Philippines scoffs at China
electronics threat By David L
Llorito
MANILA - When China acceded to the
World Trade Organization in 2001, many economic
analysts predicted that the Philippine electronics
industry's days were numbered. Five years later,
the industry has shown a surprising resilience,
while some Philippine producers are leveraging
rather than suffering from China's low costs.
The electronics industry is far and away
the Philippines' most important export industry,
directly employing more than 400,000 workers and
last year accounting for more than 66% of the
country's total
merchandise exports, with sales of about US$27
billion. Philippine producers
cover the gamut, supplying bits and pieces for
consumer, computer, communications, automotive,
medical and industrial products - all areas in
which China also competes.
Arthur Tan,
president and chief executive officer of the Ayala
Group's Integrated Microelectronics (IMI),
foresees a bright corporate future on the
competitive horizon. In the first half of 2006,
IMI's revenues rose 16% year on year, and Tan
expects an even stronger second half, when orders
traditionally pick up in anticipation of the
United States' high-spending holiday season.
Tan says IMI, like an increasing number of
Southeast Asian businesses, sees China's rise as
more of an opportunity than a threat.
"While it is true that the electronics
industry in China has grown tremendously over the
past five years, China is not the answer to all
the electronics-manufacturing needs," said Tan.
"The Philippines maintains a competitive advantage
in complex electronics assembly like the assembly
of optical disk drives and hard-disk drives."
To be sure, IMI, with production
facilities in the Philippines, Singapore and the
US, is one of the Philippines' few truly global
companies. And rather than simply acquiescing to
China's low-cost threat, it's leveraging it to its
competitive advantage. IMI is now simultaneously
expanding its production facilities at home and in
China, where its subsidiary, Speedy-Tech
Electronics, just commenced operations at its
fourth plant, in Chongqing.
"We are
studying expansion in other low-cost locations
like other parts of China, Vietnam and Indonesia,"
Tan said.
The Philippines has long been a
hub for multinational electronics producers where
Toshiba, Acer, Fujitsu, IBM, Intel,
Hewlett-Packard, Dell, Panasonic, Lenovo and
Samsung all have substantial production
facilities. Cebu Mitsumi, which produces computer
peripherals and optical pick-up devices, employs
17,000 workers in Cebu City, the biggest single
employer in the Philippines. Amkor Annam employs
8,000 workers to produce integrated circuits for
global markets. Epson and Lexmark, producers of
terminal printers and print-heads, also have big
Philippines-based operations.
The
Philippines' electronics industry produced 72
million magnetic heads, 36 million digital signal
displays used in cellular phones, 30 million
hard-disk drives, 11 million liquid crystal
displays, and 8 million optical disk drives for
these and other multinational producers last year,
according to industry statistics.
Law
of comparative advantage These are the very
sort of companies that were supposed to have in
droves fled such places as the Philippines for
lower-cost China. Instead, the law of comparative
advantage is playing out in textbook fashion, and
the Philippines has carved out various profitable
niches in the cutthroat global-electronics
industry.
"We are competitive in design
and product development," said Tan. He noted that
Intel and Texas Instruments tap Filipino engineers
for integrated circuit (IC) packaging design,
while Rohm uses Filipino engineers to design the
internal circuits themselves; Lexmark employs a
growing number of Filipino printer-software
designers, while IMI develops state-of-the-art
short-range wireless connectivity devices.
"Whenever we ask [multinational producers]
why they continue to do business here and why some
of them even expand their operations, they all
point to the quality of Filipino workers as their
main reason," Tan said.
Philippine
electronics export value is equivalent to a mere
2% of total global production, and only 5% of the
Asia-Pacific region's output. In terms of volume
production, the Philippines lags its Asian
neighbors China, South Korea, Taiwan, Singapore,
Malaysia and even Thailand. Still,
Philippines-based producers, of which Japanese
companies represent 30% of the total, have
steadily moved up the value-added ladder and
carved out various profitable market niches.
Ernie Santiago, executive director of
Semiconductor and Electronics Industries in the
Philippines (SEIPI), emphasizes the industry's
staying power in the face of Chinese competition.
He notes that the Philippines accounts for 10% of
the world's total semiconductor manufacturing, and
50% of global production for 2.5-inch hard-disk
drives.
"Most leading [electronics]
companies are here with us," he said. "Intel is
here in the country producing Pentium
microprocessors, Texas Instruments producing the
DSP, or the digital signal processor. One hundred
percent of the brain of cellular phones, of Nokia
phones, is done here in the Philippines by Texas
Instruments."
One reason multinational
companies have stayed put, Santiago reckons, is
that they know the Philippine terrain well. Intel
established an assembly and testing facility in
the Philippines in 1974. After that, many of the
then small, now big, global chipmakers followed,
including Texas Instruments, Philips, Sanyo and
Rohm Semiconductors.
After the 1985 Plaza
Accord, the sharp appreciation of the yen forced
Japanese producers to establish manufacturing
facilities in lower-cost Southeast Asia, including
the Philippines. In a recent independent study,
Gwendolyn Tecson, economics professor at the
University of the Philippines, notes that that
allowed for the hard-disk-drive (HDD) industry to
take root in the Philippines, including various
downstream supply industries.
The major
HDD manufacturers "have cited three factors,
namely the strategic location of the country, the
relative abundance of engineers and technicians,
and worker trainability, especially in terms of
their English-language proficiency", Tecson said.
"On the other hand, the supplier firms chose the
Philippines to be near the majors."
A
highly developed, reliable supply chain is another
reason the majors have so far stayed put in the
Philippines, industry analysts contend. According
to SEIPI's Santiago, the presence of these major
players has encouraged the development of various
Filipino-owned suppliers, including IMI, Ionics,
PSI Technologies, Fastech, and Team Electronics,
that produce high-end components for the majors.
Santiago says the Philippines is home to 883
electronics-related firms, 28% of which are
Filipino-owned.
Could this still change?
In 2005, many in the industry were concerned when
Toshiba decided to transfer its main
laptop-computer manufacturing facility from the
Philippines to lower-cost China. That led to
widespread speculation that other big
multinational players might follow suit.
Industry executives explain that labor
cost is only one factor companies weigh when
deciding where to locate their manufacturing
facilities. Terry Pacis, Intel's Philippine-based
manager for external relations, says location
decisions are increasingly influenced by the local
availability of technical expertise - rather than
low wages.
She also says major electronics
players prefer to establish presences in several
different locations to hedge the risks of
over-reliance on one or two particular countries.
Besides the Philippines, she notes, Intel operates
test and assembly plants in China, Malaysia and
India.
SEIPI's Santiago says that despite
Toshiba's recent pullout, new electronics-related
investments continue to pour in. He anticipates
the industry will draw $1 billion of new
investments this year, boosting total exports by
as much as 10% year on year.
"We do not
have good roads, we do not have a better
peace-and-order situation, and other countries
have better governance," Santiago said. "But the
point is they are still here. Why? Because we have
good people."
David Llorito is a
researcher at the BusinessMirror, a Manila-based
daily newspaper. He has more than a decade of
experience in socio-economic research, policy
analysis and business-economy journalism in the
Philippines and recently won the Jaime V Ongpin
Award for Excellence in Journalism (Explanatory
Category) as well as the Australian Ambassador's
Choice Award 2006.
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