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.
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.
The Federation of Philippine Industries held the 3rd Philippine Manufacturers and Producers Summit last Nov 14, 2013 at the Hotel Intercontinental Manila, Makati with over 250 participants representating both private and public sector. This year’s theme was: Inclusive Employment Through Industrialization. The keynote speaker was Sec. Rosalinda Baldoz of the Department of Labor & Employment, followed by prominent economists Dr. Gerardo Sicat, Dr. Raul Fabella, and Calixto Chikiamco. A panel composed of industry representatives from the private sector discussed employment issues of the manufacturing sector, they were: Antonio Olizon (Philippine Wood Producers Association), Arsenio Tanco (Coats Manila Bay, Manila Bay Spinning Mills), Bernadine Siy (Fil-Pacific Apparel) , Dan Lachica (SEIPI), Jesus Tanchanco (Former Minister of Food) and Maritess Jocson-Agoncillo (CONGEP). The discussion was facililated by Dr. Rene Ofreneo, Professor and former Dean of UP School of Labor & Industrial Relations.
Speeches and presentations are available on our website menu.
The NSCB announced yesterday that Philippine GDP grew 7.0% in 3rd quarter of 2013 vs same quarter last year. Drilling down the report on the NSCB website you will find that Industry continued its rapid growth, now at 8.2% led by manufacturing that grew by 9.7%, electricity, gas and water by 6.7% and a relatively slower growth for construction sector at 4.7%.
Slide below shows all the industries of the economy and it’s respected gross value added in Q3, where manufacturing continues to be the biggest industry.
The next slide shows the quarterly growth of the manufacturing sector, the last three quarters exhibiting significantly higher and consistent growth than in previous years. To see more details go to NSCB’s website by clicking here.
We face challenges in Q4-2013 due to the tragic aftermath of Typhoon Yolanda, with a few large manufacturers in Eastern Visayas directly impacted, and potentially Central Visayas if power shortages linger due to limited supply. We hope that the sector can contribute to relief, recover, rehabilitation and long term growth of the affected communities.
We increasingly see a wide range of manufacturing news from the Philippines as the sector expands rapidly in the 1st half of 2013. DTI Secretary Gregory Domingo pointed out that the 9.9% growth of manufacturing is sustainable. During this period, the Philippine manufacturing roadmap, copper, chemical, pulp & paper and rubber roadmaps were introduced to the public. There’s also a lot of discussion on inclusive employment. The World Bank released their latest Philippine development report: Creating More and Better Jobs. NEDA Chief Arsenio Balisacan says that manufacturing and importing are seen to be strong economic drivers that could help the Philippines breach its growth target by the end of the year.
4th Quarter is here, seasonally the strongest quarter for economic activity. Looking forward to sustained growth…