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Cablegate: Cambodia: Economic Downturn Highlights Remaining

VZCZCXRO4411
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #1022/01 3590928
ZNR UUUUU ZZH
P 240928Z DEC 08
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHINGTON DC PRIORITY
INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 04 PHNOM PENH 001022

SENSITIVE
SIPDIS

STATE FOR EAP/MLS, DRL/IL
DOL FOR ILAB

E.O. 12958: N/A
TAGS: ELAB ECON PGOV PHUM CB
SUBJECT: CAMBODIA: ECONOMIC DOWNTURN HIGHLIGHTS REMAINING
GAPS BETWEEN UNIONS AND MANAGEMENT

REF: A. PHNOM PENH 503
B. PHNOM PENH 934

SENSITIVE BUT UNCLASSIFIED

1. (SBU) SUMMARY: Given the bleak global economic outlook,
labor union leaders, garment manufacturers and other
stakeholders are concerned that Cambodia,s critical garment
sector may face factory closures and possibly more layoffs in
coming months. Labor union leaders complain about
difficulties in effectively applying their understanding of
Collective Bargaining Agreements (CBAs) with management.
Illegal strikes, union rivalry and discrimination, and weak
law enforcement continue to plague the sector. These
factors, along with still nascent attention paid to
productivity, will potentially dampen Cambodia,s ability to
effectively compete with its neighbors in the garment
industry in 2009 and beyond. END SUMMARY.

FACTORIES CLOSING AND ORDERS DECLINING? PERHAPS
--------------------------------------------- ---

2. (SBU) Factory closures have been the hot topic of the
garment industry for the past several months, with local
media providing added attention and spin. According to Cheat
Khemara, Senior Labor Officer of the Garment Manufacturers
Association of Cambodia (GMAC), eleven GMAC member factories
have closed down and ten others have suspended production
this year. He further warns of another 30 potentially
closing down in the first quarter of 2009 due to the global
economic crisis and downturn in orders. The closures,
however, only tell one half of the story. The perhaps less
headline-grabbing truth is that there have been 21 new
factory openings in 2008 according to the Ministry of
Commerce, exactly equaling the number of closures and
suspensions documented by GMAC.

3. (SBU) Koy Tepdaravuth, Director of the Ministry of Labor
and Vocational Training,s (MOLVT) Labor Dispute Department
agrees that the number of factory closures and openings is
more or less equal. He and others attribute some of the
closures to legitimate bankruptcy; however he stated that
some factories also shutter only to reopen under a new name
once the time period for tax incentives expires in order to
once again take advantage of the benefits received by a new
company. According to Tepdaravuth, this practice is
widespread due to the ease of movement (typically the space
and equipment is rented), coupled with the ability to obtain
a new investment license in one to seven days. Furthermore,
in order to attract investment, the government provides huge
investment tax incentives for new companies which can last up
to eight years (nine for special economic zones) from the
year the project derives its first profit. Such incentives
include corporate and export tax exemptions and non-taxation
on the distribution of dividends or profits.

4. (SBU) Economists, manufacturers, government officials and
labor unions all agree that the global financial crisis will
affect Cambodia, which is economically dependent on a garment
sector that accounts for up to thirty percent of its GDP (Ref
B). Mr. Khemara of GMAC predicts that thousands of garment
workers will be laid off in coming months due to a steep
decline in orders from international buyers. According to
Khemara, buyers traditionally place the most orders between
October and April. The first two months of this period have
already seen a decline in orders of approximately thirty to
forty percent in some factories. However, a random sampling
of a dozen factories which export to Target, Wal-Mart,
Children,s Place, H&M, Mark Spencer,s and others conducted
by PolOff revealed that numbers have yet to decline, with
most managers stating they have adequate orders for the next
6 months. Of more immediate concern may be the high prices
of raw materials and the panic created by the global economic
crisis. Some factory owners stated they have purchase orders
in hand, but cannot finance raw materials because banks are
no longer providing credit.

5. (SBU) Some factories, however, are reportedly running at
less than full capacity. Chun Momthol, President of the
pro-government Cambodia Labor Union (CUF), estimates that at
least 20,000 of his members have been laid off due to the
slowdown in production. While reftel described spot labor
shortages due to stagnant wages and soaring inflation in the
first half of 2008, indicators point to a labor surplus in
the second half. Wages remain the same; however inflation -
which determines whether a young laborer stays on the farm or
comes to live near the city factory - has declined to

PHNOM PENH 00001022 002 OF 004


approximately 15 percent, down from an unofficial high of 36
percent in May of this year. Furthermore, factory closures
or relocations and decreased levels of operation to counter
falling orders have resulted in more successful recruiting of
workers to meet factory output requirements. All told, the
number of garment workers is about 327,000 at the end of
2008, which is 6,880 less than the official number from the
same period last year (NOTE: the official number from the
Ministry of Commerce does not include subcontractors, which
can add between three to ten thousand additional workers.
END NOTE).

PRODUCTIVITY PLEASE
--------------------

6. (SBU) Chea Mony, brother of slain labor leader Chea
Vichea and president of the Free Trade Union (FTU),
Cambodia,s largest trade union, feels Cambodia will be able
to ride out the economic crisis due to the fact that the
garment sector caters to some of the low-end merchandisers,
such as Wal-Mart and Sears, which Americans turn to in times
of financial woe. Furthermore, the wages for garment workers
remain relatively low in comparison to neighboring countries
such as Vietnam, Thailand, and China. However, the
conclusion of U.S. and EU safeguard measures on Chinese
textile exports at the end of the year, coupled with the
strong emergence of other low-wage countries such as
Bangladesh, pose additional threats to Cambodia,s garment
industry. Garment stakeholders recognize that in order to
remain competitive in an increasingly crowded market, more
attention needs to be paid to improving labor productivity
and to diversification.

7. (SBU) Currently, only a handful of Cambodian factories
devote the necessary time, space and financial resources to
training. The Garment Industry Productivity Center (GIPC) is
a USAID program which trains factory supervisors and mangers
in the skills they need to increase productivity including
time studies, line balancing and production controls. Since
its inception in 2005, GIPC has worked with approximately 15
percent of Cambodia,s factories and has been able to show a
35-100 percent increase in productivity, equaling a 400
percent return on investment. Although many factories now
employ Cambodians in middle-management positions, the numbers
are still low and often the positions hold little authority.
The vast majority of factory owners, line supervisors and
middle-managers are foreigners, mainly from China, Taiwan,
Hong Kong and Korea, who see change as risky and have been
difficult to engage according to GIPC. The foreign
manager,s goal is simply to maintain production levels
determined by headquarters, which are generally at a lower
level than their actual potential. However, given the
current economic climate, more discussion and emphasis has
been placed on productivity and improvements to the garment
sector, and experts believe it is bound to infect even the
most resistant factories. Additionally, GIPC and other
industry specialists maintain that with higher productivity
and a well trained and skilled workforce, Cambodia can move
up the value chain and begin to produce higher-quality and
higher-value garments.

8. (SBU) Stakeholders have also realized the need to expand
into new markets in an effort to wean Cambodia from
dependence on the United States, which accounts for 70
percent of Cambodia,s textile exports with the EU accounting
for a further 24 percent. At the government,s request, a
delegation consisting of GMAC, the Council for the
Development of Cambodia (CDC), Commerce Ministry officials,
and union representatives traveled to Japan in late November
to explore market options. They succeeded in securing orders
for jackets and shoes for early 2009, and plan to further
expand into Chinese and Russian markets in the future.
Additionally, Cambodia hopes to cut into China's niche in the
shoe industry. While the total value of garment and textile
exports has remained more or less stagnant since 2005, the
total value of shoe exports has doubled, with the majority
being exported to the EU and Japan.

STRIKES INCREASING
------------------

9. (SBU) Yet another aspect of industrial productivity is
the need to improve worker-factory relations in order to
decrease the number of short term, wildcat strikes. There
were 102 strikes in the first eleven months of 2008, up
approximately 40 percent from the same time period last year.
Moreover, there was an 11 percent increase in the number of

PHNOM PENH 00001022 003 OF 004


working days lost due to strikes. All 102 strikes were not
technically in compliance with the labor law and therefore
were considered illegal. Chea Mony, whose FTU held the most
strikes in 2008, stated the unions had to resort to such
measures because they cannot rely on the MOLVT when they have
a dispute with factory management. Several other unions,
including the independent Coalition of Cambodian Apparel
Workers Democratic Union (CCAWDU), accused MOLVT officials of
being inactive and corrupt. Mony maintains that the MOLVT,s
labor inspectors and conciliators, weak enforcement or
inaction in relation to the labor law stems from the
officials' allegiance to management, from whom they routinely
receive under-the-table payments. Mr. Tepdaravuth of the
MOLVT denied such allegations, accusing union leaders of
inciting workers to hold strikes rather than waiting for
results from conciliation, mediation or arbitration. Som
Aun, president of the National Alliance Chamber of Cambodia
(NACC) which is comprised of 14 union federations, agreed
that some of the union leaders did not use all available
means to resolve the disputes between workers and management
before resorting to strikes. In November, the situation
escalated until it reached the level of the Prime Minister,
who appealed to unions to call off all strikes during this
period of economic uncertainty.

COLLECTIVE BARGAINING - MISTRUSTED AND MISUNDERSTOOD
--------------------------------------------- -------

10. (SBU) The International Labor Organization (ILO) and
American Center for Labor Solidarity (ACILS), with support
from USAID, have invested a significant amount of time and
energy into training both employers and union representatives
about Most Representative Status (MRS), whereby one union
which represents 51 percent or more of the workers can
negotiate on behalf of all workers, and can enter into
Collective Bargaining Agreements (CBAs) with employers. To
date, approximately 311 union federation and factory-level
union leaders have received training, along with 60 factory
management staff members. According to a Senior Program
Officer at ACILS, union trainees seem enthusiastic about MRS
and CBAs, but lack the education and capacity necessary to
fully take advantage of the concepts. Many factory owners
are able to understand the concepts, but voice concern that
MRS and CBAs will not be respected. GMAC recently sent a
letter to the Chairman of the Working Group on Industrial
Relations stating that "minority unions will more than likely
disrespect the authority of MRS," and that they have "no
confidence that the CBAs will be enforceable."

11. (SBU) The future of MRS is hopeful, but given the lack
of understanding on the part of the unions and concerns
voiced by the employers, the potential for wider adoption of
CBAs is still shaky. Thirty-four unions have received MRS
since the education campaign began earlier this year, and
over 90 are in the process for 2009. However, there are
still only six active CBAs in the garment sector. ILO and
ACILS focus their efforts and training on unions which have
received or are about to receive MRS. A quick analysis of
ILO training and GMAC strike data shows that only 3 strikes
were conducted by MRS unions in 2008, showing that the
presence of a MRS union in principle reduces intra-union
competition and is a stabilizing force for Cambodia,s
garment sector.

12. (SBU) However, there are still currently over 1300
unions in the garment sector, amounting to approximately
three per factory. Union leaders are finding it increasingly
difficult to work together, with some unions created simply
to collect dues from members or to extort money from
employers rather than advocate for workers rights. Chea Mony
of FTU told Poloff that more than twenty FTU-affiliated
factory-level union leaders have been dismissed, and three
others beaten by members of pro-government unions this year.
Although the beatings were reported to police, no one has
been arrested for the crimes. Mony himself was the recipient
of an anonymous death threat emailed to him in August.

13. (SBU) COMMENT: 2008 has been a tumultuous year for the
garment industry in Cambodia. High inflation caused some
workers to find alternate employment during the first half of
the year creating spot labor shortages in some factories,
only to be reversed in the second half of 2008 with lower
inflation, fear of diminishing orders, and fewer factory
jobs. Throughout it all, endemic problems within the
Cambodian labor movement persist, namely union rivalry,
discrimination against independent unions and union leaders,
weak labor law enforcement, and low worker and union

PHNOM PENH 00001022 004 OF 004


capacity. At the same time, while MRS unions are growing,
the acceptance of CBAs is slower than desired. The problems
taken as a whole have created increasingly poor relations
between unions and management, resulting in more strikes.
Both unions and management have yet to adequately focus on
the elephant in the room related to the survival of
Cambodia,s garment sector: productivity. Continued poor
productivity and strained industrial relations will have
significant consequences for the competitiveness and
sustainability of Cambodia,s garment industry. Although
industrial relations have improved modestly in recent years,
more dialog, time and training will be needed in order to
move to the next level. END COMMENT.
RODLEY

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