Home Insider US clothing giant Gap move to produce in Myanmar

US clothing giant Gap move to produce in Myanmar

G ap Inc. plans to produce clothes at factories situated in Myanmar, be-coming the first major US apparel retailer to tap the country’s garment indus-try since Western sanctions were lifted two years ago.

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

Myanmar’s sizable garment industry—which employed approximately 300,000 people in the early 2000s, according to govern-ment figures at the time—was hit hard by a US trade embargo imposed in 2003. The Obama administration started lifting those sanctions in 2012, after the 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’s in-vesting 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 to be one of the largest US 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 in over five years.

Other American companies, including Gen-eral Electric Co. and APR Energy 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.

However, analysts have wondered if cor-porate interest in Myanmar opportunities is waning. Western firms are facing stricter international standards on labour condi-tions, 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 Universi-ty. “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 be-fore US sanctions. Before the 2003 trade embargo, apparel accounted for nearly 40% of Myanmar’s exports, with about half going to the US, according to an academic paper by Toshihiro Kudo at the Japan External Trade Organization’s Institute of Developing Econ-omies.

In 2004, the US State Department estimat-ed 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 retail-ers, could signal a resurgence of American demand.

While US Secretary of Commerce Penny Pritzker paid her first visit here in the past week, affirming Washington’s commitment to aiding Myanmar’s economic growth. US investment lags far behind many other coun-tries.

Cumulative US direct investment in Myan-mar 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 US, 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 dili-gence, including a review involving Verité, a non government organization that focuses on labour rights. According to Verité chief Dan Viederman, his group was paid by Gap to make four trips to the country in over six months, identifying potential labour 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 labour-rights violations. Due diligence takes time but can pay off in Myan-mar, he added.

US companies are still barred from working with a couple of hundred individuals consid-ered 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 Hold-ings Ltd., the military’s economic arm.

Workers at the South Korean-owned fac-tories supplying Gap products—which Gap says cannot be identified for competitive rea-sons—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 attrac-tive to Western companies, infrastructural shortcomings as well as due-diligence de-mands, add to the expense of doing busi-ness in the country. For example, electricity shortages require backup generators at fac-tories. 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 pros-perity of the country,” said Debbie Mesloh, senior director of public affairs at Gap, who was visiting Myanmar.