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ONLINE INSIDER
A Site Selection Web Exclusive, May 2015
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Next Level

Cambodia's Minister of Commerce moves fast with reforms so that new FDI will move faster to his homeland.

ONLINE INSIDER
The Royal Palace in Phnom Penh, Cambodia
Photo by Soo Jones-Kelley, www.soojkphotog.com

by Adam Bruns
His Excellency Chanthol Sun, Cambodia's Minister of Commerce

When you think of business opportunity in Southeast Asia, does Cambodia spring to mind?

With the advent of the ASEAN Economic Community coming in December this year, maybe it should. While the recent "Doing Business 2015" rankings from the World Bank still rank the country low in ease of doing business (No. 135 of 189 countries), it's a place where GDP growth averaged nearly 8 percent from 1995 to 2012 — the fastest growth in East Asia — and per-capita income rose from $248 to $878 during that same period (it reached $1,036 in 2013).

Moreover, it's home to population of 15 million that's trending out of poverty and toward young and ambitious, with a median age of 24.1.

This spring, for the second time in a year, Cambodian Minister of Commerce His Excellency Chanthol Sun, a Wharton- and Harvard-educated former GE executive, is in the United States on a mission to increase awareness of his country and his countrymen, accompanied by US Ambassador to Cambodia William E. Todd.

"Cambodians are now my shareholders," Sun said last year. "I work for them."

"Cambodia is quickly evolving from a country where investment policies did not align with implementation to a country where foreign investors can quickly take advantage of one of the most liberal investment environments in Asia," says John Evans, managing director of Tractus Asia Ltd., the Asia-based foreign direct investment advisory. He has served for the past two years in a pro-bono role as an advisor to Minister Sun.

Chosen as a Global Leader for Tomorrow of the World Economic Forum in 1995 (during the first of several government postings), Minister Sun was appointed chairman of the Wharton Executive Board for Asia in July 2009. No wonder, then, that Knowledge@Wharton just published an insightful perspective on Cambodia's economic momentum.

"GDP growth for this year — on the back of strong performance in garment manufacturing, tourism, construction and agriculture — is expected to reach 7.3 percent," said the report. "This puts Cambodia ahead of its neighbors in Southeast Asia."

Sun continues to serve as vice chairman of the Council for the Development of Cambodia (CDC), a “one-stop” investment board. Since his appointment in 2013, he's also spearheaded a comprehensive series of reforms aimed at rooting out corruption and cultivating foreign direct investment.

He found time while in Atlanta for a conversation with Site Selection.

"I understand the mindset of the business community," says Sun. "I use my experience from 16 years at GE to run the organization and the ministry, and to make it leaner to facilitate investment. If you want to attract FDI, you have to make it simple for people. You want to cut down the costs — and the unofficial costs — of doing business. Through reform, registration and automation, we'll cut down the time."

Total trade more than tripled in value in Cambodia
from 2005 to 2013.

Appointed in late 2013 to the post, Sun wasted no time in implementing reforms, and is still in the midst of improving company registration and certificate of origin processes, as well as the very long construction permitting process.

"The system we want to put in place will allow you to do registration of a company online, and it will take 60 minutes to get a company incorporated in Cambodia," he says. "We're taking away the physical interface between the government official and the private sector — though sometimes it's the private-sector person himself who cheats on the boss."

Certificates of origin are going electronic too, though the Cambodians are still negotiating with the EU to accept e-signatures and e-stamps on certificates. Cambodia's exports continue to be led by the garment and textile sectors, as well as agriculture (rice) and bicycles. Trade with the EU is ameliorated by the EU's "Everything but Arms" (EBA) arrangement for least developed countries, which grants duty-free quota-free access to all products, except for arms and ammunitions.

Making Connections

Asked what he's hearing thus far during the US mission, Sun says his team is listening and learning as much as touting, starting in the Bay Area with Intel and Cisco.

"Intel has an application to help farmers in Cambodia with the optimal level of fertilizer to use in the rice paddies. Some farmers don't understand, and load their fields with too much fertilizer. This application can be used to improve yield and reduce costs. We will see whether we can get funding from a multilateral agency to put that application throughout Cambodia, or people can buy the application and go serve the farmers and charge fees. We also asked them whether they would consider investing in the country. Obviously we'd like to get FDI. They have a big plant in Vietnam. We told them the good reasons for them to invest in the country, and invited them to visit and see for themselves."

Cisco told the delegation how investment in broadband will increase the economy and GDP. "We asked them to come present to government officials, students and the business community in Cambodia," says Sun.

Cambodia's Investment Incentives

  • Corporate tax of 20 percent
  • Tax holiday up to Nine Years
  • Full import and export duty exemption
  • No discrimination, no nationalization
  • No local participation requirement
  • No price control on any products or services
  • No foreign exchange control
  • No restriction on capital repatriation: free repatriation of profits & free
    remittance of royalty, interest, loan repayment, dividend, investment
    capital, etc.
  • No trade restrictions
  • Long-term land lease

In Atlanta, the group met with UPS, Home Depot and Coca-Cola, which just committed in November to invest $100 million in a new plant in Phnom Penh, which will add 300 jobs to the existing payroll of 650. Other recent investments in the country have come from Tiffany (a jewelry manufacturing facility), NHK Spring in Poipet, and Japanese firms DENSO, Nidec and Minebea, which moved its micro-motor manufacturing operation from neighboring Thailand to the Phnom Penh Special Economic Zone, one of 11 operating SEZs in the country (33 SEZs in total are approved).

"We are very pleased with the investments and the factories moving into the SEZs," says Sun, "but I'm not totally satisfied, because some are not 100-percent utilized. Having said that, we want to build more SEZs in the country, because that will help the investor relocate to the country faster, with utilities already installed, custom construction and inspectors all in one location.

The SEZs are not targeted toward specific sectors, but have tended to draw companies based in part on country of origin: Japanese companies have tended to move toward the Phnom Penh zone, for instance, and Chinese companies all tend to go to the zone in Sihanoukville. Unlike the US, which is just now getting used to Chinese FDI, Cambodia has welcomed nearly $10 billion of FDI from China over the past 20 years.

"We compete with Vietnam, Laos, Thailand and Myanmar," says Sun. "Overall Myanmar would be our main competitor because of their low-level costs."

In Atlanta the Cambodians also met with the State of Georgia's economic development team (inviting them to engage in a reverse trade mission) and with GE Power & Water, who had just received the leaders of Cambodia's primary utility and electricity authority two weeks ago. The infrastructure push is on in Cambodia, and it's only a matter of time before GE turbines are helping sustain the country's churning economy.

"We've invested heavily in roads, bridges and our deep-sea port," says Sun. A new container port and general cargo terminal are rising in Phnom Penh, whose airport has been significantly upgraded to international standards. And the Mekong Bridge has been completed, speeding up transit, via ASEAN Highway Number 1 to Vietnam, that used to be dependent on ferries. A four-lane expressway is in negotiations, the rail line from Phnom Penh to Sihanoukville has been upgraded, two fiber-optic companies are laying lines.

Services and amenities infrastructure has improved too, with plenty of law firms, CPAs, international schools and good housing to choose from, as well as the country's tourism assets, headed by ecotourism and the UNESCO World Heritage site at Angkor Wat. If there's one area where Sun would like to see things catch up faster, it's healthcare, though medical tourism for dentistry is one small cluster that has prospered.

"If you have a major issue, you probably go to Thailand and Singapore," he admits. But that is changing quickly as the FDI message gets out. "A Japanese investor is building a trauma center right now," he says, "and an investor from Indonesia came two weeks ago to start setting up an emergency center."

Last but not least, more hydropower plants are arriving to help all these new and existing operations function.

"Today we don't have enough, and we buy from Thailand and other countries," says Sun of the power situation. "Three years from now we'll have more than enough."

The Human Link

Having enough skilled workers is a challenge Cambodia shares with much of the rest of the world. Sun sounds much like any US elected official in analyzing one of the issues at hand:

"Today we have a mismatch between what we produce from university versus what investors are looking for," he says of the country's higher education institutions. "We produce an MBA, Ph.D. or accountant, and investors say, 'Give me electricians, carpenters and machine operators.' So now we're pushing them in that direction so we can produce enough skilled labor force to supply the investor."

A related issue — the mobile Southeast Asian workforce — is unique to the region.

"Today we have around 700,000 Cambodian migrant workers in Thailand," says Sun, shaking his head. "We also export our labor to Korea, and to Malaysia. But we work very hard to attract FDI and high-paying jobs intp the country to keep them and help our economy. When you have 700,000 in Thailand, what does it do for Cambodian GDP? Zero. Imagine 700,000 workers, each producing $5,000 in GDP — that's $3.5 billion."

Does that migrant workforce's repatriated income via payments sent back home make up for some of that? Hardly.

"They sent in only $226 million last year," says Sun. "It's peanuts. We are losing $3.5 billion or more of GDP. So we're working very hard to attract FDI."

World Bank Doing Business 2015 Ranking of Cambodia vs. Regional Competitors

The ASEAN Economic Community's debut in December will allow workers in eight sectors to move freely within ASEAN. Sun is not worried about others coming and taking Cambodians' jobs, but despite the plan that the ASEAN EC will lift all boats, he is worried about brain drain.

"If they can move to Singapore or Thailand, that will create some issues," he says. "To keep them, you need better-paying jobs to keep them in the country. That's part of this trade mission."

It's all unfolding against the backdrop of the country's Industrial Development Policy, approved in March, which provides a roadmap for moving the country from low-income to middle-income by 2030, and aims for high-income by 2050. Bringing down power costs, improving transportation and essentially making the entire Sihanoukville province a free trade zone are among its highlights.

"That will help bring Cambodia to the next level, from low-cost labor-intensive to semi-skilled sectors such as manufacturing, food processing and component assembly," says Sun. "We cannot rely on textiles and garments forever."

Sun is comfortable stating that Cambodia's small, open economy is "the most liberal, open country economy in ASEAN" with some of the most generous investment conditions, including no restriction on foreign ownership or local partner requirement. It's a dollarized economy too, which helps things move along and takes away some risk. There is significant multilingual capability (including English, Chinese and French), and it's right in the heart of ASEAN geographically, with the ability to reach that market's 600 million consumers.

Asked to compare today to the period of his first government appointment 20 years ago, Sun summons immediate memories.

"In 1994, the country had no traffic lights," he says with a laugh. "You could probably sleep on the street and no car would hit you. Today it's congested. In 1994, you'd hear guns, AK-47s, every night. Today, not a single one. In 1994 there were blackouts and brownouts, and it was noisy because of all the generators. You don't hear generators anymore. There were no high-rises in 1994, and now you see a lot. And there were no mobile phones then — today it seems like each person has two. We have 15 million Cambodians, and last year the country's nine mobile operators sold 20 million simcards."

Sun wants all those mobile phone users to be talking about new opportunities at home, not new avenues elsewhere. And he thinks prospective investors and the curious will sense that enthusiasm.

"People fall in love with the country," he says. "They feel the spirit. They can hear Cambodians saying, 'We have suffered long enough. Please come and help us grow.' "

(This article was updated May 22, 2015, to correct inaccuracies: DENSO is based in Japan; the calculation of potential GDP from 700,000 workers should include $5,000 as the multiplier; Cambodia aims to be middle-income by 2030, not 2025; and future free trade zone plans apply to Sihanoukville province, not the entire country. — Ed.)

Natural beauty and heritage sites help drive tourists to Cambodia. International tourist arrivals reached 4.5 million in 2014, more than double the number five years earlier.
Photo by Soo Jones-Kelley, www.soojkphotog.com

Adam Bruns
Managing Editor of Site Selection magazine

Adam Bruns

Adam Bruns has served as managing editor of Site Selection magazine since February 2002. In the course of reporting hundreds of stories for Site Selection, Adam has visited companies and communities around the globe. A St. Louis native who grew up in the Kansas City suburbs, Adam is a 1986 alumnus of Knox College, and resided in Chicago; Midcoast Maine; Savannah, Georgia; and Lexington, Kentucky, before settling in the Greater Atlanta community of Peachtree Corners, where he lives with his wife and daughter.

   



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