Legal Document

Adidas has announced plans to shift more production from China to Southeast Asia, including Cambodia, over the next five years due to the rising cost of labor and materials in China, an official with the German sportswear firm confirmed yesterday.

“It has been our strategy for a while to increase the regional variety among our supply base to be prepared for future business requirements,” Silvia Raccagni, a senior manager for sustainability communication at Adidas AG told Khmer Times.

Her comment followed statements made last week by the company’s chief of global sourcing, John McNamara, about rising labor costs. Mr. McNamara told a workshop for investors the he expected labor costs to keep rising by 11-15 percent a year, while the price of materials like cotton and nylon could rise 1-4 percent a year.

Mr. McNamara was quoted by Reuters as saying that Adidas would cut the amount of clothes and shoes it sources from China, while increasing orders from Cambodia, Indonesia, Vietnam, and Myanmar. He said that by 2020 Myanmar would account for 4 percent of shoe production. Mr. McNamara said rising costs and currency fluctuations would push down the company's gross margin by 0.5 to 1 percent  a year, but its operating margin should stay stable as the company cuts operating expenses as a percentage of sales.

Ms. Raccagni said Adidas was widen its production chain and that Cambodia would remain an important part of it. “We will continue this strategy of having a balanced portfolio in place and will drive our sourcing activities in other countries in line with this,” she said, adding: “Cambodia is an important sourcing country for the Adidas Group and we are committed to it.” 

“It has been our strategy for a while to increase the regional variety among our supply base to be prepared for future business requirements,” she said.  Ms. Raccagni added that China is and will remain a key sourcing country for Adidas Group, with about 30 percent of all products sourced globally for Adidas Group currently coming from China. 

Ken Loo, secretary general of the Garment Manufacturers Association in Cambodia (GMAC), said that he had not received any information about Adidas expanding its sourcing in Cambodia and did not know how much it buys here. “Unfortunately, we do not have specific information on the amount of orders that Adidas has placed in Cambodia,” Mr. Loo said. 

“There is no evidence that Adidas has increased sourcing from Cambodia so I cannot answer your question about why they are increasing sourcing,” Mr. Loo added. 

He also said that because Adidas said it was increasing orders in four countries, including Cambodia, this did not mean that orders would rise in Cambodia. Mr. Loo did not elaborate on this. 

Adidas buys from 24 factories in Cambodia, most of them near Phnom Penh, according to a list supplied by Adidas.  Adidas currently relies on more than 1 million workers at contract factories, particularly in China and Vietnam, to make about 600 million pairs of shoes and items of clothing and accessories it sells a year, according to Reuters. 

Data from the Ministry of Commerce shows that Cambodia’s total export of garments, textiles and footwear reached $4.355 billion over the first nine months of this year, up nearly 9 percent from $4 billion in the same period last year. The new minimum wage agreed on by labor, industry executives and government officials in October will see it rise to $140 per month in January from the current $128.

 
Ms. Raccagni said Adidas welcomed the rise in the minimum wage and said that Adidas requires all of its suppliers to meet legally required wages and any other legally mandated allowances and benefits. “Our prices will be adjusted accordingly, within the normal cycle of price negotiations, to support our suppliers to fulfill the new minimum wage levels,” she explained.

 
In a related issue, the controversial draft bill on trade unions approved by the Council of Ministers in mid-November is still causing some concern. Mr. Loo said some issues had yet to be ironed out. “The trade union law will only be useful if the government enforces it,” GMAC’s secretary general added.

Mr. Loo also expressed concern about the “proliferation” of unions. 

“The recent changes to the latest version of the law that was approved by the Council of Ministers, especially regarding the minimum number required to form a union, will not be helpful to address the problem we have regarding the multiplicity of unions and union proliferation,” he explained.