Footwear Sourcing in Myanmar: Opportunities & Risks

CascadeAsia

Photo: ”Sunrise Over Bagan" by Dima Chatrov, http://yourshot.nationalgeographic.com/photos/1543168/

Ryker Labbee Senior Analyst, Myanmar

About Cascade Asia

Photo: "Mahamuni Buddha temple in Mandalay" by Paul Arps, http://flic.kr/p/iWjD4r

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

About Cascade Asia

Photo: “Shwedagon at Dusk” by Ryker Labbee, Cascade Asia file photo

Early Warning System

Photo: http://www.rawstory.com/rs/2013/08/07/californians-

angered-and-startled-by-first-mobile-amber-alert/

Over 90% of our analysts have advanced degrees.

We speak 10 Southeast Asian languages.

66% of our clients are from the private sector.

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

Cascade Asia in Myanmar

What Does Tomorrow Hold?

Footwear Manufacturing in Asia Today …and Tomorrow?

Economic & Political Overview

Photo: “Irrawaddy Near Inwa” by Ryker Labbee, Cascade Asia file photo

Macroeconomic Outlook

Source: IMF, Cascade Asia

5.3%

5.9%

6.4% 6.8% 6.9%

2010 2011 2012 2013 e 2014 f

Gross Domestic Product 2010-2014

750

800

850

900

950

1000

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0

1800.0

2000.0

Janurary February March April May June July August September October November

Myanmar Imports and Exports 2013 (US$m)

Exports

Imports

USD/MMK

Current Macroeconomic Backdrop

Myanmar’s Export Economy

China, 14193.395

Thailand, 9984.012

U.K., 6458.979

S. Korea, 3055.518

Singapore, 3044.678

Malaysia, 2437.866

Vietnam, 1625.861

France, 511.186

India, 474.36

Japan, 277.282

Netherlands, 249.136

U.S.A., 243.565

Indonesia, 241.497

Philippines, 146.667

Others, 508.637

Cumulative FDI into Myanmar from 1989 to 2013 (US$m)

Foreign Direct Investment

Source: Myanmar Investment Commission

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

Business Climate in Myanmar

Source: WEF, WB, IFC, WJP, TI

Global

Compet

itive

ness I

ndex, 2

013-2

014 (1

48)

Ease

of D

oing B

usiness

, 2014

(189

)

Rule o

f Law, 2

013 (9

7)

Logi

stics

Perfo

rman

ce In

dex, 2

012 (1

55)

Corruptio

n Per

eption In

dex, 2

012 (1

74)

AVERAGE GLO

BAL RANK

Singapore 2 1 11 1 5 4

Malaysia 24 6 46 29 54 32

Brunei 26 59 - - 46 28

Thailand 37 18 54 38 88 47

Indonesia 38 120 55 59 118 78

Philippines 59 108 64 52 105 78

Vientam 70 99 66 53 123 82

Lao PDR 81 159 - 109 160 127

Cambodia 88 137 83 101 157 113

Myanmar 139 182 - 129 172 156

Global

Compet

itive

ness I

ndex, 2

013-2

014 (1

48)

Ease

of D

oing B

usiness

, 2014

(189

)

Rule o

f Law, 2

013 (9

7)

Logi

stics

Perfo

rman

ce In

dex, 2

012 (1

55)

Custom

s

Infra

stru

cture

Inte

rnat

ional

ship

men

ts

Logi

stics

qua

lity

and co

mpete

nce

Trac

king

and tr

acin

g

Tim

elin

ess

Corruptio

n Per

eption In

dex, 2

012 (1

74)

AVERAGE GLO

BAL RANK

Singapore 2 1 11 1 1 2 2 6 6 1 5 4

Malaysia 24 6 46 29 29 27 26 30 28 28 54 32

Brunei 26 59 - - - - - - - - 46 28

Thailand 37 18 54 38 42 44 35 49 45 39 88 47

Indonesia 38 120 55 59 75 85 57 62 52 42 118 78

Philippines 59 108 64 52 67 62 56 39 39 69 105 78

Vientam 70 99 66 53 63 72 39 82 47 38 123 82

Lao PDR 81 159 - 109 93 106 123 104 111 118 160 127

Cambodia 88 137 83 101 108 128 101 103 78 104 157 113

Myanmar 139 182 - 129 122 133 116 110 129 140 172 156

Why Source from Myanmar?

Photo: “Intha Rower on Inle” by Ryker Labbee, Cascade Asia file photo

Ideal Demography

95%

literacy rate 46

million

Photo: Soe Zeya Tun/Reuters, http://blogs.wsj.com/photojournal/2009/08/04/pictures-of-the-day-233/

Ideal Demography

Median Age: 28

Source: CIA World Factbook

Competitive Wages

$25-$80* month

Photo: "Myanmar Clothing & Textiles,” http://www.myanmarbusinessconsultants.com/clothing-and-textiles

Competitive Wages

538

403

344

325

286

209

80

32

Beijing

Mumbai

Kuala Lumpur

Manila

Bangkok

Jakarta

Phnom Penh

Yangon

Monthly Base Salary (Factory Workers)

58

36

31

27

27

27

24

23

19

16

6

4

3

0

Indonesia

Thailand

Bangladesh

Philippines

South Korea

China

Malaysia

Vietnam

Cambodia

India

Hong Kong

Japan

Singapore

Myanmar

Firing Costs (in Weeks of Salary)

Source: World Economic Forum, Wall Street Journal, Cascade Asia

Proximity

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

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

Developed Port Capacity

What Challenges to Expect?

Photo: “Rail Activity Near Yangon" by Ryker Labbee, Cascade Asia file photo

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)

Labor Market Inefficiencies

60

94

28

120

17

31

68 71

15

93

32

44 49

106

39

141

29

39

131

23

41

0

89

148

64 69

81

111

15

95

Cooperation labor-employer relations

Flexibility of wagedetermination

Hiring and firingpractices

Redundancy costs Pay and productivity Country capacity toretain talent

Labor Market Efficiency, 2013 (rank/148) China (34) Cambodia (27) Indonesia (103) Myanmar (98) Vietnam (56)

Source: World Economic Forum

Low Productivity

$3.20

$5.30

$17.70

$18.30

$25.40

Myanmar

Vietnam

China

Thailand

Malaysia

Average Daily Wage Cost for a Factory Worker, 2010 ($ Per Day)

1.5

2.2

7.7

9

11

Annual Labor Productivity in the Aggregate Economy, 2010

(2010 $ Thousand per Worker)

Source: McKinsey Global Institute

A Closer Look at Productivity

Vacant 20%

Storage 30%

Operations 50%

Factory Space Utilization (% of space by activity)

~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

20

8

Average of Asiancomparison

countries

Myanmar

Labor Hours in Factories (number of hours/day)

2-3 shifts of 8 hrs each

Single shift

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

Primitive Machinery, Technology

Photo: "Design Concentration" by abrinsky, http://flic.kr/p/bQZX5a, cropped from original

Poor Electricity Infrastructure

Source: Myanmar Energy Sector Initial Assessment, Asian Development Bank (2012)

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

Transportation Infrastructure

Photo: “On the Road to Mandalay” by Ryker Labbee, Cascade Asia file photo

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.

Labor Standards & Compliance

Trade Unions

600 since

2011

Photo: "Workers Strike from the Myanmar Sunny Clothing Factory" by Mizzima, http://bit.ly/1i0k6Gi

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

Political & Economic Stability

Photo: Shwe Mann in Parliament, Reuters

Industry Snapshot Photo: “Footwear Manufacturing in Myanmar” by Neena Pathak, PRI: http://www.pri.org/stories/2013-09-16/labor-laws-

strengthened-myanmar-workers-still-struggle

Source: Institute of Developing Economies, Japan External Trade Organization, Trade Nosis

Footwear Exports from Myanmar

Myanmar FOB Exports Footwear, gaiters and the like; parts of such articles

0

20

40

60

80

100

120

140

2007 2008 2009 2010 2011 2012

US$

in m

illio

ns

Others

Thailand

South Korea

Germany

EU (15 countries)

Japan

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

Industrial Zones in Yangon

Operating Cost Comparison

Source: Various government and industry park sources

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

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

What’s on the Horizon?

Photo: “Bagan Balloons” by Alex Schwab, http://flic.kr/p/bC7iVQ

Source: http://bit.ly/16bMIES

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

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

Labor Unrest & Uncertainty

Photo: Laid-off Workers Protest in Yangon by JPAING, The Irrawaddy

(http://www.irrawaddy.org/wp-content/uploads/2013/11/workers.jpg)

Myanmar International

Terminals Thilawa

Thilawa Special Economic Zone

Ambitious target to be operational by 2015

2,400 hectares

Light industry, assembly industry; thermal plant

Connected to MITT

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)

Summary & Recommendations Photo: Sule Pagoda at Night by Damir Sagolj, http://damir.photoshelter.com/gallery-image/Heavy-Going-in-

Myanmar/G0000foxNHfmepcI/I0000XFrB_yZk9Aw

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)

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.

Q & A

t/ 1.360.358.3094

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 24–27 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