Ayala Corp. CEO: The Philippines is in great shape

The 15th Annual Global CEO Survey of financial services firm PricewaterhouseCoopers International indicated that nearly half of 1,258 chief executive officers polled worldwide believe the global economy will decline even further in the next 12 months.

But at the same time, nearly three times as many CEOs are confident in their own companies’ growth prospects for the next 12 months, suggesting that CEOs believe they have learned how to manage through difficult and volatile economic times, according to the survey results released at the recent World Economic Forum annual meeting in Davos, Switzerland.

Among these confident CEOs is Ayala Corp. chairman and CEO Jaime Augusto Zobel de Ayala, who was one of 38 CEOs who granted in-depth interviews that formed part of the report of PwC, of which Isla Lipana & Co. is the local member firm.

Business Monday publishes here excerpts of the interview.

Question: What is your view on the global economy?

Answer: Around the globe we are all more financially interrelated than ever before. But I also think that emerging Asia generally stands a little bit apart from what is happening in Europe and the United States. Once upon a time we relied on the markets in Europe and the US to a greater extent. If you look at the statistics over the last five years Asian economies are trading with each other much more than ever before. This includes the changes taking place in China.

Asia’s consumption-led demand is still quite strong and so is infrastructure development. Those two elements will fuel a growth in our part of the world that you will probably not see elsewhere.

Question: The fiscal position in Europe is a major problem now. Are you worried about the fiscal position of the Philippines and other Asian countries?

Answer: Some of the fiscal issues being faced by Europe are imbalances between the strong fiscal position, for example, of Germany versus the weaker positions of, say, Spain, Greece, Italy and Portugal. That kind of disconnect is going to create tension within the European system.

Clearly, finding a solution will require a level of coordination among these countries that may be difficult to achieve.

So Europe is facing complex, unsettled issues.

In the Philippines, we are a proxy for what’s happening in emerging Asia as a whole compared to what’s happening in Europe.

We still have growth, which is not happening in other parts of the world. We are also in a fairly good fiscal position. International reserves are at the highest ever, so our currency has been strong. In fact, some would argue that it’s been too strong, that it has affected exports.

Still, because of the strong currency, our interest rates have remained low. We’re lucky also that the inflation rate has remained tempered.

It’s a tremendous opportunity for the government to use its reserves and its fiscal strength to actually prime the economy through infrastructure development. I think that is their intention at this time.

I would argue in summary that from a fiscal position, the Philippines is in great shape. Consumption-led growth, the strength of our currency, and the fact that our international reserves are so high have given us stability in our own national balance sheet.

We are getting more retention now than ever before from the investment community. The revenue flows to the government are also increasing because the minister of finance is taking the tax recovery situation much more seriously.

So you’ve got a very good set of parameters [with regards to investment and government revenue] in our country right now combined with a low-interest-rate environment, strong consumption-led growth, potentially some investment-led growth, and the government with a strong balance sheet.

If all of that comes together, if we get things right, you may see growth numbers of between four and five percent, maybe a minimum of 3.5 percent.

These are not bad numbers in relative terms compared to what’s happening in the rest of the world. We’re really in a position to do some interesting things. It’s now time to execute.

Question: How about the fiscal problem in the US, which is our traditional investment partner, aide partner and also a source of remittances?

Answer: The US is going through some stress and you probably will have flattish growth there. I know they are still wrestling with some issues but they are in a fairly stable growth period. In Europe, there is more of a sense of crisis.

Question: What is one thing the government could do to better support your company?

Answer: Countries like the Philippines have fairly large growth in the population base. Maturing the educational system and building a progressive element into it that is aligned to the needs of the workforce is something I think we can coordinate better with the government.

We’ve built up tremendous skills in the service sector in our country. It’s the reason why we’ve become a major force in business process outsourcing. We’re also building up skills in knowledge-based outsourcing. Filipino companies are service providers to many countries around the world, to leaders in the healthcare sector, the accounting sector, the computer sector and the marine sector. This has to be supported internally by an educational system that is progressive and that aligns itself a little bit more with the skills required for these jobs.

Bringing together what industry needs with what the educational sector is producing is an accepted challenge.

We can work better together on it.

Question: The Ayala Group today is very different from five years ago. What changed?

Answer: This is the biggest change that I’ve seen in the Ayala Group: In order to keep growing in an emerging market like the Philippines, we’ve had to touch lower and lower price points.

The bulk of the market is not the traditional market for the Ayala Group. We used to deal mainly with the top end of the market across our group of companies. But that market is limited in size. So we asked ourselves, “How can we begin to address the needs of the bulk of Filipino consumers?”

In order to be relevant to them, we really had to change the whole way we did business. Our products and services had to move into a very different price range. That has meant fundamental changes in, number one, the way we do business; number two, the way we design our products; and number three, the way we use technology to address that community.

What do I mean by that? Take our real estate group. Once upon a time, we had one or two product ranges at the top end of the market that dealt with high-end subdivisions and the needs of people in the wealthier segment of our community. We built our reputation for quality in that sector.

In order to be relevant to the bulk of the Filipino community, we’ve had to introduce smaller lots and the use of technology to pre-fabricate [homes]. We’ve had to bring housing costs down to a whole different level. Once upon a time we had two brands; we now have five brands. And the price points have moved way down to houses at less than a million pesos.

In the banking sector in the past, we had five million customers and we’re a country of 95 million people, roughly. We’ve now formed a joint venture with our telecom company to provide microfinance services and microloans to communities that in the past would never have approached a bank like the Bank of the Philippine Islands.

The cost structure and technology base that delivers loans to individuals who can only afford to borrow five to 10 thousand pesos is very different from the kind of infrastructure you need at the high end.

In our water distribution company, significant chunks of our customers are in some of the lowest-income groups in the city of Manila.

It is our mandate to be relevant to them and to be able to deliver water to them at price points far below what the public/government service structure delivered before.

Instead of putting meters in everybody’s homes and billing everyone personally, we work with communities at the barangay level. We bill them as a community and let the barangay leaders collect from their constituents. It saves cost on our side and we use the community effect to get payment back to us.

On the telecom side, we started off with just a few thousand customers. We’re now at 30 million customers in the Philippines, but again we’re touching customers who can only afford to load up their phones with a small inventory of minutes on a regular basis.

We had to reinvent the technology of pre-charging our phones to accommodate much smaller denominations. We had to come up with over-the-air technology that would transfer funds as needed, bring the cost down and allow people to just have the minutes in their phone that they needed for a specific period of time.

In all our companies we’ve had to change radically the way we do business. It’s been an exciting time because the Ayala of today is now, in my opinion, far more relevant to the vast majority of our countrymen than it was 10 to 20 years ago.

Question: How do you see Ayala Group in the next five years?

Answer: Our businesses in our traditional areas—in banking, telecommunications, real estate, water distribution, electronics manufacturing and business process outsourcing—are continuing to expand at their own pace.

We are also looking at new areas. We’ve started to invest in the energy and transport infrastructure sector where the government is considering inviting the private sector to participate in new private-public partnerships.

The PPP model was successful in the past. It resulted in us getting into the water distribution business. We just submitted a bid for a toll road. It’s the first time we bid on something of this nature.

If the government decides to privatize more infrastructure networks, you’ll hopefully see groups like ours contribute to the country’s development by helping finance its tremendous infrastructure needs.

It’s an exciting time, as I mentioned earlier. The government’s financial position is strong and the economy has the capacity to keep growing.

That, combined with a dynamic private sector, can lead to tremendous development.

Question: Has it been easy for you to find talent? What kind of talent does Ayala look for?

Answer: We’ve been very lucky in the Philippines. We have a young workforce and a big community of young people coming out of the schooling system. The key is really just making sure the educational system is aligned to the needs of industry.

We are increasingly more open as a country to the global economy so we need young people who are more attuned to global trends and global standards.

While the Ayala Group is still a Philippines-based operation we do have a couple of international businesses. We have a strong electronics business. We have six plants in China, one in Singapore and two in Eastern Europe right now.

The executives that get sent there from here, particularly in finance, production and engineering, really have to feel comfortable living in a global environment. That’s not been a problem in the Philippines.

People have been quite adventurous and in the way they look at travel and relocating to other countries.

At the same time the media space has changed. The way people communicate, the way people market to young people, which is a majority of our consuming public, has changed radically.

People have become far more adept at using technology and new media to market and to communicate.

The workforce is now more mobile than it ever has been. Roughly 10 million Filipinos work abroad. They have opportunities in many sectors. It’s up to us as a local corporation to find ways to make it attractive for them to work within the Ayala Group.

Our standards of pay, number one, have to be competitive with the global environment. Number two, our level of professionalism and what employees can learn from us has to be up there with the global environment. Number three, we’re investing much more now in retraining people. The world is changing so quickly that it’s just not enough to go to school once.

We’re reinvigorating our training modules. We’re getting managers to look at new frameworks for the challenges they face as they move up in an organization. We’re reinvesting in training at the middle management level and then as they move up to a senior level giving them the exposure that one needs to be able to face this fast-changing environment.

The continuous learning process that keeps our executives engaged has really moved up to a different level.

Finally, to create an entrepreneurial spirit you’ve got to create a workforce that are part owners of the institutions they work for. We have to come up with imaginative schemes that give people a stake in the business that they work for.

We spend a lot of time on that within the Ayala Group. We have stock options. We have ways of getting people to be owners and of aligning the interests of the ownership and stocker holder base with the workforce.

If we can get a lot of these things right, if we can remain a dynamic institution that continues to shift and change with the changing environment in a positive way, and if we can remain progressive in our outlook, then I think we’ll keep adjusting to the challenges that the new world has for all of us.