The renaissance of Philippine manufacturing

Chandra Anamirthan, CEO of the Hitachi manufacturing operations in the Philippines, gave a most optimistic report that can signal the renaissance of Philippine manufacturing in the coming five to ten years. In the Global Executive Forum organized by Canadian executive search specialist Richard Mills last August 24, Chandra  explained why Hitachi is closing down some of its Chinese operations and transferring them to  its Canlubang site, resulting in the hiring of thousands more of Filipino workers. Hitachi’s China operations have been suffering from as much as 30 percent attrition in its work force as scarcity of workers is already a serious problem in such industrial centers as Shanghai, Guangzhou and Beijing. The comparative figure in the Philippines is only 5 percent.

Chandra had nothing but praises for his more than 9,000 Filipino workers. They were very trainable, highly skilled and productive. His only complaint was that many of them lacked initiative. The most positive news in his report is that the product of the Hitachi plant in the Philippines is no mere semiconductor component. It is the higher-value slider, the very brain of the hard disk of a computer. This means that Philippine export-oriented manufacturing is moving up the value chain and is no longer limited to labor-intensive chips and components.

As I listened to the very animated presentation of Chandra, whose deep understanding of the psyche of the Filipino worker is quite impressive, I thought of the recent announcement by Trade and Industry Secretary Greg Domingo that DTI is about to present a long-term road map for Philippine manufacturing. He has made it clear that the Philippines is still very much in the running as a manufacturing hub of Southeast Asia, contrary to speculations that manufacturing is dying in the Philippines and that our only hope is to compete in services. As we address such obstacles as very high rates of electricity and the unreasonable constitutional restrictions against foreign direct investments in many vital sectors, I am convinced that manufacturing will contribute significantly to both GDP and employment in the coming years.

Automotive manufacturing

A leading contender to be one of the engines of growth of the Philippine manufacturing sector is the Philippine automotive manufacturing industry. In a recent policy proposal coming from the Center for Research and Communication of the University of Asia and the Pacific, the Philippine automotive manufacturing sector was singled out for its major contribution to total manufacturing output and employment and its extensive multiplier effects and inter-industry linkages. The two sectors that make up this industry are vehicle manufacturing and the parts and components manufacturing. At present, the sector is composed of 14 automotive manufacturers/assemblers and 256 parts and components manufacturers, spread in over 20 municipalities and six provinces in the entire country.

In 2010 total vehicle sales reached 168,484 units, or a growth of 27.21 percent from the previous year. This performance was the highest growth recorded in the last decade and has surpassed the peak of vehicle sales achieved in 1996, just before the East Asian financial crisis. Not all is well, however. A closer look at the composition of vehicle sales reveals the unfavorable performance of locally manufactured vehicles (LMVs). In the last five years (2006-2010), production of LMVs has experienced timid growth and its share to total sales has been decreasing from 55 percent in 2006 to 44 percent in 2010. In contrast, sales of completely built units (CBUs) have increased their share of total market from 18.45 percent in 2006 to 27.21 percent in 2010. A brighter outlook faced the parts and components manufacturing sector that has been on the rise.  Most of the parts and components produced are exported and 2010 data showed a total export of US$ 3.1 billion. These originate mostly from parts and components manufacturers located at the ecozones. The top automotive parts exports include: electrical wiring harnesses, gear boxes, steel belted tires, lead-acid storage batteries, airbag assemblies, electronic sensor clusters for chassis and anti-lock brake systems.

At present, the Philippine automotive manufacturing is at a crossroads. While there is positive outlook of a 300,000-vehicle market by 2015, as the Filipino middle class expands, the challenges of a still relatively small domestic market and weak supply base must be surmounted.  There must be a way to go beyond the domestic market, which has been long constrained by erroneous industrialization strategies and the neglect of the agricultural sector, which could have provided a mass market of rich farmers, as in Thailand. This way is to get into a higher gear by choosing a growth path that allows it to take full advantage of the ASEAN market and secure part of the global automotive production network. But this would require a change in the mindset of policymakers. It would also entail the dynamic use of existing as well as other enhancements to generate the needed scale that will go hand in hand with the increase in market size (e.g., preferential tax for locally manufactured vehicles, as in Malaysia).

Building bigger domestic base

For the 300,000 vehicle market by 2015, local production capacity must be used as a way to build a bigger domestic base for a competitive local automotive manufacturing, which will allow successful entry into free trade areas such as the ASEAN and ASEAN Australia/New Zealand.  The expected growth in the domestic market must be used to generate volume that will be augmented by demand from the ASEAN market as other automotive manufacturers in the region will soon reach full capacity. This should set the stage for the Philippines to effectively position itself as the second automotive manufacturing hub in the ASEAN after Thailand, in close competition with Indonesia.

The challenge to our policymakers is how to satisfy the expected increase in domestic demand with locally manufactured vehicles. Without a policy response, the demand will most likely be satisfied by CBUs from other countries. This will clearly be a missed opportunity for domestic automotive manufacturers. But if government supports automotive manufacturing with the necessary fiscal incentives to match the emerging seamless market, then this could generate multiple benefits of increased tax revenues and increased employment and income levels.

In a globalized market, there is still space for a modern industrial policy that calls for generous use of fiscal incentives, especially in encouraging new areas of manufacturing activities. Given the strategic importance of automotive manufacturing and the huge investments involved, there is enough rationale for a temporary intervention from government to place Philippine manufacturing on a level playing field in regional markets. This would require a forward-looking and much broader interpretation of the heretofore application of fiscal incentives for investments destined for the domestic market. The Board of Investments will have to issue a legal clarification interpreting the ASEAN market and other freely accessible regions as though these markets were part of the domestic market. An invigorated Philippine automotive manufacturing sector should be part of the Philippine Development Plan, the Public Investment Program and the Philippine Export Development Plan. The current growth mode of the Philippine automotive market, defying the global trend toward recession, is the initial impetus necessary in introducing a new growth paradigm for Philippine automotive manufacturing. There is no better time to invigorate automotive manufacturing in the Philippines.

For comments, my e-mail address is [email protected].