Myanmar: Has the ‘Frontier’ Economy’s Time Finally Arrived?
Leveraging their longtime presence and hefty government backing, Japanese businesses eager to hedge their risks in China and find new offshore production bases and markets are rushing into Myanmar, setting up factories and taking on mentoring roles across a wide range of industries, from stock trading to rice growing. This latest economic “frontier,” is all about the country’s potential — consultancy McKinsey estimates Myanmar’s current GDP at only 0.2% of Asia’s total, about the same size as those of New Delhi or Johannesburg.
Myanmar’s opening to foreign investment with the end of sanctions imposed by Western governments against the former military-led regime was well-timed: Just as the new leadership in Yangon, Myanmar’s largest city, was looking for a way to reduce growing Chinese sway over the economy, Japan’s new leadership, under Prime Minister Shinzo Abe, was seeking a foothold in a new emerging market. Countering the regional influence of China, given Tokyo’s frictions with Beijing over a territorial dispute, was an added bonus for the Abe government.
“The current investment opportunities [in Myanmar] are in pre-manufacturing, and more along the lines of infrastructure and agriculture,” says Edwin Keh, a lecturer in Wharton’s operations and information management department. A former chief operating officer of Walmart global procurement, Keh previously managed a consulting group that worked with non-governmental organizations (NGOs) in Myanmar.
Myanmar’s opening has brought on something akin to a “gold rush” of Japanese business people looking for opportunities. In 2013, some 66,187Japanese visited the country, triple the figure two years earlier. But Japanese businesses, aware that good intentions are no guarantee of success, are approaching Myanmar with caution. So far, Japanese private corporate investment in Myanmar is still mainly confined to big infrastructure projects and logistics, and other services.
“Myanmar investments by Japanese are still small because of the infrastructure problems, such as shortage of electricity and a lack of proper industrial parks for company set-up,” notes Eitaro Kojima, an expert on Myanmar and acting director of the Asia and Oceania Division at the Japan External Trade Organization (JETRO). “Moreover, the country lacks clarity of legal systems and various rules and regulations,” adds Kojima, who worked in Yangon as head of JETRO from 2007 to 2011.
In these early days, it is the biggest Japanese corporations — huge trading houses like Mitsubishi Corp., Marubeni Corp., Mitsui & Co. Ltd. and Sumitomo Corp. — that have been moving aggressively ahead since the sanctions were lifted and Tokyo forgave billions in Myanmar debt, clearing the way for fresh borrowing.
A Long History
Japan has a long history in the country, dating back to its invasion during World War II, which was followed by a period of war reparations and development projects. Those projects were frozen after the crackdown in 1988, when the military fired on pro-democracy protesters. But many of the bigger Japanese companies kept a presence in Yangon while awaiting better times.
“The scale of involvement [in Myanmar by Japan] dwarfs that from the U.S. or Australia.” –Sean Turnell
Within two weeks after Abe took office in late December 2012, Finance Minister Taro Aso was in Yangon, standing posed with his hand pointing forward during a visit to the Thilawa trade zone, which is being built by a Japanese-Myanmar joint venture. Marubeni, Mitsubishi and Sumitomo hold a joint 49% share of the company running the zone. Hiroshima-based Penta-Ocean Construction Co. has the construction contract.
“On the public side, the sums are vast by Burma standards,” says Sean Turnell, a professor at Macquarie University and an Australian economist and expert on Myanmar. “The scale of involvement dwarfs that from the U.S. or Australia.”
Japan’s desire to sell infrastructure and to expand overseas production bases dovetails with Myanmar’s top priorities of building a modern economy, and creating factory and service industry jobs to absorb an expected doubling of its urban population in the coming 15 years. China’s $14.2 billion accumulated investments in Myanmar are mainly in oil and gas production and pipelines, dams, and related roads and port facilities.
Oil and gas fields in northern Myanmar could be the biggest attraction, but any products that require a significant amount of transportation will need big investments in ports, roads and trains before they are exportable, Keh said in a 2011 Knowledge@Wharton article on Western companies doing business in Myanmar.
While it vies for infrastructure projects, Japan is also gearing up for low-cost manufacturing and the consumer market. Its cooperation with Myanmar stretches from help for farmers, food aid and disaster prevention to dispatching financial experts to counsel the country on setting up a modern stock exchange and other financial institutions. Japanese companies are involved in building telecommunications networks, construction of bridges, airports and other infrastructure, in food and consumer goods retailing, logistics — just about every sector.
Figures compiled by the Japan Chamber of Commerce and Industry show 161 members as of May, up from about 51 in March 2011. More than a third of those members were involved in logistics and other services, about a quarter in construction, slightly more in manufacturing, and the rest in finance and trading.
Despite the high degree to which it is “embedded” in Myanmar, Japan still lags behind other major Asian countries in terms of overall investment. In the fast-expanding hotels sector, for example, Hong Kong and other Asia-based hotel chains have snapped up opportunities to develop prime sites, including the ornate but rickety Yangon Railways headquarters, which the Peninsula Hotels chain has agreed to redevelop. Keppel Land, Accor, Daewoo Group, Shangri-La and Vietnam’s Hoang Anh Gia Lai Group, or HAGL, all have big projects already underway.
South Korea was the biggest source of FDI in the nine months ending December 2013, with a 29% share, followed by Singapore, with about 28%. Thailand accounts for 19.2%, the U.K. and Vietnam about 7% each. Japan trailed with 1.7% and investment from China was at 0.8%. China’s share in accumulated FDI was more than 90% in the 2011 fiscal year, but had dropped to 31.5% as of January 2014 after the sharp cutback in investments in 2013, according to Myanmar’s Central Statistical Organization. Total FDI in Myanmar was estimated to be $4 billion for the fiscal year that ended March 31.
Investment flows are shifting away from mining and energy and into manufacturing and services, reflecting the government’s emphasis on trying to build up an industrial sector to deliver faster growth and more jobs — following the example set by China and, more recently, by Vietnam. In 2013, Myanmar attracted $1.8 billion in investment in manufacturing, accounting for 47% of the total. Other leading areas were transport and logistics and hotels and tourism, followed by energy and property development.
Although Japan has lagged other countries, such as Thailand and Singapore, in plunging into this new economic frontier, Myanmar leaders are repaying Japan’s forgiveness of billions of dollars in unpaid debt with a red carpet welcome. “Japan helped Myanmar when it needed help, and we will help Japan when it needs help,” U Win Aung, chairman of the Union of Myanmar Federation of Chambers of Commerce and Industry, told a recent Japanese business delegation organized by JETRO to showcase the Thilawa Special Economic Zone, a pet project of both governments. “Once this project is completed by mid-2015, this will help more Japanese companies to move into Myanmar,” JETRO’s Kojima says.
“Land prices have gone through the roof due to speculation or in anticipation of more investments coming into the country.” –Edwin Keh
Thilawa is little more than a 400-hectare expanse of red, leveled dust — the preliminary groundwork having just been completed — but it represents Myanmar’s ambitions for a built-by-Japan manufacturing boom.
The Used Car Connection
For now, however, used autos are by far Japan’s biggest export to Myanmar, at more than 80% of the total, followed by construction materials and then a range of manufacturing components like textiles, electronics and steel. From Myanmar, Japanese imports mainly clothing, followed by seafood and other food-related items, timber and gems, according to data from JETRO. As two-way trade rocketed by 75% in 2012 from the year before to $1.93 billion, Japan’s longtime deficit with Myanmar swung to a surplus of $585.6 million.
Looking ahead to the days when Myanmar drivers will be buying new rather than used autos, Toyota and other major automakers are setting up showrooms there. For now, they mainly cater to expatriates such as diplomats, officials of NGOs and government officials who can afford to pay six figures for an SUV. But eventually they expect to serve Myanmar’s emerging market of newly affluent private local buyers.
Expanding that vision beyond Yangon, Mitsubishi Motors Corp., parent company Mitsubishi Corp. and Yoma Strategic Holdings, the flagship of tycoon Serge Pun, have set up an auto after-sales service center in Yangon, saying they plan to set up facilities in the national capital, Naypyitaw, and in Mandalay.
But however optimistic Japanese officials are over the potential for Myanmar as a new consumer market and low-cost manufacturing base, the gold rush of investors into Yangon already is driving prices sharply higher, potentially narrowing profit margins.
Costs for land and rents in the city are already at levels comparable with downtown Tokyo, at more than $100 a square foot, up from a fifth of that level just two years ago, and compared with about $75 in New York City — and for much lower quality. Wage levels have more than doubled from about $50 a month for a factory worker in 2013 to more than $100 a month in 2014, factory managers say.
“Land prices have gone through the roof due to speculation, or in anticipation of more investments coming into the country,” notes Keh. “Lack of infrastructure is slowing down export manufacturing ambitions for the time being.”
McKinsey & Company, in a 2013 report, identified seven sectors it says have the potential to quadruple the country’s GDP: energy and mining, farming, manufacturing, and infrastructure are the four largest. Others such as tourism, telecommunications and financial services will grow faster, though from very low levels, the report says.
Myanmar needs an average growth rate of about 7% and cumulative investments of about $650 billion by 2030, according to the McKinsey report. A large share of that will come from domestic savings, but about $170 billion will need to be from foreign investment. That compares with the $40 billion in foreign investment Myanmar drew from 1989-2012, most of it from China.
Food & Timber
Apart from Thilawa and other export assembly zones, other niches with growth potential include food and timber processing and financial services. Trading house Mitsui & Co. plans to set up joint-venture rice processing facilities in Yangon with Myanmar Agribusiness Public Corp., or MAPCO, to help raise the value-added of Myanmar’s rice exports as it ramps up production.
“Japan helped Myanmar when it needed help, and we will help Japan when it needs help.” –U Win Aung
Before World War II, nearly half of Myanmar’s GDP came from agriculture, mainly rice exports. Farming still accounts for about 40% of all business activity in the country, and plans call for output to increase to the point where Myanmar could export five million tons a year. With exports forecast at 1.1 million tons in 2013-2014, and rural regions reporting shortages of farm labor, that appears a distant prospect, however. If Myanmar carries out reforms to modernize its agricultural sector, which have so far lagged other industries, Japan’s main farm machinery manufacturers, Yanmar and Kubota, would likely be looking to expand sales there.
In processed foods, Osaka-based noodle-maker Acecook, collaborating with trading house Marubeni, has set up an office in Yangon. It has plans to build a factory by 2017, expanding from its earlier overseas venture in Vietnam, where the company says it has sold more than three billion noodle meals so far.
Japanese trading companies are likewise involved in investments in Myanmar’s still barely developed timber processing industry. As the source of half of the world’s teak, Myanmar faces pressure to curb illegal exports of raw tropical hardwood, especially into China. Building a local industry to process the teak would be part of the process of bringing that illicit trade under control, and helping wean conflict-stricken border regions of their reliance on illegal trading in timber, opium and gems.
Japanese businesses remain relatively cautious for good reason: Myanmar is no Shangri-La. The latest survey by the government-affiliated Japan External Trade Organization, or JETRO, ranked the country 182nd of 189 countries in terms of ease of doing business in 2014, with deteriorations in such areas as construction permit approvals, electricity supply, financing and business registration compared with 2013. For logistics, Myanmar ranked 129th of 155 countries surveyed. There are some signs of improvement, though, with international corruption watchdog Transparency International recording an improvement in perceptions of corruption over the past three years.
But the advantages appear to be winning over many investors. Wages, though rising quickly, are still generally the lowest in the region.
“I’m often asked if it’s the right time to invest in Myanmar. It depends on which sector you are in,” says Aung Thura, CEO and founder of Thura Swiss Ltd, a Myanmar-based consulting and research company. For energy and telecom — which are key infrastructure areas — now is the right time, he told a recent conference in Yangon. “If you’re in manufacturing where you need electricity, it might be too early because we don’t have reliable electricity yet.”
While the retail market is wide open, with few foreign or domestic competitors for most consumer products, the country’s distribution systems are archaic and complex, and banking services rudimentary to non-existent, notes Ramon Meguro, a professor of marketing at Tokyo Institute of Technology. Writing in the Nikkei Asian Review, he recommends partnering with local firms, such as brewery Asahi Group Holdings’ joint venture with local beverage maker Loi Hein.
Whether Myanmar will realize its potential as an emerging economy and fast-growing consumer market remains uncertain. It’s easy enough for hardware to “leapfrog.” The ubiquity of mobile phones across the developing world, where landlines have never been installed, attests to that. But ensuring consumers have the wherewithal to pay for air time is another issue, Aung Thura points out. “We cannot leapfrog in the development of purchasing power.”
Foreign investors have allies in Myanmar’s new entrepreneurial class of business people, many of whom are foreign-educated returnees. “What we try to tell lawmakers is to open up,” notes Tun Thura Thet, the founder of software company Myanmar Technology, who spent more than 15 years running his business under the former military regime before seeing things open up under the current government. “In China, they try to protect local businesses. We don’t want to do that. We want to move past that. We want to leapfrog.”
The key is to get foreign investors to create jobs, says Tun Thura Thet. But filling those jobs can be a challenge given the scarcity of skilled workers after so many long years of economic isolation, he adds. Those working in Yangon speak of government civil servants skimping on sleep to try to get more work done as the country prepares to host the ASEAN summit later this year. “The limits are in human resources and capacity.”
Heavy government regulation, an opaque legal system and very weak physical infrastructure are other constraints. “For financial institutions and insurance companies starting up here, the most difficult thing has to be the lack of clarity in the legal system,” says Robert Walsh, managing partner at S&S Project Management in Yangon. “As yet, many necessary laws have not been drafted, let alone the accompanying implementing instructions. So any such company setting up here is running the risk of having their basis of operations cut off should new laws be passed that proscribe their activities.”
According to a recent Knowledge@Wharton article on Chinese investments in Myanmar, “This severely underdeveloped and misgoverned nation faces serious uncertainty over its true ability to transform and to leapfrog into today’s technologically advanced and fast-paced markets.” Reforms in Myanmar “will take place at the pace the Myanmar generals are comfortable with,” Vibhanshu Shekhar, a research fellow at the Indian Council of World Affairs in New Delhi, said in another Knowledge@Wharton article on the country opening its doors to foreign investments.
Myanmar will need to watch carefully to avoid the pitfalls Vietnam has run into as it opened its economy to foreign trade and investment, Moody’s Ratings says in a report. Vietnam’s Achilles heel has been its weak institutional framework and inadequately regulated banking system, which have not kept pace with the demands of a rapidly growing economy, according to the report.
The huge sway held by companies and business people with connections to the military and the massive concentration of wealth in their hands is a daunting barrier for newcomers, both local and foreign, the report notes. Investment laws requiring hiring of local workers are putting huge pressures on would-be new businesses. Under the rules, local workers must constitute three-quarters of a company’s skilled workforce by the end of its sixth year of operations.
Capital is also in short supply. Myanmar has four state-owned banks and 22 private banks, but so far none of the 35 foreign banks with representative offices in Myanmar have been allowed to begin operations, restricting the availability of financing for foreign investments.
Inevitably, the devil will lie in the details of how Myanmar manages this transformation from isolated backwater to a bustling market economy. With civil conflict still ringing its heartland, stemming from violence between Buddhists and Muslims in the east and fighting along other borders, the government’s ability to ensure stability will be key.
“Initially, it was executives flying in to this nice, unspoiled, exotic location,” says Turnell. “Now, it’s the nuts and bolts: degraded infrastructure, high rents. The initial hyper-confidence … has come off a bit. The real threat is the violence.”