European firms face Myanmar catch-up

By Chris Stewart 

The European Union on Monday suspended most sanctions against Myanmar, paving the way for a surge of overseas investment in one of the world's poorest yet most resource-rich countries. Western businesses are seen as beneficiaries of the end to sanctions, yet Asian, notably Chinese, interests may be the biggest gainers. The United States has yet to ease most of its sanctions. 

The EU decision, which removes sanctions targeting more than 800 companies and nearly 500 people, is in response to a rash of reforms by President Thein Sein that have given the former general credence as a reformer since he took office in March 2011, rather than a puppet of generals of the former military regime. 

China is already Myanmar's biggest investor, having poured nearly US$14 billion into the country so far, from $1 billion in 2008 and amounting to 35% of total investments from more than 30 countries, according to government statistics. Most of the investments involve hydropower energy, oil and gas and mining, with the latest $4 billion being made in the power energy sector. [1] 

That still leaves plenty of scope for Western companies willing to risk their money in a country where investment law has been little changed in 24 years, per capita income at $715 a year is half that of neighboring Bangladesh and the lowest in Southeast Asia, and three-quarters of the 48 million mostly rural population lack electricity. [2] (The government announced nationwide rolling blackouts on April 2, the day after a landslide by-election victories for pro-democracy leader Aung San Suu Kyi and 42 other members of her National League for Democracy.) 

Even so, Western newcomers will face stiff competition from Chinese and other Asian interests. While British Prime Minister David Cameron was obliged to describe 10 business leaders accompanying him to Myanmar this month as "tourists", Thein Sein could openly drum up investment this past weekend when he attended a summit in Tokyo with leaders of Japan, Thailand, Cambodia, Vietnam and Laos. 

"We hope that Japan's famous and successful firms ... will support us" to help shrink the economic gap between the area's rich and less well-developed nations, he told a luncheon organized by the Keidanren, Japan's biggest business lobby. 

United States companies still have to hold back before diving into the fray, although the dire strait of Myanmar's infrastructure should mean rich pickings for the likes of Caterpillar, the world’s largest construction and mining-equipment maker, when Washington removes its own restraints. Caterpillar authorized dealer Myanmar Tractors Ltd, a unit of its Nepalese dealer, has already grown from a seven-employee start-up in 1995 to a staff of 350. Businessmen affiliated with Caterpillar have met government officials to discuss sales of engines and other heavy machinery, according to the state newspaper, New Light of Myanmar. [3] 

Still, Caterpillar and European counterparts will have their work cut out to catch up with leading Chinese construction equipment makers such as Sany Heavy Industry, Chansha Zoomlion and others whose broad range of products will be in heavy demand when holes have to be dug and the concrete starts to pour for the airports, roads, factories and hotels that will sprout up in a sanctions-free Myanmar. They also have ready expertise close to hand to train operators and patch up machinery. 

Sany, owned by Liang Wengen, in 2011 rated China's richest man at an estimated $11 billion, last year won $20 million worth of equipment orders in one deal alone from Myanmar's largest conglomerate, Asia World, and China Harbor Engineering, for use in building the international airport at Myanmar's new capital, Naypyidaw. [4] Asia World's boss, Stephen Law (aka Tun Myint Naing) is among those who were subject to EU sanctions. 

Zoomlion, which claims to be China’s biggest cranemaker, stepped up its presence in Myanmar last November with the launch of a range of its products in Yangon. The two companies are well placed to meet any new demand - between them they accounted for about half of market value of China's concrete machinery industry - alone worth $17 billion - trailed by Xuzhou Construction Machinery Group (XCMG), and Shantui Construction Machinery, according to ChinaCrane.net. 

Recent purchases by the Chinese companies will limit competition from potential European outfits who might have eyed a stake in Myanmar's revival. XCMG this month agreed to buy a major stake in Schwing, Germany's second-largest concrete pump maker. Once XCMG's acquisition of Schwing is completed, the three largest concrete pump manufacturers in Europe will have all been acquired by Chinese companies, China Daily reported. 

In January, Sany paid $475 million for Putzmeister Holding, said in the industry to be the world-leader in specialist concrete pumps, in the largest Chinese-German deal to date. Sany this year has also set up a $143 million venture with Austria's Palfinger AG, the world’s biggest maker of truck-mounted cranes, while Zoomlion is already taking advantage of its 2008 purchase of Italy's CIFA, Europe's second-largest formwork and concrete handling specialist. 

Chinese firms are also ahead of the game in mining in Myanmar. While the likes of Canada's Ivanhoe Mines have left the country - it has said it pulled out of its 50% interest in the S&K mine at the Monywa Copper project about 100 kilometers west of Mandalay early in 2007 - China North Industries Corp, or Norinco, said in 2010 it would spend just short of $1 billion to develop the deposit, The Myanmar Times reported. Last August, Norinco International Corp said it had a $700 million contract to supply purchasing and construction services to the same project. [5] 

North of Mandalay, China Nonferrous Metal Mining Co and Taiyuan Iron and Steel (Group), China's largest stainless steel producer, are developing the Tagaung Taung nickel mine. The $800 million-plus mine, the biggest cooperative mining project with China, started operations last April. Delays to the project since 2004 have seen Myanmar increase its share from 25% to 50% by 2008, even as costs increased from $600 million. [6] 

Plenty more resources are awaiting exploitation, but Chinese outfits have gained much experience over the years in what is required to make a competitive bid with Myanmar generals and other local interests. 

Away from the heavy lifting, Chinese companies look strong enough to see off foreign challenges. Fridges, air-conditioners and microwaves are still a relative rarity in Myanmar and the country looks an open market for China-based whites-goods maker Haier, founded as recently as 1984 and now claiming to be the world’s No 1 consumer appliance brand. 

If China turns out to be the big winner in a growing Myanmar market place, companies from other Asian countries also aim to thrive there. Malaysian air-conditioner maker Acson is already entrenched in Yangon, Mandalay and elsewhere in Myanmar. 

The poor state of Myanmar's education system for the largely rural population (some 75% is involved in agriculture) means a low-skilled workforce and under-funded technical and academic institutions - New Light of Myanmar last year highlighted the donation of colored paper to one school; Education Minister Mya Aye told MPs in February that there was no plan for universities to have their own web sites but he confirmed that all universities have now been equipped with Internet access. 

Even so, Japan's NTT Data, the world's eighth-largest software company with $14 billion in annual revenues, said on Thursday it plans to set up a subsidiary in Yangon in September for development of computer systems, with as many as 500 employees within five years. 

Low education standards are, however, fine for factories making low-end goods gobbled up by the likes of WalMart, many of them run by manufacturers in China and elsewhere in Asia looking for lower-cost production locations. 

Thailand's clothes makers are racing to take set up shop in neighboring Myanmar, where labor costs are one-third of those at home. Up to 10 garment manufacturers, including Thailand's six largest, plan to set up plants around Yangon this year at an average cost of $10 million, according to the Thai Garment Manufacturers Association. The new plants will be larger than their other factories in the region as Myanmar "is the highest-potential destination for investment", The Nation reported last month, citing association president Sukij Kongpiyacharn. 

The EU sanctions had removed Myanmar from the Europe's General System of Preferences "GSP", which exempted garments made in the country from import duties. 

A return to the GSP could create up to 25,000 new jobs this year in the textile industry alone in 2012, Myanmar's Garment Manufacturers Association chairman Myint Soe told Associated Press. A further easing of sanctions (they have so far been relaxed only slightly) by the United States, which used to buy 75% of Myanmar's textile products, could prove even more beneficial, AP reported. 

US hotel groups aiming to target Myanmar's tourist and business accommodation sector will have to contend with local big business outfits, such as Max Myanmar Group, as well as Asian leaders. Max Myanmar is run by the well-placed and hitherto sanctioned Zaw Zaw, who accompanied former leader Than Shwe on his state visit to China in September 2010. 

Zaw Zaw, who owns a quarter of Dawei Development, a planned $8.6 billion deep-sea port and industrial zone in the southeast of the country, plans "to shift his strategy" to banking, hotels and tourism, Reuters reported this month. Construction is a "big headache", he said. "We have to look at which business is good for the future, which business we can partner with foreign companies." [7] 

Incomers will also have to tie up with the government and/or compete with the well-established outfits such as Singapore's Sedona Hotels, a unit of Keppel Corp, the world's biggest oil-rig builder, and hotels run by Malaysian Robert Kuok's Shangri La and Traders Hotel chains. 

Less classy hotel chains from around China and the rest of Asia are also familiar with the Myanmar market. Singapore last year was leading foreign investment in Myanmar's hotel sector with $598 million, followed by Thailand ($263 million) and Japan ($183 million), according to Xinhua. 

When it comes to food and beverage without accommodation, Western multi-nationals will have to compete with the likes of Malaysian noodle and snacks maker Mamee Double Decker, established in Myanmar since the 1990s and used to seeing off Western rivals. While holding 48% of the potato product market in Malaysia, it claims to have taken over from Mr Pringle products in stores as far afield as Australia. 

Still, early arrivals are not guaranteed an easy ride. A unit of Italian-Thai Development, Thailand’s biggest construction company, last year received a 30-year concession to export coal from a new mine in the northeast of the country at Monghsat, near the Thai border. [8] But the parent company has run into problems in the Dawei development, of which it is a lead company. The government recently scrapped Italian-Thai's original plan to use coal for a proposed 4,000 megawatt power plant that would drive new factories in the area while also exporting power to Thailand. 

Myanmar's new civilian government plans to offer eight-year tax exemptions to foreign investors, Minister for Industry U Soe Thein told reporters in Davos in February. His claim that "our people know the English language, it is easy to communicate", may also help attract businessmen, though newcomers might find "our people" applies to only a few, albeit essential, counterparts - that is, those just released from EU sanctions. 

Eight years ago, under Senior General Than Shwe, at the time head of the ruling junta, all senior army officers seeking promotion had to pass examinations in English - redundant when shooting protesters or kicking peasants off the land but the lingua franca of the international business world. [9] 

One restraint on commerce Soe Thein and his colleagues will find harder to fix is laws in some countries, including the United States, that prohibit bribing officials. Myanmar rates as the world's third-most corrupt nation on Transparency International's Corruption Perceptions Index of 183 countries, rating 1.5 out of 10 (10 being least corrupt and 0 being highly corrupt) as of 2011. That should ensure that creative accountants are one group of professionals certain to make a killing in the Myanmar gold rush. 

Notes
1. China now No. 1 invrestor in Burma, Mizzima, citing Myanmar's Eleven News, January 18, 2012. 
2. Potential Pitfalls for Myanmar’s Economy, Wall Street Journal, April 11, 2012. 
3. Firms See Myanmar as Next Frontier, Wall Street Journal, November 30, 2011. 
4. China Construction Machinery Business Online, March 1, 2011.
5. Norinco International Wins $700M Contract In Myanmar, Capital View, August 29, 2011.
6. See "China's Strategy to Secure Natural Resources: Risks, Dangers and Opportunities", Theodore Moran, Peterson Institute for International Economics, July 2010. (p37)
7. An image makeover for Myanmar Inc, Reuters, April 12, 2012. 
8. Thai coal mining in Burma begins despite of local concerns, Shan Herald, May 4, 2011.
9. "Burma's Military: Purges and Coups Prevent Progress Towards Democracy", Larry Jagan, Myanmar's Long Road to National Reconciliation, ed Trevor Wilson, Institute of Southeast Asian Studies, Singapore. (2006). 

Chris Stewart is business editor of Asia Times Online 

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