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
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.
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.
From 1960 to 2000, manufacturing share of GDP has averaged around 24.6% (Author’s calculation based on World Bank databank figures). However, from 2000 to 2009, this share went on a rapid decline, raising concern on the future of manufacturing in the Philippines. Fortunately, in the past four years, we seen faster growth in manufacturing sector. But what’s the impact of this renewed growth to manufacturing’s share of the economy? Is it significant enough to reverse the declining trend of the previous decade?
First allow me to point out that the sector has always been growing, thru the decades, as we’ve pointed out in previous posts. So, “decline” is a tricky word when describing the manufacturing sector. But what is factual is that manufacturing’s share of GDP has been declining for some time…until recently.
The table below shows that manufacturing’s share of GDP has rapidly declined from 24.47% in 2000 to a low of 21.47% in 2009. A huge 3 percentage point drop in one decade. It was due to a combination of rapid growth of the services sector and the relatively slow growth of the manufacturing sector. However, the trend has reversed in 2010, and by the third quarter of 2014 it had reached 23.16% of GDP.
The next table is a familiar one to our readers. This table shows a comparison of the growth rate of the manufacturing versus the services sector. The latest GDP numbers in Q3-2014 extends the lead of the manufacturing sector over services in terms of growth rate to seven consecutive quarters.
Not to be misunderstood, I am not hoping for a slow down of the services sector! But I am advocating a catch-up for the manufacturing sector so that we have a more balanced and robust economy, that can provide a wider range of employment opportunities to Filipinos. We need both engines of growth. Three would even be better, with the agricultural sector.
Growth is not mutually exclusive, it doesn’t have to be. In fact, researchers have pointed out that manufacturing can drive a further expansion of the services sector due to manufacturing’s high multiplier effect.
While the increase in manufacturing share of GDP is encouraging, this ratio is still far from what we desire, and still far from reaching our true potential. The new Philippine Manufacturing Roadmap crafted by the government and the various industry sectors provided a challenging and bold vision for manufacturing to reach 30% of GDP. It’s a vision that goes beyond our historical performance. But it is a vision that can free us from economic underperformance that has plagued us for decades.
Manufacturing Subsectors by technology classification
The manufacturing sector is highly diverse, composed of a wide range of subsectors. These subsectors can be groups into three technology groups: low, medium and high. Below is the gross value added of each of these subsectors at the end of 2013, grouped by technology level. Food manufactures is still by far the largest manufacturing subsector, followed by radio, tv and communication equipment and apparatus, which we know better as electronics and semi-conductor, and third is the chemical and chemical products sub-sector.
Low-tech sectors are generally less capital-intensive and more labor and/or resource intensive. While medium and high technology sectors are generally more capital-intensive and less reliant on labor cost and/or resources. Note the word “generally” since the products within this subsectors can have very varied characteristics in terms on capital and labor requirements.
Low technology subsectors has less entry-barriers, require less skills, and provide huge employment opportunities, but subject to strong competition from lower cost countries specially when they’re highly globalized with low trade barrier, like garments and footwear. Higher technology subsectors require higher skilled labor, and more sophisticated use of technology and capital.
By classifying the sub-sectors intro these three technology groups, it becomes easier to understand their needs, allowing us to identify targeted interventions that will enable them to be competitive. For instance, low-technology sub-sectors would require the availability of low labor cost migrating from the basic sector, whereas high-technology would need innovative talent and skills upgrading. This classification also allows us to understand where to direct our human resources, which is to higher value sub-sectors, which will raise the total productivity of the manufacturing sector in the long-term.
Shifting to higher technology levels
As countries progress and climb up the value chain, you see a consistent reduction in share of low tech secttors, for instance food manufactures, and an increase in the medium to high-tech subsectors. See from the charts below taken from UNIDO 2103 Industrial Development Report, how South Korea evolved from 1963 to 1998, reducing their share of their low tech sector in favor of their high-tech sector. Compared to Kenya that hardly changed their structure through out the same period.
The relative size of the Philippine high-technology sector which includes electronics, semi-conductor and chemicals is encouraging. Growing our machinery and transport sector should accelerate our growth as well as diversify our high-tech sector. There is of course, a lot of value in expanding our medium technology sector which represents key industries that enable us to integrate the various subsectors. These medium technology sectors are easier to develop compared to high-tech sectors, and can provide employment for our low-skilled labor that maybe not find opportunities in the low-tech sector due to competition from lower cost countries.
This is why we have more than 20 sectoral roadmaps today. Each sector has a role to play in our economy. The more sectors we participate in, the more opportunities we provide to our investors, both foreign and local, to our entrepreneurs and to our workers.
Growth of the manufacturing subsectors
Finally, let’s take a look at the growth of each of these sub-sectors in the last three years, from 2010-2013.
Furnitures and fixtures is the fastest growing sector, averaging 57% in the last 3 years, followed by chemical and chemical products at 39% per annum, and wearing apparel who seems to be making a come back at 11% per annum. One needs to take into account the actual size of these sub-sectors to put the growth into context. So while food manufactures is the largest, it a low growth industry. Chemicals has both scale and high growth. Furnitures and wearing are relatively smaller industries, but are gaining ground.
Radio, TV, communication equipment and apparatus (electronic and semi-con) has experience low but still positive growth the last few years. Interestingly, transport equipment has seen a contraction in the last three years, in spite rapid growth in motor vehicle sales. Hopefully, this translates to the expansion of the local production of motor vehicles in the next few years.
I hope this short note helps us understand the value of classifying manufacturing sub-sectors by technology level, and how they contribute to the overall growth of the manufacturing industry.
2014 growth, the fastest sector in the Philippines
Philippine manufacturing continues its rapid growth pace as it now leads all sectors of the economy, growing by 10.8% (constant prices) in the 2nd quarter of 2014. Manufacturing was the fastest growing segment of the Industry sector which grew 7.8%, the services sector grew by 6% and the agricultural sector grew by 3.6%. Data source: NSCB.
The latest quarter’s manufacturing performance was characterized by double-digit growth of the largest manufacturing sub-sector which is food manufactures which grew 10.7%. Food manufactures represents 37% of the entire manufacturing sector. The 2nd largest sub-sector is called “radio, tv, communication and equipment and apparatus” which represents the electronics and semiconductor industry. They grew by 9.4%. Third largest sector is the chemical sector, which grew at a slower pace of 4.4%.
In our post last July, 2013, (see the-philippine-manufacturing-sector-is-the-24th-largest-in-the-world) we showed how the Philippine manufacturing sector is growing vis-a-vis the other countries in the period between 2005 and 2010. Recent data from UNIDO now allows us to compare our performance in the last three years.
Did you know that in the period of 2010 to 2013, the Philippine’s manufacturing sector, (based on manufacturing value added, MVA) grew faster than the average growth rate of ASEAN’s manufacturing sector? And that it grew more than 2 times the global average?
For more info, go to UNIDO’s database on Industrial Performance.
Two days ago, the NSO released a preliminary report on the 2012 Census of Philippine Business and Industry – Manufacturing Sector for Establishments with Total Employment of 20 and Over. Compared to the last census in 2010, data shows a signficantly larger manufacturing sector. The NSO attributes this to newly listed manufacturing establishments in the 2011 and 2012 Updating of List of Establishments.
Compared to 2010, the census shows that there’s 57% establishments, reaching 7,313 in 2012. Note that this does not include establishments with employment of 20 and below. Top Subsectors were Other food products, 908 establishments, 221% increase, Wearing apparel, 668 establishments, 192%, Plastic products, 454 establishments, 133%, Printing 365 establishments, 138%, Furniture, 315, 146%.
The same report showed a 21% more manufacturing employment compared to 2010. Top employers were Electronic components, Wearing apparel, Other food products, parts and accessories for motor vehicles.
Manufacturing establishments with TE of 20 and over generated a value output of PHP4.3 trillion in 2012, 24.5 percent from the amount generated in 2010.
For more details, go to the NSO report at http://www.census.gov.ph/content/2012-census-philippine-business-and-industry-manufacturing-sector-establishments-total
We’re often asked by people from both private and government sector on whether manufacturing is really growing. In spite of all government statistics pointing to rapid industrial growth, the questions continue. I suppose, given the diversity of the sector, we can’t possibly see the growth in each and every sector, but to help us appreciate the growth, let me list down recently announced expansion plans in the media, I’ll just cite a few from the largest manufacturers in the Philippines:
So we’re seeing both local and foreign investments from reputable companies in wide range of industries. There’s so much more companies who expand without much fanfare or media release.
More to come!