Footwear Sourcing in : CascadeAsia Ryker Labbee Opportunities & Risks Senior Analyst, Myanmar

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

Photo: " in " by Paul Arps, http://flic.kr/p/iWjD4r About Cascade Asia

Cascade Asia Advisors Intelligence – On-the-ground market insight is a boutique . Industry and/or issue deep dive . Supply chain reliability analysis intelligence and strategic advisory firm Risk Management – Monitoring & Mitigation . Early Warning System (EWS) focused on . Financial & reputational due diligence Southeast Asia. Relationships – Enhanced network access . Government relations . Stakeholder perception audit

Strategy – Optimized competitiveness . Market entry/establishment design . Corporate positioning

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. Cascade Asia in Myanmar

. Ryker Labbee, Senior Analyst – 11 years experience following Myanmar – MA in international affairs, economics – Splits time between Seattle and . Jacob Clere, Senior Analyst – Industry experience and network – MS in development economics, emerging markets – Lives in Yangon

What Does Tomorrow Hold?

Footwear Manufacturing in Asia Today …and Tomorrow? Economic & Political Overview

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

Gross Domestic Product 2010-2014

6.8% 6.9% 6.4% 5.9% 5.3%

2010 2011 2012 2013 e 2014 f

Source: IMF, Cascade Asia Current Macroeconomic Backdrop

Myanmar Imports and Exports 2013 (US$m) 2000.0 1000

1800.0

1600.0 950

1400.0

1200.0 900

Exports 1000.0 Imports USD/MMK 800.0 850

600.0

400.0 800

200.0

0.0 750 Janurary February March April May June July August September October November Myanmar’s Export Economy Foreign Direct Investment

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

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

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

Global CompetitivenessEaseEase ofof DoingRuleDoingRule ofof Business,Business, Law,Index,Law,LogisticsLogistics 20132013 2013-2014 20142014Customs PerformancePerformanceCorruption (97)(97) (189)(189)Infrastructure (148)AVERAGE Pereption Index,Index,International 20122012GLOBAL Index,Logistics (155)(155) shipments2012RANKTracking quality (174) Timelinessand and competence tracingCorruptionAVERAGE Pereption GLOBAL Index, 2012RANK (174) Singapore 2 11 1111 11 15 2 4 2 6 6 1 5 4 Malaysia 24 66 4646 2929 2954 2732 26 30 28 28 54 32 Brunei 26 5959 -- -- -46 - 28 - - - - 46 28 Thailand 37 1818 5454 3838 4288 4447 35 49 45 39 88 47 Indonesia 38 120120 5555 5959 75118 8578 57 62 52 42 118 78 Philippines 59 108108 6464 5252 67105 6278 56 39 39 69 105 78 Vientam 70 9999 6666 5353 63123 7282 39 82 47 38 123 82 Lao PDR 81 159159 -- 109109 93160 106127123 104 111 118 160 127 Cambodia 88 137137 8383 101101 108157 128113101 103 78 104 157 113 Myanmar 139 182182 -- 129129 122172 133156116 110 129 140 172 156

Source: WEF, WB, IFC, WJP, TI Why Source from Myanmar?

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

46 million 95% literacy rate

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

Firing Costs (in Weeks of Salary)

Myanmar 0

Singapore 3

Japan 4 Hong Kong 6 Monthly Base Salary India 16 (Factory Workers)

Cambodia 19 Yangon 32 Vietnam 23 Phnom Penh 80 Malaysia 24 Jakarta 209 China 27 Bangkok 286 South Korea 27 Manila 325 Philippines 27

Bangladesh 31 Kuala Lumpur 344

Thailand 36 Mumbai 403

Indonesia 58 Beijing 538

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 Developed Port Capacity

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 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

Labor Market Efficiency, 2013 (rank/148)

China (34) Cambodia (27) Indonesia (103) Myanmar (98) Vietnam (56)

148 141 131 120 111 106 94 93 95 89 81 68 71 69 64 60 49 44 39 41 39 32 28 29 31 23 15 17 15

0

Cooperation labor- Flexibility of wage Hiring and firing Redundancy costs Pay and productivity Country capacity to employer relations determination practices retain talent

Source: World Economic Forum Low Productivity

Average Daily Wage Cost for a Annual Labor Productivity in the Factory Worker, 2010 ($ Per Day) Aggregate Economy, 2010 (2010 $ Thousand per Worker)

Myanmar $3.20 1.5

Vietnam $5.30 2.2

China $17.70 7.7

Thailand $18.30 9

Malaysia $25.40 11

Source: McKinsey Global Institute A Closer Look at Productivity

Labor Hours in Factories Factory Space Utilization (number of hours/day) (% of space by activity)

Myanmar 8 Vacant 20%

Single shift Operations Average of Asian 50% comparison 20 Storage 30% countries 2-3 shifts of 8 hrs each

~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 Primitive Machinery, Technology

. 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

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) Transportation Infrastructure

. 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

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

. 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. Trade Unions

since 600 2011

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

. 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

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 Footwear Exports from Myanmar

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

140

120

100

Others

80 Thailand South Korea 60 Germany

US$ in millions in US$ EU (15 countries) 40 Japan

20

0 2007 2008 2009 2010 2011 2012

Source: Institute of Developing Economies, Japan External Trade Organization, Trade Nosis Industrial Zones in Yangon

. 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 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/ Royal Rose Japanese Catalogue month 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 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

Source: http://bit.ly/16bMIES Labor Unrest & Uncertainty

. 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

Photo: Laid-off Workers Protest in Yangon by JPAING, The Irrawaddy (http://www.irrawaddy.org/wp-content/uploads/2013/11/workers.jpg) Thilawa Special Economic Zone

Myanmar International Terminals Thilawa

. Ambitious target to be operational by . Light industry, assembly industry; 2015 thermal plant . 2,400 hectares . 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/ [email protected] 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