16 Aug 2016
Myanmar Rising: Industrial and Special Economic Zones
Differences in logistics and infrastructure support, as well as varying investment benefits, are prime considerations for factory locations.
- Map: Industrial Zones in Yangon
- Photo: A paved concrete road inside the Mingaladon Industrial Park
- Photo: A factory in the Mingaladon Industrial Park
- Table: Summary of Mingaladon Industrial Park Fees
- Photo: A Chinese-invested shoe factory in Hlaing Thar Yar Industrial Zone
- Table: Selected Industrial Parks in Yangon
- Table: Selected Investment Incentives under Industrial Zones and SEZs
- Table: SEZs in Myanmar
Myanmar, a mid-sized ASEAN country with a relatively good supply of low-cost workers and improving business conditions, has drawn increasing interest from foreign investors looking to relocate their labour-intensive production activities from Southern China.
When choosing a location for their production plants in Myanmar, Hong Kong companies engaged in labour-intensive industries such as garment or footwear manufacturing may consider setting up their factories inside one of the country’s industrial zones or Special Economic Zones (SEZs) in order to benefit from the specific investment incentives offered by the Myanmar government, along with other advantages such as better infrastructure and logistics support.
This article, through assessing the conditions of two popular industrial zones and three SEZs currently being developed in Myanmar, attempts to assess the relative suitability of these locations for Hong Kong manufacturers over the short-to-medium term.
Manufacturing Clustered in Yangon-based Industrial Zones
To encourage private sector participation in manufacturing and foster industrial clusters, industrial zones were first introduced by the Myanmar authorities in the 1990s, creating a base of manufacturing operations in and around the country's major cities.
The number of industrial zones has grown only gradually over the years. At present more than 20 industrial zones are established in Yangon, as the former capital has more developed transport and infrastructure facilities than other areas, including an international airport that has been recently upgraded and a cluster of seaports that handle the bulk of the country’s merchandise trade. As a result, most of Myanmar's labour-intensive, export-oriented industries are concentrated in this area to this day.
Many of these industrial zones are specifically targeted at privately owned manufacturing enterprises. Daily management of each industrial zone is undertaken by its own Industrial Zone Committee, usually comprising investors, government officials and/or representatives from related public agencies.
While management practices and service standards in each industrial zone differ, many of them – including South Dagon and Hlaing Tar Yar – have adopted measures to upgrade their utilities. This includes building electrical substations, and installing back-up generators and waste water treatment facilities.
Road conditions in and around industrial zones in Yangon vary from one place to another. Generally, paved main roads are in good condition and wide enough for heavy trucks, including container trucks, to drive along. However, some sections of road leading into individual factories within industrial parks are in poor condition. Road conditions can be particularly bad during the monsoon seasons, as the drainage is notably poor. A lack of street lights, coupled with potholes created by heavy trucks, also complicates light driving in many places.
The port of Yangon, a downtown river port situated some 20-30 km from Yangon's industrial zones, now handles about 90% of Myanmar’s external trade. Given the rather shallow draft of the rivers surrounding central Yangon, the port is not deep enough to receive large container ships. Frequent cargo ship congestion around the port areas is reported as a result of ongoing growth in trade volumes, poor port infrastructure and inefficient cargo handling processes.
As an alternative, some manufacturers have become more inclined to use the Myanmar International Terminal Thilawa (MITT), a multi-purpose container terminal run by Hong Kong’s Hutchison Port Holdings that is located about 25 km south of Yangon’s city centre. Though faced with a locational disadvantage, the MITT offers services that comply with international standards and is capable of handling bigger container ships exceeding 1,000 TEUs at high tides.
Factories in industrial zones can operate under a land leasing agreement sought with individual management committees. In Myanmar, land purchase is basically restricted to local investors, although foreign-local joint ventures may lease an office or commercial building.
In recent years, there has been a significant surge in land prices as land plots have been bought and held in anticipation of a big influx of foreign capital attracted by government reforms and the cost spiral evident in China. In an effort to tackle the problem of idle industrial land, the Yangon regional government formed an inspection team to conduct field surveillance checks of the city’s industrial zones in May 2016. It is believed that the regional government will announce new measures to free up hundreds of vacant plots.
Mingaladon - An Industrial Park that Meets International Standards
The Mingaladon Industrial Park (MIP), located about 20 km north of Yangon city centre and 24 km from Yangon Port, was developed in the late 1990s under a joint venture between the Myanmar Government and a privately owned Japanese company in a bid to attract foreign investment. The MIP was the first industrial park in the country considered to have met international standards in terms of its utility and transport infrastructure.
Access to the MIP will be further enhanced by the Yangon Urban Expressway Development project being developed under a public private partnership (PPP). This expressway project is worth US$620 million and its first phase covers a four-lane road of 20.5 km connecting Yaykyaw Junction on the Bogyoke Aung San Road to the MIP. The Myanmar Government will contribute 20% of total project costs via official development assistance, with the construction undertaken by a Korea-Myanmar joint venture between Korean construction companies Lotte E&C and Halla Corporation and Myanmar’s Capital Diamond Star Group.
On its recent visit, HKTDC Research found that the roads in and around the MIP are very well-maintained compared to those in and near other industrial zones in Yangon. The park hosts many FDI manufacturers, some of which employ more than 1,000 workers. This creates a clear distinction between the MIP and other industrial zones in Yangon and Mandalay, where manufacturers are invariably engaged in smaller operations, employing at best a few hundred workers.
Owing to its favourable location and facilities, all plots in the MIP are leased out. Owing to long lease arrangements, there have been instances of companies running into problems and approaching the park management for a “repurchase arrangement”, leading to termination of lease agreements. However, the MIP has become more flexible in recent years with regard to sub-leasing. This gives tenants greater leeway in organising their factory activities and controlling cash flows.
While the MIP hosts many big FDI manufacturers, its management committee stressed that it also welcomes SME manufacturers. Currently, tenants operate in industrial sectors including textiles and garments, foodstuffs, electric and electronic products, machinery and parts, plastics and leather, and pharmaceutical.
As of January 2016, there were 30 tenants in the MIP, of which 11 were Hong Kong companies engaged in the manufacturing of garment (six tenants), electroplating (two), handbags (one), optical lenses (one) and watch components (one). Other major tenants include companies from Japan, mainland China and Korea.
Hlaing Thar Yar - The Largest Industrial Zone in Yangon
Established in 1995, the Hlaing Thar Yar Industrial City is the largest industrial zone in Yangon with a land area of about 567 hectares.
As of January 2016, there were over 650 factories operating in this industrial zone, with the top five major industries listed as grain (221 factories), toiletries (127), food-stuffs (83), garments (74) and construction materials (28). There were about 50 wholly foreign-owned operations in the zone, with China and Korea, each with over 20 companies, topping the list.
Similar to the MIP, virtually all land plots in the Hlaing Thar Yar Industrial City are developed, although some of the factories are either vacant or under refurbishment in anticipation of new tenants. Hong Kong manufacturers interested in testing the water in Yangon may consider renting factories in Hlaing Thar Yar at a basic rate of roughly US$3-3.5/m², according to industrial sources. However, the availability of other industrial zones within Yangon with vacant factories to let gives Hong Kong companies plenty of choice.
SEZs Offer Better Investment Incentives to Foreign Investors
In the 1990s, when the development of industrial zones was in its initial stages, the focus was primarily on grooming domestic manufacturers to serve local markets, with limited though given to attracting FDI.
Most foreign investors currently rely on the foreign investment framework under the 2012 Myanmar Foreign Investment Law (FIL). In 2014, as an alternative to investing under the FIL, the Myanmar Special Economic Zone Law (SEZ Law) was established to facilitate investment in three SEZs that are currently under development: the Thilawa SEZ, the Dawei SEZ, and the Kyaukphyu SEZ. It should be noted that Dawei had its own SEZ law passed in 2011.
The SEZ Law provides a legal framework that offers more generous investment incentives than those under the FIL, including exemptions and relief on import tax and commercial tax. Existing manufacturers in these zones do not benefit fully from the financial incentives being offered to foreign investors.
From an administrative perspective, applications for investment permits within each SEZ will be approved by their own management committees. This arrangement is different from that which operates under the FIL, where investors need to get an investment permit from the Myanmar Investment Commission (MIC) through a centralised system. The relatively decentralised application system adopted by the SEZs is intended to shorten the review process and create a more business-friendly environment for foreign investors.
Three SEZs still in Development Stage
The Thilawa SEZ, with a total development area of 2,400 hectares and located within an hour’s drive from downtown Yangon, is currently the most advanced project of the three SEZs. Phase 1 of its 400-hectare Zone A became operational in September 2015. At present, the majority of companies who have moved in are from Singapore, Japan, the Chinese mainland, Thailand, Hong Kong and Taiwan, and are engaged in light manufacturing across garments, food and beverage and construction materials. The Suzuki Motor Corporation is also said to have agreed to build a new plant in the Thilawa SEZ that will start production in 2018.
While the Thilawa SEZ benefits from its proximity to Yangon's urban centre, the attractiveness of both the Dawei and Kyaukphyu SEZs will be boosted by having international deep sea ports on-site. The Dawei SEZ, located some 300km west of Bangkok, will serve as a convenient base for cross-border trade with Thailand, while its deep sea port will also open a new gateway to the Malacca Strait from western Myanmar.
Despite some delays, the Dawei SEZ's initial phase development was launched in 2015. In June 2016, the governments of both Myanmar and Thailand reaffirmed their commitments to pushing forward the zone's implementation.
Located in northwest Myanmar, Kyaukphyu already has operational oil and gas pipelines running between the region and China’s Yunnan Province. However, the Kyaukphyu SEZ project is still in an early stage of development, against a backdrop of environmental and land ownership controversies and ethno-religious tensions. In a meeting with the Kyaukphyu SEZ Management Committee in Yangon, however, HKTDC Research learned that plans, including provision for industrial parks for light manufacturing, are advancing.
With a consortium led by China’s CITIC group selected in late December 2015 as the lead developer to construct the Kyaukphyu SEZ’s deep sea port and industrial park, project development is expected to accelerate, although the entire SEZ will not be completed before 2038.
Industrial Zones or SEZs? Balancing the Financial Incentives and Business Risks
As it stands, SEZs in Myanmar offer more favourable financial incentives to investors than the country's industrial parks. However, this is only one factor to be considered by FDI manufacturers, especially those looking to set up production plants in Myanmar in the near future.
With the first phase of Thilawa SEZ only launched in September 2015 and the other two SEZs still in their early development stages, the foreign investment regime outlined by the country's SEZ Law remains untested. In the World Bank’s 2016 Doing Business Report, Myanmar’s ranking on contract enforcement was 187th out of 189 countries. Uncertainty in the effectiveness of handling legal disputes inside SEZs may prompt foreign investors to consider investing instead in one of country's long-established industrial zones, where procedures that work are already in place.
Once fully developed, the three SEZs are expected to provide better facilities and support than the industrial zones, some of whose infrastructure is rather dated. In the meantime, however, relatively well-established industrial zones in Yangon such as the MIP and Hlaing Thar Yar – which boast reasonable utility and transport infrastructure quality – may present the most practical options for manufacturers from Hong Kong.
 The 11 Hong Kong companies were: Myanmar Tah Hsin Industrial Co Ltd, Myanmar Asia Optical International Co Ltd, Sunflower Lace Myanmar Crops Co Ltd, Linda Fashion (Myanmar) Co Ltd, Wedtex Fashion (Myanmar) Co Ltd, EMC Manufacturing Co Ltd, Sinobest Jewellery Co Ltd, Designtime Myanmar Co Ltd, Hua Tai Enterprise Co Ltd, William (Myanmar) Co Ltd and JCK (Myanmar) International Co Ltd.