Interrupted Chinese supply chains threaten to cripple Cambodia’s economy.
By Helena Kerr
The onset of the coronavirus COVID-19 outbreak catalysed major slowdowns in regional trade and halted export-import activities in several impacted countries. China, one of the biggest global suppliers of raw materials, experienced a decline in commodity prices and the volume of raw materials exports as the coronavirus rapidly spread across the country.
China’s manufacturing sector is experiencing productivity decline
According to China’s National Bureau of Statistics (NBS), the country’s Purchasing Managers’ Index (PMI)—an indicator of growth in the manufacturing and service sectors—dropped from 50.2 in December to 50.0 in January. Any index below the neutral-point mark of 50 would signal a decline in sector growth. In February, China’s PMI fell to 40.3—the lowest point in the last 12 years.
The Chinese government is quarantining nearly 50% of its population, severely impacting industrial activity. Many Chinese factories have ceased operations since the outbreak and a large segment of manufacturing sector employees have yet to resume work. The Chinese government has extended the Chinese Lunar New Year holiday and permitted all manufacturing companies to remain closed.
For Southeast Asian businesses that depend on Chinese imports in their production, the virus has caused major disruption to supply chains. In the Cambodian textile industry, demand is outstripping supply as China’s distributors remain shuttered. 60% of Cambodia’s garment industry sources supplies from China. A lack of local garment suppliers means Cambodian factories depend on these imports.
Approximately 200 garment factories in Cambodia risk losing business or closures as a result of China’s diminishing textile imports. If the shortage persists, many Cambodian factories may run out of garment materials by the end of this month, and their workers could be put on leave with no guaranteed compensation.
Cambodia’s forecasted export volumes already took a hit over the suspension of its preferential trade access to the European Union (EU). They could slide further if the disruption to supply chains persist. Even if the shortage lifts and Chinese factories resume taking orders, it takes approximately 40 days for a Cambodian garment factory to receive its order of fabric from China. For those that don’t have ample fabric stocks, the wait may lead to substantial business losses.
Cambodia’s garment industry has been the linchpin of national economic growth
Cambodia’s garment industry has been the agent of exponential economic growth for the country. The sector hires about 86% of all factory employees—around 800,000 people—and generates nearly 50% of Cambodia’s gross domestic product (GDP), exporting jackets, jerseys and other clothing to European markets and the US.
China has been the backbone of that industry. Cambodia imported around US$2.5 billion of textiles and clothing in 2016 from China and $484 million of other raw materials.
Coronavirus COVID-19 is causing layoffs and overtime cuts for factory workers
As stocks materials dwindle, factories are reducing manufacturing operations and cutting overtime hours. Approximately 3,000 employees have had their daily shifts slashed by five hours. 1,000 temporary contractors have had their contracts terminated in the past weeks.
Things could get worse before they get better. An estimated 90,000 employees in 200 of Cambodia’s garment factories will be suspended this month as supplies deplete. 7,000 more workers could be laid off by the end of this month.
The Cambodian government is offering financial assistance to struggling workers
Last month, the Ministry of Labour and Vocational Training offered to compensate garment workers who are suspended from work due to the halt in Chinese imports of raw materials. Employees will receive US$100 every month from the government, and an additional, undetermined amount from employers.
But for Cambodia’s beleaguered garment workers, things could get worse before they get better. As the impacts of coronavirus ripple across global markets and national governments battle to contain the economic fallout, the front line, is the factory line, and workers are in the crossfire.