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In today’s globalized economy, businesses seek to optimize costs without compromising on quality. One avenue that garners attention is the sourcing of affordable labor from countries with lower wage structures, particularly in Asia.
Until recently, China was a favorite destination for Western-based companies seeking cheap labor. Today, as it works strategically to grow a stable middle class, other countries have emerged.
Today, Cambodia, with its growing workforce and competitive labor costs, has emerged as a prime destination for companies looking to achieve this delicate balance between cost-effectiveness and ethical business practices.
Introduction
This blog will provide an overview of Cambodia’s labor force and cost-savings capabilities, delve into the benefits of outsourced labor, general considerations for sourcing affordable labor abroad, and challenges you may encounter and how to manage them.
Cambodia and its eager workforce
Cambodia is a developing country with a young and growing workforce. The population is nearly 17 million with a median age of just 27 years old.
Cambodia’s labor force boasts more than half of the population (The World Bank estimates around 9 million). It also has a significantly low unemployment rate of 0.4% in 2022. However, a vast majority works in the informal economy, leading to mismeasurment within the unemployment rate as labor force data is sparse (International Labour Organization (ILO).
The Cambodian government has implemented countless initiatives, in partnership with the ILO, to encourage the formalization of businesses and to transition workers into the formal sector, such as the National Strategic Development Plan, Industrial Development Policy, National Social Protection Policy, and many more. But much work remains to be done.
With one of the most youthful populations in Southeast Asia and the goal of expanding the formal sector, Cambodia boasts a vibrant, affordable, and robust labor force.
Which Industries Benefit Most?
Agriculture: 33.1% of the Cambodian workforce is employed in agriculture. The top agricultural products are rice and rubber, with an increasing share of cassava being produced. Cambodia exports low-valued agricultural products and imports high-valued manufactured agricultural products such as starch, flour, sugar, and tobacco.
Manufacturing: This sector accounts for 27% of employed workers in Cambodia. The apparel/footwear industry is one of Cambodia’s largest employers, 7% of total population, and it has played a major role in the country’s economic development. The world’s largest footwear company, Nike, outsources its production to Ramatex Group, Malaysia’s largest textile and garment producer, which uses numerous factories in Cambodia to meet world demand. However, the industry, and Nike, have been heavily criticized for the poor working conditions and low wages for using Ramatex Group.
Despite labor condition challenges, several large US companies continue to invest in Cambodia, including Coca-Cola’s $100 million bottling plant and Ford’s $21 million vehicle assembly plant to reap the benefits of affordable labor.
Services: The service sector has been growing rapidly and now accounts for 39.8% of total employment. Tourism is the fastest-growing segment of the economy and a major source of foreign investment. Significant investment flows into Cambodia to fund construction projects of hotels and resorts to capture the growing demand for tourism-related facilities.
Cambodia’s labor force is predominantly low-skilled and focused on labor-intensive industries. However, the country has made recent strides to improve the skills of its population by increasing enrollment in primary education from 82% in 1997 to over 97% currently according to UNICEF. However, Cambodia still struggles to provide quality education in primary schools falling below global learning standards. The latest literacy rate for Cambodia was 83.9% in 2021, around 3% lower than the world’s average literacy rate of 87%.
Although Cambodia, albeit making great strides, continues to struggle in education, literacy, and high-skilled labor development, the government has been working tirelessly by enacting new policies, seeking guidance from international organizations, and taking loans (such as a $60 million loan from the Asia Development Bank) to diversify and modernize its industrial sector, improve and expand worker training programs, and forge ties between government and business to meet the needs of the labor market.
Advantages and Why You Should Care
This demographic advantage, diverse labor force, and a low wage rate has made Cambodia a compelling option for businesses seeking an abundant pool of labor. The country’s history, marked by economic development and improved labor standards, has greatly contributed to its attractiveness as an outsourcing destination.
Cost savings: One of the most apparent advantages of hiring labor from Cambodia is the cost savings. The wage rates in Cambodia are substantially lower than those in many developed countries, USD$187-$192/month, enabling businesses to allocate resources more efficiently.
Growing skilled workforce: Cambodia’s labor force is becoming increasingly skilled and educated, particularly in the apparel/footwear, travel goods, construction, and real estate This makes it possible for businesses to access a capable workforce without compromising on quality.
Favorable government policies: On October 15, 2021 introduced a new investment law, “The Law on Investment in the Kingdom of Cambodia”. The law provides a variety of incentives such as tax exemptions, customs duties incentives, foreign ownership of 100%, and aims to modernize and streamline the investment environment in hopes to spur foreign investment and operations in the Kingdom.
Strategic alliances and location: Cambodia is centrally and strategically located in Southeast Asia, making it a good base for businesses seeking to access the markets of the region. Cambodia borders Thailand, Laos, Vietnam, and is a part of the Association of Southeast Asian Nations (ASEAN), giving access to a regional market of 662 million and a consumer market value of USD$1.2 trillion. ASEAN integration greatly benefits the smaller member states across the region in particular, including Cambodia and Laos. Also, while Thailand and Vietnam are directly benefiting from regional supply chain diversification as a result of the ASEAN alliance, Cambodia stands to benefit indirectly in the long term. Lastly, Cambodia is located along the Gulf of Thailand with access to the South China Sea, two of the busiest global shipping routes, allowing for easy, cost-effective import-export access.
Key Considerations:
- Labor laws and regulations: Before hiring labor from Cambodia, businesses must thoroughly understand the local labor laws and regulations. This ensures compliance with minimum wage standards, working hours, and other crucial aspects. It is important to consult with a lawyer or other qualified professional to ensure that you are complying with all applicable labor laws.
- Ethical sourcing: Cambodia’s labor laws and regulations have been under scrutiny, but they have also evolved over time. Ethical sourcing of labor is crucial, and businesses can contribute positively to the country’s development by adhering to fair labor practices and promoting decent working conditions. Companies should partner with local NGOs/IGOs to ensure that satisfactory labor conditions are being met such as the Better Factories Cambodia (BFC), Textile, Apparel, Footwear & Travel Goods Association in Cambodia (TAFTAC), and local labor unions.
- Supplier relationships: Building strong relationships with local suppliers, labor agencies, and industry networks is essential for a successful outsourcing operation. Harvard Business Review found that suppliers become crucial in a globalizing world as businesses rely on them “to reduce costs, improve quality, and develop new processes and products faster than their rival vendors can” leading to a first mover advantage. These relationships can provide insights into the labor market, regulatory changes, and potential challenges.
- Skill development: Investing in skill development programs for Cambodian employees not only benefits your business but also contributes to the growth of the local workforce. Investments in skill development have ample benefits such as helping employees perform effectively and efficiently, better understand their roles, adapt to new industry trends, and boost morale to name a few. On the firm side, this can lead to the attraction of high-quality candidates, improve retention rates, and develop an internal talent pipeline.
Challenges and Mitigations: How to Overcome:
- Political environment: A recent election was widely criticized by the West as undemocratic but applauded by the Chinese, with long-serving Prime Minister Hun Sen winning another 5-year term, which he then passed on to his son Hun Manet after stepping down. With a “loyalist-staked government,” executives are advised to continue current policies in Cambodia without taking any abrupt changes in business course and be mindful of the rapidly growing Chinese influence across the nation.
- Language barrier: While English proficiency is on the rise in Cambodia, language barriers can still exist. Offering language training, providing material in Khmer (the official language) and other widely spoken languages, such as French, and promoting a diverse and inclusive workplace can help overcome this challenge. Until 1993, French was the main foreign language but has since been replaced by English.
- Skills gap: Cambodia has a young workforce, but many workers lack the skills needed for high-paying jobs. This is due to a number of factors, including a shortage of quality education and training programs. Skill development, as mentioned, can help.
- Corruption: Corruption is a problem in Cambodia and can affect businesses in a number of ways. For example, businesses may be required to pay bribes to government officials in order to “get things done.” On the Corruption Perceptions Index, Cambodia had a composite score of 24/100 ranking 150/180 countries making informal payments and favors part of the business environment. In situations like these, it is important to adhere to your company’s corporate governance and seek guidance from local advisors.
Hiring affordable labor in Cambodia presents a compelling opportunity for businesses seeking cost-effective solutions while promoting ethical labor practices. By understanding the labor landscape, adhering to local regulations, and fostering positive relationships, companies can tap into Cambodia’s skilled workforce and contribute to its ongoing development. This endeavor, when approached responsibly, has the potential to be a win-win scenario for both businesses and the Cambodian workforce.
