Economic zones and infrastructure developments improve Myanmar's attractiveness for manufacturing

 

Industry in Myanmar has benefitted from a period of strong economic growth, an increasingly welcoming environment for foreign investment and more open regulatory reforms. However, as Myanmar heads into an election year, it is hoped that the reform agenda does not stall as politics ramps up.

Regulations

In November 2019 Parliament voted in favour of President U Win Myint’s proposal to merge the Ministry of Industry and the Ministry of Planning and Finance, in order to help reform state-owned enterprises through private investment by establishing a government body dedicated to supporting this process. Other major legal changes that have impacted the sector in recent years include the Myanmar Companies Law, which came into force in August 2018 and allows foreigners to own 35% of a Myanmar company without changing the status of said companies, enabling them to keep their privileges as a domestic company. This still leaves considerable sway with the domestic partner, but it is a step in the right direction.

The Myanmar Investment Law permits state and regional investment commissions to approve investments of up to $5m. Larger investments or investments designated as strategically important – that is, those that target state-owned land or involve significant community disruption – still require approval from the Directorate of Investment and Company Administration (DICA), an entity of the Myanmar Investment Commission. Under the Myanmar Investment Promotion Plan (MIPP), domestic and foreign investment are directed in line with the National Comprehensive Development Plan 2011-30, which aims to make Myanmar a middle-income country over the next decade. The MIPP seeks to set up a land bank and a digital platform that provides investors with information on government land available for industrial investment.

Promoting Investment

In November 2018 the government launched the Project Bank, which prioritises projects in need of funding and makes them available for review on a transparent online database. If successful, the initiative should improve the allocation of development finance and private investment, promote public-private partnerships (PPPs), and address criticisms over the opacity of government contracts with foreign partners. The initial list of 30 prioritised projects is primarily in the transport and energy sectors, and includes several fertiliser plants, as well as the multibillion-dollar New Mandalay Resort City (NMRC) and its industrial and agri-business zones.

The government plans to offer cheap or free leasing of land as its contribution to PPP arrangements, though it remains to be seen whether the private sector will view this as a satisfactory contribution. For example, the regional government of Yangon plans to develop the MMK151bn ($98.4bn) Ngwe Pin Lel Integrated Logistics Zone and Inland Water Transport Jetty as a PPP, with the objective of boosting local manufacturing in the area. In October 2018 U Myint Thaung, the regional minister of planning and finance, told local media that, “the government does not have to use public money for the project and will receive revenue from the lease for the land and an annual project concession fee.”

Investments in the government’s priority sectors are eligible for numerous incentives, including exemption from corporate income tax for up to seven years, exemption from Customs duties on materials that are not available domestically, and 50-year land leases – which can be extended twice, by 10 years each time. Promoted sectors include manufacturing – aside from products that are harmful to health, such as tobacco and alcohol – the establishment of industrial zones, infrastructure and renewable power.

An exception to these rules are special economic zones (SEZs), primarily the Japan-backed SEZ at Thilawa on the outskirts of Yangon, which has its own criteria and committee for granting investment approvals and thus does not require DICA involvement. Crucially, the committee is funded on an ongoing basis through a monthly charge levied on all tenants, which narrows the opportunity for corruption and ensures consistency in the way companies operate within the zone.

SEZs, or free zones, are generally focused on export industries, while promotion zones foster businesses targeting the domestic market. In total, Myanmar hosts more than 30 industrial zones, and the government has vowed to crack down on companies that purchase plots and then fail to develop them. “All the industrial zones are full, so it is difficult for foreign investors, but the government is trying to expand the number of zones in Ayeyarwady Region – as they are close to seaports – and Bago Region, which is a two-hour drive from Yangon,” U Soe Myint Aung, director of DICA, told OBG.

Performance

Growth in Myanmar’s industrial sector is underpinned by low labour costs, expectations of rising domestic demand and attractive incentives in economic zones. Myanmar’s minimum wage is just over $3 per day, the lowest in the region.

Under the national industrial policy released by the previous government in 2016, shortly before the National League for Democracy took office, Myanmar aims to increase industry’s share of GDP from 33% in FY 2013/14 to 37% by FY 2030/31. However, World Bank data shows that industry’s share of value-added GDP slipped to 32.3% in 2018 from 36.3% in 2017. In its “Myanmar Economic Monitor June 2019” report the World Bank forecast overall industrial growth to reach 9.6% in FY 2018/19 and 9.5% in FY 2019/20 as a result of increased manufacturing and construction activity. The report also estimates that manufacturing output growth rose to 10.2% in FY 2018/19 from 10% the previous year, backed by greater demand and diversification of activities. The European Chamber of Commerce in Myanmar (EuroCham) notes that of the 1555 foreign direct investment (FDI) projects approved since 1988, 60% were in manufacturing. It is the third-largest sector in terms of FDI value, behind oil and gas, and power.

Manufacturing, which accounted for three-quarters of the industrial sector in 2018/19, has been hampered by kyat depreciation and inflation in recent years, which limited companies’ ability to import essential raw materials. However, an ongoing shift to higher-value-added production – including of agriculture machinery, auto parts, and building structures and components – is driving strong growth. This is reflected in the Nikkei Myanmar Manufacturing Purchasing Managers’ Index, which clocked a one-year high of 54.2 in May 2019 and indicated rising employment in the sector since December 2018. Downside risks include the EU possibly delisting Myanmar from its Generalised Scheme of Preferences framework, which allows it to export goods tariff-free, as a result of human rights concerns linked to the conflict in Rakhine State.

FDI flows are already under pressure in this regard, with Western investors shying away from Myanmar in recent years. The country missed its target of keeping FDI flat at $5.8bn in FY 2018/19, bringing in $4.5bn instead. The target for FY 2019/20 is to return to $5.8bn. Announcing the results, U Thant Sin Lwin, director-general of DICA, said the government intends to run investment promotion initiatives in ASEAN and Europe, with a focus on manufacturing. DICA figures show that in FY 2018/19 FDI in manufacturing was second only to transport and communications, at $1.35bn.

Myanmar hopes to benefit from the US-China trade war, as manufacturing companies increasingly seek to relocate from China in order to bypass US tariffs. In addition, investment has also increased from China, rising by $585m in the 12 months to April 2019. This added capital has been partially credited with boosting industry and lifting employment to the highest level since 2015. However, there are still obstacles that are hindering further growth, including a $120bn infrastructure gap, which is felt in power cuts and margin-sapping transport times and costs.

Infrastructure

Industry across Myanmar is under pressure from rising electricity costs, following the government’s first hike in electricity tariffs in five years. One auto components trader told OBG that the change has lifted their prices by 40% and overall costs by 5-7%. However, broadly speaking, the industrial sector understands the need for change given Myanmar’s alarming energy issues and history of rock-bottom pricing, and is therefore prepared to absorb higher rates if this results in a more stable provision of service.

“Even in Thilawa the power supply is sometimes unreliable, and this is unacceptable for advanced manufacturing,” U Thurane Aung, vice-president of Myanmar Japan Thilawa Development (MJTD), told OBG. “Higher tariffs will only be stomached if they are announced alongside a clear plan – preferably a three-year roadmap – to improve supply.”

Major institutions such as the IMF forecast that Myanmar’s economy will grow by more than 6% through FY 2019/20, partially as a result of infrastructure investment and mega-projects. Transport developments also have the potential to improve Myanmar’s appeal for industrial investment by resolving logistical challenges. For example, in May 2019 India’s Adani Yangon International Terminal secured DICA approval to construct a $290m port to handle an additional 800,000 twenty-foot equivalent unit (TEU) containers. “Total container throughput in Myanmar is currently 1.2m TEUs but we are looking at GDP growth of around 6.5%, which will take the market to 2m TEUs by 2024. Hence, we feel there is room for more players in this industry,” Sunil Seth, CEO of Adani Myanmar and president of the India Myanmar Chamber of Commerce, told local media at the project’s announcement.

From a governance standpoint, Myanmar’s Ministry of Transport and Communications is collaborating with the Japan International Cooperation Agency to create a National Logistics Master Plan (NLMP), which aims to develop infrastructure capable of handling an expected 85% rise in cargo movement to 312m tonnes by 2030. The NLMP will include 167 project proposals designed to create an efficient logistics system that would encourage foreign investment, as well as assist in unlocking industrial and agricultural development.

Subsectors

Garment exports are the mainstay of Myanmar’s industry, and have increased from $349m in 2010 to over $4.6bn in 2018, with more set to come as Myanmar emerges as perhaps the final frontier of low-cost clothes manufacturing. Auto accessories and replacement parts, such as car seats, airbags and lubricants, present strong opportunities for growth. However, more work is needed to nurture domestic industry, for example by mandating that new cars source a proportion of components locally, or ensuring that foreign entrants commit to using local content and reach a certain volume of assembly units. This will require collaboration between industrial players and related government bodies to devise an automotive industrial development plan aimed at encouraging investment into the related industries. “Local involvement in the supply chain is essential in creating longterm competitiveness, affordability for consumers and profitability in the manufacturing sector,” U Than Htaik Lwin, CEO of Proven Group of Companies, a consortium of auto-related manufacturers, told OBG. “However, the domestic automotive sector remains small; firms wanting to join the supply chain must be able to operate at international compliance standards.”

Manufacturers are also positioning themselves to take advantage of Myanmar’s infrastructure investment pipeline. For example, Thailand’s TOA-Chugoku Paints has earmarked BT500m ($15.5m) to build its first overseas paint factory via a joint venture in the Thilawa SEZ, focusing on heavy-duty coating and marine paint, specifically to capture demand from mega-projects.

Moreover, EuroCham suggests foreign investors seeking to invest in local manufacturing should aim to secure land in an SEZ, and have highlighted agro-processing, machinery and chemical industries as areas with high growth potential. It also suggests the country’s low labour costs, especially in second-tier cities such as Pathein, Bago and Mawlamyine, present opportunities to produce garments, toys and stationery.

Food and packaging is also taking off as manufacturers bet on long-term demand for foodstuffs among Myanmar’s 53m population, according to U Soe Myint Aung. “It is mostly Korean and Japanese companies, with some Chinese, Indonesian and Malaysian firms, that are targeting the domestic Myanmar market,” he told OBG. He added that the government is working to encourage value-added food production, and these efforts are paying off. For example, in November 2019 the local unit of Singapore’s Wilmar International, the world’s largest palm oil trader, announced plans to build Myanmar’s largest rice mill, with an expected output of 1200 tonnes of rice per day, in the Thilawa SEZ.

However, attending the ProPak Myanmar exhibition in 2019, German packaging company executives told OBG that Myanmar is being held back by weak enforcement of food safety standards, and that they faced an unbalanced playing field as Chinese machines are exempt from import duties, which can be as high as 40%. The weak kyat had also made it prohibitively expensive for customers in Myanmar to afford high-quality food processing and packaging machinery from abroad.

Industrial Zones

In the 10 months to July 2019 Myanmar’s SEZs attracted FDI of $1.72bn, with Singapore being the largest source, accounting for $646.6m, or 37.5% of overall investment. This was followed by Japan, with $535.4m, and Thailand, with more than $174.1m. The 2500-ha Thilawa SEZ remains the example other SEZs aim to follow. The zone currently employs about 10,000 people, having secured over $1.6bn in approved investment. As of midway through 2019 more than half of the Thilawa SEZ’s developed area of 5.83m sq metres was occupied, attracting over 100 companies, with 90 under foreign ownership and 13 joint ventures. There were 54 Japanese companies, 15 from Thailand, eight from South Korea and six from Taiwan, according to the MJTD. The SEZ is proceeding with plans to develop the latter phases of Zone B, with an eye to opening another 500,000 sq metres in 2020.

MJTD’s Thurane Aung told OBG that one of the issues facing companies in the Thilawa SEZ is high labour turnover, with middle management particularly difficult to retain amid high wage growth. There is a dearth of local management talent in Myanmar as a consequence of the weak educational environment during military rule, which bids up wages for capable hires. The country also suffers from brain drain, with an estimated 2.3m Myanmar citizens working in Thailand in 2019, due to the relatively higher wages. Implementing an incentive scheme to lure some of that talent home could have a significant impact on industrial productivity.

In terms of building materials, a virtuous cycle has emerged in which local industries are supporting diversified investments and local production. For example, steel firms in the Thilawa SEZ, including JFE Meranti Myanmar and Vietnam’s PEB Steel Buildings, are seeking to ramp up production from the current 50,000 tonnes to meet domestic demand, as 90% of Myanmar’s annual demand of 2.5m tonnes is sourced from overseas. In turn, concrete piles are now being manufactured in the SEZ, with sand and aggregate sourced locally.

Foreign Partners

There are multiple foreign partnerships that should facilitate further investment in local industry. South Korea, for example, is laying the groundwork for its companies to invest more heavily in Myanmar. Myanmar’s Urban and Housing Development Department in August 2019 signed a joint venture with Korea Land and Housing Corporation to develop the Korea-Myanmar Industrial Complex in Hlegu, 10 km north of Yangon. The 225-ha project will leverage expressway access to Yangon’s international airport and port facilities to attract investment from an expected 200 export-orientated South Korean firms. Loans from Export-Import Bank of Korea are being secured to build a dedicated 100-MW substation and transmission line, and a new water channel from the Kalihtaw Dam, with an eye to fully completing the project by 2023.

Meanwhile, the China-Myanmar Economic Corridor, which is being developed as part of China’s broader Belt and Road Initiative, has seen construction begin at the first of three economic cooperation zones on the China border. Muse economic zone, the first of these three zones, aims to promote domestic and foreign investment, create business opportunities and jobs, support small and medium-sized enterprises, develop manufacturing, and improve bilateral trade.

In 2018 the government agreed on revised terms with China for a deep-sea port and SEZ at Kyaukphyu in Rakhine State that reduced the cost of the first phase of the project from $7.5bn to $1.3bn, helping assuage concerns over Myanmar’s mounting national debt. In July 2019 the SEZ drew proposals for $800m of investment in a container terminal, a resort and a fisheries facility, precursors for further investment in a 1000-ha industrial park and cargo-handling infrastructure.

A $400m, 500-factory economic free zone at Namjin, on the outskirts of the capital of Kachin State, is also taking shape. Local media reports that efforts are being made to compensate locals who will be dispossessed of their land by the 4700-ha zone, which is earmarked for development by China’s Yunnan Tengchong Hengyong Investment. The zone aims to foster agriculture technology, transportation, processing, handicrafts, forestry, biomedicine and tourism industries. Officials have said they intend to sign a follow-up agreement in 2020.

Elsewhere, in October 2019 Myanmar and Thailand published a nine-point agreement on the long-stalled $8bn Dawei SEZ in Tanintharyi Region, which is set to be South-east Asia’s largest industrial complex. The deal included plans to connect the area to road and electricity infrastructure. Later phases of the project will build zones for advanced manufacturing, such as IT products and export processing. “Power companies from China, steel firms from Thailand and logistics firms from South Korea have said they want to make site visits as they are interested to invest,” U Myint San, vice-chair of Dawei SEZ Management Committee, told local media.

Other mega-projects involving international players include the NMRC and a host of new city projects around Yangon, many of which will have manufacturing zones once basic infrastructure is laid down. For example, the Ministry of Construction and Thailand’s Amata Corporation in August 2019 signed a framework agreement to jointly develop the $1bn Smart Eco City in Yangon’s East Dagon Township, which will be the first industrial zone between Myanmar and Thailand.

Outlook

The outlook for Myanmar’s industrial sector is bullish in light of ongoing reforms, the stellar blueprint provided by the Thilawa SEZ, steadily rising domestic demand linked to infrastructure development and the growing consumption power of a nascent middle class. Looking ahead, there is significant potential for further growth as efforts to source materials locally pick up and infrastructure improves, particularly transport routes that will reduce logistics costs and open up less developed parts of the country to further investment.

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The Report: Myanmar 2020

Industry chapter from The Report: Myanmar 2020

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