The development path of each of Asia’s advanced and middle-income economies has been characterized by strong growth of the industrial sector and large shifts of workers from lower value-added agriculture and services into higher-value manufacturing and exports. This has yet to take place in the Philippines on a sufficiently large scale.
For much of the last century, industrialization in the Philippines consisted of import substitution and exports of agricultural and forestry products having limited value-added (e.g. coconut oil, copper metal, and plywood). Most factories set up by domestic and foreign investors in the Philippines made products primarily sold in the domestic market. Government protected their production with high tariffs, as well as quotas on imports. Elsewhere in Asia, beginning half a century ago, Japan, Korea, and Taiwan became manufacturing powerhouses with indigenous firms successfully exploiting global markets.
Over the last three decades, the Philippines benefited from the globalization of trade and manufacturing investment as multinationals from within and outside the Asian region moved into Southeast Asia to take advantage of lower production and logistics costs to serve global markets. However, primarily because of political instability in the 1980s, the Philippines benefitted less from these investment flows than Malaysia, Singapore, and Thailand. More recently, after joining the World Trade Organization (WTO), Vietnam has been attracting a large influx of foreign manufacturing investment because of its extremely low production costs.
Figure 103 and Table 45 show the export percentage of GDP of the ASEAN-6 countries over the last three decades. Malaysia (81% in 2009), Singapore (199%), Thailand (68%), and Vietnam (61%) have increased their export percentage of GDP during this period, while Indonesia (24%) and the Philippines (32%) have not.
When global trade fell sharply in 2008 and 2009 during the global financial crisis, the Philippine economy was much less affected than the regional economies that became wealthy through manufactured exports. The Philippine government argued it avoided negative economic growth because it was “resilient,” when in fact it had not developed its potential to be a major exporter and had instead become dependent on remittances for most of its economic growth. Strong exports usually create quality jobs at home in the manufacturing sector and increase direct revenue for the public sector, which overseas jobs do not.
Garment Exports: Philippine manufactured exports benefitted from the Multi Fibre Agreement (MFA) that governed world trade in textiles and garments from 1974 through 2004. The MFA controlled the growth of textile and garment imports by developed countries by assigning annual quotas each developing country could export. The quotas by category of garment usually grew each year, and many Filipino and some foreign firms went into garment export manufacturing based on their allocated quotas. Being protected from competition, their businesses were guaranteed to be profitable.
Figure 104 shows employment in the textile/garment sector in the Philippines, which grew to a peak of more than 840,000 in 1995. Since the expiration of the MFA in 2005, the Philippine textile and garment sector has lost some 150,000 jobs as guaranteed access to the American and European markets disappeared and competition from lower cost producers in Bangladesh, Cambodia, China, Indonesia, Vietnam, and elsewhere crowded out Philippine exporters, many of whom closed their operations. Figure 105 shows the share of Philippine garments in the total exports has declined since the early 1990s, as electronic product exports grew. In the last three years, however, the value of garments exports has dropped significantly. From an annual average of US$ 2.4 billion between 1995 and 2006, the industry only managed to take in just over US$ 1.5 billion in export receipts in 2009 – the lowest export revenue for the sector since 1988 in nominal terms.131
Figure 104: Employment in textile, garment, and leather industries, in thousands, Philippines, 1991-2008
The Philippine garments industry, supported by the GRP, is seeking passage of the Save Our Industries Act (H.R. 3039 and S. 3170) in the US Congress.132 Under the proposed bill, Philippine garments made from imported American textiles would be allowed duty-free entry into the US, an arrangement in effect for Carribean Basin Initiative (CBI) countries since 1983. For some categories of garments, the preferential tariff treatment would be sufficient to make Philippine products competitive by removing the current US duty of more than ten percent. The Confederation of Garment Exporters estimates that, if passed, the law could add 100,000 jobs in the Philippines.
_____________ 131 This is not yet adjusted to inflation 132 While attending a global summit on nuclear non-proliferation in Washington in April 2010, former president Macapagal Arroyo visited the US Congress to urge passage of the proposed legislation.
Electronic Exports: Beginning in the late 1970s, the Philippines developed a modest electronics manufacturing sector that has grown to nearly 1,000 firms employing over 400,000 Filipinos and producing about 2% of global electronics production.133 Starting with two American firms – Intel in Makati and National Semiconductor in Mactan – many global semiconductor manufacturers located factories in the Philippines.134 Texas Instruments (US), which operates two large facilities in Baguio and Clark, is the largest investor in the sector. Computers and computer components and accessories are also assembled in the Philippines by companies such as Acer (Taiwan), Epson (Japan), Lexmark (US), and Integrated Microelectronics (Philippines). More recently, several solar panel manufacturers have established factories in the Philippines. Figure 106 shows the value of investment in the electronics sector over the last two decades, exceeding US$ 1 billion in seven separate years.135
Figure 106: Investments in electronics, US$ Bn, 1992-2009
Figure 107 shows the value of electronics exports over the last two decades. Figure 108 shows the high rate of growth of electronics exports, growing as fast as 50% in 1995, and the large share of electronics exports in total exports, reaching more than 70% in 1999. Without electronics, Philippine export of manufactured goods would have grown very slowly over the last decade. Conversely, the high percentage of exports made up of electronics products indicates a failure to develop a diversified mix of manufactured exports and creates a risk should technological change, cost, or other factors reduce the viability of manufacturing electronics in the Philippines. Other countries that are significant manufacturers of electronics have diversified their exports. Malaysia, for example, has strong agricultural exports in addition to electronics. Thailand also exports food, as well as automobiles, in addition to electronics.
____________ 133 Foxcomm Technology, the world’s largest contract manufacturer, has 920,000 employees in China and will have as many as 1.3 million by the end of 2011 (International Herald Tribune, August 26, 2010). This single Taiwanese company, which supplies Apple, Dell, and Hewlett-Packard, employs more than the entire electronics sector of the Philippines, and has annual revenues larger than the value of total exports of the Philippines. 134 Intel closed its Philippine plant in 2009 along with a plant in Malaysia and several in the US following the sharp drop in global demand during the financial crisis. 135 1994, 1995, 1996, 1997, 2000, 2007, and 2009
Figure 108: Electronics exports growth and share of total exports, 1992-2009
Other categories of manufactured exports are small in comparison with the dominant position of electronics exports. Garments are 3% of total exports, ignition wiring 2%, woodcraft and furniture 2%, and coconut oil 2%. Garment exports comprised 7% of total exports in 2000.
Automotive Manufacturing: Another industry subsector that has declined in recent years is automotive manufacturing. More than two decades ago the GRP established the Motor Vehicle Development Program (MVDP), which attracted one American and several Japanese manufacturers to invest some US$ 2 billion in Philippine factories, entirely for the local market, with the exception of one firm that exports. A small parts and components manufacturing subsector has developed to supply local assemblers and for export, notably electric wire harnesses, which reached a peak total of US$ 902 million in value in 2008.136
Over the last decade the government has failed to protect the domestic automotive manufacturing industry and was for years unable to prevent large volumes of used car imports despite their prohibition in 2002. The industry in 2009 produced only 48% of total new car sales in the country, while in 2002, 87% were produced domestically (see Figure 109 and Table 46). Imports of new cars have been liberalized, and some 200,000 “illegal” used cars have been imported through the Subic and Cagayan economic zones in less than a decade.
____________ 136 In 2006, the country recorded its highest number of units sold at 62.3 million worth US$ 787.5 million (in 2006 prices).
Figure 109: Decline in locally manufactured vehicle share of car sales, 1991-2010
Table 46: Decline in locally manufactured vehicle share of car sales, 1991-2010
Although former president Macapagal-Arroyo issued EO 156 in 2002, which prohibited almost all used car imports, small used car importers at the Subic Bay Freeport Zone and later the Cagayan Special Economic Zone and Freeport obtained injunctions from local courts in Olongapo and Aparri that blocked implementation of national government policy (see Figure 110). During the years needed before the government succeeded in appealing the injunctions, huge sums of duties and taxes may have not been paid to government coffers, with “illegal” car importers profiting in the hundreds of millions of dollars. Figure 111 shows the number of cars newly registered which includes those sold by the industry and those legally, as well as illegaly, imported.137 Critics, including a former SBMA administrator, pointed to extensive corruption to allow the imports to flow despite the ban.
Figure 110: Clash between national government policy and Aparri RTC injunction
______________ 137 In the Philippines a vehicle is registered only one time, after its importation or local production.
Figure 111: Industry sales versus new registration, 2002-2009
Employment in the Philippine automotive manufacturing industry has declined from a peak of 130,000 in 1996 to 70,000 in 2010. By contrast, Thailand’s automotive industry employs 150,000 people in assembly and auto-parts manufacturing, with the capacity to produce 1.5 million vehicles a year. In 1996, Thailand’s automotive industry produced 555,821 automobiles. By 2008, production reached 1,391,728.
A new Comprehensive Motor Vehicle Development Program (EO 877) was signed in 2010 to create stronger support for domestic automotive manufacturing. Pointing to the higher cost of production in the Philippines, the elimination of tariffs on auto imports from ASEAN and Japan under the ASEAN FTA and Japan-Philippines Economic Partnership Agreement (JPEPA), and continued used car imports, some experts believe domestic automotive production is likely to further decline unless the government adopts a more supportive industrial policy.
In 2010 the Export Development Council (EDC) listed the following products as the sector’s future revenue streams: electronics, textiles and apparel, automotive products and parts, food, home decor, organic products, and construction materials.
The construction materials sector has good prospects. Cement is an example of a domestic manufacturing industry that can survive because the transport cost of imports is fairly high. Beverages are a similar category, as are many food products. Food and beverage manufacturing comprised 58% of total manufacturing GVA in 2009 (see Figure 112).
Figure 112: Manufacturing GVA, distribution per segment, 2009
Figure 113 shows the total value of manufacturing in the Philippines and its rate of growth. With total value above PhP 1.6 trillion and a normal growth rate of 4-5%, the sector remains a very important part of the economy. Manufacturing growth rate fell to zero or less in 1991-92 (power crisis), 1998 (Asian financial crisis), and 2009 (global financial crisis), all years in which GDP growth was very low. In 2009, around 8.3 million workers were employed in manufacturing.
Figure 113: Manufacturing GVA, PhP Bn, 1981-2009
Manufacturing is the largest component of the industry sector (68%), which also includes construction (16%), electricity, gas, and water (11%), and mining and quarrying (5%) (see Figure 114).
Figure 114: Industry sector distribution per segment, 2009
Figure 115 clearly shows the expansion of the services sector in the Philippine GDP since 1990 (from 44% to 55%) and the relative shrinkage of the industry sector (from 35% to 30%) and the agricultural, fishery, and forestry sector (from 22% to 15%). The services sector has grown steadily with increased remittances from overseas Filipino workers and the rise of business process outsourcing. This data also underlines the need to rebalance the economy by investing more in agricultural and manufacturing to create jobs in these sectors.
Figure 115: GDP distribution by sector, Philippines, 1990-2009
Employment in the industry sector in the Philippines, measured as a percentage of total employment, has failed to grow during the last two decades, remaining below 20%, while the relative shares of agriculture and services exchanged places as the country’s fast-growing population moved into low paying service work (see Figure 116).
Figure 116: Employment distribution by sector, 1990-2009
Clearly, the development path of Asia’s advanced and middle-income economies, with large shifts of workers from lower value-added agriculture and services into higher-valued manufacturing and exports, is not occurring fast enough in the Philippines.
Labor productivity in manufacturing has not improved and remains only slightly above its index level in 1980 (see Figure 117). However, since 1980, total employment in the industry sector has doubled, but in Indonesia, Malaysia, and Thailand total employment in industry grew much faster, roughly tripling in each case (see Table 47).
Since industry is more capital intensive than agriculture and services, one explanation for the slow growth of the sector can be found in the low levels of investment in the Philippines. As a percent of GDP, these have fallen considerably below 20% and are currently at 14% in the Philippines, while in the Asia region they are above 35% (see Figures 120 and 121).
The relatively weak industry sector in the Philippines is reflected in the share of exports as a percent of GDP in comparison to more developed Asian economies. While the Philippines never became an export powerhouse, its exports have steadily grown, until the last two years when they fell sharply in tandem with the decline in global trade following the financial crisis in the United States and Europe (see Figures 122, 123 and 124)
Table 48: International merchandise trade, ASEAN-6, 2009
Domestic manufacturing in the Philippines has never faced more challenges to its survival than today. Smuggling has become been a serious threat to the operations of local manufacturers.138 Costs of production of many goods are higher than in several competing Asian economies at a time when more and more free trade agreements are coming into effect with ASEAN, Australia, China, India, and Japan.
The sector’s landscape has changed radically from the days of import substitution policies when investors (predominantly local) were protected from foreign competition by high tariffs and import quotas. Since millions of Filipinos are employed in manufacturing, the future of the sector is not only extremely important to them and future generations but to the overall economy and to government revenues.
_____________ 138 Smuggled goods include angle bars, cars, cement, clothing, flour, fruit, galvanized iron sheets, oil, rice, sugar, textiles, and vegetables.
Many in the private sector believe government agencies are generally complacent when major manufacturing investors close and exit the country.139 Their attitude appears to be that eventually another investor will enter, because they believe there always are business opportunities in the Philippines given its domestic market and strategic location as a gateway to the fast-growing Asian region. These bureaucrats seem to believe businesses stay or leave regardless of what government does. However, by maintaining the status quo and standing passively by when companies leave, the Philippine economy risks stagnanting, while Asian competitors grow faster.
Government agencies are stymied by the lack of direction, commitment, and follow through from top Philippine leadership. There appears to be no strong, unifying policy that manufacturing is a key component in the nation’s economic development. Other countries, such as Indonesia, Malaysia, and Thailand, were successful in developing industrial exports because they had clear policy direction from the top. As a result, Thailand became the leading automotive manufacturer in Southeast Asia and able to produce 999,378 vehicles in 2009 of which 535,596 units were exported, comprising over a quarter of the total shipments from the ASEAN region (1.9 million units).140 In the same year, the Philippines only exported 7,277 vehicles. The Federation of Thai Industries (FTI) is targeting produce to 1.45 million units in 2010 on the back of a recovering global demand.141
During the global financial crisis, the Philippines lacked an industrial policy and the former DTI secretary was not effective in creating one. There has not been sufficient industrial sector planning for where the country wants to go and which sectors it wants to develop. The periodic BOI Investment Priorities Plan (IPP) is a mere list of sectors eligible for fiscal incentives and not a comprehensive industry sector policy development plan.
By contrast, in 1986, the government prioritized 11 sectors for economic growth. Each sector had a government-funded master plan created and headed by the private sector, whose leaders were called the G-11. All agencies of the government were guided by that plan. As a result, the sectors developed until the failed 1989 coup d’etat attempts damaged investor interest. In the last decade, the government implemented uncoordinated and immediate policy actions, rather than following a strategic plan.
Any future master plan should be private sector-led. The government may not have the resources to draft a master plan for manufacturing and logistics but can hire expert consultants. As major stakeholders, the private sector should take the initiative of recommending inputs, which the government should incorporate, support, and implement.
______________ 139 The Philippines was a first mover in Southeast Asia in the semiconductor electronics export sector in the mid-1970s and has grown consistently since. However, the government in recent years had no consensus policy to support the industry. There were champions at DTI and PEZA, but the importance of the industry was not well understood at the DOF and in the Congress. While the former president understood the sector and met with the CEOs of top American, European, Japanese, and Korean electronics firms to encourage them to invest in the Philippines, there was inadequate policy support to make the country more attractive to more electronics investors. The same situation has been repeated for automotive, petroleum, pharmaceutical manufacturing, and electricity generation. Companies that have closed manufacturing operations in the country include Chevron, Goodyear, Intel, and Toshiba. 140 ASEAN Automotive Market Report (May 2010). International Trade Administration. 141 http://www.export.by/en/?act=news&mode=view&id=19852
PEZA is an institution that has been successful in creating a competitive business environment due to an effective and consistent leadership. The PEZA staff, who develop and implement policies, understand the issues very well. PEZA was exempted from salary standardization over a decade ago, allowing it to pay professional level salaries to its personnel. There has been continuity in its leadership through several administrations.
The DTI did not support the pharmaceutical industry when the Department of Health imposed maximum retail prices (MRP) on several medicines and asked companies twice, in 2009 and 2010, to reduce prices voluntarily. When a similar policy was followed in New Zealand, the prices of some medicines were lowered so much that several companies pulled out. As a result, some medicines are not being sold in New Zealand. This may happen in the Philippines if the MRP policy continues.
Price controls also were extended to gasoline prices. After severe flood damage in Metro Manila and Central Luzon following two typhoons in 2009, the government imposed price controls on petroleum, arguing this would benefit citizens harmed by the floods. Since most of the people who were displaced did not own motor vehicles, any savings in fuel expenses could only benefit the small percentage of flood victims owning cars. Because petroleum retailers were buying imported fuel above the government-set prices, fuel imports were about to dry up and create shortages, which would have harmed the economy. Philippine politicians often appear oblivious to the realities of the international oil market, blaming oil companies for fuel increases, when the oil companies are passing on prices set by oil-rich governments.
The government’s funding for trade promotion is insufficient to participate in large international trade shows to help market Philippine products. The private sector receives no DTI assistance to attend. The small budget for international marketing for tourism results in limited promotion of the Philippines compared to other countries in the region. In Hong Kong, a small tax was levied on exports to fund trade promotion and exhibitions abroad. The Philippines could consider this as an option to raise revenue for marketing. Industry associations could designate which trade exhibitions have the greatest impact and should have a Philippine presence. Each association can organize participation from among its members, and the government should provide some financial support, as is done in other countries.
Corruption in the Bureau of Customs (BOC), especially prevalent in provincial offices, increases the cost of international transportation of goods. In Manila, anecdotal evidence suggests that corruption in the BOC has declined in comparison to past years. In some provinces, so little cargo enters the ports that customs officials charge very high illegal fees per transaction. There should be a complete change in the attitude of the BOC towards trade facilitation.
There have been efforts to reduce fiscal incentives for investors, primarily led by the DOF. There should be a dialogue between the government and the private sector to make sure that incentives tied to export performance and other industrial policy priorities that are measurable and auditable continue to be provided.
The cost of power is a serious competitive disadvantage for the Philippines, especially for manufacturers. For example, over 10% of the expense of manufacturing an automobile in the Philippines is for electricity. A car assembly plant in the Philippines pays 50% more than its counterpart in Thailand and 100% more than in Vietnam, where power is government-subsidized. This is the case even with discounted power rates for firms in PEZA zones.
Minimum wages in the Philippines are higher than elsewhere in Southeast Asia, except Singapore (see Part 4 Business Costs). While it is appropriate to increase the minimum wage for industrial workers to keep up with the cost of living, there should also be concomitant focus on improving labor productivity. Industrial sector wages in different parts of the world increase as workers achieve higher productivity and better efficiencies.
The minimum wage policy of Malaysia should be studied by the Philippines. Prime Minister Mahatir prioritized manufacturing as a key driver of Malaysian economic growth. Because the government regarded manufacturing for export as a global industry, government policy allowed global market forces to dictate the price of labor in Malaysia. Global manufacturing is exempt from the minimum wage. By contrast in the Philippines, hundreds of thousands of jobs were lost when garment export firms became unprofitable because of high production costs, especially wages and power costs. In the Philippines, the minimum wage is linked to inflation and living costs, rather than global wages and labor productivity.
Smuggling is a major problem for many domestic industries. Foreign goods entering without paying proper duties and VAT compete with domestic goods that are taxed. Following complaints from the private sector, the government established the Ports Transparency Alliance (PORTAL) to discuss remedies. Within PORTAL, subgroups were established to devise anti-smuggling strategies and monitor compliance for oil smuggling, used car smuggling, vegetable smuggling, and other products.
Despite Supreme Court rulings affirming the validity of the prohibition against importing used cars, they continue to enter the country. In the Cagayan Freeport, some 600 cars each month are reportedly sold to buyers outside the freeport. Vendors there were previously located at Subic Freeport and relocated in anticipation of the Supreme Court decision that closed their business at Subic. The national government has rationalized that it can do nothing to stop imports at CEZA so long as the local judge who issued an injunction delays his ruling on whether the imports are legal.
Well-entrenched syndicates protected by elected politicians run smuggling activities. Until the politicians have the political will to stop smuggling activities, there will be little progress in curbing smuggling.
Oil smuggling in the last half decade deprived the national government of hundreds of billions of pesos in tax and duty revenue. There was no smuggling problem before the EVAT applied a 12% VAT to petroleum. But with the EVAT, large volume importations of refined gasoline, with paperwork that misdeclares the true volume, are processed with a much lower tax. This has been immensely profitable for a syndicate of gasoline retailers, their collaborators in the BOC, and their high-level protectors. Despite seizures of illegal imports and an oil-marking program funded by the oil industry to identify illegal petroleum being sold at retail stations, no prosecutions have resulted in imprisonment of smugglers.
As long as smuggling provides better profits than manufacturing, the Philippines will move towards becoming an economy of traders and smugglers rather than manufacturers. The auto industry has lost almost 50% of its manufacturing jobs in the past 10 years. Claims in the press that auto industry sales are rising fail to explain that only 48% of the vehicles are Philippine-assembled. Ten years ago, 90% of the vehicles sold domestically were built in the country. Currently, imported new cars from Japan, Korea, and Thailand are very competitive, even with a 30% duty. Legitimate businesses find it hard to invest in an economy lacking a level playing field.
FTAs make it easier to import less expensive foreign goods that compete with products manufactured locally. Consumers choose products based largely on price and rarely because of “buy local” campaigns. Duty-free importation of capital equipment should be allowed for local manufacturers; however, it currently is only granted to firms that export 70% of their production.
The E2M program depersonalizes doing business with customs, thus removing opportunity by custom officials to ask for bribes. In PEZA zones, automation has already been achieved in customs offices. However, some officials do not support these programs.
Recommendations: (17)
A. The private sector should make a strong, collective statement to the government that reforms are needed for global manufacturing companies to remain in the country. The private sector should urge an end to corruption and smuggling, an end to inconsistent rules,
and an end to tolerating “businessmen” circumventing laws to earn money. In the absence of reforms, more companies will close and more jobs and potential revenue will be lost. (Immediate action private sector)
B. The Philippines must be prepared to increase the priority given to manufacturing and to make serious efforts to offer a competitive business environment to be able to keep existing companies and to attract new investors into the country. (Immediate action DTI)
C. There should be a clear overall policy supportive of the manufacturing sector from the president. There should be high level, dynamic collaboration between priority industries and the government. There should be a solid commitment from all government agencies to implement such policy. (Immediate action OP and DTI)
D. Working with private industry, the next administration should: (1) develop an industrial master plan, identifying the best opportunity sectors for the export of goods and services to global markets created by FTAs; (2) support the plan with consistent policies, fiscal incentives, legal, administrative, and other reforms; and (3) put a strong economic team in the Cabinet that works in tandem with designated private sector leaders of the targeted global industries to implement the plan. (Immediate action DTI and private sector)
E. Professionalize the bureaucracy by limiting political appointees. Public officials dealing with priority industry sectors should be highly qualified and competitively compensated. They must create long-term consistency in regulation and policy and in their application to manufacturers. (Immediate action OP, DTI, and CSC)
F. Diversify Philippine exports by giving priority to developing manufacturing export sectors (in addition to electronics) where the Philippines enjoys competitive advantage, such as creative industry products, manufactured goods, minerals, and processed foods. (Medium-term action DENR, DOST, DTI, NEDA, and private sector)
G. Reduce costs of doing business, where possible, including corruption, high electricity prices, inefficient domestic logistics, holiday overtime pay, red tape, and inefficient transport infrastructure. (Medium-term action DOE, DOJ, DOTC, DTI, Ombudsman, and private sector)
H. Consider removing or reducing the EVAT on electricity and fuel for domestic manufacturers who can establish domestic market loss from foreign imported goods. This 12% tax is not applied to export manufacturing because the products would be less competitive in export markets. (Medium-term action DOF, DTI, and Congress)
I. Increase E2M coverage for customs. The E2M program should be applied to all customs offices. (Immediate action BOC)
J. Reduce unwarranted government interference in industry matters, such as price controls. Experience everywhere demonstrates that populist price control policies harm the intended beneficiaries more than they help. (Immediate action DOH, DOJ, DTI)
K. Link minimum wage policies to productivity enhancements. Study the experience of Malaysia in exempting key global industries from minimum wages. Resolve wage policies in tripartite discussions with labor groups, the private sector, and government and not by legislation. (Immediate action DOLE and private)
L. On the issue of labor contracting and security of tenure, government should continue to engage in tripartite discussions with labor groups and the private sector to address the issue of abuses in the law rather than adopt arbitrary legislation. Regularization of employees should not be made at the expense of meeting labor quality and productivity standards. Contractual arrangements, when they comply with the existing law, should meet both business and employee needs. (Immediate action DOLE and the private sector)
M. Rationalize holidays. (Medium-term action DTI, OP, and Congress) (See recommendations under BPO and Part 4 Business Costs)
N. Fight smuggling vigorously; send smugglers and corrupt officials engaged in smuggling to jail. End official protection of smuggling syndicates. The private sector should lobby strongly against smuggling, emphasizing that it destroys jobs. Identify Congressional allies in districts where smuggling is creating unemployment. Expose smuggling syndicates and their protectors. (Immediate action BOC, DOF, DOJ, Ombudsman, private sector)
O. Pass the Rationalization of Fiscal Incentives bill, maintaining incentives to stimulate investments that produce multiple benefits of job creation, exports, and technology transfer. The private sector should show strong support for the legislation in the Congress. (Immediate action DOF, DTI, Congress, and private sector)
P. Allow duty and VAT-free importation of capital equipment for manufacturing in priority industries. Revisit the 70% output to export requirement for capital equipment to be imported duty free. (Immediate action DOF and DTI)
Q. Increase funding for and promotion of Philippine exports, inward foreign investment, and tourism. Establish an Export Development Fund to promote exports. Aggressively promote the Philippines at international trade fairs as recommended by industry associations. Increase the DTI budget for investment promotion and the DOT budget for tourism promotion. Target the major traditional markets of Europe, Japan, and the US, and new markets in China and India. (Immediate action DOT, DTI and private sector)
Logistics
Background
The ports of Batangas and Subic have substantial new investment in port infrastructure that should be utilized to lower international shipping costs for industry in CALABARZON and to develop an Asian regional freeport at Subic.142 The Philippines is ideally located to manage the storage and distribution of consumer goods, spare parts, and equipment to surrounding countries, especially its ASEAN partners, but also Greater China, possibly even Korea and Japan, across the Pacific to North America, and even the Middle East and onwards to Europe.143
The Subic-Clark-Tarlac Corridor infrastructure inclusive of Subic as a true freeport enables such a regional distribution hub, as it has a significant cost advantage over the other two Asian freeports – Singapore and Hong Kong. Fedex and UPS have provided dedicated uplift capacities for manufacturers through Subic and later Clark.
Table 49: TEU capacity and utilization, ports of Batangas, Manila, and Subic
Improving logistics efficiency by using Batangas port144
The port of Batangas should provide services for the industrialized CALABARZON provinces, while Subic could service the requirements of domestic manufacturing hubs at the northern periphery of Metro Manila.
In Batangas, shipping companies have received invitations from PEZA and the GRP to provide service for the new container port. PEZA has helped address issues such as improper fees imposed by LGUs on truckers, encouraged incentives (e.g.15% lower port charges than in Manila), and facilitated an agreement with the BOC to process goods within 30 minutes and provide better service with shorter processing lines. But when shipping companies set up operations in Batangas, the export cargo volume was too small for the firms to make a profit. Only import cargo volume was sufficient. Consequently, four of the five international shipping lines that invested in Batangas ceased operations there.
____________ 142 CALABARZON is one of the regions of the Philippines which is composed of five provinces, namely: Cavite, Laguna, Batangas, Rizal, and Quezon. 143 Timex Philippines uses Cebu as its global distribution hub. 144 Also see discussion and recommendations under Infrastructure: Seaports
Most inbound cargo to Batangas arrives on intra-Asian ships because the supply chain for CALABARZON factories for raw materials and parts to manufacture export goods is predominantly within Asia. However, no matter how many intra-Asian ships service Batangas this will not attract export cargo as long as the right connections to the ultimate export markets are absent. Exported goods go to different destinations than the ports from which the imports come, so the inbound ships lack export cargo when they depart Batangas.145
Developing the port of Batangas depends on establishing interconnections with the two main Asian feeder ports of Singapore and Kaohsiung (including Hong Kong) to access export markets (See Map 5). The port of Batangas does not need direct service by major shipping lines going to Europe and North America. Connections to Singapore and Kaohsiung will open transshipment access to these markets. Once Batangas has these links, cargo exports will build volume. There is sufficient export volume at the factories in the industrial estates in CALABARZON, and it is relatively cheaper to transport these goods by road to Batangas port than to Manila. Seventy percent of the exports manufactured in Luzon originate from the southern part of the region, while 30% is from the north and very little from Metro Manila.
Improving logistics efficiency by reducing international cargo at Manila port
If current demographic trends continue, projections show the population of Metro Manila reaching 30 million in 2030 to become the 3rd largest metropolitan region in the world.146 Heavy container trucks should not continue to transit the metropolis to the Manila port. Container export cargo should begin to transfer to Batangas and Subic to reduce current and future traffic congestion in Manila.
The auto manufacturing plant of a major global firm in Thailand is strategically located 20 minutes from the port of Lam Chaebang, where imported materials and parts and exported completely built units (CBU) pass. The situation for the firm is very different in the Philippines, where the plant is located in Santa Rosa, Laguna. Eighty percent of the materials and parts used to manufacture its cars are imported through the port of Manila, while all CBU vehicle exports leave through the port of Batangas on RORO vessels. Although the Philippines is competitive compared to Thailand in terms of the cubic meter cost for RORO vessel shipments, moving materials and parts through the port out of Manila is very inefficient, expensive, and slow. The port of Manila is congested, equipment sometimes breaks down, and importers have encountered corrupt authorities blocking the entry of goods. Compared to the seamless system in Thailand, the present arrangements in the Philippines are very uncompetitive.
______________ 145 Instead of transshipment in Manila, international carriers now go directly to ports in Davao, General Santos, and Cagayan de Oro, resulting in a significant reduction in international shipping costs from these ports. There was demand for more efficient shipping for tropical fruit exports from Mindanao. The shipping lines would not have initiated service to these ports had cargo volume not been sufficient to earn a profit. 146 Source: Demographia, see Table 31: Population of urban mega-regions, 2007 and 2030.
Map 5: Needed feeder lines from Subic and Batangas
Decision by shipping lines to set up operations at the port of Batangas will be commercially driven. If there are three ports serving Central Luzon, and import/export business is divided among the three, there will be no economies of scale. A high-level government decision will be required to close the port of Manila to international cargo. There should be a 5-year plan to eventually phase out Manila, and government should have the political will to implement the plan. A special fee for international cargo at the port of Manila would encourage a shift to Batangas and Subic.
Making Subic a true freeport
Subic can best survive and grow if it becomes a hub for the commercial distribution of goods to the Asian region. Studies show that the volume of cargo from the industrial belt north of Manila is insufficient to support an expanded port in Subic. Therefore, the freeport option for Subic should be seriously explored. There are three freeports in Asia: Hong Kong, Singapore, and Subic. Subic could be a less expensive alternative than the other two freeports, leveraging its lower rentals, salaries, and other operating costs. However, Subic has not yet been able to deliver its potential as a freeport because the unique services it can offer have not been clearly defined.
Subic could become a logistics hub to distribute goods from manufacturers in the US and Europe to the Asian region. Subic is not a freeport in the sense a freeport is defined internationally. Turning Subic into a real freeport means allowing traded goods to enter more or less uncontrolled, as long as they will not leave the port. Access to and egress into Philippine customs territory from the designated freeport area must be strictly controlled. Goods can enter the port for storage in warehouses for eventual distribution within Asia. For this to happen the smuggling issue must be solved.147
A true freeport is a port where cargo can be placed “to order of shipper” on the bill of lading and which maintains public warehouses. Customs remains at the perimeter of the freeport to collect applicable duties and or taxes. On ingress, customs only controls the import of banned substances but not the volume or value of normal trade goods, which can be freely imported and exported, without even registering a company. Transactions into and out of the freeport are tax and duty-free, except when sold to a Philippine non-tax-exempt company located in the Philippines. A typical example is the Freeport of Hamburg, operating in a special section of the greater Hamburg Port.
The original perimeter of Subic could be turned into a real freeport but not the entire Clark-Subic corridor, which is too large to control smuggling leakages. Outside the freeport the present rules and jurisdictions can be maintained.
______________ 147 The so-called freeport of Bataan, being established under a recent law, is a potential smuggling entry port. It is not a true freeport. The public and private sectors must be vigilant that it is not misused for the entry of restricted goods or to evade taxes.
Sea-air, air-air transshipment potential to Gulf and Europe
In combination with available air capacity from Middle Eastern carriers, the Philippines is geographically well located to act as a sea-air, or air-air transshipment hub. In Dubai there is a thriving multibillion-dollar transshipment industry. Cargo arrives from Asia in containers, is repackaged and transported via air to Europe. Since several Middle Eastern carriers are flying to NAIA catering to the OFW market, there is a large unused air cargo capacity out of the Philippines to Gulf region airports. Asian regional air cargo hubs experience uplift shortages during peak seasons, and there is not enough air uplift capacity in Hong Kong, Vietnam, and Southern China. Maritime access from their ports via sea to the Philippines takes only a few days. Cargo can arrive in Manila by sea transport and be distributed from NAIA to Europe via Dubai through air transport. Map 6 illustrates the potential sea-air transhipment industry in the Philippines. However, transshipment is currently impossible due to the lack of political will. BOC regulations make it impossible.
Other ways to reduce logistics costs
The cost of the entire “logistics” chain must be internationally competitive to support existing businesses in the Philippines as well as to attract new ones. Several reforms could reduce costs.
• CIQ overtime charges
Airline carriers pay PhP 300-400 million per year for Customs, Immigration, and Quarantine (CIQ) overtime charges. Carriers should not pay for these services; it is the duty of the government to provide customs and immigration services whenever needed. There was a court decision that enabled carriers to discontinue paying these charges. However, the new Immigration Act under consideration in the 14th Congress was passed in both the House and the Senate without consulting the industry that has been paying these fees. The proposed legislation would continue to allow CIQ overtime to be charged to airlines, retaining a 50-year old provision in the current law. The CIQ overtime charges make it more expensive for logistics companies to operate in the Philippines, affecting their competitiveness. As the bill did not receive final approval because of the lack of a quorum in the House, it is expected to be introduced again in the 15th Congress.
• Open more logistics operations to international investors
Greater involvement of expert foreign companies in the Philippine domestic logistics chain would improve the quality of service, lower costs, and result in faster transit or turnaround times for domestic transport.
International freight forwarding is not in the Foreign Investment Negative List, and is open to 100% foreign ownership. However, government agencies at times interpret the law differently. Whenever laws are subject to subjective interpretation, there are opportunities for corruption.
Map 6: Potential sea-air transhipment industry in the Philippines
• Cargo deconsolidation to PEZA bonded warehouses
Direct deconsolidation of cargoes to PEZA bonded warehouses is currently not allowed. Instead, non-PEZA Container Yard/Container Freight Station (CY/CFS) operators deconsolidate these cargoes. The number of these operators is few, resulting in less competition and higher costs. Allowing direct deconsolidation to PEZA bonded warehouses would reduce the shipping cost of less container load (LCL) shipments for manufacturers, increase competition, and decrease red tape and protection of a few operators.
• Take advantage of quick turnaround cycles and local BPO capability
Processes driven by the development of the electronics industry such as quick turnaround cycles open the door to develop other products, such as agro-based manufacturing. Sufficient transformation of products in the Philippines would enable the tax and duty free distribution of such goods to ASEAN countries. Many processes of logistics companies can be outsourced to BPO companies in the Philippines.
• Facilitate IOR services
Enhancing Importer of Record (IOR) services could trigger expanded access to Internet trade. IOR services provide a legal entity to act as the “importer of record” on behalf of an entity (the shipper) who does not have a registered company in the port or airport of destination of his cargo. This service has become a necessity to enable the expansion of Internet trade over country boundaries.148 Internet trade is largely concen-trated within country or custom union boundaries, e.g. within the EU. IORs facilitate Internet trade across borders. EVAT applies on entry, but the IOR has no subsequent resale; this can cause problems with the BIR and needs clarification. IORs are still operating in a gray area with respect to VAT payments as their points of sales are abroad, but the shipments IORs handle are subject to VAT on entry without domestic resale.
• Continue recent reforms in customs practices
The ratified Kyoto Protocol, E2M, and the national single window will make Philippine logistics more competitive. The Customs and Tariff Modernization Act (CTMA) will implement these reforms and should be passed as early as possible in the 15th Congress. The de minimus of PhP 10 was set over 50 years ago and needs to be changed to allow its determination administratively.
_____________ 148 For example: “A” has internet “shops” set up in all countries in Asia, including the Philippines. The products are bought on-line and are paid through credit cards or PayPal. The point of sale is therefore abroad, e.g. in Singapore, where the central distribution warehouse of “A” is located (managed by a third-party logistics provider). If “A” shipped each individual order to the final consignee in the Philippines as an independent shipment, the cost of transport and clearance would be prohibitive. Also bundling orders through appointed agents also adds cost. “A” therefore appoints an IOR company, to act as Importer of Record for a nominal fee, whose main job is to get commodity clearances, if necessary, and maintain transaction papers for a period of 5 years.
• Reduce domestic shipping costs
Domestic shipping costs are high. It is cheaper to transship a container from Manila to Cagayan de Oro via Hong Kong or Kaohsiung than to ship directly from Manila to Cagayan de Oro (see Table 50). Yet foreign companies are not allowed to come in to provide cheaper and good quality transportation services. Domestic shipping is nearly cartelized. However, there is a reciprocity issue; other countries are not easing their cabotage rules and Philippine ships cannot carry domestic cargo in Indonesia, Japan, the United States, and elsewhere.
Table 50: Costs of foreign transhipment of domestic cargo vs.
cost of domestic shipping, Manila (MNL) to Cagayan de Oro (CGY), US$
A recent development has been the joint venture between Maersk Line and Aboitiz. New ships have been introduced which are reliable and cheaper. Such joint venture agreements can be a solution to lower domestic marine transportation costs and also to improve service.
The Philippine domestic shipping industry is not competitive due to the predominant use of small ships (i.e. 200-300 TEU container ships compared to the more efficient 5,000 TEU foreign container ships). Aboitiz is bringing in larger ships (1,500 TEU) from Singapore and Japan; this should reduce transportation costs.
Currently, any shipping company can bring in ships regardless of how long they have been used. This lack of regulation allows companies to bring in old, inefficient ships that may also be unsafe.
Consumer industries can pool their imported products and charter their own ship by industry association. Pooling shipments to obtain better trade terms makes sense for bulk and possibly break-bulk cargo. There are a number of shippers associations in the United States doing this. For container shipments, industry associations can pool their cargo for better bargaining power with shipping lines.
Recommendations: (25)
A. Promote the port of Batangas for CALABARZON-destined shipments and Subic for Central Luzon-destined shipments. Batangas should become the primary port for manufacturing companies in CALABARZON, which are mostly export-oriented. Develop the port of Subic to cater for companies in Central Luzon and the northern periphery of Metro Manila.
A1. Invite feeder vessel operators to call at Batangas and Subic to take on CALA-BARZON manufactured exports, linking them through Singapore, Kaohsiung, and Hong Kong to worldwide shipping. (Immediate action DTI, PEZA, and private sector)
A2. Request port operators to offer special promotional rates for feeder ships calling at Batangas and Subic. (Immediate action DTI, PEZA, SBMA, and private sector)
A3. Promote the use of both ports with PEZA and SBMA. (Immediate action DTI and private sector)
A4. PEZA should organize a meeting of export companies from CALABARZON, shipping lines, customs, PPA, and the operators of Batangas port to coordinate actions to increase export cargo volume at Batangas. (Immediate action PEZA, PPA, and private sector)
B. Modernize port operations in Batangas to serve automotive companies in CALABARZON in order to significantly reduce the competitiveness gap in automotive production costs between the Philippines and Thailand, Asia’s third largest automotive industry. Automotive materials and parts should be imported through the port of Batangas instead of the port of Manila. (Immediate action PPA and private sector)
C. Create a plan to eventually phase out international cargo at the port of Manila over five years. The government should have the political will to implement the plan. Study the possibility of making it more expensive for ships to use Manila to encourage a shift to Batangas and Subic. (Immediate action PPA, PEZA, DTI, and private sector)
D. Develop Subic as a true freeport for logistics to distribute goods from the US and Europe to Asia. (Medium-term action SBMA, BOC, DOF, DTI, and private sector)
D1. Allow cargoes to freely enter uncontrolled assigned “to–order” of bearer as long as goods will not leave the freeport.
D2. Move customs out of the Subic freeport to a perimeter defined by SBMA.
D3. Before allowing goods to enter the port uncontrolled, put in place tight safeguards against smuggling.
D4. Organize and convene a public-private planning group to promote an Asian Distribution Center of Goods.
E. Allow transshipment of cargo in various modes, air-air, sea-air, and air-sea by requiring the BOC to implement relevant transshipment rules (1) to capitalize on the capacity of Middle East carriers delivering cargoes from surrounding countries to Europe and Africa, (2) to invite additional carriers to the Philippines, and (3) to develop a trans-shipment industry similar to Dubai and Singapore. (Immediate action BOC, DOF, and private sector)
F. The government should provide CIQ services whenever needed; overtime charges should not be paid by carriers.149 (Immediate action DOF, DOH, and DOJ)
G. Open the door to foreign investment along the entire multi-modal transportation chain, including domestic forwarding and distribution to (1) reduce domestic distribution cost and (2) increase service levels. In domestic distribution there are some grey areas. Review to what extent these restrictions make sense in the age of multi-modalism and international service supply chains. (Immediate action DOJ, DTI)
H. Allow direct deconsolidation of cargoes to PEZA bonded warehouses instead of using non-PEZA CY/CFS150 operators, thereby (1) reducing shipping cost of less con-tainer load shipments for manufacturers, (2) increasing competition, and (3) decreasing red tape and protection for a few operators. (Immediate action BOC and PEZA)
I. Take advantage of quick turnaround cycles and local BPO capability to develop new export products and labor-intensive business processing jobs. (Medium-term action private sector)
___________ 149 This issue is also discussed under Tourism, Medical Travel, and Retirement below. 150 Container Yard/Container Freight Station
J. Facilitate IOR services to develop expanded access to Internet trade. Clarify EVAT rules as points of sales are abroad, but shipments IORs handle are subject to VAT on entry without domestic resale. (Immediate action BIR)
K. Continue to implement recent reforms in customs practices (ratified Kyoto Protocol, E2M, and national single window) that will make Philippine logistics more competitive. Extend E2M to all customs offices. Pass the Customs and Tariff Modernization Act (CTMA) as early as possible in the 15th Congress. Remove the de minimus limit in the law and allow it to be set by the Executive Branch. (Medium-term action BOC, Congress, and private sector)
L. Reduce high domestic shipping costs.
L1. Liberalize rules that do not allow foreign companies to operate in order to provide cheaper and better quality transportation services. Encourage more joint ventures between foreign and domestic shipping firms. (Immediate action DOJ, Marina, and private sector)
L2. Introduce more reliable new ships with larger TEU capacity that are less expensive to operate. (Medium-term action Marina and private sector)
L3. Limit the age of ships that can be imported to operate in the Philippines. (Immediate action Marina and DOTC)
M. Groups of importing companies should explore chartering ships and pooling container shipments in order to save international transportation costs. (Medium-term action private sector)
N. Develop better data for the logistics sector in order to be able to chart and analyze its growth. (Immediate action NSCB, NEDA, and private sector)
Manufacturing and Logistics FGD Participants, Moderator and Secretariat members March 11, 2010
Joint Foreign Chambers of the Philippines
FOCUS GROUP DISCUSSION ON MANUFACTURING AND LOGISTICS
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