POIPET, Cambodia — Once ravaged by war, the city of Poipet on Cambodia’s western border with Thailand is reinventing itself as a manufacturing center, leveraging its cheap labor costs and strategic location in the regional supply chain.
“Many companies will come here, and this is where you will work when you’re older,” Sok Chenda, secretary-general of the Council for the Development of Cambodia, told a group of 50 high school students during the opening ceremony.
Sok also played up his version of the “Thailand-Plus-One” business strategy, which envisions corporations operating in Thailand setting up additional production facilities in neighboring countries. “We want them to come to Cambodia, not to Myanmar or Laos,” he said.
Located in the Sanco Poipet special economic zone, Techno Park partially opened in September of last year. The five tenants now occupy the first tract of factory space spanning 20,000 square meters, employing more than 100 workers. The second tract will open as early as 2019.
All five tenants run plants in Thailand and are shifting labor-intensive processes to Techno Park. For example, Sanko Electronics, which makes wire harnesses for automobiles, handles the primary processing of wires at its automated facilities in Prachinburi, a province in eastern Thailand.
The company then sends the semi-manufactured goods to Poipet for final processing — which can only be done by human hands — such as covering the wires with thin plastic tubes. Thanks to the cheaper labor, even with transport costs, production expenses shrank 20%.
Sumitronics, an electronic component affiliate of trading house Sumitomo Corp., manufactures parts for household electronic appliances in Poipet using material procured from Thailand, and then ships the finished products back to its Thai plant for inspection.
“By manufacturing on the border, we can utilize the road infrastructure of Thailand, which has matured as an industrial hot spot, and cut costs at the same time,” said Noriya Mifune, managing director of Sumitronics Manufacturing (Cambodia).
The Cambodian unit plans to quintuple its overall factory floor space, currently at 1,000 sq. meters, in two years’ time.
As part of the Mekong region’s southern economic corridor running from Vietnam to Cambodia and Thailand, Poipet is especially well positioned as a secondary production hub for companies already operating in Thailand. It takes only two to five hours to drive from Thailand’s eastern industrial areas to the Cambodian city.
Cambodia’s factory wages are a mere 60% of those in Thailand. With a general election approaching, the Cambodian government decided to raise the minimum monthly wage 11% to $170 starting next year. Even at that level, Cambodian labor is still cheaper than that in Thailand, where finding workers willing to work minimum wage is a challenge. Cambodia will likely maintain its labor cost edge for decades, predicts Toyota Tsusho.
Furthermore, tariffs in Cambodia will be abolished across the board starting in 2018 as the Association of Southeast Asian Nations integrates its economy. Outside the Techno Park, autoparts maker NHK Spring and hard-disk components manufacturer Nidec, both of Japan, also have plants in Poipet.
From minefields to boomtown
The economic activity has quickly transformed the city’s landscape. Roads made of clay have been paved, creating more truck traffic. Popular restaurants from neighboring Thailand such as Cafe Amazon and Pizza Company dot the scenery. Japanese restaurants and hotels catering to foreigners are also increasingly setting up shop here.
Poipet’s population has doubled to over 100,000 in the past decade. Not only are Cambodians streaming into the city to find jobs, migrant workers who crossed the border to Thailand are coming back, said Poipet’s Acting Mayor Kan Nara.
Poipet has served as a historical trading hub, but the civil war during the Khmer Rouge era left the place devastated at one point. After Pol Pot’s regime collapsed, he and his remnants engaged in prolonged guerrilla warfare here. Land mines lay hidden on the outskirts of Poipet even to this day.
After the civil strife ceased, Poipet entered into a renaissance by becoming a casino town for visiting Thais. The gambling houses created jobs and drew tourists. But what Poipet needs to do next is attract manufacturers that can offer sustainable employment and nurture technical expertise, says Nara.
The government has been busy advancing infrastructure projects, which are vital to pulling in companies. A new, truck-only customs gate is scheduled to open on the border entering Thailand near to the current gate, which has only one lane and is getting more and more congested. A cross-border rail line linking the Cambodian capital of Phnom Penh with Bangkok is due to begin operations as soon as 2018 after a missing 1.5km link through Poipet is built.
Spreading the burden
Poipet’s fledgling industrial area also has its share of problems. For one, Cambodia’s electricity bills are about double that in Thailand, and power outages are frequent. Steady power supplies are a matter of life and death to precision parts manufacturers.
Because of the Khmer Rouge massacre, people aged 35 to 45 are few in number compared with other age groups. This is the demographic that normally fills the middle-management ranks.
At any rate, the bulk of Cambodians come from agricultural backgrounds, with little to no business experience. Many companies operating on both sides of the border dispatch skilled staff from Thai factories. Toyota Tsusho is taking advantage of this demand by training local talent and hiring them out to tenant factories.
Trade in the Mekong region around Poipet has become increasingly active. Thailand’s imports from Cambodia, Laos and Myanmar have jumped in the past few years. With the evolving international division of labor, goods have been flowing both in and out of Thailand.
According to customs data from Thailand’s north and northeast, areas that border the three neighboring countries, the value of exports came to 426.6 billion baht ($13 billion) last year, while imports stood at 168.7 billion baht. Exports were up 40% from 2012, and imports nearly tripled.
Labor-intensive manufacturing jobs are being outsourced to surrounding countries, mainly due to Thailand’s rising labor costs. Many Japanese companies also set up factories in Poipet that make components to be assembled in Thailand.
Meanwhile, Thailand is pouring resources into improving productivity through digital means, as well as into attracting new industries such as aircraft and robotics. But those efforts suffer from a lack of highly skilled workers, among other issues.
Why invest in Cambodia?
Angkor Wat, Khmer Rouge, landmines and perhaps Angelina Jolie’s children are the things that come into one’s mind when they think about Cambodia. I first set foot into Cambodia in 2006 and like many others, I had pre-conceived ideas about the country – backward and poor. While it is true to some extent, but that didn’t stop me from returning every year, and sometimes 3 times a year. It is a place with rich culture, history and most importantly, it’s transformation. From travelling on the dirt road to travelling on their highway, from beautiful architecture with french influence to a changing city skyline, and (some advertisment here), from drinking $0.50 Angkor beer to seeing how my husband has helped to set up the first microbrewery in Phnom Penh, Siem Reap and how the craft beer scene has evolved and many more.
Cambodia is going through massive transformation and is now classified “lower-middle income country” by World Bank Group. Like many developed and developing nations, there are always the less fortunate who are left out in this upside growth. Many have seen opportunities in the country. I attend the Singapore Shiok Night in Phnom Penh whenever I get the chance and spoke to many Singaporeans who have businesses and own properties in Cambodia. And I have compiled some of the common questions from those who do not know much about the country, and gathered responses from those who has invested there. Read on..
Why should I buy property in emerging markets?
Real estate investments in emerging markets are typically seen as investments with higher risks, yet they also come with higher potential returns.
Emerging markets “benefit from more attractive capital growth rates than developed ones while still offering increasingly safe investment environments”.
“Pricing is typically a fraction of the cost of comparable properties in first-home markets”, yielding higher returns on investment as a result.
Developed markets, on the other hand, usually offer low rates of return.
“A slowdown in economic growth is particularly visible across many developed markets, which can lead to uncertainty in capital growth and yields, compared with the staggering pace of economic growth that countries like Cambodia can achieve,”.
Is now a good time to start buying property in emerging markets?
Economic uncertainty has knocked confidence among investors everywhere, but consultants believe that Asia remains the global growth engine and the fastest-developing region in the world.
Cambodia with a constant GDP and FDI of 7% on average over 10 years and many more good years to come.
What are the typical risks involved when it comes to investing in property overseas?
Additional risks come with real estate investments in a foreign country compared with those made locally. They include foreign exchange and political risks.
“If the currency of the country that your property is in depreciates against the Singapore dollar, the gains made by your investment will be eroded even if your property value rises,”.
Cambodia uses US dollars and the US currency had been stable against the Singapore dollar.
Investing in Cambodia
If you are looking at setting up a business or buying a property in Cambodia, contact me for a no obligation discussion. Regular Study and Investment trip to Cambodia are being organized by our team to let you better understand the country before making the final decision. Email PhyllisWong@ApacPropertyDeals.com if you are keen to join us for the next study trip.