FDI boosts to continue, thanks to Chinese supply chain
FDI boosts to continue, thanks to Chinese supply chain
Manufacturing-based foreign direct investment (FDI) in Cambodia by Chinese firms is expected to continue to increase in the coming periods, thanks to major Chinese supply chain shifts visible across Southeast Asia, believe regional economic commentators.
According to Michael Glancy, country head of JLL Thailand, commenting in a July report by Jones Lang LaSalle (JLL), Southeast Asian countries are expected to benefit significantly as companies implement the China+1 strategy, which involves establishing additional manufacturing bases outside of mainland China to mitigate supply chain disruptions.
Under the China+1 strategy, in the next ten years the Southeast Asian region, as well as India, is expected to see a swift acceleration in the diversification of manufacturing and production locations by Chinese investors.
The JLL report noted that rising costs in China in terms of wage and material costs over the past decade have also accelerated this shift in supply chains to new external destinations, with manufacturers seeking more favourable conditions in overseas markets.
Meanwhile, industrial land prices in China are now double the cost compared to prices found in some Southeast Asian countries, noted the firm, again adding to costs of production inside the country for manufacturers.
The JLL report explained that in comparison Southeast Asia offers manufacturing investors strong economic fundamentals, including a large labor pool, favorable costs of production, as well as other incentives.
In a recent interview with Khmer Times, Sisavuthara Sim, Founder and CEO of Nexus Capital & Investment Advisory, confirmed that the current geopolitical circumstances in which the US and China are both vying for international trade growth are a key factor driving a dynamic shift of manufacturing from China to countries like Cambodia.
Tension between the US and China has led to various trade barriers between the two powers, he explained.
At the same time, European and US manufacturers are also looking for options to invest in operations outside of China, he added, another potential window of opportunity for incoming FDI.
Sisavuthara noted that Cambodia benefits from preferential trade agreements such as the Everything But Arms (EBA) for access to the European market and the Generalized System of Preferences (GSP) for access to the US market, hence offering a unique gateway for manufacturers in the country.
Cambodia has already proven it can attract at least some of these investors, said Sisavuthara, however, given that overall costs of production are reduced, through lower transportation and electricity costs, Cambodia will expect a larger share of such incoming FDI.
Cambodian-based manufacturers looking to export their products internationally still face higher average transportation costs than neighbouring countries, including Vietnam, he said, and in the current circumstances, a significant portion of Cambodia’s traders are also reliant on transit via Vietnamese ports, adding to costs of delivery.
Sisavuthara highlighted that given Cambodia’s goal to become a worldwide hub for manufacturing, it is crucial that costs of transportation are lowered to stimulate increased foreign direct investment into the manufacturing sector.
In order to garner increased manufacturing investments, the Cambodian government has demonstrated its clear commitment to large-scale infrastructure development as its priority for the coming years, he said, a key example being the Funan Techno Canal (FTC) project, which broke ground this week.
“The main reason for prioritizing projects such as national expressways, airports, waterways and railways is to increase the ease of trade for Cambodian-based manufacturing operations, and lower the costs of trade logistics across the economy,” he explained.
