Revving the engine of Philippine manufacturing

Author: Rafaelita M. Aldaba, PIDS

A resurgence of the Philippines’ manufacturing industry, driven predominantly by the expansion of domestic investment, puts the industry on the cusp of transformation, into a major driver of growth. Since the first quarter of 2013, manufacturing in the Philippines has continued to post growth rates above 10 per cent, hitting 12.3 per cent for 2013 compared to 5.5 per cent in 2012.

The leading manufacturing subsectors are chemical and chemical products; basic metal industries, furniture and fixtures; radio, television and communication equipment; non-metallic products; and footwear and leather products. Investment in capital formation for durable equipment continued to accelerate from 8 per cent in 2012 to 14.4 per cent in 2013.

The Philippines’ Department of Trade and Industry has been actively coordinating with industry associations for the formulation of industry roadmaps since 2012. This has led to a new industrial policy aimed at reviving the manufacturing industry. The government recently allocated US$1.5 million to a new program dubbed the Manufacturing Resurgence Program, which aims to support the implementation of the Philippine Manufacturing Industry Roadmap. A large part of the program is the establishment of an Industry Development Council composed of representatives from various government agencies and private sector groups. The Council will monitor the Roadmap’s implementation and recommend policies and programs to address binding constraints to manufacturing growth and development.

This is crucial for two reasons. First, it will enable the Philippines to take advantage of opportunities and negotiate challenges arising out of the ASEAN Economic Community (AEC). Second, and more importantly, it will ensure the creation of quality jobs and the attainment of sustainable and inclusive growth as reflected in the country’s Updated Development Plan.

The experiences of the last two decades have shown that the Philippines cannot leapfrog industrialisation and rely on the service sector alone to achieve sustainable and inclusive growth. A large and competitive manufacturing sector is required. Manufacturing provides opportunities for high-skilled, semi-skilled and low-skilled workers, and can thus support the development of a nation’s human capital. The transformation of the sector currently underway in the Philippines should also support the movement of workers from the informal to the formal sector as well as from low value-added to high value-added activities where wages and compensation are greater.

At the heart of the Philippine Manufacturing Industry Roadmap for Structural Transformation is the development of the automotive industry through its integration into the production and sales systems of global automakers. A car has over 30,000 parts and its construction is dependent on metal, chemical, plastic, textile, rubber, glass, steel, electrical and other manufacturing subsectors. As a consequence, through inter-industry and supply-chain linkages, auto manufacturing can have a large multiplier effect in an economy because any expansion in the automotive industry drives growth in feeder industries. While the Philippines’ domestic production of automobiles is currently limited, there are clear opportunities to increase production as the country’s middle class grows and AEC integration creates an open market of over six million people. The third wave of ASEAN motorisation is also expected to reach the Philippines by 2016.

The goal of the New Auto Program is to attract foreign direct investment (FDI) in assembly and component manufacturing to enable the Philippines to deepen its participation in the global value chains of multinational companies. Global value chains are a new form of industrial organisation where different stages in the construction of a finished good are located in different geographical areas in order to minimise production costs. Suppliers of components usually follow where assemblers locate their operations. This has been the experience of several emerging market economies including China, Brazil and Thailand, where massive inflows of FDI into assembly attracted many new component companies that followed their major customers.

To ensure the Philippines can achieve similar results, a comprehensive mix of policies will be crafted to stimulate demand and effectively regulate the industry. If it inspires new investments in the automotive industry, the New Auto Policy could not only catalyse growth within the industry but also drive broad-based manufacturing growth and economic transformation across the Philippines.

The Manufacturing Industry Roadmap will coordinate measures to address the most binding constraints that prevent the entry of firms into the Filipino manufacturing sector and hinder their integration into global value chains. The goal is to help markets work better by developing an investment strategy, optimising supply-chain integration, improving regulation, making education more industry appropriate, and encouraging industrial clustering to achieve agglomeration effects and reduce transaction costs.
The present administration’s effective implementation of the Manufacturing Roadmap is crucial and timely given the success of governance reforms that have led to the economy’s recent strong performance and the growing interest of investors, who are now seriously looking at the Philippines as a good place to do business.

Rafaelita M. Aldaba is Senior Research Fellow at the Philippine Institute for Development Studies.