From the doldrums
In 2010, there was a sense of resignation in the manufacturing sector that had witnessed a series of declines for nearly three decades. In the decade of 2000 to 2010 average annual growth of the sector was only 4% with a recent contraction of -4.4% in 2009 due to the effects of the global financial crisis. The common perception is that there was no manufacturing activity left in the country, or at least nothing significantly enough to talk about. The new administration announced their priorities, namely agriculture, tourism and services. Manufacturing, maybe…
Economists and industry stalwarts tirelessly reminded us that manufacturing is the main driver of the economy. To step up the advocacy, the private sector organized manufacturing summits to increase awareness for strategic importance of manufacturing in the Philippines. The first summit was somewhat discouraging as experts described the dismal performance of the sector, but awareness was created. We started by taking stock of what we still had, a large electronics and semiconductor sector, a resilient and diverse food manufacturing sector and a number of smaller yet successful sub-sectors with un-integrated niches. More summits were conducted, and success stories started emerging, policy makers were engaged and slowly perceptions changed.
Recognizing the need to get organized and the potential of the industry in the new Philippine economy, the government and private sector collaborated through road mapping exercises, some led by the private sector, some prodded by the government. Seminars were held, summits, workshops and technical working groups. Government leaders started talking about prioritizing manufacturing. The media caught on, then public perception changed rapidly. Analyst, first local, and then international started talking about a manufacturing revival in the Philippines.
By 2013, the Philippine manufacturing sector experienced double digit growth, becoming one of the fastest among major Asian economies. From a handful of industry roadmaps, the manufacturing sector would eventually generate over 30 roadmaps. Government supported both small and large sub-sectors, even extending to agri and agribusiness subsectors. As these exercises became visible and public, individual investors gained confidence that manufacturing is a sector that government will support and that government now has a better understanding of its needs.
Industry champions from the manufacturing sector sectors emerged, and partnered with a government champion in the BOI. The BOI was full of industry development activity, as a series of industry groups poured into the BOI building to conduct meetings and workshops with their counterparts. The government even boosted their capabilities by recruiting PhDs from the academe and the research community to help sectoral champions in their roadmaps and by harnessing global experts from international development agencies.
What we’ve achieved in 6 years
From 2010 to 2015, the manufacturing sector has added Php 738 Billion in gross valued added reaching Php 2.7 trillion GVA at current prices, growing an average of 7.3% per annum, nearly double the annual growth rate of the previous decade. We still have a couple of quarters to measure but the growth is not expected to be any less. More importantly, manufacturing labor productivity gained a huge 30% increase (based on GVA current prices) from 2010 to 2014 after plateauing in previous decades. Foreign direct investments in manufacturing, excluding reinvestments and debt instruments reach US$ 3.1 billion in the last 5 years. In 2015, approved foreign direct investments reach Php 135 billion pesos, representing 55% of all approved FDIs in that year. Domestic investments which are harder to quantify yielded countless expansions and green field projects. The manufacturing sectors also delivered landmark investments like the first naphtha cracker in the Philippines, new and upgraded oil refineries and two nickel refineries, just to name a few.
Let’s remember though that a lot of investments, huge billion peso investments were made by bold investors not just because of our industry policy, our roadmaps and manufacturing summits. They were made because of favorable market forces, strong macro-economic fundamentals, the change in production cost in China, and so many other factors. But I would like to add that the combined effort of private sector and government in making the sector a prioritized sector have reinforced investor’s confidence to make those big investments in the country.
The path forward
After 5 years, we’ve established a track record of growth, but the road ahead is still very long. Will we reached a manufacturing share of 30% of GDP? Will we increase our manufacturing workforce from 3 million to 7 million workers? Will we gain the needed diversification of our manufacturing sub-sector to have a balanced portfolio of low, medium and high tech sectors? Will we continue to be competitive versus our neighbors? Can we bridge the infrastructure gap? Can we make it a truly inclusive industry and not just for the big boys? It all depends on our next steps.
Government and private sector has started to institutionalize a new industry policy, sectoral road mapping and the manufacturing resurgence program. That is a big step. what more should we do?
(1) We need to implement our sectoral roadmaps, in collaboration with the new administration.
(2) With STEM education in high school as a new enabler for the industry, we should continue and expand TESDA training and factory internship rapidly increase our talent pool for manufacturing.
(3) We must engage the research community to make innovation a more important driver of our growth.
(4) We must lay down strategic enablers like the infrastructure-manufacturing convergence, including special domestic zones for manufacturing.
(5) We must continue to bring down the barriers to investors so domestic and foreign investments will continue and accelerate, with new investments integrating with previous ones, or making new paths into new sectors.
(6) With new government leadership, we should prioritize the integration of MSME into the manufacturing sector.
(7) And finally, industry champions and government partners must continue to lead and accelerate the growth of the manufacturing sector in pursuit of inclusive and sustainable growth of the Philippines.
I’ve spent five years documenting this journey. I want to thank those who encouraged me, read my blog and challenged me. I hope that the articles have inspired some students to seek a STEM education, or a career in manufacturing, hope that one of my articles, or one graph or data point made an entrepreneur seek his fortunes in the manufacturing sector, or helped a manager or a corporate leader to try manufacturing in the Philippines one more time and succeed.
Maraming salamat po.
 National Accounts, NSCB
 National Accounts, NSCB
 Calculated from DOLE labor statistics and Manufacturing GVA data
 Banko Sentral ng Pilipinas: http://www.bsp.gov.ph/statistics/efs_ext2.asp#FCDU
 Philippine Statistics Authority, Investments: https://psa.gov.ph/sites/default/files/table%203a_0.pdf
Losing our cost competitiveness?
When manufacturing giants like China, and neigboring Asian countries rapidly grew their manufacturing sector in the 90s and 2000s, it was a foregone conclusion that it was cheaper to manufacturing products in those country than in the Philippines. The main culprits, power, labor, transportation cost were often cited as being uncompetitive for manufacturing. There’s no denying that our electricity prices are among the highest Asia, and our minimum wage higher than most Southeast Asia countries. This is partly why many people assume that manufacturing has moved off-shore. But the reality, as we have seen, is that the manufacturing sector’s output continued to grow, and in fact has accelerated in the last four years. Why?
We have previously pointed out in previous posts, that power cost as component of total manufacturing cost varies significantly, depending on the product that you produce. Some products may require a lot of power to produce, reaching 50% of total cost, while some products can consume power at less than 1% of total manufacturing cost. In fact, the average share of electric power to total manufacturing cost is only 4.7%. That’s a surprisingly low number. Second, power cost of manufacturers can be lower that the cost that you see in your electric housebill, Not only are industrial rates lower, many manufacturers produce their own power. So cost of power, while it’s an important component of manufacturing cost, is certainly not the main driver of competitiveness for many industrials sectors. Since the Philippines had high power cost for a long time, it’s not surprising to see that sectors that consume less power have thrived much better.
High wages are another often cited reason for our lack of competitiveness. Minimum wage in the Philippines is higher than many Southeast Asian countries, sometimes even higher than countries with higher per capita income like Thailand. However, wages are very dynamic. In recent years, wages in Thailand, Malaysia, Vietnam has rapidly increased, while Philippine wages has been rising at a relatively slower rate. The average annual wage increase in the country is only 4.1%, compared to double digit growth in Vietnam and other neighboring countries. Second, one needs to compare total cost of labor, minimum wage and average wages does not fully describe the full cost of labor.
Is the Philippines competitive?
Competitiveness is very complex. Comparing a few cost components cannot give us a clear picture of our competitiveness. And given the near infinite variety of products being manufactured, there can’t be absolute competitiveness when comparing countries. It is however possible to approximate one’s competitiveness if it’s measure with a common reference. Which is why I found the following graph very interesting. In the JETRO survey of 2013, Japanese companies were asked how their cost of producing in foreign countries compared to the cost of producing in Japan. The results was very surprising to me. The Philippines is the 3rd lowest cost country in among 16 countries in the survey.
Does this mean that based on the Jetro survey, Philippines is now among the low cost countries in Asia? One needs to be careful in interpreting this table. We need to remember that Japanese companies produce different sets of products in each country, hence it can’t be an apple to apple comparison. Nevertheless, the cost difference between producing in Japan and the Philippines is more favourable than most of the other countries in the survey. Certainly a valuable insight for foreign investors looking for lower cost locations in Asia Pacific.
What I learned from this analysis is that cost competitiveness is dynamic and there are many relevant components that determines cost competitiveness. The Philippines, in spite of some disadvantages, can be cost competitive compared to other Asian countries, at least in certain sectors and a set of products. Can we extend our current competitiveness to a broader range of products? I believe we can.
How do we sustain our gains in industry? Given the unprecedented collaboration between government and private sector that led to the creation of doznes of road maps, how do we sustain it? The best way is to institutionalize it. This is well demonstrated by the Philippines Board of Investment, when they launched a website that raises awareness on Philippine industries, providing comprehensive industry data, industry news, policies and programs. What I find most exciting about it is that it is now the repository of the industry and sectoral roadmaps developed by various industry associations and government in the last four years. It contains 28 sectoral roadmaps, the manufacturing, agribusiness and services roadmaps and ongoing programs. Kudos to DTI Secretary Gregory Domingo, Usec Adrian Cristobal, the BOI Governors, Asec Aldaba, Director Corieh Dichosa and many more forward thinking leaders in the DTI.
Visit the site: http://industry.gov.ph/
After missing several months, I just updated the Philippine manufacturing news section, from January to August 2015. In the third quarter, the most prominent news were the CARS program of the DTI, the rapid growth of motor vehicle sales, the expansions of cement companies Cemex, Lafarge, Holcim and additional investments by Coca-Cola and Cargill.
Keep following our blog for the latest Philippine manufacturing news.
We’ve written a lot about the resurgence of the Philippine manufacturing sector, as well as the different manufacturing sub-sectors in the country. A recent trip to Davao made me think about how the regions of the Philippines contributed to the national growth of manufacturing. Using three sets of data, the attached bubble chart shows each of the 16 regions in the Philippines in terms of size (using manufacturing value added, MVA), growth rate (between 2011 and 2013) and manufacturing’s share of regional GDP. Each region tells a different story, here’s how interpret some of them…
Region 4A, is by far the largest manufacturing region in the Philippines, hosting some of the largest export zones in the country, with electronics and semi-conductor as the leading sub-sector, but this region is really more diversified than it seems. They include machineries, motor vehicle and parts manfacturing, metal products, chemicals, plastics, food products, beverage, tobacco and so much more. In 2013, total manufacturing value added in Region 4A, at current prices, reached Php 948 billion. Manufacturing is the largest sector in the region, with a 53% share of its GDP. However, Region 4A’s manufacturing sector is growing at a slow rate of 4%. It’s important to understand the region’s growth constraints. Is it the weak export market, lack of new zones to host additional investments, or lack of manpower. It is critical to unlock these constraints given that region 4A is the largest, and probably the most complex and sophisticated manufacturing region in the country.
National Capital Region (NCR) is the second largest manufacturing region, with total MVA reaching Php 485 billion in 2013. It is only half of the total manufacturing output of Region 4A, but NCR turned out to be the fastest growing manufacturer in the country with an annual growth rate of 19%. NCR plays host for most of the central offices of companies in the Philippines, so this number may actual reflect activities not confined to NCR alone, yet NCR continues to have many manufacturers in Quezon City, Manila, Caloocan, Valenzuela, Pasig and Muntinlupa. I find Valenzuela City particularly interesting as it hosts thousands of small, medium and large scale companies forming a complex value chain all in close proximity.
Central Luzon is the 3rd largest manufacturing region, host to a wide range of local and foreign manufacturers, to serve the large and growing domestic market, as well as export from two major economic zones, Clark and Subic. There are significant manufacturing activities in Bulacan and Pampanga as companies expand beyond Metro Manila, and Bataan hosts heavy industries like oil refining and petrochemicals. However Central Luzon is growing very slow in the time period of 2011-2013, with a growth rate of only 1%.
Regions to watch are the rapidly growing regions of the Zamboanga Peninsula, Davao Region, Western Visayas, all growing at 15% or more. Next set of regions, growing at around 10% are Sockssargen, Northern Mindanao and Central Visayas.
Eastern Visayas, which was affected by Typhoon Haiyan/Yolanda will need sometime to resume growth. CAR, with a more concentrated group of manufacturing companies in its region is also experiencing negative growth for the moment.
There are a number of regions with very little manufacturing. While Ilocos has a significant economy, only 5% comes from manufacturing. Likewise, Bicol Region’s manufacturing only has 3% share of its economy. There’s a few more regions with negligible manufacturing. But for inclusive growth, we need to think about how to engage these regions in the fastest growing sector of the Philippines.
In our next post, we’ll be talking about Davao, which in my opinion, is poised for rapid manufacturing growth.
Ever since I heared Dr. Norio Usui of the ADB talk about Product Space, I’ve been fascinated by the work of Hausmann and Hidalgo and how economic complexity drives growth. I’ve also seen Dr. Fita Aldaba Assistant Secretary of the DTI, use Product Space in the development of the Philippine Manufacturing Roadmap. Since then, I’ve been following a web-based tool that Harvard and MIT created called Atlas of Economic Complexity http://atlas.cid.harvard.edu/ and I wanted to share with you how these tools characterizes our economic development and how we can use these tools to identify paths for growth by increasing the complexity of our economy.
Product Tree Map
These charts clearly show a break-down of our exports, organized by industry or product groups, it covers more than a decade so you can see how our exports change over time. In terms of complexity, we do have an advantage over a number of economies due to the size of our electronics and semi-conductor exports. However, as many economist point out, we’ve gone too narrow and too specialized, resulting in the under-development of other important sectors. Annual product tree maps shows these changes, where we see the hi-tech sector reached its highest share (electrical and machinery) of export at 73% in 2003 . In the suceeding years, we’ve seen better diversification, with the hi-tech sector share at 60% in 2013, even as the sector’s export continue to increase.
These maps are even more interesting, since it doesn’t simply show a breakdown of our exports, it actually show how each product (or product group) is linked to each other. By looking at a country’s product space, you find out which products are already competitive and which are the nearby products that the country can move to in order to grow, diversify and increase the country’s economic complexity. Attached is the latest product space map of the Philippines. Going through the years (in the tool), you will see how our complexity has changed, how many products have gained or lost its comparative advantage in the world market. Its also useful to compare product space of different countries. I tend to compare Philippines with Thailand which has a very complex profile that we can aspire for, or Vietnam with a rapidly growing industry sector.
As an industry participant, I may want to drill down on our specific sector, in my case this would be the chemical sector to find “nearby” products that I can move to from my existing business.
You can get a profile for any industry, for any year from 1002 to present, for any country.
Rapid rise in Country Ranking
The tool also provides country ranking of economic complexity over the time period. The countries with the highest rank in Economic Complexity Index (ECI) is Japan, Switzerland and Germany. The Philippines ranks #45 in the latest list, but it’s rise in the country rankings is among the fastest in the list. From rank #72 in 1992 to #45 in 2013, jumping 27 notches. The line chart below shows our ranking vs peer countries in SEA.
More interesting is how economic complexity can project future growth rates. The Atlas of Economic Complexity website just recently published their 2023 growth forecast, http://atlas.cid.harvard.edu/rankings/growth-predictions/ and it shows that the Philippines can be among the fastest growing economics of the future. Looking at their table, we’re projected to be growing faster than China in the near future.
Useful as it is, I would not blindly follow these numbers and call it a growth strategy, I would seek the experience, knowledge and insights of individuals, entrepreneurs and firms and their first hand knowledge of their specific industry. However, rarely do you find an individual with enough knowledge across multiple segments, let alone the entire industry that this tool represents. So, the tool is an extremely valuable guide to businessmen, firms, industry associations and industry planners, when combined with their real world knowledge. Lastly, the tool comprehensively describes products that country exports, it tells use little about domestic production, which in the Philippines continue to be the bigger part of the manufacturing sector.
Last March 13, 2015, I attended “A Gathering of Industry Champions” organized by the Board of Investments. Led by DTI Secretary Gregory Domingo, Undersecretary and BOI Managing Head Adrian Cristobal, BOI Governor Lucita Reyes, Asec. Fita Aldaba, Director Corieh Dichosa, it’s the third annual gathering of industry associations who are currently implementing their industry roadmaps in coordination with the BOI and wide range of government agencies. Private sector and BOI industry champions were all present, with a number of sector leaders providing testimonies on their roadmap implementation, successes and challenges.
This reminded of what Dr. Ricardo Hausmann called, “value networks”. Hausmann points out that the secret to economic growth is diversity and complexity, and they can be attained by networking a variety of activities, instead of focusing on a few existing, tried and tested things.
Looking back at the past decade, we had a few very strong sub-sectors, like electronics and semi-conductors, but it had little connectivity to the other manufacturing sub-sectors. We had a fragmented collection of sub-sectors without the benefit of networks that would have provided a wide range of suppliers, customers, service providers as well as generate new opportunities, new products and even spur new sub-sectors.
Individual companies craft their own strategies. But when they participate in creating an industry or sectoral roadmap, collaborations are formed, as they find new customers, suppliers and even partners. A value network extends beyond sub-sectors, and enabling firms to network faster with those in other sub-sectors. It’s difficult for individual firms to engage an entire sub-sector, but through value networks, facilitated by industry and umbrella associations and government agencies, more firms are engaged, faster.
Emerging Manufacturing Value Networks
One example I heard in the forum is how the BOI connected the construction supply producers to the mass housing sub-sector. While it’s certainly possible for individual firms to connect to the builders of mass housing, networking at a sub-sector level, with a government agency facilitating, brings the collaboration to whole new level. Another example is how auto and metal part makers in the Philippines are “jumping” to aircraft parts and other new applications, enabled by DOST MIRDC new investment on state of the art metal working laboratories.
It is at the intersections and connections where great value is created. Think about how auto-parts, fiberglass, electronics and batteries yield a new industry called e-trike. How the new naphtha cracker drives the expansion of plastic resins, which enables world-class quality packaging for our largest sub-sector the food manufacturing industry.
Nodes are getting connected, no longer randomly, but in a more coordinated fashion, making it faster than ever. As more firms get connected, the network broadens, encouraging more entrants instead of hindering them. There is no single firm, nor industry association, nor government agency has a broad enough perspective to guide our entire industry. Only through extensive collaboration and networking can we achieve long term, inclusive growth.
In our next post, well talk about these nodes and connections, in what is known as the Product Space of the Philippines.
Fastest growing sub-sectors of manufacturing
The manufacturing sector has at least 22 major sub-sectors, making it quite a diverse industry. Like in our previous posts, we grouped these sub-sectors into three technology groups (low, medium and high), as can be see in the bar chart below which shows 2014 growth rates.
In 2014, the fastest growing sub-sectors were: Publishing and printing which grew 89% vs previous year, fabricated metal products 46% growth, beverage, 25%, furniture and fixtures, 25%. In fact, 17 out of the 22 major sub-sector experienced positive growth last year. If you want to see a full list of the sub-sectors, go to the NSCB website on Q4-2014 results for manufacturing by following this Link.
Growth of technology groups
Let’s compare the growth of the technology groups. The bar graph below shows that the low-technology group grew fastest at 10.3%, followed by the medium technology group at 8.3% and finally the high-technology group at 5.5%. Interesting to see that the low-tech sector led the growth last year. This group has the best potential to provide a lot of jobs, though at relatively low value and low productivity to the other technology groups. Its encouraging to see the medium tech ground gaining ground, with fabricated metals leading the growth. With the start up of a steel mill in Davao (see related news), and plans for future expansions (see related news), this is a good sector to watch. The medium tech group provides raw materials to the other sectors, enabling much needed integration across the value chain. These group provides fuel, cement, iron and steel, plastics and rubber. Lastly, the high tech sector is experiencing relatively low growth due to the weak demand for semiconductor and electronics. Fortunately, the sector saw a rebound towards to 2nd half of the year, and we do hope to see better growth this year. The chemical sector experienced its slowest growth in recent years after it’s very high growth rate last year, hence this could be due to base effect. We may see this sector resume it high growth rate with the start up of very large projects like the first naphtha cracker late last year (see related news).
If you would like to see the 3-year average growth of these sub-sectors, please refer to our earlier post by going to this link.
2014 is another growth year for Philippine manufacturing, with a full year growth rate of 8.1%. While it’s slower than 2013 growth of 10.5%, it was high enough to bring the three years average growth to 8%. See the bar chart below for the quarterly and annual growth rate in the last three years.
Food manufacture continues to be the largest subsector with 36% share, followed by radio, tv, communication equipment with 17% share, chemicals is third with 11% share of total manufacturing value added (MVA) in 2014.
As we’ve done in previous post, we classified the subsectors into technology groups to understand the profile of the manufacturing subsectors. Low tech group continues to dominate given the size of food manufactures. We’re seeing some diversification with the growth of beverage and furniture. Contribution of the medium technology group seems limited last year. While radio,tv, communication and chemicals continue to provide much needed diversification into the high value, high technology sector, though both sector experienced low but positive growth this year.
In our next post, we will see which are the fastest growing sectors in manufacturing, and more important, look at the bigger growth trends by technology group bearing in mind that we need a more diversified profile, with a bias towards higher value, higher technology sector for faster overall growth of the manufacturing sector.