Cambodian Garment Industry Facing Subcontracting Threat: ILO

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Cambodian Garment Industry Facing Subcontracting Threat: ILO

Cambodia's garment factories appear to be ramping up their use of subcontractors, which tend to get the least attention from regulators and raise the most fears of abuse among labour rights groups, according to a report released last week.

In its latest bulletin on the country's all-important garment sector, the International Labor Organization (ILO) looks into why exports continued their strong growth last year, rising 7.2% to hit US$ 7.3 billion, even as the number of workers and registered exporting factories fell.

After years of consistent growth, the sector's workforce fell nearly 3% last year to 605,000. The number of factories fell from 699 in 2015 to 626. The ILO says faulty - but improving - Commerce Ministry statistics and rising productivity likely explain some of trend. But it warns that exporting factories may also be relying increasingly on subcontractors, with worrying consequences.

"A rise in employment and production in subcontracting factories could be a concerning development if subcontracting is being used as a way to undercut regulations, including labour law and the minimum wage," Maurizio Bussi, ILO's country director, said in a statement. "The situation should be carefully monitored by stakeholders and relevant agencies of the Royal Government of Cambodia."

To get an estimate of the number of subcontractors, the ILO compared the Cambodian Commerce Ministry's list of registered exporting factories with separate figures kept by the National Social Security fund that capture all garment factories with at least eight employees, whether they export or not. Comparing the separate sets of figures reveals that the fund counted 82 more factories than the Commerce Ministry did in 2014, 106 more in 2015, & 244 more last year.

"Subcontractors' enterprises are operated from private home, warehouses or industrial buildings," the report says. "It is common to find no name displays on the facility and for factories to change locations regularly; in some cases they may do so to evade their responsibilities to their workers." A spokesman for the Labour Ministry, which monitors garment factories, could not be reached.

But Ken Loo, secretary-general of the Garment Manufacturers Association in Cambodia, was highly skeptical of the ILO's interpretation of the numbers. He was also doubtful that the year-on-year increase in factories captured by the fund actually represented new facilities, given the introduction of medical insurance to its list of services last year. "This forces them to go down to all the factories, and this helps them, obviously, in capturing more factories," he said.

Loo said some factories might look for outside help to fill sudden, extra-large orders when they're already operating at capacity. But when they have capacity to spare, he said, "financially it makes more sense for a factory to pay their workers overtime than to use subcontractors. It's just business sense."

Loo said he would take a closer look at the fund's number's before drawing any further conclusions. The report said garments and footwear are still the country's most important exports, accounting for 78% of total merchandise exports in 2016. "The EU remains the most important market destination for Cambodia's garment and footwear exports, with the US second," it said.

"The sector's exports to the EU and US combined accounted for only 65% in 2016, down from 72% in 2015, with an increasing share going to markets outside the US and EU, notably Japan and Canada." The report highlighted improvements in the income of workers, despite the overall drop in staff numbers. "The average monthly earnings (including overtime), of Cambodia's garment and footwear workers increased from $145 in 2014 to $175 in 2015 and to $195 in 2016. Adjusted for inflation, real average monthly wages/earnings were 8% higher in 2016 than they were in 2015," it said.

The World Bank in its latest economic outlook on Cambodia said while the country's economic growth remains strong, growth in garment exports eased, expanding at 8.4% (in value terms) year-on-year in 2016, compared with 12.3% in 2015. "Rising labour costs, driven in part by the increasing cost of living, US dollar appreciation and competition from low-wage countries like Myanmar, exert downward pressure on prices of exported garment products," according to the World Bank’s report.