Myanmar develops modern manufacturing, enhances competitiveness

Myanmar’s recent economic growth, low wages and favourable tax exemptions have enticed the arrival of international manufacturers. To support this trend, the government has enacted a range of policies to promote the development of special economic zones (SEZs) and industrial clusters. As a result, manufacturing capacity is on the rise, helping to diversify the agricultural economy. Likewise, maturing consumption patterns have captured the attention of some of the world’s leading consumer brands, which now occupy retail shelves across the country. According to a World Bank report released in October 2017, real annual sales growth between 2013 and 2015 was 4.3%, which was higher than in Cambodia, Laos, Thailand and Vietnam.

Strategic Growth

Given the expanding fiscal and trade deficits, the need to create a stable macroeconomic environment by developing a modern manufacturing base and enhancing the international competitiveness of domestic products have been cited as key steps to achieving long-term economic success. With this in mind, the National League for Democracy administration has identified industrial development and the creation of economic corridors as a top priority, and created the National Export Strategy (NES), launched in March 2015, and the Myanmar Industrial Development Vision, released in June 2015, to facilitate this process. While these efforts indicate the willingness of the current regime to increase industrial output, questions continue to be asked of the administration’s capacity to implement the necessary changes. There are still a range of obstacles to overcome.

The manufacturing segment, like others in Myanmar, faces a number of structural issues, including an inadequate road network that limits access to neighbouring countries, as well as power cuts which impede productivity. This is in addition to limited access to finance and a legacy of ambiguous land policies, which have hindered the progress of industrial development. Despite these challenges, the investment appetite in the segment remains healthy as efforts continue to circumvent logistical hurdles. Moreover, NES initiatives got off to an encouraging start with 96 projects enacted in FY 2015/16 (see analysis).

History

The current economic opportunities for policymakers to develop the manufacturing base come after many years of impediments to progress in the sector. Industrialisation efforts in the second half of the 20th century were impeded by the military regime of General Ne Win, who was in power from 1962 until 1988. After the 26-year-long stagnation ended with a change in leadership, legislation, such as the Foreign Investment Law (FIL) in November 1988 and the State-owned Economic Enterprises Law in March 1989, was enacted to promote investment and stimulate the private sector. Additional reforms included the decentralisation of economic control, deregulation of export and import restrictions, and the reduction of government subsidies. It was also announced that the country would open its borders to international trade, establish industrial zones and invest in infrastructure.

Although these efforts were aimed at transitioning from a centrally planned to a market-oriented economy, implementation under a military regime was restricted by economic sanctions. Thus, on the back of international pressure, the military began the process of relinquishing some of its political power in late 2010.

Momentum

Since 2011 the appointment of a quasi-civilian government, coupled with the easing of international sanctions and the passing of supportive legislation – a new FIL in 2012, which has since been combined with the Myanmar Citizen Investment Law passed in 2013 to form the (MIL) in 2016 – have played a role in increasing industrial output. The MIL, which came into effect in April 2017, was drafted by the country’s Directorate of Investment and Company Administration (DICA) with the support of the International Finance Corporation, which assembled specialists in investment policy and promotion, government and private sector stakeholders, and civil society. Moreover, an important amendment to the legislation occurred in April 2017 with the removal of the requirement that all foreign investments had to be greenfield operations. Under previous conditions, foreign investors were forced to build new processing plants, which could take up to two years to construct. However, under the reformed law, a foreign investor or joint venture (JV) can upgrade existing plants with the option of extending processing capacity, serving as a catalyst for private investment.

Meanwhile, against a backdrop of power shortages and an underdeveloped logistics network, the establishment of three SEZs – in Thilawa, Dawei and Kyaukphyu – is also set to advance manufacturing and export capabilities. As a result, the outlook for the industrial and retail segments is promising, despite the challenges.

Contribution

As of end-January FY 2017/18 – calculated in the fiscal year running from April to March, though a change to an October to September calendar will be implemented in FY 2018/19 – manufacturing has become the largest recipient of foreign direct investment (FDI), with more than $1.6bn of yearly approved investment, according to DICA. The figure was a significant increase over the same period in 2017, when approved FDI had reached $1bn, before coming to a total of $1.2bn for FY 2016/17, which was also an increase on the total $1.1bn seen in FY 2014/15.

Since 1988 manufacturing has been the third-largest generator of FDI, with 849 foreign investments valued at more than $9.3bn, or 12.4% of total FDI, as of January 2018. In the past the oil and gas and energy sectors received more foreign funding and have accumulated totals of $22.4bn and $21.0bn, respectively. However, the pattern of investment is changing considerably as the country develops. According to a World Bank report, between June 2014 and November 2016, the biggest increases in FDI commitments were in transport and communications and manufacturing, which grew by 275% and 77%, respectively. The growth in the latter was driven by large investments at Thilawa SEZ, particularly in the areas of automotive and assembly, electronics, machinery, building materials, and food and beverages, as well as communications equipment (see analysis).

According to the report, access to finance was a major constraint with a limited range of lending products, most with a one-year maturity, available, although this has started to change with lending to the manufacturing sector rising by 23% in nominal terms between FY 2014/15 and FY 2015/16.

A Changing Picture

Despite recent increases in capacity, in June 2017 the Nikkei Myanmar Manufacturing Purchasing Managers’ Index (PMI) fell below 50 to 49.4, indicating a contraction, for the first time in six months. The downturn was caused by declines in output and new orders. Industrial output in the second half of 2016 and the first half of 2017 slowed, mainly due to a drop in food processing, which stemmed from a sluggish recovery from the 2015 floods (see Agriculture chapter), while a disruptive review of high-rise construction dampened the performance of the construction segment and led to a decline in the manufacturing of building equipment (see Construction chapter).

However, the PMI recovered in late 2017, rising from 51.1 in October, to 51.6 in November and 51.7 in January 2018. London-based IHS Markit, which compiles the index, cited solid manufacturing production levels, increased demand from clients and a rise in new orders as the causes for the increase, which was the highest since May of the previous year.

Industry Fluctuations

According to data from the World Bank’s “Myanmar Economic Monitor”, food processing, such as rice milling, edible oils and snacks, accounted for approximately two-thirds of the country’s production, and around three-quarters of total industrial output leading up to mid-2016. As a result, the economy was vulnerable to shifts in global food demand and price movements. Given the dependence of the sector on imports, a challenge has been competition with cheaper and more efficient food-processing nations in the region. Moreover, the country’s agriculture sector contracted slightly in FY 2016/17, despite expectations of a recovery from heavy flooding in 2015. The decline in overall agricultural output may have been caused by a drop in the production of beans and pulses over the period. Meanwhile, livestock and fisheries continued to grow in FY 2016/2017, while forestry contracted further, in part due to legal restrictions.

Additionally, though industrial output remained strong in FY 2016/17, it was below the average of the past five years, due to a 7% contraction in gas output, according to the World Bank report. This, in turn, had a negative impact on the construction sector, as levels of spending on public infrastructure declined with changing budget allocations. Alongside these challenges, an unstable domestic currency limited the ability of firms to compete. Many producers remained heavily reliant on imported inputs in FY 2016/17, which raised costs as the local currency depreciated. However, investment in the sector, primarily in areas with low capital costs such as garments and food processing, remained strong.

Since Myanmar began to open up its economy, its trade has been characterised by the high value of imports of capital goods and other raw materials. From April to September 2017 – the first six months of FY 2017/18 – there was a trade deficit of $2.2bn, with exports totalling $4.8bn and imports amounting to more than $7bn over the same period. As of February FY 2017/18, exports had reached a figure of over $12.4bn, while the value of imports was as high as $16.2bn.

The same period of FY 2016/17 saw exports at $10bn and imports just under $14.3bn, figures that went on to reach $11.9bn and $17.2bn, respectively, for the entirety of FY 2016/17, according to the Ministry of Commerce (see Economy chapter). This revealed growth in both areas and a continuing pattern.

Special Economic Zones

Myanmar’s economy has long suffered from low productivity, an outcome of decades of isolation and economic mismanagement. To address this shortfall and improve integration with ASEAN neighbours, previous regimes launched three SEZ projects between 2008 and 2013, in cooperation with the Japanese, Thai and Chinese governments. However, the progress of each of these zones has varied due to land disputes and financing issues.

Thilawa SEZ has been the most successful venture (see analysis). Located about 25 km outside Yangon, the zone was formed in 2015 in a joint partnership with Japan. Each government owns a 10% stake, while Myanmar Thilawa SEZ Holdings, a consortium of nine local firms, holds 41% and Myanmar Japan Thilawa Development (MJTD), a consortium of Japanese firms, holds the remaining 39%. Comprised of two zones, the first phase of zone A was completed in August 2015, with the second phase launched a year later. MJTD began work on zone B in February 2017, with the 101-ha first phase set to be completed by August 2018 and an additional 66 ha to be added by August 2019. Moreover, leasing contracts became available in late 2017, generating investments from firms in Japan, South Korea, Thailand and Singapore. The total area to be developed in zone B covers 262 ha, with negotiations between stakeholders for the development of the next area in zone B currently under way, according to the MJTD.

Whereas major investments across the country have stalled due to processing capacity, Thilawa SEZ has created a fast-track gateway for FDI through the creation of a one-stop service centre that addresses each step of the approval process. Investors can acquire investment approvals, tax exemptions and construction permits, as well as Customs clearance, tax returns, labour registration and visa applications, all from one location.

On the Horizon

Meanwhile, 27 km north-west of Dawei in the Tanintharyi region is the location of the proposed Dawei SEZ, which has the potential to be one of the largest industrial estates in South-east Asia, stretching 250 sq km. However, unlike Thilawa, progress at Dawei SEZ has been slow. While the Dawei project was the first such zone conceived of in the country, civil opposition and a lack of investment have slowed its development. However, good news for the site came in June 2017, when the government agreed with Thai officials to build a 132-km road between Dawei and the Thai border town of Phu Nam Ron, in Kanchanaburi Province. The road will be built using a $133m loan granted by Ministry of Transport of Thailand with an interest rate of 0.1%, a 10-year grace period and a 30-year repayment timeframe.

In mid-2015 it had been announced that the first phase of the megaproject, valued at $1.7bn, was set to begin after Italian-Thai Development (ITD) signed a deal with the Myanmar officials to build a $500m natural gas import terminal in the SEZ. However, due to ITD’s inability to raise funding, construction of the terminal has progressed slowly. Despite the uncertainty that has clouded the SEZ since its inception in 2008, Japan International Cooperation Agency signed on as a partner in 2016 and is currently conducting a master plan survey to be released in June 2018 in an effort to rejuvenate the project. Additionally, in February 2018 local media reported completion of a port, a five-story apartment block, the road connecting the zone to the border and a dam for water supply, with the construction of one more dam under way.

When successfully completed, the deep-sea port at Dawei will provide the country with a gateway to the Malacca Strait, a major global shipping channel. Despite a challenging global shipping environment in recent years, the world’s busiest shipping lane – the straits of Malacca and Singapore – saw a 3.4% increase in traffic in 2016, with approximately 83,700 transits. Furthermore, in 2017 the number reached a new alltime high of nearly 84,500, a clear indication of the potential revenue the added access to the strait could generate (see Transport chapter).

Kyaukphyu

Backed by Chinese investors, Kyaukphyu SEZ in Rakhine State has also been subject to delays. At an estimated 1736 ha, the project includes a 1000-ha industrial park and a deep-sea port. Initially started as a state-backed JV with China, it has since transitioned to a consortium of private investors, steered by the state-run CITIC, China’s biggest and oldest financial conglomerate. The other five companies involved in the enterprise include Thailand’s Charoen Pokphand, China Harbour Engineering, China Merchants Holdings (International), TEDA Investment Holding and Yunnan Construction Engineering Group.

In May 2017 international media reported the Chinese backed consortium proposed taking a 70-85% stake in the $7.3bn deep sea port and a 51% stake in the industrial park, substantially more than the initial 50% share for both the industrial park and sea port offered by Myanmar officials. If the deal were to go ahead, China would abandon the $3.6bn Myitsone dam in Myanmar, which has been a contentious issue between the two governments and strained diplomatic ties.

Upon completion, the SEZ will create an estimated 100,000 jobs with an annual capacity of 7.8m tonnes of bulk cargo and 4.9m twenty-foot equivalent unit containers for the deep-sea port. Additionally, the industrial zone hosts the Sino-Myanmar oil and gas pipeline. While the gas pipeline has been in operation since May 2013, crude oil was first loaded into the 770-km connection in May 2017. It will allow China to import 22m tonnes of crude oil per year via the Bay of Bengal to supply its refinery in Yunnan Province (see Energy chapter). With revenue coming from the industrial park, deep-sea port and pipeline, Kyaukphyu SEZ is projected to earn $15bn in tax revenues over the 20-year concession period, after which the project will be handed over to the Myanmar government.

Garments

Given Myanmar’s low labour costs and the labour-intensive nature of the textile industry, the country has become a popular location for garment manufacturing, particularly cut-make-pack (CMP) operations, in which local factories are contracted by foreign buyers to manufacture garments according to specific designs, or CMP specifications that are then exported to foreign markets. As it stands, the free-onboard system of manufacturing, in which the buyer is not involved in the production process, is not yet widely practised in the country, even though it is more profitable than CMP, which has been the dominant system in the industry for over 20 years.

However, business in the segment is doing well. The country exported nearly $1.9bn worth of garment units as of January of FY 2017/2018. This represents an increased performance over FY 2016/17, when the figure was $1.9bn for the entire year. The segment has grown significantly in recent years; between 2010 and 2015 the value of garment exports more than tripled from $337m to $1.46bn. Moreover, in 2016 there were almost 400 clothing factories, employing upwards of 350,000 workers, 90% of which were women, according to latest data available from the Myanmar Garment Manufacturers Association (MGMA). Of these factories, 196 were privately owned, 171 were foreign-owned and 22 were operating as JVs. The majority of the foreign-owned factories were in the hands of Chinese, Korean, Taiwanese and Japanese investors. The MGMA estimates the garment industry will employ approximately 1.5m workers by 2024.

Yangon Factories

Prior to the conception of the three SEZs, the government had developed a number of zones in the 1990s, mostly concentrated in Yangon, with much of the existing industrial real estate occupied by garment manufacturers. In February 2018 it was announced that the local government was planning to construct 400-ha industrial zones in 11 southern and northern districts of Yangon. Yangon had over 30 industrial zones, at the time of the announcement. The largest of these zones, 566-ha Hlaing Thar Yar with around 700 factories and 300,000 employees, focuses mainly on light manufacturing such as garments and food processing. Outside Yangon’s metropolitan area, there are a number of industrial zone developments in Bago, Pathein, Mawlamyine and Myaungdagar.

With limited access to infrastructure, theses zones are significantly cheaper than industrial real estate in the commercial hub. According to consulting group Tractus Asia, the average cost of industrial real estate in Yangon was $121.37 per sq metre per month in 2015, compared to $36.79 in Bago. The reduced costs are attractive to investors, and in June 2017 Korea Land & Housing Corporation, a South Korean state-owned entity, entered into an agreement with Myanmar’s Department of Urban and Housing Development (DUHD), an entity under the Ministry of Construction, to build a 230-ha industrial zone in northern Yangon. According to local media, the government-to-government project is valued at about $100m, with the South Korean government holding a 60% share and DUHD with the remaining 40%. Construction was scheduled to start in early 2018, though no updates have been announced as of February 2018.

Automobile

The automobile sector has been affected recently by policy. In 2012 regulators lifted restrictions on car imports, allowing any vehicle manufactured from the year 2007 onwards to be imported. In addition, any citizen that owned a foreign currency exchange account at one of the four state-owned banks could import a car without the use of an agent. As a result, the roads of Yangon quickly became congested with second-hand vehicles, mostly from Japan. Local media reported 80% of all vehicle sales were conducted in Yangon in 2016, and over 90% of all passenger vehicles registered in Myanmar at the end of FY 2014/15 were second-hand vehicles from Japan. In an effort to curb congestion, import permit requirements were introduced in January 2015, necessitating that buyers prove they had a parking space. Imports then declined, with some retailers reporting a 20% reduction in sales in 2016. Subsequently, the government introduced new restrictions in January 2017, banning the import of right-hand-drive vehicles, except those built between 2011 and 2014 on the basis that the buyer could provide a certificate showing the scrapping of an older vehicle.

While the restriction was put in place to stimulate the emergence of a domestic automotive industry, the subsequent shrinking of the used-car market has had a negative impact on most consumers. “With fewer cars available, prices have gone up. The ban does not make sense because the market is not wealthy enough to purchase brand new cars,” Daw Yi Yi Kyaw Win, managing director of Royal Empire, told OBG. “The ban is likely to increase the size of an already huge informal market of car dealerships. Yangon has 7m inhabitants and about 540,000 registered vehicles,” she added.

However, in February 2018 it was announced that some leeway would be granted for those looking to import, as the ban on automobiles coming into a country on free permit, in place since April 2016, would be lifted. The change is set to come into effect in April of 2018 and will allow import of any vehicle as long as they meet 2018 import guidelines.

Global Brands

As free-market initiatives accelerated, a number of international automobile brands have entered the market with companies such as BMW, Ford, General Motors, Hyundai, KIA, Mercedes-Benz, Nissan, Suzuki, TATA and Toyota establishing an official presence in the country. While most of these companies are showcasing their brands at showrooms in partnership with local companies, others have decided to invest in manufacturing facilities. By January 2017 Suzuki had capacity to build 2700 units a year, with 1000 of these sold domestically. The Japanese giant was scheduled to open a new production facility in Thilawa SEZ in early 2018, with a production capacity of 10,000 units; however, no update as to the factory’s progress had been announced as of February 2018. Moreover, other Japanese firms have been working to increase their presence in the country. Nissan, through its Malaysia-based partner Tan Chong Motor, began selling units of its Sunny model – assembled at a facility in Bago and sold at a starting price of $15,000 – in January 2017. Meanwhile, it was announced in February 2018 that Toyota was in negotiations as to the possibility of opening a manufacturing plant in Thilawa SEZ.

Consumption

With around 10m people under the age of 10 and approximately 50% of the population under the age of 24, Myanmar’s large youthful population creates a dynamic consumer market with positive growth potential. In addition to the young population, the number of middle-income consumers in Myanmar is expected to double by 2020, reaching 10m, according to the Boston Consulting Group. Likewise, consumer spending is anticipated to rise to $100bn per year by 2030, up from $35bn currently. Such factors have enticed brands such as Coca-Cola, Unilever, Carlsberg and Heineken to set up operations On the back of growing purchasing power driven by Myanmar’s economic expansion, a number of shopping malls have been built in recent years in Yangon. According to regional media, as of mid-2017 the city held 290,000 sq metre of leasable space, with 250,000 sq metre to be added to the market in 2018. Additionally, retail supply by volume had increased by approximately 32%, compared to that of a year earlier.

However, there is still much room for the market to develop. “Compared to other regional countries, Myanmar is still very low on purchasing power and consumption is still too focused on basic products,” Kiwi Aliwarga, CEO of UMG Myanmar, a leading business conglomerate headquartered in Yangon, told OBG. “In this context, agriculture and fast-moving consumer goods are two sectors that offer investors some of the most promising growth prospects. These days most farmer are trying to shift from ordinary farming processes to machinery farming, so it’s still more promising in the agriculture sector,” he added.

Pharma

Unsurprisingly the consumption of pharmaceuticals has also risen along with increases in disposable incomes. Total expenditure in the segment grew from $391m in 2015 to $409m in 2016, and increases in government expenditure on health care should further spur the market, which is predicted to surpass $1bnin value by 2023 (see Health chapter).

International pharmaceutical companies have remained hesitant to move into Myanmar due to infrastructure and human resource supply concerns; however, this has left more room for local firms to operate. In mid-2017 the Myanmar Pharmaceutical Factory, known as Burma Pharmaceutical Industry, a state-owned factory under the Ministry of Industry, announced that it was launching a third factory. The new facility will bring total output up to 1.3bn tablets and capsules, up from the 800m produced in 2016.

Outlook

According to the US International Trade Administration, an agency specialising in providing information on international investment opportunities, optimistic estimates project a quadrupling of Myanmar’s GDP by 2030. In order to meet the needs of this long-term growth, more advanced industries will need to be supported by a well-trained workforce in combination with major investments in infrastructure. Moreover, uncertainties around land rights and compensation need to be remedied before the country can benefit from trade advantages at Dawei and Kyaukphyu.

While urban dwellers in Yangon have access to more shopping malls and supermarkets, the highly cash-dependent society is also beginning to welcome a wide range of e-commerce products.

“Demand for e-commerce services in Myanmar is growing as a natural consequence of the increasing penetration of mobile and internet services,” U Phyoe Min Kyaw, managing director of Pahtama Group, told OBG. “At present, the distribution market for e-commerce is very fragmented and inefficient.”

With the vast majority of the population having access to mobile internet services as a result of the liberalisation of the telecoms sector (see Telecoms & IT chapter), retailers and marketers now have an opportunity to extend their target and reach more customers via social media and commercial websites.

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The Report: Myanmar 2018

Industry & Retail chapter from The Report: Myanmar 2018

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