Why Manufacturing?

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ADB’s Dr. Norio Usui’s Presentation during the 1st Philippine Manufacturers & Producers Summit

So many people are asking for a copy of ADB Senior Country Economist Dr. Norio Usui’s presentation during the 1st Philippine Manufacturers & Producers Summit. He pointed out that the Philippines cannot sustain inclusive economic growth if we rely only on the Service sector and neglect Industry, in particular the Manufacturing Sector. He backs it up with tremendous amount of data. But best of all, he describes in minute detail our evolving Manufacturing Space and where we can go to grow in the future. Attached is his complete presentation.

FPI Summit Structural Transformation 24 Nov 2011 by Dr. Norio Usui (ADB)

Investing in Philippine manufacturing… and why now after all these years.

The challenge is in inducing foreign and domestic investments in manufacturing in the Philippines and we have heard so many reasons not to invest in the Philippines, and choose Vietnam or Indonesia instead. From high power cost, to rising labor cost vis-a-vis our competitors, to land ownership, poor infrastructure, to corruption and poor governance. No doubt these are disincentives to investing, but investors choose based on different requirements. The most common and relevant measure for choosing a location for manufacturing is total production cost and availability of skilled labor. Tax incentives are fleeting if the cost rises fast or if the labour pool dries out quickly. Low power cost are relevant only to products that consumes a lot of electricity. Lack of land ownership and corruption never stopped thousands of investors from going to China, Vietnam and Indonesia. High labor cost never stopped the manufacturing sector in Singapore.

There is a lot of capital, the banking sector is as healthy as ever, always looking for better returns. There’s also lots of “foreign” capital coming from OFWs. As foreign remittances begin driving the growth of small and medium enterprises, their investment can be directed towards manufacturing and not just service related businesses like retail, restaurants, etc. Manufacturing is not only for large enterprises. Countries like Japan are supported by hundreds of thousands of manufacturing SMEs who specializes on products that are procured by larger manufacturers.

Now if all if this is true, why did countless number of enterprises lose their livelihood in the past 20 years of globalization and liberalization, where everything can be done in China, and everything can be imported cheaply to the country.

The answer is in the only constant that we know…..change. Things have changed.

First, Japanese companies are looking at relocating again from Japan due to the strength of the yen and for some, due to their vulnerability to natural calamity as demonstrated by the recent earthquake and tsunami.

Second, the huge exodus of manufacturing from Coastal China due to the rapid rise in labour cost and shortage of skilled labour

Third, macro-economic condition, national leadrship and governance in the Philippines has never been this conducive to investments

Fourth, there continues to be an abundance of labour from rural and urban sectors and potentially, given the right conditiions, the availability of highly skilled manufacturing talent from overseas Filipinio workers.

We have never seen this unique combination of conditions in the past twenty years. The Philippines is in a position to capitalize on this today and start a virtuous cycle of growth and prosperity.

– end.

This article is prepared by Roberto Batungbacal to elicit discussion and comments. Views expressed are entirely those of the author. Questions and comments can be addressed to the author (bobbybatungbacal@gmail.com).

Why Manufacturing is Strategic to the Economy

Manufacturing has far more benefits than just employment opportunities. Manufacturing has the highest Multiplier Effect to the economy compare to other sectors. Based on studies of The Manufacturing Institute, the manufacturing sector has a Multiplier Effect of 1.4.*

What is Multiplier Effect? Let me give an example. For every liter of paint manufactured, it required a range of chemical raw materials, packaging like metal or plastic containers, printed paper labels, delivery trucks, it required capital equipment that grinds, blends filters and stores the product. It requires building a factory, warehouse, offices. It employed chemist in laboratories, engineers and operators to run and maintain the plant. It requires utilities like electricity and water. It requires “services” such as financial, marketing, sales and logistics services.

That is why Manufacturing is called the engine of the economy. Many services exist because of manufacturing…and many service jobs will disappear if manufacturing disappears.

Manufacturing is indispensible. It is imperative for the growth of any economy. Even the most competitive and advanced economies like Singapore and Switzerland understands the strategic importance of their manufacturing sector. The US, UK and other western countries are seeking to bring back manufacturing into their country. The recent credit crisis and the current global financial crisis, further highlights the vulnerability of service related jobs, and the urgent need to create manufacturing jobs.

Manufacturing is also essential to innovation. Innovation is today’s buzz word because growth is the way out of the financial crisis and stagnation. To grow you need to create something new or use something existing in a new or different way. Apple didn’t invent the MP3 player, they just made it more simple and easy to use and called it iPod. That is innovation. Now everybody knows that Apple no longer manufactures their products. They’re made in China. But as the inventors stay farther and farther away from the production of the product, then innovations becomes more difficult for the designer, but at the same time, innovation becomes easier for the producer. After all, the producer works with the product every single day.

*The Manufacturing Institute, Facts about Modern Manufacturing, 2009.

The Strategic Importance of Manufacturing

With the rapid expansion of the service sector of the Philippines, it is easy to forget that the main engine of an economy is the manufacturing sector. After two decades of globalization and liberalization, the Philippine manufacturing sector remains to be the most important sector for long-term productive employment, revenue and value-added generation and innovation. Understanding the strategic importance of its manufacturing sector will enable the Philippines to capitalize on the unique combination of events which could lead to higher economic growth, and these events are the ongoing exodus of manufacturers from Coastal China searching for skilled talent and competitive total cost, the new wave of Japanese manufacturers relocating abroad and significant improvement in macro-economic condition, leadership and governance in the Philippines.

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