Friday, December 21, 2012

Myanmar: Southeast Asia’s “Last Frontier” for Investment

The country’s reforms and the easing of Western sanctions are opening the way for many new business opportunities.
By Dave Dubyne
Following the recent reforms in Myanmar that have caused the United States and other countries to ease sanctions against its military regime, businesses around the world are taking a new look at opportunities in that market. Taiwan is no exception. Recently a private Myanmar trade delegation visited Taiwan courting investors, and in May this year the Taiwan’s Ministry of Economic Affairs (MOEA) issued a 36-page, Chinese-language Investment Guide to Myanmar.

In July this writer attended, at the invitation of two Taiwanese business owners, a Myanmar Investment Conference sponsored by the MOEA’s Department of Investment Services in conjunction with the Taiwan External Trade Development Council (TAITRA) and the Myanmar Investment Commission (MIC). The purpose of the conference was to showcase investment opportunities in what was termed the “Last Frontier Market in Southeast Asia.”

A quick glance at a map of Asia shows the central location of Myanmar (also known as Burma) as a crossroad between China, India, Bangladesh, and Thailand, giving it a strategic potential for shipping. As a member of the Association of Southeast Asian Nations (ASEAN), it should also benefit from the increasing regional economic integration that ASEAN is fostering. Another attraction of Myanmar’s infant market is the huge investment the country will need to build its economy.

Both U.S. and Taiwanese companies should be able to find space in certain sectors of what is already becoming a crowded foreign investment destination. Of the 31 countries with investments in Myanmar, China leads with US$14 billion or 34.5% of the total, followed by Thailand with $9.6 billion, Hong Kong with $6.3 billion, South Korea with $2.9 billion, Britain with $2.7 billion, and Singapore with $1.8 billion. The few small Taiwanese firms there are manufacturing consumer products such as diapers, mobile phones, and foodstuffs. Among U.S. firms, Chevron has a stake in oil exploration, and Coca-Cola and Pepsi are on sale again after a period of 59 years in which U.S. trade sanctions kept them out of the market.

“Myanmar is ready for any foreign partnership, joint venture, or investment,” says U Tin Ko Win, deputy director general of the Directorate of Investment and Company Administration (DICA). To entice Foreign Direct Investment (FDI), the MIC has been offering incentives such as a five-year corporate tax holiday and an increase in the length of the normal land lease from 35 years to 50 years with two additional 15-year extensions.

Myanmar’s parliament passed a new FDI law on September 7, the last day of the lower house’s session, and in the final version of the bill dropped a controversial clause of requiring a US$5 million minimum investment. The parliament also increased the maximum shareholding of foreign parties to 50%, up from the previous 49%, in sectors including manufacturing, farming, hotels, and fisheries. Many would-be investors worry, however, that a 50/50 shareholding means potential deadlock. Under the new law, 13 vaguely defined additional sectors are also open to foreign investment, but only if the foreign partner’s holding is less than 50%.

As of early October, the specific sectors had not yet been announced. There were also unconfirmed reports that Myanmar was considering allowing foreign investment of up 100% in some high-tech sectors. Some local business interests in Myanmar “worry that opening the country too aggressively would let foreign firms dominate the economy,” says Kristy Hsu, program coordinator at the Chung-Hua Institution for Economic Research who attended a Myanmar Global Investment Forum in Yangon in September.

“The fear is that 90% of Myanmar’s business sector is comprised of SMEs and they feel the new bill puts them at a competitive disadvantage from the start. Most SMEs in the country want fresh capital through a JV partnership, not direct competition from 100% foreign-owned entities. They also want the same tax incentives that are offered to foreign firms.” Hsu also noted that “local unions are beginning co-ops in order to garner heavier bargaining power, and to include themselves in pivotal roles in price, wage, and investment issues. Strikes and land disputes are heating up as land prices increase throughout the country, but the government arbitration committee has continued a hands-off approach unless a dispute involves thousands of workers.”

Another FDI inducement was removal of a “Hostile Buy-Out” clause that allowed a Myanmar joint-venture partner to forcefully buy out the other side if they had enough capital, whether agreed to or not by the counterpart. In addition, rules and regulations have been relaxed, and it is now supposed to be possible to complete the entire incorporation process in a day, though that does not seem to be realized in practice. A new session of parliament begins this month, and more changes in the law may be forthcoming. Numerous challenges Despite the new opportunities, there is agreement that foreign companies will find Myanmar a difficult place to do well in.

“The market is small and the pool is full – everyone is already in,” said Taiwanese businessman Roger Yin, general manager of Good-Men Associates, interviewed while attending the investment conference in Myanmar in July. “The only way to compete is to have a high-tech advantage in materials or techniques that will take a few years to copy. When I started in China 20-plus years ago, there weren’t too many foreign businesses there, so you could experiment and start slowly. But precisely the opposite is true in Myanmar. Everyone is here and they only want big investments. The climate is not right for what I’m doing at this time. It’s cheaper to manufacture in China, and the infrastructure is in place there, unlike Myanmar.”

On the other hand, explains Albert Fan of TAITRA’s Market Research Department, a keynote speaker at the July conference, Taiwan may enjoy some special advantages in dealing with Myanmar. One is the fact that many people in Myanmar are able to communicate in Chinese due to the country’s longstanding trade ties with China. Another is the legacy of the presence of former Kuomintang troops in the mountain regions of Myanmar, where they fled across the border at the end of the civil war with the Chinese Communists. For years, the Taiwan government subsidized the education in Taiwan universities of the offspring of these soldiers – known as Myanmar-born Kuomintang (MBK). After graduation, many of them returned to Myanmar. “If you must have a Myanmar JV partner,” says Fan, “the safest approach is to partner with a Taiwan-educated MBK business family.”

U.S. companies might also benefit from choosing an MBK entity to partner with, especially in fields in which the MBK businesses are strongest – canning and dehydrating equipment, as well as other machinery for the food and beverage industry. Overall, however, the most productive sectors are those related to natural resources: oil and gas, mining, and timber. The first challenge in trying to assess the business climate is the lack of trustworthy data, with different private and government sources releasing different figures.

Although no comprehensive nationwide census has been taken since 1931, the current estimated population is about 50 million. Import figures are grossly underestimated since so much smuggling takes place from Thailand, China, Malaysia, and India. The International Monetary Fund forecasts Myanmar’s 2013 GDP growth at 7.7%. Another negative is that the administration is widely perceived as non-transparent, corrupt, and highly inefficient. Over 60% of the FY2010-11 national budget was allocated to state-owned enterprises, most of which operate at a deficit. TAITRA’s Fan notes some other drawbacks.

“As the rural population is too small, spread out, and impoverished to purchase anything, most investors, including Taiwanese businessmen, focus only on major cities like Yangon, Mandalay, and Naypyidaw,” he says. Additionally, in the absence of a formal stock market, domestic investment goes mainly into land, “creating sky-high prices that deter the development of manufacturing facilities and warehouses.” Kristy Hsu notes that “property prices in the city of Yangon are higher than Bangkok and some places in Tokyo,” and that while the official exchange rate is 6 kyat to the dollar, “on the street that same dollar will get you 860 kyat.”

In 2010-11, the transfer of state assets, especially real estate, to military families under the guise of a privatization policy further widened the gap between the economic elite and the general public. Generals control vast tracts of land and therefore hold the key to the development process, says Fan. “These generals can use their power for or against reforms.” Under a controversial 2010 amnesty agreement, the military was given a clean slate for any crimes committed before 2010. Potential transport hub If U.S. sanctions are fully lifted, economic stability should be assured, as Myanmar is well situated to be a regional transport hub.

For China and India, a stable Myanmar would be a strategic asset providing deepwater port access to the Indian Ocean and enabling circumvention of the Malacca Straits by using overland rail routes through Yunnan Province in western China. The rail connections from the Chinese side are in place, but key portions of track within Myanmar remain in the planning stages. Existing railways are old and rudimentary, using narrow gauge, and haven’t been repaired in decades. The train trip from Mandalay to Myitkyina, which is 530 miles, takes 24-30 hours, but the same distance can be covered by car in 17 hours.

Highways are unpaved, and even streets in major cities are a patchwork of semi-pavement. Transportation costs are high and energy shortages are common, especially from January to April when hydroelectric reservoirs are at low water. To further complicate matters, ethnic armies control all the roadways throughout the Shan and Kayah States. “Bribery and road-use taxes imposed every hundred kilometers or so through different ethnic army-controlled areas make it cheaper to deliver by air,” says Kristy Hsu.

What will look more attractive to potential investors are the low wage rates. Factory workers earn US$50-100 per month, a truck driver $150, and salespeople $80-160. Social Security Benefits require the employer to contribute 2.5% of the insured wage and the employee 1.5%. Most workers come from remote rural areas, so that room and board must also be included in labor costs. Those over the age of 40 can speak English as they received schooling during the period of British rule, while the English ability of younger workers is described as hit or miss, but generally higher in the cities.

The population consists of many different ethnicities, with different management techniques needed for each group. The capital of the country is now Naypyidaw, so that companies setting up in Yangon (formerly known as Rangoon), the largest city and commercial center, may encounter delays in paperwork running into days or weeks while documents are sent back and forth. Construction has begun on a new industrial park for foreign investors within the Thilawa Special Economic Zone, which includes the deep-sea port of Thilawa 25 kilometers south Yangon.

Politically, “Myanmar recognizes the People's Republic of China, accepts the One China Policy, and does not maintain any representation in Taiwan,” including non-official representation, notes Kristy Hsu. With even TAITRA barred from opening an office in Myanmar, connections are maintained through wholly private entities. Hsu says that some Taiwanese businessmen have set up a desk at the Yangon Golf Club to serve as a channel to provide business information and answer inquiries and business. In addition, she says she receives at least 12 calls a day in Taipei from Taiwanese companies, mostly asking about the investment law changes.

“Foreign firm are highly sought-after as partners as they can bring new technology and fresh capital,” says U Ken Tun, CEO of Myanmar’s Parami Energy Group. “Foreign firms should come in and identify an opportunity, then find a person who shares the same vision,” he suggests. “Access to the oil and gas industry is limited to a profit-sharing joint venture arrangement with a local company owning the exploration concession. The same is true for mining, since mineral reserves are controlled by the Ministry of Mines and the best spots have been awarded to private local companies. One advantage is that with a well-known business entity as a partner, you could circumvent some of the bureaucratic challenges – that’s local firepower. The partner can also contribute essential assets in the form of connections, land holdings, and property.”

But prospective investors need to be aware that many leading business figures are former members of the military regime that the U.S Treasury Departments has placed on its Specially Designated Nationals (SDN) list of individuals targeted for “Frozen Asset” sanctions. Dealings with them could pose long-term risks to a company’s finances and reputation. Some of the key opportunities for investment are likely to be in such areas of infrastructure development as power plants, industrial parks, airports, and telecommunications, as well as in mining, oil and gas exploration and production, forestry and timber development, agriculture, and hotels and other tourism facilities. In manufacturing, major sectors identified as in need of investment are cement, building materials, and spare parts for agricultural machinery and automobiles. There is also a need for imported hospital equipment, even second-hand.

David DuByne is an American businessman currently resident in Taiwan. He has been studying the feasibility of the Myanmar market for an algae biodiesel production system. His website is here.
 
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