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YANGON, MYANMAR — A cracked concrete road flooded by monsoon rains leads to a new knitwear factory in a duty-free industrial zone an hour outside of Yangon. It is the first of two plants to be opened in the next year by Prosperity Knitwear Myanmar Ltd., based in China.

This story first appeared in the November 18, 2014 issue of WWD. Subscribe Today.

One million sweaters a year, some 90 percent of production, will be shipped to British retailers Marks & Spencer, Jack Wills, John Lewis and White+Warren Cashmere Clothing, once both plants are on line, said chief operating officer Alan Renton.

“We needed a duty-free route to Europe and wanted to spread our risk,” Renton said in an interview in his factory office. With much of Prosperity’s production based in China, the manufacturer considered Bangladesh, Cambodia and Vietnam before settling on Myanmar 18 months ago for expansion. The lure of factory wages ranging from $110 to $170 a month, a welcoming government and a nearby port proved irresistible to the firm, which is investing $700 million in the plants, Renton said.

Prosperity Knitwear of Myanmar is, so far, just steps ahead of hundreds of international garment makers who have come to Myanmar anticipating a new production location. The Gap started production with a contractor last summer, and Myanmar-made jackets are already in its U.S. outlet stores. Legwear manufacturer TTI Global Resources, based in Greensboro, N.C., has contracted for production of 70,000 dozen pairs monthly. More than 100 Hong Kong garment makers have traveled to this emerging democracy to explore manufacturing options. According to ASEAN, 39 percent of the region’s firms expect to invest in Myanmar in the next five years.

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Firms exporting to the European Union were the first to wade into Myanmar’s workforce since the EU granted Myanmar duty-free preferences under GSP last year. The U.S. is also debating GSP benefits for the country.

Manufacturers complain that with factory wages ranging from $250 to $700 a month, along with personnel shortages, China is pricing itself out of the production market. Monthly salaries of apparel makers in Vietnam reach $300. Production abilities in Cambodia and Vietnam are near capacity, and ongoing concerns over Bangladesh’s safety record presents its own set of problems, they said. Myanmar, with its Bay of Bengal ports, a history of garment making, and the 2011 fall of its military dictatorship, seemed like the logical choice.

When Myanmar President Thein Sein took office in 2011, he opened the military dictatorship to international investment. But after some 50 years of oppression under the generals, Myanmar is still struggling to emerge. Where once the only thing in the skies above Yangon were the murders of cawing crows, now building cranes pierce the skyline. Major hotel chains are moving in. Banks have opened and travelers once warned to bring in crisp $100 bills for any financial transactions now can withdraw Myanmar kyats from ATMs. Full-sized grocery stores have been built, and elderly Burmese, who once shopped exclusively at the wet markets around town, marvel at the shopping carts filled with imported food. The onerous import tax on new vehicles has been lifted and Yangon’s streets are jammed. Internet access in downtown Yangon is widespread and the heavy censorship of news and e-mail sites by the military regime has almost disappeared. Bandwidth, however, is low. And infrastructure, with little investment in the past 50 years, is collapsing.

Eighteen months ago, the executive lounge in Yangon’s downtown Shangri-la Hotel was stacked with foreign investors and their attorneys vying for opportunities. But the crowd has thinned while it waits for the country’s judicial and legal structure to resolve the uncertain investment climate. Myanmar’s new democracy is working to update laws dating back to the 19th century colonial era. Legislation on environment, banking, microfinance, securities exchange, import-export and tax are being drafted. A revision of investment laws is in its 21st draft.

International institutions also are urging the reform of Myanmar’s judicial system so new laws can be properly enforced. The Organization for Economic Cooperation and Development earlier this year recommended that Myanmar’s government, with its 30 often overlapping ministries, be streamlined.

Nor is the OECD the only organization pressuring the government: President Obama, on his visit to the country last week for the Asian regional summit, urged President Thein Sein to maintain Myanmar’s push to democracy by reforming its political system and Constitution. He also called on the country’s leaders to stop persecuting Muslims in western Myanmar.

The newly created Myanmar Investment Commission is the gateway to investment opportunities for businesses, but it’s also the inhibitor. Just 18 months into the burgeoning investment cycle, investors say it’s underfunded and overwhelmed by demand.

The MIC is encouraging apparel investments because it offers plentiful employment, said Gary Biesty of South Asia Law. Based in Bangkok, Biesty travels to Yangon weekly to manage his clients’ investments and help them navigate Myanmar’s regulatory maze. While demographic data are hard to come by in Myanmar, an official with the International Labor Organization there estimated that nationwide unemployment reaches 80 percent. The new government is trying to find jobs quickly, Biesty said.

“The Myanmar Investment Commission knows that the garment industry offers a fantastic opportunity for the people here,” Biesty said over tea served in china cups in the Shangi-La Hotel lounge. “The garment industry offers high employment, is nimble, able to get in quickly and start producing quickly.”

Yet the commission is having difficulty responding to requests. While initially eager to give wholesale investment approval, it’s now seeking environmental impact statements and corporate social responsibility commitments that can reach 5 percent of return. At the same time, it’s trying to move from paper-based to online systems.

“Investors are frustrated because there is no legal infrastructure,” Biesty said. “We need experts in Myanmar to help write this law.”

Steve Mostofsky, president and chief executive officer of TTI Global Resources, said his firm is hoping for government clearance to begin legwear manufacturing by the end of 2014.

“It’s taking longer than we planned,” he said. His Myanmar contractor will hire 350 workers to turn out 70,000 dozen pairs monthly once operations begin, he said. While awaiting government clearance, Mostofsky said worker training is underway, and that Myanmar workers already are achieving up to 80 percent of the productivity level of their Chinese counterparts.

“There’s not a major company out there today that isn’t considering manufacturing in Myanmar in some way,” he said. TTI Global Resources is investing up to $10 million in Myanmar. The firm manufactures for Adidas, Ann Taylor, Gap, Lacoste, Esprit, Banana Republic, Old Navy, Donna Karan, DKNY and Tommy Hilfiger, he said.

Felix Chung, a Hong Kong garment maker and a member of the Legislative Council of Hong Kong for Textiles and Garments, has led executives from more than 100 Hong Kong firms on trips to explore investment in Myanmar. While firms aren’t abandoning their Chinese manufacturing options, they eye Myanmar for expansion, Chung said. China is still the best for on-time, high-end orders, he said, but Myanmar will prove valuable for large orders of basic styles.

“We feel very positive, otherwise we wouldn’t invest there,” he said in a telephone interview from his Hong Kong office.

Wilma Wallace, vice president of global responsibility with Gap, said Myanmar manufacturing helps the company diversify its sourcing portfolio. Gap contracted with two of its South Korean vendors for production of a quilted, anorak jacket intended for the North American market.

Most workers in the domestic apparel industry earn Myanmar’s minimum wage of $2 an hour. International apparel makers are paying about $4 an hour, Biesty said. At Prosperity Knitwear of Myanmar, wages will be based on piece work and could reach $180 a month, Renton said. The firm had 2,700 applicants for the 1,000 jobs in its first plant, he said. The second nearby plant, which will start construction by the end of 2014, is expected to employ 3,000, Renton said.

Many of the applicants to Prosperity have been working in the diminished local apparel industry that survived international sanctions, Renton said. At its peak in 2001, the domestic industry comprised 300 firms and employed some 300,000. By 2004, just 51,000 Burmese worked in the domestic industry. About 84 percent of Myanmar’s apparel exports went to the EU in 2004, when they dropped to zero to the United States because of sanctions. Before the levy, about 45 percent of Myanmar’s apparel exports went to the U.S. in 1997. Today, about 170 domestic firms operate in the country, and have survived primarily because of aid from Japan and Korea, said Michal Strahilevitz Ben Eliezer, a chief technical adviser for the ILO in Myanmar.

Another reason major apparel makers are delaying investments in Myanmar is because of infrastructure problems. According to local press reports, more than two dozen people in Yangon were electrocuted from May through June when aging electrical cables fell to the streets.

Factories must rely on generators for 24-hour power. Prosperity’s new plant has generators, along with a water purification and recycling system.

According to the World Bank, Myanmar ranks 145th among the world’s nations for the quality of its customs operations, logistics, tracking and tracing ability, and international shipments. ASEAN reports that the biggest barrier to doing business in Myanmar is infrastructure, followed closely by housing and office costs, and the lack of a trained workforce.

“This is the only place left in South East Asia for expansion,” he said. “We calculated that it’s worth the risks. In two or three years, when everything is up and running, we’ll have our edge.”