International interest and investment are driving development

Thanks to the recent acceleration of investment in manufacturing and retail, alongside other industries, Myanmar has been making rapid progress in its effort to catch up with regional peers. While much ground remains to be covered, its achievements to date are remarkable, given its history and the challenges it faces in a highly competitive neighbourhood. Strong international support and investment, together with the efforts of a hard-working, young, highly literate and motivated population, are paying increasing dividends, as Myanmar opens up to the world and progresses towards joining the ASEAN Economic Community (AEC).

Skin In The Game

A strong indicator of robust growth in manufacturing is the number of approved investment projects and their value. According to figures from the Central Statistical Organisation (CSO), in terms of investment made by Myanmar citizens across all sectors, the 2012/13 financial year saw 65 domestic enterprises launch investments worth $742.5m, with these numbers rising in 2013/14 to 68 enterprises and $1.13bn. The first half of FY 2014/15 saw 20 more investments from domestic enterprises, worth an additional $84.4m.

Manufacturing accounted for the largest share of investment in terms of the number of enterprises involved across all three fiscal years in question, with 39 companies investing a combined $168.7m in the sector in FY 2012/13 and 26 enterprises making $333.7m worth of investments in FY 2013/14. Looking to the first half of FY 2014/15, 11 firms invested $14.15m.

Foreign investors likewise contributed to the country’s investment growth. Some 94 firms invested a total of $1.42bn across all sectors in FY 2012/13, with these numbers rising to 123 and $4.11bn, respectively, the following fiscal year. This was strong year-on-year growth – with one-third more enterprises and a nearly threefold increase in the value of investments. The first half FY 2014/15 also saw significant foreign investment, with 88 enterprises investing a further $3.18bn.

As with domestic investment, manufacturing was a major focus of foreign investment growth. In FY 2012/13 the sector saw 78 enterprises make combined investments of $400.7m. These figures grew to 95 firms and $1.84bn in total investments in FY 2013/14. During the first half of FY 2014/15, 52 companies made nearly $328m of investments in the sector.

In terms of overall investment, figures from the end of November 2014 from the Myanmar Investment Commission (MIC) show manufacturing coming in third, behind the oil and gas and power sectors, in terms of investments received. The MIC further ranked investments by national origin, with China topping the list for overall value of investments, followed by Hong Kong, Singapore, South Korea, Thailand and the UK. While China’s total investments exceeded those of Hong Kong and Singapore combined, in terms of the number of investments made, China came in fourth.

Tricks Of The Trade

Export figures also demonstrate the importance of manufacturing to the country’s economy, with manufactured goods making up the largest share of exports. According to the CSO, the sector accounted for $4.38bn of $8.98bn in total exports in FY 2012/13 and $4.25bn out of $11.2bn in FY 2013/14. In the first half of FY 2014/15 manufactured goods represented $2.21bn of the total $4.71bn.

Manufactured products also made up the lion’s share of total imports, with capital and consumer goods showing strong growth in recent years, rising 4.6% and 16%, respectively, in FY 2012/13 and 52.3% and 60.2% each in FY 2013/14. The first half of FY 2014/15 saw 59% and 27% growth, respectively.

Figures from the International Trade Centre on the average share of goods in total exports from 2009-13 gave a further breakdown of the country’s industrial sector. Clothing averaged 9% of total exports over the period, ahead of any other manufactured product, though still behind the main exports – minerals, with 52.6%; fresh food, with 20.7%; and wood products, at 12.7%. Other manufactured products, which averaged just over 1% of total exports, included jewellery made from pearls, precious stones and minerals, while leather products, particularly footwear, accounted for another 1%. Meanwhile, basic manufactured goods, non-electronic machinery and transport equipment led imports over the period. While manufacturing remains a strong component of the country’s economy, it is still an area often dominated by imported goods. This is a gap that locally based industry – as well as the government – would very much like to bridge going forward.

History Lessons

Although investment growth is helping to gradually industrialise the economy, in many respects Myanmar remains a largely agrarian country. Data from the UN Economic and Social Commission for Asia and the Pacific (UNESCAP) shows that nearly 55% of added value in Myanmar in 2002 came from agriculture, while 13% came from industry. This rebalanced to around 36% and 26%, respectively, by 2012, roughly the same breakdown as Cambodia.

Much of the reasoning for this lies in the difficult history of the country, which had once been a major economic and military power in mainland South-east Asia. The modicum of industrialisation that took place during the British colonial era – focused on resource extraction and processing – suffered as the country was fought through twice during the Second World War. Post-war civil conflicts further impaired rebuilding and revival, while the Burmese Way to Socialism saw a damaging import substitution regime divert resources to unprofitable and unproductive industries. A combination of internal prohibitions on foreign investment and international sanctions kept the economy isolated from outside trends and technologies. An important exception to this was China, with whom Myanmar enjoyed close relations, leaving behind a legacy of large Chinese investment projects – though their future at times appears uncertain, as political sands continue to shift.

Indeed, since the recent start of the reform period, both the industrial and retail sectors continue to be confronted with the challenge of establishing themselves in an environment that is still very much in transition from earlier economic and political reforms.

Rules & Regulations

Two bodies are central to the manufacturing sector – the Ministry of Industry (MoI) and the Ministry of Cooperatives (MoC). The Ministry of National Planning and Economic Development also plays an important role, setting overarching strategies and overseeing the MIC – though the MIC may soon become an independent body, depending on reforms to two major investment laws: the 2012 Foreign Investment Law (FIL) and the 2013 Myanmar Citizens Investment Law. In the run-up to the targeted launch of the AEC in 2015, they are expected to be combined into a single law, which would be administered by a newly independent MIC. The MoI oversees both state-owned enterprises (SOEs) and private sector manufacturers, including small and medium-sized enterprises (SMEs), while the MoC looks after cooperatives and micro-enterprises, which often exist at the village level.

Manufacturer Metrics

According to UNESCAP, there were around 60,000 registered manufacturers operating in Myanmar in 2014, along with many informal outfits, with the OECD estimating that some 80% of all private enterprises fall into the latter category. While the MIC defines SME manufacturers as those having 10-100 workers, a wider definition is currently being reworked as part of the drafting of a new SME law.

An assessment of the share of value added by type of enterprise ownership showed that in 2011, SOEs contributed 26%, while private enterprises and cooperatives accounted for 73% and 1%, respectively. The UNESCAP report found that food and beverage SMEs were the most prevalent private enterprise, followed by construction materials, clothing and ready-wear items, and metals and minerals.

Meanwhile, SOEs tend to be larger and concentrated in key industries, with heavy metal products, dockyards and construction materials accounting for over one-third of the 639 manufacturing SOEs in 2013. However, this is declining as a result of privatisation efforts under way since 1995. Many of the remaining SOEs are unprofitable, with the MoI announcing SOE losses of MMK90bn ($90m) from the two previous fiscal years in October 2014. Indeed, only two of the six SOEs under its purview made a profit in FY 2012/13.

Words Of Encouragement

With direction from the government, the MIC lists activities that are open to foreign investment, with several still reserved for SOEs. In the manufacturing sector, restrictions only apply to most security and defence equipment. That said, the government can rule to lift an embargo as it sees fit.

The MIC also issues permits for foreign investors under the FIL, with companies entitled to a series of incentives, including exemption from income tax for up to five years; the right to deduct depreciation of capital assets; exemptions from international taxation and Customs on certain imported goods; and incentives for long-term investment. Goods manufactured for export also receive a commercial tax exemption.

Manufacturing Leaders

Traditionally, the main manufacturing activity in Myanmar has been textiles and ready wear. Indeed, according to consultancy Charltons Myanmar, in 2003 apparel accounted for 85% of the country’s exports, turned out by some 300-400 different factories. The US was a major market for these products, until sanctions brought in 2003 halted trade, with the Myanmar Garment Manufacturers’ Association (MGMA) estimating that output is only now back at the levels it enjoyed prior to the sanctions.

In the interim, the main export markets for apparel shifted to Japan and South Korea, with companies such as Japan’s Famoso Clothing becoming major investors in the country. Japan receives some 34% of Myanmar’s total clothing exports, according to the MGMA, and is also investing in sector development via projects such as Teijin Group’s Teijin Frontier Myanmar, which will act as an on-the-ground consultancy.

This all may be about to change, however, with signs of renewed Western interest in Myanmar as a source for apparel. In mid-2013 the EU granted the country generalised system of preferences status – an exemption from quotas and tariffs – and H&M began placing test orders in the country. In June 2014 Gap Inc became the first US apparel company to return to Myanmar, announcing it would source some of its outerwear products at two South Korean-owned factories in Yangon. This elicited a positive response from the MGMA, with its chairman, U Myint Soe, telling local press that he hoped Gap Inc’s presence would mean improved conditions for garment workers and that apparel exports would reach $2bn by 2016 – compared to around $1.2bn in 2013, which saw a 33% increase over 2012, according to local news outlet DVB Myanmar.

According to the MGMA, there were 200 garment factories in the country as of mid-2014, up from 181 in November 2012. Meanwhile, the UK-based garment producer and designer, Dewhirst, is also reportedly considering a move into Myanmar, while Tesco is also looking to source products in the country.

As low labour costs are a major draw for many foreign firms, Myanmar is likely to attract more investment in the garment sector. According to industry reports, wages for qualified tailors can be as low as $64 per month – or $85-110 including overtime and bonuses – compared to a recently introduced $128 minimum wage in Cambodia and $358 in Thailand. Indeed, six of Thailand’s top garment manufacturers signed deals with the MIC in 2014 to open factories in the country.

However, this comparative advantage is not without risks. To that end, the EU and the International Labour Organisation are working closely with labour unions, the MGMA and the authorities to ensure best practices in garment factories, with programmes under way to avoid exploitation, provide training to workers and ensure good health and safety standards in factories.

The automotive sector also recently received a boost, as Nissan and its regional distributor, Tan Chong Group, were granted a licence to produce completely knocked down units – or vehicles assembled entirely from pre-manufactured, imported kits – in 2013 (see analysis). A plant with a 10,000-unit annual capacity is being built in the Bago Region and is expected to be operational by 2015. It will be the first such facility in the country, focusing on small passenger cars and pickup trucks.

In The Zone

Many factories are located in industrial zones (IZs) spread around the country, with a major concentration in the Yangon Region, which is home to 20 IZs, according to the Myanmar Industries Association. This clustering allows companies to take advantage of proximity to the country’s most-populous city and its well-connected port and airport, as well as benefit from cluster synergies, such as shared infrastructure.

The MoI, along with national and regional governments, has been advancing a similar strategy by developing special economic zones (SEZs) – with 18 already established and another seven in the pipeline. Three such zones are currently being rolled out: Thilawa, 23 km south-east of Yangon; Dawei, in the southern Tanintharyi region; and Kyaukphyu, in Rakhine State.

The Japan International Cooperation Agency is part of the joint venture developing the Thilawa SEZ, along with Mitsubishi, Marubeni and Sumitomo. Indeed, 49% of project capital is coming from Japanese firms, with the remaining 51% split among nine local companies and a state entity. The 400-ha initial phase (of a total 2400 ha) is under way and set for completion in 2015.

Dawei’s first phase involves an area of just over 1000 ha – 5% of the zone’s total – and will be in service within five years. Kyaukphyu, meanwhile, has a price tag of $280m, with Singapore’s CPG Consortium appointed as master planner. Phase one of the project is scheduled to be completed in the first quarter of 2015, according to announcements made in mid-2014. Kyaukphyu will be the only zone with a deep-sea port, with gas and oil pipelines from the SEZ to China already in place, along with some hydrocarbon storage facilities.

A fourth zone was recently announced for Muse, in Shan State on the Chinese border, with the goal of boosting the already considerable cross-border trade. Indeed, according to analysts from Asia Briefing, some 60% of the more than $3bn in trade between China and Myanmar in FY 2013/14 passed through the city.

Companies that locate in the SEZs benefit from an incentive package similar to that of the FIL under the 2014 Myanmar SEZ Law. The Central Body for the Myanmar SEZ, the zones’ ruling organisation, operates and assigns this package, which features tax holidays, long-term leases, protection against nationalisation and guarantees on profit repatriation – all of which serve to assuage investor concerns and promote investment. Exemptions on Customs duties and the carrying forward of losses for developers are also on offer.

As more foreign companies do business in Myanmar, labourers could also start to benefit. “The business environment is evolving at a steady rate,” Christoph Steinwehe, the CEO of Loi Hein Company, told OBG. “This can easily be seen in the arrival of international players such as Pepsi and Coca-Cola, which has also led to an increase in the average wage.” Indeed, a stronger presence of global firms could also help raise corporate governance standards. “The entrance of international players will in itself assist in the ease of doing business in Myanmar, because they arrive with their own set of standards and practices in place,” Daniel Sjorgen, the managing director of Carlsberg Myanmar, told OBG.

However, SEZs have not been without controversy. Some argue that the methods used to secure land from previous owners were not always equitable. Kyaukphyu may also see carry-through effects from a decline in Chinese investment, which has long been a driver of plans for the pipeline and transport links to the zone. Kyaukphyu is also of key importance to the proposed Bangladesh-China-India-Myanmar corridor, a project to boost regional transport and trade links.

Infrastructure concerns also remain at the forefront of SEZ discussions. “Industrial zones like Hliang Thar Yar, Shwe and Pyithar are faced with difficult challenges, such as water supply, power limits and the lack of fluid labour,” U Than Tun Win, managing director of TA Resources Myanmar, a supply and distribution company, told OBG. “These issues faced by the current industrial zones should be addressed before the government looks to complete the SEZ projects.” Nonetheless, the SEZ strategy remains a key part of the agenda.

Outlook

With robust economic growth expected to continue, paralleling continuing investor interest, industry and retail are likely to see further expansion in 2015 and beyond. However, Myanmar is still relatively unchartered territory for many international firms.

Global players need to develop and hone their market entry strategies. While almost all manufacturing areas offer major upsides, an awareness of changing local conditions and the ability to adapt to political dynamics will be key for sustained growth. Despite its challenges, the country’s strong comparative advantages and desire for rapid development are likely to keep investors and locals engaged for many years to come.

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The Report: Myanmar 2015

Industry & Retail chapter from The Report: Myanmar 2015

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