Myanmar: foreign investment rush raises hopes….and concerns 0

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Foreign investors are rapidly entering Myanmar

Foreign investors are rapidly entering Myanmar

Reposted from The Financial Times
By Gwen Robinson

One of the most visible symbols so far of Myanmar’s opening to the west was the recent launch of Coca-Cola’s new bottling operations at its joint-venture plant on the outskirts of Yangon. Less visible was the changing dynamic around the seemingly unstoppable surge of foreign investment interest in the previously secretive country.

In a marquee festooned with trademark red and white signs and flanked by trucks emblazoned with company logos, dignitaries including former US secretary of state Madeleine Albright hailed Coca-Cola’s decision to set up bottling operations through a local partner, Pinya, as a “momentous occasion” in Myanmar’s international re-emergence.

Muhtar Kent, Coca-Cola’s chairman and chief executive, went a step further, comparing Myanmar’s opening to the fall of the Berlin Wall. “It’s a great moment in history, just like it used to be when we opened up our business in east and central Europe … right after the fall of the Berlin wall,” he said in a television interview.

Theatrical, perhaps. But Kent is putting Coca-Cola’s money where his mouth is, announcing the company will invest $200m in Myanmar over the next five years, creating 2,500 direct jobs and 22,000 more indirect jobs as a result. Just as symbolic, perhaps, is the tentative entry of Coke’s archrival PepsiCo to Myanmar, signifying a new phase in their so-called “cola wars” – although Coca-Cola has a clear lead over its rival, as Pepsico is merely in planning stages for a bottling plant.

One year ago, such moves by western companies would have dominated local media headlines. But there are too many announcements these days to make more than a fleeting impact on Myanmar’s increasingly active media – now freed from censorship.

In the country’s largest-ever gathering of foreign executives, business people descended last week on Naypyidaw, the once-isolated capital north of Yangon, to attend the World Economic Forum’s Asia gathering.

Between packed sessions, regional leaders and executives from companies including Microsoft, Chevron, WPP, Mitsubishi Corp, Citibank, Philips, General Electric, Visa and Mastercard International mingled with local figures, headed by Myanmar’s president Thein Sein and opposition leader Aung San Suu Kyi.

After two years of unprecedented economic and political reform, it was, as one local consultant remarked, “Myanmar’s true ‘coming-out’ party.

Amid recent bouts of anti-Muslim violence wracking the country, policy paralysis over the fate of nearly 800,000 stateless Muslim Rohingya in western Myanmar, and unresolved ethnic conflicts in the north, there is a growing disconnect. Perceptions in the main cities of accelerating reform and robust growth contrast with tensions in many parts of the country.

Even so, investors have good reason to hope that the modernisation push will steadily lift the country. In Yangon, the commercial capital, other signs of boom times include Ford Motor’s new showroom and factories such as Suzuki Motor’s newly recommissioned plant, abandoned when it withdrew in 2010, and a Unilever factory. The Anglo-Dutch consumer goods giant will produce food seasoning in Myanmar from next month, and is already planning a second facility under plans to invest $650m in Myanmar over the next decade. Meanwhile Philips, the Dutch electronics group, has launched its first electronics shop, in Yangon, and aims to move into other areas of business such as health care equipment.

“It was time,” says Harjit Gill, Philips regional CEO. “This country is in a fantastic position to leapfrog, we want to be here.”

The list of western projects goes on: in tourism, Hilton International’s 300-room luxury hotel, to open at year end, is leading the way.

As Myanmar prepares this year to receive 1.3m visitors, surpassing its 2012 record of 1m visitors, other big hoteliers include US chain Best Western, which will open a renovated property later this year; French group Accor with a Novotel in Yangon; and most recently, Marriott International of the US, which plans its first hotel in Myanmar this year.

Asian companies are also in the vanguard, with Vietnamese groups Hoang Anh Gia Lai and CT in advanced stages of large hotel projects.

“It is reaching the point where in many ways, you can’t afford NOT to be here,” says another local consultant. Other western companies, meanwhile, are pursuing “phase one” strategies of distribution and joint venture deals including Microsoft which last week announced a partnership with local software company Myanmar Information Technology to initially focus on distribution of products.

In other sectors, J Walter Thompson just sealed a deal with local partner Mango Marketing to tap the nascent advertising and marketing sectors, while Japan’s Dentsu has set up shop.

In alcoholic beverages, Carlsberg, Heineken and ThaiBev, have all gained permission in the past few months to brew beer in Myanmar with local partners. Heineken is forging ahead with a majority-owned venture with local partner APB Alliance Brewery; Carlsberg recently announced a $50m brewery and marketing push with local partner Myanmar Golden Star Breweries; and ThaiBev plans to produce its Chang beer at three sites.

Separately, ThaiBev “inherited” a 55 per cent stake in a venture with Myanmar’s biggest brewer, Myanmar Breweries, maker of Myanmar Beer through its recent takeover of Singapore-based Fraser & Neave (previously Heineken’s joint venture partner in Asia Pacific Breweries).

Clearly the previous trickle of investment interest has exploded into a torrent, driven by belief in the country’s bright economic prospects. Myanmar’s economy could grow 6.75 per cent this fiscal year, up from 6.3 per cent last year and almost double the pace from 1990 to 2010, according to the IMF.

McKinsey & Co in a report this month said Myanmar’s economy, at $45bn in 2010, could reach $200bn by 2030, while the country could draw $170bn in capital inflows, about $100bn of it in foreign direct investment, more than double the level over the previous 20 years.

The opening of any new frontier market, as other emerging market economies have shown, can offer more hype than tangible profits in the short to medium-term. But in Myanmar’s case, some important elements have moved into place comparatively smoothly. Luc de Waegh, a consultant who is helping to set up a European business association in Myanmar, says the reforms and resulting changes are “close to a miracle”. But like many other Myanmar expats, he warns of “unrealistic expectations” among new entrants.

The rapid easing or removal of western sanctions has been critical to boosting investor confidence – not least the European Union’s move this week to restore preferential trade access to Myanmar. For US and other multinational companies, however, the most significant development has been Washington’s move last month to clarify investment guidelines for its companies.

The US has only eased rather than lifted a range of curbs on bilateral investment and business ties. In the process, it has introduced what many executives describe as onerous disclosure requirements.

The new “responsible investment reporting requirements”, issued last month, includes requirements for regular detailed reporting on investments worth more than $500,000; reporting on any contact with military or non-state armed groups; detailing new investments with the military-controlled Myanmar Oil and Gas Enterprises, which dominates the oil and gas sector; and stiff penalties for companies transacting business with individuals or entities on the so-called US “black list”.

US law firm Pillsbury, Winthrop Shaw Pittman, a leading adviser to US companies on sanctions regimes, said in a client note: “This final rule does provide an interesting contrast – where the EU, Canada and Australia have largely dismantled their sanctions regimes, the US has maintained controls and is permitting new investment subject to reporting and transparency. It will be interesting to see what impact this has in practice. Our clients are paying close attention.”

Indeed, says John Rice, a vice chairman of General Electric, on the sidelines of WEF in Naypyidaw, “There is enormous potential here, but it’s a very complicated process – you don’t just turn up and start selling.”

For Myanmar’s local companies, the foreign rush is a mixed blessing. Win Aung, president of Myanmar’s main business group UMFCCI, readily acknowledges concerns about increased competition for local companies. “We know the opportunity for partnerships and development will be greater,” he told the FT. “With the increased competition, however, we must also prepare our SMEs to survive and thrive in the new environment.”

With its base of more than 60,000 small and medium companies in mind, the UMFCCI helped the government draft a new SME Development Law, aimed at promoting SME development.

As a close presidential adviser and an urbane face of Myanmar business, Win Aung has pushed hard for business liberalisation and has been a key facilitator for many western and Japanese business executives in the country.

Yet, his tale also illustrates the many aberrations in Myanmar’s transition period. In the process of building up his sprawling Dagon construction group, he ended up on the US “specially designated nationals” list (or so-called blacklist) due to his government dealings. The listing bars entry to the US and prevents US companies dealing with his group. As the US moves to “normalise” relations, not least through the likely removal by Congress this month of some remaining trade restrictions, Western diplomats believe he will be among the first to be taken off the US list.

Western companies should be relieved at the outcome on Sunday of a critical contest for leadership of the UMFCCI, the main business group. In an election that will set the tone of how Myanmar business responds to the foreign investment rush in the next three years, Win Aung and his pro-reform supporters won a landslide victory against two competitors for a new, three-year term to lead the chamber.

Given Win Aung’s agenda for deepening relations with western and Japanese business groups, the outcome proves that – for now, at least – Myanmar’s business lobby is more concerned with reaching out than turning inward, said some expat Yangon business executives.

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