Managing Director Brian Sheley discusses opportunities and risks associated with footwear sourcing in Cambodia and Indonesia with members of the Footwear Distributors and Retailers of America. (December 10, 2013)

1. 10
Footwear
Sourcing in
Indonesia &
Cambodia:
Opportunities
and Risks
Brian Sheley
Managing Director
CascadeAsia
A d v i s o r s
erg News

2. Cascade Asia Advisors is a boutique research
and strategic advisory firm focused on
Southeast Asia.
KEY SERVICES
Research & Analysis | Strategic Advisory
 Due diligence
 Bespoke research
 Supply chain reliability
analysis
 Local market intelligence
 Policy & regulatory
assessment
 Political risk analysis
 Market entry & establishment
strategy design
 Corporate positioning
 Government mapping &
relations
 CSR strategy
 Issues management

3.  92% of our analysts have
advanced degrees
 We speak 10 Southeast
Asian languages
 66% of our clients are from
the private sector though we
serve public sector clients as
well.

4. Why are you on this call today?
You may be in one of a few different scenarios:
1.You are new to Southeast Asia and are evaluating procurement options or the
end market potential for your brand(s);
2.You are already sourcing in the region and are looking to re-evaluate an
existing sourcing relationship;
3.Southeast Asia is an end market for you and you are evaluating how you will
get your products to market (distributor or JV).

5. China still king but…
Source: Travis Coburn 2007, Markit, HSBC

6. Some production headed south

7. zzzzIndonesia’s comparative advantage
Source: BPS, BCG Population and Household Expenditure Database 2012; BCG analysis
250million
Jakarta
201220122012
2020
74
141
million
million
2012
2020

8. zzzzBusiness Climate in Indonesia
Source: WEF, WB, IFC, WJP, TI
GlobalCom
petitivenessIndex,2013-2014
(148)
Ease
ofDoingBusiness,2013
(185)
Rule
ofLaw,2012-2013
(97)
LogisticsPerform
ance
Index,2012
(155)
Corruption
Pereption
Index,2012
(174)
AVERAGEGLOBALRANK
Singapore 2 1 11 1 5 4
Malaysia 24 12 46 29 54 33
Brunei 26 79 - - 46 50
Thailand 37 18 54 38 88 47
Indonesia 38 128 55 59 118 80
Philippines 59 138 64 52 105 84
Vientam 70 99 66 53 123 82
Lao PDR 81 163 - 109 160 128
Cambodia 88 133 83 101 157 112
Myanmar 139 - - 129 172 147
GlobalCom
petitivenessIndex,2013-2014
(148)
Institutions
Infrastructure
M
acroeconom
icEnvironm
ent
Highereducation
and
training
Goodsm
arketefficiency
Laborm
arketefficiency
Technologicalreadiness
M
arketsize
Businesssophistication
Ease
ofDoingBusiness,2013
(185)
Rule
ofLaw,2012-2013
(97)
LogisticsPerform
ance
Index,2012
(155)
Corruption
Pereption
Index,2012
(174)
AVERAGEGLOBALRANK
Singapore 2 3 2 18 2 1 1 7 34 17 1 11 1 5 4
Malaysia 24 29 29 38 46 10 25 51 26 20 12 46 29 54 33
Brunei 26 25 58 1 55 42 10 71 131 56 79 - - 46 50
Thailand 37 78 47 31 66 34 62 78 22 40 18 54 38 88 47
Indonesia 38 67 61 26 64 50 103 75 15 37 128 55 59 118 80
Philippines 59 79 96 40 67 82 100 77 33 49 138 64 52 105 84
Vientam 70 98 82 87 95 74 56 102 36 98 99 66 53 123 82
Lao PDR 81 63 84 93 111 54 44 113 122 78 163 - 109 160 128
Cambodia 88 91 101 83 116 55 27 97 92 86 133 83 101 157 112
Myanmar 139 141 141 125 139 135 98 148 79 146 - - 129 172 147
GlobalCom
petitivenessIndex,2013-2014
(148)
Ease
ofDoingBusiness,2013
(185)
Startinga
business
Dealingw
ith
construction
perm
its
Getting
electricity
Registeringproperty
Getting
credit
Protectinginvestors
Paying
taxes
Tradingacrossborders
Enforcingcontracts
Resolvinginvolvency
Rule
ofLaw,2012-2013
(97)
LogisticsPerform
ance
Index,2012
(155)
Corruption
Pereption
Index,2012
(174)
AVERAGEGLOBALRANK
Singapore 2 1 4 2 5 36 12 2 5 1 12 2 11 1 5 4
Malaysia 24 12 54 96 28 33 1 4 15 11 33 49 46 29 54 33
Brunei 26 79 135 43 29 115 129 117 22 40 158 46 - - 46 50
Thailand 37 18 85 16 10 26 70 13 96 20 23 58 54 38 88 47
Indonesia 38 128 166 75 147 98 129 49 131 37 144 148 55 59 118 80
Philippines 59 138 161 100 57 122 129 128 143 53 111 165 64 52 105 84
Vientam 70 99 108 28 155 48 40 169 138 74 44 149 66 53 123 82
Lao PDR 81 163 81 87 138 74 167 184 126 160 114 185 - 109 160 128
Cambodia 88 133 175 149 132 115 53 82 66 118 142 152 83 101 157 112
Myanmar 139 - - - - - - - - - - - - 129 172 147
GlobalCom
petitivenessIndex,2013-2014
(148)
Ease
ofDoingBusiness,2013
(185)
Rule
ofLaw,2012-2013
(97)
Lim
ited
governm
entpowers
Absence
ofcorruption
Orderand
security
Fundam
entalrights
Open
governm
ent
Regulatory
enforcem
ent
Civiljustice
Crim
inaljustice
LogisticsPerform
ance
Index,2012
(155)
Corruption
Pereption
Index,2012
(174)
AVERAGEGLOBALRANK
Singapore 2 1 11 21 7 1 26 19 10 4 3 1 5 4
Malaysia 24 12 46 45 28 16 73 48 46 39 31 29 54 33
Brunei 26 79 - - - - - - - - - - 46 50
Thailand 37 18 54 55 65 71 38 42 53 80 35 38 88 47
Indonesia 38 128 55 29 86 52 61 35 54 66 62 59 118 80
Philippines 59 138 64 46 63 77 59 59 52 84 72 52 105 84
Vientam 70 99 66 82 60 24 79 91 83 79 37 53 123 82
Lao PDR 81 163 - - - - - - - - - 109 160 128
Cambodia 88 133 83 90 85 54 88 83 94 94 77 101 157 112
Myanmar 139 - - - - - - - - - - 129 172 147
GlobalCom
petitivenessIndex,2013-2014
(148)
Ease
ofDoingBusiness,2013
(185)
Rule
ofLaw,2012-2013
(97)
LogisticsPerform
ance
Index,2012
(155)
Custom
sInfrastructure
Internationalshipm
ents
Logisticsquality
and
com
petence
Tracking
and
tracing
Tim
elinessCorruption
Pereption
Index,2013
(175)
AVERAGEGLOBALRANK
Singapore 2 1 11 1 1 2 2 6 6 1 5 4
Malaysia 24 12 46 29 29 27 26 30 28 28 54 33
Brunei 26 79 - - - - - - - - 46 50
Thailand 37 18 54 38 42 44 35 49 45 39 88 47
Indonesia 38 128 55 59 75 85 57 62 52 42 118 80
Philippines 59 138 64 52 67 62 56 39 39 69 105 84
Vientam 70 99 66 53 63 72 39 82 47 38 123 82
Lao PDR 81 163 - 109 93 106 123 104 111 118 160 128
Cambodia 88 133 83 101 108 128 101 103 78 104 157 112
Myanmar 139 - - 129 122 133 116 110 129 140 172 147

9. zzzzCurrent macroeconomic backdrop
Source: CEIC, Cascade Asia analysis
11,961 Rp/$

10. zzzzIndonesia’s Macroeconomic Outlook
Source: Bloomberg, Cascade Asia
BI Scales Back FX-Market Intervention After Admitting
IDR’s New Equilibrium Closer to 11,500 ($ mil., left axis)
Growth Momentum Slows Before Future Pick-Up
as Domestic Imbalances Correct Themselves

11. Infrastructure spending outlook
Source: World Bank
Indonesia infrastructure investment falls

12. Near-term political outlook
Q4 Q1 Q2 Q3 Q4
2013 2014
Q4
2013
•Negative
investment
list being
finalized
Negative
investment list
likely to be
announced
•April:
Parliamentary
election held
•Mid-July:
Presidential
election to be
held
•September:
Presidential
run-off
election (if
needed)
•October: New
president’s
term begins

13. Near-term political outlook
Joko Widodo “Jokowi”
Pros: Reformer, clean, result
focused, pro-business, non-
elite, earning trust
Cons: New to national stage
Megawati Soekarnoputri
Pros: Would likely choose
Jokowi as running mate
Cons: Traditional elite/patron,
lacks natural leadership
qualities
Prabowo Subianto
Pros: Decisive
Cons: Controversial former
general, businessman with
vested interests
Source: CSIS (Indonesia)
Cascade Asia assessment

14. 2014 wage debate summarized
Source: http://bit.ly/16bMIES
Environment
•High inflation
•Invigorated labor groups
•Nationalistic leaning policy making
•Outgoing president & looming elections
= Most dramatic wage negotiations in recent
history
Developments
•Some foreign manufacturers have threatened to
leave
•Some companies have been bypassing government
through “outsourcing”
•Regulation issued which defines outsourcing as
“supporting services or activities that are not
directly related to the main production
process” Ministry of Manpower and Transmigration Regulation 19, Section 17(2)
•Protests continue

15. Labor cost comparison
Firing costs (in weeks of salary) Monthly base salary (factory workers)
Source: World Economic Forum, Wall Street Journal

16. 2014 Indonesia minimum wage map
West Sumatra: 23%
2012 Rp.1,150,000
2013 Rp.1,350,000
2014 Rp.1,420,000
Papua: 25%
2012 Rp.1,525,000
2013 Rp.1,710,000
2014 Rp.1,900,000
South Sulawsi: 36%
2012 Rp.1,032,300
2013 Rp.1,325,000
2014 Rp.1,400,000
Jambi: 6%
2012 Rp.1,421,000
2013 Rp.1,300,000
2014 Rp.1,500,000
West Nusa Tenggara: 23%
2012 Rp.1,000,000
2013 Rp.1,130,000
2014 Rp.1,230,000
Banten: 19%
2012 Rp.1,110,000
2013 Rp.1,170,000
2014 Rp.1,325,000
Jakarta: 60%
2012 Rp.1,529,000
2013 Rp.1,220,000
2014 Rp.2,440,000
Bangka-Belitung Islands: 48%
2012 Rp.1,110,000
2013 Rp.1,265,000
2014 Rp.1,642,000
Bengkulu: 45%
2012 Rp.930,000
2013 Rp.1,200,000
2014 Rp.1,350,000
East Kalimantan: 62%
2012 Rp.1,117,000
2013 Rp.1,752,000
2014 Rp.1,806,000
Central Kalimantan: 30%
2012 Rp.1,327,000
2013 Rp.1,553,000
2014 Rp.1,723,000 West Kalimantan: 53%
2012 Rp.900,000
2013 Rp.1,000,000
2014 Rp.1,380,000
Source: Investor Daily, Jakarta Post

17. Indonesia’s footwear industry
Source: UBS, UN, Economic Complexity Observatory, MIT Media Lab and the Center for International Development at Harvard University, A.T. Kearney
Global Retail Development Index.

18. Domestic competition

19. Summary: Indonesia
Opportunities
•Market size
•Burgeoning middle class
•Growth outlook
•Improving infrastructure
•2014 election (medium-term)
Risks
•Rising labor costs
•Rigid labor laws
•Currency fluctuations
•Growing domestic competition
•Counterfeiting
•2014 election (short-term?)

20. Cambodia

21. Well established garment factory
ecosystem
Trailblazer in core labor standards
(Better Factories Program)
Cambodia’s comparative advantage

22. zzzzBusiness Climate in Cambodia
Source: WEF, WB, IFC, WJP, TI
GlobalCom
petitivenessIndex,2013-2014
(148)
Ease
ofDoingBusiness,2013
(185)
Rule
ofLaw,2012-2013
(97)
LogisticsPerform
ance
Index,2012
(155)
Corruption
Pereption
Index,2012
(174)
AVERAGEGLOBALRANK
Singapore 2 1 11 1 5 4
Malaysia 24 12 46 29 54 33
Brunei 26 79 - - 46 50
Thailand 37 18 54 38 88 47
Indonesia 38 128 55 59 118 80
Philippines 59 138 64 52 105 84
Vientam 70 99 66 53 123 82
Lao PDR 81 163 - 109 160 128
Cambodia 88 133 83 101 157 112
Myanmar 139 - - 129 172 147
GlobalCom
petitivenessIndex,2013-2014
(148)
Institutions
Infrastructure
M
acroeconom
icEnvironm
ent
Highereducation
and
training
Goodsm
arketefficiency
Laborm
arketefficiency
Technologicalreadiness
M
arketsize
Businesssophistication
Ease
ofDoingBusiness,2013
(185)
Rule
ofLaw,2012-2013
(97)
LogisticsPerform
ance
Index,2012
(155)
Corruption
Pereption
Index,2012
(174)
AVERAGEGLOBALRANK
Singapore 2 3 2 18 2 1 1 7 34 17 1 11 1 5 4
Malaysia 24 29 29 38 46 10 25 51 26 20 12 46 29 54 33
Brunei 26 25 58 1 55 42 10 71 131 56 79 - - 46 50
Thailand 37 78 47 31 66 34 62 78 22 40 18 54 38 88 47
Indonesia 38 67 61 26 64 50 103 75 15 37 128 55 59 118 80
Philippines 59 79 96 40 67 82 100 77 33 49 138 64 52 105 84
Vientam 70 98 82 87 95 74 56 102 36 98 99 66 53 123 82
Lao PDR 81 63 84 93 111 54 44 113 122 78 163 - 109 160 128
Cambodia 88 91 101 83 116 55 27 97 92 86 133 83 101 157 112
Myanmar 139 141 141 125 139 135 98 148 79 146 - - 129 172 147
GlobalCom
petitivenessIndex,2013-2014
(148)
Institutions
Infrastructure
M
acroeconom
icEnvironm
ent
Highereducation
and
training
Goodsm
arketefficiency
Laborm
arketefficiency
Technologicalreadiness
M
arketsize
Businesssophistication
Ease
ofDoingBusiness,2013
(185)
Rule
ofLaw,2012-2013
(97)
LogisticsPerform
ance
Index,2012
(155)
Corruption
Pereption
Index,2012
(174)
AVERAGEGLOBALRANK
Singapore 2 3 2 18 2 1 1 7 34 17 1 11 1 5 4
Malaysia 24 29 29 38 46 10 25 51 26 20 12 46 29 54 33
Brunei 26 25 58 1 55 42 10 71 131 56 79 - - 46 50
Thailand 37 78 47 31 66 34 62 78 22 40 18 54 38 88 47
Indonesia 38 67 61 26 64 50 103 75 15 37 128 55 59 118 80
Philippines 59 79 96 40 67 82 100 77 33 49 138 64 52 105 84
Vientam 70 98 82 87 95 74 56 102 36 98 99 66 53 123 82
Lao PDR 81 63 84 93 111 54 44 113 122 78 163 - 109 160 128
Cambodia 88 91 101 83 116 55 27 97 92 86 133 83 101 157 112
Myanmar 139 141 141 125 139 135 98 148 79 146 - - 129 172 147
GlobalCom
petitivenessIndex,2013-2014
(148)
Ease
ofDoingBusiness,2013
(185)
Startinga
business
Dealingw
ith
construction
perm
its
Getting
electricity
Registeringproperty
Getting
credit
Protectinginvestors
Paying
taxes
Tradingacrossborders
Enforcingcontracts
Resolvinginvolvency
Rule
ofLaw,2012-2013
(97)
LogisticsPerform
ance
Index,2012
(155)
Corruption
Pereption
Index,2012
(174)
AVERAGEGLOBALRANK
Singapore 2 1 4 2 5 36 12 2 5 1 12 2 11 1 5 4
Malaysia 24 12 54 96 28 33 1 4 15 11 33 49 46 29 54 33
Brunei 26 79 135 43 29 115 129 117 22 40 158 46 - - 46 50
Thailand 37 18 85 16 10 26 70 13 96 20 23 58 54 38 88 47
Indonesia 38 128 166 75 147 98 129 49 131 37 144 148 55 59 118 80
Philippines 59 138 161 100 57 122 129 128 143 53 111 165 64 52 105 84
Vientam 70 99 108 28 155 48 40 169 138 74 44 149 66 53 123 82
Lao PDR 81 163 81 87 138 74 167 184 126 160 114 185 - 109 160 128
Cambodia 88 133 175 149 132 115 53 82 66 118 142 152 83 101 157 112
Myanmar 139 - - - - - - - - - - - - 129 172 147
GlobalCom
petitivenessIndex,2013-2014
(148)
Ease
ofDoingBusiness,2013
(185)
Rule
ofLaw,2012-2013
(97)
Lim
ited
governm
entpowers
Absence
ofcorruption
Orderand
security
Fundam
entalrights
Open
governm
ent
Regulatory
enforcem
ent
Civiljustice
Crim
inaljustice
LogisticsPerform
ance
Index,2012
(155)
Corruption
Pereption
Index,2012
(174)
AVERAGEGLOBALRANK
Singapore 2 1 11 21 7 1 26 19 10 4 3 1 5 4
Malaysia 24 12 46 45 28 16 73 48 46 39 31 29 54 33
Brunei 26 79 - - - - - - - - - - 46 50
Thailand 37 18 54 55 65 71 38 42 53 80 35 38 88 47
Indonesia 38 128 55 29 86 52 61 35 54 66 62 59 118 80
Philippines 59 138 64 46 63 77 59 59 52 84 72 52 105 84
Vientam 70 99 66 82 60 24 79 91 83 79 37 53 123 82
Lao PDR 81 163 - - - - - - - - - 109 160 128
Cambodia 88 133 83 90 85 54 88 83 94 94 77 101 157 112
Myanmar 139 - - - - - - - - - - 129 172 147
GlobalCom
petitivenessIndex,2013-2014
(148)
Ease
ofDoingBusiness,2013
(185)
Rule
ofLaw,2012-2013
(97)
LogisticsPerform
ance
Index,2012
(155)
Custom
sInfrastructure
Internationalshipm
ents
Logisticsquality
and
com
petence
Tracking
and
tracing
Tim
elinessCorruption
Pereption
Index,2012
(175)
AVERAGEGLOBALRANK
Singapore 2 1 11 1 1 2 2 6 6 1 5 4
Malaysia 24 12 46 29 29 27 26 30 28 28 54 33
Brunei 26 79 - - - - - - - - 46 50
Thailand 37 18 54 38 42 44 35 49 45 39 88 47
Indonesia 38 128 55 59 75 85 57 62 52 42 118 80
Philippines 59 138 64 52 67 62 56 39 39 69 105 84
Vientam 70 99 66 53 63 72 39 82 47 38 123 82
Lao PDR 81 163 - 109 93 106 123 104 111 118 160 128
Cambodia 88 133 83 101 108 128 101 103 78 104 157 112
Myanmar 139 - - 129 122 133 116 110 129 140 172 147

23. zzzzCurrent macroeconomic backdrop
Source: Trading Economics, Australia Department of Foreign Affairs and Trade
Cambodia’s principal export destinations, 2012
1.United States 25.9%
2.Hong Kong 21.5%
3.Singapore 8.7%

24. zzzzMacroeconomic outlook
Source: Bloomberg, Cascade Asia
Growth momentum stalls in 2014 due to political
gridlock

25. Source: World Bank
Cambodia: Infrastructure
• Main roads in all provinces where
garment factories are located
• Two antiquated railway lines that
run through six of the 11 provinces
with garment factories
• Two major ports (Phnom Penh &
Sihanoukville) & one minor port
(Koh Kong)
• Three international airports & five
local airports

26. Source: ADB
Infrastructure development projects
• A US$142m railway project is underway
• 93% of the southern line is complete,
and trains are operating between
Phnom Penh and Sihanoukville Port.
• Will link Cambodia to the Trans-Asian
Railway Network

27. Leader Hun Sen Sam Rainsy
Party Cambodia
People’s Party
(CPP)
Cambodian
National Rescue
Party (CNRP)
Seats 2008 90 29
Seats won 2013 68 55
Seat change - 22 + 26
• CPP’s Hun Sen re-elected as Prime
Minister
• More evenly balanced National
Assembly
• CNRP disputes election results
and boycotts National Assembly
• Possibility exists for the political
impasse to have positive impacts
• Impasse likely to be resolved by the
CPP allowing for more balance of
power in the National Assembly and
reforms
Political outlook
2013 National Assembly Election Results

28. 2014 wage debate summarized
Environment
•Political impasse
•Unprecedented labor unrest
•Labor unions pushing for US$150/mo
•Violent clashes between protestors and
police
•Recent factory accident and looming safety
concerns
Developments
•Representatives from the labor ministry,
factory owners and workers unions are
negotiating a new minimum wage for 2014
•Wage hikes in January are imminent

29. Labor cost comparison
Firing costs (in weeks of salary) Monthly base salary (factory workers)
Source: World Economic Forum, Wall Street Journal

30. 2014 minimum wages
Source: Wage Indicator

31. Cambodia’s footwear industry
Source: UBS, UN, Economic Complexity Observatory, MIT Media Lab and the Center for International
Development at Harvard University, A.T. Kearney Global Retail Development Index.

32. Summary – Cambodia
Opportunities
•Extensive garment industry ecosystem
•World-class labor standards
•Connectedness and proximity to global port in BKK
•Strong economic growth outlook
Risks
•Wage negotiations
•Safety compliance
•Continued political impasse

33. Preventable missteps
• Being caught in a bad business relationship/missing out on a great business
relationship
• Relying too heavily on a local partner
• Being caught off-guard by: a policy that inhibits your operations, protests,
changed or new regulations, negative press, responding to a bribe, etc
• Viewing IP violations as a cost of doing business
• Failure to have include your perspective in on a draft regulation
• Being caught in a responsive cycle vs. capturing strategic opportunities
• Not clearly understanding where your brand(s) fits in
• Failure to fully appreciate the competitiveness of local players

34. 10 questions to which you need
answers for these markets
1. How will you ensure that your due diligence is sufficiently rigorous for these
markets? OR When was the last time you’ve evaluated your local partner?
2. Where does your brand fit in in Cambodia? In Indonesia?
3. What early warning systems do you have in place for (local and national level)
policies?
4. What system do you have in place today to monitor the media (local and
national)?
5. What is your strategy for responding to IP violations?
6. How are you monitoring ancillary industries?
7. What system do you have in place for teasing out opportunities?
8. Who are your key stakeholders and how are you nurturing relationships with
them?
9. What is your positioning strategy?
10. What are your greatest compliance risks and how are you measuring and
mitigating them?

35. Q & A
t/ 1.360.358.3094
e/ bsheley@cascadeasia.com
www.cascadeasia.com