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Economy

The Cambodian city that went from war zone to manufacturing hub

The border city of Poipet is leveraging its cheap labor and strategic location

Electronics cable is made at a factory in Poipet run by Sumitronics Manufacturing (Cambodia).

POIPET, Cambodia Once ravaged by war, the city of Poipet on Cambodia's western border with Thailand is reinventing itself as a manufacturing center, leveraging its cheap labor costs and strategic location in the regional supply chain.

Techno Park Poipet, an industrial park built by the Japanese trading house Toyota Tsusho, opened here on Dec. 8, with four Japanese companies and one Thai business leasing factories as tenants.

"Many companies will come here, and this is where you will work when you're older," Sok Chenda Sophea, secretary-general of the Council for the Development of Cambodia, told a group of 50 high school students during the opening ceremony.

Sok also played up his version of the Thailand-Plus-One business strategy, which envisions corporations operating in Thailand setting up additional production facilities in neighboring countries. "We want them to come to Cambodia, not to Myanmar or Laos," he said.

The entrance to Technopark Poipet

IN THE SWEET SPOT Located in the Sanco Poipet special economic zone, Techno Park partially opened in September 2016. The five tenants occupy the first tract of factory space spanning 20,000 square meters, employing more than 100 workers. The second tract will open as early as 2019.

All five tenants run plants in Thailand and are shifting labor-intensive processes to Techno Park. Sanko Electric, which makes wire harnesses for automobiles, handles the primary processing of wires at its automated facilities in Prachinburi, a province in eastern Thailand.

The company then sends the semi-manufactured goods to Poipet for final processing -- which can only be done by human hands -- such as covering the wires with thin plastic tubes. Thanks to the cheaper labor, even with transport costs, production expenses shrank 20%.

Sumitronics, an electronic component affiliate of trading house Sumitomo Corp., manufactures parts for household electronic appliances in Poipet using material procured from Thailand, and then ships the finished products back to its Thai plant for inspection.

"By manufacturing on the border, we can utilize the road infrastructure of Thailand, which has matured as an industrial hot spot, and cut costs at the same time," said Noriya Mifune, managing director of Sumitronics Manufacturing (Cambodia).

The Cambodian unit plans to quintuple its overall factory floor space, currently at 1,000 sq. meters, in two years' time.

As part of the Mekong region's southern economic corridor running from Vietnam to Cambodia and Thailand, Poipet is especially well positioned as a secondary production hub for companies already operating in Thailand. It takes only two to five hours to drive from Thailand's eastern industrial areas to the Cambodian city.

Cambodia's factory wages are a mere 60% of those in Thailand. With a general election approaching, the Cambodian government decided to raise the minimum monthly wage 11% to $170 starting next year. Even at that level, Cambodian labor is still cheaper than that in Thailand, where finding people willing to work for minimum wage is a challenge. Cambodia will likely maintain its labor cost edge for decades, predicts Toyota Tsusho.

Furthermore, tariffs in Cambodia will be abolished across the board starting in 2018 as the Association of Southeast Asian Nations integrates its economy. Outside Techno Park, autoparts maker NHK Spring and hard-disk components manufacturer Nidec, both of Japan, also have plants in Poipet.

BETTER TOGETHER The economic activity has quickly transformed the city's landscape. Roads of clay have been paved, allowing for more truck traffic. Popular restaurants from neighboring Thailand such as Cafe Amazon and The Pizza Company dot the area. Japanese restaurants and hotels catering to foreigners are also increasingly setting up shop here.

Poipet's population has doubled to over 100,000 in the past decade. Not only are Cambodians streaming into the city to find jobs, migrant workers who crossed the border to Thailand are coming back, said Poipet's acting Mayor Kan Nara.

The city has served as a historical trading hub, but the civil war during the Khmer Rouge era left the place devastated. After Pol Pot's regime collapsed, he and remnants of his forces engaged in prolonged guerrilla warfare here. Land mines lie hidden on the outskirts of Poipet even to this day.

After fighting ended, Poipet had a renaissance as a casino town for Thais. The gambling houses created jobs and drew tourists. But, Nara says, what Poipet needs to do next is attract manufacturers that can offer sustainable employment and nurture technical expertise.

A Cambodian government soldier mans a 14.5 mm heavy machine gun at a government base camp near Poipet on Jan 3, 1994.   © Reuters

The government has been busy advancing infrastructure projects, which are vital to pulling in companies. A new, truck-only customs gate is scheduled to open on the border entering Thailand near the current gate, which has only one lane and is getting more and more congested. A cross-border rail line linking the Cambodian capital of Phnom Penh with Bangkok is due to begin operations as soon as 2018 after a missing 1.5km link through Poipet is built.

Poipet's fledgling industrial area also has its share of problems. For one, Cambodia's electricity bills are about double those in Thailand, and power outages are frequent. Steady power supplies are a matter of life and death to precision parts manufacturers.

Because of the Khmer Rouge era, people aged 35 to 45 are few in number compared with other age groups. This is the demographic that normally fills the middle-management ranks.

At any rate, the bulk of Cambodians come from agricultural backgrounds, with little to no business experience. Many companies operating on both sides of the border dispatch skilled staff from Thai factories. Toyota Tsusho is taking advantage of this demand by training local talent and hiring them out to tenant factories.

Trade in the Mekong region around Poipet has become increasingly active. Thailand's imports from Cambodia, Laos and Myanmar have jumped in the past few years. With the evolving international division of labor, goods have been flowing both in and out of Thailand.

According to customs data from Thailand's north and northeast, areas that border these three neighbors, the value of exports came to 426.6 billion baht ($13 billion) last year, while imports stood at 168.7 billion baht. Exports were up 40% from 2012, and imports nearly tripled.

Labor-intensive manufacturing jobs are being outsourced to surrounding countries, mainly due to Thailand's rising labor costs. Many Japanese companies also set up factories in Poipet that make components to be assembled in Thailand.

Meanwhile, Thailand is pouring resources into improving productivity through digital means, and into attracting new industries such as aircraft and robotics. But those efforts are suffering from a lack of highly skilled workers.

Nikkei staff writer Hiroshi Kotani in Bangkok contributed to this story.

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