Walking down the street in Yangon, the feeling of change is palpable. New buildings are being constructed and you cannot help but notice the influx of foreign tourists visiting the local sites. There is a lot to like about the opening of one of the world’s last frontiers, especially given its size, geography and vast raw materials. At close to 60 million people, Myanmar is the size of France and shares a border with Bangladesh, China, India, Laos and Thailand. Its geographic proximity to India and China alone makes Myanmar an intriguing economic and geopolitical partner and it is clear that the United States has taken notice. Relations between Myanmar and the United States have escalated rapidly after years of sanctions, isolation and Chinese based-influence in the country formerly known as Burma. According to a June 2013 McKinsey report, Myanmar’s GDP is poised to quadruple by 2030 and foreign direct investment (FDI) may total close to $100 billion by the same time. But what exactly does Myanmar’s opening mean for foreign investors?
Companies from multinational corporations to private equity firms seem to be chomping at the bit to get into Myanmar, hoping to establish a first mover advantage in one of the world’s last economic frontiers. Many companies are sending in teams to do market research, due diligence and to establish relationships with potential local partners. However, very little American capital is actually being deployed inside the country. There are many potential reasons for this but taking a look at some large multinational corporations might give potential investors a better understanding of the current marketplace.
Where are the multinationals?
Bootlegged from Singapore and Thailand, Coca-Cola and Pepsi have long been in Myanmar, and can be found on the shelves of grocery stores throughout the country. Additionally, Ford Motor Company recently became the first American automaker to launch operations in Myanmar with the opening of a new showroom and service center in Yangon. Ford entered the Myanmar market through a partnership with Capital Automotive, a subsidiary of one Myanmar’s largest companies. Companies like GE, Chevron and Caterpillar have operations in Myanmar and are competing for market share with Asian counterparts who have been in the market much longer.
However, none of the big multinationals have announced any landmark deals or transactions that indicate that U.S.-Myanmar economic relations are going at the same speed as U.S.-Myanmar political relations. This might signify a larger problem of dealing with the complex web of networks and bureaucracy that is the Myanmar government. Additionally, if these large companies are having trouble navigating the bureaucracy what does this mean for small and midsize companies looking to enter the Myanmar market? They don’t have government-relations arms or consulting firms aiding their market entry, which makes them increasingly reliant on finding local partners. However, finding a reliable local partner in a country that is opening after fifty years of military rule is a challenge that has undoubtedly scared some companies away.
Yangon or New York City?
One of the biggest barriers to entry for foreign companies is the high cost of real estate in Yangon, the former capital and main financial center of Myanmar. Foreigners cannot directly purchase land and companies are often getting priced out of the commercial real estate market. Many companies are interested in setting up a local office in Yangon but are unwilling to pay market prices and are subsequently working through their Bangkok or Singapore offices on Myanmar-related business. The real estate bubble extends to the residential market, where a one bedroom apartment in Yangon can cost the same as its equivalent in Manhattan. Real estate has long served as an alternative to banks as a place where individuals hold their money. Coupled with low supply and the fact that the government owns a lot of the land, this has created an inflated real estate market, which has made establishing a physical presence in Myanmar more difficult for foreign companies.
About the Cronies
While a complex government bureaucracy is one thing foreign companies have to navigate, there is another element of the economic system in Myanmar: crony businessmen. Cronies in Myanmar are those individuals who have procured most of their wealth through their connections to the government. Many still run some of the largest companies in the country and remain major players in almost every type of business. While doing business with cronies might not scare off companies from other parts of Asia, Americans are not allowed to deal with individuals or companies on the OFAC sanctions list. These individuals include Tay Za, Zaw Zaw and Stephen Law whose businesses Htoo Group, Max Myanmar and Asia World Company are major economic players in Myanmar. This makes growing your market presence in Myanmar a little more complex because if you are looking to have any sort of scale you are inevitably going to run into some of these cronies or one of their adjacent businesses.
Realities of a New and Emerging Market
Although the barriers to entry for doing business in Myanmar are high, opportunities do exist for those who have the savvy to successfully navigate the complex system. Additionally, the market size is too large and the geopolitical ramifications are too big for Myanmar to be ignored, as the United States jostles with China for influence in Southeast Asia. As the cost of labor rises in places like China, Myanmar will be an attractive alternative for companies looking for cheaper low-skilled labor. In 2013, the manufacturing sector, specifically garments, has been the largest recipient of FDI in Myanmar. More investment will come, from America and elsewhere.
For foreign companies, the focus needs to be on establishing the right relationships. The “wait and see” attitude of many companies suggests a more cautious approach to one of the world’s last frontiers. Myanmar is moving toward a more open economy and democratic society, but these transitions are neither seamless nor do they happen overnight. The world has high hopes that Myanmar can become the next great success story in Southeast Asia, but it is going to take more than the elections of 2015 to show the world that it is truly open for business.
Peter Birgbauer is a consultant for Johns Hopkins University SAIS in Yangon working on establishing an International Center of Excellence at Yangon University.