Sourcing Opportunities and Risks in Myanmar

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Information about Sourcing Opportunities and Risks in Myanmar
Business & Mgmt

Published on March 3, 2014

Author: CascadeAsia

Source: slideshare.net

Description

With wages steadily rising in manufacturing countries in Asia, this webinar takes a practical look at the prospects of sourcing in Myanmar. Though the presentation is geared to footwear manufacturers much of it is applicable to all industries.

Email info@cascadeasia.com for the audio.

Footwear Sourcing in Myanmar: Ryker Labbee Opportunities & Risks Senior Analyst, Myanmar CascadeAsia Photo: ”Sunrise Over Bagan" by Dima Chatrov, http://yourshot.nationalgeographic.com/photos/1543168/

About Cascade Asia Photo: "Mahamuni Buddha temple in Mandalay" by Paul Arps, http://flic.kr/p/iWjD4r

About Cascade Asia Cascade Asia Advisors is a boutique intelligence and strategic advisory firm focused on Southeast Asia. Intelligence – On-the-ground market insight  Industry and/or issue deep dive  Supply chain reliability analysis Risk Management – Monitoring & Mitigation  Early Warning System (EWS)  Financial & reputational due diligence Relationships – Enhanced network access  Government relations  Stakeholder perception audit Strategy – Optimized competitiveness  Market entry/establishment design  Corporate positioning Photo: “Shwedagon at Dusk” by Ryker Labbee, Cascade Asia file photo

Early Warning System Photo: http://www.rawstory.com/rs/2013/08/07/californiansangered-and-startled-by-first-mobile-amber-alert/

 Over 90% of our analysts have advanced degrees.  We speak 10 Southeast Asian languages.  66% of our clients are from the private sector.

Cascade Asia in Myanmar  Ryker Labbee, Senior Analyst – 11 years experience following Myanmar – MA in international affairs, economics – Splits time between Seattle and Yangon  Jacob Clere, Senior Analyst – Industry experience and network – MS in development economics, emerging markets – Lives in Yangon

What Does Tomorrow Hold? Footwear Manufacturing in Asia Today …and Tomorrow?

Economic & Political Overview Photo: “Irrawaddy Near Inwa” by Ryker Labbee, Cascade Asia file photo

Macroeconomic Outlook Gross Domestic Product 2010-2014 6.8% 6.9% 2013 e 2014 f 6.4% 5.9% 5.3% 2010 Source: IMF, Cascade Asia 2011 2012

Current Macroeconomic Backdrop Myanmar Imports and Exports 2013 (US$m) 2000.0 1000 1800.0 1600.0 950 1400.0 1200.0 900 1000.0 800.0 Exports 850 Imports USD/MMK 600.0 400.0 800 200.0 0.0 750

Myanmar’s Export Economy

Foreign Direct Investment Cumulative FDI into Myanmar from 1989 to 2013 (US$m) China, 14193.395 Thailand, 9984.012 U.K., 6458.979 S. Korea, 3055.518 Singapore, 3044.678 Malaysia, 2437.866 Vietnam, 1625.861 France, 511.186 India, 474.36 Japan, 277.282 Netherlands, 249.136 U.S.A., 243.565 Indonesia, 241.497 Philippines, 146.667 Others, 508.637 Source: Myanmar Investment Commission

Near-Term Political Outlook  Stability, further liberalization expected in 2014  National elections coming in 2015  Constitutional reform efforts ongoing – Required for Suu Kyi to run for presidency – No changes to military reservation in parliament  Opposition party fragmentation expected  Unrest involving ethnic minority groups – Conflict persists in hinterland – Buddhist/Muslim tension a problem

Gl ob al Ea Com se pe o t Ru f Do itiv en in le g B ess of us La I Lo ine nde gis w, x, 20 ss ti Cu cs P 13 , 20 201 Co s ( 3to rru m erfo 97) 14 ( 2 18 014 In ptso rma 9) (1 f i nc 48 AVra s n P e ) In E R tru ere In A ct de te G ur pti x, rn E G e on 20 at L In 12 i o OB Lo de na A (1 gi x, st 55 20 ics l shi L RA ) 12 Tr qu pm NK ac (1 kin a lit ent 74 y s g ) Ti an and m d el co t in es raci mp Co s ng et rru en ce pt io n AV Pe ER re AG pt io EG n In LO de BA x, LR 20 AN 12 K (1 74 ) Business Climate in Myanmar Singapore Malaysia Brunei Thailand Indonesia Philippines Vientam Lao PDR Cambodia Myanmar 2 24 26 37 38 59 70 81 88 139 1 1 6 6 59 59 18 18 120 120 108 108 99 99 159 159 137 137 182 182 11 11 46 46 -54 54 55 55 64 64 66 66 -83 83 -- 1 1 29 29 -38 38 59 59 52 52 53 53 109 109 101 101 129 129 15 29 54 46 42 88 75 118 67 105 63 123 93 160 108 157 122 172 Source: WEF, WB, IFC, WJP, TI 24 2 6 6 1 2732 26 30 28 28 - 28 4447 35 49 45 39 8578 57 62 52 42 6278 56 39 39 69 7282 39 82 47 38 106 123 104 111 118 127 128 101 103 78 104 113 133 116 110 129 140 156 5 54 46 88 118 105 123 160 157 172 4 32 28 47 78 78 82 127 113 156

Why Source from Myanmar? Photo: “Intha Rower on Inle” by Ryker Labbee, Cascade Asia file photo

Ideal Demography 46 million 95% literacy rate Photo: Soe Zeya Tun/Reuters, http://blogs.wsj.com/photojournal/2009/08/04/pictures-of-the-day-233/

Ideal Demography Median Age: 28 Source: CIA World Factbook

Competitive Wages $25-$80* month Photo: "Myanmar Clothing & Textiles,” http://www.myanmarbusinessconsultants.com/clothing-and-textiles

Competitive Wages Firing Costs (in Weeks of Salary) Myanmar Singapore Japan Hong Kong India Cambodia 0 3 4 Monthly Base Salary (Factory Workers) 6 16 19 Yangon Vietnam Malaysia 23 Phnom Penh South Korea 27 Philippines Jakarta 27 27 Thailand Indonesia 80 24 China Bangladesh 32 Bangkok Manila Kuala Lumpur 31 Mumbai 36 58 Beijing Source: World Economic Forum, Wall Street Journal, Cascade Asia 209 286 325 344 403 538

Proximity

Government Incentives  New foreign investment law (November 2012) – Land leases now possible for 50 (+20) years – Eleven types of tax incentives: e.g., 5-year income tax exemption, import duty exemptions, etc. – 100% foreign ownership now possible – Remittances of profits much easier, no longer taxed  Changes in trade environment – CMP customs tax exemption on raw material imports – Reduced cargo inspection stations at border checkpoints

Developed Port Capacity Coastal Ports  Over 2,000 kilometers of coastline  9 major ports  Dawei Port/SEZ linking South Asia to Thailand – To rival Singapore? – Interstate highway  Reduced shipping costs versus Strait of Malacca transport Source: Myanmar Port Authority

What Challenges to Expect? Photo: “Rail Activity Near Yangon" by Ryker Labbee, Cascade Asia file photo

Mature CMP Capacity, Incipient FOB  CMP: – Sanctions limited manufacturers to CMP orders until recently – CMP garment exports reached about US$1 billion in 2012  FOB: – Lifting of sanctions improved prospect for FOB businesses – Poor banking services complicate FOB – US $114 million FOB exports (2012)

Labor Market Inefficiencies Labor Market Efficiency, 2013 (rank/148) China (34) Cambodia (27) Indonesia (103) Myanmar (98) Vietnam (56) 148 141 131 120 111 106 94 93 95 89 81 68 64 60 71 69 49 44 39 41 23 32 29 28 17 15 39 31 15 0 Cooperation laboremployer relations Flexibility of wage determination Source: World Economic Forum Hiring and firing practices Redundancy costs Pay and productivity Country capacity to retain talent

Low Productivity Average Daily Wage Cost for a Factory Worker, 2010 ($ Per Day) Myanmar Vietnam 1.5 $3.20 2.2 $5.30 China Thailand Malaysia Source: McKinsey Global Institute Annual Labor Productivity in the Aggregate Economy, 2010 (2010 $ Thousand per Worker) 7.7 $17.70 $18.30 9 $25.40 11

A Closer Look at Productivity Factory space utilization 0% Labor Hours in Factories (number of hours/day) Myanmar (% of space by activity) 8 Vacant 20% Single shift Average of Asian comparison countries Factory Space Utilization Operations 50% Storage 30% 20 2-3 shifts of 8 hrs each ~100 percent space utilized for operations in most advanced and developing countries Source: Focus group on Myanmar manufacturing firms, April 2013; International Labor Organization; McKinsey Global Institute analysis

Primitive Machinery, Technology  Lack of new machinery  Small-scale operations  Limited and inconsistent internet access  Poor telecoms infrastructure  Lack of experience with 21-st century machinery and maintenance Photo: "Design Concentration" by abrinsky, http://flic.kr/p/bQZX5a, cropped from original

Poor Electricity Infrastructure Source: Myanmar Energy Sector Initial Assessment, Asian Development Bank (2012)

Transportation Infrastructure  Only 22% of roads paved  Poor overland connections to neighboring countries  Poor inland water transport capabilities  Abysmal rail infrastructure  Dry port plans in Mandalay being explored Photo: “On the Road to Mandalay” by Ryker Labbee, Cascade Asia file photo

Labor Standards & Compliance  No unified labor code  Common complaints of workers in Myanmar: – Low wages (average $25–$80 per month) – Forced overtime – Poor factory conditions and treatment  Rated a ‘Tier 3 country’* in the 2011 US Department of State 2011 Trafficking in Persons Report  Rapid urbanization without adequate regulatory policies may cause environmental problems – Example: Shwe Gas Pipeline Project  State Department reporting requirements * As defined by the U.S. Department of State’s 2011 Trafficking in Persons Report, a country with a Tier 3 rating is a country whose government does not fully comply with the minimum standards and is not making significant efforts to do so.

Trade Unions 600 since 2011 Photo: "Workers Strike from the Myanmar Sunny Clothing Factory" by Mizzima, http://bit.ly/1i0k6Gi

Political & Economic Stability  Inexperienced government  Little experience working with western businesses, international regulations  High volume of FDI to process, approve, etc.  Legislation being enacted, yet enforcement is lax  Inadequate judicial system  Location of Naypyitaw & lack of access Photo: Shwe Mann in Parliament, Reuters

Industry Snapshot Photo: “Footwear Manufacturing in Myanmar” by Neena Pathak, PRI: http://www.pri.org/stories/2013-09-16/labor-lawsstrengthened-myanmar-workers-still-struggle

Footwear Exports from Myanmar Myanmar FOB Exports Footwear, gaiters and the like; parts of such articles 140 120 US$ in millions 100 Others Thailand 80 South Korea 60 Germany EU (15 countries) 40 Japan 20 0 2007 2008 2009 2010 2011 2012 Source: Institute of Developing Economies, Japan External Trade Organization, Trade Nosis

Industrial Zones in Yangon  Yangon has 4,000 hectares of land for industrial zones, ~20 distinct zones – Hlaing Thar Yar (470 hectares, ~500 companies) – Shwe Pyi Thar (435 hectares, ~200 companies) – Dagon (400 hectares)  Hlaing Thar Yar, Shwe Pyi Thar both operating light manufacturing like garments and food processing  Most CMP operations in Yangon are situated in industrial zones within a 30-km radius of Yangon Port, including those listed above Source: HKTDC Research

Operating Cost Comparison Source: Various government and industry park sources

Profile: Royal Rose Footwear  Sells primarily to domestic and Japanese markets  Two large workshops  Subcontracting and hiring temps are common when large orders received  Singer sewing machines only machines in use  30,000 pairs of sandals/ month Royal Rose Japanese Catalogue

Profile: Royal Rose Footwear  (Left) Cutting & making: not a machine in sight!  (Below) Finished products Photos: Royal Rose Factory by Jacob Clere, Cascade Asia file photos

What’s on the Horizon? Photo: “Bagan Balloons” by Alex Schwab, http://flic.kr/p/bC7iVQ

Laying More Groundwork  Minimum wage law – We have a law in place (effective June 2013) – Wage limits, determined by presidential committee on per-industry basis, in place by year-end 2014 – Enforcement is likely years away  Improvement of worker skills, productivity – Employment & skills development law – Educational reform  Intellectual property law (major issue)  2015: banking, telecoms improvement Source: http://bit.ly/16bMIES

Labor Unrest & Uncertainty  Low wages, political liberalization energizing labor groups – Strike by 600 workers at shoe factory last week  Wages to increase but remain competitive – Legislation, unions to push wages higher – Population stabilizer  Much in flux at present Photo: Laid-off Workers Protest in Yangon by JPAING, The Irrawaddy (http://www.irrawaddy.org/wp-content/uploads/2013/11/workers.jpg)

Thilawa Special Economic Zone Myanmar International Terminals Thilawa  Ambitious target to be operational by 2015  2,400 hectares industry; thermal plant  Connected to MITT

ASEAN Economic Community (AEC)      Economic integration via AEC by 2015 Free labor mobility Removal of cross-border import duties Capital market linkages Interstate transport, including several Myanmar-Thailand links, to improve  Challenges integrating the “six majors” with the underdeveloped ASEAN 4 (CLMV)

Summary & Recommendations Photo: Sule Pagoda at Night by Damir Sagolj, http://damir.photoshelter.com/gallery-image/Heavy-Going-inMyanmar/G0000foxNHfmepcI/I0000XFrB_yZk9Aw

Summary  Opportunities – Huge long-term potential for industrial relocation – Unskilled but literate workforce eager for jobs – Unparalleled strategic location  Challenges – – – – Infrastructure challenges won’t be solved overnight Labor unrest likely to continue Political stability not yet certain Expectations are high (and the world is watching)

Recommendations 1. Begin monitoring today. Daily media monitoring, rolling coverage of new players, monthly regulatory assessments, quarterly infrastructure updates. 2. Don’t settle for anything but on-the-ground intelligence. What’s percolating on the streets today that your team should know about? What are your key stakeholders saying or thinking? Which factories are adding capacity? Which industrial zones are easiest to do business? 3. Begin considering now how to tailor your market entry strategy. Begin mapping out the process for your market entry that anticipates the uniqueness of Myanmar.

Q&A t/ 1.360.358.3094 e/ rlabbee@cascadeasia.com w/ cascadeasia.com 1. Q: How long does it take for a ship from Myanmar to reach the United States? A: Approximately 24–27 days, typically connecting in Singapore 2. Q: What is the flight schedule to Myanmar? A: Daily: Bangkok, Doha, Kuala Lumpur, Singapore, Seoul, Tokyo; at least 3x weekly: Hanoi, Hong Kong, HCMC, Taipei; 2x weekly: Phnom Penh

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