The Philippines – A promising future

The Philippines is in the unenviable position of constantly looking forward to a rosy future but inevitably getting snagged with one problem or another.

Once, one of the economic darlings of Asia the country can never quite shrug of its image as a backward nation with so much potential. This past summer has seen a series of negative publicity as the current president, Macapagal (Gloria) Arroyo, has been accused of any number of wrong doings culminating in the demand for her resignation for supposedly rigging last year’s election. Although unclear what the final outcome may be, the episode highlights just one of the many problems facing this country.

Economically, the country appears to be getting back to its feet and at least some credit must go to Arroyo who, as an economics professor, has a grasp of what must be done to turn the nation around; better than some of her predecessors.

The first quarter of 2005 saw the economy grow 4.6 percent and for 2004 it was 6.1 percent, the strongest the country has seen in 15 years. The government is also addressing its debt position and leading credit agencies have upgraded the country’s credit ratings (but subsequently lowered them due to the political concerns).



Electronics, a shining industry
Given all the negative publicity relayed to the rest of the world, there has been a bright star on the Filipin score card for the past two decades-the electronics sector. Consider the numbers, in 2004 the Philippines exported $39.6bn of goods around the world, 68.3 percent of that figure was from the electronics sector, i.e. $27bn (Table 1). However 2005 is being seen as a bit of a ‘sleepy’ year with the industry association, The Semiconductor and Electronics Industry in the Philippines, Inc (SEIPI) projecting only a 5 percent growth on the previous year, despite government’s desire of at least 10 percent.

Unsurprisingly, the government has targeted the industry as one of its priority sectors to not only help balance the books, but to provide employment and prosperity to legions of unemployed Filipinos.

The industry can be broken down into five broad categories:
• Semiconductor and component manufacturing;
• Telecommunications/sound and video apparatus;
• Electrical machinery/apparatus and appliances
• Electronic office and automatic data processing machines;
• Consumer electronics.

Dominated by the giants such as Texas Instruments, Intel, AMD and the like, the industry has gone from strength to strength since the country was singled out as an ideal location for contract manufacturing. Today, it is estimated that 72 percent of the industry is owned by multinationals with the remaining percentage held by Filipino companies, but generally with a foreign partner. There are exceptions, however, such as IMI, PSI Tech and Fastech; all of which have been born out of much larger parent companies and generally concentrate on the subcontracting market although are not afraid of increasingly look to add value to the process.

PSI Tech’s CEO and President, Arthur Young, feels that the high concentration of foreign ownership is of limited concern; “the industry is incredibly capital intensive and we do not have the kind of economic structure that can generate a significant local entrepreneurial base. The great strength that we have here is our people and we must concentrate on ensuring that our labor force remains competitive and responsive to the needs of our customers.”

The country has become a favorite for a number of different aspects, the main factor being the people. As Mr Richard Wang from Amertron puts it; “the Filipino worker is absolutely fantastic, very hard working and with the kind of broad imagination that you would be hard pressed to find elsewhere in Asia.” English has been a dominant reason in many people’s eyes but reliability and integrity are up there as well. In fact, asked to compare the Filipino worker with their counterparts in Malaysia it is perhaps surprising to hear that there is a deeper pool of easily trained people in the Philippines.

In the case of Device Dynamics, a Santa Barbara based provider of finishing services to the semiconductor industry, having recently established a presence in Malaysia, Mr Darin Valley was surprised with the quality of the local labor; “we ended up flying a pile of our guys out from the Philippines to set up, train and eventually operate the facility. We have kept them out there for longer than we originally intended.”

PEZA, a catalyst for growth
Despite traditionally having their hands tied due to reasons like funding and political wrangling, the government has been effective in putting into place the Philippines Economic Zone Authority (PEZA) with the explicit purpose of attracting and settling in foreign investors.

Although intended to attract investment into a whole plethora of industries, electronics has benefited the most. Providing a one stop shop for foreign companies, the Director General Atty. Lilia de Lima is very keen to promote the abilities of her organi-zation; “we are able to help with everything from sourcing the appropriate property right through to securing work visas for expat workers.” Given the rampant corruption that still haunts the country, Ms de Lima is keen to promote the transparency within her organization; “everyone has my mobile phone number, if there is a problem, I act upon it swiftly.” Given the amount of positive praise that she has received from private sector investors her comments can’t be seen as merely hot air.

Again, the numbers speak for themselves. In 2004, PEZA attracted P46bn ($884m) of foreign investment, up 63 percent on the previous year; generating approximately 110,000 new jobs. Over the same period, companies located within PEZA properties exported nearly $31bn of goods which represents approximately 85 percent of the country’s total exports. But still there is an uphill struggle, as Ms de Lima explains, “we have attracted about as many big names as we are going to, we now need to attract their suppliers and create clusters within our approved business parks.”

The China factor
China, however, does continue to provide sleepless nights to more than a few who are concerned about the Philippines continued competitiveness.

However, local players are remarkably sanguine about the threat, highlighting a number of factors that will ensure continued competitiveness. “Take a look at the property prices in China, they are crazy” comments PSI’s Arthur Young, “then there is the extremely high turnover rate of employees, always looking for better pay and conditions. The Filipino worker is extremely capable and loyal and it is for these reasons that the country will retain its attractiveness.” In fact, we were regaled many times by horror stories in China; with many highlighting intellectual property rights as being their major concern, something that would never be perceived in the Philippines.



There are those, however, such as Amertron’s Richard Wang, who are making bets on the two; “we will always maintain our presence in the Philippines but we are going to continue building up our capabilities in China. Our new research and development department will be based in Shanghai, close to our factory.” Ever the country champion, Ms de Lima is keen to draw attention to varying regimes around China; “in China you will find very different tax regimes and policies from one city to the next. Here, everything is done through PEZA and all regulations, taxes, etc, are uniform.”

Such is the simplicity of the PEZA regime that companies can easily receive components, assemble them into the final product and ship it out to the final market in a fraction of the time that it would take in China. Duty free processing zones ensure that customs processes are minimal, thereby greatly reducing the chances of corruption.

Other investment factors
One real concern, however, is the price of energy; Fastech’s John Payne complains that “power rates have traditionally been very high here but this year has seen a significant increase in rates; between 30 and 40 percent over the past 12 months.” The situation has not been well received by such a power hungry industry and although numerous government people have suggested otherwise, it appears that with oil prices continuing their upward climb, producers cannot look forward to substantially less rates any time soon. It is an area that many suggest that the government should address as a matter of urgency.

Surprisingly, logistics and transportation do not seem to weigh heavily on the minds of investors here. Given the state of the roads and the congestion that seems to affect Manila and the environs up until the early hours of each morning, most do not site transport as an issue; although pilfering was mentioned. The country is within three hours of most major Asian destinations and both DHL and Federal Express have based their regional hub just north of Manila.

Conclusion
While The Philippines has long ago fallen from grace as an ideal location for investment, the country must doggedly continue in its pursuit of providing a better environment to do business. Foreign investors in the country are generally happy with their lot with a few exceptions mentioned previously but would they invest again? On the whole, yes. What improvements need to be made?

New roads and expressways are in the works and numerous energy programs are in the pipeline to bring down the cost of power. However, it will always be the negative political news constantly being transmitted around the world that will really hinder development.



The electronics markets, together with related sectors such as call centers and business processing are what many see as the drivers for the Filipino economy over the next few years. Maybe the future really is bright this time…