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Revving the engine of Philippine manufacturing

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In Brief

A resurgence of the Philippines’ manufacturing industry, driven predominantly by the expansion of domestic investment, puts the industry on the cusp of transformation, into a major driver of growth. Since the first quarter of 2013, manufacturing in the Philippines has continued to post growth rates above 10 per cent, hitting 12.3 per cent for 2013 compared to 5.5 per cent in 2012.


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The leading manufacturing subsectors are chemical and chemical products; basic metal industries, furniture and fixtures; radio, television and communication equipment; non-metallic products; and footwear and leather products. Investment in capital formation for durable equipment continued to accelerate from 8 per cent in 2012 to 14.4 per cent in 2013.

The Philippines’ Department of Trade and Industry has been actively coordinating with industry associations for the formulation of industry roadmaps since 2012. This has led to a new industrial policy aimed at reviving the manufacturing industry. The government recently allocated US$1.5 million to a new program dubbed the Manufacturing Resurgence Program, which aims to support the implementation of the Philippine Manufacturing Industry Roadmap. A large part of the program is the establishment of an Industry Development Council composed of representatives from various government agencies and private sector groups. The Council will monitor the Roadmap’s implementation and recommend policies and programs to address binding constraints to manufacturing growth and development.

This is crucial for two reasons. First, it will enable the Philippines to take advantage of opportunities and negotiate challenges arising out of the ASEAN Economic Community (AEC). Second, and more importantly, it will ensure the creation of quality jobs and the attainment of sustainable and inclusive growth as reflected in the country’s Updated Development Plan.

The experiences of the last two decades have shown that the Philippines cannot leapfrog industrialisation and rely on the service sector alone to achieve sustainable and inclusive growth. A large and competitive manufacturing sector is required. Manufacturing provides opportunities for high-skilled, semi-skilled and low-skilled workers, and can thus support the development of a nation’s human capital. The transformation of the sector currently underway in the Philippines should also support the movement of workers from the informal to the formal sector as well as from low value-added to high value-added activities where wages and compensation are greater.

At the heart of the Philippine Manufacturing Industry Roadmap for Structural Transformation is the development of the automotive industry through its integration into the production and sales systems of global automakers. A car has over 30,000 parts and its construction is dependent on metal, chemical, plastic, textile, rubber, glass, steel, electrical and other manufacturing subsectors. As a consequence, through inter-industry and supply-chain linkages, auto manufacturing can have a large multiplier effect in an economy because any expansion in the automotive industry drives growth in feeder industries. While the Philippines’ domestic production of automobiles is currently limited, there are clear opportunities to increase production as the country’s middle class grows and AEC integration creates an open market of over six million people. The third wave of ASEAN motorisation is also expected to reach the Philippines by 2016.

The goal of the New Auto Program is to attract foreign direct investment (FDI) in assembly and component manufacturing to enable the Philippines to deepen its participation in the global value chains of multinational companies. Global value chains are a new form of industrial organisation where different stages in the construction of a finished good are located in different geographical areas in order to minimise production costs. Suppliers of components usually follow where assemblers locate their operations. This has been the experience of several emerging market economies including China, Brazil and Thailand, where massive inflows of FDI into assembly attracted many new component companies that followed their major customers.

To ensure the Philippines can achieve similar results, a comprehensive mix of policies will be crafted to stimulate demand and effectively regulate the industry. If it inspires new investments in the automotive industry, the New Auto Policy could not only catalyse growth within the industry but also drive broad-based manufacturing growth and economic transformation across the Philippines.

The Manufacturing Industry Roadmap will coordinate measures to address the most binding constraints that prevent the entry of firms into the Filipino manufacturing sector and hinder their integration into global value chains. The goal is to help markets work better by developing an investment strategy, optimising supply-chain integration, improving regulation, making education more industry appropriate, and encouraging industrial clustering to achieve agglomeration effects and reduce transaction costs.
The present administration’s effective implementation of the Manufacturing Roadmap is crucial and timely given the success of governance reforms that have led to the economy’s recent strong performance and the growing interest of investors, who are now seriously looking at the Philippines as a good place to do business.

Rafaelita M. Aldaba is Senior Research Fellow at the Philippine Institute for Development Studies.

5 responses to “Revving the engine of Philippine manufacturing”

  1. How can Philippine manufacturing take advantage of the Internet (in making more connections possible around the world) and the new technologies (like 3D printing)? How does the Philippines combine relative low labor costs with tech-enabled factories?

    • 1).The government continues to implement supporting regulations & policy to foster e-Commerce. The E-Commerce Act was legislated in June 2000 defining policies on electronic transactions & paving the way for the country’s online trade infrastructure. There are also several SME portals linking SMEs to the global economy through the Internet & providing a wide range of information (finance, marketing promotion, resource development, training, product & package design, & technology) to help entrepreneurs in the country. 2) The goal is to diversify the manufacturing industry by addressing gaps in the value/supply chain, integrating industries, & strengthening industry linkages. Efforts are directed to maintain the country’s competitiveness in sectors such as garments & electronics (semi-conductors mainly) but at the same time deepen participation in global & regional production networks by targeting high-tech industries or high value added activities in the value chain based on the country’s comparative advantage.

      • The country’s first fablab (Bohol Fabrication Laboratory) was launched two months ago at the Bohol State University in Tagbilaran City. This aims to improve the competitiveness of the creative industry & provide state-of-the-art equipment to perform rapid prototyping and modelling.

  2. Thank you for the article, Dr Albada. I have only recently become interested in learning how Asian countries have industrialized their economies.

    I am wondering if you could give your thoughts on the following, especially as to how applicable they may be to the Philippines:

    1) LICENSES TO MANUFACTURE. Among the top manufactured imports into the Philippines last year were electronic equipment (~US$15 billion); machinery/engines/pumps (~US$6.6 billion); vehicles (~US$3.6 billion); aircraft (~US$ 2.4 billion); plastics (~US$1.9 billion) and pharmaceuticals (~US$1.1 billion). To help create more jobs and keep more dollars at home, shouldn’t the Philippines be more pro-active in buying “licenses to manufacture” the equipment, that it is currently importing the most? Didn’t “licenses to manufacture” help India, Taiwan, South Korea, Malaysia, etc to kick-start transfer of technology and heavy industrialization of their economies? Aren’t these good examples of how the Philippines build on the experiences of other countries that used to be poorer than us, but have now overtaken us through government-backed industrialization?

    2) NEW AUTO PROGRAM & ALTERNATIVE FUELS. The New Auto Program is very encouraging. To help ease the country’s reliance on imported oil, could there be provisions to mass-produce vehicles that can run on locally manufactured fuels? For example, can the New Auto Program tap the Philippine sugar industry to supply alternative fuels?

    3)NEW AUTO PROGRAM & 2-WHEELED VEHICLES. With growing traffic congestion throughout the Asian region, could there be a similar program for motorcycles and scooters (especially those that can also run on Philippine-made alternative fuels) that can be exported to other countries?

    4) INDUSTRIAL OFFSETS. The AFP is currently in desperate need of modernization and the Philippine government is in the process of procuring updated equipment for it, mostly from overseas suppliers. How can the Philippines negotiate industrial offsets in its dealings with foreign defense suppliers, so that whatever the Philippines spend towards those foreign suppliers, can be offset by investments from the countries of those suppliers, into the Philippine manufacturing sector? Why doesn’t the Philippines negotiate with companies that have reputations for very favorable industrial offsets, such as Saab, for example?

    5) OFFERING LOANS TO BOOST EXPORTS. For many decades, the Philippines entered into loan agreements with other countries, with stipulation that the Philippines use those loans in the procurement of equipment manufactured in the lending country. In other words, various foreign countries provided finance to sell their manufactured equipment to countries such as the Philippines. Now that the Philippines dollar reserves might be reaching the $100 billion mark, is there a way that the Philippines can use at least a fraction of its dollar reserves to offer financing to other countries for them to procure Philippine-made equipment, and help increase the market for Philippine-manufactured equipment?

    I apologize if my wording is too lengthy. Thank you very much again and God bless!

    • Hi Mr. Lacsina! Thank you very much for the very useful suggestions. First, for licenses to manufacture, yes this is currently being practiced and with the focus of government policies on manufacturing, we expect more investors/businessmen to use this path to upgrade their technology and take advantage of the growing market not only in the Philippines but as well as in the ASEAN region. Second, for alternative fuels, yes this is a possibility, but at the same time, we need to ensure stable supply of alternative fuels along with the necessary policy measures & support regulations. For instance, to develop biodiesel as an alternative fuel, there is already a legislation requiring oil companies to blend fossil fuels with biofuels. Third, for 2-wheeled vehicles, the top Japanese motorcycle companies have assembly plants in the country holding 80% of the domestic market. Chinese, Taiwanese, Thai, Malaysian, and Indian brands have also entered the market due to rising demand. I agree with you, our goal in the immediate future is for the Philippines to serve as a regional supply hub. Fourth, for industrial offsets, I think we can study this further and craft measures that should be in place and identify the support industries to this activity in order to entice our partners to invest in the country. Finally, for the last point to boost exports, I think we can make use of the country’s free trade agreements to promote our export products, manufactured products in particular along with services and services embedded in manufacturing. To realise this, we need to focus on improving our competitiveness by upgrading and transforming our industries, moving up the value chain and creating a proper environment to ensure private sector development along the lines of our comparative advantage.

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