Bernardo M. Villegas

Business World

November 6, 2024

Can Philippine Manufacturing Ever Recover? (Part 6)

            Although it is tempting to rely on services to bring the Philippine economy to First World status (OFWs, IT-BPM, tourism, etc), the hard evidence from the history of industrialization, as we have seen in the last article, should convince us to persevere in our efforts to develop a strong manufacturing sector which should employ at least 16 to 18% of our labor force.  There is some glimmer of hope that shows that this goal is within reach if we capitalize on some ongoing trends.  First, there is the increasing proactive role that the Philippine Economic Zone Authority (PEZA) is playing in attracting FDIs in manufacturing.  As Maria Veronica Magsino, Director General for Finance and Administration of PEZA, said in the recent Business World Economic Forum on PH Next Growth Drivers, “PEZA is creating a more competitive business environment by simplifying processes, enhancing transparency, offering targeted incentives for sustainable development, etc.   These include ensuring regulatory coherence, reducing regulatory burden, and addressing trade barriers through engagements and partnerships with the government, as well as the private sectors alike.” To ensure that these are not just motherhood statements, Secretary Frederick D. Go is devoting a great deal of his time examining legislative measures as well as executive decrees which in the past have been notorious for canceling one another out.  As the “Super Secretary” he is doing much to attain the regulatory coherence that Ms. Magsino was talking about.  It is about time that the left hand of the government knows what the right hand is doing!

            Secretary Go is especially focusing on the potential big increase in the number of semiconductor and electronic components factories from the U.S. and Japan that can locate in our PEZAs,  especially in what is now being called the Luzon Economic  Corridor, an initiative of the Japanese and U.S governments to relocate their chips manufacturers away from China (for geopolitical reasons) to a proposed corridor that will boost connectivity among the major international ports of Manila, Batangas, Subic and  via a cargo rail line.  Secretary Go estimates the cost of setting up the rail lines to be about $ 7 billion.  In addition, this initiative, which is being pursued under a trilateral agreement among the Philippines, the US and Japan, will result in strategic investments in other infrastructure projects like ports, clean energy, data centers and agribusiness zones. PEZA has already announced that many of its locators will benefit for this corridor.  There are already some 1,600 PEZA-registered manufacturing, service, and export-oriented enterprises in 137 economic zones in Metro Manila, Clark and Batangas. With this Corridor, the Philippines will have a chance of competing with Vietnam, Malaysia and Thailand in attracting export-oriented manufacturing ventures, not only from the US and Japan but also from a few countries from the European Union. With lower energy costs and more efficient railway systems, the Philippines will no longer be bypassed by manufacturers from countries suffering from acute shortages of labor resulting from very low fertility rates.

            The building of the Luzon Economic Corridor will be very timely for the Philippines to benefit from the anticipated growth in global chip demand that will be precipitated by the so-called Fourth Industrial Revolution (IR 4.0).  Everything that has to do with Artificial Intelligence, Internet of Things (IoT), Robotization, Data Center, etc. will not be possible without chips.  As concluded in a policy brief from the Senate Economic Planning Office, the Philippine performance in manufactured exports will benefit from the anticipated expansion of world semiconductor trade.  According to the World Semiconductor Trade Statistics report, demand growth for chips is projected to grow by 12.5% in 2025.  US Commerce Secretary Gina M. Raimondo announced in a recent trip to the Philippines that the U.S.  would like to double the number of existing packaging, testing and assembly facilities in the Philippines.  At present there are 13 of these facilities in the country.  The Philippines is one of seven countries that the U.S. plans to partner with in order to diversify its semiconductor supply chain under the CHIPS and Science Act.  Under this law, the U.S. will provide $52.7 billion in federal subsidies to support chip manufacturing and persuade chipmakers with operations in China to relocate to the US or to friendly countries like the Philippines. 

            A related good news was the announcement by the Board of Investments  (BOI) that it is partnering with Arizona State University (ASU) and the US Department of State to launch a groundbreaking initiative under the International Technology Security & Innovation (ITSI) Fund to train 6,000 Filipino students in advanced semiconductor technologies, enhancing the capabilities of the Philippines in this critical industry and solidifying its position as a key player in the global semiconductor supply chain.  According to Trade Undersecretary and BOI Managing Head Ceferino Rodolfo, this ITSI project will help achieve the country’s ambitious target of producing 128,000 engineers and technicians for the semiconductor and electronics industry by 2028.  As Dr. Danilo Lachica, President of SEIPI wrote in a column of a leading daily, the Philippines can be the next semiconductor superpower.

            Another industry in which there are brighter prospects for increasing employment in manufacturing is steel.  Our previous attempts to build a steel industry failed because our domestic market was too small for any steel factory to attain the economy of scale required for a very capital-intensive sector. Both our population and our incomes were half or less of what they are now in the last century.  It is a good sign that Steel Asia Manufacturing Corp, one of the large steel manufacturing firms in the Philippines, just announced that it is planning to invest P82 billion in constructing five new steel plants in order to increase its annual output by 2.2 million metric tons. The CEO of Steel Asia, Mr. Benjamin Yao, echoed at the microeconomic or firm level what macroeconomists say about the importance of employing our workers in the manufacturing sector to attain high-income status. He said in an interview with this paper, “We are building the mother industry for manufacturing (IR 2.0) .  We are way behind our neighbors, but we will catch up.  And as we do so, our mills and steel products will create new manufacturing industries that will result in more jobs, higher-skilled workers, and economic growth.”  He noted that in 2022, the country spent over $3 billion on importing wire rods, billets, sections, and sheet piles—products that our new plants will manufacture.  The steel produced by these new plants will in turn be used in infrastructure, construction, and various downstream steel-intensive manufacturing industries.”

            Another breath of fresh air in the steel industry was the announcement of Secretary Frederick Go in an investment forum in General Santos City organized by the PCI chapter in that city that a Chinese company is investing $1 billion to build a steel manufacturing plant in Maasim town, Sarangani province. This is the biggest FDI so far under the BBM Administration.  Secretary Go said the venture of Panhua Integrated Steel, Inc. (PISI) will be the first ever 2 million metric tons per annum integrated steel mill in the Philippines.  It will be located at the PEZA-approved Kamanga Agro-Industrial Economic Zone at Barangay Kamanga, Maasim.    PISI is a private company (not a state enterprise) under the Panhua Group Co, Ltd.  which is headquartered in China’s  Jiangsu province and is one of the top 500 enterprises in China.

            The announcement by the Government of this major foreign direct investment by a private  Chinese business enterprise should remind the Philippine public that there are numerous Chinese individuals and enterprises  whom we can trust to do good to the Philippines by providing us much needed long-term capital and technology that can help in accelerating our GDP growth to 8 % or more in the coming years.  It would be tragic if Filipinos become so paranoid about the Chinese that we equate  the Chinese people with the likes of Xi Jin Ping or Alice Guo.  We should exert as much efforts as possible to identify among the hundreds of millions of Chinese the many good people among them with whom we can productively engage in trade and investment.  We have to always bear in mind, that despite temporary clashes we have with some of the Chinese leaders as regards the Western Philippine Seas, we cannot ignore the undeniable fact that the Chinese economy will be one of the largest in the world for a long time to come, despite the serious challenge of ageing.  We can benefit from friendly economic relations with private enterprises from China, especially in manufacturing.  PISI, example, will generate some 2,000 jobs directly and will contribute to the improvement of the regional economy of Southern Mindanao in numerous ways.  To be continued.