Philippines needs catch-up plan to boost manufacturing value
By Kyle Aristophere T. Atienza, Reporter
THE PHILIPPINE ECONOMY beat expectations by growing by 6.3% in the second quarter amid increased state spending ahead of an election season, when cash flows to poverty-stricken areas.
But the expansion was mainly driven by sectors whose workers are paid low, including construction, which accounted for 16% of the growth.
The building sector was followed by wholesale and retail trade, repair of motor vehicles and motorcycles at 5.8%, and financial and insurance activities at 8.2%.
Such a growth anatomy has been common for a country without a solid manufacturing base, which is needed for growth to hit double digits, according to a De La Salle University School of Economics report in June.
The Philippine economy would probably by 5.5-5.6% this year, against the government’s 6-7% target, it said.
Meeting most targets under the Philippine Development Plan for 2023 to 2028 including cutting poverty to 8.8-9% will be delayed, with over 50% of the country’s workers still employed in low-paying agriculture, wholesale and retail trade, and construction, it added.
Jesus Felipe, a professor and research fellow at De La Salle School of Economics, said the Philippines has failed to develop manufacturing, which has helped its Southeast Asian peers become economic powerhouses.
By simply visiting ordinary markets, one would get a hint of how the Philippines lacks firms that produce products which compete in international markets and that create jobs which require high skills.
When one’s inside a basic Filipino home, “everything here is imported,” from basic appliances to furniture, said Mr. Felipe, who has advised Asian, Latin-American and African governments on long-term growth. “One should ask, why aren’t these products being manufactured by Filipino companies?” he said by telephone.
The share of the manufacturing sector in the country’s workforce — the number of people employed in manufacturing divided by the total number of workers in the country — is only 8%.
The manufacturing industry employs only 8% of the country’s workforce. While the number of workers is increasing, many of them are in sectors with low-paying jobs. “In particular, services are generating employment faster than manufacturing,” Mr. Felipe said.
To revise the trend, the government should support manufacturing startups and develop niches. An important step is a government-led incubation program for manufacturing companies, he added.
For example, the government could focus on the Marikina shoe industry by selecting dozens of local players that can compete with the likes of Italy’s Salvatore Ferragamo, which has strong markets in Indonesia and Switzerland, Mr. Felipe said.
“The Marikina shoe industry cannot go back to making P500 shoes,” he said. “That’s a dead end. The story is, can we have 30 very good companies that can compete with Ferragamo? That should be the objective — 30 companies, top of the line.”
The government can help them compete globally by upgrading their organizational capabilities and helping them acquire equipment and machinery.
“It’s about selecting 10, 15, 20 brands and say, in the next five years, ‘We’re going to help you upgrade these producers that already exist,’” he said. “We are going to make them competitive, which means that they can export to the world economy.”
SUPPLY CHAINS
Mr. Felipe said the Philippines should learn from post-war South Korea, which achieved an “economic miracle” by helping local companies become global manufacturers. South Korea now has Samsung Electronics, which has a revenue of over $234 billion (P13 trillion), and Hyundai Motor Co., whose sales have reached $110.4 billion.
The Philippines has been focused on foreign direct investments (FDIs) and ambitious targets, including becoming a leader in artificial intelligence, that it had failed to manufacture basic materials that do not require foreign technology.
“Do we need foreign technology to manufacture glasses? No, we don’t. To manufacture plates? No. Spoons, forks, tables? If the country cannot manufacture these products, you know what I would do? I would close it. It’s a failure as a nation.”
“We already have a shoe industry here. What we need to do is to upgrade it. We already have furniture makers. So what do we need to do? Make sure that these furniture makers do very nice things that can compete with Italian designers in five years.”
Amid heightened geopolitical tensions, many multinational companies including Chinese firms have been diversifying their supply chains and manufacturing operations away from China, which is also facing serious economic challenges.
The Philippines under the government of President Ferdinand R. Marcos, Jr. is capitalizing on the so-called friendshoring trend, in which companies select partners in countries that are geographically closer and align politically, economically and socially with their own.
He has pursued more than 20 international trips since coming to power in 2022 — 11 of these last year — to attract investments and security support for the country. This year, he has had three overseas trips so far.
Data from the Philippine central bank showed FDI net inflows fell by 36.9% to $556 million in April from a year ago, the lowest in 10 months.
A report by Nomura Global Markets Research in May said the Philippines and Indonesia, despite being among the fastest-growing economies in the region with “favorable demographics and strong reform prospects,” have been laggards in terms of benefiting from supply chain diversification.
“This likely reflects in part their starting positions: both countries have weak forward and backward linkages to regional supply chains… and smaller manufacturing bases with the share of manufacturing output to total GDP (gross domestic product) declining,” it said.
Unfortunately, the Philippines has failed to capitalize on its electronics industry, its largest export sector, amid supply chain diversification across the region, according to the report.
Electronic products account for 58.6% of Philippine manufactured goods and more than half of total exports. Exports were up 0.8% to $3.59 billion in March.
The Philippines may not be benefitting significantly from the diversification trend, but it has a good future with its “growing market,” said George N. Manzano, who teaches trade at the University of Asia and the Pacific.
“There will be plenty of market opportunities,” he said in an e-mail, noting that the Philippines should further capitalize on its electronics sector to attract investments in heavy industries.
FDI
“As much as Vietnam is getting lots of investments, there will come a time when it falls short of labor and middle manager resources,” Mr. Manzano said. The Philippines’ service sector is likely to benefit from the diversification trend, in which Vietnam has been considered as a key player.
The Philippines’ manufacturing sector growth heavily relies on FDIs, which amounted to only $9.2 billion in 2022, behind Thailand ($10 billion), Malaysia ($15.1 billion), Vietnam ($17.9 billion), Indonesia ($21.7 billion) and Singapore ($140.8 billion).
This was despite the passage of laws liberalizing the Philippine economy, including the Corporate Recovery and Tax Incentives for Enterprises Act, which cut the corporate income tax for domestic and foreign corporations to 25% from 30%.
In 2021, the Philippines passed a law that amended the country’s 85-year-old Public Service Act, allowing full foreign ownership in domestic shipping, telecommunications, shipping, railways and subways, airlines, expressways and tollways, and airports.
Vietnam had FDIs worth $112 billion from 2010 to 2019, compared with $57 billion for the Philippines. Its merchandise exports in 2019 hit $300 million, more than four times the $70 million for the Philippines.
Mr. Manzano said high power costs, red tape and physical connectivity issues remain threats to the Philippines’ ambition of becoming a manufacturing hub.
“The problem is that the government never had any comprehensive ‘catch-up’ program to match the technologies of other countries,” said Leonardo A. Lanzona, an economics professor from the Ateneo Center for Economic Research and Development.
“Technologies and global linkages everywhere in the world have been shifted, and yet we are stuck with infrastructure, domestic integration and economic protectionism,” he said in an e-mail.
While semiconductors exports have boosted Philippines participation in the global value chain, it “remains a low value-added activity,” he added.
“We need to upgrade and create our value chain,” Mr. Lanzona said. “As a first step, we should allow more foreign firms in the country to ‘learn by doing.’ And then we should innovate and leapfrog in order to reach higher value-added products.”
“FDI can help a little bit, but definitely not the solution to our problem,” Mr. Felipe said. “Foreign companies come here, and they don’t bring any knowledge that is transferred to Filipino companies.”
“That’s not the solution. The solution is there must be Filipino companies producing.”