Labor costs and Cambodia
/Labor costs and scarcity of labor in Vietnam
I have written about this a bunch of times so far over the past year (and yes, I have been doing this for a year now - Happy Birthday to me!): labor costs in Vietnam are higher than people expect and could very well hurt its ability to compete for certain types of low-cost manufacturing.
The reason I bring this up again is because there are a few articles out talking about higher labor costs. This is a long term trend and doesn’t count labor issues around COVID-19, which has had factories stop work, Chinese workers quarantined, and supply issues with materials coming from China).
The first article is from Furniture Today and talks about minimum order quantities (MOQ) being raised. The reason the author gives is because of higher labor costs and turnover. So the manufacturers are trying to be much more efficient with their labor. It looks like MOQs have doubled or more: container orders form 6 to 12, chairs from 250 to 600.
Sources say the situation has gotten more noticeable in the past several months as Vietnam factories not only face worker turnover, but also have to pay more to recruit and to keep the workers they already have…a host of industries are competing for skilled — and even unskilled — workers.
The second article is from a Vietnamese newspaper that reports higher wages and easier criteria for works in Dong Nai Province (northeast of HCMC). In one case, the basic salary is VND4.7m ($204) per month, with bonuses, travel, annual salary increases. The only requirement is literacy. And there are 90-100,000 people that need to be employed in the province, potentially at this level.
SOURCE: WORLD BANK. (PG 22)
This is good news! It is great that more people are getting paid. This puts the salary well above the minimum (VND4.18m for HCMC and Hanoi, lower for other areas). The only concern is that manufacturers will decide that the prices are too high, especially if productivity isn’t there.
But, so far, it is. At least according to World Bank data (we talked about this here). It isn’t as good as China, but among its competitors ex-China, it is doing pretty well. Of course, Malaysia is up there, but the population just isn’t that great. Philippines are a bigger risk, but the government isn’t as attractive (read: stable) as Vietnam.
I think Vietnam will be safe for a while, especially given COVID-19 and my expectation that manufacturers will be trying to move some production out of China. The US-China trade war still at the hot truce level probably helps too.
Source: Vietnam Customs, chart by Vietecon.com
Cambodia
This article from Moody’s about Cambodia’s problems with the EU caught my eye, and I think it will have a ripple effect on Vietnam.
Basic info, the EU isn’t happy about Cambodia’s government. It currently allows the country to export mostly tariff free under its status as a “least developed” country. This status will be partially suspended, so higher tariffs (averaging 12% for garments and 16% for footware) will return in August 2020, if ratified by the EU Parliament and Council.
Just some stats here:
Vietnam exports $4.4bn to Cambodia in 2019.
Total Vietnamese exports were $264bn, so it is fairly small.
20% of exports were textiles, garments and raw materials for textiles.
Garments and textiles account for 11% of Cambodia’s GDP in 2018.
45% of Cambodia’s exports are to the EU, and of these, 87% are garments and footwear, also 2018. This represents more than $5bn in exports from Cambodia.
Luckily, not all tariffs will be imposed, so it looks like it will only hit $1.3bn-worth of goods. That’s not too bad. But it will probably hurt some exports, and the government, because of international and domestic pressure, is also raising minimum wages to $250 per month by 2023, up from $190 in late 2019. As Moody’s reports, it will likely make some foreign investors shy away from investing.
This is bad for Cambodia, and somewhat bad for Vietnam, at least its textile business. My assumption here is that Vietnam provides some raw materials to the Cambodian producers, given the trade statistics.
So, while it isn’t a big deal, it is still something that Vietnam should watch out for. Ultimately, a growing Cambodia is good for Vietnam. And Cambodia will still grow, even with these tariffs. But maybe not as much.