Don’t Go Into Myanmar Only For Cheap Labor Costs
Look carefully into the details, including generators and other costs
Look carefully into the details, including generators and other costs
Jiji Research Institute
As of around last year, Japanese firms have suddenly begun to pour into Myanmar, drawn by the prospect of cheap labor costs. This spring, however, a string of foreign firms have been hit by wage strikes. Myanmar also poses many challenges, including power shortages and a lack of industrial parks. Japanese companies thinking about setting up in Myanmar should avoid being swept up in the prevailing mood and instead consider the situation carefully.
In late September, I toured Myanmar (which has a population of around 62 million) with a mission from the Japan Chamber of Commerce and Industry. One senior executive from a Japanese textile manufacturer which we visited in the outskirts of Yangon confided that a number of companies had been hit by wage strikes that spring, with his company too raising wages twice this year to 20 percent higher than in 2011. I had also heard that Myanmar suffered from a lot of brownouts, and indeed during my time in the country, there were numerous albeit brief brownouts at the hotels at which I stayed, switching the air conditioner off. Companies operating in Myanmar cannot get by without their own generators, so the cost of establishing and operating these needs to be factored in. Given that wages will also certainly continue to rise, the tour left me with the impression that companies which set up in Myanmar solely for wages “only 20 percent of those in China and Thailand” are likely to fail.
Two wage hikes boost wages by 20 percent
Explaining why the above Japanese textile manufacturer had been forced to raise wages twice this year, the senior executive said, “We revise wages over February and March every year, with a 10 percent annual hike the standard for the past several years. This year too, we raised wages 10 percent, but it wasn’t enough. As of April this year, Myanmar public servants have been paid 30,000 kyat (around 3,000 yen) as a monthly living allowance. Because that allowance has effectively doubled public servants’ monthly pay packets, not only our company but also other companies from Japan, Korea and elsewhere experienced a succession of wage strikes in April and May. In the end, we decided to lift wages by an additional 10 percent.” He added wryly that the shift toward democratization had workers convinced that wage hike demands would always be met. Like China and Vietnam, Myanmar too could see frequent strikes in the years ahead as workers seek higher wages.
Serious power shortages
Another major challenge for Myanmar is electricity. This year from late March through to early July, many companies struggled with severe power shortages. Myanmar relies on hydropower for around 70 percent of its electricity. This year there was less rain than usual, leaving the country with a serious power shortfall.
Many senior staff whom I met at Japanese firms in Myanmar bemoaned the rise in hotel charges and rents for offices and serviced apartment. The surge in hotel charges in Yangon, the biggest city in Myanmar, has been particularly steep. Since last year when the country’s military government was replaced by civil administration, foreign businesspeople and tourists have been flooding into Myanmar, with hotels unable to keep up with demand. An executive at a Japanese travel agency identified a serious hotel shortage in recent months, making it difficult to get a room in Yangon. “Where a room once cost around US$75 per night last year, this has recently tripled to around US$200,” he said.
Office rents higher than in Singapore
The sudden spike in office demand has also seen Yangon monthly office rents “shoot up to around US$70 per square meter,” according to an executive at a Japanese trading company. “Some offices are more expensive than in Singapore,” he says, adding that “the rent for the serviced apartments used by Japanese staff stationed in Myanmar is now around US$3,500 per month for 80 square meters.” Not only Japanese companies already in Yangon but also those thinking about heading there in the future will find the explosion in office and serviced apartment rents to be a real headache.
Most Japanese executives stationed locally seem to expect hotel charges and office and serviced apartment rents in Yangon to continue rising for the next two or three years. This is because the Myanmar government is calling on construction majors to prioritize the construction of hotels, sports arenas and other venues in the capital Naypyidaw ahead of the Southeast Asian Games—the Southeast Asian equivalent of the Olympics—being held there next year. When I visited Naypyidaw, there was a hotel construction rush underway. By contrast, there wasn’t as much hotel and office construction in Yangon as I had expected.
Mingaladon Industrial Park sites sell out
I also toured the Mingaladon Industrial Park in the outskirts of Yangon, said to be the only place in Myanmar with full infrastructure. Mitsui & Co. took part in the construction of the park, which opened its doors in 1998. However, factors such as the Asian financial crisis and European and US sanctions kept tenant numbers down, and Mitsui eventually pulled out in 2006, with the park now managed and operated by a Singaporean company and the Myanmar government. The recent popularity of Myanmar has led to all 41 sites within the industrial park selling out. Five Japanese firms, including textile manufacturers and Ajinomoto, have apparently signed contracts for their sites. Ajinomoto has yet to launch operations but is expected to have a factory up and running in the near future.
There are three Japanese textile manufacturers in Mingaladon. The one which I visited on my trip makes men’s office and casual shirts, as well as shirts for women and students. All three million shirts it produces every year are exported to Japan, where they are bought by big supermarket chains like Ito Yokado as well as men’s stores like Aoki, Konaka and Taka-Q. The factory employs 1,200 workers, the vast majority—99 percent—of whom are women. These women are also young, with an average age of 24. The factory operates every day except Sunday, and work days are 10 hours. The company takes its workers to and from the factory every day by bus.
Wages are US$92 per month, including overtime. Wages for those employees who have university degrees, speak Japanese and English, and can operate computers are US$140-150 per month, about 1.5 times higher than those of ordinary staff. Accountants are paid US$600 per month. According to an executive at the company, over the four months between March and June, power was out for half the day almost every day. The company installed its own generators to take care of the problem, but that was expensive. In addition, the firm apparently loses 50 to 100 workers every month, exceeding the national job-leaving rate of around five percent.
Thilawa Industrial Estate tenancy 2015 at earliest
According to the Myanmar government, the country currently has 18 industrial parks. Dawei, which lies on the Indian Ocean around 600 kilometers south of Yangon, has also already been designated as a special economic zone. Thilawa, located around 23 kilometers out from the center of Yangon, and Kyaukpyu on the Indian Ocean coast up north are expected to receive the same designation.
According to one executive stationed at a trading company in Myanmar, there are infrastructure shortfalls at most of these 18 industrial parks, and companies need to check carefully whether or not infrastructure is properly in place at their planned location. Japanese government and private sector parties are expected to play a central role in the development of the Thilawa industrial estate, so many of the Japanese companies considering moving into Myanmar may well end up there. However, it will be 2015 at the earliest before companies can move in, and if the infrastructure development takes longer than planned, this could extend out as far as 2016 or 2017.
Mingaladon Industrial Park, which does already have infrastructure in place, apparently has no plans for further expansion. This leaves almost no industrial estates with fully developed infrastructure available for manufacturers considering establishing operations in Myanmar. With the development of infrastructure such as roads, bridges, ports and power stations likely to take priority, it therefore seems likely that Japanese firms involved in such infrastructure projects will continue to move into Myanmar for the next several years. However, it may be 2015 and beyond before Japanese manufacturers start to build factories in Myanmar and launch full-scale production operations.
Every month, 500-600 executives from Japanese companies visit the Yangon office of the Japan External Trade Organization (JETRO) in search of local information, keeping the staff extremely busy, and Myanmar’s popularity continues to soar as part of ‘China + 1’ and ‘Thailand + 1’ strategies. At the same time, Japanese companies thinking about setting up in Myanmar should avoid being swept up in the prevailing mood and consider the situation carefully.
(original article : Japanese)