Amid the series of political and economic reforms implemented since 2011, Myanmar has experienced rising foreign direct investment (FDI) across various sectors, with the manufacturing industry attracting a significant influx of foreign investors. It is expected that the manufacturing sector will continue to enjoy a healthy growth rate and rising investment drawn by various economic benefits and especially the development of the country’s banking system.
However, such potential growth could be tempered by challenges in infrastructure development in the short term, according to a white paper released by consultancy firm Solidiance, titled “Myanmar: The Next Manufacturing Hub – with a special focus on special economic zones”.
Economic benefits
Myanmar is strategically located between two economic giants – China and India, and offers access to a 2.3 billion consumer base across all its neighbouring countries. Additionally, in the domestic market, opportunities abound for investors in the booming automotive, construction and electronic sectors, with demand being largely met through imports currently. Large multinational companies (MNCs) such as Lafarge and Ball Corporation have invested in the country’s manufacturing sector mainly to cater to local demand.
With a population of over 50 million and a healthy GDP growth rate of 8.05 percent, according to the International Monetary Fund (IMF), there are significant untapped opportunities in the domestic market, which is gradually transitioning away from being a primarily agriculture based economy. The industrial sector’s share of GDP in Myanmar increased from 11 percent in 2008 to 21 percent in 2014.
Low labour wages and favourable tax exemptions allow firms to lower their operating costs, reinforcing their competitiveness, especially in the regional market. To highlight the significant benefits, if not all, under the Foreign Investment Law, investors can claim a corporate tax exemption of five years and a custom duty exemption on imported raw material for the first three years of commercial operation.
Under the Special Economic Zones (SEZ) Law, five to seven years of corporate tax exemption is granted depending on the business type and custom duty exemption is granted for imported raw materials and machinery for the first five years of commercial operation. Timing remains critical and investors are certainly rushing in with the total manufacturing FDI in 2014-15 amounting to $1.5 billion, a third of which comes from investment in Thilawa SEZ.
MNC presence
Furthermore, development of the banking system that followed political and economic reforms has boosted manufacturing growth by providing viable financing solutions for trade. Recently, ANZ bank announced that it has received the approval license to operate in Myanmar and intends to provide banking services to diverse growing sectors in Myanmar, especially manufacturing.
Manufacturing companies in Myanmar can now also trade with other countries by leveraging on the various trade finance options available. As the CEO of a major oil company has put it, “With increasing the availability of letter of credit schemes provided by banks, it is now easy to perform trading activities with foreign counterparts as the letter of credit is the main vehicle for trading in international market”.
Logistical and infrastructure challenges
Infrastructure continues to be a major challenge in the facilitation of upgrades and improvements in the manufacturing sector. Although infrastructure development projects are underway, approximately 70 percent of the roads are still unpaved. Though sea trade handles more than 80 percent of the overall trade, the ports are not able to cater to big vessels above 20,000DWT, requiring manufacturing firms to maintain high inventory.
Myanmar is also in dire need of power, which is essential for industrial development. Currently, almost all manufacturing companies are using back-up power generators due to unsteady and low-voltage of electricity. At present, Myanmar has approximately 30 percent of electrification rate and is expected to achieve 100 percent electrification rate by 2030, supported by a $400-million financial aid from the World Bank.
Investment options
Key players have the option to either invest in the industrial zones or SEZs, governed by the Foreign Investment Law and SEZ Law respectively. Industrial zones have been long established since 1990s and are widespread throughout the country whereas SEZ is a new concept. SEZs offer less bureaucracy as the investment approval is needed only from the respective SEZ management committee rather than from various government organizations.
As the Director of a large MNC operating in Thilawa SEZ puts it, “There is a quick decision making process among the management committee. Furthermore, there are frequent meetings and follow up between companies and the committee which leads to effective information flow.”
Although Dawei and Kyaukpyu SEZs target to establish a port of call for much larger vessels of about 300,000DWT, the completion of all stages can go beyond 2020. Due to their significantly larger scale, Dawei and Kyaukphyu SEZs require much longer time and substantial financing compared to the Thilawa SEZ – making Thilawa a good near-term investment option.
The first phase of Thilawa SEZ was completed and launched recently in September while investment bids for the remaining two phases are already underway. The Thilawa SEZ is also regularly hosting training programs in collaboration with non-government organizations (NGOs) and Japanese International Corporation Association (JICA).
Through these development programs for skills enhancement, Thilawa SEZ is expected to aid the imminent shift in the Myanmar manufacturing sector from its current low value manufacturing focus in sectors such as textile and food manufacturing plants, towards medium value manufacturing which requires higher level of skill sets such as electronic products and construction materials.
This has led to an increasing presence and commitment from medium-value manufacturing companies in Myanmar specifically in the Thilawa SEZ. For instance, Foster Electric and Koyo have set up manufacturing plants in Thilawa SEZ for production of speakers and radiators for automobiles respectively.
Myanmar has been successful in attracting significant inflow of FDI in the manufacturing sector owing to variety of benefits offered by the government, coupled with favourable political and economic changes. The country is at the onset of fast paced development in the manufacturing sector but lack of sufficient supporting infrastructure and trained talent remain the key hurdles to be overcome. Myanmar could possibly be the next manufacturing hub if investments are channelled effectively to imperative infrastructure development and human resource training programs.
Thin Zar Win Maw is a Consultant at Solidiance Myanmar. Solidiance is a corporate strategy consulting firm focused on Asia Pacific.