After many years of struggling, the Philippines’ electronics industry appears to be finally making a turnaround, thanks to an improving investment climate and strengthening global demand. Bankers, economists and business executives who follow the industry’s fortunes say the turnaround began in late 2013 and has been gathering pace since. The crucial question, which will only be answered in time, is whether the Philippines is beginning to overcome the problems that have caused its electronics industry to lose ground against competitors, or if it is merely enjoying a short-term bounce from stronger global markets.
Trade data from the Philippines Statistics Authority (PSA) showed electronics exports growing by 7.4% year-on-year in the first nine months of 2014, on track for the best annual performance since 2010, when the global industry bounced back from a disastrous 2009. Even more hopeful, Hong Kong, a major market, reported that its imports of electronics from the Philippines were up 31% in 2014, according to the UN Comtrade database. Japan reported that its imports from the Philippines were up 5.1% in 2014, according to Comtrade, a decent performance considering the yen’s weakness. The electronics industry is a major component of the Philippines economy, and its weak performance has been a significant drag on growth. According to the PSA, its export earnings fell from a peak of $32.2bn, or 21.6% of GDP, in 2007 to $26.6bn, or 9.8% of GDP, in 2013. Other countries’ reports of their electronics imports from the Philippines, drawn from the UN Comtrade database, show that the Philippines electronics industry is much bigger but fell even faster, from $47bn, or 31.5% of GDP, in 2007 to $37.6bn, or 13.8% of GDP, in 2013. Even after that decline, electronics exports still accounted for 53% of merchandise exports in 2013 using Comtrade data, or 47% using PSA data. By comparison, the business process outsourcing sector’s export receipts came to $15.2bn in 2013, according to central bank data.
LOW VALUE ADDED: However, the Philippines electronics industry is mostly not high value added, and its contribution to GDP is less impressive. According to the PSA, the sector produced just P355bn ($8bn) of gross value added in 2014, or 2.8% of GDP. That was up from P330bn ($7.4bn), or 2.9% of GDP, in 2013 and P324bn ($7.3bn), or 3.1% of GDP, in 2012.
The Philippines’ electronics sector produces predominantly intermediate components, shipping them primarily to the electronics manufacturing hubs of Asia. China and Hong Kong are the biggest markets, taking 24.9% and 11.1% of exports in 2013, respectively, according to Comtrade data. Japan, Korea and Taiwan are also important, taking 9.4%, 4.2% and 3.4% of 2013 exports, respectively. In South-east Asia, Singapore, Thailand and Malaysia took 11.1%, 3.1% and 2.2% of 2013 exports, respectively. North America and Europe are also important markets. The US, Mexico and Canada took 10.2%, 3.1% and 1.7% of 2013 exports, respectively, while Germany received 4.5% and the Netherlands 2% of exports.
Until 2013 the Philippines had been losing out in the competition with other manufacturers as costs rose faster than productivity and low-cost players such as Vietnam moved into its niches. Investors were frustrated with poor infrastructure and especially with the slow pace and high cost of moving goods into and out of the country, which is crucial for an intermediate producer in a complex supply chain. The Philippines also appeared to be on its back foot when tablets and smartphones boomed as its plants were more geared towards components for laptops and desktop computers.
GROWTH AHEAD: The global industry went through a tough patch in 2011-13 as advanced economies slowed. Global semiconductor sales grew by just 2.4% in dollar terms between 2010 and 2013, according to World Semiconductor Trade Statistics, an industry association. By contrast, global semiconductor sales grew by 9.9% in 2014. However, the pace of global demand growth was forecast to slow to annual pace just over 3% in 2015-16. The test for the local industry will be whether it can sustain its strong 2014 performance in years when global demand growth is unexceptional.
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