• Published: 21 February 2020

Cambodia: Navigating risk in a key ASEAN sourcing destination

Global factors, from cost pressures and trade wars to the COVID-19 Coronavirus outbreak, have caused more companies and brands to diversify their sourcing destinations to improve preparedness and avoid business disruption. However, alternative sourcing markets may present new and unexpected risks to corporate supply chains and companies’ ESG impact.

The ELEVATE Supply Chain Risk Profile series provides an overview of current and emerging risks in the supply chain and is intended to support sourcing decisions, new country evaluation and risk management strategy. Risk profiles are calculated primarily from ELEVATE on-the-ground audit and assessment analytics and publicly available insight (available in EiQ). Each profile evaluates 5 main risk dimensions: labor, environment, business ethics, management systems and health and safety.

 

Cambodia Overview

Between 1995 and 2018, Cambodia sustained a GDP growth rate of 7.7% due to a booming tourism sector and growth in apparel and footwear industries.[1] Cambodia remains one of the highest risk sourcing countries in Asia even when compared to other high-risk geographies. Recent improvements in its overall ELEVATE risk score reflect the achievement of basic management system practices and business ethics associated with more transparency during audits. However, the deterioration of the political situation, ongoing repression of labor unions and an increased role of Chinese foreign companies that are less considerate of compliance standards undermine these improvements.[2] Such trends have already led to a significant increase in Health and Safety risks in 2017-2019. We expect Cambodia to remain one of the higher risk sourcing countries globally for the next 1 to 3 years.


Cambodia Supply Chain Risk Profile

Source: ELEVATE (2019). EiQ


Labor Risk

The Labor Index, which includes also forced labor and wage payment violations, has deteriorated in the last three years, moving from 2.88 (high risk) in 2017 to 2.45 (extreme risk) in 2019. The worsening score was driven by:

  • Wages: Violations associated with late paydays, irregularities in the minimum wage and overtime payments increased significantly in the past 3 years.
  • Child Labor: The supply chain in Cambodia is still at extreme risk of child labor as many informal subcontractors using underage workers are escaping audits.[3]
  • Forced Labor: Cambodia is among the top 10 countries with the highest prevalence of modern slavery [4]. Latest survey reported 260,000 people involved in forced labor, including in the manufacturing and farming sectors.

 

Environment Risk

Rapid economic and population growth, together with a permissive legal framework intended to attract foreign direct investment and an ambiguous regulatory enforcement are enabling significant environmental pollution.[5] In the last 3 years, the Overall Environment Index declined from 3.76 to 3.48 largely due to deterioration of air quality and poor waste management.

 

Business Ethics and Management Systems Risks

Over the period 2017-2019, Cambodia saw significant improvements related to business transparency and practices related to audits. The Transparency Index, which calculates the frequency of transparent and reliable audits, improved significantly from 2.13 (extreme risk) to 4.09 (high risk). Likewise, record and documentation keeping practices have improved significantly from high to medium risk.

 

Health and Safety Risk

Since 2017, Cambodia has seen a decline from 3.10 (high risk) to 1.90 (extreme risk) in the ELEVATE Health and Safety Index for the following reasons:

  • Audit results highlight the deterioration in infrastructure-related non-compliances such as lack of building permits – which is also reflected in the local news: on the 22nd of June, a construction site with no legal permits collapsed in Sihanoukville claiming the life of 28 construction workers.
  • Audits in the last three years report an increase in the risk related to overloading of chemical products, the lack of ventilation and the installment of exposed electrical wires in the chemical warehouses that put at risk the safety of the workers.

 

Our Recommendations

Health and Safety is the largest risk in Cambodia. ELEVATE recommends companies sourcing from Cambodia to tighten the supervision of health and safety norms in the workplace, with a significant focus on building and fire safety, and emergency evacuation. Labor standard violations (e.g. forced labor) are difficult to be identified through traditional audits as workers are afraid to speak up. We recommend companies to partner with organizations that have an expertise in identifying these types of risk and that leverage on worker voice technology (engaging workers through mobile surveys) to identify such instances in a manner that safeguards worker anonymity and ensure non-recrimination.

Unauthorized subcontracting can expose brands to all sorts of risks – from child labor to hazardous working conditions. Companies should run production capacity audits to assess whether the supplier can deliver the order and meet production output on time. We also recommend brands to adopt more stringent policies prohibiting unauthorized sub-contracting, increase surveillance checks and expand audit scope to cover 2nd tier sub-contracting factories.

Contact ELEVATE to purchase the full report and commission supply chain risk profiles for additional countries. Coming soon – new ELEVATE EiQ risk data for 2020.


Contact ELEVATE for our full Supply Chain Risk Profile report


These blogs are written by ELEVATE staff members or associates and the views and opinions expressed are not necessarily those of ELEVATE.


Footnotes and sources

[1] The Work Bank in Cambodia – Context. Accessed 11th of July, 2019.
https://www.worldbank.org/en/country/cambodia/overview

[2] Davis, E., China investment signals support for Cambodia, FDI Intelligence. Accessed 11th of July, 2019
https://www.fdiintelligence.com/News/China-lends-Cambodia-FDI-support

[3] Better Factories Cambodia, Annual Report 2018: An Industry and Compliance Review, https://betterwork.org/blog/portfolio/better-factories-cambodia-annual-report-2018-an-industry-and-compliance-review/

[4] Global Slavery Index 2018
https://www.globalslaveryindex.org/resources/downloads/

[5] Young, S. (2019). Protests, Regulations, and Environmental Accountability in Cambodia. Journal of Current Southeast Asian Affairs, 38(1), 33–54. https://doi.org/10.1177/1868103419845515

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