5 June 2017

The : The Prospect for Manufacturing Relocation Stronger emphasis on infrastructure improves the appeal as a manufacturing base

With soaring wages and operating costs in China, many manufacturers are looking for alternative production bases in Southeast Asia to relocate or diversify their production. Unlike Vietnam and Myanmar, the alternative production bases in Southeast Asia that can boast cheap labour, the Philippines’ comparative advantages and opportunities lie in its burgeoning local sales market, English-speaking skilled labour and management efficacy. This article examines the manufacturing opportunities in the Philippines, following HKTDC Research’s recent field trip to the country.

Economic Optimism Sustained Under the Duterte Government

The Philippines registered strong economic growth of 6.8% in 2016, ranking it among the fastest-growing economies in the world. This momentum is expected to continue, with projected annual growth of more than 6.8% over the next five years. For many years, economic growth has been driven by robust manufacturing and business processing operation (BPO) services, and strong investment and consumption, buttressed by hefty overseas remittances. Fast income growth and a surge in purchasing power have combined to transform this archipelago state of more than 100 million people into a burgeoning modern consumer market. Foreign manufacturers can find local sales opportunities while also serving the export market.

President Rodrigo Duterte remains popular after almost a year in office, despite a clear realignment of Philippine foreign policy. As far as economic policy is concerned, President Duterte continues the reforms initiated by the previous Aquino administration, including the promotion of foreign direct investment (FDI). Under the Philippine Development Plan released in February 2017, Duterte’s government is keen to enhance the global exposure of the Philippines via trade and inward investment promotion. The government is working to reduce red tape and streamline the bureaucracy to improve the ease of doing business. Notably, the diplomatic shift towards closer economic co-operation with China is seen as opening a new window for foreign investment and trade.

During a recent market research trip in , HKTDC Research found that businesses were optimistic about the future development of the Philippines. They were generally supportive of the government’s economic policy and believed a strong government under President Duterte could better tackle the long-standing problems of red tape and bureaucracy that remain major hurdles for anyone doing business in the Philippines. Filipino-Chinese business communities in the country are particularly enthusiastic about the opportunities brought about by potential Chinese investment. They expressed a keen interest in co-operating with Chinese partners.

Manufacturing Development in the Philippines

1 The Philippines: The Prospect for Manufacturing Relocation

Manufacturing makes up almost a quarter of Philippine GDP. The sector recorded strong growth of more than 6% in 2016 and was the top contributor to the country’s GDP growth last year. Important manufacturing sectors in the Philippines include semiconductors, electronic components, refined petroleum products, computers, peripheral equipment and accessories, and processed food. The Philippines lies in the mid-range among ASEAN countries in terms of manufacturing gross value added, or GVA (see the figure below), surpassing Malaysia and way ahead of Vietnam, despite the fact that Vietnam has been industrialising fast lately, thanks to substantial FDI-led manufacturing or assembly of electronic products.

Manufacturing is also an FDI magnet in the Philippines, compared to most other sectors. The Department of Trade and Industry (DTI), along with related investment promotion agencies, devises the policies for attracting ma