Q&A with McKinsey’s Managing Partner in Southeast Asia, Oliver Tonby

The numbers speak of FDI doubling from 2013 to 2014, so the numbers are good from that point of view. But is there nervousness or hesitation? I think investors are clearly looking at what is going to happen before and after the election.

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Published in Mizzima Weekly on 18 June

Southeast Asia’s Managing Partner of McKinsey & Company, Oliver Tonby
Southeast Asia’s Managing Partner of McKinsey & Company, Oliver Tonby

Oliver Tonby is the managing partner of the multinational management consulting firm McKinsey & Company in Southeast Asia. He talks to Mizzima Weekly’s Jessica Mudditt about Myanmar’s progress since 2011 and why the path to completing the reform process remains a long one.

Since McKinsey published its report titled Myanmar’s moment: Unique opportunities, major challenges in June 2013, do you feel the government has done enough to attract foreign investment?

The government has clearly done a number of significant things. The corporate tax rate has been lowered and the first licenses have been awarded to foreign banks and to telecom companies. However the task at hand is really big and it is going to be years or decades in the making. Going back a few years, there was a lot of optimism. I still think there is still that optimism, but perhaps also some realism about the pace of change.

The terms of the licenses awarded to foreign banks are quite restricted – do you think that applying a protectionist policy is the right way forward?

That is a tension that exists everywhere, including the likes of Singapore and Malaysia. At the end of the day it needs to be a thoughtful path. And it’s very sensible for a country to try to grow and develop its own companies as well. There needs to be the right balance with foreign companies, who bring technical experience and capabilities. At the same time, you want local companies to grow. It’s a tension that will last many years.

Do you feel similarly about the requirement of having a joint venture in almost every area of business in terms of ensuring that growth is conjoined?

I think the idea of partnerships and joint ventures is a good one in terms of it being a practical way to build local capabilities. The thing to avoid is a situation where there are middlemen involved who don’t add value as partners in terms of building a long term future. This is distinct from active investors who are trying to build local capability, build up assets and are also willing to re-invest whatever money they are making.

Do you believe the rush to invest in Myanmar has slowed? And if so, why?

The numbers speak of FDI doubling from 2013 to 2014, so the numbers are good from that point of view. But is there nervousness or hesitation? I think investors are clearly looking at what is going to happen before and after the election. What kind of government will there be? Are we going to continue to see the policies of the current government remain or will there be a step change? These are big questions. So I’d say that it’s not reluctance but a case of just waiting and seeing. It’s so close now, so why invest hundreds of millions of dollars? It makes sense to wait six months.

With so much of ASEAN governed autocratically, do you believe that foreign investors do care about what type of government Myanmar gets – as opposed to simply wanting stability?

Investors care about multiple things. And they absolutely care about governments. They do look for stability in terms of business policies and practices, taxes and the rule of law. That is understandable. But they also care about what a government stands for more broadly. I think multinationals want to be good global corporate citizens because corporate citizenship is critical.

Myanmar’s Moment reveals that the average productivity of a worker in Myanmar is US$1,500, which is 70 percent lower than that in benchmark Asian countries. However the report also highlights that labour costs here are much cheaper. What are the reasons for this and are there both pitfalls and benefits?

The reason why productivity is significantly lower is due to a sector such as agriculture being so large in Myanmar. Productivity in agriculture is far lower than say, manufacturing, because the value of the goods produced by workers is a lot lower. And it’s good if your workers are producing textiles, but it’s even better if they are producing computer chips or petroleum products, and so on. Productivity is a reflection of the state of evolution of a country. Take Vietnam, which is well ahead of Myanmar because it started its manufacturing journey a long time before Myanmar did. But the good news is that labour costs in Myanmar are lower than elsewhere in the region: that is an asset for Myanmar. China’s labour costs have gone up quite radically over the past decade – it’s now around $27 per day per worker, which is around five times higher than Vietnam. The amount workers are paid is a competitive factor, because companies are looking to go somewhere where labour costs less. So now that wages have gone up significantly in China and other countries, companies will be looking at where to invest other than China.

At the end of the day, yes, a company in Myanmar might be paying half of what they do in Vietnam, but there are problems if it’s not possible to find people with the necessary skills and experience. Or it could be the case that a greater number of people need to be employed, which wipes out the cost advantage. That is why it’s so important to improve education and training levels in Myanmar.

The report cites UNDP’s finding that Myanmar has one of the world’s lowest averages of schooling, which is just four years. However McKinsey believes that change could come quickly if Myanmar uses technology to deliver an element of e-education to a much larger number of children of school age as well as adults in vocational training and even tertiary education. Are there case studies elsewhere where improvements in education levels have been achieved in a short space of time?

It is certainly ongoing in some countries. One of the countries in the region that is putting a lot of effort in is Malaysia – e-learning is being used to raise standards across the board. It has enabled teachers to have access to the same curriculum regardless of where they are. Ask me in five years – and that would be the early answer.

Myanmar has the highest e-learning growth rates in Asia, however it takes years and I think it’s too early to make a call on its benefits even now. It is of course pretty clear that a country doesn’t evolve unless you educate its people.

Would you agree that potential foreign investors are deterred by Myanmar’s current human resource constraints?

The answer is yes, absolutely. It depends to an extent on the type of business, but if someone is looking to set up a medium sized investment with a hundred million dollars, that person needs people to operate the lines of whatever is being produced. You need technicians who can calibrate the instruments, supervisors, electrical engineers, automation engineers and so forth. An investor will always be thinking about whether they can get the right people with the right backgrounds – and if the answer is no, they will not come. It is a significant barrier, but it’s not the only one.

What do you consider the other major barriers?

There’s also issues around infrastructure: you can’t operate a plant without electricity. And there are macroeconomic factors to consider, such as political stability and some of the tensions that are happening now. A person will ask themselves what it means for the country’s forward prosperity and growth – it’s a serious consideration. The quality of institutions, the ease of doing business and the rule of law is another significant question for businesses. These factors are significant and thrown into the mix when a company weighs up whether to do business here or somewhere else.

What are the opportunities and are they significant enough to counter the challenges?

Myanmar has huge opportunities, such as a large population and a growing economy – there are opportunities for all kinds of consumer products. There are also opportunities in mining, energy and the materials sectors. Myanmar also possesses massive amounts of water resources. So long as a real escalation in tensions – whether political or ethnic tensions – does not take place, so that it is not significantly worse than it is today, I think we will continue to see FDI coming in and that the country will continue to grow. Myanmar absolutely has its place in an Asian economy and the global economy. I choose to be optimistic, but realistic too.

Corruption remains endemic. What can be done to tackle it?

This is where the idea of professional and capable institutions come in: whether it is energy regulators, the court system or financial institutions. If you have quality institutions running quality processes and practices then over time corruption and other bad practices will be reduced.

There seems to be a greater level of transparency in the energy sector, such as the recent gas and oil exploration tender process and the fact that Myanmar is now a candidate country for the Extractive Industries Transparency Initiative (EITI). Does this encourage greater FDI?

EITI is one thing – and I think it’s a positive thing. But let’s not be naïve – it doesn’t change anything overnight. At the end of the day, a company will judge things on a day-to-day basis; in meetings with governments bodies and other companies. The hope is for step by step improvement. There is no country where in the space of a few years, it has gone from bad to great.

Is McKinsey planning another Myanmar-specific report?

Nothing has been scheduled as yet. In November 2014 McKinsey published a report titled Southeast Asia at the crossroads: Three paths to prosperity. This report contains a number of revised figures on Myanmar.

In terms of Myanmar’s overall progress since your most recent report was published, has McKinsey’s views changed significantly in any way?

No, because we continue to see very significant opportunities in Myanmar and very similar changes that were highlighted back in 2013. Growth rates over the past few years have been in the sevens and remain so, which is good – especially so if we look at what has happened globally. Our report predicts that Myanmar’s economy will have quadrupled by 2030 if the following seven sectors are expanded: manufacturing, agriculture, infrastructure, energy and mining, tourism, financial services and telecoms. Things are going in the right direction, though we would encourage there to be even more ‘oomph’ behind it. So while our views have not changed, we do continue to be impatient to see even more drive by the government, as well as by local companies, multinationals and educational institutions. This is a multi-year, multi-decade journey. It’s very easy to say that not enough progress has been made over the last two years, but it needs to be thought of as chipping away at things over a long term period.

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