Business model, disrupted
Introspective By Calixto V. Chikiamco | October 9, 2017
If the Philippines were a company, its business model would be facing disruption.
Its business model, if you will, rests on OFW remittances and BPO revenues, i.e. on exporting labor and services. That translates to growth in consumption from the expenditure side, and services from the sectoral contribution side.
However, like most companies nowadays, its business model may possibly be under threat primarily due to technological disruption.
Let’s take OFW remittances. A significant contributor to OFW remittances is remittances of OFWs in the Middle East. (Those figures showing the USA being the biggest contributor to OFW remittances misstate the true situation, since remittances from Middle East countries are routed through US money center banks and counted as US remittances.)
The technological threat to OFW remittances from the Middle East is the coming shift toward electric cars and self-driving autonomous vehicles. General Motors plans to introduce an all-electric new car model lineup by 2023. Furthermore, an analyst predicts that by the year 2021, autonomous cars will be launched. By 2025, oil use will reach its peak. By 2030, gasoline use for cars will fall to zero.
According to him, simple economics explain the inevitable shift toward electric vehicles and autonomous cars. There are more than 2,000 parts in an internal combustion engine, compared to only 20 for an electric vehicle. With fewer parts, EVs are more durable, cheaper to maintain, with no oil to change, no catalytic converter, no ignition coil. An average internal combustion engine lasts only 150,000 miles vs. 500,000 miles for electric vehicles.
In addition, batteries are getting cheaper. Hence, Elon Musk was able to launch Tesla 3, a mid-sized sedan, at about $35,000. For the first time in the history of the car industry, buyers have been making deposits way in advance. Elon Musk’s problem is not in selling cars, but how to produce them fast enough.
In addition to technological forces, there’s regulatory pressure to lessen carbon emissions and phase out polluting internal combustion engines. Governments are forcing carmakers to meet stringent emission standards that can only be met by electric vehicles.
In sum, Big Oil will become Small Oil. Oil will still have some uses, such as for asphalt or to produce plastics and fertilizer, but it’s no longer going to fuel transportation.
If that is so, the economies of the oil-dependent countries in the Middle East, already disrupted by shale oil and fracturing, will collapse, unless they can diversify quickly enough. This will be bad news for OFWs who work in the Middle East. In Saudi Arabia alone, there are more than a million Filipinos.
As if this scenario isn’t scary enough, the other pillar of the Philippine economy — the BPO industry, which generates $25 billion in revenue and employs one million Filipinos — is facing headwinds short-term, medium-term, and long-term.
Short-term, the declaration of martial law in Mindanao, the perception that the Philippine government encourages extrajudicial killings, and the anti-Western rhetoric have scared investors in the BPO sector. Short-term and medium-term, the growing scarcity of qualified personnel due to the poor state of education in the country, is crimping the ability of BPO companies to expand. Short-term to long-term, the specter of Artificial Intelligence and associated technologies is a challenge to the industry.
I talked to one BPO executive and he said that AI (Artificial Intelligence) isn’t coming, it’s already here, at least in the form of AI-assisted software. While AI-assisted software will not replace a call center agent, it will enable him to handle more calls. With AI-assisted software, what once used to require six agents, can now be handled by one. Therefore, the requirements for warm bodies will be less. Now, imagine if full AI, which is getter better at human tasks of cognitive intelligence, are fully deployed.
Staying in the base of the value chain isn’t an option. The BPO industry has to level up, or else lose its position as the biggest contributor of foreign exchange.
With the current account now in deficit, any slowdown in the growth of remittances and BPO earnings will scare the markets, aside from putting into question the sustainability of Philippine economic growth.
What should we do? Here are a few ideas.
First, we have to attract investments, both domestic and foreign, by a significant order of magnitude. We would need to significantly increase investments to increase employment and absorb the displacement of our workers, especially in the Middle East.
The administration is correct in trying to remove the legal and regulatory barriers to foreign investment. Socioeconomic Planning Secretary Ernesto Pernia has declared that the government is trimming down the foreign investment negative list. It will also seek Constitutional amendments to remove all foreign ownership restrictions except in the ownership of land.
Furthermore, The Public Service Act Amendment should be passed soon. The bill seeks to provide an updated statutory definition of the term “public utilities,” so that only electrical distribution, electrical transmission, water distribution, and sewerage will fall under the Constitutional restriction of foreign investment in public utilities. Thus, telecommunications and transportation will no longer be considered as public utilities and 100% foreign investment will be allowed in those sectors.
If passed into law, the PSA Act will have huge, multiple benefits to the economy. Not only will much needed foreign investments flow into those sectors, it will also solve the problem of poor public services, from telecommunications to transport, which have degraded our competitiveness and deterred investments in other sectors of the economy.
Second, we need to diversify our economy, particularly toward agriculture and industry. Again, the secret is to make the investment climate favorable to investing in agriculture and industry. In agriculture, the key reform is to free the land market, from those restrictions on agricultural land imposed by the Comprehensive Agrarian Reform Law and the Commonwealth-era Public Land Act.
In industry, the key is removing the rigidities in our labor law, from the six month security of tenure provisions to the minimum wage rule. In fact, the recent labor regulations against “endo” (End of contract or contractual employment) haven’t really ended “endo” but have just added regulatory costs to small and medium-sized businesses. Also, the rise of the “gig economy” or jobs on demand, such as driving for Uber, underscores the need for labor rule flexibility.
We need to provide millions of jobs, not only for OFWs displaced in the Middle East, but also for our millions of currently unemployed and underemployed youth. We have to encourage labor-intensive industries, the kinds that have left for Cambodia and Vietnam, such as garments and light manufacturing, by removing those rigidities.
Third, we need to invest more in education and make education reforms big time. Our education is in a sorry state. We are churning out college graduates who can’t write, can’t analyze, can’t adapt to a fast-learning environment, and can’t speak well either in Filipino or English. This is why the BPO industry is constrained from growing.
However, it’s not just college-educated labor that must adjust. Even factory machines need more computer and numeracy skills to operate.
We just have to invest more in education, primarily in primary and secondary school education, because the quality of primary and secondary graduates feed into the quality of college-level students.
Fourth but by no means the last, we need government to change its approach. The forces of technological change are moving too fast for government to cope with. Government is just too slow, too political, and too bureaucratic to adjust quickly to the disruptive changes going on. It should really be relying more on the private sector to respond to these changes.
For example, instead of financing SUCs (State Universities and Colleges), it should have given scholarships targeted to poor students, who can choose to go to private colleges and universities. Private colleges can adjust their curriculum and training faster and better in response to market demands. Not so with SUCs.
For another example, instead of government doing infrastructure, it should rely on Public Private Partnership (PPP). Government rules are just too rigid, from purchasing to firing people, to quickly do infrastructure projects. The name of the game in this era of technological disruptions is quick and efficient, which government is not.
Moreover, instead of government imposing more and more regulations on agriculture and industry, from prohibiting ownership of agricultural land beyond five hectares to specifying what is “core business” not subject to outsourcing and contractual employment, it should be more liberal and apply a lighter regulatory touch. The fact is that technological progress is moving so fast as to leave regulations behind. This is what is happening to the rise of Uber and other TNVSs, which aren’t covered by the Public Service Act, written in 1936.
Business model disruptions can be deadly. Witness Kodak. Witness Nokia. While a country is not a company, the similarity to existential threats isn’t far behind. Yes, to paraphrase President Duterte, technological “change is coming.” We better be damned prepared.
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