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An Outlook published by Technopak February Opening the Door Opportunities & Challenges for the Garment Industry in Myanmar

An Outlook published by Technopak February 2013 Opening the Door Opportunities & Challenges for the Garment Industry in Myanmar About the Outlook Myanmar began reforming its economic policies rather belatedly,
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An Outlook published by Technopak February 2013 Opening the Door Opportunities & Challenges for the Garment Industry in Myanmar About the Outlook Myanmar began reforming its economic policies rather belatedly, with two waves of reforms in 2011 and While the country has all the ingredients for making it a viable and attractive garment sourcing destination (e.g. abundant and cheap labor), it is also faced with some serious challenges (such as the fragile political scenario). Myanmar s rise as a sourcing destination will require a joint effort involving the government, development aid agencies and the private sector. This Outlook is an attempt at shedding some light on the past and future of the garment industry of Myanmar, a country which has long been politically and economically isolated. About the Fashion Division at Technopak Fashion & Textile Services Strategy & Planning Business Entry India Entry & Partnerships Growth and Diversification Industry Studies - Benchmarking, Trends etc. Mergers and Acquisitions / JV s Partner Search Due Diligence Investment Evaluation Partnership Structure Textile Operations Project Management Consultancy (PMC) Construction Management Consultancy (CMC) Technology Selection Techno-economic Feasibility Report Lean Management Public Private Partnership Mega Cluster Development Skill Development Textile Parks Apparel Operations Services Performance Enhancement Productivity and Efficiency Enhancement Material Utilization and Quality Enhancement Streamlining Merchandising and Pre-production Activities Lean Manufacturing Tools Total Quality Management SOPs and Visual Control Start-Up Assistance Planning and Design of Factory Lean Processes and Layouts Implementation of Total Quality Management and Statistical Process Control Selection and Training of Middle Management Productivity and Efficiency Build-up Skill Development & Capacity Building Program Design and Team Profile Development Merchandisers, Quality Personnel and Industrial Engineers Training Setting up Criteria & Procedures for Selection & Recruitment of Operatives Training of Operatives & Middle Management based on AAMT Methodology Contents Myanmar: An Introduction Opportunities & Challenges for the Garment industry in Myanmar Conclusion About technopak Authors: Amit Gugnani Senior Vice President Lalit Kumar Yadav Associate Director Design & Development Arvind Sundriyal Assistant Manager-Design Pavan Kumar Mishra Sr. Designer Opportunities & Challenges for the Garment Industry in Myanmar February 2013 Myanmar: An Introduction Myanmar is situated in southeastern Asia, bordering China, India, Bangladesh, Laos and Thailand. Myanmar touches the Andaman Sea and the Bay of Bengal and is located in close proximity to the major Indian Ocean shipping lanes. Presently, Myanmar s Gross Domestic Product (GDP) is about USD 83 billion and growing at between 5.5% and 6%. Agriculture is the largest contributor to the country s GDP, and is alone worth 40%. Myanmar has a land area of about 677,000 sq. km. dotted with mountain ranges and valleys; out of this expanse, only 18% is arable. Limited land availability is one of the biggest challenges for the agricultural sector threatening its continued role as the largest contributor to Myanmar s GDP. On the other hand, Myanmar houses a labor force numbering about 33 million with an average age of 27 years and a literacy rate of nearly 90%. This large, and comparatively young, manpower is a prerequisite for the manufacturing sectors; the high literacy rate aids the efficient conversion of available manpower to a need-based, skilled workforce and thus helps develop manufacturing. The current average labor cost is favorable to nearby garment hubs like Cambodia and could be a major factor in attracting low cost industries such as garment manufacturing and boosting exports from the country. Some of the key international financial bodies indicate that Myanmar could match Asia s fast growing economies by touching a GDP growth rate of 7% to 8% and may triple its per capita income by Key Indicators in Brief Exhibit 1 GDP - About USD 83 bn (PPP Basis) Growth 5.5% to 6% Composition by Sector Agriculture % Industry % Services - 42% Population - 55 mn* Urban Population - 34% Urban Centers - Yangon, Mandalay, Nay Pyi Taw Labour - 33 mn Literacy (age 15 and above, can read & write) % Average Age - 27 years Employment Generation Agriculture - 70% Industry - 7% Services - 23% Indusry Sectors Agriculture, Wood & Wood Products Metal Oil & Natural Gas Garments Gems & Stones Source: CIA Fact File (*60 mn, as per Ministry of Immigration and Population, Myanmar) 1 Current Trade Performance The primary export commodities are natural gas, wood products, pulses, beans, fish, rice, clothing, jade, and gems. Thailand, China, India and Japan are Myanmar s major export partners. The chief imports include fabric, petroleum products, fertilizer, plastics, machinery, transport equipment, cement, construction materials, crude oil, food products, and edible oil. Myanmar's Exports & Imports (USD bn) Exhibit (P) Source: Central Statistical Organization, Myanmar Exports Imports Myanmar has achieved consistent growth in its exports to various destinations. In , the total exports amounted to USD 6,779.1 million at a CAGR of 5.97% and are estimated to increase to USD 9,057.4 million in year Myanmar has also been able to maintain a positive trade deficit balance over these 5 years. Major Destinations of Myanmar's Exports Exhibit % 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 13.1% 10.3% 8.9% 2.6% 0.5% 0.4% 1.4% China Germany Hong Kong India Indonesia Japan Republic of Korea Source: Central Statistical Organization, Myanmar 2 Opportunities & Challenges for the Garment Industry in Myanmar February 2013 China, India, Hong Kong, Japan and Republic of Korea are the major export destinations, accounting for an estimated 36% of the total exports over the five-year period from to Major Sources of Myanmar's Imports Exhibit % 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 26.7% 3.2% 3.6% 4.9% 0.6% 0.9% 0.3% China France Germany Hong Kong India Indonesia Japan Source: Central Statistical Organization, Myanmar China, India, Indonesia, Japan and Germany are Myanmar s major import partners accounting for about 39% of total imports over the five years period of time from to Myanmar s Garment Industry In , garment exports brought in USD 401 million; this has grown at a CAGR of 16.1% to USD million in Woven garments have driven the growth of exports while the exports of knit products have been flat over the years. Myanmar's Garment Export Performance(USD mn) Exhibit Garment Export Knits-HS 61 Woven-HS 61 Source: UN Comtrade 3 At present, Myanmar s garment manufacturing is dominated by Woven products which account for more than 90% of the total manufacturing. There are approximately 400 garment manufacturing units, each with a varying number of machines. Most of these garment manufacturing units cater to the domestic market and have a vast scope for improvement on the efficiency, processes, quality and compliance front. Some suits manufacturing factories have been set up by Japanese and Korean companies that cater to markets in those countries. Major Garment Export Destinations - Myanmar Exhibit % 33.3% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 15.4% 17.3% 8.6% 6.3% 2.2% 2.2% Austria Germany Japan Rep. of Korea Spain Turkey United Kingdom Source: UN Comtrade Japan, the Republic of Korea, Germany, Spain, the United Kingdom and Turkey are the major garment export destinations, comprising about 85% of total garment exports. 4 Opportunities & Challenges for the Garment Industry in Myanmar February 2013 Opportunities & Challenges for the Garment Industry in Myanmar Opportunities The garment industry in Myanmar may provide low cost sourcing alternatives amid the current global recession. The country addresses the following prerequisites in this respect: Ideal Demography Garment manufacturing, by nature, is a labor intensive industry. An abundant labor supply, with a higher literacy rate and a comparatively lower average age, are the biggest selling points in Myanmar becoming a garment manufacturing hub. If complemented by financial and technological inputs from international players, Myanmar can transform itself into a low cost garment manufacturing hub. Skill development initiatives will be required to help the country convert its young and literate human resource to a needs-based, skilled workforce. Low Wages Currently, Myanmar has the lowest minimum wage and average payout when compared with key garment hubs like China, Thailand, Cambodia, Vietnam and India, but very close in comparison to the corresponding rates in Bangladesh. Competitive pricing is one of the key factors governing business decisions in the garment industry and, as labor costs contribute about 15% to 20% of the total garment cost, will directly help Myanmar to edge out other garment manufacturing hubs. 5 Labor Availability & Wages Exhibit 7 Myanmar Thailand Vietnam Cambodia India Bangladesh China Pakistan Sri Lanka Labor Force (mn) Minimum Monthly Wages (USD) Average Monthly Payout (USD) Source: Technopak Analysis However, wage rates are rapidly increasing, and the comparison is made more complex when seen in US dollar terms due to the sharp fluctuations of local currency vis-à-vis the US dollar. There are even talks of raising the minimum wage in the region of USD 100 per month; if that becomes a reality it may prove to be a decisive hurdle in Myanmar s becoming a significant garment exporting country. Proximity to Shipping Hubs Yangon is the main shipping port of Myanmar and is located close to the Port of Singapore which lies on the main Indian Ocean shipping lane. It takes about 5-6 days for shipping from Yangon to Singapore. This may be explored for faster connectivity and can eventually reduce the lead time for both material procurement and shipping of goods to destinations in a cost effective manner. In tune with the expansion of external and internal trade, the modernization and rationalization of the national shipping industry and port facilities should be prioritized. Foreign investments, either privately or through joint venture models, can be the means to develop the shipping infrastructure. Favorable Government Schemes / Incentives At present, Myanmar s Foreign Investment Law (FIL) allows 100% ownership by foreign companies and also permits joint ventures with State Economic Enterprises (SEEs) or private firms. For joint ventures, the foreign capital infused must amount to at least 35% of the total capital requirement. The FIL is liberal and comparable to the laws of advanced ASEAN members. The Myanmar Investment Commission (MIC) indicates a minimum capital investment of USD 0.5 million for any manufacturing firm. The FIL also provides various benefits such as a three year exemption from income tax, allowance of accelerated depreciation, and relief from customs duty and other internal taxes such as those on machinery, equipment and spare parts. Government schemes and incentives to investors will help boost the growth of the garments manufacturing business and attract more investments. However, there are many laws, regulations and administrative procedures related to foreign investment; much effort is required to make these more detailed, explicit and transparent. In order to balance China s influence over the country and the region we can expect to see more investment from western countries. This can also be facilitated by the lifting of restrictions on financial investments in the country. 6 Opportunities & Challenges for the Garment Industry in Myanmar February 2013 Duty-Free Trade Agreements / LDC Status: The special and preferential treatment of exports from a Least Developed Country (LDC) makes a huge difference in achieving success, especially in the garment trade where competitive pricing is the key. With the successive waves of economic reforms and improving relationships with major garment markets (viz. the US and Europe), Myanmar may be granted tariff relaxations. This will help local garment manufacturers attain competitiveness and open their doors to significant business opportunities. Presently, Myanmar enjoys an LDC status with Japan along with other export countries such as Laos, Bangladesh and Cambodia. This helps gain a tariff exemption of up to 10%. In September 2012, the EU placed Myanmar in its Generalized System of Preferences (GSP), thereby granting duty- and quota-free access to the European market for clothing. This proposal was to be approved by the EU s 27 member states and European parliament, with benefits from GSP accruing to Myanmar 2013 onwards. With the U.S. also taking steps to ease its own import ban, Myanmar is not short of initiatives which can help it in reaching out to markets worldwide and business opportunities. Increased interest of Retailers / Brands in sourcing from Myanmar Sufficient business / order flow will be a prerequisite for the growth of the garment manufacturing sector in Myanmar. This may be achieved by encouraging retailers and brands to source from Myanmar on a consistent basis. As the usual clothing supplier countries are becoming saturated and facing increases in labor costs, retailers and brands can utilize this opportunity to develop a strong sourcing base and also highlight their contribution to the growth of a Least Developed Country. Challenges Before Myanmar s garment industry takes off, some key issues need to be addressed in order to shore up the industry s growth. In a nutshell, the challenges for Myanmar s garment industry can be summarized as under. Only CMP and no FOB Most garment manufacturing companies currently undertake only cut, make, pack, or CMP, orders because of the sanctions that prevent direct buying from Myanmar. Difficulties with letter of credit, or L/C, terms and inadequate banking support also renders doing Free on Board, or FOB, business very difficult for local companies. Usually, the factories deal with buyers/ sourcing companies, which have their offices situated, for instance, in Hong Kong or Bangkok. After the cut, make and pack process, these factories are paid by the buyers. Now that economic sanctions have been removed, even if temporarily, and increased support is coming in from the banking industry, working through a L/C and doing FOB business may soon become reality. Infrastructure & Technology Poor infrastructure in terms of transport, telecommunications and utilities supply is the largest issue hampering Myanmar s economy in general and the garment manufacturing industry in particular. Myanmar was ranked 133rd of 155 countries on the Logistics Performance Index vis-à-vis Bangladesh, China and India which were ranked 79th, 13th and 47th respectively, as per the World Bank. The lead time is also affected by limited inland transport alternatives and the lack of good port facilities. Since this is one of the most important factors in garment exports, the provision of reliable and fast transport is essential. The cost of such projects is likely to burden the country s economy, but this can be addressed by foreign investment. Presently, about 67% of the total electricity generated is from fossil fuels while the rest is generated by use of hydroelectric plants. Natural gas supply is available, via a pipeline, in primary locations. The inconsistent and costly supply of electricity is a matter of concern to a labor intensive industry like garment exports. Collectively, there is need and requirement to build and improve infrastructure as this can set the pace for economic reforms. The factories should not have to rely on their own diesel generators at a cost four times that of regular electricity. Laws and Regulations Cumbersome and inefficient laws and regulations are the next biggest challenge in Myanmar. The export first policy is a big deterrent to the Myanmar garment industry as the industry has high import intensity, with most materials imported. Special provisions are required to attract foreign investments, facilitate them in executing investment plans, and also support them in the course of running. Labor laws are one key area which can encourage more foreign investment and help increase the growth rate, if prudently mandated. The relaxing of government controls and the provision of the right to form labor unions has caused frequent strikes over such issues as wages, working conditions and frequent job hopping. 7 Economic and Political Stability Economic and political stability are areas of concern when sourcing from Myanmar, especially in terms of planning security and the ease of doing business amid political unrest. Lending interest rates, which can be one of the hurdles for investment in the RMG sector, are still high, averaging 13-15% or 2.5 times the level of China s average lending interest rate (5.4%), according to the IMF. Lack of Skilled Manpower 70% of the local workforce is employed in the agriculture sector, with only 7% working in industry. Skill development will be one focus area where external help will ensure that the growth of manufacturing sector remains on the fast track. Initiatives for needs-based training of both the direct workforce and middle management will help bridge this gap. Further, these initiatives can be brought under the umbrella of Corporate Social Responsibility (CSR) for improved labor and social compliance standards. Underdeveloped Supply Chain At present, there are no domestic suppliers of fabrics, trims or packing material, and very few washing facilities. If made available, these can promote the maximum utilization of investment and technical expertise. At the same time, using such facilities, garment factories can fulfill their needs and achieve an economy of manufacturing without requiring any isolated investment. Low productivity Due to the limited interaction with the international market, transfer of technology from foreign buyers has also been restricted. Given the highly labor intensive nature of the garment manufacturing industry, a free exchange of knowledge and skills is essential for improving overall productivity. Myanmar has been reeling under curbs and sanctions, which have had an adverse impact on the flow of orders. Lower business intakes have further impacted garment factories, which have to survive on work orders with a wide range of variables including styling, work content, etc. This situation has in turn affected operational efficiency, quality, costs, etc. Compliance Issues The limited exposure to, and working experience with, international players has resulted in a lack of adequate knowledge about compliance issues and international standards. Child labor, insufficient per workstation working space, inadequate provision of toilets, fire-prevention and fire-fighting systems, and the absence of medical facilities are some of the factors that undermine Myanmar s capability as a socially responsible sourcing destination. 8 Conclusion Myanmar has the prerequisites for setting up labor-intensive industries, including the garment industry, and also has the potential to attract investments from neighboring countries where manufacturing costs are on the rise. However, there are various challenges related to both attracting investments as well as making these operational and sustainable. A transparency in laws and regulations, improved infrastructure, affordable and efficient logistics / shipping connectivity, and training and skill development initiatives are among the factors slowing down growth and obstructing the opportunity for development. Internal reforms should primarily target the creation of a favorable business and trade environment via the rationalization of existing laws and regulations with respect to fair trade practices, improvements in economic governance and in infrastructural facilities such as transport, economical and reliable ene
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