Thursday, September 21, 2017

Harnessing the manufacturing hype

Trade and investment liberalisation, access to a large domestic and regional market as well as abundant low cost labour make Myanmar attractive from a manufacturing perspective, but can Myanmar be the next China?

The flying geese model introduced by the Japanese economist, Kaname Akamatsu, in 1930s with Japan as the head goose, emphasised on how labour-intensive industries lose their traditional competitive advantage over time, pushing manufacturers to other countries with lower costs.

Capitalist market reforms that was introduced in 1978 in China paved the way for its ascension as a manufacturing behemoth, with GDP increasing from US$148.4 billion in 1978 to $10.4 trillion in 2014, according to the World Bank, posting an average annual growth of about 10% during the period. China’s economic boom was hence over 35 years in the making and as the country transitions towards a domestic consumption-driven economy, rising costs have forced manufacturers to look for alternatives, and if not supplements in what is popularly referred to as the “China + 1” manufacturing strategy.

As ASEAN gains importance on the global map, countries such as Vietnam and Indonesia with their low cost labour, improving infrastructure and investment environment are already seeing a rise in manufacturing FDI. But what’s next?

The rise of manufacturing in Myanmar
The Myanmar government is actively moving forward to increase share of industrials in the overall economy and boost exports to narrow trade deficit. The industrial share of GDP increased from 11 percent in 2008 to 21pc in 2014, with the manufacturing sector witnessing rising interest from foreign firms. However, infrastructure remains a key challenge and the government is now depending on the development of industrial zones and special economic zones (SEZ) across Myanmar with attractive tax benefits aiming to lure investments and dispel the hype.

Myanmar’s special economic zones
While investors in industrial zones can claim an income tax exemption for five years, exemption on custom duties on imported raw material for first three years and lease land for up to 70 years, investors in SEZs can claim tax exemption for five to seven years depending on business type, custom duties exemption on imported materials for first five years and lease land for up to 75 years, rendering it considerably attractive from an investment perspective.

The Kyaukphyu SEZ with joint investment from China and Myanmar is expected to rival Singapore as a petrochemical hub with $2.5 billion oil and gas pipeline supplying to China. The SEZ plan includes a deep-sea port (vessel size up to 300,000 DWT) and industrial zones to be implemented in three phases, expected to finish by 2016, 2020 and 2025 respectively.

The long-delayed Dawei SEZ is also being resurrected with the Japanese government signing a memorandum of intent in July 2015 to contribute along with Myanmar and Thailand. Italian-Thai Development Plc (ITD) is working towards raising a $1.7 billion loan from the International Finance Corporation and the World Bank, amongst interest from other sources including Bangkok Bank and the Siam Commercial Bank. Infrastructure developments remain the key focus of the first phase expected to see investment from labour-intensive sectors such as electronics, tyres and textiles, with the aim of setting the ground for longer-term investments in automotive, steel, electronics, metals, chemicals and even pharmaceuticals.

However, it is the Thilawa SEZ with its strategic location, priority implementation status and efficient operations with a one-stop centre that has been enjoying the limelight for all the right reasons, as highlighted by the latest whitepaper released by Solidiance.

Majority of the investment in Thilawa comes from the manufacturing business lured by cheap labour costs and generous incentive schemes for export-oriented businesses. Investments range from labour – intensive basic garment sector to manufacturing of steel and electronic products. Foster Electric (Thilawa) Co Ltd and Unimit Engineering (Myanmar) Co Ltd will manufacture electronic products and machinery parts respectively in Thilawa, indicating a gradual shift toward medium-value manufacturing.

However, rigorous due diligence, selecting the right location and timing as well as investing in human resource training becomes crucial to access the untapped manufacturing opportunities in Myanmar in the long term. Majority of the labour in Myanmar is unskilled and suitable for low-value, labour – intensive manufacturing industries, which makes intensive and continuous sector specific training imperative for businesses to succeed. There certainly remains a significant opportunity to capture local demand in the booming automotive, construction materials, industrial machineries and electronic sectors, which are currently met through imports as well as gaining access to an estimated 2.3 billion consumer base through trade with neighbouring countries.

Naithy Cyriac heads the Solidiance Myanmar operations. Solidiance is a corporate strategy consulting firm focused on Asia Pacific. The firm advises CEOs on deals, define new business models and accelerate Asia growth. Solidiance’s expertise is focused on industrial applications, green technology, healthcare and technology sectors with offices in 10 different Asian countries, including Myanmar.