Easing of U.S.
imports ban opens new market for manufacturers
BY VICTORIA BRUCE
Senior Reporter
M-ZINE+
When the United States government announced a
blanket ban on made-in-Myanmar imports almost a decade ago, the country’s
garment manufacturing industry went into free-fall.
The loss of its biggest export client forced over
100 garment factories to close and left thousands of workers destitute, said Dr
Aung Win, the vice chairman of the Myanmar Garment Manufacturers Association
(MGMA).
At their peak, exports of garments to the U.S.
totalled around US $232 million and by 2003, almost 90 percent of the garments
produced in Myanmar’s 400 clothing factories were destined for the shelves of
some of America’s biggest fashion brands, including Levis, Nautica and Gap.
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| Scouts for US clothing labels such as GAP have been visiting Myanmar. |
“The U.S.
sanctions really devastated our garment industry and many factories had to
close,” Dr Aung Win told M-ZINE+ in an interview in Yangon.
Now, Myanmar’s crippled manufacturing industry
could receive a huge shot in the arm after U.S. Secretary of State Hillary
Clinton announced on September 27 that her government would take steps to lift
its ban on imports during the recent visits of President Thein Sein and
opposition leader Aung San Suu Kyi to the United States.
The European Union (EU) is considering removing
tariffs and quotas on the import of Myanmar products and reinstating the
Generalised System of Preferences (GSP). The restrictions were put in place in
1997 due to concerns over the use of forced labour in Myanmar.
Western
fashion houses on the prowl
Big American fashion houses are reported to have
already been scoping out opportunities to bring made-in-Myanmar garments back
to their catwalks, shelves and clothing racks.
Representatives of U.S. labels such as Gap and
Eddie Bauer, Germany’s Hugo Boss and British retailers Marks & Spencer and
Primark have visited the Southeast Asian nation in recent months.
“Since this summer many big American and European
companies have come to visit our association and to see our industry,” Dr Aung
Win said.
“Many have already come from Hugo Boss, Gap, Eddie
Bauer, Marks & Spencer and Primark,” he said. “There’s so many I don’t
remember.”
Local players in the country’s garment
manufacturing industry have welcomed the move, and say the re-opening of the
American market could break the current monopoly held by Asian garment-hungry
nations such as Korea and Japan.
Tun Tun, director of clothing factory Princess
Power Manufacturing Company Ltd., said he is very keen to establish links with
the U.S. market.
“As an owner of a factory, we will take of the
client with better terms and conditions and the U.S. firms give us much more
favourable terms and conditions than the Asian market,” Tun Tun claimed in an
interview with M-ZINE+ at the Traders Hotel in Yangon.
Transparency is important, according to this
manufacturer.
“If a U.S. investor comes to us, my policy is to be
very open and honest and show them that we have this capacity; we can produce
this product at this quality and if they are satisfied then we hope they can
work with us.”
West – East
shift during sanctions
A decade ago, the situation was dire. With their
biggest market, America, closed and many European clients seeking alternatives
to the stigma of producing garments in military-regime controlled Myanmar,
local manufacturers were left with little choice of destination to sell their
wares.
This meant Asian firms could dictate payment terms
and conditions, sometimes at much less favourable rates than their Western
counterparts.
“In our Myanmar garment industry, the U.S. market share
used to hold the biggest part. But after the sanctions, the U.S. market closed
so we had to turn to Asian buyers,” Tun Tun said, adding Korea and Japan are
currently the two biggest clients for his firm and for many other Myanmar
manufacturers.
But with any restricted market, monopolies occur,
and after the U.S. government’s blanket import ban on Myanmar products came
into play in 2003, stricken garment manufacturers had little choice.
“From the buyer side, Asian firms found themselves
with no competition so they could in a sense monopolize the industry,” Tun Tun
said. “At the same time, they pay much less compared to the U.S. market, but we
had no other choice other than accept their terms or to close up shop.”
So while the U.S. sanctions devastated Myanmar’s
manufacturing industry and contributed to the country’s economic decline, some
countries made a lot of money from Myanmar’s plight, according to Dr Aung Win.
“After the sanctions there was one Chinese company
who brought in woven jean orders for the German market. They brought a big
volume into Myanmar and sub-contracted out to more than 20 factories,” he said.
“After the sanctions there were no orders at all so
we had to take [business] from that Chinese company at a very cheap price,” he
said, noting that for one pair of pants or trousers they paid around 25-50
cents only, but they had no choice, to keep their workers and their companies
operating, but to accept the orders from this company.
“They made a
big benefit out of the U.S. sanctions,” he said.
Diversification
key to survival
Before joining the MGMA in 2000, Dr Aung Win headed
up his family garment manufacturing business, Maple Trading Company Ltd, and is
no stranger to the European or U.S. markets.
He’s produced a variety of clothing and apparel for
major fashion brands including Spanish powerhouses Zara and Pull & Bear as
well as getting his first big break from a Taiwanese sub-contractor making
men’s polo shirts for U.S. brand Siegfried and women’s shirts for retail chain
Walmart.
He says diversification was the key to his
company’s survival since strong ties with the Spanish market accounted for
around 90 per cent of his company’s business before the 2003 sanctions, which
slashed around 10 per cent of his income from America’s Nautica.
“We were luckier than other factories since many of
them relied 100 percent on U.S. orders and when the sanctions came down, their
business disappeared and many had to close,” Dr Aung Win said.
“For us, we produced around two lines for the U.S.
market and four lines for the Spanish market, so we weren’t affected as badly
as other companies,” he said.
When Zara cancelled its orders in wake of the 2003
sanctions, his company was kept afloat by a contract with another Spanish
retailer until 2008 when that firm relocated its orders to neighbouring
Bangladesh, drawn by the favourable tax cuts from the country’s inclusion in
the European Union’s Generalized System of Preferences (GSP) scheme.
Since then, like most of his competitors in
Myanmar’s garment industry, he’s been relying on sporadic orders from Japanese
and Korean clients and currently spends around six to eight months of the year
producing down jackets for the Korean market.
But the relatively small order sizes means many
factories only operate at full capacity for part of the year.
However, Dr Aung Win is optimistic his country will
regain its once-booming manufacturing industry and is taking the first steps to
re-engage with the U.S. – he is currently courting a U.S. jeans buyer from San
Francisco and will be taking them on a site visit to his two factories this
week.
“We are starting slowly and waiting for the new
orders to come – waiting for the U.S. to come,” he said.
Finding the
right people for the job
In its peak period from in early 2000, it is
estimated Myanmar hosted around 400 garment factories with more than 300,000
employees, but now the industry is struggling to find enough skilled workers to
staff its factories, Tun Tun said.
“Right now I don’t think we have enough human
resource skills because every factory has labour shortages, so we can’t reach
our optimum productivity,” he said.
“We need to raise our human resources capacity to
be more skilful and stable, but this can be done because our young people are
easily trained and willing to learn.”
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| A girl at work in a social enterprise created to help women who were victims of sexual trafficking. |
While labour in Myanmar is relatively cheap,
experts such as Professor Aung Tun Thet, senior advisor at the UN Resident
Coordinator’s Office, Yangon, point to Myanmar’s imminent need to build
capacity and skill workers to support Myanmar’s economic growth.
He said the industry’s decline over the past decade
and Myanmar’s years of isolation from the international community has left the
country impoverished and its education system in disarray.
“This is a long term process - there are no quick
fixes,” Professor Aung Tun Thet said.
“The question is how do we try to address this
skills gap in the short term,” he said, explaining that there needs to be a
greater focus on vocational education and workplace training to groom Myanmar’s
young labour force of some 30 million for successful employment.
Dr Aung Win estimates the current
workforce to be around 150-200,000 but says many locally owned factories have
difficulty retaining staff because they cannot compete against the higher wages
offered by foreign owned firms.
But money isn’t everything – local firms can
compete and keep workers by creating more attractive and pleasant working
environments for their staff and they can start by employing good management
conditions so their staff feel valued, Professor Aung Tun Thet said.
“It’s a combination of pull and push factors,” he
said.
“We can’t stop the pull – foreign firms will
attract people and pay exponentially more than local firms and we can’t stop
this,”
“However we can keep talent within our firms by motivating
them and allowing them to learn and grow.”
Local
versus foreign owned factories
As the Myanmar government irons out the finishing
touches to its long-anticipated foreign investment law, it is tipped that
investment in the manufacturing industry will be restricted to joint venture
with a local partner.
“According to the new regulations
there are around 14 types of business which do not allow 100 per cent foreign
ownership, and this will include the garment industry,” Dr Aung Win said.
“However, there is the
opportunity for foreign firms to joint venture with local firms and it’s very
likely the foreigners will take the majority partnership as they are bringing
in fresh capital and technology,” he said.
Experts including Professor Theodore Moran, an
American economist from Georgetown University, are in favour of liberal over
protectionist foreign investment laws because these allow economies to develop
naturally with healthy competition.
“Mandatory JV requirements induce foreign investors
to withhold their most advanced technology,” Professor Moran told M-ZINE+ in an email.
“The key here is not to require foreign investors
to have local partners,” he said, stressing the word “not.”
“It may seem counterintuitive but foreign investors
transfer more advanced technology into the domestic economy when they are not
“required” to do so than when technology sharing mandates are imposed upon
them.”
Currently, South Korea and Japan have shown the
most interest in Myanmar’s manufacturing industry, with a number of Japanese
garment firms claiming spots in the Mingaladon Industrial Park outside of
Yangon.
“Most garment factories are controlled by Korean
firms,” Tun Tun said, adding that “Korean investors have their own factories
here and have plans for the long run.”
He said the resurgence of U.S. investment could
boost the industry, however if Myanmar’s locally owned factories could bring
their operations up to international standards they will be well-placed to fill
American orders.
“If American firms come here with their own
investment and build their own factory and train our people, this would be good
for our country as they will bring investment and technologies,”
“However if we are in direct competition, then our
local firms will not be able to compete with multinationals.”
One scenario would be to have local firms supplying
foreign exporters through CMT (cut, make trim) contracts where the supplier
keeps the development of new styles and the materials under his control, and
outsources the labour-intensive jobs, which has been the traditional method
employed in Myanmar’s manufacturing industry.
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| Women in a Myanmar garment factory. |
Challenges in
doing business
While Myanmar’s changing political and economic
environment combined with a cheap and abundant labour force have peaked the
interest of foreign investors, experts say current challenges such as the high
cost of land and lack of infrastructure are holding back significant investment
in the manufacturing industry.
Alessio Polastri, managing partner of local law
firm P&A Asia terms Myanmar’s current land price issue as the “worst aspect
of Myanmar” and says for some investors it poses serious problems.
“Lack of infrastructure will be temporary and
telecommunication networks will come, as will a banking system,” Polastri said.
“But right now, [the] price of land is completely
uncertain – it’s a total deal-breaker.”
“Unfortunately this may push investors out of the
country, not only those in real estate but those in manufacturing,” he said.
“Even if the labour costs are cheaper than in other
countries, for example China, people are still thinking twice about Myanmar because
of the price of land,” Polastri said.
He said Myanmar had a long way to go before
positioning itself as a more attractive investment destination than
manufacturing-intensive emerging markets such as Bangladesh, Vietnam and
Cambodia, which also boast low labour costs.
For local investors, the biggest obstacle to
running an effective garment factory is lack of electricity, since domestic
demand far outweighs current supply, often leaving factory owners to rely on
expensive diesel-fuelled generators.
“Local business have
listed the most important obstacle to doing business as the insufficient
electricity supply, followed by political instability, foreign sanctions,
corruption and credit,” said Jared Bissinger a PhD candidate at Australia’s
Macquarie University who is studying Myanmar’s economy.
Other issues such as out-dated
technology and challenging logistics mean Myanmar’s garment factories struggle
to reach optimum productivity, Dr Aung Win said.
Today, with many firms feeling the squeeze of the
global economic downturn, buyers will be looking for the best bang for their
buck, says Keith Rabin, president of New York-based business consultancy KWR
International.
“We are experiencing a general global economic
weakness, so expansion of manufacturing capacity is not a high priority for
many companies these days,” Rabin told M-ZINE+.
“However, given rising labour costs in China and
other parts of Asia and an escalation of political tensions elsewhere in Asia,
we are starting to see a shift of production out of China into Southeast Asia,”
“Myanmar is likely to benefit from this emerging
trend and this relaxation makes that more feasible,” he said.
Removal of
European trade tariffs
Although
trade with Myanmar was not prohibited under European sanctions, negative
stigma, issues with U.S. financial sanctions and unattractive trade tariffs has
kept European interest to a minimum over the past decade.
The country’s exclusion from the
EU’s Generalized System of Preferences tax reduction scheme also places it on
an uneven playing field compared to manufacturing powerhouses such as
neighbouring Bangladesh, Tun Tun said.
“But if the U.S. orders come in and the EU gives us
back the Generalized System of Preferences, then we will have more choices and
our CMT will become higher,” Tun Tun said, adding this would result in greater
profits for local manufacturers who can then pass those benefits onto their
staff.
In
lieu of the Myanmar’s progress towards democratization, the EU will look at
removing these restrictive trade tariffs, a move which will be welcomed by
European buyers and Myanmar manufacturers.
The
country’s exports to the EU totalled just 169 million euros
(US$ 221 million) in 2011 – about three percent of the country's total exports
to the world with textiles making up the majority of those exports to the EU,
the Commission said.
This is a stark
contrast to a decade ago when the EU was the second largest market for
made-in-Myanmar garments, behind the U.S., receiving around 40 percent of
Myanmar’s clothing exports in the year 2000.
The
EU Commission said its proposal to restore GSP status for Myanmar was based on
an International Labour Organization
(ILO) conclusion that the country had made "significant"
progress in tackling forced labour.
In a statement on
September 18, EU Trade Commissioner Karel De Gucht said that, "since
Myanmar started to open up earlier this year I saw the need to underpin such
deep and important changes with real economic support once key improvements for
the workforce had been met.”
"Trade is
fundamental to supporting political stability and the EU's trade preferences
mean we will give this reform-minded country priority access to the world's
largest market. That said, we will continue to engage with Myanmar to encourage
continued progress on all fronts," De Gucht said.
What the
experts say
While some local manufacturers are bullish about
the return to the U.S. market, economists say that although Washington’s announcement
to lift the import ban is an important symbolic move in support of Myanmar’s
political and economic reforms, the country may need some time to see real
economic benefits.
Australian economist and Myanmar expert Dr Sean
Turnell said he is “bullish” about Myanmar’s potential to resume its regional
status as an agricultural success story and this growth would naturally fuel the
country’s manufacturing industry.
He says the removal of the U.S. import ban is an
important step forward for Myanmar’s economic and political growth.
“This is very significant. It removes the last
remaining external impediment to international investment in Myanmar, but
especially that in labour-intensive manufacturing,” Dr Turnell said.
“Hitherto, investing in that sector made little
sense when the world's most significant market for the output of such a sector
was out of bounds.”
The move could also encourage potential investors
by ranking Myanmar as a more attractive investment destination in terms of
political risk.
“It will take time for
investors to gain confidence but it is a step in the right direction,” said Tim
Harcourt, former chief economist at Austrade and professor at the Australian
School of Business in Kensington, New South Wales.
Australia never imposed
trade or investment sanctions on Myanmar, but instead opted for targeted travel
and financial sanctions against members of the former military regime, which
were suspended in April as part of the Australian government’s engagement
strategy with the impoverished Southeast Asian nation.
With time, trade links with the U.S. and the West
will grow as both sides explore new business opportunities, Bissinger said,
however it is unlikely Western demand will eclipse Asian markets, at least in
the short term.
“It's certainly a positive, as it gives export
oriented industries another major market to sell into. But it's an incremental
benefit, not a game changer,” Bissinger said.
“It will take time to rebuild business
relationships and may take time for Myanmar producers to get products to the
standards needed by many American clients,” said Bissinger.
“Over the medium run, trade links should grow. Garments
were previously a major export to the US and could be again though it's
unlikely they will be as important as they were in the early 2000's. But Asian
markets will continue to be more important than the American market,” he
said.
But most agree that while the U.S. government’s
move to ease its import ban on Myanmar and re-open a once crucial market to the
country’s exporters has positive symbolic political implications, further
economic reforms must continue before Myanmar reaches it real potential as an
attractive investment destination.
“While relaxation of the import sanctions helps to
move Myanmar out of the curiosity category into becoming a more viable
contender – one still has to factor high land prices and the other operational
issues within the parameters of an overall business and expansion plan,” said
Keith Rabin from KWR International.
“That said, these measures are clearly a positive
in a story that has exceeded almost everyone’s expectations and it likely to
get better over time,” he said.
Clearly, these are early days. But there are indications
that hip Americans could soon be togged out in the latest fashionable designer
brand “Made in Myanmar” clothes.
ENDS
This article first appeared in edition 42 of M-ZINE+ on 18 October 2012.
