YANGON -- Myanmar's once-thriving garment manufacturing sector is steadily recovering from years of damaging international sanctions. But it is still far from meeting expectations of a rapid resurgence -- due partly to lingering fears among international apparel buyers of reputational risk.
Since the reformist government of President Thein Sein came to power in 2011, the U.S. and the European Union have lifted or suspended sanctions that had significantly stalled the industry.
Exports hit $868 million in 2001, according to the Myanmar Garment Manufacturers Association, giving the country 0.45% of total global clothing exports, then valued at $195 billion, according to the World Trade Organization. They dropped to just over $300 million in 2005, after initial U.S. sanctions were toughened in 2003.
Their trajectory has now been reversed. They reached $1.2 billion in 2013, and could rise to $1.7 billion this year, according to the garment association.
That forecast represents 0.37% of a global clothing exports market that has more than doubled in size since 2001 and was worth $460 billion in 2013, according to the WTO. Based on this yardstick, Myanmar has a long way yet to get back to where it was before being hit by sanctions.
"They are buying more, but not according to our expectation," said factory owner and industry champion Khine Khine Nwe, referring to European and North American brands. "We expect more from them."
Garment exports to the EU were valued at $125 million in the first eight months of this year, according to the EU's preliminary figures, but the garment association predicts that by year's end the total will be more than double the $179 million for 2013.
Brands importing from Myanmar to Europe include the Swedish apparel giant Hennes & Mauritz, which runs nearly 3,600 stores worldwide under the H&M brand. British retailer Marks and Spencer, with 1,253 stores in 55 countries, has placed trial orders with Myanmar factories.
However, the U.S. has only suspended rather than lifted sanctions, causing uncertainty for buyers. The sanctions could be easily and quickly reimposed.
Washington also continues to blacklist Myanmar businesses with links to the former military regime and imposes strict reporting requirements on U.S. investors. Among major brands, only Gap has publicly declared it has resumed buying from Myanmar, albeit at a low level.
Exports to the U.S. in the first nine months of 2014 totaled $11.2 million, according to the garment association. By way of comparison, Japan in 2013 bought $480 million worth of garments from the country and South Korea placed $391 million worth of orders.
Khine Khine Nwe -- also secretary general of the garment association and joint secretary general of the Union of Myanmar Federation of Chambers of Commerce and Industry, the country's principal business organization -- said the garment industry has about 200,000 workers. Most work in "cut, make and trim" factories, where imported cloth is turned into garments.
The sector peaked at more than 300,000 workers in 2000 but shrank to 60,000 while the sanctions were in full force, she said. U.S. sanctions began in 1997 but were at their most restrictive from 2003 to 2012.
"We expect quicker [growth], but when I think from the investors' side, maybe they might have some reasons why they don't come," Khine Khine Nwe said. "Some people told me it's about labor standards here; some are talking about the political issues here."
Political reform concerns
U.S. President Barack Obama, who visited Myanmar in mid-November for an international summit, expressed concerns that political reforms had stalled, damping hopes that Washington might soon agree to preferential trade terms for the garment industry.
Western investment across Myanmar's economy has been slow, with many companies thought to be delaying investment decisions until parliamentary elections scheduled late next year.
For international garment buyers, many stumbling blocks remain -- notably Myanmar's reputation for employing child labor. A minimum wage law was introduced in 2013, but discussions over details are dragging on, while working conditions in the industry wildly vary. Factory inspections are inadequate by international standards.
Concerns have been heightened by the results of an extensive audit of two South Korean-owned garment factories in Yangon, which was ordered by Gap when it began sourcing jackets and vests for its Old Navy and Banana Republic labels.
The audit, voluntarily published by Gap, was conducted by Verite, a nonprofit labor rights group, which said it had "uncovered a number of compliance issues," including problems relating to disciplinary practices, overtime payments and safety. The factories had made progress on addressing most of the issues, the report said, but more work was needed to fully comply with Gap's global supplier standards.
Gap said its decision to invest in the country "underscores our priority to maintain a flexible and nimble supply chain, and is the result of a rigorous due diligence process that included discussions with critical stakeholders."
The U.S. company said it is "working with two factories in Myanmar and ... committed to applying industry-leading best practices and to doing our part to ensure that internationally recognized human rights and labor standards are upheld."
However, the findings of the audit followed earlier reports of poor labor conditions that were already putting pressure on international brands considering Myanmar as an export base.
An investigation by Myanmar labor unions and nongovernmental organizations last year found that "workers in Yangon's 13 industrial zones work in unsafe, hot, overcrowded factories, typically for around 11 hours per day, six days per week."
Paul Forman, group chief executive of Coats, a U.K. thread and yarn manufacturer that is moving into Myanmar to supply the garment industry, said the clothing sector sees Myanmar as a useful source of supply.
"But it will not go to Myanmar as a major destination if it feels that it is a major risk to any brand's global reputation," he said. "The sensitivity to reputational issues has increased markedly in the last year or two. It's not necessarily driven by consumers but by investors."
The garment industry's heightened concerns are in part based on problems in neighboring countries, such as the collapse last year of the Rana Plaza garment factory in Dhaka, Bangladesh, which killed more than 1,100 people.
In Cambodia, four workers were shot dead by security forces in January during protests over pay and conditions -- a reminder that governments in garment-producing countries are not always as concerned with workers' rights as Western shareholders might wish.
The "red line"
Forman said that Myanmar would likely engage in "a journey" toward compliance with global garment industry standards. But some buyers are wary of health and safety issues in factories. These problems, along with the use of child labor, could constitute a "red line" that brands would not risk crossing, he said.
Steve Marshall, the International Labor Organization's liaison officer in Yangon, said the garment industry's slow recovery in Myanmar might also be the result of fundamental economic factors.
"It hasn't been the huge flood that some people had predicted," Marshall said. "But I would actually suggest that it's not all about the issues of politics and labor standards. I think you'll find that actually there are other elements."
He cited Myanmar's poor infrastructure, burdensome trade bureaucracy and unreliable electricity, which forces many factories to use expensive diesel generators. Myanmar ranks 178th of 189 countries in the World Bank's ease of doing business index 2013 and regularly appears on lists of the most corrupt countries in the world.
"Electricity, communications and finance are pretty fundamental issues, as is [the] rule of law," Marshall said, "which makes a lot of companies very nervous."
Nevertheless, the country's low wages were still drawing plenty of interest in the garment sector, he said, describing the ILO's Yangon office as a "railway station" -- always busy with international buyers looking to do business in Myanmar.
"I think you'll find for big companies, really big boys, they can actually take some of those risks and they can see it as an investment for the future," Marshall said.
The ILO is working with the U.S., Japan, and Denmark on an initiative to assess laws governing labor in Myanmar and advise the government on reforms. Marshall said that once there is more clarity about the extent and detail of legislation affecting the industry, the country could enter a program called Better Work, run by the ILO and the International Finance Corp., an arm of the World Bank. The program seeks to improve labor conditions in manufacturing nations.
Said Khine Khine Nwe: "We're trying to catch up with the international norms. We have our natural norms also, but we need [a] bridge between our local norms and international norms to match each other. That will need time."