22 June 2016
Myanmar Rising: The Garment Sector Takes Off
Myanmar’s garment sector is flourishing as the last low-cost production frontier for factory relocation and diversification in Southeast Asia.
- Chart: Monthly Minimum Wages of Selected Countries or Cites
- Chart: Myanmar′s Clothing Export, 2010-2015
- Table: Average Applied MFN Tariff of Selected ASEAN Countries
- Photo: A garment factory in Yangon with multiple production lines
- Photo: An export-oriented garment factory in Yangon
- Photo: Shirts ready for export to Japan
- Photo: A shoe factory with most raw materials imported from China
China has long been the world’s top garment exporter, thanks to the presence of an enormous industry cluster that is well integrated vertically and supported by a vast number of skilled workers. In recent years, however, production costs in China have soared along with the surge in wages, especially in the Pearl River Delta (PRD) region.
This, together with the difficulty in hiring garment workers and the Chinese government’s policy of upgrading its manufacturing sector structure with a strategic shift towards higher value-added industries, has driven many garment manufacturers in the PRD to relocate and diversify their factories, in particular to countries in Southeast Asia with a reasonably good supply of lower-wage labour. The chart below shows that Chinese minimum wages are way above those in ASEAN countries, with that in Myanmar found to the lowest in ASEAN.
With a competitive minimum wage of around US$90 per month, Generalised System of Preferences (GSP) trade privileges in the EU market and strategic location at the China-India intersection, Myanmar is becoming increasingly popular among manufacturing companies burdened by the upward cost spiral in China, prompting some mainland and Hong Kong garment manufacturers to set up factories in Yangon and nearby areas lately.
Based on a recent field trip to Myanmar by HKTDC Research, the previous article Myanmar Rising: Opportunities in Asia's Final Production Frontier provided an update on the country’s broad economic and policy setting against which the new democratically-elected government is operating, with its strong emphasis on economic reforms to attract FDI, harmonisation of investment regimes, and the development of special economic zones (SEZs) and needed infrastructure. This article makes a close examination of the business opportunities in and challenges for Myanmar’s manufacturing sector, with a focus on the garment industry.
Industrialisation Achieved Primarily through Garment Manufacturing
The military-backed civilian government under former President Thein Sein, who set the country on a course of bold political and economic reforms in 2012, effectively helped the country re-establish its once impaired ties with the US and the EU, which had imposed many rounds of economic sanctions on Myanmar since 2003.
In the face of intensified sanctions in early 2010’s, the Thein Sein government reacted by introducing a shift in economic policy to put a much greater emphasis on the promotion of industrial development to diversify the country’s economy, which had long been dominated by agriculture and resources extraction. With Myanmar’s competitive edge in manufacturing lying mostly in its demographic strengths and competitive wages, labour-intensive industries, including garment manufacturing, were highlighted by the authorities as a key area of focus.
In order to speed up the industrialisation process, industrial zones and SEZs were set up across Myanmar to provide a favourable environment for manufacturers to start and run their businesses. This would include better transport links, additional power transmission, and special drainage systems. While SEZs were being developed under the Thein Sein government, industrial zones were the prime locations to meet the demand for additional manufacturing output, most of which were export-oriented.
Sanctions Ease along with Growing Economic Ties With the EU and US
In 2013, the EU lifted all economic sanctions imposed on Myanmar, with the exception of arms, and granted the country duty-and-quota-free access to the EU market under the GSP scheme. Similarly, the US also removed many sanctions against Myanmar, though restrictions remain in place against individuals and companies under the US Treasury Department’s Specially Designated Nationals (SDN) list. Meanwhile, the US has yet to provide GSP preferences for Myanmar products.
It is understood that Myanmar has been seeking US GSP benefits since 2013, with the country’s former Vice President requesting US officials to remove some economic sanctions at the US-ASEAN Summit meeting held in February 2016. The Union of Myanmar Federation of Chambers of Commerce is hopeful that Myanmar and the US will resume discussion on GSP in upcoming months.
GSP Benefits a new driver for Exports of Manufactured Products
In the wake of the 2010 sanctions, major US and EU buyers had ceased garment procurement, forcing Myanmar to shift gears to develop even closer trade ties with other Asian countries. Increasingly, the country’s export-oriented garment industry relied overwhelmingly on Korea and Japan, the latter of which offers GSP privileges to Myanmar. In 2014, Japan and Korea were Myanmar’s major export destinations, accounting for 38% and 31% respectively of its total garment exports.
Thanks to the grant of GSP benefits, the EU has become an increasingly important driver of garment export growth for Myanmar. In 2014, the EU took a 23% share of Myanmar’s total garment exports. With enhanced prospects of the US further relaxing sanctions and even granting GSP benefits, the Myanmar Garment Manufacturers Association (MGMA) anticipates that Myanmar’s garment sector will experience exponential growth in years ahead, creating around 1.5 million new jobs from its current level of approximately 250,000 and generating US$12 billion in export value by 2020.
During the Thein Sein government, Myanmar’s garment exports experienced substantial growth. Based on WTO data, Myanmar’s total export value of garments reached US$986 million (8.9% of the economy’s merchandise exports) in 2014, nearly triple that of the 2010 level (US$337 million or 3.9% of the economy’s total merchandise exports). According to the MGMA, garment exports jumped to US$1.46 billion in 2015 and accounted for 10% of the country’s export revenues.
Regional Integration to Spur Growth
While Japan, Korea and the EU are the key export markets for Myanmar garments, China is an important market for the country’s non-agricultural products on the whole, thanks in particular to the free trade arrangements with China forged under the auspices of ASEAN. As a member of ASEAN, Myanmar is part of the China-ASEAN Free Trade Area (CAFTA), which was formally established in 2010, removing import duties on a great number of tariff lines between China and ASEAN countries.
In November 2015, ASEAN and China concluded an upgraded agreement on CAFTA that was expected to raise bilateral trade to US$1,000 billion (from about US$480 billion in 2014) and ASEAN-bound FDI to some US$150 billion by 2020. Such an increase in trade of goods and services as well as technological cooperation is expected to give an extra push to Myanmar’s garment industry in the mid-to-long term, including relocation of China-based garment manufacturers to the country.
Within ASEAN, the launch of the ASEAN Economic Community (AEC) in December 2015 marked a major milestone in the trade bloc’s regional integration plan, resulting in a form of economic community akin to the EU. It has the aim of increasing intra-regional and global trade by creating a single market and production base with free flow of goods, services, investment capital and skilled labour. Myanmar is eager to exploit this ongoing integration process, especially the improvement in regional logistics links, in order to become a new manufacturing powerhouse. While full integration appears unlikely in the near future, momentum has been built up with the elimination of tariffs as a notable step, which will further strengthen the case of Myanmar as a low-cost manufacturer in ASEAN.
Another pillar of the single ASEAN market is the creation of a single window for cross-border trade in goods. In preparation for the ASEAN Single Window, Myanmar has announced plans to introduce an electronic import export clearance system named Myanmar Automatic Cargo Clearance System (MACCS) and Myanmar Customs Intelligence System (MCIS) by November 2016. It is understood that the new measures will first be introduced in Yangon area, including international ports, Yangon Airport International Cargo Terminal and Thilawa Special Economic Zone.
Multilaterally, Myanmar is a WTO member and its Most Favoured Nation (MFN) status allows it to export at low tariff rates to other member countries. Yet, preferential treatments seem to be more important in driving the growth of Myanmar’s garment exports over the past few years. Myanmar’s non agricultural products to its major export markets including Japan, China and the EU are basically duty-free.
Myanmar also offers lower import tariffs than many of its ASEAN peers, with the average MFN applied tariff at 5.6% in 2013. Generally, the country’s low import tariffs on items needed in the manufacturing process help the country keep its production cost-competitive relative to the neighbouring countries. Currently, garment manufacturing for exports account for a large chunk of Myanmar’s non-agricultural exports, and processing trade in the form of “Cut-Make-Pack” (CMP) operations, as discussed in the following section, is pivotal in Myanmar’s manufacturing sector.
CMP Dominancy Lingers before FOB Operations Take Shape
When HKTDC Research was in Yangon, industrial sources suggested that there were about 300 export-oriented garment factories in the country, operating primarily under “Cut Make-Pack” (CMP) system, a form of contract work whereby buyers will pay contracting fees to a garment factory in Myanmar to carry labour-intensive tasks, such as cutting fabrics and sewing garments, but not be involved in any design and/or input sourcing process.
In general, these CMP factories can be classified into three categories. First, large factories, with a workforce of more than 1,000 and usually regarded as market leaders able to produce garments of better quality. The second group are medium-size factories which employ between 500 and 1,000 workers. The last group comprises small factories with less than 500 workers and limited machinery capacity, out-numbering both the large and medium-size factories.
To allow maximum flexibility for foreign investors, the Myanmar Investment Commission (MIC) allows 100% FDI in setting up textile and garment factories in the country. Among Myanmar’s garment exporters, large factories are either wholly foreign-owned or operating through joint-venture (JV) agreements between local and foreign companies, most of which come from the Chinese mainland, Hong Kong, Japan, Korea, and Taiwan. While most of the small factories are locally owned, medium-size factories are locally owned or operated through JV.
Garment Sector to benefit under the National Export Strategy
To provide the country with a clear economic development roadmap, the Myanmar government launched its first National Export Strategy (NES) in March 2015, outlining a five-year plan that aimed to improve the country’s export capacity. Under the NES, seven key sectors were identified to have great potential to drive economic development and employment generation, which included the textiles and garment industries.
To reinforce the sector-specific advantage and competitiveness of Myanmar’s garment industry, the NES was dovetailed with measures including the development of export infrastructure (e.g. deep sea ports), production locations (e.g. sector-specific economic zones), country quality standards in compliance with international standards, as well as upgrading of the existing regulatory and legal framework to better protect the rights of both producers and workers.
In particular, the NES acknowledged the need for the garment industry to move up the value chain, advising it to move towards operations on a “Free-On-Board” (FOB) basis from its current CMP system as a longer-term development goal. In the wake of the NES launch, the MGMA has arranged workshops to help factories learn to handle “FOB” operations, with topics including production planning, merchandising, logistics, communications and audits.
“Made in Myanmar” - MGMA’s 10 years Strategy Plan
Under the FOB system, retailers will place orders to factories in overseas markets, which are responsible for producing the garments from development, production to exporting. This system of garment production offers more opportunities for value retention and addition than CMP as manufacturers cover a wider range of the value-adding activities, such as sourcing and design.
Echoing the government’s commitment to supporting the upgrade of the garment industry by moving from operating on a CMP basis to operating on a FOB basis, in 2015 MGMA published a long-term strategy plan for industrial growth & development for the coming 10 years, with a focus on responsible manufacturing practices, skills development and facilitating ethical sourcing, thus building up the brand label of “Made in Myanmar”.
Streamlined Import and Export Licensing to Promote Trade
In addition, the Myanmar government has moved to reduce trade barriers for traders and manufacturers based in Myanmar, introducing a new, fully online export and import licensing system in early June 2016. Companies can now print out an export and import licenses through the Myanmar TradeNet website after filling out the application form and paying the licensing fee through an e payment system. In contrast, the previous semi-online licensing system required traders to go to the Ministry of Commerce in person.
A trial period for the fully online export and import licensing system is scheduled for three to six months, covering about 50 export and import products, including textiles. This, along with the much reduced numbers of import and export items subject to the licensing process, will further enhance the attractiveness of Myanmar as an emerging garment production base.
Improving Labour Relations to Boost Buyers’ Confidence
The Myanmar government has also stepped efforts in giving greater rights to workers, after banning trade unions for nearly 50 years under military rule. As part of the economic reform plans, the former Thein Sein government introduced the country’s first Labour Organisation Law in 2011. The new law regulates industrial relations pertaining to trade unions, employer associations, and collective actions. Not only has it improved industrial relations, it has also boosted the confidence of foreign buyers in sourcing from the country.
According to a study from the Action Labour Rights, many garment factories formed their workers unions after this labour law was promulgated. Worker unions at the township level were also established, including industrial parks in Hlaing Thar Yar and Shwe Pyi Thar.
A number of industry initiatives are also underway to improve workplace harmony and social compliance in the garment industry. In January 2015, the MGMA ratified a Code of Conduct for its member companies as a guide and framework for responsible business practices in the country’s garment sector. Some factories are reported to have taken positive action, such as setting up Workplace Cooperation Committees (WCC) to facilitate better communication between owners and workers.
Streamlining Government Structure to Improve Efficiency
For many years, the Myanmar government has been lamented for low efficiency and transparency. Since taking power in April 2016, the new NLD government is pushing for important changes within its first 100 days in office in order to keep the reform momentum.
First and foremost, President Htin Kyaw announced major plans to downsize the existing government in a bid to establish a more transparent public sector. One of the notable moves was the reduction of the number of ministries from 36 to 21. For example, the Ministry of National Planning and Economic Development was merged with the Ministry of Finance, and the Ministry of Commerce with the Ministry of Cooperatives, both of which are attempts to help create a lean and efficient government. The new Myanmar government hopes that savings from consolidation will improve the healthcare and education systems, and in turn, the productivity of Myanmar’s labour force in longer run.
On the infrastructure side, two road sections on the Yangon-Mandalay highway are being upgraded as a pilot project. The new construction ministry is also pledging to build low-cost housing units that cost less than K10 million (US$8395) in Nay Pyi Taw, the capital of Myanmar since 2006.
Growing Interest from International Investors
Suffering from decades of under-development, Myanmar’s garment industry is highly import-intensive, and most of the necessary inputs have to be acquired from abroad under the CMP arrangement. With a lack of both capital and expertise to upgrade the industry, the government has adopted an FDI-led development strategy. Between 2013 and 2015, FDI in the garment industry grew at an impressive rate - from 26.5% of total inward FDI in 2013, to 27.4% in 2014 and 29% in 2015.
While about 70% of Myanmar’s garment exports go to Korea and Japan, international apparel brands including Gap, H&M, Marks & Spencer and Primark have shown a growing sourcing interest in Myanmar following the easing of sanctions. For example, Gap announced that the volume of products it was sourcing from Myanmar had tripled in the period from June 2014 to June 2015. With the government keen on improving labour rights and industrial relation practices, such as implementing the Initiative on Labour Law Reform and Institutional Capacity Building in 2015, it is expected that more western apparel retailers will follow the footsteps of major fashion brands to source products in Myanmar in the near future.
Immature Local Supply Chain and Banking System as Key Obstacles to Overcome
While huge progress is being made, many industry players indicate that one of the major weaknesses of the garment sector lies in the lack of locally available input supply. Myanmar relies heavily on the import of various goods for garment production, ranging from zippers and hangers to machinery and electronic products because the quality of its domestic products is lagging behind international standards. This, together with outdated infrastructure, poses a significant obstacle for the sector’s further development. It will take a major effort for Myanmar to overcome this barrier within a short period of time in order to meet the ambitious export targets set for the industry.
Another issue investors have to bear in mind is the lack of funding channels. In Myanmar, the garment industry consists mostly of SMEs that do not have the necessary financial resources or knowledge to secure a loan from the financial sector.
The country’s banking sector is vastly under-developed. As of May 2016, only 13 foreign banks were permitted to operate in Myanmar and to offer a narrow range of services. They are allowed to provide credit to local banks and financial institutions as well as foreign companies, but not to participate in retail banking operations or engage in direct lending in local currency. There will be more room for improving corporate banking services for foreign companies and nationals.
With a population of about 52 million, Myanmar has reportedly less than 1,000 bank branches, the majority of which operated by local banks, which are considered highly inefficient. Despite the introduction of credit cards and ATMs in the market a few years ago, the economy is still very much cash-based. To leapfrog into the digital economy, Myanmar took a positive step in January 2016 to improve its financial and banking system, passing a new Financial Institutions Laws to pave way for mobile banking, helping both consumers, manufacturers, and other companies.
This development in no doubt will help to boost manufacturing growth by providing viable financial solution for trade, especially for SMEs. Nevertheless, as Myanmar’s economy continues to open up, a significant amount of financial support is required and it is crucial for the new government to keep its course and accelerate the pace of reform if it wants to catch up with its neighbouring garment-exporting countries such as Vietnam and Cambodia.
The smooth transition from a military-backed government to a democratically elected government is a key milestone in Myanmar’s reform and opening up development. While the new government of President Htin Kyaw has revealed a commitment to introduce major policy initiatives in its first 100 days in office, there has yet to be any major announcement concerning the garment industry.
Nonetheless, Myanmar’s attractive labour cost, along with its preferential trade arrangements, currently including GSP privileges from the EU and prospectively from the US, provides a low-cost production base with enhanced market access for the consideration of overseas manufacturers. All this improves the odds of Myanmar becoming another garment manufacturing hotspot in Southeast Asia.
 ‘Everything But Arms’ arrangement is part of the EU’s GSP scheme tailor-made to the specific needs of least developed countries. Under this arrangement, Myanmar enjoys duty free access to the EU for export of all products, except arms and ammunition.
 "Specially Designated Nationals" (SDN) are organisations and individuals who are restricted from doing business with the US or American companies, or Americans. The SDN list is maintained by the US Department of the Treasury's Office of Foreign Assets Control (OFAC).
 Under the AEC framework, more developed ASEAN member countries (Singapore, Thailand, Indonesia, Brunei, Indonesia, Malaysia and the Philippines) had basically achieved zero tariffs as of the end of 2015, with the four remaining countries (Cambodia, Laos, Myanmar and Vietnam, that is, ASEAN-CLMV) given more flexibility in lowering import duties. In addition to many zero-rated tariff lines on the normal tracks, the CLMV countries are allowed to maintain duties at 1% to 5% on specific tariff lines, which account for only 2.7 % of the total ASEAN tariff lines until 2018.
 As part of ASEAN, Myanmar is part of China ASEAN Free Trade Area (CAFTA) that was formally established in 2010, allowing the country to export its products to China at low-to-nil import tariffs, including garments.
 A Study of Labour Conditions in Garment Factories in Myanmar which are wholly Korean owned or in a Joint Venture with Korean Companies, Action Labour Rights, March 2016.