12:06 PM
Waa Haa Haa
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 following Aung 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 129th
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.
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