Burma Opens for Business
It was 1997, and U Moe Kyaw, a U.K.-raised entrepreneur with a rasping London accent, was in demand. On busy nights he went table to table at restaurants in Rangoon to greet clients of his advertising firm, a joint venture with Bates Worldwide. Like his foreign visitors (who knew him as Peter, the Cockney adman), he was convinced that isolated, military-run Burma (Myanmar) was finally open for business.
Not so fast. Reverting to type, Burma’s ruling junta swiftly purged its ranks and clamped down on foreign companies and opposition groups. U.S. lawmakers and prodemocracy campaigners quickened the pace with tougher sanctions and consumer boycotts of Western companies in Burma. The final blow was Asia’s financial crisis, which sidelined promarket reformers.
Peter’s multinational clients drifted away, and the shutters came down. Millions of Burmese voted with their feet, migrating overseas to work. “When I came back in 1989, I thought that in one generation we would be like Thailand. Now I think it’s going to be two generations at least,” he says.
It usually pays to be bearish on Burma. But a flurry of initiatives by a new, semi-elected government has raised hopes of a fresh start. Since taking power in March, it has begun tackling barriers to economic growth, such as commodity import cartels and restrictive investment and labor laws. President Thein Sein, a retired general, has pledged to support local entrepreneurship and to attract foreign investors to special economic zones. He’s also tapped independent thinkers as economic advisors and appointed businessmen as ministers. In much of Asia this would be mainstream politics. In Burma it’s almost a Tea Party movement. Even the political standoff that has defined Burma on the world stage–the Lady versus the Generals–appears to have eased with a warm presidential reception on Aug. 19 for Aung San Suu Kyi, the opposition leader. “Things have moved surprisingly quickly,” says a European diplomat. A veteran foreign aid worker concurs: “The political conversation has changed.”
Burma’s political history is strewn with false starts and reversals. The question on everyone’s lips is whether this time is different. Skeptics say Thein Sein has yet to deliver on his reformist rhetoric and faces resistance from political hardliners and conservative bureaucrats, as well as rent-seeking tycoons who thrived under the dictatorship.
This uncertainty, as much as sanctions and boycotts, prevents many Western firms from taking the plunge, says Luc de Waegh, founder of West Indochina, a consultancy in Singapore. “The business environment isn’t friendly to foreign investors yet. It’s challenging to do business there,” he says. Asian manufacturers have also been deterred by high costs for inputs and dilapidated infrastructure, despite a cheap labor pool. Only Burma’s natural resources have attracted significant investment, led by China, though this has proven controversial.
Still, some Western executives are keen to size up a potential market of 54 million people with an estimated GDP of $43 billion. Tourist arrivals rose 23% in the first half of 2011, and not all were vacationers. “The big guys from the big companies are going there for tourism and business curiosity. It’s like the last frontier,” says De Waegh, who used to run British American Tobacco’s Burma operations. Under political pressure at home, BAT exited in 2003.
Burmese businessmen are girding for a return of multinational brands and a more open economy. For Sai Sam Htun, CEO of Loi Hein, a beverage company based in Rangoon, this presents both an opportunity and a challenge. His company has a dominant share of bottled-water and energy-drink markets, and has spare capacity in its factories. It has set a target for $100 million in annual sales as a trigger for a potential IPO, a first for a private company (he declines to give current revenues).
Dr. Sam–a physician-turned-entrepreneur–knows that his local brands would be severely tested by direct competition from the likes of Coca-Cola and Pepsi if sanctions were lifted. “We try to visualize two, three, four years down the road. When all the big guys come in, how should we prepare?” he asks.
This isn’t blue-sky thinking: Western consumer brands are busy dusting off their marketing plans for Burma. Many of their products are already distributed via Thailand and Singapore, as a visit to Rangoon’s new malls reveals. And while U.S. law forbids all investments, European sanctions don’t apply to sodas, shampoos and sauces.
Dr. Sam says he may seek a foreign partner who wants to enter the beverage market. “If we have to join or be bought by a foreign company, I think we have no choice,” he says. He’s also begun to diversify his business, which he founded in 1992 after a stint overseas. He owns Yadanadon Football Club, the current champions of Burma’s soccer league, and is develop ing an upscale condominium project in a Rangoon suburb. “We have to open the door, correct our politics and normalize relations with all the countries in the world, including the West,” he tells FORBES ASIA.
Born into a merchant family in Shan State, near the Chi nese border, Dr. Sam spent 15 years working as a doctor at public hospitals. He left Burma before a failed uprising in 1988 against military rule. When he returned he began trading plywood and timber, using his savings of $20,000 to set up Loi Hein, which is named after his father. In 1994 he switched to manufacturing and distribution after the junta began leasing state-run factories to private operators. “I brought in new ma chinery, new packaging and branding. That’s where I made money for myself,” he recalls.
By 2003 Loi Hein was ready to expand. It built a modern factory outside Rangoon, the commercial capital, and launched Alpine bottled water, which now has 65% market share, according to Dr. Sam. He also licensed Shark, an energy drink from Thailand, and added carbonated sodas. Most of his plants are now fully private, including a former state-owned bottling factory in Mandalay, the second-largest city, and the company’s payroll has swelled to nearly 2,000 workers.
But 2011 has brought an unwelcome jolt for Burmese entrepreneurs: a currency appreciation of 25% against the dollar that has squeezed exporters and depressed farm prices. The government has cut export taxes and agreed to overhaul a Socialistera foreign-exchange system with multiple rates. For now commodity traders are stuck with currency volatility and crops that can’t compete on global markets. “They’re caught between a rock and a hard place,” says a foreign economist.
In an opaque, rumor-driven economy, it’s unclear exactly why the currency, the kyat, has spiked so dramatically since January. Most observers point to a flood of dollars for priva tizations and gem auctions, as well as speculation on real estate and other assets. Burmese allege that Chinese in vestors are snapping up prime sites in major cities, using bribes and local partners to evade bans on foreign owner ship of land.
“People are paying stupid prices for property,” says adman Peter, who is now managing director of Myanmar Marketing Research Development. He names a new mall in Mandalay that is selling ground-floor stores for $1,430 per square foot. “Stupid and insane prices,” he laughs.
This combination of asset inflation and economic stagna tion may reveal the “resource curse” that some economists say is Burma’s greatest challenge. Annual natural gas ex ports to Thailand are already worth $2.5 billion, and Chi nese investment in new energy projects could bring in vastly more revenues. Other lucrative exports are timber and gems, mostly cut and shipped for processing in other countries. These natural resource exports tend to enrich a narrow elite without boosting investment in domestic in dustries. Artificially inflated prices for imported goods such as cars and telephones further deter manufacturers. “It’s the reverse of supply-side economics,” says a Burmese investor.
Some companies did very well under military rule. Burmese conglomerates run by cronies of the regime dominate much of the private economy, including mining, banking, construction, aviation and tourism. Some corpo rate owners and their families are under Western sanctions, including travel and financial service bans, though such measures have failed to dampen their businesses and may have made them stronger, since medium-size companies had to bear higher overheads due to general sanctions.
Dr. Sam isn’t on any sanctions list. “I just returned from Switzerland,” he says. His ownership of a club in a soccer league thick with cronyrun teams may raise eyebrows, not least because the regime allegedly awarded mining conces sions to compliant club owners, according to a leaked 2009 U.S. cable. Dr. Sam says that his invitation came from Zaw Zaw, a friend (and sanctioned crony) who chairs the league, and that Yadanabon so far has earned trophies but no prof its. Burmese state television doesn’t pay clubs for the right to broadcast games.
It falls to the new government to overhaul a sclerotic econ omy that is riddled with corruption. It has to do this without the support of the World Bank and other development agen cies. The IMF is sending a technical team in October to advise on exchangerate reform, but the U.S. vetoes multilateral loans to Burma on political grounds. Economic observers say the IMF mission gives political cover to the president to adjust the exchange rate. But it still leaves his promarket faction largely on its own as it tries to reverse five decades of poorly executed development. “We’re whistling in the dark,” says a well-placed Burmese observer.
Lifting sanctions may be the key to unlocking Burma’s po tential. But Western opinion, which hardened after the 2007 military crackdown on monkled protests, is unlikely to shift until Aung San Suu Kyi calls for an end to sanctions. Many Burmese recognize the futility of a policy that has left their country poor and isolated, though they also blame the gener als for mismanaging an economy rich in natural resources.
Western powers should also consider their own geopoliti cal interests when sanctions come up for renewal, says a Burmese businessman. “China has embedded itself in our infrastructure and the extractive industries. It’s almost too late–the West has lost,” he says.
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DOING BUSINESS IN BURMA
Getting Started
The United States supports the Burmese Government’s ongoing reform efforts, and believes that the participation of U.S. businesses in Burma’s economy can be a model for responsible investment and business operations, encouraging further change, promoting inclusive economic development, and contributing to the welfare of the Burmese people. Increasing U.S. trade and investment in Burma – a key priority for the U.S. Embassy in Rangoon – brings substantial benefits both countries.
In response to the political reforms undertaken by President Thein Sein’s government, the United States has waived virtually all of its economic sanctions on Burma, with the exception of the Specially Designated Nationals list, the import of Burmese-origin jade and rubies, and certain travel restrictions. These policy changes opened the door for U.S. businesses to trade and invest in Burma.
The United States remains concerned about the protection of human rights, corruption, and the role of the military in the Burmese economy. A key element of U.S. policy is that we are not authorizing new investment with the Burmese Ministry of Defense, state or non-state armed groups (which includes the military), or entities owned 50 percent or more by any of the foregoing.
Nevertheless, the core legal authorities underlying our sanctions remain in place. U.S. persons are still prohibited from dealing with blocked persons, including both listed Specially Designated Nationals (SDNs) as well as any entities owned 50 percent or more by an SDN. The Treasury Department’s Office of Foreign Assets Control (OFAC) publishes a list of SDNs availablehere.
For an excellent overview of the investment climate in Burma, please click on the following link which will take you to the 2013 Investment Climate Statement - Burma.
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