BANGKOK/TOKYO -- Japanese and Thai companies began flocking to Myanmar a decade ago, betting that its tentative embrace of democracy would open up an untapped market. Now the military coup threatens to throw long-nurtured business plans into disarray.
The risk for foreign companies, which have been eager to use Myanmar as a production base as well as tap its nascent domestic market, is threefold: the possibility that the U.S. and Europe will reimpose sanctions on the Southeast Asian country, the reputational risk of doing business under a military regime, and policy uncertainty.
The specter of Western sanctions is looming especially large.
"We are not very concerned about border trade, as that has got back to normal," Supant Mongkolsuthree, chairman of the Federation of Thai Industries, told Nikkei Asia. "What we are worried about is that sanctions from the West could affect Thai investment in Myanmar."
Thailand is Myanmar's second-largest trade partner for goods, exporting $3.2 billion and importing $2.2 billion in 2019, according to ASEAN statistics. It also invested more than $1.1 billion in Myanmar between 2015 and 2020, according to Myanmar government data, making the sixth-largest source of foreign investment after such countries as Singapore, China and Japan.
Japanese companies, meanwhile, have invested over $1.7 billion in Myanmar since international sanctions began easing in 2011, according to Myanmar's foreign investment authority, and the government estimates around 3,500 Japanese nationals live in the country. Automakers, including Suzuki Motor and Toyota Motor, were among the earliest to enter the Myanmar market and are in the midst of expanding their presence there.
Myanmar has offered an attractive market for both Japanese and Thai companies, who are grappling with slowing growth and aging populations in their home markets. The southeast Asian country also offers lower production costs, making it attractive as a production base.
While most businesses have been circumspect in commenting on the coup, Western governments have been quick to condemn the military's seizure of power.
U.S. President Joe Biden has threatened to reimpose sanctions on the country, saying the U.S. will "stand up for democracy." Washington has already officially labeled the power grab a coup, which means some forms of aid to Myanmar will automatically be cut.
Leaders of European countries, meanwhile, have condemned the seizure of power and demanded the military release Aung San Suu Kyi, the leader of the National League for Democracy party, and other civilian leaders being held.
"The responses from the West indicate that there is a very high likelihood that they will issue trade sanctions to keep pressure on the Myanmar military," said an analyst at Asia Plus Securities.
The European Union may find itself under particular pressure to respond after it recently revoked Cambodia's trade privileges over "democratic backsliding" on the part of the government.
While Biden can threaten U.S. sanctions, however, Myanmar's military leaders can likely count on China and Russia to shield it from a truly multilateral response. The two countries, both permanent members of the U.N. Security Council, have historically vetoed sanctions and resolutions punishing Myanmar for human rights violations.
Previous U.S. sanctions on Myanmar have included a blanket ban on imports from the country as well restrictions on the export of financial services to Myanmar.
U.S. ally Japan could also stand in the way of multilateral action, especially if the military-owned Myanma Economic Holdings and Myanmar Economic Corp. are targeted. A number of Japanese companies have business ties with the two companies, including beverage giant Kirin, which holds the majority stake in two breweries it jointly owns with MEHL.
"If the United States imposes economic sanctions on Myanmar, its ally Japan will be put in a difficult position," Nippon Foundation Chairman Yohei Sasakawa wrote in a statement on Monday. The charitable organization played a key role in negotiating the cease-fire between the Myanmar government and ethnic combatants in 2015.
But even if sanctions do not materialize, companies with global operations could face another risk: reputational damage.
Kirin has already come under scrutiny for its business ties with MEHL, which has been accused of massacring minority Rohingya Muslims and destroying their villages. An audit commissioned by the Japanese company to conduct an independent assessment of MEHL failed to reach a satisfactory conclusion in January.
Toyota, which has been actively selling cars in Myanmar since 2014, says it is still considering whether to open a plant in the country this month as planned. Doing so would make it the first global company to launch a major project in post-coup Myanmar -- a distinction that may not sit well with consumers in the U.S. and Europe, two of Toyota's most important markets.
The possibility of sanctions has already forced some Thai companies to pause projects in Myanmar.
Amata Corp., Thailand's largest industrial estate developer, said on Tuesday it has suspended development of its first industrial estate in Yangon due to foreign investors taking a wait-and-see approach.
Visit Limluecha, vice chairman of the Thai National Shippers' Council, said Western sanctions would cut Myanmar's exports to the West and stifle the country's economic growth, which would in turn affect Thai investment in Myanmar.
"The sentiment looks gloomy now, as no one knows what will happen next. We can do nothing except wait and see," Visit said.
Uncertainty over government policy, meanwhile, is hanging over companies like PTT Exploration and Production, or PTTEP. The Thai energy giant has invested billions of baht in gas exploration and production in Myanmar. Its $550 million gas pipeline carries natural gas from its sites in Myanmar to gas-fired power plants in Thailand.
The company said in a statement on Tuesday that it is maintaining normal gas production operations at all three of its blocks in Myanmar, but analysts have flagged the possibility of changes to energy policies under the military leadership.
"The current operation will stay intact, but what concerns us most is PTTEP's next projects in Myanmar, which could be delayed if there is any change in the country's energy policy after the coup," said an analyst at Phillip Securities.
Those projects include a $2 billion plan to build a 600-megawatt power plant in the Ayeyarwady region of Myanmar. PTTEP received government permission to move ahead with the project on Dec. 30, and a final investment decision is due to be made in early 2022.