The strong performance of the Philippines' industrial sector invites higher levels of investment


A pillar of one of Asia’s rising economies, the Philippine industrial sector posted another strong performance in 2017, growing by 7.6% despite recent geopolitical turbulence related to the 2016 election. Manufacturing output increased by 8.5%, bolstered by expansion in each of its core segments of electronics, food and beverages, chemicals and furniture. Meanwhile, the construction industry has continued to develop under the government’s $158bn Build, Build, Build infrastructure investment programme. The result is a mood of cautious optimism among foreign investors.

Growth Driver

The government has vowed to spend 70% of the new revenues generated by the Tax Reform for Acceleration and Inclusion package passed in late 2017 – the first of five reform packages and set to raise P92bn ($1.8bn) – on infrastructure, which should sustain the construction industry. Perceptions of political risk, which gave investors pause in 2016 and early 2017, have since abated. Factories and assembly lines are being upgraded towards higher in-country value, with Toyota and Mitsubishi Motors Philippines both having announced that they will reach 50% local content in select vehicle models by 2020.

Such conditions are having a positive impact on business. Despite strong regional competition, the IMF projects GDP growth at 6.7% for 2018 and 6.8% for 2019. As ASEAN integration has deepened and relations with traditional Western partners have stabilised, exports have increased, growing by 9.5% in 2017 alone. The upshot is a rising tide that can lift a range of sub-industries, creating opportunities for local firms and multinationals alike. “Much of the Philippine industry is driven by steel, petrochemicals and mining, which have held relatively steady despite outflows of foreign capital due to a stronger dollar,” Vinayak Kembhavi, vice-president of sales at industrial gas firm BOC India, told OBG. “While tax reforms and energy price hikes are pressing businesses to better manage production costs, certain segments such as electrical semi-conductors are growing quickly and seeing more investment, notably from Japan."

Regulation & Oversight

The sector’s chief regulating agency is the Department of Trade and Industry (DTI), formed in 1981 from the merger of two separate entities, the Department of Trade and the Department of Industry, which had both been created in the previous decade. With a mandate to boost investments, expand exports, grow small businesses and protect consumers, the DTI accredits and licenses industrial firms, regulates import-export activity, facilitates the ease of doing business, fields consumer complaints – including from foreign buyers – and conducts human resource training. It also promotes foreign investment and partnerships through its domestic offices and at international trade fairs, having attended 13 of these in 2016, reaching 1600 exhibitors and generating sales worth $235m. To facilitate planning, the DTI also drafts development roadmaps. It has completed 36 such plans for various industrial segments, from automotive and biodiesel to rubber and shipbuilding.

The DTI governs partly through affiliates, with the main ones being the Construction Industry Authority of the Philippines (CIAP), which regulates growth in the building industry and formulates sector-specific policy in line with national development goals; the Bureau of Product Standards, which conducts quality control; and the Philippine Trade Training Centre, which manages the sector’s human resources and upskilling programmes. Since 1919, the National Development Company, a DTI partner, has overseen development projects key to strategic state objectives, and managed a state investment portfolio worth around P4.5bn ($88.9m).

Private entities with a prominent role in the sector include the Philippine Exporters Confederation, the policy advocacy group Makati Business Club, the Philippine Chamber of Commerce and Industry, and a range of professional associations for sub-segments such as semiconductors and electronics, software and franchises. Well-developed chambers also exist to foster commercial relations with the country’s main economic partners, notably the US, Europe, Canada, Australia, New Zealand and China.

Meanwhile, the Philippine Economic Zone Authority (PEZA), a government agency attached to the DTI, oversees and administers the country’s special economic zones (SEZs) of which 74 focus on manufacturing, 22 serve the agro-industrial segment and 19 cater to tourist development. The authority’s remit also includes 262 IT parks and two medical tourism parks, in addition to liaising with foreign firms to attract new investment into growth-critical industries.

Size & Structure

Industrial expansion has been key to national growth since the 1980s. According to World Bank data, value added from industry more than doubled from $26.3bn in 1985 to $59.4bn in 2008, prior to the global financial crisis. Following a dip in 2009, it accelerated once more, averaging annual growth of 7.5% in the years to 2016, when it reached $96.4bn.

As of the first quarter of 2018, industrial sectors made up an aggregate 34.6% share of GDP, compared with 56.8% for services and 8.6% for agriculture, according to figures from the DTI. This was 0.75 percentage points higher than in 2014, a consequence of secondary-sector growth outpacing that of other parts of the economy – rising by 7.3% in 2017 versus 3.9% and 6.7% for the primary and tertiary sector, respectively. In terms of total absolute value, Philippine industry was worth just under P3trn ($59.3bn) that year at constant (2000) prices, according to the DTI’s Bureau of Trade and Industrial Policy Research. This was split between four major components, each of which has grown substantially over the past three years. The largest by far is manufacturing, which rose from P1.7bn ($33.6m) in 2014 to P2bn ($39.5m) by 2017, representing growth of 23%. The second, construction, grew from P409bn ($8.1bn) to P548bn ($10.8m) in that same period, or 34%, followed by utilities (electricity, gas and water) which expanded by 20% to P280bn ($5.5bn), and mining and quarrying which grew 3.7% to P84.7bn ($1.7bn).

Recent Performance

Industry makes a significant contribution to the country’s rising GDP, which expanded by 6.8% in the first quarter of 2018, the 77th quarter of consecutive expansion. Of the three main components of the economy, industry showed the fastest growth in that quarter, rising by 7.9% against 7.0% for services and 1.5% for agriculture. The top driver of GDP overall that quarter was manufacturing, which experienced an 8.0% increase, according to the Philippine Statistics Authority (PSA). Breaking that number down further, the highest-growth industries in that period were accounting and computing machinery (31.2%), communications equipment (22.4%), petroleum and fuel products (17.1%) and non-metallic mining (16.5%), which offset declines in tobacco products (23.1%), transport equipment (6.3%) and textiles (4.7%).

Exports of manufactured goods rose by 2.9% in the first quarter of 2018, down from 22.2% in the last quarter of 2017. Growth in 2017 helped to offset a slowdown in construction by 2.8%, as private contractors curbed activity during the year-end holiday season. However, Ernesto Pernia, director-general of the National Economic and Development Authority, expects public construction to pick up again as several infrastructure mega-projects roll out in 2018 under the Build, Build, Build programme, including expansion of the Clark International Airport, groundbreaking of the Metro Manila Subway and phase one of the Mindanao Railway project (see Construction chapter).

Broader Context

Positive industrial performance helped fuel overall GDP expansion to 6.7% in 2017, just behind China and Vietnam as the third fastest among Asian countries, according to the PSA. Driven by strong exports alongside robust public spending and a rebound in agriculture, the figure was down only slightly on 6.9% the previous year and represented the sixth consecutive year above the 6% mark. The World Bank and Asian Development Bank both forecast growth to be either the same or slightly higher in 2018, while the government is targeting a rate between 7% and 8%. “Our decline is really very moderate,” Pernia told local press. “To me, this is a good performance, given the fact that it is already normal for post-election years to witness a decline in economic growth.”

Value Added

Recent indices compiled by the DTI show a clear upward trajectory for the value of manufacturing output – as well as a gradual ascent up the value chain as factories have upgraded their lines to manufacture more advanced products. Starting from a base of 100 in the year 2000, the value of the production index for manufacturing overall climbed to 216.8 as of February 2018. As manufacturing has matured, many sub-industries have increased their production value several times over in that span: sub-indices show printing rising to 904, metals to 414, output food products to 382, beverages to 279, non-metal mineral products to 250, chemicals to 223, transport equipment to 199, rubber and plastics to 164, petroleum products to 141 and electrical machinery to 127. As these segments have expanded, others have faded due to regional competition and gradual reallocation of investment to segments with greater comparative advantages: production value for tobacco shrank to 10 in light of disincentive-oriented taxation, textiles to 43, wood products to 54, non-electric machinery to 57, footwear to 65, and furniture and fixtures to 68.


According to the most recent survey of formal business and industry published by the PSA in 2016 using 2013 data, the number of manufacturing establishments in the country was 25,149, of which more than half fell under the top-10 industries. The largest proportion of establishments make baked or perishable goods, numbering 6618 or 26.3% of the total, followed by bottled water with 2411 companies (9.6%) and printing with 1458 firms (5.8%). Rounding out the top 10 were rice or corn milling companies (4.7%), wooden furniture producers (2.9%), concrete products (1.9%), women’s, girls and babies’ garments (1.7%), custom tailoring (1.7%), men’s garments (1.4%) and plastic packing materials (1.3%). By employment, the semi-conductor and electronic components industry had the largest share with 11.4% of the total 1.22m manufacturing jobs, followed by baked goods at 6.1%, computer products with 4.5%, and engine ignition equipment and women’s garments tied at 3.6%.


The construction industry has been showing strong numbers as of late, increasing by 12.6% in 2016 and 6.4% for the first three quarters of 2017, when output – as measured by the gross value added – reached P403bn ($8bn) in real terms, according to CIAP. Employment grew in tandem, rising by 5.4% in January-September 2017 to reach 3.5m, driven in part by robust investment, which hit P1.8trn ($35.6bn) in that period, up 9.3% on the same period a year earlier and accounting for more than one-third of the total gross capital formation. Public infrastructure investments alone tallied some P162.7bn ($3.2bn) in the same period, up 10% on the previous year, while private construction activities rose 5.7% to P464bn ($9.2bn).

In 2017 the Philippine Contractors Accreditation Board issued around 9800 domestic contractors’ licences, of which 11% were new applicants. The majority of these were small contractors (61%), followed by medium-sized ones (33%), with 6% being large corporations. Only 25 foreign contractors were issued special licences, 12 of which were Chinese contractors.


An enabler of industrial activity, utilities supply has recently shown buoyant growth. In 2017 aggregate gross value added from this source rose 6.8% to P486m ($9.6m), up 12% on two years earlier at current prices. The bulk of this growth came from electricity, which formed four-fifths of the total and expanded 7.8% to reach P402m ($7.9m). Meanwhile, value added from water supply moved up a steadier 3% to hit P75m ($1.5m), while steam production dropped by that same rate to around P9m ($178,000).


Mining output has similarly buttressed industry figures, its own growth supported by the rising prices of base metals on the world market. In 2017 the output of mineral mining rose by 5.7% in value to reach P108.6bn ($2.1bn), according to statistics from the Mines and Geosciences Bureau of the Department of Environment and Natural Resources. Between 2016 and 2017, increased demand from China to fuel both its manufacturing sector and infrastructure projects combined with global supply disruptions, pushed up the per-pound prices of copper from $2.20 to $2.72 and nickel from $4.35 to $4.68. While gold rose more modestly, from $1247 to $1258 per troy ounce in that span, it still made up 42% of the mining sector’s output value, ahead of nickel’s 39% and copper’s 18%. The remaining 1% consisted mostly of iron, chromite and silver. Volume also rose, with the biggest contributors being the Masbate Gold Project, a joint venture of Fiminera Mining Corporation and the Philippine Gold Processing and Refining Corporation, with an output of just under 6300 kg, and the Didipio Gold Project managed by OceanaGold Philippines, with output of around 5680 kg. Combined, these two projects accounted for around 53% of the country’s total gold production value.

Zoned In

Authorised by the SEZ Act of 1995, these zones offer a range of fiscal incentives, including sixyear tax holidays for projects given “pioneer” status, exemptions from local imposts, a discount 5% tax rate on gross income, duty-free import of raw materials and equipment, and value-added tax waivers for certain domestic purchases, among others.

There are 74 manufacturing-related SEZs in operation, with total approved investments worth P77.5bn ($1.5bn) covering nearly 40,000 ha of land area, according to PEZA figures from late 2017. The largest by capital inflows is the capital city’s 79-ha Manila Harbour Centre in Tondo, with P19.3bn ($381.3m) in approved investments, followed by the 423-ha mining-focused Rio Tuba Export Processing Zone in Palawan with P7.5bn ($148.2m) and the 142-ha Hermosa Ecozone Industrial Park in Bataan with P6.8bn ($134.3m).

An additional 22 SEZs are dedicated to agro-industry, covering 775 ha of land and reaching P6.1bn ($120.5m) in approved investments as of late 2017. Of these, the largest inflows have gone to the 26-ha San Carlos Ecozone in the region of Negros Occidental, which specialises in production of biofuels, electricity generation and manufacturing of sugarcane syrup, and has seen P3.5bn ($69.1m) in approved investments. The second-largest in this category is the Sarangani Agro-industrial Ecozone, whose P1.4bn ($27.7m) in investments centre on aquaculture production for export.

A total of 34 industrial SEZs are under development. The 28 of these dedicated to manufacturing – which have secured nearly P41bn ($810m) in investment pledges – include a logistics centre at Villamor Airbase in Pasay City with investment of nearly P10.6bn ($209.4m), the Hijo SEZ in Davao del Norte with P7.2bn ($142.2m), and Fil-Estate Industrial Park in Cavite with P2.1bn ($41.5m). The remaining six are agro-industrial zones, and have approved investments worth a total of P1.2bn ($23.7m), the largest being the 70-ha UPLB Agro-Industrial Park in Laguna, at P942m ($16.8m).


Industrial exports have risen steadily, growing by 2.4% in 2017 to $62.9bn, according to the DTI, but more should be done to improve the trade balance. “The Philippines is a heavy importer and this is a huge disadvantage for foreign lines, as their containers depart empty,” Ian Claxton, president and CEO of Magsaysay Shipping & Logistics, told OBG. “This offers many opportunities to grow Philippine export capacity to ASEAN if we can only increase manufacturing capabilities.”

Of all products exported that year, more than half by value were electronics-related – a category that grew 11% – followed by other manufactured goods (6.5% of the total), and machinery and transport equipment (6%). Other product categories with a 2-3% share were wiring sets for vessels and vehicles, woodcrafts and furniture, coconut oil, metal components, chemicals, cathodes and gold, with the miscellaneous category making up the remaining 19%. Destination markets for these goods centred on Asia, with Japan at 16%, Hong Kong at 14% and China at 11%, followed by Singapore at 6%, and Thailand and South Korea at 4% each. The top Western markets were the US with 15%, and Germany and the Netherlands with 4% each.


Inflows of overseas and local capital into the industrial sector has been steady. Between 2011 and 2016 the amount of total investments approved by DTI officials has ranged from P25bn ($493.9m) to P742bn ($14.7bn), driving employment up by around 160,000 jobs per year. However, all six years were outstripped in 2017, when total approved investments reached P854bn ($16.9bn), up by 29% on the year before. Of this total, 33% went to utilities, 17% to manufacturing and 15% to construction, according to the DTI.

The bulk of capital inflows came from local investors, at 88% or P754bn ($14.9bn), offsetting the decrease from international sources, which nearly halved over the previous year due in part to political uncertainty surrounding the perceived shift in trade policy away from long-time Western allies such as the US and towards Asian countries, following the election of President Rodrigo Duterte in 2016. The remaining 12% – some P100bn ($2bn) – came chiefly from Japan (32%) and the trio of Taiwan, Singapore and the Netherlands at 10% each. While the US portion shrank by 70%, the fastest-growing source markets were Taiwan, whose contribution grew from P520m ($10.3m) in 2016 to P10.4bn ($205.5m) in 2017, and mainland China, whose contribution doubled to P2.2bn ($43.5m) over the same period.


Growth prospects remain strong as global commodity prices stabilise and local manufacturing units progress up the value chain. Foreign capital inflows may taper over 2018 and 2019 as rising interest rates in the US put upwards pressure on the value of the dollar, yet strong domestic fundamentals – buoyant consumer confidence, investment-friendly policies, state support for industry and political stability – seem unlikely to change substantially in the medium term. The domestic market appears set to benefit from positive demographic and consumer trends, with a young, increasingly urbanised population and rising incomes fuelling sustained demand for industrial products.

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The Report: The Philippines 2018

Industry & Retail chapter from The Report: The Philippines 2018

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