Manufacturing to serve as key growth driver in Myanmar's economy

Recording steady growth in recent years, Myanmar’s industrial and retail sectors have been buoyed by solid macroeconomic fundamentals, economic liberalisation and regulatory reforms encouraging investment and expansion. In industry, the new administration of the National League for Democracy (NLD) has set a bold industrialisation target, with manufacturing expected to become one of the country’s most significant economic growth drivers in the coming years. Job creation and infrastructure investment are priorities, with ongoing development at three special economic zones (SEZs) also expected to attract new industrial and manufacturing investment. The country’s low labour costs provide an additional incentive, despite a shortage of skilled labour, which has driven the government to target significant new investment in vocational training (see Education chapter).

The retail sector’s outlook is equally promising, as new international brands rush to capitalise on a growing consumer class and a relatively untapped market. The automotive, food and beverage (F&B), and fast-moving consumer goods (FMCG) segments in particular are poised for growth, as evidenced by rising foreign investment bolstered by the lifting of US sanctions and domestic trade liberalisation policies (see Trade & Investment chapter).

On A Growth Path

Myanmar’s industrial sector has witnessed dramatic growth over the past five years, with manufacturing largely concentrated in garment and textiles, agricultural processing, automotive parts manufacturing, and canning and bottling. According to the latest data by Myanmar’s Central Statistical Organisation, industry, including energy, mining, processing and manufacturing, electrical power and construction, contributed 30% to GDP in 2014, with processing and manufacturing alone comprising 21% of the economy that year. World Bank data shows that the share of GDP made up by industrial value-added stood at 9% as of 1999.

The Ministry of Industry (MoI) oversees industrial development in the country through a vast portfolio of offices and directorates, most notably its Union Ministerial Office, responsible for consumer products including pharmaceuticals and foodstuffs, textiles, ceramics, paper and chemicals products, and construction materials, as well as heavy industrial products. These industries have been the focal point of recent government policy. The Directorate of Industrial Collaboration, meanwhile, coordinates industrial enterprise activity in accordance with MoI guidelines, and negotiates with foreign and local investors.

Investment

The authorities have been working to enhance the attractiveness of the industrial sector. The foreign investment and SEZ laws include incentives such as corporate income tax relief, import duty relief, long-term land leasing and expropriation protection mechanisms. The country also offers an ideal geographic position and is set to become a transportation hub on the back of new land and sea infrastructure investment (see Transportation chapter). Its 54m-strong population and low labour costs also present potential benefits, with Verisk Maplecroft, a UK-based risk analysis consultancy, reporting in February 2015 that Myanmar’s labour costs are the second-lowest out of 172 countries surveyed, with only Djibouti ranking lower. This has been a major growth driver for the garment and textiles industry, which employs 350,000 people at nearly 400 factories.

Foreign investment in manufacturing has soared in recent years. The Directorate of Investment and Company Administration (DICA) reports that the value of approved foreign investments in manufacturing stood at just $1.6bn between FY 1988/89 and FY 2003/04, and remained subdued between 2004/05 and 2008/09, with investments totalling $22m during the period, although it began to rise in 2009/10, when DICA recorded $33.2m of approved foreign investments, before hitting $66.3m in 2010/11, sky-rocketing to $400.7m in 2012/13 and $1.8bn in 2013/14. Although the numbers have moderated in the years since, coming in at $1.5bn in 2014/15 and $1.1bn in 2015/16, manufacturing was the third-most-popular sector for foreign investment in 2015/16 after oil and gas and transportation and communication. The number of permitted manufacturing investment projects stood at 648 as of August 2016, worth $6.9bn, comprising 10.8% of foreign investment. Although approved investments in the sector stood at just $336.4m during the first five months of the 2016/17 fiscal year, recent policy announcements could see this number rise.

Industrial Law

The government is moving to update the laws pertaining to industrial development, and in July 2016 the MoI announced plans to introduce new industrial legislation which will support and promote sector development. U Myo Zarni Win, assistant secretary at the MoI, told the Myanmar Times in July 2016 that existing laws which specify permissible investment levels, the size of the labour force and electricity supply are not appropriate under current economic conditions, with the new industrial policy expected to give priority to labour-intensive industries including basic food production and low-level manufacturing, which could become competitive in a relatively short period of time, given Myanmar’s large workforce and relatively low labour costs.

The MoI also announced plans to form an Industrial Support Committee, which will be tasked with detailing registration procedures, tax incentives and technological uptake, as well as support mechanisms for small, medium and heavy industries through revisions to legislation governing public investment and labour laws. Authorities hope the new legislation will be enacted prior to the country’s integration into the ASEAN Economic Community, planned for 2018.

Policy Priorities

The NLD administration is also intensifying its efforts to promote industrialisation through a new industrial strategy. In July 2016 the MoI became the first ministry to issue an official policy document, when it published an industrial plan running from 2016 to 2022 in the National Gazette. The plan, which was drafted under the previous administration and originally published in March 2016, outlines the country’s near-, mid- and long-term industrial strategies, and targets increasing manufacturing’s share of GDP to 37% by FY 2030/31 (see analysis). Calling for targeted industrial development in central and southern Myanmar, the plan also highlights 11 challenges, including availability of electricity, poor transportation infrastructure, high land prices and, critically, a lack of available skilled labour.

Vocational Training

Although the government is moving to address these challenges through investment in hard infrastructure, including new highway and road links, airports and deepwater ports (see Transport chapter), investment in soft infrastructure, particularly vocational training facilities, is also heavily emphasised, with Asia Sentinel reporting in August 2016 that the country is in critically short supply of vocational training centres for engineers and craftsmen, including electricians, carpenters and plumbers, as well as hospitality training facilities.

Indeed, both the Myanmar Investment Commission and the MoI’s industrial plan have called for the creation of new vocational training facilities in each of the country’s 19 industrial zones, six of which are under development. An emphasis on human resource development and job creation also form part of the NLD’s 12-point economic strategy unveiled in August 2016. Critically for the industrial sector, it includes a commitment to develop a skilled workforce to fill new manufacturing and service jobs, with investment in vocational training highlighted as a critical element of any long-term job creation strategies. Job creation features heavily in the 12-point plan, as part of efforts to encourage thousands of migrant workers based in Thailand to return home, in addition to bolstering foreign investment at the three SEZs currently under development. These zones are expected to become major manufacturing centres over the long term, benefitting from close proximity to major sea transport routes and spanning a broad range of high-potential manufacturing segments. “The 12 point plan itself is headed in the right direction, but serious questions remain about implementation and financing,” Christoph Steinwehe, CEO of Loi Hein, a Myanmar-based consumer goods firm, told OBG.

Thilawa SEZ

The Thilawa SEZ was the first to be launched in the country, after the government of Myanmar partnered with the Japanese government to launch a joint venture, Myanmar Japan Thilawa Development (MJTD) in October 2013. Each government holds a 10% stake in the company, while a consortium of nine local companies known as Myanmar Thilawa SEZ Holdings has a 41% stake, and a consortium of private Japanese companies the remaining 39%.

The zone, which is being developed in phases, is located next to two port terminals, the Myanmar International Terminal Thilawa and Myanmar Integrated Port, to facilitate growth in export-oriented industries. Zone A, which spans a 396-ha plot south of Yangon, launched partial operations in September 2015, and was 90% complete as of August 2016, with authorities announcing in the previous month that it had attracted $760m in foreign investment since it began operations. MJTD reported that 73 local and foreign investors had signed on to build factories that will create 15,000 new jobs, with the majority of new investments coming from manufacturers of garments, bottles, construction materials, food, steel, fertiliser, auto parts, agricultural machines, medicine and medical equipment. Of these, 12 have already begun operations, 25 were due to open by the end of 2016 and 30 will be built in 2017.

Manufacturing Impact

Operations at Thilawa will provide a major boost to manufacturing output, with MJTD reporting that at current levels of investment, the zone’s manufacturing capacity is set to rise to $241m annually, while an anticipated $1bn in new foreign investment will see output grow to $350m per year. Investment into Thilawa SEZ comprised 12.5% of total foreign direct investment inflows in Myanmar during the 2014/15 fiscal year, with the SEZ’s output making up 3% of the country’s total exports over the same period. According to officials, construction of Thilawa SEZ B will begin by the end of 2016 on a 700-ha plot of land, with the project’s size set to reach 2400 ha once completed.

Dawei SEZ

Promisingly for the long-delayed Dawei SEZ, the Japanese government signed on as a third equal partner to the project in 2015 after Myanmar and Thailand inked a memorandum of understanding to develop the project jointly in 2008. This followed the April 2015 announcement that the project’s $1.7bn first phase was set to move forward after Italian-Thai Development (ITD) signed a $500m deal with the government of Myanmar to build a $500m natural gas import terminal in the SEZ. With plans also under way to construct a $500m power plant, Dawei SEZ will be one of the largest industrial parks in South-east Asia on completion, rivalling facilities in Singapore and opening a new gateway to the Malacca Strait from the country’s western seaboard.

The 196-sq-km park is set to be home to a deep-water port, manufacturing facilities for canneries, electronics, pharmaceuticals, automotive parts and built-up infrastructure including a vital road link connecting it to Kachanaburi in Thailand, with Bangkok just 350 km away from the SEZ, compared to 678 km from Yangon. The first phase will include a 27-sq-km industrial estate, with ITD given the rights to develop 8 sq km of industrial land, of which it will sell 20% to generate $284m in revenue. However, construction on the 138-km Thai-Myanmar highway was suspended after Japan voiced concerns about highway safety, with new design plans expected to include tunnel construction, raising the possibility of further construction delays. Local opposition to the Dawei project could also serve to hamper its development.

Kyaukphyu SEZ

Development of the Kyaukphyu SEZ also moved forward in December 2015, when an international consortium led by CITIC, one of China’s largest conglomerates, was awarded a contract to develop the project. The 1000-ha industrial park, located in Rakhine State on the western coast, will include textile and garment factories, facilities for the construction materials and food-processing industries, and marine supply and maintenance facilities. Significantly, the SEZ will also be home to a deepwater port, which will be built in four phases, with construction spanning a 20-year period and including the Made and Yanbye island terminals, each of which will contain 10 shipping berth alongside road and bridge connections, enabling annual handling capacity up to 7.8m tonnes of bulk cargo and 4.9m containers.

The project will be developed in three phases under a build-operate-transfer public-private partnership, with the CITIC’s consortium also comprising four Chinese industrial and investment groups, as well as Charoen Pokphand, a major Thai conglomerate. Work on the industrial park began in January 2016, with the project expected to generate 100,000 jobs and contribute $10bn to annual GDP on completion. CITIC told media that during the 20-year concession period the country would earn $15bn in tax revenues from the port and industrial park, after which the project will be handed over to the government.

SME Support

SEZ growth dovetails with government efforts to improve credit access and support for small and medium-sized enterprises (SMEs), an important consideration for industry as the MoI reports that Myanmar’s industrial sector is composed of more than 45,000 large, medium and small enterprises and over 19,000 cottage industries.

Myanmar ranked 174th out of 189 in the “getting credit” category on the 2016 “Ease of Doing Business” report published by the World Bank, with access to credit cited as one of the most common challenges for industrial producers, construction contractors and property developers. In the 2017 report the country ranked 175th out of 190 in the same category, with the bank commenting that Myanmar had improved its credit information system by enacting a law that allows the establishment of a new credit bureau. Lending rates remain high, loan tenors short, and many small businesses lack the necessary collateral to qualify for a loan, although banks have moved to ameliorate the challenges facing SMEs in recent years (see Banking chapter).

The state-owned Small and Medium Industrial Development Bank reported in July 2016 that it had provided MMK5bn ($4.1m) in SME loans to 11 companies during the 2016/17 fiscal year, and MMK20bn ($16.3m) during the 2015/16 fiscal year, although it also noted that 300 SMEs had outstanding repayments in the latter period. Also in July, the MoI announced that the state-owned Myanma Economic Bank was partnering with six private lenders to launch a MMK30bn ($24.4m) lending scheme. Participating banks include Myanma Oriental Bank, Ayeyawady Bank under the Co-operative Bank, Myanmar Citizens Bank, Kanbawza Bank and the Small and Medium Industrial Development Bank, under its credit guarantee system. Loan amounts vary between MMK15m ($12,200) and a MMK500m ($406,000), with interest rates set at 8.5%, considerably lower than the prevailing market rate of 13%, and a five-year tenor.

Retail

Like the manufacturing sector, retail is also benefitting from ongoing liberalisation. The US government’s move to lift sanctions and support trade growth have improved investor confidence, bolstered by rapid recent expansion in the automotive, F&B and FMCG segments, and driving growth of new formal retail space in the commercial capital of Yangon.

The sector offers significant investment potential to foreign retailers, and retail sales are expected to expand in the coming years on the back of positive macroeconomic indicators, including forecast GDP growth of 7.8% during FY 2016/17, following 8.5% and 7% growth in FY 2014/15 and 2015/16, respectively, according to the World Bank.

A population of more than 50m offers an attractive future domestic market. Myanmar’s middle class will likely support strong long-term growth, even if GDP per capita remains low, at $1200 in 2015, according to World Bank statistics. In 2013 Euromonitor estimated the country’s consumer class would double by 2020. This is in turn driving development of new formal retail space, and Colliers International reported that Yangon’s total retail stock reached 220,000 sq metres of leasable space at the end of 2015, almost twice as much as in 2014 (see Real Estate chapter).

Food & Beverage

Although middle-class purchasing power remains limited at present, F&B retailers are already capitalising on consumer preferences which favour F&B purchases over merchandise in formal retail developments (see analysis). The beverage market, particularly the beer market, is also heating up after the entrance of two major international players hoping to access the market’s relatively untapped potential and low levels of competition. In 2014 Standard Chartered Bank reported average annual domestic beer consumption per capita in Myanmar is just four litres, compared to 40 litres in Vietnam, 38 litres in Thailand and 22 litres in the Philippines, while Euromonitor forecast the country’s $375m domestic beer market could grow to reach $675m in 2018.

On Tap

Sales are presently dominated by Myanmar Beer, a legacy brand in which Japan’s Kirin now holds a 55% stake after making a $560m acquisition from Singapore’s Fraser and Neave in 2015. Although Myanmar Beer’s market share is estimated to be as high as 80%, Reuters reported in December 2015 that the company is facing stiff competition with the entrance of Heineken and Carlsberg in that year. Heineken in particular is making inroads, after opening a $60m brewery with capacity for 330,000 hectolitres annually, in July 2015. According to Reuters, demand for Heineken’s economy brand, Regal 7, has been so strong that the company is now accelerating expansion plans which will see it double capacity at its Yangon facility. Carlsberg was the first to enter the market, opening its $75m Bago brewery in May 2015, after forming a joint venture with local firm Golden Star Group. Similar trends have been witnessed in the non-alcoholic beverage sector, with local producers including Loi Hein, a bottled water and soft drink manufacturer, is facing increased competition after the re-entrance of Coca-Cola in June 2013. In 2014 Loi Hein partnered with Japan’s Asahi group to form a new soft drinks company in Myanmar. Initially, Loi Hein – which holds a 49% stake in the venture – will continue producing its Blue Mountain brand of carbonated soft drinks, although there are plans to add Asahi’s brand Calpis as well as tea and coffee later on.

FMCG

The broader FMCG segment also holds growth potential, with US-based market research firm Nielsen reporting in May 2015 that Myanmar’s FMCG sector had expanded 15% since 2011, noting that food, groceries, household products and personal care products account for 47% of average monthly consumer expenditure in the country.

According to Nielsen, a number of global and Asian brands are keen to enter the market, noting the importance of brand building through word-of-mouth advertising and, increasingly, mobile advertising channels, with 75% of consumers reporting being open to receiving ads on their phones, and mobile penetration rising to reach 44% by 2015. This has not gone unnoticed by foreign investors, most recently when Singapore Myanmar Investco (SMI), announced in June 2016 that it plans to expand into the retail and F&B segments over the next three years, after signing an agreement with Royal Golden Sky to open a retail facility in Yangon International Airport (YIA) in 2015. The group is in discussions with Junction City, a $300m mixed-use development, to identify retail and F&B opportunities, with plans to introduce 10 international brands to the retail market, and 30 brands to its YIA operations before 2017. SMI is targeting the downtown business district near Kandawgyi Lake, as well as Myanmar’s second city, Mandalay, for new retail opportunities. It also plans to bring in China’s Crystal Jade restaurant franchise, as well as the Coffee Bean and Tea Leaf chain, scheduled to open in YIA.

Automotive

The automotive market, while still in its nascent stages and dominated by used imports, is also projected to record rapid mid-term growth, despite a challenging regulatory environment. At present the retail auto market largely consists of used imports from Japan, all of which are right-hand-drive vehicles despite Myanmar having switched to driving on the right side of the road in 1970. New vehicle sales remain low, at just 5000 units in 2015, although they have recorded tremendous growth in recent years, with the Road Transport and Administration Department reporting that the share of new vehicles in total sales rose to 3% as of mid-2016, compared to less than 1% two years before. Research firm Frost & Sullivan projects the country’s auto market will increase by an average of 7.8% annually through to 2019.

Automotive manufacturing activities have also been on the rise. WardsAuto reports that 800 Suzuki vehicles are assembled annually in Yangon, and in May 2015 Suzuki announced plans to build a new manufacturing facility in Thilawa SEZ. The new facility will be located on a 20-ha plot and employ 300 people. It will assemble imported parts and initial outputs, with a capacity for 10,000 vehicles annually. The firm announced the new facility will come on-line in 2018.

Other car makers are also coming into the market. In February 2016 Nissan announced plans for a new 10,000-unit-per-year assembly plant in Bago. Despite positive recent growth, WardsAuto reported in July 2016 that market maturation remains limited by unsupportive government policies in Yangon, which accounts for 80% of the vehicle sales market.

Import Permits

Rising congestion in Yangon prompted the government to roll out import permit requirements in January 2015, which included a requirement that buyers prove they have a parking space. Yoma Strategic Holdings, which imports and distributes Volkswagen vehicles, and distributes Bridgestone tyres and Mitsubishi vehicles, reported it expects its sales to fall by 20% in 2016 as the industry continues to grapple with these challenges.

Outlook

The outlook for industrial, manufacturing and retail growth in Myanmar remains positive, as accelerating economic liberalisation, supportive public policy and attractive market fundamentals continue to attract new foreign investment. Industrialisation will maintain momentum on the back of SEZ developments, with investors set to benefit from incentive reforms, low labour costs and large untapped potential. Opportunities for expansion will also drive retail growth, particularly in the F&B and FMCG segments, with the country’s fast-expanding consumer class set to bolster automotive sales.

 

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The Report: Myanmar 2017

Industry & Retail chapter from The Report: Myanmar 2017

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