and touch screens and vibration motors for cellphones. European companies are not far behind, making dance shoes and microfiber sleeves for sunglasses.

Foreign companies are flocking to Cambodia for a simple reason: They want to limit their overwhelming reliance on factories in China.

Problems are multiplying fast for foreign investors in China. Blue-collar wages have surged, quadrupling in the past decade as a factory-construction boom has coincided with waning numbers of young people interested in factory jobs. Starting last year, the labor force has actually begun shrinking because of the “one child” policy and an aging population.

“Every couple days, I’m getting calls from manufacturers who want to move their businesses here from China,” said Bradley Gordon, a U.S. lawyer in Phnom Penh.

But multinationals are finding that while they can run from China’s rising wages, they cannot truly hide. The populations, economies and even electricity output of most Southeast Asian countries are smaller than in many Chinese provinces, and sometimes smaller than a single Chinese city. As companies shift south, they quickly use up local labor supplies and push wages up sharply.

Still, at $119.7 billion, foreign investment in China continues to dwarf investment elsewhere. By comparison, investment in Cambodia rose to $1.5 billion.

But last year was the first time since comparable record keeping began in the 1970s that Cambodia received more foreign investment per person than China.

“People are not looking for exit strategies from China; they’re looking to set up parallel operations to hedge their bets,” said Bretton Sciaroni, another U.S. lawyer here.

Among Japanese makers, Sumitomo is making wiring harnesses for cars, Minebea is assembling parts for cellphones and Denso is about to start production of motorcycle ignition components. Bloch, a European shoemaker, is here, while Oakley is making sleeves for its sunglasses.

Foreign investment also increased sharply last year in Vietnam, Thailand, Myanmar and the Philippines.

As companies compete for employees, working conditions in the region are improving. Pactics, a Belgian-run company that is the world’s largest maker of microfiber sleeves for luxury sunglasses, has introduced employee benefits that were previously rare in Cambodia, like medical insurance, accident insurance, education allowances and free lunches.

Because costs are extremely low in Cambodia, where a visit to the doctor may cost only a couple of dollars, overall compensation for each worker is still less than $130 a month. At the company’s factory on the outskirts of Shanghai, workers doing the same tasks earn $560-$640 a month, including government-mandated allowances, said Piet Holten, the company’s president.

Overall monthly compensation for industrial workers has jumped as much as 65 percent in the past five years in Cambodia, although from such a low base that workers here remain among the poorest in Asia.

At the Phnom Penh Special Economic Zone here in central Cambodia, Minebea is trying to attract workers by building a modern, four-story dormitory for 2,000 people with six beds to a room and a large recreation hall — a big change from the plywood houses with thatched roofs in which millions of Cambodians still live.

The Laurelton Diamonds unit of Tiffany has already driven pilings for a modern, 95,000-square-foot factory.

Employment at the zone is doubling this year, to 20,000 workers, and is projected to redouble to 40,000 in the next several years, said Hiroshi Uematsu, the zone’s managing director.

Tatiana Olchanetzky, a manufacturing consultant to companies in the handbag and luggage industry, said that she had analyzed the costs in her industry of moving operations from China to the Philippines, Cambodia, Vietnam and Indonesia.

She found that any savings were small because China produces most of the fabrics and other materials required for the bag trade, and these would have to be shipped to other countries if final assembly moved.

But some factories have moved anyway, at the request of Western buyers who fear depending exclusively on a single country.

While moving to a new country with an unproved supply chain is a risk, Olchanetzky said, “They think there’s a risk in staying in China, too.”

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