Cambodia’s Industrial Transformation: From Garments to Diversification
Cambodia has emerged as a key player in Southeast Asia’s low-cost manufacturing sector, primarily driven by its garment industry. For over two decades, preferential trade agreements with major markets like the United States and the European Union have facilitated the growth of this sector. By providing cost-competitive labor and duty-free access, these agreements have allowed Cambodian manufacturers to thrive. Currently, garment exports constitute over 70% of the country’s total merchandise shipments, employing more than a million workers and contributing approximately 15% to the national GDP.
However, the very elements that fueled this explosive growth—such as low wages, tariff preferences, and a youthful workforce—are increasingly inadequate for ensuring long-term industrial resilience. Rising labor costs and the desire for international buyers to diversify sourcing bases are reshaping the landscape. In response, Cambodia is actively seeking to diversify its manufacturing base, emphasizing industrial upgrading, regional trade integration, and targeted incentives for higher-value sectors.
The Need for Diversification
The global shift in manufacturing priorities—driven by automation, Environmental, Social, and Governance (ESG) requirements, and evolving trade dynamics—has highlighted the risks of over-reliance on a single sector. In August 2020, the European Union partially suspended its Everything but Arms (EBA) benefits for Cambodia, which had significant ramifications for garment, footwear, and travel goods exports. As of June 2025, roughly 20% of Cambodia’s exports to the EU are now subject to standard Most-Favored-Nation (MFN) tariffs. While 80% of exports still enjoy duty-free access, the loss of preferences in critical sectors has undercut the competitiveness of Cambodian products in European markets, making it essential to pivot towards more resilient, diversified industries.
The EU has indicated its willingness to restore full access if labor rights and civil liberties improve. Until then, ongoing policy uncertainty necessitates a push for diversification into industries that are less susceptible to external political pressures.
Emerging Manufacturing Sectors
In light of these challenges, Cambodia is expanding its manufacturing capabilities beyond garments, focusing on seven higher-value industries: electronics, automotive parts, electrical equipment, pharmaceuticals, rubber and plastics, furniture, and agro-processing. These sectors are gaining momentum through foreign direct investment (FDI), regional trade agreements, and government support via special economic zones (SEZs).
Electronics and Semiconductor Assembly
Cambodia’s electronics sector has seen notable growth, with exports of electronic components rising from negligible amounts in 2015 to over $900 million by 2019. By 2023, electrical and electronic equipment (E&E) exports reached $730 million, accounting for nearly 14% of total exports. The sector, supported by over $450 million in FDI since 2011, primarily focuses on component assembly, such as wire harnesses and semiconductors. Japanese and Chinese manufacturers lead the charge, and by 2025, the number of qualified investment projects (QIPs) in this area could exceed 100.
Facilities are largely located in SEZs, strategically positioned to cater to downstream factories in neighboring countries like Vietnam and Thailand. While E&E investments primarily support regional value chains, domestic supply capabilities remain limited, indicating a pressing need for greater upstream integration.
Automotive Parts and Components
The automotive parts sector is still in its nascent stages but is drawing increasing interest from global buyers. From October 2023 to September 2024, there was a 43% year-on-year increase in automotive parts export shipments—primarily directed toward Peru, India, and Colombia. The Cambodian government has set ambitious goals of achieving $500 million in automotive exports by 2027, along with the creation of 10,000 jobs.
With vehicle assembly plants from major manufacturers like Ford and Toyota opening in the country, local demand for components like wire harnesses and brake systems is expected to grow. Significant growth is also seen in tire manufacturing, with tire exports surging by 129.7% in a single year.
Electrical Equipment and Appliances
The electrical equipment sector has emerged as a significant contributor to Cambodia’s manufacturing exports. In 2023, exports of electrical machinery and appliances reached $3.13 billion, representing 13.8% of all exports. Despite some corrections in growth rates in 2024, this sector remains crucial, benefiting from labor-intensive production suitable for large-scale assembly.
The establishment of infrastructure and global market linkages continues to attract FDI, positioning Cambodia competitively for various electrical products.
Pharmaceuticals and Medical Products
Pharmaceutical manufacturing is gradually growing, with over 30 licensed factories producing a mix of over-the-counter drugs, herbal remedies, and generics. In 2024, $25 million in new investment proposals in this sector were made, supported by government policies that aim to improve regional export potential.
Despite the current low output, the sector is positioned for strategic growth in essential medicines and contract manufacturing over the coming years.
Rubber and Plastics
Cambodia’s rubber and plastics sector is beginning to diversify, exporting over 200,000 tons of natural rubber annually, generating significant revenue. The shift towards downstream manufacturing is evident, with increasing investments in glove production and packaging materials.
The focus on enhancing transport connectivity and customs efficiency under ASEAN initiatives further solidifies this sector’s growth potential.
Furniture and Wood Products
The wooden furniture sector is also experiencing rapid growth, with exports more than doubling between 2020 and 2023. The enforcement of stricter regulations concerning timber sourcing has helped boost transparency and market access.
Agro-processing and Food Products
Agro-processing is a vital sector that the Cambodian government is keen to develop, reducing post-harvest losses while generating rural jobs. Rich agricultural resources pave the way for processed food exports, which reached $1 billion in 2023. Ongoing investments primarily target cashew processing, a rapidly growing area where efforts are underway to boost domestic capabilities and reduce reliance on foreign processors.
Comparative Sector Analysis
| Sector | Capital Intensity / Tech Requirements | Workforce Skill Needs | Value Chain Positioning | Export Destinations / Market Access |
|---|---|---|---|---|
| Garments | Low–moderate capital; limited automation | Entry-level operators; basic quality control | Labor-intensive, “cut-make-trim” model | US, EU, Japan; $11.68B exports in 2024 |
| Electronics | Medium–high capital; cleanrooms and SMT lines | PCB assemblers; test engineers | Mid-level assembly; limited upstream integration | China, South Korea, Vietnam |
| Automotive Parts | High capital; CNC and IATF certification | Vocational-certified CNC operators | Basic to mid-level components; joint ventures | Thailand, Vietnam, Philippines |
| Electrical Equipment | Medium capital; lab-certified component lines | Electrical assemblers, safety testers | Component and sub-assembly export | Japan, South Korea, China |
| Pharmaceuticals | Very high capital; ISO 13485, GMP compliance costs | Pharmacy techs, clean-room staff | Final assembly/packaging only | Small exports to Laos, Myanmar |
| Rubber & Plastics | Moderate–high capital; tire and molding | Specialized molding and quality control skills | Upstream rubber → downstream tires | Malaysia, Vietnam, Singapore |
| Furniture & Wood | Variable capital; CNC and certified audits | Carpenters, CAD/CAM supervisors | Plantation wood → finished furniture | US, EU, Japan; $331M in H1 2024 exports |
| Agro-Processing | Moderate capital; HACCP, GMP setups | Rice-mill operators, canning and bottling staff | Smallholder-linked food exports | EU, China, US; 212K MT exports to EU in 2024 |
Outlook for Cambodia’s Industrial Upgrading
The successful transition from a garment-dependent economy to a diversified industrial base is contingent on improvements in infrastructure, skills development, and regulatory transparency. Core sectors like electronics, automotive parts, and electrical equipment are paving the way for this transformation, while pharmaceuticals, food processing, and plastics show considerable promise. As Cambodia continues to navigate these changes, the urgency for diversification is more apparent than ever, making it a strategic necessity for sustainable growth.