Industrial activities are key to growing Myanmar's GDP

After decades as a primarily agrarian society, over the past six years Myanmar has made considerable progress towards the development of a sustainable industrial base. Its key manufacturing sectors – which include textiles and garments, food and beverage (F&B) products, and construction materials – have attracted growing investment and, consequently, have rapidly expanded output.

Growing Contribution

In 2014 the industrial sector as a whole accounted for 21% of Myanmar’s GDP, according to consulting firm Solidiance. This is nearly double the sector’s 2008 GDP share of 11%. Similarly, foreign direct investment (FDI) in the country’s manufacturing sector showed considerable growth in 2014 and the first three quarters of 2015, reaching $1.5bn over the period.

“There has been a lot of speculation that investment would slow in 2015 due to uncertainty about the November election,” said U Aung Naing Oo, secretary of the Myanmar Investment Commission (MIC) and director-general of the Directorate of Investment and Company Administration (DICA), both of which fall under the Ministry of National Planning and Economic Development (MNPED). “This has not been the case at all. We currently have more than 50 projects awaiting approval.”

Challenges

While the introduction of a new foreign investment law in November 2012 was a positive step, the MIC admits that Myanmar’s investment environment remains underdeveloped. More concretely, the nation’s power grid is not up to international standards, which is a key hurdle to attracting manufacturing firms that require a steady supply of electricity. “There is considerable potential in light manufacturing in Myanmar,” said Timothy Duckett, the deputy director of UK Trade and Investment in the country. “However, power is an issue. Many companies use generators to ensure a steady supply of electricity.”

Similarly, high-quality transport infrastructure – including roads, port infrastructure and air cargo facilities – is lacking, particularly outside Yangon. While information and communication technology penetration has improved dramatically over the past five years, largely as a result of the successful liberalisation of the telecoms sector, Myanmar’s digital infrastructure is weak compared to neighbouring countries. Finally, the country lacks a large, well-trained workforce.

In recent years the state has introduced a variety of policies aimed at overcoming these issues, with mixed results. While the new government’s development plans had yet to be expressed at time of press, most local players expect Myanmar to continue to liberalise, and for the industrial sector to be central to any long-term economic development programme. Despite half a decade of rapid expansion, Myanmar still lags behind most of its neighbours across a range of indicators.

Closing this gap represents a key opportunity for the domestic private sector and foreign investors alike. Manufacturing and other industrial activities are widely expected to play an increasingly important role in the coming decades. “From 2013 to 2015 there has been strong growth here,” Habib Rab, the World Bank’s senior country economist in Myanmar, told OBG. “This has been driven by services, in particular telecoms and natural resources, but also by manufacturing, which accounts for a growing percentage of total FDI, much of it centred on the garment industry.”

History

The modern industrial sector has only recently become a key economic contributor in Myanmar. Mining and extractive industry was a key component of Britain’s interest in the country during the colonial period, which ran from early in the 19th century until the mid-20th century. Since then, however, Myanmar’s fraught history has prevented industrial development on any sort of nationwide or sub-regional scale. The Second World War, during which the nation was occupied by Japan before the British regained control in 1945, served as a catalyst for a series of domestic political events that resulted in independence in 1948. Over the ensuing decade – and particularly under the socialist regime that came to power in the early 1960s – the government began a long process of economic isolation, nationalisation of the economy and introduction of an import substitution regime, with long-term negative effects.

The country’s isolationist stance was maintained until the mid-1990s, when the government, with the Myanmar Armed Forces (Tadmadaw) at the helm, began to explore options for boosting the economy by opening up slightly to foreign involvement. This position was formalised in 2011, when a sweeping and historic set of political and economic reforms threw open the doors to industrial development. Today, though the economy continues to rely on agricultural exports, Myanmar is in the midst of industrialising, with the involvement of a wide range of foreign players.

Oversight & Regulation

As of late 2015 a variety of organisations were involved in regulating, developing and promoting the industrial sector, though the nation’s political structure is widely expected to change in 2016 as the new government takes control. As mentioned, the MNPED plays a key enabling role in terms of attracting and promoting investment. The MIC, which was initially established in the early 1990s, has undergone a variety of reforms over the years, most recently under the 2012 foreign investment law, when the institution was reorganised under a newly independent board. The Ministry of Industry (MoI), meanwhile, has a mandate to facilitate industrialisation across a wide range of sectors, from agriculture to heavy industry, primarily by supporting the establishment of private small- and medium-sized enterprises (SMEs) and public-private partnerships. The MoI also manages state-owned enterprises involved in industrial activities, while the Ministry of Cooperatives oversees micro-enterprises and industrial cooperatives.

The 2012 Foreign Investment Law is widely credited with launching the current period of intense foreign investor interest in Myanmar. The regulation allowed for 100% foreign ownership in most sectors, increased the duration of land leases, granted three-year minimum tax exemptions, and reduced taxes and duties on raw materials and imported capital goods. More recently, the government has moved forward with additional legislation. In August 2015 it announced the introduction of a minimum wage of MMK3600 ($3.24) for an eight-hour workday, ending more than two years of negotiations between labour unions and the garment industry, which is the country’s largest manufacturing employer. According to the International Labour Organisation (ILO), while the minimum wage will require factory owners to pay their workers more than in the past, Myanmar will remain competitive regionally, with a new minimum monthly wage of around $67, compared to $90 in Vietnam and $128 in Cambodia.

As of late 2015 DICA was in the midst of preparing both a new investment law and a new companies law. According to the World Bank, under the former piece of legislation investment procedures will be streamlined, while the latter aims to strengthen corporate governance practices throughout the country (see Trade & Investment chapter). Myanmar ranked 177th overall out of the 189 countries listed in the World Bank’s 2014 “Doing Business” report, and 189th in terms of starting a business. With these new pieces of legislation DICA aims to boost these numbers.

By The Numbers

Total FDI commitments jumped sharply from March 2014 to February 2015 as compared to the same period in 2013/14, from $3.2bn to $8bn, primarily on the back of industrial activity, according to World Bank data. Myanmar’s gas sector, which relies largely on raw natural gas exports, accounted for 40% of this increase, due to a number of new production-sharing contracts signed during the year (see Energy chapter). Manufacturing – primarily garments, but also construction materials and other products – made up another 20% of the increase, while growth in telecoms investments accounted for another 20%.

Around 150 new manufacturing projects were launched in Myanmar from March 2014 through February 2015 – by far the largest number of individual FDIs – as compared to around 30 gas and oil FDI projects, fewer than 20 projects in the transport sector and similarly low numbers across a range of other industries, including tourism, real estate, power, agriculture and fisheries, according to World Bank data. In terms of value, gas and oil projects were the largest, bringing in an estimated $3.2bn in FDI from 2014/15. This was followed by transport and communication, with $1.97bn, manufacturing, at $1.72bn and real estate, at $1.05bn.

For the 2014/15 period, the nation’s economy posted overall GDP growth of 8.5%, according to the World Bank. Some 2.5 percentage points of this was the result of industrial activity, while 4.2 percentage points can be attributed to expansion of the services sector and 1.8 points to agriculture. In 2013/14 industrial growth accounted for 3.2 percentage points of the total 8.5% GDP growth. Both of these figures are up on 2012/13, when industrial activity represented 2.2 percentage points of overall GDP growth of around 7.5%; and 2011/12, when the sector contributed 2.7 points of overall expansion of 6%.

In 2014/15 Singapore topped the list of sources of FDI in Myanmar by a significant degree, with a total investment of around $5bn, according to World Bank data. Other major sources of FDI during this period included the UK, with $700m; Hong Kong, with some $600m; China, with an estimated $500m; and the Netherlands, with around $400m.

The types of industries attracting FDI have shifted in recent years. The small amount of FDI that came into Myanmar prior to the 2011 economic opening went primarily to natural resources, including hydropower projects, with around 40% of the pre-2011 total; gas projects, with 30%; and mining initiatives, with around 8%, for example. Since 2012 in particular, however, a rapidly growing number of investments have been made in light manufacturing, and particularly the garment industry (see analysis). “Even in 2011 some 80-85% of overall FDI was in natural resource sectors,” U Aung Naing Oo told OBG. “Today, however, just 30% of incoming FDI is in oil and gas projects, 22% is in power generation, 15% is in telecoms and around 20% is in manufacturing, with the latter one of our largest sectors in terms of employment.”

Structure

In 2013 the OECD estimated that 60,000 manufacturing firms were registered in Myanmar. Given the amount of FDI that has poured in since then, this number has almost certainly risen considerably. As of 2015 more than 90% of Myanmar’s overall economy was composed of private companies, with the remaining 10% made up of state-owned enterprises (SOEs), according to the German Institute for Development Evaluation (DE val). SMEs and micro-enterprises account for a considerable percentage of private sector activity, with the former – defined as companies with 5-9 employees – making up 67% of the total according to DE val. Small private firms, with 10-49 employees, accounted for 31%, while medium-sized companies (50-99 employees) made up 2%.

The state has aggressively privatised SOEs in recent years. Since May 2013, for example, bricks have been produced solely by private sector entities, where before the activity was state led. According to the Central Statistical Organisation, in 2014/15 the volume of industrial production by SOEs fell, mainly due to the leasing of government-held factories to private firms. Industrial production by private enterprises jumped over the same period, with large rises taking place in the manufacturing of garments, cooking oil, cement, fertiliser and batteries, among other products.

Site Specific

Since 2011 a longstanding plan to build economic zones in an effort to attract FDI has found its feet. In 2012 Thilawa Special Economic Zone (SEZ), located on a 2342-ha plot 25 km south-east of Yangon, was backed by the Japanese government, launching a period of rapid development in the area. In September 2015 the first phase of Thilawa SEZ celebrated its official launch, though the site had been attracting investors for over a year. Indeed, as of the launch, 44 foreign companies were active in the zone, 23 of which were from Japan, four from Thailand and others from China, Singapore, Malaysia, Australia, Hong Kong, Sweden, South Korea and the US, among others. Four domestic firms have also based their operations at the site. Of the 48 total firms that have signed contracts to set up shop in Thilawa SEZ, 37 are involved in manufacturing, including a large percentage of garment companies.

The zone is owned in part by three Japanese industrial firms – Mitsubishi, Sumitomo and Marubeni – which jointly hold 39% of the SEZ’s management company, Myanmar-Japan Thilawa Development Company. Additionally, the Japan International Cooperation Agency owns 10% of the project, as does a Myanmar state-owned firm, the Thilawa SEZ Management Committee. The remaining 41% of the SEZ is controlled by a domestic holding company, which is partly publicly held and partly owned by a handful of local businesses.

In addition to Thilawa, two other SEZs are currently in development. Dawei SEZ, located in the south of the country, 300 km from Bangkok, was initially established in 2008 as a joint venture between Thailand and Myanmar, though financing issues resulted in the suspension of the project soon thereafter. In August 2015 the two governments were joined by Japan to relaunch the initiative. Development is currently under way.

Similarly, Kyaukphyu SEZ, located in Arakan State in the west, was in the early stages of development as of late 2015. The 75-sq-km site is being jointly managed by China and Myanmar, and is expected to eventually serve as a hub for the petrochemicals industry. In addition to the three SEZs currently under construction, the government has announced plans for at least seven others, which are in the early planning stages.

Through the SEZs, foreign investors have access to better incentives than under the 2012 foreign investment law. These include tax exemption for 5-7 years, depending on the type of business, plus a 50% tax exemption for the following five years, and an additional five years of tax relief on reinvested profits. Investors are also allowed to lease land for up to 75 years, and benefit from Customs duty exemptions on imported raw inputs, machinery, parts and construction materials for the first five years of operation. “The SEZs are an important component of Myanmar’s push to attract more FDI,” said U Aung Naing Oo. “They provide incentives, better power supply and easy access to infrastructure, including ports for export.”

Garments

Garment production is one of the largest manufacturing activities in Myanmar in terms of the number of companies involved, employees and, increasingly, export revenues. In 2014 the segment earned $1.56bn in revenues, according to the Myanmar Garment Manufacturers Association, up from $1.12bn in 2013 and $900m in 2012. The majority of production goes to Japan and South Korea, which together account for nearly one-third of total revenues. Since the EU and the US eased economic sanctions on Myanmar in 2013, however, Western apparel firms have begun to show interest. In June 2014 the American retailer Gap became the first US clothing brand to source from Myanmar. Today, while East Asian companies still make up the largest export destination for Myanmar-made garments, a handful of Western brands – Gap, H&M, Marks and Spencer and Primark – have contracts with local garment producers. By July 2015 some 260,000 workers were employed in the domestic garment industry, according to ILO estimates (see analysis).

F&B

Given Myanmar’s long agricultural history, it is perhaps not surprising that F&B manufacturing has taken off in recent years. Key products include rice, beans, oils, meat, milk, eggs, bottled water and beer, all of which are currently produced almost entirely for domestic consumption.

Lo Hein Company (LHC), the country’s largest bottled water manufacturer, is in the midst of a project to triple production. LHC, which also manufacturers energy drinks and carbonated soft drinks, has seen rising competition from major foreign players in recent years, including Coca-Cola and Pepsi, both of which have opened bottling plants in the country in the past three years.

The beer market has also become increasingly crowded since 2011. Myanmar Beer, the legacy state-owned brand that is now 55% held by Japanese brewery Kirin, has an 80% share of the $375m domestic beer market. In the past two years both Carlsberg and Heineken have set up breweries in Myanmar, in an attempt to tap into what is widely regarded as a growth market. Myanmar’s beer consumption rate was just 3.2 litres per person in 2013, according to Euromonitor, which is one of the lowest rates in Asia. Some forecasts expect the market to double in size before 2019. “International brands like Heineken and Carslberg setting up factories in Myanmar is a positive sign. There needs to be more awareness of the potential of the fast-moving consumer goods segment, with the prospect of becoming a manufacturing hub for South Asia,” Daw Win Win Tint, managing director of City Mart Group, told OBG.

Automobiles

In April 2015 Japanese automobile manufacturer Suzuki announced that it planned to open a vehicle assembly plant on a 20-ha site at Thilawa SEZ, at a cost of more than $10m. The company plans to produce 10,000 vehicles per year in the country once the new plant is completed in 2017. This follows a similar project launched in 2013 by the Tan Chong Group, the regional distributor of Japan’s Nissan, which involves constructing a plant to produce 10,000 vehicles annually in Myanmar’s Bago Region. The factory, which will assemble cars and small trucks from imported, pre-manufactured parts, is expected to begin production in the near future.

Pharmaceuticals

Given the government’s increased spending on health care in recent years (see Health chapter) and rising incomes, the pharmaceutical segment is trending upwards. Low-cost generic importers dominate the industry, with producers from India, China and Bangladesh accounting for the bulk of local consumption, though no individual company holds more than 10% market share. Recent growth has been largely government driven, with the Ministry of Health and related firms placing large orders for pharmaceuticals since 2011. As of late 2015 only state-owned firms manufactured drugs in-country, though this is expected to change as a result of the ongoing privatisation efforts and foreign majors setting up factories of their own in Myanmar.

Challenges facing the pharmaceutical industry include the lack of intellectual property laws, which encourages counterfeit producers; and the relatively porous borders, which facilitate a high amount of drug smuggling. “The government is making progress against smuggling. However, the grey market is well established so it will take time to eradicate,” Lester Tan, managing director of APB Alliance Brewery Company, told OBG.

Outlook

Myanmar’s burgeoning industrial sector faces a number of hurdles to continued expansion. The poor state of infrastructure is an issue, particularly for export-orientated manufacturers, which comprise a growing percentage of sector output. Most industrial exports are moved domestically by road and internationally by port. The fact that almost 80% of Myanmar’s roads are unpaved and 90% of international trade moves through a single port, the outdated Port of Yangon, therefore, represents a key challenge. Despite improvements to the power infrastructure in recent years, many manufacturers continued to rely partially on generators for electricity. Similarly, though the business environment has improved rapidly, most local players agree that the regulatory framework is not yet at international standards.

Nonetheless, given the rapid pace of change in recent years, and taking into account the historic late-2015 elections and the subsequent change in government, industrialisation is expected to grow substantially and continuously over the foreseeable future. A large, youthful population and a nascent middle class point toward significant potential for the expansion of domestic consumption of manufactured products of all kinds. Additionally, Myanmar’s location in South-east Asia, between China and India, means that the country is well-placed to export regionally. “We have traditionally exported only primary products,” said U Maung Aung, advisor at the Ministry of Commerce. “Now, however, we are investing heavily in value-added activities. The industrial sector is central to Myanmar’s economic policy moving forward.”

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The Report: Myanmar 2016

Industry & Retail chapter from The Report: Myanmar 2016

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