Industrial expansion has played a leading role in the country’s economic progress, with value added from industry more than doubling between the late 1980s and the early 2000s. While Philippine industry is positioned further down the value chain than many of its ASEAN peers, the sector has nevertheless long served as a pillar of the national economy. From a manufacturing standpoint, a number of inherent advantages make the country an enticing production base and consumer market, including its strategic location, large and young population, and burgeoning middle class. However, congested transport networks and the relatively high cost of power have restricted the sector’s progress.
The administration of President Rodrigo Duterte is pursuing the Inclusive Innovation Industrial Strategy (i3S), which seeks to take advantage of the opportunities arising from regional integration and advanced technologies. As part of the long-term vision to create a globally competitive manufacturing industry that is supported by well-managed supply chains, many stakeholders are shifting to high-value-added industries, investing in upstream activities, and integrating manufacturing in the agriculture and service sectors.
Driven by a new policy enacted by a proactive government, the country aims to position itself as an international production hub for automotives, electronics, garments, food and other strategic industries. As a trade dispute unfolds between the world’s two largest economies, decisive moments lie ahead for the future of international industries and supply chains (see analysis).
Points of Interest
Like other emerging markets, the Philippines must overcome significant infrastructure gaps to achieve its industrial targets. While a shift in the political agenda and efforts to achieve a more innovative manufacturing ecosystem are set to bolster industrial activity, the infrastructure deficit continues to weigh heavily on productivity. Congestion across the country’s transport network has long been a major concern for enterprises as it hinders the timely supply of raw materials. Port congestion in particular remains a challenge in the supply of inputs, which in turn increases lead times and the cost of manufacturing. The situation is improving, however, with recent economic expansion and the government’s comprehensive infrastructure agenda attracting greater transport investment. As such, the Philippines stands to benefit from improved productivity, with a host of new airports, roads, bridges and rail networks being erected across the archipelago.
Investors are also tracking falling demand across China’s industrial value chain – a direct consequence of the trade dispute with the US and the Asian country’s rising labour costs. This has created a trend of migration among manufacturing firms as they seek alternative production bases in the region, increasing the Philippines’ prospects of becoming an industrial centre in South-east Asia.
Structure & Oversight
The Department of Trade and Industry (DTI) oversees industrial development and facilitates the ease of doing business in the Philippines. The department also promotes foreign investment and partnerships through its domestic offices and at international trade fairs. As part of its role as regulator, the DTI accredits and licenses industrial firms, develops industry roadmaps and formulates sector-specific policies in line with national development goals. It also regulates import and export activity, fields consumer complaints and conducts human resource training.
I3S
The 12 key industries prioritised for development under the i3S are automotive; electronics and electrical; aerospace parts; chemicals; tool and die, and iron and steel; garments, textiles and furniture; shipbuilding; tourism; IT-business process management; agri-business; construction; and infrastructure and logistics. Broadly speaking, the i3S seeks to foster innovation by creating an enabling environment through the establishment of industrial clusters. The government strategy has also prioritised investment in human resource development and improvements in the business environment, particularly for small and medium-sized enterprises (SMEs). “In order to increase competitiveness, the priorities for industrial corporations in the Philippines should be to invest in technology and innovation; expand worker training, especially in newer technology; collaborate more with educational institutions; and improve supply chains with SMEs,” Guillermo Luz, co-chairman of the National Competitiveness Council, told OBG.
In preparation for the i3S, a total of 35 industries submitted their sector roadmaps to the DTI and Board of Investments, including rubber, copper, biodiesel, furniture, metal casting and shipbuilding. Based on the review of the roadmaps and industry consultations, the most common constraints identified were in the areas of infrastructure and logistics, particularly the high costs of domestic shipping and power. In addition to these shortcomings, governance and regulation were major issues, specifically smuggling, bureaucracy, red tape, and the lack of streamlining and automation of inter-related government procedures. These are all set to be addressed under the strategy.
Although the Philippines has carved out significant niches in manufacturing subsectors, such as semiconductors, industrial output has had little impact on poverty and underemployment. To that end, the government has fine-tuned the industrial strategy to adapt to changing market trends and attain sustainable and inclusive growth. In doing so, the i3S aims to create more and better-paying jobs to achieve shared prosperity.
Performance & Size
Although industrial expansion has played a key role in the country’s economic progress, many labour-intensive industries – such as textiles and garments – opted to move production facilities to China in the 1990s to take advantage of rapid industrialisation fuelled by an abundance of cheap labour. Even amid the proliferation of factories in China, the Philippines managed to expand its manufacturing base. According to a World Bank report published in 2018 titled “Growth and Productivity in the Philippines: Winning the Future”, the Philippine manufacturing sector grew at an average annual rate of 7.5% between 2010 and 2016, more than double the annual average of 3% posted between 2003 and 2009.
The last decade of productivity growth is attributable to stakeholders’ efforts to transition to value-added products that require more skilled workers and technologically advanced inputs. This contributed to the gradual decline in the performance of labour-intensive industries – particularly textiles and garments – resulting in an average annual drop of 3.5% in apparel exports from 1998 to 2016. Over the same period, the country experienced an uptick in more advanced products, with the export of electronic components expanding by 5.5% annually.
Strong consumer confidence, investment-friendly policies and government support for industry all played an important role in manufacturing output growth in 2018. According to the DTI, the industrial sector expanded at the fastest pace of any economic sector in the last quarter of the year, growing by 6.9% and accounting for some 34.8% of GDP, compared to the services sector’s contribution of around 56.2%. At constant prices, the manufacturing sector grew by 4.9% for the whole of 2018, compared to the 8.4% growth posted in the previous year.
The last decade of productivity growth is attributable to stakeholders’ efforts to transition to value-added products that require more skilled workers and technologically advanced inputs VALUE ADDED: In terms of gross value added (GVA), the sector contributed P3.3trn ($61.4bn) to GDP at current prices in 2018, accounting for 19.3% of economic activity. Looking more closely at economically important products, the top-three subcategories in terms of GVA in the first half of 2019 were food, which grew by 5.4% year-on-year (y-o-y) and contributed P803.6bn ($14.9bn); radio, television and communications equipment, which was down 1.4% and accounted for P202.5bn ($3.8bn); and chemicals and chemical products, with GVA growth of 2.3% for P111.5bn ($2.1bn). Other major contributors included petroleum and other fuel products, which fell by 10.7% to post P68.7bn ($1.3bn); paper and paper products with P60.7bn ($1.1bn) after growing by 12.6% y-o-y; and non-metallic mineral products, which saw 9.5% growth for P37.4bn ($695.6m).
As a key driver of technological development and innovation, the manufacturing sector employs around 17% of people in formal employment. According to the latest edition of the “Annual Survey of Philippine Business and Industry” (ASPBI), in 2016 there were 6208 manufacturing firms with 20 or more employees operating in the Philippines. The National Capital Region had the highest number of manufacturing firms among the 18 regions, with 2256, followed by Calabarzon with 1634, Central Luzon with 779, Central Visayas with 577 and Davao with 210. According to the ASPBI survey, the top-paying manufacturing jobs were in refined petroleum products, which paid an average annual rate of P1.8m ($33,500) per employee, compared to average annual pay of P518,900 ($9650) per employee in the manufacturing of pharmaceuticals and medicinal, chemical and botanical products.
Trade
While the sector has benefitted from rising export demand in recent years, growth has been hindered by a decline in domestic order volumes and input price inflation. As a result, output growth hit a seven-month low in the first quarter of 2019, with the Nikkei Philippines Manufacturing Purchasing Managers’ Index falling for four consecutive months to 51.5 in March 2019. While some manufacturers witnessed an uptick in productivity, the overall drop in the rate of output expansion resulted from falling sales and reduced supply of raw materials caused mainly by delays at the Port of Manila.
Despite a number of logistical bottlenecks, the export of manufactured goods to a variety of trading partners continues to be an important contributor to national revenue. Foreign trade in goods amounted to $14.9bn – with $5.9bn in exports and $9bn in imports – in March 2019, reflecting a total foreign trade increase of 3.5% y-o-y. Over the same period, total export value declined by 2.5% y-o-y, with decreases in sales in four of the top 10 commodities, including a 10.2% decline in machinery and transport equipment. Electronic products remained the top export, with total earnings of $3.2bn, representing 55% of all exports in March 2019.
Meanwhile, imports increased by 7.8%, mainly due to growth of the cereals and cereal preparations subsector, which was up 97.9%. China and the US represent the Philippines’ largest and third-largest trade partners, respectively. The US is its top export market and China is its largest source of imports.
Following several decades of no steel rebar exports, the Philippines is once again a provider of the product. In March 2019 Philippine firm SteelAsia Manufacturing shipped 10,000 tonnes of infrastructure-grade rebar to Canada worth over P300m ($5.6m). Having passed the stringent standards imposed on steel by Canadian authorities, SteelAsia is the only Philippine company to achieve such certification. The recent accreditation has been hailed as an important achievement for the industrial base as it shows that the Philippines’ steel products meet international requirements.
Metals
Production from the country’s 48 operating metallic mines has continued its upward momentum. Strong demand from China and improved international prices saw metal production rise by 10.4% in 2018 to generate P122bn ($2.3bn).
Accounting for about 45% of total metal production value, nickel ore took the top spot with P55.1bn ($1bn), 92% of which was exported to China. Gold accounted for 37% of production value on aggregate earnings of P44.8bn ($833.3m), down 2% compared to 2017, and with output of 20,765 kg. Copper accounted for P20.7bn ($385m), or 17% of total metal production value. Its 7% growth is attributable to a rise in prices, from $2.72 to $2.95 per pound. Meanwhile, the production value of silver decreased by 9% to P791m ($14.7m).
Investment Levels
In 2018 net foreign direct investment (FDI) decreased slightly to $9.8bn, down 4% from $10.3bn in 2017. Looking at the manufacturing sector in particular, investment through equity capital amounted to $1.1bn in 2018, some 9% lower than the $1.2bn recorded in the previous year. In the five years to 2018 investment priority was given to export-oriented and low-pollution light industries, such as semiconductors and consumer electronics.
President Duterte’s efforts to build a more balanced economy by accelerating infrastructure development and diversifying away from the narrowly based economic structure represent a step forward for the manufacturing sector as a whole. Indeed, efforts to overcome high logistics costs through the implementation of the Build, Build, Build initiative could usher in a new period for manufacturing, albeit with major obstacles still to address.
Throughout the six-year term of President Duterte, which is scheduled to end in 2022, more than P7trn ($130.2bn) in public funds have been earmarked for infrastructure development, with the construction of roads, railway networks, bridges, ports and airports, as well as dams and irrigation networks, set to improve connectivity between and within the major islands of the archipelago.
Challenges
One of the reasons the Philippines’ trade deficit has been widening in recent years is because of its reliance on imported materials to fuel the Build, Build, Build infrastructure drive (see Trade & Investment chapter). As such, some industrial stakeholders believe the country should make further efforts to develop base industries to satisfy growing domestic demand.
“Right now, the domestic cement industry is not producing enough to meet demand in the Philippines, and it is being supplemented by imports from Vietnam and China,” Kevin Chui, country head of German engineering firm Thyssenkrupp, told OBG. “Likewise, there is no integrated steel mill in the Philippines at the moment. These base industries are the low-hanging fruit that the country should focus on in the short term.”
Meanwhile, proposed fiscal reforms could bolster textile exports. This industry has witnessed a major decline in shipments since the abolition of textile quotas by the World Trade Organisation in 2005. Industry bodies have long pushed for government subsidies to bring down the cost of doing business in the country and attract further FDI. However, as of July 2019 the proposed Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) bill had not yet passed Congress.
TRABAHO seeks to gradually lower the corporate income tax rate from 30% to 20%, while also revamping the tax incentive system. Stakeholders have pushed for these changes in the hope that they will support garment manufacturing, a labour-intensive industry. Opponents to the bill, however, argued against the proposed removal of the preferential 5% gross income earned tax, which would consequently impose an 20% corporate income tax on firms operating in special economic zones.
Outlook
Ongoing efforts to upgrade the country’s transport system under the government’s Build, Build, Build programme bode well for future industrial activity. Manufacturers are likely to see business conditions improve as major infrastructure projects are completed. However, until adequately addressed, the relatively high cost of power will continue to weigh on competitiveness.
A major determinant of industrial output in the short term will be the outcome and lingering consequences of the trade war between the US and China. While the dispute casts a long shadow over global economic prospects, there are opportunities in the form of export diversification and product substitution for the Philippines (see analysis). As US tariffs continue to affect firms with manufacturing facilities in China, the Philippines has an opportunity to attract those wishing to diversify their Asian production bases. On top of avoiding tariffs, some manufacturers are seeking to relocate their operations away from China altogether to avoid a rising wage bill as the world’s second-biggest economy moves up the industrial value chain.
The manufacturing sector is well positioned to generate positive economic multiplier effects over the long term – a result of its strong links with the construction, mining, agriculture and services industries. However, while the government is pushing ahead with industrial reform, SMEs will continue to face difficulties accessing finance, technology and skilled workers, at least over the short to medium term. The need to address these constraints is more apparent than ever, as the country moves into a new phase of inclusive industrial activity, anchored by the i3S. Creating greater synergies between industry, academia, and technology firms focused on research and development will be vital in the years ahead as the country looks to foster an innovative ecosystem to remain competitive in a rapidly developing region.
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