Tag Archives: business myanmar

Myanmar’s car market faces growing pains

Published in Wards Auto on 11 July 2016

Fewer cars of this vintage are seen on Yangon's roads today
Fewer cars of this vintage are seen on Yangon’s roads today

 

Myanmar’s potential market for new cars is significant, but growth is hampered by regulatory uncertainty. Although it has a population of 51 million, only 5,000 new passenger cars were sold in the last financial year.

“The future is very good, potentially. But right now it’s a very primitive market,” said Htoo Aung Lin, executive committee member of the Authorised Automobile Distributor Association (AADA), which represents the new car industry.

Car imports were effectively banned under the military regime until September 2011. Half a million cars were imported during the quasi-civilian government’s five year tenure that ended in April this year. The sudden influx of vehicles caused congestion in the commercial capital of Yangon – and a number of arguably misguided policies designed to lessen it.

Parking permit woes

Downtown traffic
Downtown traffic

Yangon’s municipal authority introduced a policy in January 2015 that requires individuals applying for a car import permit to prove they have a parking space.

The policy created a black market in parking permit recommendation letters, which cost approximately MMK700,000 (USD585,000). When Myanmar’s first democratically elected government in 50 years came to power in April, it did so on an anti-corruption platform. It promptly cancelled the issuing of parking permits.

On June 20, the government’s Supervisory Committee for Motor Vehicle Imports announced it would allow certain commercial vehicles to be imported. Passenger cars, however, remain subject to the permit requirement.

The old and the new
The old and the new

“It’s a rough patch we’re going through and businesses are suffering,” said Michael Rudenmark, Managing Director of Automotive at Yoma Strategic Holdings. Singapore-listed local company Yoma is the importer and distributor Volkswagen, Bridgestone tyres and distributor for Mitsubishi.

He predicts sales will be down 20 percent this year and that it’s too early to tell whether the new government will be more business friendly.

Most expressed optimism that it will adopt longer-term policies that are properly enforced.

“I’m sure the new government doesn’t want Myanmar to keep being a dumping ground for used Japanese vehicles,” said AADA’s Htoo Aung Lin.

Left to rust...
Left to rust…

When asked whether the regulation has hampered sales, Mr Eak said: “To a certain extent. Orders are still strong, although some buyers did drop out due to the parking permit issue.”

Dr Soe Tun, president of the Myanmar Automobile Manufacturer and Distributor (MAMD), which acts as a bridge between policy makers and the private sector, said a Japanese policy is ineffective in the context of Myanmar.

“In Japan, authorities will go to a car owner’s house to check the address registered. In Yangon the permits are fake and there’s no public or private parking.”

MAMD submitted 16 proposed solutions to lessen traffic congestion to the government two months ago, but none have been implemented. He said that as many as 80 percent of vehicles are sold in the commercial capital of Yangon.

Right-hand drive on left hand roads

Another challenge is used car imports, the bulk of which are right-hand drive (RHD) Japanese or Korean brands. As a former British colony, cars in Myanmar drove on the left side of the road until 1970, when the superstitious dictator General Ne Win changed the law overnight because his astrologer believed the country had moved too far to the political left.

Hot-rods are a dangerous addition to Yangon's streets
Hot-rods are a dangerous addition to Yangon’s streets

“The biggest challenge for the importers and distributors of new LHD cars and trucks is primarily used car imports. While there have been some moves to curtail [RHD used cars] imports on the basis that they are clearly unsafe and do not meet the legislated left hand drive requirement, progress has been slow,” said Mike Pease, Ford General Manager at Capital Automotive Ltd.

Chevrolet opened one of its largest showrooms in Southeast Asia as a joint venture between Singapore’s Alpine Group and Myanmar’s AA Medical Group in November 2014. According to General Manager Samuel Eaks, the company sold 250 units last year and is number two for new passenger cars, with Mazda placed first and Mercedes, third.

“I wouldn’t say Myanmar’s market is crowded with brands yet, but it’s becoming more so day by day,” said Mr Eaks.

He said that when he came to Myanmar two years ago, the new car market was less than one percent of all registered, whereas data from the Road Transport Administration Department shows it’s grown to three percent.

My husband hailing an (unmarked) taxi
My husband hailing an (unmarked) taxi

However many in the industry complain that the sector is widely over-taxed.

“It seems that the government sees the car industry as an easy target for collecting tax,” said an industry insider who declined to be named.

Tax on commercial vehicles is comparatively lower than on passenger vehicles, which is in part because Myanmar’s economy is driven by agriculture.

“The new car segment is 70:30, with 70 percent being commercial and 30 percent are passenger,” said Yoma’s Mr Rudenmark.

Local manufacturing scope limited

Due to Myanmar’s proximity to major manufacturing hubs such as Thailand, the potential for local assembly is negligible.

“You have countries manufacturing cars next door and free trade [in ASEAN] soon – why would you move all that just to please a very small market?” said Mr Rudenmark.

Around 800 Suzuki vehicles are assembled in Yangon annually and Nissan is currently building an assembly plant in Bago, which is 91 kilometres from Yangon.

Parking in Yangon doesn't usually look so simple...
Parking in Yangon doesn’t usually look so simple…

“… the investment required in local assembly requires a combination of a strong domestic sales base together with supportive government investment policies. At this stage the size of the market for LHD new cars is small which makes the business case challenging,” said Ford’s Mr Pease.

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Firing the corporate cannons

Published in Myanmar Market Intelligence on 21 March 2016

Corporate governance is lagging behind, and it’s going to take more than a new stock exchange to fix it.

Myanmar’s ambition to expand its economic reach beyond its own borders may be a necessary step toward becoming a fully integrated member of the international business community, however legitimacy comes at a price.

If those companies wish to find success in the form of new investors in the post-junta era, they are going to need to quickly learn the definition of corporate governance, analysts familiar with Myanmar believe.

“The majority of [local] businesses are starved for capital. The cronies never needed capital – they had their own sources of money,” said Peter Beynon, country manager of Jardine Matheson International Services, who is also the contact person for the Institute of Chartered Accountants in England and
Wales (ICAEW) strategy in Myanmar.

“The family grown businesses have never had access to investors like us or international lenders,” he said. “Bank lending has only just started now, but it doesn’t cut it for those seeking large-scale expansion.”

Indeed, obtaining international capital will require a great deal of internal change as corporate governance is a relatively new concept – and for many, one that remains wholly unknown – while
accounting standards are rudimentary across the board.

“There basically aren’t any [accounting standards] in Myanmar. It’s as rare as hen’s teeth to find a high quality financial accountant,” Mr. Beynon said.

He explained that this is common in frontier markets, as most businesses are owner-managed.

“Business owners don’t think they need a set of financial books and they are not demanded by the authorities. They understand how their business is doing purely by the level of money they have
in the bank account – or how big the pile of money is at the end of the day if they don’t have a bank account,” he added.

The Myanmar Institute of Certified Public Accountants did not respond to requests for an interview about the standards it recently adopted for the profession.

As the issue has all but stunted growth for Myanmar’s biggest companies, the International Finance Corporation (IFC) and the Union of Myanmar Federation of Chambers of Commerce and Industry
(UMFCCI) signed a deal to improve local corporate governance practices in mid-February by providing training and workshops in an array of related topics.

The deal will focus on addressing challenges such as the necessity for more independent boards of directors, creating a more defined role for directors, improving transparency and putting place better control frameworks and shareholder practices.

Many of these problems are due to the lack of a robust legal and regulatory framework that includes basic governance provisions and investor protections.

“There is awareness of corporate governance in Myanmar, but the understanding of it remains limited,” said IFC’s country representative, Vikram Kumar, citing a widespread lack of investor protections.

“Every shareholder should have a voice, but large shareholders can change dividends and there is no mechanism to prevent that. You can basically do whatever you want,” he said. “There is no form of minority rights and very few companies hold AGMs. It’s very important to build capacity on the quality
on financial information that’s shared.”

Protection for investors in listed companies is even more important as private shareholders are typically family members.

The hope for the Yangon Stock Exchange (YSX), which launched in December but is yet to begin trading, is to bring a greater level of transparency and corporate governance to Myanmar. However experts have lamented the rules on public disclosure as being nebulous at best.

“When you look at YSX listing rules in terms of disclosure requirements, they refer to company information,” an expert told The Myanmar Times. “It’s not clear what company information is, so it’s
very vague … and in my opinion the big issue here is that the listing rules are not supported by any corporate governance code.”

Others agreed, saying that the Central Bank has done a poor job in producing said rules – and merely requires that accounting standards be in line with ambiguous local accounting standards.

“I personally think that [the terminology of the rules] means nothing because it’s open to anyone’s interpretation,” said an industry player who is not authorized to speak to the media.

The source added that the Central Bank is aiming to develop a set of standards that meet the “very basic” local standards half-way with those of the International Financial Reporting Standards (IFRS) –the latter of which he said is “way above everybody’s head.”

Forty-nine percent of YSX is owned by two Japanese companies – Japan Exchange Group, the operator of Tokyo Stock Exchange and Daiwa Securities Group.

The source said that the Japanese owners “would like to bring the standards for listing up but in the early stages, they will find that very difficult to do. It’s working from scratch and things will be very
difficult during the first six months – if not the first two years,” said the source.

Still, he believes the stock exchange represents a huge step forward for the country.

“It’s exactly what Myanmar needs. It will bring up standards of corporate governance and accounting. It’s an ideal opportunity for companies looking at other ways of getting financing,”Others remain more holistically optimistic.

“We believe that there is a growing awareness of corporate governance in Myanmar,” Tina Singhsacha, who co-chairs the UK–Myanmar Financial Services Taskforce. The taskforce comprises the British Government and UK private sector organizations and was established in 2013 to aid the development
of a transparent financial sector.

“More importantly, we see…a growing recognition of the importance of good corporate governance practices. The main challenge on this front is not uncommon, and it is to do with the need for greater exposure and experiences to be able to adopt the appropriate practices that suit the local environment,” said Ms. Singhsacha, who is also the chief representative of Standard Chartered Myanmar’s representative office.

Anthony Preston, head of the British Embassy’s Burma’s Prosperity Team, said: “We are getting to the point where a core group of businesses will adopt good corporate government practices. And once we have that, we might see a group of businesses collectively developing standards, rules and regulations; or at least advised standards for the local business community.

“It will be a process of selection – I think certain companies will end up doing very well out of investment and the stock exchange and those who don’t catch onto corporate governance with fall behind,” he said.

Aviation sector’s downward spiral

Published in the October edition of Myanmar: All That Matters

Mandalay International Airport. Photo: Sherpa Hossainy
Passengers board a flight at Mandalay International Airport. Photo: Sherpa Hossainy

Myanmar’s economy is on the rise and tourism is at its highest point in decades, but that alone has done little to help the country’s struggling aviation industry, which experts worry is being hampered by low safety standards and oversaturation in the market brought on by new carriers.

In 2010, just 791,000 tourists came to Myanmar. The Ministry of Hotels and Tourism is targeting as many as 5 million tourists by the end of this year after posting a record 3.5 million tourists and US$1.14 billion dollars in revenue last year. The rise in arrivals and the privatization of the aviation sector has spurred an influx of six new airlines – which now stands at a total of nine – in a country of only a few million fliers.

Realizing the market potential of Southeast Asia’s largest country, Myanmar’s civil aviation authorities have for years sought to upgrade its severely outdated airports, but a lack of regulation in addition to a profit-first mentality adopted by most airlines has resulted in airlines and authorities skirting international safety standards.

As a result, Myanmar’s air accident rate was nine times higher than the global average in 2013, U Win Swe Tun, director general of Myanmar’s Department of Civil Aviation (DCA), told Reuters.

Mandalay's airport terminal. Photo: Sherpa Hossainy
Mandalay’s airport terminal. Photo: Sherpa Hossainy

Htoo Group’s Air Bagan,which is owned by tycoon U TayZa, was ranked in January by AirlineRatings.com as one of the world’s most dangerous airlines following a number of incidences in recent years, including a fatal crash that killed two people at Heho Airport in Shan state on December 25, 2012.

But they are not the only ones. Many of Myanmar’s magnate-owned airlines have been the subject of minor accidents including Myanma Airlines, Air KBZ and KMA Group chairman U Khin Maung Aye’s Golden Myanmar Airlines.

“There are concerns over safety standards of some airlines operating within Burma. The [Foreign Commonwealth Office] can’t offer advice on the safety of individual airlines,” the British government’s overseas protection agency, the Foreign Commonwealth Office, states on its website.

To make matters worse, many of Myanmar’s 69 airports lack the capacity to follow international practices that would otherwise bolster the industry as the government spends just $12 million a year on maintenance. Among the issues that befall the airports include the absence of modern safety equipment, poor runway conditions, untrained staff and in some cases, air traffic controllers, who still perform their duties on paper.

“Yangon airport has a lot of constraints – the space is inadequate and the building and facilities are old,” said Air KBZ’s U Khin Maung Myint, deputy managing director of Air KBZ.

Air KBZ has a fleet of eight carriers, while most domestic airlines have two or three. It ranked second behind after national carrier Myanmar National Airways in passenger numbers last year. He said that foreigners now make up 46% of Air KBZ’s customers – a dramatic increase since the reform process began in 2011.

Beginning of the end

With the number of new airliners hitting a critical mass last year, profits in the local aviation industry have plummeted and many airlines have already been forced to consolidate their operations by installing code sharing arrangements with other airlines or closing down routes altogether. Golden Myanmar Airlines started operations in 2012 with 15 destinations – including international ones – but by 2015 it had reduced its route to just three destinations.

All routes between Yangon and Chiang Mai have been suspended, whereas 12 months ago at least four airlines, including Thailand’s Nok Air serviced the route.

“People tend to think that the aviation industry is a good move economically, but the reality is that scheduled carriers have a very thin profit margin,” said U KhinMaungMyint.

Bagan Airport. Photo: Sherpa Hossainy
Bagan Airport. Photo: Sherpa Hossainy

In mid-August, Air Bagan announced on its Facebook page that it was suspending all flights until repairs were carried out on its fleet of three aircraft.

“We find that business remains tough in Myanmar. There’s no question that it’s an irrational market. Everybody just follows everybody – there’s no real scheduling going on,” said Trevor Jensen, CEO of FMI Air, which is owned by Serge Pun and launched scheduled flights in May 2015.

Despite the growing number of foreign tourists flying throughout Myanmar, mergers and acquisitions are both necessary for the sector to once again become profitable, said FMI Air’s Mr. Jensen.

“Myanmar has 2.2 million passengers per year and nine domestic airlines. In Australia, there are 57 million passengers and four airlines. Having too many airlines means the customer loses out because if airlines aren’t making money they can’t provide a quality service,” he said.

He added that the majority of foreign fliers are mostly wealthy or on business, while the low-income segment has yet to make an impact in the otherwise expensive Myanmar market place.

There is some light on the horizon though, with several carriers, including Myanmar National Airways, Air Mandalay, FMI Air and Myanmar Airways International purchasing new aircraft – the latter inked a deal to lease 10 Boeings from GE Capital Aviation Services in February, with the first delivered in June.

The need for action

With the airlines struggling to survive, Myanmar faces another major challenge as it appears little will be done to repair most of its badly outdated airports despite promises that the government would handle the situation.

Onboard an FMI Air flight. Photo: Jessica Mudditt
Onboard an FMI Air flight. Photo: Jessica Mudditt

In late 2013, DCA announced that it would privatize at least 30 of Myanmar’s airports, however,that program has been delayed until at least the end of 2015 as it is necessary to focus on developing and upgrading airport projects in Mandalay and Yangon, said U Win Swe Tun.

In the meantime, FMI Air is trying to offer its customers a better flying experience by providing lounges at each airport it flies to. So far it has lounges in Yangon and Nay Pyi Taw and is in talks with Mandalay’s new management.

“The airport in Sittwe [Rakhine State] is nothing more than a shed really – there’s nothing we can do there. So we’ve bought  a really nice property in the centre of town which we’ll open as a lounge, ticket sales office and coffee shop and we’ll provide a shuttle service to the airport,” said Mark Turner, director of customer experience at FMI Air.

The recent announcement that $1.4 billion Hanthawaddy International Airport project in Bago has been delayed again, this time to 2022, has disappointed many.

The idea of constructing the country’s biggest airport was first conceived in the nineties but put on ice until 2004. When discussions resumed in 2013, officials said it would be ready by 2016. However talks with the original tender winner, a Singapore-led consortium,and DCA stalled in early 2014. DCA has since pushed back the opening date from December 2019 to 2022, with state media reporting on August 28 that there have been hold-ups in obtaining Official Development Assistance (ODA) loans to spend on the $1.4 billion project.

DCA’s deputy director confirmed that more time is needed to complete negotiations about securing ODA. There have been murmurs that some feel that the location of Bago, which is 80 kilometers from Yangon, is off-putting to some.

“People often say that Bago is too far from Yangon, but with improved infrastructure, such as the planned elevated road, or a high speed train, it will be convenient,” U Khin Maung Myint said.

He was also upbeat about the delay.

“There’s a lot of mumbling during the planning stage: but when it comes to construction, things will move quickly.”

Light at the end of the tunnel

Still, not all of Myanmar’s airport projects have failed. Yangon’s domestic terminal will double in size and is expected to be completed by mid-2016, while a consortium called Pioneer Aerodrome Services, which is a subsidiary of Stephen Law’s conglomerate Asia World, was selected in August 2013 to expand the international airport’s capacity from 2.7 million to 6 million passengers a year by 2015.

Mandalay International Airport is also slated for an upgrade and will become the country’s foremost cargo hub when the upgrade is completed next year, said U Ne Win of DCA.

FMI Air cabin crew
FMI Air cabin crew

He said that safety standards are also likely to improve when ASEAN’s ‘Open Sky Policy’ comes into effect later this year, establishing a regional safety authority that is modeled on the EU’s Aviation Safety Authority.

“We are still having discussions on most issues. It took the EU nearly 20 years to develop its single market. We are at the inception stage, so we need some time,” he said.

What is more, slight upgrades in domestic airline services have also begun to take hold over the past year as some are now offer online flight bookings, while the country’s first airfare aggregate website launched in June.

Flymya.com founder Mike Than Tun Win said that 95% of purchases are made by foreigners, which signals that there is a market eager to explore new growth in Myanmar’s aviation sector and that greater competition will raise service standards and offer more to what could only be described as disillusioned consumers.

“Airlines services offered in Myanmar are very similar and the routes are the same, therefore airline prices do not vary significantly. However, travelers do tend to want to look for the lowest price possible,” he said.