Easing of U.S. imports ban opens new market for manufacturers

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. 

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.”

                  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.

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.