CHINA PLUS ONE Production Network: A Case Study on Cambodia and Vietnam

FinalPresentationforTradePolicy ByYOUNy,M1 4010R3623 22July2011

Outlines of the Presentation

Objectivesofthestudy j y MotivationBehindCHINAPLUSONE FactorsInfluencingProductionNetwork F t I fl i P d ti N t k MovementofApparelIndustry SituationofGarmentIndustryinCambodiaandSWOTanalysis SituationofGarmentIndustryinVietnamandSWOTanalysis ComparativeSnapshotBetweenVietnamandCambodia Trade sPolicyonCambodia sGarmentIndustry Trades Policy on Cambodias Garment Industry

Objective of the Study

TounderstandwhythereisCHINAPLUSONE?

ToseetheimplicationofCHINAPLUSONEtodeveloping countriesinSouthEastAsia,particularlyCambodiaandVietnam countries in South East Asia particularly Cambodia and Vietnam TodrawcasestudiesonGarmentIndustryinCambodiaand Vietnam Trade Policy Implication for Cambodia to catch benefit from TradePolicyImplicationforCambodiatocatchbenefitfrom CHINAPLUSONE

What is CHINA PLUS ONE ?

CHINA

CHINA PLUS ONE is a concept that multinational firms in China are interested in finding locations that can lower the costs of production through establishing or expanding Asia bases outside China.

WHY CHINA ?
Amount of FDI inflows 2007 2008 2009

World ASEAN China and Hong Kong

2099973 73963 137862

1770873 47251 167933

1114189 36787 143449

Percentage of FDI inflows ASEAN share g g China and Hong Kong Share 3.522093 6.564942 2.668232 9.483063 3.301684 12.87475

Source:UNCTAD,onlinedatabase

Motivation of CHINA PLUS ONE

Objective of profits maximizing firm is to lower costs Objectiveofprofit smaximizingfirmistolowercosts ofproductionthroughcheaplabour,rawmaterials, taxincentiveandfavorableinvestmentpolicy. p y DiversifysuppliersnottoheavilydependonChina Inflationandincreasingwageinthecoastalareasof Inflation and increasing wage in the coastal areas of Chinamakesinvestorstoconsidermoving Risingpriceofrawmaterialsandlandtooperate gp p factoryevenmakesChinamoreexpensive g y Labour shortageinlabour intensiveindustry

Motivation of CHINA PLUS ONE

Internationalcompetitionkeepsthewageincoastal areasassameasinlandareasalthoughthelivingcostis different. Appreciation of RMB makes Chinese export less AppreciationofRMBmakesChineseexportless competitiveandaffectsunskilledlabour intensive industry. y Socialinfrastructure,energysupply,corruption Unpredictablepolicychange in2007unifiedits corporateincometaxandraiseditto1525percentand disappearedtaxincentive Segmentation of prod ction process Segmentationofproductionprocess

WHY STILL ENGAGE IN CHINA ?

Chinaisabig g consumermarketdue toithugepopulation A growingnumberof skilllabourers Rising numberof middleclass Economic linkagewith china
2010 US China Japan p Germany France Brazil India India Korea 2050 China US India Brazil Mexico Russia Indonesia Japan UK Germany

Source:GoldmanSachsReporton p GrowthProjectioninthefuture

Factors Influencing Location of Production Network k

Athukorala (2010) in ADB Working Paper on production (2010)inADBWorkingPaperonproduction networksandtradepatterninEastAsiaidentifiedrapid economicgrowth,labour supplycondition,wageand firstcomersadvantageaskeyfactorsthatcontinueto first comers advantage as key factors that continue to makeEastAsiaacenterofglobalproductionsharing Hiratsuka(2007)inaresearchpaperonIntraAsianFDI flows,foundthatJapansoutwardFDItoAsian countriesthathavegoodinvestmentenvironment,free g , flowofforeigncapital,taxincentives,exportprocessing zone,betterinfrastructureandcheaptransportation cost.

Factors Influencing Location of Production Network k

Ueki (2010) in a research paper on complementary Ueki(2010)inaresearchpaperoncomplementary manufacturingrelationshipbetweenfirmsinChinaand CLML,revealedthatChinesegovernmentsGoGlobal , g Policy haspromotedChinesefirmsinvestmentin developingcountries.ChineseFDIaimsatpreferential accesstothirdcountriesmarketthroughGSPandFTA thatarenotavailableinChina.

Movement of Apparel Manufacturing Industry d

Fromthe West to Westto Japan Movedto M dt Chinaand SouthEast Asiain Asia in 1980s

FromtheWesttoHong From the West to Hong Kong,SouthKoreaandTaiwanin 1960s

Movement of Apparel Manufacturing Industry d

From the third wave onward Hong Kong Korea and Fromthethirdwaveonward,HongKong,Koreaand Taiwanhaschangedtheirrolesofbeingmanufacturers intobeingmiddlemenlinkingEUandUSbuyersto g g y manufacturersinlowercostcountries. MotivationoftheboomofgarmentindustryinLaos, CambodiaandVietnamwasdrivenbypreferentialtrade arrangementandpreferentialstatusofLDCcountriesto exporttextilesandclothingproducttoUSmarket. l d l h d k

Situation of Garment Industry in Cambodia and SWOT Analysis b d d l

RecentDataonCambodia'sGarments andTextiles Totalworkforcein2010 Totalgarmentexportin2010 Total garment export in 2010 Averagewage Numberofgarmentfactoriesin2010 Started in1995 319000 USD$3.3billion USD$ 3 3 billion USD$77 273

Situation of Garment Industry in Cambodia and SWOT Analysis b d d l

Represent 80% of Cambodias total export in Represent80%ofCambodia stotalexportin manufacturingsector Accounts for 16% of GDP Accountsfor16%ofGDP 2/3ofgarmentexportsgotoUSand22%gotoEU, whiletherestgotoCanada,SouthKoreaandJapan while the rest go to Canada South Korea and Japan Mostofthefactoriesareownedbyforeigninvestors fromTaiwan,China,HongKongandSouthKorea from Taiwan China Hong Kong and South Korea

SWOT Analysis
Strengths: +MarketaccesstotheUS,EU,Canadaand + Market access to the US EU Canada and Japanthroughtradeagreements +Abundantcheaplabour (230,000young workersjoininglabour marketeachyear) +Highcomplianceoflabour standardon workingcondition Opportunities: +FreeTradeAgreementwithChina,South KoreaandJapancanenlargemoremarket access. +Improvingproductivitythroughnew technology,skillstrainingandprocess p improvement +CambodiacanbecheaperthanChina +EconomicIntegrationinASEANwillallow Cambodiatorealizeeconomiesofscale Weaknesses: Lackofskilledworkerswithexperiencein Technology,fashionandmanagement Cut,MakeandTrimproduction Depend on imported raw materials and Dependonimportedrawmaterialsand foreigninvestment. Highelectricitycost,andcorruption Toomanyunionsinthefactories Threats: RelianceonrawmaterialimportandFDI makesCambodiavulnerabletoexternalshock Competition from Vietnam and Bangladesh CompetitionfromVietnamandBangladesh Risingcostofrawmaterials LiftingsafeguardonChinesein2009

Situation of Garment Industry in Vietnam and SWOT Analysis d l

RecentDataonCambodia'sGarments andTextiles Totalworkforcein2010 Totalgarmentexportin2010 Averagewagein2010 A i 2010 Numberofgarmentfactoriesin2010 Startedin1980s 2million USD$9.082billion USD$143158 USD$143 158 morethan1000

Situation of Garment Industry in Vietnam and SWOT Analysis d l

Garment is Vietnams largest manufactured isVietnam slargestmanufactured export,contributingto17%ofGDPin2009 Vietnam is the United States's second largest supplier istheUnitedStates s secondlargestsupplier afterChina.EuropeandJapanarealsoimportant destinationsforVietnamsgarmentexport Foreignowned,privateownedandStateowned.State ownedconglomeratecalledVINATEXTaccountsfor over1/3ofallgarmentexports.

SWOT Analysis
Strengths: +Abundant,skillfulandquicklearninglabour + Abundant skillful and quick learning labour atcompetitivecost +Canproducequalityandcomplicatedstyles +Goodrelationshipwithmajorimportersand retailersintheUS +Stablesocial,economicandpolitical environmentandbetterinfrastructure Opportunities: +FreeTradeAgreementwithChina,South KoreaandJapancanenlargemoremarket access. +Largedomesticmarketof87million population p +VietnamcanbecheaperthanChina +EconomicIntegrationinASEANwillallow Cambodiatorealizeeconomiesofscale Weaknesses: Lackofskilledworkerswithexperiencein Technology,fashionandmanagement Stilldependonimportedrawmaterialssuch asfabricandaccessories as fabric and accessories Corruption Nolocalbrandnameclothingproduct Threats: Increasingtechnicalbarriers CompetitionfromChina,India,Cambodia andBangladesh and Bangladesh Risingcostofrawmaterials LiftingsafeguardonChinesein2009

Comparative Snapshot between Cambodia and Vietnam b d d

StructureofEconomy PercentageofGDP Agriculture Industry I d t Manufacturing Service Averageannualgrowth Agriculture Industry Manufacturing Service Cambodia 1999 2009 43.3 19.1 19 1 14 37.6 5.2 13 12.5 9.5 35.3 22.6 22 6 15 42 5.6 2.5 6 1.4 Vietnam 1999 2009 25.4 34.5 34 5 20.3 40.1 3.9 6 9.8 7.4 20.9 40.2 40 2 20.1 38.8 1.8 5.5 2.8 6.6

Source: World Bank Country Report, online database

Comparative Snapshot between Cambodia and Vietnam b d d

Value
1990

Share in economy's total merchandise exports 2000

3.1 79.3 69.8 0.8 14.5 2.6 1.7 11.9 42.2 8.0 14.1 14 1 7.2 0.1 2.3 48.6 6.4

2000
| 197570 5067 970 2077 36071 43286 12954 24214 9935 14279 5960 4734 534 2257 800 2536

2007
347059 8855 2851 1586 115516 80579 24795 28765 4985 23780 9932 5870 523 3159 412 2294

2008
364914 10920 2985 1271 120399 86573 27741 27908 2867 25041 11495 6285 593 3624 371 1979

2009
315622 10726 2974 1005 107261 75115 21682 22826 578 22248 11454 5915 483 3126 505 1534

2009 a
2.6 71.1 70.8 0.3 8.9 2.5 1.4 6.9 3.4 7.1 7.0 70 5.0 0.1 2.0 7.5 4.0

World Bangladesh b, c Cambodia c Canada China d intra-EU (27) exports extra-EU (27) exports Hong Kong, China domestic exports re-exports India I di Indonesia Japan Malaysia d Myanmar c Philippines d Taipei, Chi T i i Chinese Thailand United States Viet Nam c a b c d e Or nearest year year. Figures refer to fiscal year. Includes Secretariat estimates. Includes significant exports from processing zones. Mainly re-exports.

108129 643 ... 328 9669 15406 9266 6140 2530 1646 568 1315 12 1733
3987

2817

2565

...

3015 3759 8629 1821

1274 4073 4320 7400

1194 4241 4449 8724

904 3724 4186 8629

2.0 20 5.4 1.1 12.6

0.4 04 2.4 0.4 15.1

Source: UNcamtrade datatbase

Comparative Snapshot between Cambodia and Vietnam b d d

Doing Business in Cambodia ,China and Vietnam
200 180 160 140 120 117 100 100 80 78 60 40 20 15 0 Easeofdoing Starting Business businesstime Dealingwith Registrationof Gettingcredit construction propety permit Protecting investors Payingtaxes Enforcing contracts Closing business 79 62 43 65 57 38 31 15 89 74 93 147 170 151 181 173 183

146 124 114

142 124 Cambodia Vietnam China 68

Source: World Bank Country Report, online database

Comparative Snapshot between Cambodia and Vietnam b d d

Source: World Bank Country Report, online database

Comparative Snapshot between Cambodia and Vietnam

Comparative Snapshot between Cambodia and Vietnam b di d i

Source: Araya, Kanokpan Lao(2002)

Comparative Snapshot between Cambodia and Vietnam b di d i

Number of strikes
Cambodia Vietnam 773

541

387

86

80

105 58 2008 2009

2006

2007

Source:VietnamBusinessNews;(NounandMalissa,2010)

Comparative Snapshot between Cambodia and Vietnam b di d i

Comparative Snapshot between Cambodia and Vietnam b di d i

Cambodias Trade Policy for Garment Sector

StrengthenInstitutions/ Informationbase

ReduceTransactions Cost

Maintainand improvemarket access ShortenLead Times/Improve Ti /I BusinessOperation

Building Export Competitiveness for Garment Industry

Improvethe marketing environment EnhanceLabour Productivity

Source: Cambodias Ministry of Commerce, National Export Strategy 2007-2010

Cambodias Trade Policy for Garment Sector

Another unique approach that focuses on labour Anotheruniqueapproachthatfocusesonlabour complianceandlabour disputeresolutionin Cambodiasgarmentindustrymakesthiscountrythe onlygarmentexportingcountryintheworldthatlinks l i i h ld h li k improvementinworkingconditionstotradepolicy Using tax incentive can be away to attract Foreign UsingtaxincentivecanbeawaytoattractForeign DirectInvestmentsincetherehasbeengrowing evidencethattaxratesandincentiveinfluencethe locationdecisionofthecompanieswhenthelocations havebeennarrowdowntoafewplaceswithsimilar characteristics(Morisset,2003). characteristics (Morisset 2003)

Cambodias Trade Policy for Garment Sector

International investors look for countries that provide Internationalinvestorslookforcountriesthatprovide favorabletaxrate,especiallybelowtheinternational normof35to45percent.Alowcorporaterateshows p p thatthegovernmentisinterestedinlettingthemarket determinethemostprofitableinvestments Investmentlaw:9yearstaxholiday,dutyfreeforimport ofproductionequipment,intermediategoodsandraw materials,40%specialdepreciationallowanceonthe l ld ll h valueoftheneworusedtangiblepropertiesusedinthe production. production

Cambodias Trade Policy for Garment Sector

Tax exemption on the distribution of dividends or Taxexemptiononthedistributionofdividendsor profits Allow remittance of profits and repatriation of invested Allowremittanceofprofitsandrepatriationofinvested capital Five year loss carried forward can be allowed yearlosscarriedforwardcanbeallowed No valueaddedtaxforsupportingindustryor contractorwhosuppliesproductsfortheexportsof pp p p garment,textileandfootwear.

Reference:
Araya,Kanokpan (2002).HowCanCambodia,LaoPDR,MyanmarandVietnamCopewithRevenueLost DuetoAFTATariffReduction?.ADBWorkingPaperSeries,No29 Due to AFTA Tariff Reduction? ADB Working Paper Series No 29 Athukorala,Pema Chandra(2010).ProductionNetworksandTradePatternsinEastAsia:Regionalizaiton orGlobalizaiton.ADBWorkingPaperSeriesinRegionalEconomicIntegration,No56. Hill,Hall(1998).VietnamTextileandGarmentIndustry:NotableAchievements,FutureChallenges. MinistryofPlanningandInvestment. Hiratsuka,Daisuke(2007).IntraAsain FDIFlows:Magnitudes,Trends,ProspectsandPolicyImplication. Keola,Souknilanh(2010).InternationalFragmentationinLaos:Patterns,ProgressandProspects.In Hiratsuka,D.;Uchida(eds)Input Trade and Production Networks in East Asia.Cheltenham:Edward Elgar Lemoine,FrancoiseandKesenci Deniz Unal(2002).ChinaintheInternationalSegmentationof Production Process . C PII Working Paper, No 00 0 ProductionProcess.CEPIIWorkingPaper,No200202 MinistryofCommerce(2006)CambodiaNationalExportStrategy:20072010 Morisset,Jacques(2003).TaxIncentive.PublicPolicyforthePrivateSector.TheWorldBankGroup PrivateSectorandInfrastructureNetwork Noun,Veasa andSerrano,Melisa(2010).BuildingUnioninCambodia:History,Challenges,Strategies. FriedrichEbertStiftung.Singapore Friedrich Ebert Stiftung Singapore Sayres ,N.J.,(2002).TheVietnamUSTextileAgreementDebate:TradePatterns,Interests,andLabor Rights.CongressionalResearchServiceReportforCongress,June Ueki,Yasushi(2010).ComplementaryManufacturingRelationshipbetweenFirmsinChina.BRC ResearchPaperNo.3,BangkokResearchCenter,IDEJETRO,Bangkok,Thailand.