Aeon’s Myanmar bid highlights supermarket uncertainty

Japanese retail giant Aeon’s ambitions in Myanmar’s lucrative retail sector have highlighted uncertainty about what foreign firms are allowed to do as far as trading is concerned, with local industry heads calling for more clarity and a level playing field for domestic and international players.

Aeon has provided most of the US$8.1 million in capital for a joint venture – Aeon Orange – with local firm Creation Myanmar Group of Companies (CMGC). This new company began operating 14 supermarkets it acquired from a CMGC affiliate on August 1, and plans to open a new store within a year.

The existing supermarkets, which are based in Yangon and Mandalay, and the new store will all operate under the Aeon Orange brand, according to Kitagawa Yosuke from Aeon’s corporate communications department.

Aeon’s entry marks a significant foreign investment into a sector with huge potential for growth. Very few incumbent retailers operate supermarkets in Myanmar’s booming economy, and a report from Bangkok Bank on the country’s retail sector in 2014 estimated consumer spending could almost triple from $35 billion to $100 billion by 2030.

But uncertainty around trading rules makes it unclear to what extent foreign-local joint ventures will be able to carve out a slice of the supermarket business.

When foreign companies register with the Directorate of Investment and Company Administration (DICA), they must sign an undertaking “not to conduct any trading activities”, according to Sebastian Pawlita, a partner at Lincoln Legal Services in Yangon.

However, there is no precise definition of “trading” in the regulations, said Edwin Vanderbruggen, senior partner at VDB Loi. Some officials argue that the regulation refers to importing and then reselling goods without any manufacturing or processing, he said.

“That is certainly the way it is enforced, through the denial of import licences to foreign-owned companies,” he said.

The Ministry of Commerce relaxed long-standing restrictions on trade in November last year – allowing foreign businesses to import fertilisers, insemination seeds, pesticides and hospital equipment, on condition they partner with a local company. This was extended to construction materials last month.

But outside of that narrow group of goods, a foreign-domestic JV needs special permission from the ministry.

Mr Yosuke said that Aeon Orange would not seek permission from the ministry to import goods. Instead the firm will rely on a tried and tested strategy for foreign firms, where a licensed local partner – in this case CMGC – imports the goods for the joint venture to sell.

Local players, meanwhile, are unhappy with what they see as a loophole allowing a joint venture like Aeon Orange to register as a services company but still engage in trading.

At present the Aeon Orange supermarkets are still selling existing stock and the venture has not yet started to import goods, which will eventually make up 20-30 percent of those on sale and come mainly from Thailand and Japan, Mr Yosuke said.

But the rules around buying and selling locally made goods, which will be the bulk of Aeon Orange’s business, are also unclear. Mr Pawlita said that according to “general understanding” the trading prohibition as part of the DICA registration process also covers buying and selling domestically produced goods.

“Theoretically competitors could try to lobby DICA to deregister the joint venture company,” he said.

Myanmar retailers are clearly unhappy with how the government is regulating the sector. Daw Win Win Tint, president of the Myanmar Retailers Association and CEO of supermarket chain City Mart, said the local firms are at a disadvantage.

Myanmar’s nascent financial sector does not offer domestic companies the same access to finance as their international rivals, she said. The Myanmar Investment Commission (MIC) also has the discretion to grant tax incentives – including a five-year income tax holiday – to newly registered foreign firms with MIC permits. Daw Win Win Tint believes these should only be applied in sectors that support Myanmar’s development.

In addition to preventing foreign firms from skirting trading restrictions by using a local importer, the government should also make its position on foreign involvement in the trading sector public, she told The Myanmar Times. “Current uncertainty makes it impossible for Myanmar businesses to plan for the future,” she said.

Clarity on the regulation around trading is hard to come by, however. U Aye Lwin, a member of the Myanmar Investment Commission – of which DICA serves as the secretary – said he was unsure of whether the trading restriction allowed foreign firms to buy and sell local products.

U Aung Naing Oo, DICA’s director general, said that although the Ministry of Commerce’s policy is not to allow joint ventures to engage in trading – including operating supermarkets – if the venture obtained an MIC permit it would be allowed.

This permit is in addition to the standard company registration process, and consultation between the ministry and the MIC on this policy is still ongoing, he added. But Aeon Orange has not “not yet applied” to the MIC for this permit, U Aung Naing Oo said.

Yoshinori Takekawa, deputy chief representative at Aeon’s Myanmar office, said that the firm follows government “guidelines and directions” and had received the “required permission” to operate in Myanmar.

U Aung Naing Oo did not respond to further questions about Aeon Orange’s lack of an MIC permit, or what the policy would be toward issuing such permits to foreign firms in the future.

Lincoln Legal Services notes that there is no explicit legal basis for barring foreigners from trading, just an “administrative practice that appears to have set in rather suddenly in 2002”.

Just as “nothing absolute” prevents a foreign firm from using a Myanmar entity to import goods for resale, there is nothing to stop a foreign-owned company from buying local goods and reselling them, Mr Vanderbruggen said.

“Whether that is in fact permitted has purposely been left undetermined it seems to me,” he said.

 

Source: The Myanmar Times

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