Cambodia’s growing bicycle industry at risk from trade uncertainties

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PHNOM PENH — Investment in Cambodia’s growing bicycle industry is being put on hold due to trade war uncertainty and a possible end to trading privileges with the European Union.

The industry, worth an estimated $300 million to $400 million, has enjoyed years of growth and the country recently replaced Taiwan as the number one bicycle supplier to the EU, making it a valuable contributor to an economy known for its reliance on textiles and garments.

But that growth has been fueled by Cambodia’s duty-free access to Europe, which could end pending the results of a six-month review that began in February.

“Everybody is basically living day to day,” said Bob Margevicius, an executive vice president of US-based Specialized bike group, which has sourced bicycles from a Cambodian factory for the past six years.

“No one is making any long-term plans. There’s too much volatility and too much uncertainty out there — from the government side, from the European side and the local makers’ side.”

In 2017, the small country of 16 million surpassed Taiwan as Europe’s top bike supplier and also benefited from the trade tensions between Washington and Beijing, which prompted U.S. companies to look for alternative production sites in places like Cambodia.

Trump’s trade war, though, appears to be subsiding — a 10% tariff on Chinese bicycles levied in September was not increased to 25% as threatened. This has lessened the immediate incentive for manufacturers to shift to Southeast Asia.

More pressingly is the EU’s reevaluation of Cambodia’s eligibility for its Everything But Arms duty-exemption scheme due to “severe deficiencies” in its human rights record and a democratic backslide.

Inside Cambodia, much of the focus on the EBA review has fallen on the potential fallout for the country’s multibillion-dollar garment and footwear industry. But the scheme is also critical for bicycles, the country’s third most valuable export.

Bicycles had long been touted as a success story for Cambodia’s long-doubted ability to diversify from textiles, which comprise more than 70% of exports. Currently, three major companies — A&J, Asama and Strongman (subsidiaries of Taiwanese parent companies) — export bicycles from low-tax special economic zones in Bavet, a small city bordering Vietnam.

According to official figures, 1.4 million bicycles were exported from SEZs last year, 88% of them to Europe. A&J Worldwide CEO Jon Edwards said keeping the EBA was “hugely important” for the industry’s health.

“Our success and continued investment has been in a large part due to EBA,” Edwards said. “If the duty reverts to [the regular] rate of 14%, then many countries will have not only a duty advantage over Cambodia, in most cases lower logistical costs and bigger local supply chains with better shipping facilities.”

“It will be very hard to compete with traditional bicycle producing countries like Taiwan, Thailand, Philippines and Indonesia,” he added.

It would be a dramatic turnaround for an industry that had only recently seemed well-positioned to benefit from the simmering U.S.-China trade tensions.

In March, a major Chinese producer — Shenzhen Xidesheng Bicycle — even registered a subsidiary in Cambodia, according to filings with the Commerce Ministry. U.S.-based firms Kent International and Trek Bicycles also planned moves to Cambodia.

But efforts to increase bike exports to the U.S., which stood at $24 million in 2017, according to U.S. trade data, are now also facing the same challenges as those to Europe. In January, U.S. Senators Ted Cruz and Chris Coons introduced a bill demanding a similar review of Cambodia’s duty-free trade access to their market.

Kent Chairman and CEO Arnold Kamler said plans by his company’s Chinese business partners to build a factory in Phnom Penh and begin exporting by September had been put on hold, amid expectations that U.S. tariffs on China could be removed.

“With the strong possibility that the 10% is going to go away, the fire drill is over,” Kamler said, explaining the company still planned to move to Cambodia, but now there was “no timetable.”

As labor costs in China increase, Cambodia’s bicycle makers still stand to benefit in the long-run. But questions also remain about the industry’s capacity to scale.

Cambodian bicycle factories mostly import semi-finished parts that are assembled and finished with local labor and exported under the tariff-free scheme, a process allowed by “cumulation” rules.

This allows companies to source components from certain other Southeast Asian nations and have them counted as Cambodian parts to meet local-origin requirements — 30% and 35% for duty-free schemes to the EU and U.S., respectively.

Cambodia’s compliance with trade rules has been questioned before.

In 2015, the E.U. slapped anti-dumping tariffs on two local factories for re-exporting mostly Chinese-made bikes, circumventing the bloc’s 48% tariffs on Chinese bicycles.

If exports to Europe further increased, Margevicius of the Specialized bike group said there were fears of new anti-dumping investigations.

The bike industry could soon be facing a confluence of terrors, with a free-trade agreement between Europe and Vietnam set to be ratified this year or next.

Vietnam’s emergence as a local duty-free competitor could be a double blow, as the FTA may mean Vietnamese components could longer be counted as local parts by Cambodian factories, according to Edwards of A&J.

“This is a kind of collateral damage and will potentially be a big problem in the case of neighboring Vietnam, where many suppliers and support services are situated,” Edwards said.

Despite the challenges, Margevicius said he does not expect a “mass exodus” from Cambodia and noted that Vietnam’s FTA with the EU would be implemented in stages, with tariffs eliminated in six years for bicycles and three years for bicycle components.

He said he hoped Cambodia will realize what was at stake.

“I’d love to see the Cambodian government become much more engaged and embrace the industry,” he said.

“I can see our business and many other businesses growing and scaling in Cambodia if the government makes some good political decisions.”