Philippine Electronics Industry set to Take Off
Posted by butalidnl on 18 January 2011
The Philippine Electronics Industry is about to take off. In 2010, investments in the industry surged to more than $1 billion, and exports reached $20 Billion. According to the Semiconductors and Electronics Industry of the Philippines (SEIPI), an industry association for the electronics industry, exports could exceed $30 billion this year, and reach $50 billion in 2015.
But it is all relative. The Philippines’ share in the world electronics market is a mere 1%, while that of China is more than 20%. So, even if the Philippine electronics industry grows by 150% in 5 years, it won’t be too much in the overall scheme of things.
Although it is a small part of the overall “pie”, the electronics industry is quite important to the Philippines. By the end of 2010, the industry employed nearly 500,000 people. And electronics exports make up almost 50% of total Philippine exports.
Growing Market, Lower Tariffs
One of the main reasons to be enthusiastic about the electronics industry is that there is a growing number of electronics products. A couple of years ago, things like the iPod, GPS navigation and e-Readers were unheard of. Now, they are capturing the market, and a big part of the production of such items is done in East Asia. More than half of all electronics are made in Asia, so as the number of things that are electronic grows, the more all East Asian countries stand to benefit.
As people get wealthier, their need for electronic products will grow. If everyone who now owns a mobile telephone will also get to use an e-Reader, just think how many e-Readers would be needed. And even if wealth does not grow in some countries, the use of electronic products will grow anyway: modern appliances need ever more sophisticated electronics, so simply replacing old appliances will increase the demand for electronics.
At the same time as the demand for electronics increases, production costs are decreasing. Tariffs within ASEAN, for example, in electronics products (and a lot of other items too) have gone to 0% as of 1 January 2011 (under the Asian Free Trade Area – AFTA – agreement). And ASEAN has free trade agreements with China, India and Australia/New Zealand too. Technical specifications for electronics are also getting more standardized. The low tariffs and technical standardization mean that it would be easier for companies to source their electronic inputs from anywhere in the ASEAN area, with very little extra expenses for doing so. Thus, final assemblers in the Philippines could source some parts from plants in other ASEAN countries, while Philippine-based suppliers could also easily supply the needs of assemblers in other countries. The effective scale for electronic products has been increased because of this, making for cheaper production costs.
What About China?
The Philippines’ niche in the growing electronics market is in final assembly and testing – this is also the most labor-intensive part of the electronics value chain. In a sense, we are competing directly with China, which has generally the same niche. However, we should consider the role of the Philippines (and ASEAN) relative to China.
Japanese and other multinationals prefer to have a “China Plus One” policy when they do offshore production. This means that they would set up shop in China, but also in one other country, preferably one of the “ASEAN-5” (Indonesia, Malaysia, Philippines, Thailand and Vietnam). This is some kind of an insurance against problems in China. China sometimes makes policies against Japanese or Taiwanese companies, and they need to have a back-up operation or else they would have problems if their China operations get into trouble. And things could also go wrong with joint ventures with Chinese. In addition, ASEAN-5 countries are more friendly to 100%-owned subsidiaries than China is.
While China is perceived as the cheapest production platform, its price advantage over ASEAN-5 is rather small when it comes to electronics. Both China and ASEAN-5 import chips and high-end electronics from Japan and the NIE-3 (Hong Kong, South Korea and Singapore), process these into finished products, and export these mostly to developed countries. The cost of the electronics inputs are the same, and the difference between countries is only in the cost of operations – things like transport, labor costs, electricity, infrastructure. Since the electronics products (both intermediate and final products) are relatively lightweight, it is relatively easy and cheap to transport them from one location to another. Chinese labor costs are lower than that in ASEAN-5, and transport and electricity are subsidized more in China than elsewhere, but the difference is rather small, and these are average costs. So, there are enough cases where the particular mix of operating costs for producing certain items would actually be lower in an ASEAN-5 country than in China.
Sometimes, the decisive difference is the proximity of other electronics companies which make intermediate products needed for the assembly of a specific item. This reduces the cost of transport, and thus the overall cost of making a product. This proximity of suppliers is something new in the Philippines. Today, there is a wide range of companies producing all kinds of electronic parts that the chance of sourcing most of a company’s needs from within the Philippines ( from within the Calabarzon region), or even from within the same Export Processing Zone, is getting bigger. The range of companies includes everything from the assemblies around chips to making of hard disk drives to electric power supply. There is even a company that specializes in helping electronic companies get ISO certifications.
A recent trend (in the last decade) in the Philippine electronics industry is that there are now a lot of Philippine-owned companies. This means that there is a stable anchor of companies which are definitely Philippine-based. Some of these are getting quite integrated in the industry, even to the point of buying US electronics companies. They are busy “filling-in” gaps in the supply base of electronic materials, making it cheaper to produce all kinds of products. Where before, we could fear that companies would pull out of the country; now, chances are that if a foreign company pulls out, their equipment will be taken over by a local company.
Experts have commented that the Philippine electronics industry needs to go “upstream” in the electronic value-chain in order to survive. Well, I think this needs to be nuanced a bit. As is, the Philippines handles a disproportionate proportion of high-tech electronic products; and this is probably because it has a relative advantage in short-run (smaller batch) assembly and testing. China and Vietnam will have a relative advantage in long-run assembly. Philippine companies are busy innovating in terms of manufacturing process, and even to some extent re product development.
The real upstream activity would be the fabrication of the chips itself. But this is a very expensive thing to do. It will take a bit more to induce companies to take this step, and to base it in the Philippines. The growing role of Philippine-owned companies in the field makes it more likely for the country to soon have chip production. Why? Because, as the production base for electronics widens, it will soon become quite profitable to also establish chip production in country. Even with low transport costs, which mean that chips could still be sourced from Hong Kong, Taiwan or Singapore, it would be even cheaper for companies if the chips are made in the Philippines itself. And since Philippine-owned companies have a different take on the issue of basing; they will more likely want to start chip production earlier than foreign-owned firms. So, I think that chip making will soon be done in the Philippines also.
Another issue is the adequate supply of skilled personnel for all the electronics companies. There are now schools that are specifically producing skilled workers for companies; and I think that more will do so with time. However, I think that the government should also do something to encourage the continuous training of personnel who are already working with companies – to ensure that their skills keep getting upgraded.
All in all, things are indeed looking bright for the Philippines electronic industry. I think that the projected growth rate for 2011 of 10% is indeed too conservative. It will grow much faster than that – perhaps something in the 20-30% level. And, in the process, it will also positively influence the rest of the economy.