Investment liberalisation positions Myanmar manufacturing subsectors for growth

 

Myanmar’s manufacturing sector reached a turning point in 2018 as liberalisation, tax reforms, infrastructure improvements and the development of special economic zones (SEZs) helped turn the country from a low-cost regional production base to a rising manufacturing destination with capacity on the rise. The sector has an advantage due to the country’s relatively low operating costs, favourable demographics and liberalising government policies.

Despite its many strengths, players in the industrial sector, which employs around 16% of the workforce, continue to face challenges. Although the country has low wage costs, insufficient infrastructure, a lack of local materials and poor access to credit remain obstacles. Nevertheless, the labour supply, government efforts to improve the business climate, and an enviable location between the Chinese and Indian consumer markets — both sizeable and growing — should facilitate the growth of manufacturing, job creation and earning from foreign exchange.

Structure

Industrial policy and regulatory oversight falls under the purview of the Ministry of Industry (MoI), which is working to implement policies that enhance the competitiveness and productivity of the sector, with a long-term goal of developing advanced industries. The sector faces a number of structural challenges, such as inadequate transport infrastructure to move goods to and from the ports, power cuts and limited access to finance. It can take up to three weeks to obtain goods imported by sea, contributing to higher costs and delays. There have been efforts to alleviate these challenges, such as the Myanmar Sustainable Development Plan 2018-30, which seeks to utilise public-private partnerships to address the infrastructure gaps that weigh on industrial productivity (see Economy chapter).

Industrial Policy

Recent years have been pivotal for manufacturing as a new round of reforms have been implemented. The MoI and the government as a whole are working to improve the business environment and encourage investment. In 2018 Myanmar ranked 171st out of 190 countries in the World Bank’s “Doing Business 2019” report, but the government, led by the National League for Democracy (NLD), has implemented changes and reforms, such as the Myanmar Investment Law of 2016, aimed at easing procedures for both foreign and local investors.

The Myanmar Companies Law of 2017 was also recently implemented, which allows foreigners to acquire up to a 35% stake in local companies and permits companies with foreign investors to maintain their local status, paving the way for more foreign investment in the economy. The law, which replaced the 1914 Companies Act enacted under British rule, became effective in August 2018 once a new electronic corporate registration system called the Myanmar Companies Online (MyCO) became operational. MyCO replaced the paper-based filings that hindered investment and accountability. The Directorate of Investment and Company Administration (DICA) now aims to approve investment proposals within 30 days using the new system, although there are some indications human capacity constraints are contributing to delays in the process.

The reforms are part of broader government initiatives introduced in 2015 called the National Export Strategy and the Myanmar Industrial Development Vision, which aim to boost Myanmar’s local production and reduce reliance on imported manufactured goods. The government also unveiled its industrial policy in 2016, which targets industrial growth of 5-6% per year through to 2030. In particular, the 2016 policy focuses on fostering value-added agriculture and agricultural products, and more effective utilisation of natural resources and raw materials.

Performance

Myanmar’s potential as a manufacturing powerhouse is significant. The country of 55m is strategically located between China, South-east Asia and India — sitting astride 40% of the world’s population, which accounts for around $15trn, or 20%, of global GDP — with river and sea links to the Indian Ocean and the Gulf of Thailand.

The government’s pro-investment policies have been bearing fruit. According to the Asian Development Bank (ADB), industry and services grew by 8% in 2018, outpacing broader GDP growth rate of 6.8%. Economic expansion is expected to continue at a rate of 7.2% in 2019, and ADB officials note that industrial development will be a key driving factor.

Emerging & Target Industries

One of Myanmar’s most established industries is the garment segment, which is seeing double-digit growth. According to the Myanmar Garment Manufacturers Association, Myanmar exported over $2.7bn in garments and over $300m in footwear in 2016/17, representing a 28% increase on export figures from the previous year. Garment exports are expected to top the $3bn mark in 2018, with footwear exports on track to increase to $400m. Approximately half of Myanmar’s garment exports are sent to the EU, 25% to Japan, and the remainder to South Korea, Canada, the US and China. Garment factories are owned predominately by individuals and companies from China, South Korea and Taiwan.

Garment makers are attracted primarily by Myanmar’s low costs. Labour is far cheaper than in Cambodia, Laos or Thailand, with a minimum wage of about $3.60 per day. Myanmar also lacks the labour tensions of nearby Cambodia and Bangladesh, making it an attractive alternative for companies looking to diversify their production away from Bangladesh and Vietnam, two regional garment superpowers.

Growing trade tensions between the US and China are also benefitting the Myanmar garment industry, and exports more broadly, as companies in the region reposition themselves to avoid expected tariffs.

Food & Beverages

Food and beverage production is also on the rise, with local and foreign manufacturers eyeing the Myanmar market for its potential growth. Unlike garments, which are mostly exported, the burgeoning food and beverage industry is aimed at the local market’s growing wealth. Liberalisation after 2011 opened the country to foreign goods and popular brands of soft drinks, snacks and alcohol. Low market penetration combined with favourable demographics make Myanmar an attractive market for consumer goods manufacturers. Approximately 55% of the population is aged below 30 — a key target segment for consumer goods. The country’s GDP per capita is expected to grow from $1480 in 2018 to $2300 in 2022, freeing up more disposable income to spend on non-essential goods.

The alcohol industry is in the early stages of development. Myanmar has one of the lowest alcohol consumption rates in South-east Asia, where consumption of alcohol per capita is expected to reach 6 litres in 2018, below that of Cambodia (35), Vietnam (65.9) and Laos (89.6). Domestic consumption is growing, however, and by 2021 the beer market alone is expected to increase 80% from 2016, reaching 900m litres. “Over the past few years the alcoholic beverages market has been quite dynamic,” Christoph Vavrik, managing director of Carlsberg Myanmar, told OBG. “Beer is growing, attracting new global players such as Carlsberg, Heineken, Kirin — and a new regional player, Chang, is expected to enter the market in 2019. Wine is growing too, and there is good local production. Local spirits are also increasing in quality,” Vavrik added.

International companies have recognised the potential of Myanmar’s alcoholic beverages market. French beverage giant Pernod Ricard announced in May 2018 it will team up with Myanmar’s Yoma Strategic Holdings to produce and sell whisky in Myanmar. The arrival of Pernod Ricard, the world’s second-largest wine and spirits company, marks the entrance of the first major global producer. Other foreign companies are already present in the market, however. In 2017 Thailand’s ThaiBev acquired a 75% stake in Myanmar Distillery Company, the producer of Myanmar’s Crown Royal whisky, in a $495m deal. Singapore’s Fraser and Neave (F&N) re-entered the Myanmar beverage market after losing a court battle with its former joint-venture partner, the military-backed Union of Myanmar Economic Holdings, in 2015. In March 2018 F&N received approval for Emerald Brewery, a joint venture with an affiliate of local conglomerate Shwe Than Lwin to manufacture and distribute beer in the country.

While Myanmar’s industrial sector has multiple emerging subsectors, impediments to attracting high-value-added technological production remain. South Korean electronics giant Samsung announced in July 2018 that it was shelving plans to build a manufacturing plant near Yangon due to infrastructure deficiencies. The population’s relatively low purchasing power is another barrier to higher-end manufacturing for local sale. Some eight years after economic and political reforms began, the country’s middle class is small. Sales of modern electronic goods have been strong but confined to lower-end Chinese products, preventing high-end foreign producers from appealing to the local demand base.

Innovation

Industrial players are turning to innovation and research and development to adopt methods of improving sustainability and reducing impact on the environment. Heineken Myanmar reduced carbon emissions by 17% per 100 litres of beer produced in 2017 compared to 2016, and at the same time reduced the volume of water used to brew beer by 33%. The company also invested $10m in a wastewater treatment facility and pipeline, allowing it to recycle more than 70% of waste.

Other players in the food and beverage industry are innovating new ways to encourage sustainability. Tha Bar Wa, a four-year project led by the World Wildlife Fund (WWF), the Myanmar Food Processors and Exporters Association, the Savings Banks Foundation for International Cooperation and the EU, focuses on the management of wastewater discharge and energy efficiency. According to figures provided by Tha Bar Wa, there are an estimated 27,000 food and beverage companies in Myanmar, of which 5% have a functioning wastewater treatment system. The organisation therefore aims to provide technical know-how and assist producers with procuring the finances necessary to invest in innovative and sustainable production systems.

Incentives & Regulations

Myanmar instituted sweeping changes to regulations regarding foreign investment in 2017 with the adoption of the Myanmar Investment Law, which replaced the Myanmar Foreign Investment Law. Included in the new legislation were incentives to encourage investment including exemptions from corporate income tax that replaced the automatic five-year tax holiday under the previous investment law. Companies are given a tax exemption for three, five or seven years, depending on whether the investment occurs in an underdeveloped area of the country.

The new law also permits foreign investors to lease land for 50 years, with the option for two, 10-year extensions and additional incentives in less-developed regions. It removes the requirement for the appointment of a specified percentage of skilled employees and establishes the equality of foreign and local investment. However, it permits the government to grant discretionary exemptions for locals. Foreign investors may also buy shares in domestic companies, and benefit from simplified and cheaper procedures for incorporating a business.

SME

Small and medium-sized enterprises (SMEs) make up the vast majority of Myanmar’s business community, with 98% of registered businesses classified as such. These companies face numerous difficulties, however, including securing financing, sourcing qualified human resources and facing an underdeveloped support system.

In recent years Myanmar authorities have sought to change this and have prioritised the development of SMEs, recognising their potential. In early 2018 officials announced a programme to boost training and provide $147m in loans dispersed through Myanma Economic Bank. The government is also working to help SMEs utilise technology to encourage the production of value-added goods and expand market access. These efforts will focus primarily on SMEs in the food and beverage industry, where officials estimate around 60% of companies require assistance and training in the adoption of technology.

Exports Targets

Increasing manufacturing exports were key to reducing Myanmar’s overall trade deficit in 2018, which fell by $500m to $1.3bn in the second and third quarters of 2018 compared to the same period of the previous year.

The garment industry in particular has played an important role in balancing trade. Garment exports reached $2.2bn in the first half of 2018, with garment exports in the cut-make-pack (CMP) segment increasing by $1bn during the second quarter. Myanmar earned around $2.5bn from CMP garment exports in FY 2017/18 alone, a nearly three-fold increase from $850m in FY 2015/16.

“The garment sector is one of the prioritised sectors that drives increasing exports,” the MoI noted in October 2018. “The CMP garment industry has emerged as a very promising one with preferential trade from Western countries.”

The largest export market for Myanmar’s garment sector is Europe (47%), followed by Japan (27%). In 2017 garments made up 72% of the $1.8bn exported to Europe, one of the few entities with which Myanmar enjoys a trade surplus. Income from Europe-bound exports has grown almost 10-fold since 2012, the year before Myanmar’s EU Generalised System of Preferences (GSP) status was reinstated. However, the EU’s announcement in the final quarter of 2018 that it would re-evaluate Myanmar’s GSP status has prompted fears of a slowdown in the garment trade, which is the country’s largest source of foreign exchange after the oil and gas sector.

“Growth will continue in the garment industry, but its pace depends on three factors,” U Khin Maung Aye, Chairman of Lat War Group, told OBG before the EU announced it was reviewing Myanmar’s GSP status. “The government must do its homework and address the infrastructure gaps hindering further growth in the sector. Second, adequate housing needs to be made available for workers in this labour-intensive industry across the different industrial hubs. Third, the labour law needs to be reviewed, and the ministry has already agreed to revise the minimum wage.”

Foreign Direct Investment

Foreign direct investment (FDI) in Myanmar declined by around $900m to $5.7bn during FY 2017/18 compared to $6.6bn the previous year, according to figures provided by the Myanmar Investment Commission. The top investors in the country were China, the Netherlands, Japan, South Korea, the UK and the US, with 28 countries investing in total. Manufacturing attracted the largest proportion of investment, at 31%, followed by real estate and services.

In October 2018 the authorities announced the launch of the Myanmar Investment Promotion Plan (MIPP), a 20-year investment plan that targets FDI from East Asia, which includes South Korea, Japan and China. The shift east came as Western countries raised concerns about internal conflict in Myanmar, potentially signalling a stalling of investment. The five-pronged plan puts forward new policies and regulations, institutional development and infrastructure development. It will also leverage local business systems and human resources. The MIPP covers local and foreign investment, and will prioritise export businesses, domestic import substitution businesses and businesses involved in natural resources.

Based on estimates provided by DICA, under the plan FDI will reach $220bn over the next 20 years. As FDI increases, the MIPP aims to raise earnings for individual workers to MMK45,000-50,000 ($31.83-35.37) per day by 2036, making Myanmar a middle-income economy.

Free Zones

Myanmar has sought to encourage the development of the local manufacturing sector through the creation of several SEZs across the country that provide reliable infrastructure, one-stop-shop access to government permits, banking services and other incentives. The most successful SEZ is the Thilawa SEZ, located around 25 km outside Yangon and formed in 2015 in a joint partnership with Japan. The Myanmar and Japanese governments each hold a 10% stake, while Myanmar Thilawa SEZ Holdings, a consortium of nine local firms, holds 41% and Myanmar Japan Thilawa Development, a consortium of Japanese firms, holds 39%.

In the country’s Rakhine State, China has supported the planned Kyaukphyu Industrial Estate, which forms part of the Belt and Road Initiative, a Chinese strategy to link 71 countries across Asia, Europe and Africa with more than $1trn worth of total investment. The 1736-ha project includes an industrial park and a deepsea port.

While it began as a joint venture with China, it has since transitioned to a consortium of private investors managed by China’s state-run CITIC Group, the country’s largest and oldest financial conglomerate. Also involved are Thailand’s Charoen Pokphand Group, China Harbour Engineering, China Merchants Holdings (International), TEDA Investment Holding and Yunnan Construction Engineering Group. Upon completion, CITIC estimates the project will create 100,000 local jobs, and earn Myanmar $7.8bn and $6.5bn from the SEZ and seaport, respectively.

Myotha Industrial Park, located approximately 67 km outside of Mandalay, has similarly attracted a steady flow of investment since the project began in 2013. Operated jointly by Mandalay’s regional government and Mandalay Myotha Industrial Development (MMID), the park had received investment totalling MMK150.5bn ($106.5m) as of February 2018. It is home to seven international factories producing animal feed, plywood, food and beverages, and concrete. Investors from China, Indonesia, Hong Kong and Denmark have been attracted to the park alongside local investors. MMID was reportedly mulling an initial public offering in 2018, and Myanmar media reported that a $390m agreement had been reached with China’s Techong Industrial Park Development Company to establish a new 120-ha industrial zone within the park. However, lingering risks remain over ongoing land rights disputes and disagreements over resettlement compensation.

Outlook

Despite internal and external headwinds that have threatened to blow Myanmar’s fast-growing economy off course, industrial growth continues to outpace GDP expansion and prospects are encouraging. Ongoing efforts to minimise red tape and address infrastructure gaps should allow the industrial sector to capitalise further on the advantages of a large human resource base and a strategic location that is close to significant consumer markets.

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The Report: Myanmar 2019

Industry & Retail chapter from The Report: Myanmar 2019

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