Can Manufacturing Succeed In Myanmar?

Justin Kent, Contributor

The ongoing quest for low cost production has drawn manufacturers’ attention to a small Southeast Asian nation that has been out of the sourcing network for nearly a decade.

Myanmar (formerly known as Burma) has been thought of more as an exotic tourist destination than a sourcing location, however that might be about to change.  The nation is attempting to move towards a more democratic and transparent government as well as stimulate economic growth.   These efforts are helping to bring Myanmar out of political and economic isolation from the West.

Late last year when envoys from Europe and the United States began visiting the nation, and ultimately loosened long held sanctions, Myanmar became a more serious topic of conversation in sourcing circles.

At the end of April 2012 the EU announced that it would suspend sanctions for one year while it assesses the nation’s progress in political reform.

Japan has waived Myanmar’s $3.7 billion debt and will resume assistance to the nation. Travel and financial restrictions on the nation have been relaxed by various countries including; Australia and Norway.

In May the U.S. lifted investment restrictions but announced that import restrictions would remain in place.  This stance has now softened followingAung San Suu Kyi’s visit to the U.S. in September this year. Secretary of State, Hilary Clinton announced at the end of September that the U.S. will begin easing the ban on imports.  Easing the ban will require the issuance of a Treasury license before it becomes effective.

Myanmar is making progress in terms of more democratic elections, moving towards greater freedom of speech and a more transparent government.   The nation’s rich natural resources  which include oil, gas, coal, minerals, and what is considered to be the world’s finest teak wood, have made it a prime trading partner for China and Western countries are now eager to participate in this market.

Although the U.S., EU, and other countries placed sanctions on Myanmar, the country has traded with non-sanction nations.  During that period (2003 – 2012), its military government established lucrative trade deals with China, Thailand and India, especially for the export of energy.  Thailand, for example, purchases about 30 percent of its gas from Myanmar.

Returning to Manufacturing…Slowly

Myanmar has a history in the apparel industry.  From the mid ‘90s to 2004 the nation had a small, relative to the size of the industry in other Asian nations, garment manufacturing sector, which relied heavily on exporting to the United States.

Prior to the sanctions, about 85 percent of the nation’s exports were apparel and textiles of which an estimated 25 percent went to the U.S.; at that time Myanmar’s largest export market.

In 2002, the last full year before the import ban was imposed, the United States imported approximately $356.4 million of clothing and other goods from Myanmar. Imports fell to $275.7 million in 2003 and have been zero in most years since then.

U.S. sanctions against Myanmar’s military-led government resulted in a 60 percent decrease in the value of exports from Myanmar by 2005 compared with Cambodia, which had 90 percent growth during that time.

A key factor that had previously compelled Western apparel importers to source in Myanmar was quota.  While the country was still under sanctions, the industry changed dramatically in 2005 when China joined the WTO and quotas fell away.  China, with its massive workforce and superior supply chain, was the location of choice for apparel manufacturing.  Significant garment and other manufacturing moved to China, resulting in a huge drop in exports for many Southeast Asian countries.

Rebuilding the Apparel Sector

While most of the nation’s recent trade has been in raw materials, manufacturers increasingly are eyeing the nation’s ample low cost labor force.

 Wage increases in China grew by an average of 10 to 15% annually during 2000 – 2009, while wages in ASEAN countries increased more modestly.  The Asian Development Bank’s August report states “If the wage rate increases in the PRC continue to outpace those elsewhere, investors may start looking at other countries in the region to locate or relocate their investments.”

With 13 million people between the ages of 15-28, a minimum wage of just $1.25 per day (plus allowances), and the government’s stated objective of creating 1 million new jobs by 2015, Myanmar looks set to command a share of the region’s manufacturing market.

It’s not just the cheaper and more abundant labor, but the investment and tax incentives the Myanmar government is offering for those manufacturers established in special economic zones which is attracting interest.  Incentives include a 5 year holiday on tax, custom duty exemptions on imported machinery and equipment as well as the value of the machinery being considered part of the capital investment requirement.

The Hong Kong Apparel Society and the Hong Kong Trade Development Council have proposed establishing a special Hong Kong Industrial Zone that will allow 50-80 manufacturers to set up within a two to three-year period.

Exports from the nation’s 200 garment factories, 195 of which are privately held, reached $770 million in 2011, according to the Myanmar Garment Manufacturers Association (MMA), close to the $829 million achieved in pre-sanction 2001.  Key export markets are Japan ($348 million) and South Korea ($232 million), with remaining exports going to Brazil, Argentina, South Africa and Turkey.

Obstacles

A recent Hong Kong Trade Development Council [HKTDC] mission to Myanmar revealed that factories often concurrently produce a variety of products. At one factory they witnessed a line producing lingerie, another producing jackets and a third making pants.  In the packing zone items other than apparel were being packaged.  The factories regularly lost power and had to rely on their own diesel generators, at a cost four times that of regular electricity.  “Most factories can only do CMP, [cut, make, pack] although there are some Korean and Taiwanese owned factories that can offer FOB production.” advised Jeremy Winterson, head of Connor’s Thailand office.

With only two washing facilities in the country and no domestic supply of fabrics, trims or even packaging materials, long lead times are required.  It takes three weeks to ship raw materials in from China with all shipments going via Singapore.

Equipment is a further challenge.  With little demand for new machinery, there has been no impetus for major equipment suppliers to establish technical support offices in Myanmar.  However that might change since the value of imported machinery may be included in the country’s $500,000 investment capital requirement for new foreign businesses.

On the plus side, Myanmar has the region’s lowest cost labor with minimum wages of just $32 per month, (not including allowances and overtime pay).  However the cost of labor is often inversely proportional to the overall ease of doing business in a country and Myanmar is no exception.

While wages are likely to remain comparatively low when compared with other countries in the region, Myanmar’s workforce is becoming increasingly dissatisfied with wages and working conditions.  The relaxing of government controls and the right for labor to unionize and strike (part of the 2011-12 reforms) has meant that strikes are becoming more common as is job-hopping between factories.  The government responded by setting a temporary minimum wage of US$32 per month (US$65 including overtime and allowances) with a bill to make this wage a new minimum wage currently with parliament.  Realistically, as has happened throughout the region, the cost of labor in Myanmar will start to rise.

Outside of labor costs, the nation is a challenging place for sourcing.  Due to non-existent infrastructure (Myanmar ranked 129^th out of 155 countries on the Logistics Performance Index), an antiquated banking system, power shortages,  corruption, as well as a total lack of modern equipment and skilled technicians, cost savings on labor may be offset by higher costs and delays in non-labor areas.

Then there’s the matter of compliance.  Myanmar is still on the ‘watch list’ for child labor, has a Tier 3 rating in the U.S. Department of State’s 2011 Trafficking in Persons Report (alongside Libya, Yemen, Lebanon and North Korea) and is also cited for environmental issues.

There is relatively little knowledge in terms of international standards for social compliance and there are currently no SA8000-certified factories in Myanmar.  There is no unified labor code in place and in the past, disputes between workers and factory owners have been settled with government arbitration. This makes auditing a challenge as government requirements are sometimes arbitrary or relate to a specific dispute that may or may not be relevant.

A significant amount of education and training is needed to bring factories up to a level to meet international standards required by major retailers and brands.

Although Myanmar currently pales by comparison to its regional neighbors, there remains the possibility that the nation will develop into a viable apparel sourcing destination.

“These are early days for Myanmar.  The demographics are ideal and it’s pro foreign investment,” said Steve Vickers, CEO, Steve Vickers & Associates Ltd., specialists in risk mitigation and security.

The establishment of a Foreign Investment Law has been bogged down over disagreements about the terms and conditions for foreign investors.  While the government seeks foreign investment to help boost the economy, local businesses are leery of outside companies that they believe threaten their hold on the market.

On September 7 parliament approved the latest draft of the law, which has now been passed to President Thein Sein for review.

Future Forecast

When compared with neighboring countries [see table above] such as Thailand, Vietnam and Cambodia the potential for growth and development within Myanmar is apparent.  While Myanmar and Thailand have similar size populations, Thailand has a GDP six times the size.  Cambodia with a workforce almost a quarter the size of Myanmar has half the volume of exports.

“There’s real motivation for change.  Myanmar fears becoming a ‘client state’ of China,” said Hans Vriens, managing partner at consulting firm Vriens & Partners, which maintains an office in Yangoon,

Part of the desire for foreign investment from the West is to help balance China’s growing power over the nation.

An increase in capital inflows is likely now that many nations have lifted restrictions on financial investment in the nation.

In September the EU commission took steps to place Myanmar in the EU’s Generalised System of Preferences (GSP),   thereby granting duty and quota free access to the European market for clothing.  The proposal is awaiting approval of the EU’s 27 member states and European parliament.  “Since Myanmar started to open up earlier this year, I saw the need to underpin such deep and important changes with real economic support once key improvements for the workforce had been met,” explained EU Trade Commissioner Karel De Gucht.

This sentiment was followed later in the month by the U.S. taking steps to ease its own import ban.

The outlook remains tenuous.  The lack of infrastructure, an inexperienced and increasingly restless labor force, coupled with political wrangling may rattle what UN chief Ban Ki-moon called a “risky and fragile” reform process, thereby derailing the country’s attempts to return from economic exile.

Ref:forbes