Myanmar is one of the more promising nations for investment into manufacturing. Wages are some of the lowest in the world, workers are productive and the literacy rate is in the high ninety percentile. In addition, the country is actively targeting manufactured goods after years of isolation, with legal reform and better regulation gathering pace to allow foreign investors easier access to the market and a higher degree of certainty. International investors are already positive on the country. Tetsuo Yamaguchi, for example, a senior advisor at the Japan External Trade Organisation (Jetro), said that Jetro’s Yangon office is currently their busiest in the world.
A Difficult History
Myanmar has long faced challenges establishing an industrial base. In pre-colonial times, small-scale local manufacturing did exist; enterprises in the country processed food and made furniture, building materials and ships, according to research by the National University of Singapore (NUS). During colonial times, Myanmar was introduced to global free trade, and what it had in terms of manufacturing suffered, with many of its small factories shutting down as cheaper goods poured in from the more efficient factories of the West. The country was reduced for the most part to being a supplier of raw materials and a buyer of foreign-manufactured consumer goods. A degree of industrialisation did begin to occur in the 1930s, but it primarily involved the production of basic goods on a small scale. According to NUS research, these facilities included rice and oil mills, match factories, soap factories and bottling plants. Most of these were destroyed during the Second World War.
The 1950s was a period of rapid industrialisation in the country. Labour-intensive industries were developed, as were some larger-scale operations, such as paper mills and plywood factories. Exports started to become competitive. Then, under the Burmese Way to Socialism, a highly focused import-substitution policy was pursued and the state established a wide range of factories, some quite sophisticated. Tractor and car assembly were introduced, as were the manufacturing of appliances and glass.
Ultimately, the push failed. The country lacked the capital and technology needed for such ambitious projects, and its efforts suffered from low quality, low productivity and a shortage of spare parts.
Nationalisation in particular took a heavy toll. Private industry was taken over by the state and failed to perform well under bureaucratic management.
Subsidies led to bad decision-making, mis-allocation of resources and a heavy fiscal burden.
Under the State Law and Order Restoration Council, reforms were introduced, with foreign investment permitted and even promoted with incentives.
Notwithstanding, the liberalisations produced mixed-to-negative results. The state sector was maintained, as were many of the policies regarding wages and prices, and inefficiency and high costs remained.
International sanctions also had an effect. Foreign currency was hard to come by and technology and advanced equipment were difficult to purchase.
Exports to the US and other Western countries, meanwhile, became all but impossible. The garment sector, one of the country's strongest industries, was particularly hard hit. The export of clothing dropped 60% in the wake of sanctions and approximately 80,000 jobs were lost.
Playing Catch Up
The story of Myanmar's postwar industrialisation greatly contrasts the experiences of its neighbours. While East Asian economies prospered with liberalisation and export-driven growth, Myanmar failed to effectively commit to the right kind of reforms. Despite industry’s contribution as a percentage of GDP creeping up from 12% to 15.3% between 1970 and 1995, in Thailand this figure rose from 25.7% to 42.2%, respectively. At the same time, agriculture remained about half the economy in Myanmar (see Agriculture chapter), while it dropped from 30% to 10% in Thailand, according to data from the Asian Development Bank. Jetro notes that only 176 foreign investments were put into manufacturing in Myanmar from 1988 through the recent round of reforms in 2012.
In 1990, Vietnam’s exports were 2.5 times the total for Myanmar. By 2010, this difference had accelerated further, with Vietnam’s exports 13 times greater than Myanmar’s. Research also indicates that the latter failed to diversify and was still dependent on extractive industries. In 2010, a full 80% of its exports were from just three products: natural gas, wood and clothing, while dried pulses comprised much of the remaining 20%. In contrast, Vietnam's top-10 exports accounted for 78% of total exports. As it stands currently, industry generates roughly 20% of Myanmar’s GDP and employs around 7% of the labour force, according to the multinational professional services group, PwC.
Re-Starting The Engine
Notwithstanding, Myanmar did emerge from its isolation with a relatively productive sector, albeit a small one. As of 2012, the country had an estimated 200 garment factories, having peaked at 300 in 1999. It also had five steel plants: Ywama Steel Plant (in production 1955); Anisakhan (1979); No 1 Steel Plant (1996); No 2 Steel Plant (1999); and No 4 Steel Plant (2010). This is in addition to hundreds of smaller steel workshops and four cement factories, according to The Global Cement Report. Other factories include those making bricks and construction materials, pumps for irrigation, paper, glass, electrical cable, and cooking pots and breweries. Manufacturing did exist despite the years of isolation, but it remained under-capitalised and lacking in technology. In most cases, it cannot meet domestic demand. For instance, the country still imports an estimated 2m tonnes of cement a year from Thailand, and is unable to export much due to quality concerns. Despite the challenges, however, processing and manufacturing accounted for 19% of GDP in 2011, up 15% from 2007.
However, with reform has come the optimism of a turnaround in the making. In many ways, Myanmar has very suitable conditions already in place to develop and sustain a industrial base. The population is highly literate – 92% according to the World Bank – while people are generally considered to be hardworking, easygoing and accepting of foreigners. Perhaps most importantly of all, however, is the low cost of labour. There is no definitive data on wages, but several estimates put numbers at competitive albeit unregulated levels.
According to Hong Kong-headquartered business intelligence group ASEAN Briefing, public employees are paid a minimum of MMK50,000 ($55) per month, while day labourers earn MMK2000 ($2.20) per day. A Jetro 2012 survey notes that Myanmar has the lowest wages in East Asia, with manufacturing workers receiving an annual salary of $1100, which compares to $1424 in Cambodia, $1478 in Bangladesh, $2602 in Vietnam, $4551 in Indonesia, $6704 in Thailand and $6734 in China.
However, there is currently no general minimum wage in Myanmar. And while a new minimum wage law did go into effect on July 4, 2013, at the time of publication it was not immediately apparent what the exact level would be as the law itself only outlines the process for setting and adjusting the wage.
For countries like Japan, Myanmar is a highly attractive place to invest and establish manufacturing. Costs are rising around the region, while, at the same time, it is becoming more difficult to find labour with suitable technical skills. To an extent, Myanmar is one of the few destinations able to offer an attractive combination of low wages, literacy and national enthusiasm to bring in new investors. Likewise, the country’s improved position within ASEAN, which included becoming a full-fledged member of the ASEAN Inter-Parliamentary Assembly in 2011, has also been a positive move for investors.
The 2011 floods in Thailand, as well as ongoing political troubles there, not to mention the April 2011 Fukushima earthquake, has left Japanese manufacturers more aware of concentration risk and the importance of spreading their factories around the region. First-choice targets include Indonesia, Vietnam and the Philippines, but Myanmar is also at the top of the list given the attractive mix of low costs and technical abilities. “The main reason they [investors] come is that we cannot get high-quality labour in other countries,” said Yamaguchi.
Open For Business
Indeed, manufacturers globally believe Myanmar is a good place to establish their factories, and a sort of rush is in progress. Coca-Cola opened its first plant in the country in 60 years in April 2013, with a second plant following just a few months later. The group has promised total investment of $200m over the next five years. “Although there are many challenges such as a lack of statistical data, Myanmar is in a position to leapfrog many obstacles, which will enable the market to develop at a rapid pace,” Rehan Khan, general manager of Coca-Cola Myanmar, told OBG. Meanwhile, Anglo-Dutch global giant Unilever opened a factory in 2013 and has promised investment to the tune of $654m over the next decade. The group has also announced plans to open a second facility and provide direct and indirect employment for more than 2000 staff by 2015. In September 2013, Asmo Corporation, a Japanese company that makes small motors for use in automobiles, said that it would be setting up a factory in the Shwe Lin Pan Industrial Zone in Yangon. Further, Japanese automobile group Suzuki began making small trucks in the country in 2013.
Indications are that foreign investors are active in the garment sector as well. According to U Kan Zaw, union minister for national planning and economic development, foreign direct investment (FDI) in 2013 from April through August was $1.8bn, and most of this was garment-related. It was also reported in Global Times, a Chinese publication, that 25 garment factories previously operating under local names had been taken over by foreign owners and their investments officially converted to FDI.
Hurdles & Concerns
Despite the enthusiasm, there are a number of challenges to attracting investment going forward, in particular the local manufacturing base. Front and centre is the new Foreign Investment Law (FIL), signed November 2, 2012 (see Legal Framework chapter). Many aspects of the statute are seen as improvements over what existed previously under the FIL 1988. Joint-ventures (JVs) can be made with any shareholding ratio ( foreigners had previously needed to own at least 35%). In addition, 100% foreign ownership of local corporations is still permitted. No minimum share capital is set and the prohibited list is shorter than before. Tax holidays are now five years, up from three, and leases are now 50 years, with two 10-year extensions, as opposed to 30 years with two 15-year extensions (see Tax chapter). A precise schedule of foreign employee ratios has been added: 75% for two years, 50% in the following two years and 25% thereafter.
However, a closer reading of the law suggests that the FIL could be less than straightforward in its application. Indeed, almost everything of significance requires approval by the Myanmar Investment Commission (MIC) and no clear path for such approval is stated. MIC approval is also required for 100% ownership, with capital levels now set by the MIC and activities under the restricted or prohibited lists only to be undertaken with MIC approval. This also includes manufacturing. In addition, any “large” project must be disclosed to parliament, though “large” is not defined. According to UK-headquartered legal firm Berwin Leighton Paisner, the FIL seems to expand discretionary authority when the expectation was that it would place certain obligations on the bureaucracy. The risk is that investments will be approved in a less-than-transparent manner and that decisions may be made less on principles and more to meet political and national interests. “Regulation is a constraint in many aspects and it is changing very fast,” Pierre Trouilhat, former senior projects manager at Nestlé Indochina, told OBG.
A long list of other issues could also slow industry’s development. Local companies simply do not have the resources and the banks do not have the finances to fuel growth domestically, and foreign investment will be needed. For foreign investors, potential complications only begin with the FIL. The country is just coming out of decades of isolation, and even assuming all goes according to plan it will take years simply to update the laws and statutes.
Company law is one such challenge. Currently, the formation of a corporation is governed by the Myanmar Companies Act 1913, the Myanmar Companies Rules 1940, the Special Company Act of 1950 and the Myanmar Companies Regulations 1957. The 1913 Act, which is similar to the British Companies Act, was amended in 1989 and 1991. It is outdated and not necessarily conducive for modern business. In particular, it is not clear how it interacts with the FIL and what exactly constitutes a foreign company and a domestic company.
There are also several administrative issues, as the act requires multiple submissions of relevant paperwork. The government has promised to upgrade the Companies Act, but the original deadline of 2013 was missed and now a target of 2014 has been set. The lack of clarity could slow much-needed investment as foreign companies with capital and technology may not have legal protection.
Intellectual Property (IP)
IP law is also a concern. Claimants must rely on a number of outdated or only tangentially related laws to protect their brands, including the Copyright Act of 1914, the Myanmar Penal Code of 1860, the Myanmar Merchandise Marks Act (1889), the Registration Act No 16 of 1908, and the Code of Civil Procedure (1808).
In the absence of a dedicated trademark registry, companies have resorted to filing a Declaration of Ownership with the Yangon Registration Office of the Settlement and Land Records Department (see Legal Framework chapter), which is an imperfect solution as there is no real examination of the filings and submissions from multiple claimants if the same IP is permitted. Companies will often publish a “cautionary notice” in an English-language newspaper of general circulation notifying the public of tradework ownership and enhancing their own claim of ownership in case of potential court litigation.
While Myanmar has been a member of the WTO since 1995, and a trademark law is currently in the works, the uncertainty of when it might be implemented is a yet another challenge to attracting foreign investment in manufacturing.
The recent dispute between Fraser & Neave and Union of Myanmar Economic Holdings (UMEH) over Myanmar Brewery highlights the need for robust laws and fair legal remedy. UMEH, which holds 45% ownership of the brewery, said it wants to terminate the JV agreement it has with the Singapore-headquartered conglomerate, which has 55% ownership. With dated and weak laws on the books, and regulations that further complicate legal proceedings, the forced break-up is likely to set a precedent and could undermine investor confidence should the events be seen as unfair. International investors are watching to see if the system in its current form works, or if they should wait for a better legal foundation.
In the meantime, rising property prices and increasing costs are bringing into question the attractive economics of transferring manufacturing to Myanmar. Electricity is expensive and often unreliable, while transportation infrastructure is in need of improvement. U Kyaw Win, managing director at National Wood Industry, a local timber and teak manufacturer, told OBG, “Using backup generators to accommodate for electrical power shortage is the only option right now. In summer this is costly as we use a hydropower source, but it is less of an issue during the rainy season.”
The lack of bureaucratic capacity makes for slow approvals, even when the laws are in existence and solid. More broadly, some investors are still worried about political instability. While the reforms have so far been successful, the sense on the part of some is that the country has been through this all before and that the success of liberalisations is not at all guaranteed. Japanese investors in specific are being somewhat cautious. While they are actively researching and discussing possible deals, they want to see a successful 2015 election before making a significant commitment to the country. If the election goes well, it would be a successful litmus test that political transformation is working well.
As well, short of a complete reverse course is the real possibility of half measures. A number of developing countries are continuing to question the sensibility of open markets and are starting to rein in some of their more welcoming policies. The trend now seems to be toward encouraging JVs and the protection and state-control of important sectors.
Most importantly perhaps is the question of wages, a key reason for the interest on the part of foreign investors. With Myanmar now more open, and home to a population with high levels of literacy, the people in the country are well aware of the value of their labour and know about the push for higher minimum wages on par with the wider region.
In 2012, a new Labour Organisation Law went into effect, improving worker rights, permitting labour associations, in particular allowing for unions for the first time in 39 years, as well as setting out procedures for strikes. Drafted with the assistance of the International Labour Organisation, it is regarded as one of the most liberal in Asia.
Following the passing of the law, strikes have become fairly common and wage demands have been aggressive. In 2012, 5000 workers walked out at garment factories at the Hlaing Thar Yar Industrial Zone in Yangon and demanded wages be doubled from MMK15,000 ($16.50) per month to MMK30,000 ($33). While this is still only a fraction of what is being paid elsewhere, pressure is significant and workers may ask for more. And given recent global trends, current levels will probably not be acceptable to the international community. Even though companies would like to save money, they know they need to pay a living wage or face pressure from activist shareholders, non-governmental organisations and customers.
The 2013 tragedy in Bangladesh, in which 1129 garment workers were killed in a building collapse, is weighing on the sector and central to the debate about wages. Many companies are already moving capacity from Bangladesh back to some of the more reliable markets of the region, such as Indonesia, where greater due diligence has been conducted for years on the working conditions at sub-contractors. Myanmar will therefore need to be careful that it is not missed along the way on the assumption that it will be a country of unreasonably low wages and dangerous working conditions. This message has not been lost on Myanmar, and efforts are being made to improve exporting factories.
Despite the challenges, the outlook for industry is relatively good. Myanmar is working well with the international community to bring the country’s legal framework more in tune with global standards. It will undoubtedly be a slow process, and it is difficult to predict exactly how the national industries will develop. Much will depend on how the laws are finally settled and whether the domestic financial system can be reformed to the extent that local corporations are able to finance their own facilities.
In all likelihood, the path ahead is likely to take on traits seen in Thailand. Industrial zones will lead the way (see analysis), as they can be designed to avoid issues that slow development in the country as a whole, and then manufacturing can spread as the legal architecture evolves, local expertise increases and domestic demand takes hold. The question is not so much if, but exactly how and precisely when.
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