Bernardo M. Villegas
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Not Too Late for Manufacturing (Part 1)

          One of the worst consequences of the Philippine economy descending to the level of “the sick man of Asia” in the last century was the lackluster performance of its manufacturing sector.  This weakness of the Philippine economy was highlighted in a Special Report of the Hong Kong-based think tank CLSA entitled “Quest for a champion:  ASEAN manufacturers.”  The Philippines was readily discarded as a potential winner because of its past poor performance in this important part of the industrial sector (which comprises in addition to manufacturing such other sectors as mining, construction and public utility).  The CSLA report points out that there is a great opportunity for the ASEAN manufacturers opened up by two developments.  “First, foreign manufacturing firms have been setting up or diversifying operations in Asia as China’s labor cost advantage is eroded.  Vietnam has been the favored relocation destination, emerging rapidly as Asia’s upstart manufacturer.  Indonesia’s high manufacturing potential requires bold policies which, given political constraints, will not be undertaken in the next few years.  Manufacturing can expand in the Philippines but its comparative advantage is in services.  Thailand and Malaysia are among Asia’s more established manufacturers; however, a smaller wage cost advantage offer China presents a tougher competitiveness advantage.” 

         In a recent forum at the University of Asia and the Pacific entitled “Manufacturing’s Turnaround” hard data were presented that can belie this conventional wisdom about the Philippine competitive disadvantage in manufacturing.  While manufacturing grew at an average rate of 4.0 per annum during the 2000-2010 period, its growth accelerated to 6.9% during 2011-2016, outpacing the GDP average growth of less than 6%. The fastest growing sub-sectors of manufacturing during 2011-2016 were Furniture and Fixtures at 32.1% annual growth; Chemical and chemical products, 24.2%; Publishing and printing, 17.3%; Basic metal industries, 13.8% and Machinery and equipment except electrical; 12.6%.  In a paper presented during the UA&P forum by Dr. Peter Lee U entitled “Lazarus Rising:  The Return of Philippine Manufacturing,”  the Furniture and Fixtures sector was singled out for its outstanding performance, reaching seven times the volume of production in 2016 compared to 2010.  Its output continues to soar so that by April 2017, its volume of production was 10.08 times that of 2000.    Other sectors related to construction that also posted strong volume growth rates were Basic Metals (especially Non-Ferrous Metals), Non-Metallic Mineral Products (especially Cement), and Fabricated Metals.  Such growth rates can be sustained and even improved on as the Duterte Administration implements its Build! Build! Build! or Golden Age of Infrastructure Program over the next five years.

         Also growing at an above-average level is the Transport Equipment sector.  Strong automotive sales in recent years (growing at double-digit rates annually) can explain the bullish performance of transport equipment.  Industry leaders expect the rush by car buyers to avoid the expected higher taxes of the proposed tax reform to keep car sales (and automotive assembly activities) buoyant in 2017.  Growth rates can be sustained beyond 2017 if the car companies are able to shift their production to lower-priced models that will enjoy lower excise taxes than the more expensive ones.  These cheaper models will also benefit from the expected increase in the real income of middle-class households who are the main beneficiaries of the reduction of personal income taxes under the proposed tax reform program.  The sectors that are lagging are Electrical Machinery which includes the electronics industries that have suffered from falling global demand.  Other sectors that show signs of dying out are Leather Products and Tobacco Products (a result of public ordinances banning smoking in public and other anti-smoking campaigns).  An interesting observation of Dr. Peter L. U is that, despite the Philippine economy usually being described as a consumer-oriented one, many of the sectors with the highest indicators are from the intermediate or capital goods sectors.  He theorizes that a significant part of consumer spending may be on imported goods which obviously will not be captured by the manufacturing indices.

         In the same Forum, Walter Van Hattum, Trade Commissioner of the European Commission in the Philippines, presented some encouraging data on manufacturing trade between the Philippines and the European Union. In 2015, Philippine manufactured exports to Europe expanded by 21%, despite the slow recovery of European economies from the recent Great Recession. Now that there are signs of recovery in the EU, we can expect an acceleration of manufacturing exports to the region.  The leading Philippine exports to Europe are electrical machinery and equipment; optical, medical or surgical instruments; preparations of meat; machinery and mechanical appliances; animal or vegetable fats and oils.  With 37% of new reported investments in the Philippines coming from the European Union, the EU remains the largest investor in the Philippines in terms of stocks and flows, most of which investments are in manufacturing.  Despite the strong growth in reported investments of the EU in the Philippines, there is still a wide room for improvement if we compare EU investments in the Philippines to the much larger amounts in Singapore, Indonesia, Malaysia and Thailand.

         According to the CSLA Report, Vietnam is the dark horse.  As global trade recovers from the Great Recession, a major threat to overcome is the rising protectionism US President Donald Trump has introduced by killing the Trans-Pacific Partnership.  What the President did not fully realize is that the TPP was meant, more than to open the US market to imports, to oblige its members to open their markets to foreign investment.  That is why Vietnam may take the lead because, despite the TPP loss, it has done most to open its economy to FDIs, thus becoming a regional supply center in the information and communications technology (ICT) industry.  There is still reason for optimism for the Philippines if we do the right things.  As the CLSA Report adds:  “The contest, though, remains open; the country that resists protectionism and opens its economy fully to trade and foreign investment will ultimately be champion.”  (To be continued).