Footwear Sourcing in Myanmar: Opportunities & Risks. CascadeAsia. Ryker Labbee Senior Analyst, Myanmar

Transcription

1 Footwear Sourcing in Myanmar: Opportunities & Risks Ryker Labbee Senior Analyst, Myanmar CascadeAsia Photo: Sunrise Over Bagan" by Dima Chatrov,

2 About Cascade Asia Photo: "Mahamuni Buddha temple in Mandalay" by Paul Arps,

3 About Cascade Asia Cascade Asia Advisors is a boutique intelligence and strategic advisory firm focused on Southeast Asia. Intelligence On-the-ground market insight Industry and/or issue deep dive Supply chain reliability analysis Risk Management Monitoring & Mitigation Early Warning System (EWS) Financial & reputational due diligence Relationships Enhanced network access Government relations Stakeholder perception audit Strategy Optimized competitiveness Market entry/establishment design Corporate positioning Photo: Shwedagon at Dusk by Ryker Labbee, Cascade Asia file photo

4 Early Warning System Photo:

5 Over 90% of our analysts have advanced degrees. We speak 10 Southeast Asian languages. 66% of our clients are from the private sector.

6 Cascade Asia in Myanmar Ryker Labbee, Senior Analyst 11 years experience following Myanmar MA in international affairs, economics Splits time between Seattle and Yangon Jacob Clere, Senior Analyst Industry experience and network MS in development economics, emerging markets Lives in Yangon

7 What Does Tomorrow Hold? Footwear Manufacturing in Asia Today and Tomorrow?

8 Economic & Political Overview Photo: Irrawaddy Near Inwa by Ryker Labbee, Cascade Asia file photo

9 Macroeconomic Outlook Gross Domestic Product % 5.9% 6.4% 6.8% 6.9% e 2014 f Source: IMF, Cascade Asia

10 Current Macroeconomic Backdrop Myanmar Imports and Exports 2013 (US$m) Exports Imports USD/MMK Janurary February March April May June July August September October November 750

11 Myanmar s Export Economy

12 Foreign Direct Investment Cumulative FDI into Myanmar from 1989 to 2013 (US$m) China, Thailand, U.K., S. Korea, Singapore, Malaysia, Vietnam, France, India, Japan, Netherlands, U.S.A., Indonesia, Philippines, Others, Source: Myanmar Investment Commission

13 Near-Term Political Outlook Stability, further liberalization expected in 2014 National elections coming in 2015 Constitutional reform efforts ongoing Required for Suu Kyi to run for presidency No changes to military reservation in parliament Opposition party fragmentation expected Unrest involving ethnic minority groups Conflict persists in hinterland Buddhist/Muslim tension a problem

14 Business Climate in Myanmar Logistics Performance Index, 2012 (155) Global Competitiveness Index, (148) Ease of Doing Business, 2014 (189) Rule of Law, 2013 (97) Corruption Pereption Index, 2012 (174) AVERAGE GLOBAL RANK Global Competitiveness Index, (148) Ease of Doing Business, 2014 (189) Rule of Law, 2013 (97) Logistics Performance Index, 2012 (155) Customs Infrastructure International shipments Logistics quality and competence Tracking and tracing Timeliness Singapore Malaysia Brunei Thailand Indonesia Philippines Vientam Lao PDR Cambodia Myanmar Corruption Pereption Index, 2012 (174) AVERAGE GLOBAL RANK Source: WEF, WB, IFC, WJP, TI

15 Why Source from Myanmar? Photo: Intha Rower on Inle by Ryker Labbee, Cascade Asia file photo

16 Ideal Demography 46 million 95% literacy rate Photo: Soe Zeya Tun/Reuters,

17 Ideal Demography Median Age: 28 Source: CIA World Factbook

18 Competitive Wages $25-$80* month Photo: "Myanmar Clothing & Textiles,

19 Competitive Wages Firing Costs (in Weeks of Salary) Myanmar 0 Singapore 3 Japan 4 Hong Kong India 6 16 Monthly Base Salary (Factory Workers) Cambodia Vietnam Malaysia China South Korea Yangon Phnom Penh Jakarta Bangkok Philippines 27 Manila 325 Bangladesh 31 Kuala Lumpur 344 Thailand 36 Mumbai 403 Indonesia 58 Beijing 538 Source: World Economic Forum, Wall Street Journal, Cascade Asia

20 Proximity

21 Government Incentives New foreign investment law (November 2012) Land leases now possible for 50 (+20) years Eleven types of tax incentives: e.g., 5-year income tax exemption, import duty exemptions, etc. 100% foreign ownership now possible Remittances of profits much easier, no longer taxed Changes in trade environment CMP customs tax exemption on raw material imports Reduced cargo inspection stations at border checkpoints

22 Developed Port Capacity Coastal Ports Over 2,000 kilometers of coastline 9 major ports Dawei Port/SEZ linking South Asia to Thailand To rival Singapore? Interstate highway Reduced shipping costs versus Strait of Malacca transport Source: Myanmar Port Authority

23 What Challenges to Expect? Photo: Rail Activity Near Yangon" by Ryker Labbee, Cascade Asia file photo

24 Mature CMP Capacity, Incipient FOB CMP: Sanctions limited manufacturers to CMP orders until recently CMP garment exports reached about US$1 billion in 2012 FOB: Lifting of sanctions improved prospect for FOB businesses Poor banking services complicate FOB US $114 million FOB exports (2012)

25 Labor Market Inefficiencies Labor Market Efficiency, 2013 (rank/148) China (34) Cambodia (27) Indonesia (103) Myanmar (98) Vietnam (56) Cooperation laboremployer relations Flexibility of wage determination Hiring and firing practices Redundancy costs Pay and productivity Country capacity to retain talent Source: World Economic Forum

26 Low Productivity Average Daily Wage Cost for a Factory Worker, 2010 ($ Per Day) Annual Labor Productivity in the Aggregate Economy, 2010 (2010 $ Thousand per Worker) Myanmar $ Vietnam $ China $ Thailand $ Malaysia $ Source: McKinsey Global Institute

27 A Closer Look at Productivity Labor Hours in Factories (number of hours/day) Factory Space Utilization (% of space by activity) Myanmar 8 Vacant 20% Average of Asian comparison countries Single shift shifts of 8 hrs each Operations 50% Storage 30% ~100 percent space utilized for operations in most advanced and developing countries Source: Focus group on Myanmar manufacturing firms, April 2013; International Labor Organization; McKinsey Global Institute analysis

28 Primitive Machinery, Technology Lack of new machinery Small-scale operations Limited and inconsistent internet access Poor telecoms infrastructure Lack of experience with 21-st century machinery and maintenance Photo: "Design Concentration" by abrinsky, cropped from original

29 Poor Electricity Infrastructure Source: Myanmar Energy Sector Initial Assessment, Asian Development Bank (2012)

30 Transportation Infrastructure Only 22% of roads paved Poor overland connections to neighboring countries Poor inland water transport capabilities Abysmal rail infrastructure Dry port plans in Mandalay being explored Photo: On the Road to Mandalay by Ryker Labbee, Cascade Asia file photo

31 Labor Standards & Compliance No unified labor code Common complaints of workers in Myanmar: Low wages (average $25 $80 per month) Forced overtime Poor factory conditions and treatment Rated a Tier 3 country * in the 2011 US Department of State 2011 Trafficking in Persons Report Rapid urbanization without adequate regulatory policies may cause environmental problems Example: Shwe Gas Pipeline Project State Department reporting requirements * As defined by the U.S. Department of State s 2011 Trafficking in Persons Report, a country with a Tier 3 rating is a country whose government does not fully comply with the minimum standards and is not making significant efforts to do so.

32 Trade Unions 600 since 2011 Photo: "Workers Strike from the Myanmar Sunny Clothing Factory" by Mizzima,

33 Political & Economic Stability Inexperienced government Little experience working with western businesses, international regulations High volume of FDI to process, approve, etc. Legislation being enacted, yet enforcement is lax Inadequate judicial system Location of Naypyitaw & lack of access Photo: Shwe Mann in Parliament, Reuters

34 Industry Snapshot Photo: Footwear Manufacturing in Myanmar by Neena Pathak, PRI:

35 US$ in millions Footwear Exports from Myanmar Myanmar FOB Exports Footwear, gaiters and the like; parts of such articles Others Thailand South Korea Germany EU (15 countries) Japan Source: Institute of Developing Economies, Japan External Trade Organization, Trade Nosis

36 Industrial Zones in Yangon Yangon has 4,000 hectares of land for industrial zones, ~20 distinct zones Hlaing Thar Yar (470 hectares, ~500 companies) Shwe Pyi Thar (435 hectares, ~200 companies) Dagon (400 hectares) Hlaing Thar Yar, Shwe Pyi Thar both operating light manufacturing like garments and food processing Most CMP operations in Yangon are situated in industrial zones within a 30-km radius of Yangon Port, including those listed above Source: HKTDC Research

37 Operating Cost Comparison Source: Various government and industry park sources

38 Profile: Royal Rose Footwear Sells primarily to domestic and Japanese markets Two large workshops Subcontracting and hiring temps are common when large orders received Singer sewing machines only machines in use 30,000 pairs of sandals/ month Royal Rose Japanese Catalogue

39 Profile: Royal Rose Footwear (Left) Cutting & making: not a machine in sight! (Below) Finished products Photos: Royal Rose Factory by Jacob Clere, Cascade Asia file photos

40 What s on the Horizon? Photo: Bagan Balloons by Alex Schwab,

41 Laying More Groundwork Minimum wage law We have a law in place (effective June 2013) Wage limits, determined by presidential committee on per-industry basis, in place by year-end 2014 Enforcement is likely years away Improvement of worker skills, productivity Employment & skills development law Educational reform Intellectual property law (major issue) 2015: banking, telecoms improvement Source:

42 Labor Unrest & Uncertainty Low wages, political liberalization energizing labor groups Strike by 600 workers at shoe factory last week Wages to increase but remain competitive Legislation, unions to push wages higher Population stabilizer Much in flux at present Photo: Laid-off Workers Protest in Yangon by JPAING, The Irrawaddy (

43 Thilawa Special Economic Zone Myanmar International Terminals Thilawa Ambitious target to be operational by ,400 hectares Light industry, assembly industry; thermal plant Connected to MITT

44 ASEAN Economic Community (AEC) Economic integration via AEC by 2015 Free labor mobility Removal of cross-border import duties Capital market linkages Interstate transport, including several Myanmar-Thailand links, to improve Challenges integrating the six majors with the underdeveloped ASEAN 4 (CLMV)

45 Summary & Recommendations Photo: Sule Pagoda at Night by Damir Sagolj, Myanmar/G0000foxNHfmepcI/I0000XFrB_yZk9Aw

46 Summary Opportunities Huge long-term potential for industrial relocation Unskilled but literate workforce eager for jobs Unparalleled strategic location Challenges Infrastructure challenges won t be solved overnight Labor unrest likely to continue Political stability not yet certain Expectations are high (and the world is watching)

47 Recommendations 1. Begin monitoring today. Daily media monitoring, rolling coverage of new players, monthly regulatory assessments, quarterly infrastructure updates. 2. Don t settle for anything but on-the-ground intelligence. What s percolating on the streets today that your team should know about? What are your key stakeholders saying or thinking? Which factories are adding capacity? Which industrial zones are easiest to do business? 3. Begin considering now how to tailor your market entry strategy. Begin mapping out the process for your market entry that anticipates the uniqueness of Myanmar.

48 Q & A t/ e/ rlabbee@cascadeasia.com w/ cascadeasia.com 1. Q: How long does it take for a ship from Myanmar to reach the United States? A: Approximately days, typically connecting in Singapore 2. Q: What is the flight schedule to Myanmar? A: Daily: Bangkok, Doha, Kuala Lumpur, Singapore, Seoul, Tokyo; at least 3x weekly: Hanoi, Hong Kong, HCMC, Taipei; 2x weekly: Phnom Penh