Jun 7, 2014

Apparel Retailer Gap Forges Ahead in Myanmar

Gap Inc. plans to produce apparel at factories in Myanmar, becoming the first major U.S. apparel retailer to tap the country's garment industry since Western sanctions were lifted two years ago.

The San Francisco-based retailer said it has signed a sourcing deal with South Korean-owned factories in the country, producing outerwear for its Old Navy and Banana Republic stores. Shipments to malls across the U.S. are set to begin this summer.

Myanmar's sizable garment industry—which employed approximately 300,000 people in the early 2000s, according to government figures at the time—was hit hard by a U.S. trade embargo imposed in 2003. The Obama administration started lifting those sanctions in 2012, after a new nominally civilian government in Myanmar enacted a series of economic and political reforms.

Gap, which sources apparel from roughly 40 countries, declined to say how much it is investing in the Myanmar project. But, based on the employment Gap expects to create—about 700 jobs to fulfill its apparel orders at the South Korean factories, and as many as 4,000 indirect jobs in the country—it is likely one of the largest U.S. economic commitments to Myanmar since the end of sanctions. More than a year ago, Coca-Cola Co. started producing Coke in Myanmar, pledging to spend $200 million here over five years.

Other American companies, including General Electric Co. GE +1.53% and APR Energy APR.LN -4.70% PLC, have embarked on significant investments in Myanmar. In January, GE's financial arm signed a $960 million contract to lease 10 Boeing aircraft to carrier Myanmar Airways, and in February APR Energy won a contract to refurbish a 100-megawatt power plant in the country, an investment valued at $30 million.

But analysts have wondered if corporate interest in Myanmar opportunities is waning. Western firms are facing stricter international standards on labor conditions, requiring due diligence before taking on new suppliers. They also confront a weak infrastructure in Myanmar, and for American companies some continuing sanctions.

"[The Gap contract] is what we have been waiting for in a sense—the 'big footprint' investment project beyond the extractive sector that will employ a lot of people," said Sean Turnell, an expert on Myanmar's economy at Sydney's Macquarie University. "Western investment broadly has stayed away, wary of all-pervasive uncertainty on a range of fronts."

The Gap deal is notable because the garment industry was one of Myanmar's largest before U.S. sanctions. Before the 2003 trade embargo, apparel accounted for nearly 40% of Myanmar's exports, with about half going to the U.S., according to an academic paper by Toshihiro Kudo at the Japan External Trade Organization's Institute of Developing Economies.

In 2004, the U.S. State Department estimated more than 50,000 garment jobs had been lost to sanctions, though the slack was later picked up by exports to Japan and Korea. Gap's outsourcing deal, which analysts say is likely to be followed by other apparel retailers, could signal a resurgence of American demand.

U.S. Secretary of Commerce Penny Pritzker paid her first visit here in the past week, affirming Washington's commitment to aiding Myanmar's economic growth.

Still, U.S. investment lags far behind many other countries.

Cumulative U.S. direct investment in Myanmar amounts to $243.6 million, or less than 1% of overall foreign direct investment in the country. China has invested $14 billion in the country, or just over 30% of the total.

Myanmar government officials say privately that investment from Western countries, and particularly the U.S., hasn't risen as quickly as hoped—a shortfall that is especially worrying because new Chinese investment has slowed dramatically since Myanmar embarked on economic reforms in 2011.

Gap's decision to invest required due diligence, including a review involving Verité, a nongovernment organization that focuses on labor rights. According to Verité chief Dan Viederman, his group was paid by Gap to make four trips to the country over six months, identifying potential labor issues and violations. Verité also educated workers about international business standards.

Myanmar is "not a place where quick fixes are going to result in the raising of levels of awareness on international best practices," said Mr. Viederman, leaving workers more susceptible to labor-rights violations. Due diligence takes time but can pay off in Myanmar, he added.

U.S. companies are still barred from working with a couple of hundred individuals considered to be cronies of the previous military government.

Economic activity with the country's military is also prohibited, putting off limits garment factories partially owned by the Union of Myanmar Economic Holdings Ltd., the military's economic arm.

Workers at the South Korean-owned factories supplying the Gap products—which Gap says cannot be identified for competitive reasons—are paid an estimated average of $110 a month, with supervisors earning as much as $1,000.

Those wages are approximately four times what the average Myanmar garment worker earns. At the factory on Wednesday, dozens of applicants were waiting at a booth under the blazing sun, submitting documents for employment.

Though wage levels in Myanmar are attractive to Western companies, infrastructural shortcomings as well as due-diligence demands add to the expense of doing business in the country. For example, electricity shortages require backup generators at factories. Still, Gap, says it was ready to seize on opportunities in a country in transition.

"This is a historic moment for Myanmar, and we believe the apparel industry will play a key role in helping to fuel the economic prosperity of the country," said Debbie Mesloh, senior director of public affairs at Gap, who was visiting Myanmar.

Source: Wall Street Journal