16 Aug 2016

Myanmar Rising: Industrial and Special Economic Zones

Differences in logistics and infrastructure support, as well as varying investment benefits,
are prime considerations for factory locations.

Myanmar, a mid-sized ASEAN country with a relatively good supply of low-cost workers
and improving business conditions, has drawn increasing interest from foreign investors
looking to relocate their labour-intensive production activities from Southern China.

When choosing a location for their production plants in Myanmar, Hong Kong companies
engaged in labour-intensive industries such as garment or footwear manufacturing may
consider setting up their factories inside one of the countrys industrial zones or Special
Economic Zones (SEZs) in order to benefit from the specific investment incentives offered
by the Myanmar government, along with other advantages such as better infrastructure
and logistics support.

This article, through assessing the conditions of two popular industrial zones and three
SEZs currently being developed in Myanmar, attempts to assess the relative suitability of
these locations for Hong Kong manufacturers over the short-to-medium term.

Manufacturing Clustered in Yangon-based Industrial Zones

To encourage private sector participation in manufacturing and foster industrial clusters,

industrial zones were first introduced by the Myanmar authorities in the 1990s, creating a
base of manufacturing operations in and around the country's major cities.

The number of industrial zones has grown only gradually over the years. At present more
than 20 industrial zones are established in Yangon, as the former capital has more
developed transport and infrastructure facilities than other areas, including an
international airport that has been recently upgraded and a cluster of seaports that
handle the bulk of the countrys merchandise trade. As a result, most of Myanmar's
labour-intensive, export-oriented industries are concentrated in this area to this day.

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Myanmar Rising: Industrial and Special Economic Zones

Many of these industrial zones are specifically targeted at privately owned manufacturing
enterprises. Daily management of each industrial zone is undertaken by its own Industrial
Zone Committee, usually comprising investors, government officials and/or
representatives from related public agencies.

While management practices and service standards in each industrial zone differ, many of
them including South Dagon and Hlaing Tar Yar have adopted measures to upgrade
their utilities. This includes building electrical substations, and installing back-up
generators and waste water treatment facilities.

Road conditions in and around industrial zones in Yangon vary from one place to another.
Generally, paved main roads are in good condition and wide enough for heavy trucks,
including container trucks, to drive along. However, some sections of road leading into
individual factories within industrial parks are in poor condition. Road conditions can be
particularly bad during the monsoon seasons, as the drainage is notably poor. A lack of
street lights, coupled with potholes created by heavy trucks, also complicates light
driving in many places.

The port of Yangon, a downtown river port situated some 20-30 km from Yangon's
industrial zones, now handles about 90% of Myanmars external trade. Given the rather
shallow draft of the rivers surrounding central Yangon, the port is not deep enough to
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receive large container ships. Frequent cargo ship congestion around the port areas is
reported as a result of ongoing growth in trade volumes, poor port infrastructure and
inefficient cargo handling processes.

As an alternative, some manufacturers have become more inclined to use the Myanmar
International Terminal Thilawa (MITT), a multi-purpose container terminal run by Hong
Kongs Hutchison Port Holdings that is located about 25 km south of Yangons city centre.
Though faced with a locational disadvantage, the MITT offers services that comply with
international standards and is capable of handling bigger container ships exceeding 1,000
TEUs at high tides.

Factories in industrial zones can operate under a land leasing agreement sought with
individual management committees. In Myanmar, land purchase is basically restricted to
local investors, although foreign-local joint ventures may lease an office or commercial
building.

In recent years, there has been a significant surge in land prices as land plots have been
bought and held in anticipation of a big influx of foreign capital attracted by government
reforms and the cost spiral evident in China. In an effort to tackle the problem of idle
industrial land, the Yangon regional government formed an inspection team to conduct
field surveillance checks of the citys industrial zones in May 2016. It is believed that the
regional government will announce new measures to free up hundreds of vacant plots.

Mingaladon - An Industrial Park that Meets International Standards

The Mingaladon Industrial Park (MIP), located

about 20 km north of Yangon city centre and 24
km from Yangon Port, was developed in the late
1990s under a joint venture between the
Myanmar Government and a privately owned
Japanese company in a bid to attract foreign
investment. The MIP was the first industrial park
in the country considered to have met
international standards in terms of its utility and
transport infrastructure.

Access to the MIP will be further enhanced by the

Yangon Urban Expressway Development project A paved concrete road inside the Mingaladon
being developed under a public private Industrial Park
partnership (PPP). This expressway project is
worth US$620 million and its first phase covers a four-lane road of 20.5 km connecting
Yaykyaw Junction on the Bogyoke Aung San Road to the MIP. The Myanmar Government
will contribute 20% of total project costs via official development assistance, with the
construction undertaken by a Korea-Myanmar joint venture between Korean construction
companies Lotte E&C and Halla Corporation and Myanmars Capital Diamond Star Group.

On its recent visit, HKTDC Research found that the roads in and around the MIP are very
well-maintained compared to those in and near other industrial zones in Yangon. The
park hosts many FDI manufacturers, some of which employ more than 1,000 workers.
This creates a clear distinction between the MIP and other industrial zones in Yangon and
Mandalay, where manufacturers are invariably engaged in smaller operations, employing
at best a few hundred workers.

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Myanmar Rising: Industrial and Special Economic Zones

Owing to its favourable location and facilities, all

plots in the MIP are leased out. Owing to long
lease arrangements, there have been instances of
companies running into problems and
approaching the park management for a
repurchase arrangement, leading to termination
of lease agreements. However, the MIP has
become more flexible in recent years with regard
to sub-leasing. This gives tenants greater leeway
in organising their factory activities and
controlling cash flows.

While the MIP hosts many big FDI manufacturers,

A factory in the Mingaladon Industrial Park
its management committee stressed that it also
welcomes SME manufacturers. Currently, tenants operate in industrial sectors including
textiles and garments, foodstuffs, electric and electronic products, machinery and parts,
plastics and leather, and pharmaceutical.

As of January 2016, there were 30 tenants in the MIP, of which 11 were Hong Kong
companies[1] engaged in the manufacturing of garment (six tenants), electroplating
(two), handbags (one), optical lenses (one) and watch components (one). Other major
tenants include companies from Japan, mainland China and Korea.

Hlaing Thar Yar - The Largest Industrial Zone in Yangon

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Myanmar Rising: Industrial and Special Economic Zones

Established in 1995, the Hlaing Thar Yar

Industrial City is the largest industrial zone in
Yangon with a land area of about 567 hectares.

As of January 2016, there were over 650

factories operating in this industrial zone, with
the top five major industries listed as grain (221
factories), toiletries (127), food-stuffs (83),
garments (74) and construction materials (28).
There were about 50 wholly foreign-owned
operations in the zone, with China and Korea,
each with over 20 companies, topping the list.
A Chinese-invested shoe factory in Hlaing Thar
Similar to the MIP, virtually all land plots in the Yar Industrial Zone
Hlaing Thar Yar Industrial City are developed,
although some of the factories are either vacant or under refurbishment in anticipation of
new tenants. Hong Kong manufacturers interested in testing the water in Yangon may
consider renting factories in Hlaing Thar Yar at a basic rate of roughly US$3-3.5/m,
according to industrial sources. However, the availability of other industrial zones within
Yangon with vacant factories to let gives Hong Kong companies plenty of choice.

SEZs Offer Better Investment Incentives to Foreign Investors

In the 1990s, when the development of industrial zones was in its initial stages, the focus
was primarily on grooming domestic manufacturers to serve local markets, with limited
though given to attracting FDI.

Most foreign investors currently rely on the foreign investment framework under the
2012 Myanmar Foreign Investment Law (FIL). In 2014, as an alternative to investing
under the FIL, the Myanmar Special Economic Zone Law (SEZ Law) was established to
facilitate investment in three SEZs that are currently under development: the Thilawa
SEZ, the Dawei SEZ, and the Kyaukphyu SEZ. It should be noted that Dawei had its own
SEZ law passed in 2011.

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Myanmar Rising: Industrial and Special Economic Zones

The SEZ Law provides a legal framework that offers more generous investment incentives
than those under the FIL, including exemptions and relief on import tax and commercial
tax. Existing manufacturers in these zones do not benefit fully from the financial
incentives being offered to foreign investors.

From an administrative perspective, applications for investment permits within each SEZ
will be approved by their own management committees. This arrangement is different
from that which operates under the FIL, where investors need to get an investment
permit from the Myanmar Investment Commission (MIC) through a centralised system.
The relatively decentralised application system adopted by the SEZs is intended to
shorten the review process and create a more business-friendly environment for foreign
investors.

Three SEZs still in Development Stage

The Thilawa SEZ, with a total development area of 2,400 hectares and located within an
hours drive from downtown Yangon, is currently the most advanced project of the three
SEZs. Phase 1 of its 400-hectare Zone A became operational in September 2015. At
present, the majority of companies who have moved in are from Singapore, Japan, the
Chinese mainland, Thailand, Hong Kong and Taiwan, and are engaged in light
manufacturing across garments, food and beverage and construction materials. The

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Suzuki Motor Corporation is also said to have agreed to build a new plant in the Thilawa
SEZ that will start production in 2018.

While the Thilawa SEZ benefits from its proximity to Yangon's urban centre, the
attractiveness of both the Dawei and Kyaukphyu SEZs will be boosted by having
international deep sea ports on-site. The Dawei SEZ, located some 300km west of
Bangkok, will serve as a convenient base for cross-border trade with Thailand, while its
deep sea port will also open a new gateway to the Malacca Strait from western Myanmar.

Despite some delays, the Dawei SEZ's initial phase development was launched in 2015.
In June 2016, the governments of both Myanmar and Thailand reaffirmed their
commitments to pushing forward the zone's implementation.

Located in northwest Myanmar, Kyaukphyu already has operational oil and gas pipelines
running between the region and Chinas Yunnan Province. However, the Kyaukphyu SEZ
project is still in an early stage of development, against a backdrop of environmental and
land ownership controversies and ethno-religious tensions. In a meeting with the
Kyaukphyu SEZ Management Committee in Yangon, however, HKTDC Research learned
that plans, including provision for industrial parks for light manufacturing, are advancing.

With a consortium led by Chinas CITIC group selected in late December 2015 as the lead
developer to construct the Kyaukphyu SEZs deep sea port and industrial park, project
development is expected to accelerate, although the entire SEZ will not be completed
before 2038.

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Industrial Zones or SEZs? Balancing the Financial Incentives and Business Risks

As it stands, SEZs in Myanmar offer more favourable financial incentives to investors than
the country's industrial parks. However, this is only one factor to be considered by FDI
manufacturers, especially those looking to set up production plants in Myanmar in the
near future.

With the first phase of Thilawa SEZ only launched in September 2015 and the other two
SEZs still in their early development stages, the foreign investment regime outlined by
the country's SEZ Law remains untested. In the World Banks 2016 Doing Business
Report, Myanmars ranking on contract enforcement was 187th out of 189 countries.
Uncertainty in the effectiveness of handling legal disputes inside SEZs may prompt
foreign investors to consider investing instead in one of country's long-established
industrial zones, where procedures that work are already in place.

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Myanmar Rising: Industrial and Special Economic Zones

Once fully developed, the three SEZs are expected to provide better facilities and support
than the industrial zones, some of whose infrastructure is rather dated. In the meantime,
however, relatively well-established industrial zones in Yangon such as the MIP and
Hlaing Thar Yar which boast reasonable utility and transport infrastructure quality
may present the most practical options for manufacturers from Hong Kong.

[1] The 11 Hong Kong companies were: Myanmar Tah Hsin Industrial Co Ltd, Myanmar
Asia Optical International Co Ltd, Sunflower Lace Myanmar Crops Co Ltd, Linda Fashion
(Myanmar) Co Ltd, Wedtex Fashion (Myanmar) Co Ltd, EMC Manufacturing Co Ltd,
Sinobest Jewellery Co Ltd, Designtime Myanmar Co Ltd, Hua Tai Enterprise Co Ltd,
William (Myanmar) Co Ltd and JCK (Myanmar) International Co Ltd.

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