The Philippines, a nation long in need of industrialisation, is taking steps this year to pull investment away from Asia’s manufacturing centre: China. And some multinationals are already giving the Southeastern Asian archipelago a chance.
Manila‘s ambition to divert foreign investment intended for China has lured electronic hardware manufacturers such as Seiko Epson (SEKEY) and Lexmark International (LXK – Get Report) . Food and beverages make up another booming sector, and officials expect a surge in bicycle manufacturing next.
Industrial parks in three provinces near the capital, Manila, attract easily trainable, English-literate workers for product assembly jobs or writing user manuals, says Benedict Uy, a Philippine trade representative in Taipei. English is one of the national languages, and the one most widely used in writing. Factory workers in the country may also get paid less than in China, where the minimum wage is 40% higher.
“Mastery of the English language — a strong skill set, as [linguistic] dexterity is needed in [writing manuals for] electronics — and lower wages compared to China,” Manila-based Banco de Oro UniBank chief market strategist Jonathan Ravelas says, listing a few reasons that multinational companies try the Philippines.
The Philippines is also expanding its congested seaport in Manila and a notoriously traffic-choked system of roads leading south into the provinces intended for industrial development. Infrastructure will rise to 5% of the $292 billion GDP next year. Further helping exporters, Manila and the European Union last year reached a Generalised System of Preferences Plus deal that eliminates import tariffs from the Southeast Asian side on 6,274 goods.
Manila calls its ambition “China+1,” a growth plan that pits it against Vietnam and other parts of emerging Southeast Asia that offer low-cost factory bases to multinational companies. China says its GDP growth has slowed to a “new normal” partly because foreign investment in factories has cooled. Investors complain of rising land and labour prices in China.
High-tech hardware is shaping up as a China+1 leader for the Philippines. Seiko Epson, Lexmark, and fellow electronics maker Brother Industries (BRTHY) have expanded in the Phillipines rather than China, Uy says.
Seiko Epson said in December it would invest the equivalent of $111 million in a new factory to produce projectors and inkjet printers, slated to open in early 2017. Today’s Asian production in those areas is “insufficient to meet expected demand,” the company said in a statement.
The food and beverage industry is another prime source of projects diverted from China, the Asian Development Bank’s principal country economist Sona Shrestha says. An icon of that sector’s change in focus is Nestle (NSRGY) , which runs a 25-hectare plant near Manila to make sweets and drinks for the domestic market.
The government expects a surge in bicycle manufacturing next. Japanese bike parts maker Shimano (SHMDF) has set up a 1.32 billion peso ($29.9 million), 13-hectare factory in the Philippines, where it will benefit from the EU agreement, which axes tariffs on bicycles and their parts. Taiwanese bike builders Giant and Merida are now studying possible investments in the Philippines too, Uy says.
Delta Airlines (DAL – Get Report) may gain as well as it flies North American business people to Manila, while foreign investors might go to Citibank (C – Get Report) , one of a few authorised overseas banks, for financial services.
The Philippines is eager to start seeing China+1 results, because its otherwise on-the-move economy lags its developing Asian peers in foreign direct investment due to a historic lack of infrastructure and relatively long distances to export markets. The Philippines is also no friend of China’s politically.
To ensure the growth of foreign factory investment, the Philippines must still confront its sticky customs rules and tough barriers on foreign property ownership, analysts say. It faces high prices for transportation and energy as well, the Asian Development Bank economist says, calling its energy prices Asia’s highest.
Vietnam and Cambodia may outdo the Philippines on holding down wages for textile manufacturing jobs, she adds.
But foreign direct investment in the country rose from 173 billion pesos ($3.92 billion) in 2004 to 274 billion pesos ($6.22 billion) in 2013, government statistics show. A particular flood came last year. “The pickup in manufacturing is very positive,” Shrestha says. “That sector had not been performing well, or not up to potential.”
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