Myanmar’s Corruption Legacy Shadows Opening to Investors – Dealing with Corruption Series part 1

Last week’s sold out What Lies Beyond the BRICS event produced by the Princeton Council on World Affairs and Fluent In Foreign LLC., examined whether the time to invest in the booming BRICS markets has passed and may be it’s time to look at the next wave of emerging smaller markets around the globe.  The event featured representatives of eight countries with four – Canada, Slovakia, Czech Republic and Slovenia making very appealing and informative presentations.  In the exclusive announcement, the itinerary and the dates of the upcoming Global Business Conference at Sea, which will feature participation of 40 countries and over 2,500 international investors, exporters, financiers, franchisors and buyers were revealed

This week’s two posts illustrate both the slowing economy in China as an example of the BRICS’ cooling off cycle, and the challenges of investing in some of the hottest new markets such as Myanmar.  The article below is a very good illustration of issues, which exist in many emerging markets and how these issues counterbalance fantastic business opportunities available there.

In the next few months, Princeton Council on World Affairs and Fluent In foreign will present a series of events titled: They WILL be Asking You to Pay Bribes, or How to Deal With Corruption in International Business.  The dates for the upcoming events and their venues will be announced shortly.

Myanmar’s Corruption Legacy Shadows Opening to Investors

Bloomberg News, May 2012

For Zaw Naing, 40, who sells satellite imagery to Myanmar’s government, teeing off on the golf course with any of the former generals running the country is essential to sealing deals. Sometimes, he has to do more.

Naing, managing director of Credent Technology in Yangon, says he puts aside a “small percentage” to buy goodwill and “pay back not to individuals, but to the community, the society or the organization.”

“We have to look at all the culture, all the history; Those organizations want something back,” Naing said in a May 2 interview in his office. “How can you eradicate a culture overnight?”

Such business practices pose a hurdle for U.S. companies that may be looking to enter the Myanmar market after President Barack Obama yesterday eased an American investment ban. The U.S. continues to bar doing business with companies linked to the military, which ran the country for five decades, and is watching to see how political and economic reforms develop in the nation also known as Burma.

“We say to American business: Invest in Burma and do it responsibly, be an agent of positive change,” Secretary of State Hillary Clinton said yesterday in Washington.

Perhaps more than anywhere else, golf in Myanmar separates the elite from rest. A legacy from British colonial rule, knowing how to wield a golf club and who to share a cart with is key to doing business in the long-isolated country that ranks among the poorest and most corrupt in the world.

‘Personal Relationships’

“It’s all about personal relationships; they are still very important,” said Naing, who displays golfing trophies and a framed certificate from Michigan State University, where he studied international development on a U.S.-funded Hubert H. Humphrey Fellowship.

American companies in oil and gas, mining and financial services — now free to hunt for investment opportunities –will need to bear in mind that personal relationships in Myanmar may involve more than golf.

Only two nations — Somalia and North Korea — are more corrupt than Myanmar, according to Berlin-based Transparency International, which ranks 183 countries based on surveys of entrepreneurs and analysts on their perception of corruption. “We do have such things: bribery, corruption, nepotism, kickbacks,” said Naing.

Still, he said, the practice of “giving back” is something of a way of life. “Maybe I am working with the Ministry of Agriculture and Irrigation. I give back to the ministry so that they know that Zaw Naing gives back, but not to a person, not the minister,” he explained. “Sometimes the government budgets are not enough to keep the offices alive to have some paper for the copiers.”

Former Insiders

One of the biggest challenges to Myanmar’s year-old elected civilian government is how to free commerce from the former military-regime insiders who’ve had a lock on the country’s resources, such as oil, timber and gems.

President Thein Sein, 67, the general-turned-civilian who began opening Myanmar to the West after he took office 14 months ago, is aware of the corruption that’s blighting efforts to develop a country that aspires to be the next Asian Tiger. Still, his economic team sees no quick fixes.

“We don’t expect this problem can be eradicated immediately, but we try our best to control, to medicate this problem,” his top political adviser, Ko Ko Hlaing, said in a May 2 interview in Yangon.

No Water, No Electricity

Myanmar is drawing interest as a resource-rich country with enormous potential now that it is embracing reform. The U.S. Chamber of Commerce, the US-ASEAN Business Council, and the National Foreign Trade Council applauded the Obama administration’s action.

“Myanmar’s leadership has made it clear that it welcomes American investment, and in many ways sees it as preferable to that of some of our competitors” because of U.S. standards for corporate responsibility, the three groups said in a statement yesterday.

In 1962, the start of military rule, Myanmar “was the single richest country in Asia,” investor Jim Rogers, the chairman of Rogers Holdings, said at a conference in Singapore Feb. 22. “Now it’s the poorest because it’s been so badly managed in the past 50 years. But they are changing that now.”

“If I could put all of my money into Myanmar, I would,” said Rogers, who predicted a global commodities rally in 1999.

For overseas businessmen trying to establish a presence in Myanmar, potential bribery isn’t the only obstacle. Investors are required by the government to bring at least $500,000, half of it in cash and the rest in assets, according to Thura Swiss Ltd., a Myanmar-based consultancy.

‘Quite Challenging’

The lack of modern infrastructure and financial systems also present a barrier. The U.S. move to ease sanctions was also criticized by New York-based Human Rights Watch, citing the prevalence of cronyism and ethnic strife.

“In a country such as Myanmar, with little or no infrastructure, everything from water to electricity is an issue in terms of just setting up shop,” said Howard Kuan, 29, from Hong Kong, the manager of a Chinese garment factory on the outskirts of Yangon. “Everything is quite challenging.”

Only about a quarter of the population has access to electricity, the Asian Development Bank said in a report last month. One in 30 people has a mobile phone, and less than 1 percent of the population has an Internet connection, Tokyo- based Nomura Holdings Inc. (8604) said in a March 14 report.

Fresh Paint

The fresh coat of white paint on Kuan’s new clothing factory is a contrast to the poverty just outside the gates, where stray dogs sniff garbage along muddy roads with open sewers and a line of aspiring workers stares up at a board with job postings. They peek inside at rows of sewing machines in a well-aired room.

To operate his machines, Kuan had to get generators to cope with power outages that can last six hours a day. He also had to find a way to pump and filter water. When he arrived to face all these problems, he couldn’t make calls or send an e-mail.

“When we first came, we couldn’t buy SIM cards for cell phones,” he said in a May 2 interview. “As people here without any friends, at first we were left without communication with the outside world. Going online was even more impossible.”

Making the right friends was necessary to navigate a series of unwritten rules in a country with no code of law.

Over a cigarette and a can of Coke, Kuan recalled that two weeks after the factory opened, some “local government types started knocking on doors” and asked him for licenses that neither he nor his lawyer, a former judge, thought were needed. He paid them what they asked to obtain the paper document.

‘No Receipt’

“Now whether they took that money we don’t know, but the bottom line is as business people, these are expenditures we have to make,” Kuan said. “And there really is no receipt or anything official. We are here to stay, so we pay the sums just to make sure that what is due is due, and that in the end we are not going to be illegal here.”

To reward Myanmar for beginning the transition from dictatorship toward democracy, the U.S. eased sanctions with some reservations.

“We continue to have concerns, including remaining political prisoners, ongoing conflict and serious human rights abuses in ethnic areas,” the administration said in a statement. The European Union has suspended most of its sanctions for a year.

Still, for the Burmese it’s the Americans that count.

Even days before the U.S. action, Zaw Naing says his phone was ringing off the hook with American companies such as GeoEye Inc. (GEOY), a Herndon, Virginia-based satellite-image provider, interested in partnering with him.

“American sanctions are very important, very influential,” he said. “I have been telling Americans since 2008 that this government is serious about change. You believe me?”

To contact the reporter on this story: Flavia Krause-Jackson in United Nations at fjackson@bloomberg.net

China’s Car Dealerships Struggle as Stockpiles Increase – time to look Beyond The BRICS?

Although BRICS have still have massive expansion potential, entering those countries today is fraught with additional risk and the rewards for direct investors may be more elusive than ever.

Last week’s sold out What Lies Beyond the BRICS event produced by the Princeton council on World Affairs and Fluent In Foreign LLC., examined whether the time to invest in the booming BRICS markets has passed and may be it’s time to look at the next wave of emerging smaller markets around the globe.

China’s Car Dealerships Struggle as Stockpiles Increase

Bloomberg News, May 18th, 2012

Chinese dealers are struggling with the rising number of unsold cars that’s threatening to deepen price cuts, according to the nation’s biggest automobile dealers’ association.

Dealerships for Honda Motor Co. (7267), Chery Automobile Co., BYD Co. (002594) and Geely (175) Automobile Holdings Ltd. carried more than 45 days of inventory as of the end of April, exceeding the threshold that foreshadows debilitating price cuts, Su Hui, vice president of the auto market division at the state-backed China Automobile Dealers Association, said in an interview yesterday.

“Unsold cars are crowding dealer lots in cities from Guangzhou in the south to Xi’an to the west,” Su said in a phone interview yesterday from Beijing. “It’s like a contagious disease that will spread.”

The warning signals that vehicle deliveries reported by companies, which have risen more than analysts’ estimates for the past two months, aren’t fully translating to consumer sales. Demand was the slowest in the first four months since 1998, weighing on automakers from General Motors Co. (GM) to Volkswagen AG (VOW), which are counting on the world’s largest auto market to offset slumping sales in Europe.

Intensifying Competition

“Competition will get fiercer,” said Huang Wenlong, a Hong Kong-based analyst with BOC International Holdings Ltd. “China’s auto demand will definitely slow down with the decline of the economic growth rate.”

BYD (1211) fell 4 percent to HK$15.22 at the midday trading break in Hong Kong, poised for its lowest close since Oct. 24, after earlier dropping as much as 5.4 percent. Geely dropped as much as 3.4 percent and Guangzhou Automobile Group Co. (2238), which makes cars with Honda, fell as much as 2.7 percent.

An increasing number of small-scale dealers are suffering losses after discounting cars to boost sales, according to Feng Jian, deputy general manager of Pang Da Automobile Trade Co. (601258), China’s second-largest auto dealer by market value. Competition is also leading to consolidation among dealers, Feng said.

China Yongda Automobiles Services Holdings Ltd., a Shanghai-based car retailer, plans to raise as much as HK$3.4 billion ($433 million) from an initial public offering in Hong Kong and plans to use 35 percent of the proceeds on potential acquisitions.

Recommendation Cut

Honda’s joint venture factory in China shut down for more than two weeks for the Labor Day public holiday and line maintenance, according to the Tokyo-based automaker. The stoppage prompted CLSA Asia Pacific Markets to cut its recommendation on Honda’s partner, Guangzhou Automobile, citing worsening demand.

“While we had expected a poor first half, we did not expect to see the market deteriorate so fast that the Honda JV needed to close the factory for 16 days,” Scott Laprise, Beijing-based analyst at CLSA, said in a May 11 report.

Honda President Takanobu Ito said yesterday in Tokyo that he wasn’t too concerned about China because the market still has room to expand. Executive Vice President Tetsuo Iwamura said at the same event the automaker’s inventory levels in China are appropriate and “aren’t too big of an issue yet.”

CLSA this month also lowered its recommendations on Dongfeng Motor Group Co. and Great Wall Motor Co. (2333), citing worsening prospects for sedan makers.

China ZhengTong Auto Services Holdings Ltd. (1728) and Baoxin Auto Group Ltd., Chinese luxury auto dealers, canceled plans to sell dollar-denominated bonds on May 16 as yields on Chinese debt in the U.S. currency surged the most since September.

Vehicle Sales

China’s total vehicle sales declined 1.3 percent in the January-to-April period, the worst showing since 1998 when deliveries fell 1.6 percent, according to data compiled by the China Association of Automobile Manufacturers, as slowing economic growth and rising fuel prices dented consumer demand.

GM, the world’s largest automaker, reported sales growth accelerated last month as demand for its Wuling minivans offset a drop in Chevrolet deliveries. While Wuling helped total growth quicken to 12 percent from 11 percent in March, Buick sales growth slowed to 1.7 percent from a year earlier and demand for Chevrolet vehicles shrank 6.2 percent.

Inventory levels at automakers rose 3.3 percent to 757,400 units as of the end of April, the highest in at least 16 months, CAAM data show. Dealerships are holding at least the equivalent in stock, according to Cheng Xiaodong, who oversees auto price monitoring at the National Development and Reform Commission, the nation’s top economic planner.

The monthly NDRC survey of 36 major Chinese cities showed average car prices fell 1.9 percent in April from a year earlier, a fourth straight decline this year.

‘Big Pressure’

“There’s pretty big pressure on auto dealers and automakers to cut prices,” said NDRC’s Cheng. “Car demand is not rigid and is easily undermined by macroeconomic conditions and the cost of owning cars.”

Pacific Investment Management Co., which oversees the world’s largest bond fund, said this month that China’s economic growth may slow to the “mid-7 percent range,” a pace unseen since 1999. Economists at Citigroup Inc. and JPMorgan Chase & Co. cut their estimates for China’s economic expansion after April industrial production and trade grew less than estimated and renewed European debt turmoil roiled markets, prompting authorities on May 12 to cut the reserve ratio for the third time in six months.

Steeper discounts bode well for consumers shopping for their next drive.

“The auto consumer is becoming very price sensitive and appears to be buying only if there is a good deal,” said Ole Hui, a Hong Kong-based analyst at Mizuho Securities Asia Ltd. “Pricing is definitely on a structural downtrend.”