Manufacturing Potential

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While the Philippines continues to grow and diversify its service-based industries, such as its business process outsourcing sector, the reality for its manufacturing does not live up to full potential. If the country can develop a robust manufacturing sector to go along with its already expanding service industries, its future economic prospects stand to significantly increase, especially as global demand for consumer goods thaws in the coming years.

The year 2008 was certainly a difficult one for Filipino exports as demand in the country's two largest trading partners, the US and Japan, sank on the back of the ongoing financial turmoil. That downward trend continues as trade with Japan has fallen 32% year-on-year as of end-July. In July exports to the US, which account for 18% of total exports, fell 17.5% from the same period last year. In total the first seven months of 2009 have seen exports plunge 32% year-on-year to $20.5bn.

Even though imports to the Philippines have likewise fallen drastically by 31.2% to $24.3bn in the first seven months of 2009, it is nevertheless unlikely that the country will post a trade surplus in 2009. Imports from the Philippines' second-largest trading partner, Japan, have decreased by 34% in the first half of 2009. The country's trade deficit for the first seven months of the year amounted to $3.9bn, as the sharp fall in imports outpaced the decline in exports. The country imports nearly all of its crude oil requirements and is also the world's largest buyer of rice.

It is precisely because imports to the Philippines have fallen that the large decrease in manufactured exports is not felt quite as strongly in the overall economy – as has happened in Malaysia where exports represent nearly 120% of GDP. This has allowed the country to continue posting positive economic growth figures in 2009, albeit quite minimal 1% growth in the first half of 2009, whilst other nations continue to feel the brunt of the global economic downturn. Malaysian GDP dipped 6.2% in the first quarter and 3.9% in the second quarter of 2009 primarily due to losses sustained in its export-oriented manufacturing sector.

Industrial manufacturing in the Philippines is dominated by the electronics sector. Production of semi-conductors accounts for 75% of all electronics manufacturing, making the most significant contribution to the Filipino economy in terms of exports (the country accounts for roughly one-tenth of the world's supply of semiconductors). However, global demand for electronics has fallen, resulting in the large decreases in semi-conductors and other electronics. Many analysts are quick to point out the Philippines is merely an assembler of parts, with relatively low added value.

Auto manufacturing has endured a relatively quiet year as domestic sales have remained flat. Elizabeth Lee, president of the Chamber of Automotive Manufacturers of the Philippines, recently told local media that the industry was just 1.3% off its 2008 pace and should still attain its goal of flat growth by year-end. While domestic sales have been quiet, Ford Motor Company Philippines recently completed the largest-ever fleet sales order from Ford Motor Indonesia. The American auto-manufacturer recently exported 577 Philippine-made Ford Focus units to the Indonesian National Police Force.

Positive signs have also emerged for textiles, which recently reported renewed demand on the other side of the Pacific, with orders beginning to come in from the US. The recent filing of a bill in the US Congress awarding preferential tariffs to Philippine-made garments has prompted an initial $35mn worth of orders. The undersecretary of trade and industry, Elmer Hernandez, recently told local media the bill is expected to pass no later than the end of the first quarter of 2010 and the industry should expect an increase of $300m in garment exports on top of the current average of $1bn.

Energy is one of the major stumbling blocks for manufacturers operating in or considering the Philippines as a potential base. The Philippines has the highest energy costs in the Association of South-east Asian Nations and the second highest in Asia behind Japan, although it should be noted several countries have similar inefficiencies in the power sector that are masked by subsidies. Nevertheless, it poses a significant concern for energy-intensive manufacturers when conducting due diligence on prospective factory sites. The recent privatisation of the energy sector will alleviate some apprehension; however until the energy costs actually begin to drop power will remain a significant deterrent to manufacturing in the country.

On the other hand, human resources in the Philippines are often judged to be some of the best in the region. In addition, geographic proximity to China, India and Russia, homes to the world's largest populations and fastest-growing economies, is also a very positive factor defining the Philippines' manufacturing potential.

During a volatile period in which the current global economic system is being called into question, the subject of where to manufacture the world's goods remains debatable. However, manufacturing goods from raw materials has and will always remain a crucial cog in the world's economy. The Philippines, which boasts strategic advantages with regards to location and human resources, would do well to diversify its current manufacturing industry away from the cyclical demand of electronics. Harnessing these advantages and developing a stronger manufacturing industry to go along with its growing service industry could generate stronger growth figures in a country once viewed as one of Asia's emerging tigers.

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