Cambodia is not the hotspot for attracting big manufacturing from Japan because it is not yet ready to compete for these types of investments, given lower levels of development, say experts.
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Japanese investors may be taking a wait-and-see approach while the trade war between the US and China continues, says Jayant Menon, lead economist at Asian Development Bank’s trade and regional cooperation office.
“There is also significant risk of a global slowdown that is affecting international foreign direct investment (FDI) flows.
Some Japanese investments in China may be diverted to Vietnam to avoid tariffs in the US market,” Jayant adds.
“Cambodia is not yet ready to compete for these types of investments, given lower levels of development. Thus, Cambodia should accelerate reforms and strengthen governance and institutions,” he adds.
For the last 10 years, bilateral trade between Japan and Cambodia has grown remarkably, reaching $2 billion in 2018 from just $366 million in 2010, according to the report from Japan External Trade Organisation, Phnom Penh Office.
From January to August this year, bilateral trade between two nations achieved $1.452 billion, an increase of 15 percent compared with the same period last year.
In the first eight months, Japan imported goods from Cambodia valued about $1.1 billion, up to 9.6 percent, while, Japan exported goods to Cambodia worth $350million, an increase of 37 percent.
Mostly, Japan exported to Cambodia automotive, machinery, construction equipment and some Japanese agricultural products including food. Japan imported from Cambodia agricultural and textiles products.
China dominates nation’s FDI
However, when it comes to investment opportunities, especially on the manufacturing front, there are fewer Japanese investors looking to put in Cambodia. Instead, the inflow of FDI is dominated by Chinese investors.
From 2016 to the end of August this year, the inflow of investment was more than $22.56 billion. Cambodia stood in first place, with a share is 44.7 percent.
In addition, the inflow of Chinese investment to Cambodia stood at 35.31 percent among total investment in the Kingdom.
However, investment from Japan accounted for only 7.87 percent among the total foreign investment of 56 percent, according to the report from the Council for the Development of Cambodia (CDC).
In 2018, Japanese investments in Cambodia slowed a little because companies were eyeing up the situation for business opportunities and were also watching the politics because Cambodia had an election that year.
Things improved this year with investment from Japanese. Investors began looking at manufacturing, retail, wholesalers and other service industries such as, real estate.
Companies getting interested
Companies are getting interested in Cambodia, says Miyao Masahiro, chief representative of the Japan External Trade Organisation (Jetro), Phnom Penh Office.
“From the Jetro point of view, we are really interested in attracting Japanese manufactures to Cambodia because manufacturing is one of the big industries not only to affect the Cambodian economy, but also because it hires many Cambodian staff, which can reduce the unemployment rate in Cambodia and provide training programmes for workers. Thus, we believe that the manufacturing industry is one of the key industries needed to stimulate the Cambodian economy and society,” says Masahiro.
“Many Japanese companies who come to Cambodia to manufacture have been garment-related industries in the past but, recently, electric appliance or wire and food processing businesses are increasing their interest,” he adds.
Toyota opted for Myanmar
Hiroshi Uematsu, chief executive officer, Phnom Penh Special Economic Zone (SEZ), says at present there are fewer Japanese manufactures coming to Cambodia.
He says that Cambodia is a small country and adds that Toyota Motor recently decided to build its assembly plant in Myanmar because of the market size.
“To my understanding, it is much easier to do business in Cambodia compared with Myanmar but Toyota chose Myanmar because of the market size,” he adds.
“However, Cambodia can grow a larger manufacturing sector by being integrated with bigger countries such as Thailand, China and, hopefully, Japan.
“Honestly speaking, we see few Japanese manufacturers are coming to Cambodia now. I understand much more Japanese manufacturers are going to Vietnam then China in this region.
“Ironically, foreign investors are more attracted by this one-party dictatorship country.”
To attract more Japanese investors to Cambodia, there are a lot of things that government has to do, says Uematsu.
He raises as an example that the Cambodian government is expected to update its investment law and to introduce a special economic law in line with it industrial development policy.
“I think that Cambodia has already lost more than few opportunities by delaying these two key laws to attract higher value-added industries to which Japanese manufacturers could contribute,” Uematsu adds.
“As everyone is aware, for the manufacturing sector, an improvement in electricity and logistics must be addressed.
“I also would like to mention that the government services are expected to become much more efficient by introducing digitalisation, simplification and visualisation of the administrative procedures.
“The world is talking about AI [artificial intelligence], the IOT [the internet of things] and Industry 4.0, while in Cambodia we need to sign and fingerprint tremendous numbers of papers. I myself signed and fingerprinted thousands of papers to do business in this country.
Hidden attractive market
“I can also say that the productivity of Cambodian workers in many Japanese higher value-added factories dramatically improved in the last decade. The expansions of MinebeaMitsumi, Sumi Wiring Systems and Denso prove this.”
Uematsu adds that Sumitronics, which produces printed circuit boards built its own modern factory in Poipet SEZ, because of the high productivity of Cambodian workers. On the other hand, the productivity and mind-setting of some government agencies is not compatible with Industry 4.0.
Cambodia is one of the hidden attractive markets for Japanese companies, but it is not for giant companies. Rather it is for small and medium-size businesses SMEs) says Jetro’s Masahiro.
Masahiro adds that there are limited regulations or rules restricting foreign companies from doing business here, so this is one of the hidden markets for SMEs to do business. “Thus, I definite think Cambodia is a good place to do business.”
Masahiro says, however, that there are some challenges still hindering Japanese investment in manufacturing, including electricity shortages, high tariffs on electricity, unstable electricity, a complicated taxation system, a tricky trade custom system, trade-related procedures, high costs of truck transportation cost and a poor logistics system.
“If this kind of cost is reduced, the trade and investment between Japan and Cambodia will increase,” he adds.
Masahiro adds that manufacturers are interested in the Cambodian market because labour-intensive industries obviously need many workers. There are also many young people here even though they may not be trained. He says companies but can train them and thereby increase productivity.
Masahiro adds that the taxation system in Cambodia is still complicated and different from surrounding countries.
“The first thing that surprised us was the prepayment monthly tax for income here before the company receives any benefits,” he says. “A company has to pay the tax monthly basis for their turnover so even the benefit is not decided yet they have to pay in advance, and this makes the company cash-flow difficult to control.”
Moreover, Masahiro adds that benefits are lower than most expect.
Taxation is an issue
“Taxation is one of the issues that a company will consider before investing. We are struggling on this issue and are communicating with the government how we can make it better and the government can make it better and make new investment comfortable in this country,” he adds.
He says the manufacturing, agriculture and fishery sectors have potential in Cambodia.
“Car manufacturers or other automotive manufacturers have already set up assembly lines in neighbouring countries, but Cambodia can consider what the country is lacking,” Masahiro adds.
“The automotive industry in Cambodia should think what other countries lack in some areas of industry, so Cambodia can better attract them to come here. For example, there is already a car assembly industry in Thailand, but we could think of some components or some parts of the industry that could be located in Cambodia and which we can export to Thailand, so that Cambodia could be part of a supply chain,” he concludes.