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Country Watch: Philippines Poised for Recovery

What does the continuing global financial crisis mean for Asian electronics manufacturing? To answer that question, Asia Time is looking at 10 countries along the continent’s electronics supply chain to see how the crisis is affecting business there. Today, we look at the Philippines.

When you follow the electronics supply chain through the Pacific Rim, you realize there are really two chains emerging, with the Philippines sitting between them.

At least until recently, the massive former American colony was showing signs of becoming a mini-China. A large market for electronics was emerging. Lower wages than most of the region's countries and a large population made the country a manufacturing center. It was also a curiously atypical market. A report last May by the firm Research and Markets found that more than 40 percent of the electronics sales in the Philippines were for high-dollar items like personal computers, bucking a global trend toward lower-price items like smartphones.

That was before this year, when the country's imports and exports started to contract. Rather than being a high-population, high-production link between north and southeast Asia, the Philippines started to fall behind neighbors (and competitors) like Indonesia. What was happening?

Part of the problem appears to be Europe. The unresolved EU crisis, hinging on Greece’s likely debt default, has reached all the way to Asia, kneecapping local currencies and depressing exports across the region. The Philippines is taking this particularly hard, both because it has several major European trading partners and because, with risk high everywhere, more established competitors in Thailand and even higher-wage China look like a safer bet. Right now there’s a flight from risk. For Manila, that means business is heading back to China.

In July, the Philippine government gritted its teeth and reported its first drop in electronics exports in 20 months.

Does that mean the Asian electronics supply chain will start skipping a link? That’s not what most opinion says. Among the region’s manufacturers and assemblers, Manila’s headaches are not coming from fundamentals in the country. The consensus seems to be that the recent downturn is a symptom of the ongoing global financial crisis, not of any particularly bad moves made by the country. Compared to a direct competitor like Vietnam, which is years behind in modifying many tax and investment laws, the Philippines is well positioned for a recovery, whenever it comes.

Most importantly, the incentives for the Philippines are enormous. A shocking 60 percent of the country’s export economy comes from electronics, according to SEIPI, the semiconductor and electronics industry association of the Philippines. That’s a massive number. If six out of 10 workers in an export-related industry need electronics to roar back after the crisis ebbs, the Philippines really has no choice but to become the major player it was on the brink of becoming before the world crashed.

With less tourism income than Thailand, less textile work than Indonesia, less infrastructure than China, and less money than Japan, the Philippines has basically two cards to play — wages and workers. It seems likely to push hard on both once the world is back on its feet.

14 comments on “Country Watch: Philippines Poised for Recovery

  1. AnalyzeThis
    September 22, 2011

    Marc, I read your previous blog on Vietnam and I agree it's a very different situation for the Philippines.

    I'm very optimistic about the Philippine role in the electronics supply chain. Yes, due to the economy it's probably not going to see too much growth in the near-term, but I'm thinking that 8-10 years from now there's going to be a lot of buzz, investment, and opportunity happening here.

    The Philippines are a surprisingly tech-savvy market. While their infrastructure isn't as as advanced as China, on the other hand, they avoid many logistical problems due to the relatively small size of the country. And as you mention, the government is much friendlier to the industry.

    Hopefully the economy will rebound sooner rather than later and we'll get to see how this all plays out.

  2. Houngbo_Hospice
    September 22, 2011

    The truth is that the ongoing economical crisis if affecting every country and Phillipines is no exeption. Besides emerging Asian countries are competing against one another and in times like this, the big players such as China will play hands and feet to take-over the more vulnerable ones.

     

  3. Houngbo_Hospice
    September 22, 2011

    @DennisQ:

    but I'm thinking that 8-10 years from now there's going to be a lot of buzz, investment, and opportunity happening here.

    I agree that the  Phillipines has great potentials,  and in ten years from now, it may become more attractive to investors. But it will have to overcome fierce competitions from its Asian neighbours. I don`t know if the country is really prepared for that.

  4. Nemos
    September 22, 2011

    “The unresolved EU crisis, hinging on Greece’s likely debt default, has reached all the way to Asia”

    Unfortunately Europe is not united as it should be, we saw a lot of voices and the “word” solidarity you can find only in a lexical page and not in the European policy. We see countries in the European union and outside of the economic union to speculate against  the EURO and to invest in potential bankruptcy of Greece. The leaders of today's Europe is far away form the leaders who created the European Union.   

  5. Anna Young
    September 22, 2011

    “The Phillippines is well positioned for a recovery whenever it comes”

    Marc, your article spelt a clear hope for electronics market in the Phillippines once the global financial crisis ebbs. It's surprising – “60 percent of the country's export economy comes from electronics”. I hope recovery happens quicker for the Phillippines.

  6. SunitaT
    September 23, 2011

    The unresolved EU crisis, hinging on Greece’s likely debt default, has reached all the way to Asia

    @Marc, this is really scary indeed. Euro has already corrected significantly against dollor. Experts are predicting euro might even retest its 2008 lows. Do you think these events will impact China and India also or is the impact limited to Philippines and Indonesia ?

  7. SunitaT
    September 23, 2011

    But it will have to overcome fierce competitions from its Asian neighbours.

    @Hospice_Houngbo I agree with you. There is lot of competition among Asian countries. Countries like India, Vietnam, Indonesia etc are all offering favourable destianation to investors. The only major challenge most of the asian countries currently face is Inflation which is increasing the manufacturing cost. The country which handles inflation successfully will surge ahead of other nations.

  8. FLYINGSCOT
    September 23, 2011

    60% reliant on electronics for exports.  40% consumption is high ticket item electronics.  The govt needs to look at these stats and try come up with a more balanced strategy to better ride the storm.

  9. Marc Herman
    September 23, 2011

    I was also struck by the drastic reliance on one industry. Though I suppose we see that in other countries and in other sectors particularly dependent on international conditions, say tourism. It's usually pretty disasterous in bad years, as you point out. And in such a large country, more so. It's a huge bet they've made there.

    I was in Manilla a little less than a year ago, and was struck by how many of the electronics deals were mid-level retail. I don't know what that represents percentage-wise, compared to big ticket, industrial items, like switching equipment, etc. I'm sure they're looking at work for telcos and infrastructure-scale electronics and adding those numbers to the retail, pc and mobile phone market. I'd love to know how that 60 percent figure breaks down. If it's all or mostly retail, they're really playing a high stakes game.

  10. Kunmi
    September 24, 2011

    The world economic crisis posed a big challenge to many countries including Phillipines. Down the road, when recovery begin to set in, Phillipines may pick up in electronics and become a center of attraction for manufacturers and supply chain. The only challlenge will be the competitors in the neighbourhood like Indonesia and India.

  11. Anna Young
    September 24, 2011

    @ Flyingscot, I agree. A balanced strategy is required to help ride the storm.

  12. Jay_Bond
    September 26, 2011

    Having 60% of the Philippines exports being electronics is extremely dangerous to keep the economy running. With the global economic crisis resulting in lower spending in certain items, particularly electronics, the Philippines needs to look at some alternatives and not rely on the global recovery. It would appear that the Philippines has the means to become a significant player in the electronics business, which is rather good considering they are competing directly with all the other Asian countries with cheaper labor.

    When the recovery takes place, it looks like the Philippines will be in good shape if they continue to grow as exporters, but relying on too much exporting in one particular segment is a dangerous game to play.

  13. maou_villaflores
    September 27, 2011

    In past decades the Philippines focused too much in manufacturing but after the first recession this souteast asian nation already learned their lesson. Right now the focus more in the business process outsourcing – callcenters and software development. Although there's a big threat when it comes manufacturing from another episode of global recession I think the Philippines is more stronger now since the BPO is the leading industry in their country.

  14. AsiaBusinessConnect
    August 21, 2017

    Great post, thanks for sharing. I think there is a lot of room for growth indeed in the coming years.

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