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Myanmar: The Next Major Apparel Production Hub?

The apparel industry is keeping a watchful eye on Myanmar, also called Burma, where labor disputes and continued concerns over factory safety compliance and other issues have stymied a long-anticipated resurgence of the country’s garment industry, slowing efforts to grow it into a key supplier of garments to the rest of the world.

Before considering Myanmar as a potential manufacturing location, however, brands and retailers should know a little about the country, its recent history, economic situation, capabilities and shortcomings, and should weigh the risks against anticipated cost-savings benefits.

Myanmar’s Stained Human Rights Record

Burma, under military rule for nearly 50 years beginning in the early 1960s, has for many years been a concern of human rights activists. In 1998, Amnesty International published numerous reports claiming, among other things, the government’s false imprisonment of 1,300 political prisoners without a fair trial. The reports attracted the attention of world leaders and NGOs. One of the prisoners was opposition politician and 1991 Nobel Peace Prize recipient Aung San Suu Kyi, or Daw Suu, whose National League for Democracy party won 59 percent of the popular vote in the country’s 1990 general election but who was placed under house arrest (where she remained until November 2010).

The stories of human rights violations multiplied, and included reports of human trafficking, child labor and forced labor. American firms sourcing in Myanmar came under increasing pressure. Levi Strauss and Eddie Bauer shut down their operations there.

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Sanctions Slow Industry Growth

Garment manufacturing was one of Myanmar’s fastest growing sectors in the 1990s, driven primarily by demand from the U.S. According to the WTO, Myanmar’s total garment exports grew from $15 million in 1990 to a peak of $800 million in 2000, when they represented 40 percent of the country’s total exports. U.S. apparel imports from Myanmar grew from $9 million in 1990 to over $400 million in 2000.

In 2003, President Bush signed into law the Burma Freedom and Democracy Act, banning the importation of Burmese products into the U.S. This, combined with the removal of GSP trade preference status by the E.U., both of which were imposed to weaken the despotic government, significantly crippled growth in the Myanmar apparel manufacturing sector. By 2005, the country’s total garment exports had plunged to $331 million. While the sanctions were in force, Myanmar’s biggest garment export markets became Japan and South Korea.

In 2011, the country elected a reform government led by President Thein Sein that promised to make significant improvement in human rights and to rid the country of corruption and other unsavory practices. However, the new president is a former general who also served as the junta’s prime minister. Critics of the election condemned it as a sham aimed at ensuring continued military rule.

New Government Promises Reform, Attracts Investment

In May 2012, President Obama and then Secretary of State Hillary Clinton announced that the U.S. would begin easing, but not lifting (meaning they could be reimposed should conditions warrant it) certain sanctions in response to the historic reforms taking place there. In 2013, the E.U. restored the country’s GSP status, which allows unrestrained access to European markets.

Apparel industry leaders in Burma hoped the relaxing of sanctions would open the floodgates of interest by U.S. and European brands seeking lower-cost garment production and result in a rapid recovery of the industry. However, growth has so far been much slower than expected, hampered by concerns ranging from labor compliance to infrastructure problems. Total garment exports from the nation’s 200 garment factories, the vast majority of which are privately-owned, were only $346 million in 2012.

Garment production and export figures are poised to grow, however. One result of the relaxing of trade sanctions has been a huge increase in flow of investment capital to the country’s garment manufacturing sector. According to the Myanmar Garment Manufacturers Association (MGMA), total investment in the sector surged from $300 million in fiscal 2011-2012 to $1.9 billion the following year, and over $4 billion in the most recent fiscal year, making it (along with telecommunications) one of two fastest in terms of FDI growth. Unlike Vietnam, Myanmar allows 100 percent direct foreign investment in the garment industry, in addition to joint ventures.

The creation of special economic zones and incentives, including a years-long holiday on tax and certain duty exemptions on imported machinery and equipment, have also created a more attractive environment for apparel production.

The True Cost of Labor

Cheap and abundant labor and a relatively young workforce are the main draws to Myanmar. Rising labor costs in China are causing many brands to shift garment production to Southeast and South Asia. Although Vietnam and Cambodia have been the biggest beneficiaries of this shift, other countries, such as Sri Lanka, Bangladesh and now Myanmar are being viewed as the next frontiers. Garment worker wages in Myanmar are around $80 per month, the lowest in Asia, compared to over $200 in neighboring Thailand and over $150 in Vietnam, offering tremendous potential savings to Western manufacturers.

Direct labor is only one of the cost elements that a company must consider when making sourcing decisions, however. According to Charles van Caloen, a senior analyst at risk analytics and management firm Verisk Maplecroft, they must also weigh the cost of brand damage, investor alienation, potential lawsuits, and lost productivity due to accidents or poor worker health–not to mention the cost of shipping inferior product quality to an increasingly demanding set of Western retailers. Additionally, extremely low wages and poor working conditions can contribute to lost productivity due to industrial and civil unrest. “The true cost of business in the emerging economies is more than the direct expenses associated with the labor force,” said van Caloen. “It is essential for companies to understand and price in risks, such as strikes, disruptions and poor worker health, when making market entry or strategic sourcing decisions.”

And U.S. and E.U. brands may be paying attention to some of those risk factors. Although there has been an increase in garment exports from Myanmar to Europe and Japan, those to the U.S., which only began again in 2013, remain small. In 2014, they totaled $16 million. Last June, Gap Inc. announced that it had begun production of vests and jackets in two factories on the outskirts of Yangon. However, other brands have been slow to follow Gap’s lead.

In 2013, the most recent year for which annual import data are available, clothing imports to Europe from Myanmar grew 18 percent over the prior year to $100 million, according to European Commission trade data. E.U. brands importing from Myanmar include H&M, Marks and Spencer and Adidas.

Workers Speaking Out

Exactly how long labor rates will remain at rock bottom is anybody’s guess. Last spring, strikes by workers at the South Korean-owned Shin Soung apparel factory attracted world attention when the protest leaders who organized it were arrested, putting Myanmar and its apparel industry aspirations in the spotlight. More recently, more than 4,000 workers from the Ford Glory, Han Jen, Costes International, E Land, and Red Stone factories in the Shwe Pyi Tha Industrial Zone near Yongon began to strike and hold demonstrations calling for wage increases, the formation of a labor union, safer workplaces and an end to discrimination against workers, among other requests. Those protests don’t show signs of being settled anytime soon, but have remained relatively peaceful.

“Wages in the big city, though often many times higher than what was available in workers’ native villages, never go as far as they first expected,” said Michael Flanagan of U.K.-based Apparel Sourcing Consultancy Clothesource, referring to the fact that in Myanmar, like in most developing countries, workers move from rural areas to big cities to take jobs in garment factories.

Flanagan expressed surprised at the way the labor disputes are playing out so far in the country. “Personally, I’ve been amazed at the relatively humane behavior of the Burmese government since the E.U. relaxed sanctions: the forward thinking of some of its officials; the pragmatism of the Myanmar Garment Manufacturers Association; and the measured approach we’ve seen to entry by Adidas, H&M, Gap and Marks & Spencer.”

Obstacles to Industry Growth

Obstacles that need to be overcome before Myanmar can become a major hub of apparel manufacturing for brands remain formidable, however. Its labor force, though plentiful, is relatively unskilled, and will require training in cutting, sewing and other production tasks. Poor infrastructure from years of political and economic isolation, trade bureaucracy, poor electricity supply, corruption, and weak legal system by U.S. standards are also hampering industry growth.

Many U.S. and E.U. brands, concerned about what non-compliance would do to their reputation, believe that Myanmar still needs to take certain steps like passing minimum wage laws, eliminating child labor and installing occupational health and safety standards. A spokesperson for a major U.S. brand told Sourcing Journal, “Another disaster like Rana Plaza could set the industry back a decade,” referring to the garment factory collapse in Dhaka, Bangladesh that killed more than 1,100 people in 2013.

According to Flanagan, pointing out the risk of doing business in such a poor country is “like saying there’s a risk of snow in a Chicago winter.”

“I prefer to dwell on the significant possibility that Burma may be re-engaging with the west’s apparel industry. Remember, the U.S. and Europe didn’t impose sanctions because of poor working conditions, but to punish the sins of an unaccountable military dictatorship…This time around, the aura around Daw Suu, the energy the U.S. and EU are putting into helping the Burmese government and manufacturers sort themselves out, and Western retailers’ fear of creating a second set of Bangladesh scandals are all grounds for optimism that, whatever goes wrong (and it will), there’s a pool of goodwill around to minimize the horrors.”