By Irma Isip and Ruelle Castro
As countries diversify their production bases outside China post the new coronavirus disease 2019 (COVID-19) pandemic, the Philippines hopes to get a slice of the business.
Trade Secretary Ramon Lopez in a webinar hosted by European business organizations last week said the Philippines is looking at 20 existing business leads involving companies in China, Japan, Taiwan, and US that are looking at the Philippines as an investment hub amid the COVID-19.
Lopez said the Department of Trade and Industry, as part of its industry promotion strategy post-COVID, is positioning the Philippines as a complementary host country to target companies in the manufacturing industry, specifically those that are looking at diversifying their business locations to sustain and enhance competitiveness.
These are companies with China operations or those with concentrated supplier base in China, etc.
Specifically, Lopez said the Philippines targets companies that are based in Wuhan, the epicenter of the virus, and China in general.
He said the DTI continues to encourage retention and present expansion opportunities for exporting companies in the Philippines to complement production disruptions in China.
Target companies are those in medical supplies / devices, industrial and information technology components, electronics and semiconductors, travel goods, etc.
Lopez’ comments came after a report of the Oxford Business Group (OBG) cited a recent move by the lawmakers to introduce some changes in the long-pending Corporate Income Tax and Incentives Rationalization Act (CITIRA).
Currently before the Senate, the bill is intended to streamline and “rationalize” incentives offered to firms located in special economic zones while progressively lowering the rate of corporate income tax across the board.
OBG said opponents of the bill have warned that now is not the time to limit incentives for export-oriented firms as countries across the region look to attract international manufacturers seeking an alternative base to China.
In mid-May, the Department of Finance proposed changes to the bill that would grant the President more flexibility in allowing incentives to be tailored to the needs of specific investors.
OBG quoted Charito Plaza, director-general of the Philippine Economic Zone Authority, as saying the Philippines provides an ideal location as a hub in the Pacific.
“We must do all we can to attract manufacturers here as they reassess their global operations. This will come not only from preserving our tried-and-tested incentives, but also from concerted efforts to reduce power costs, and enhance digital and physical infrastructure around the country,” OBG quoted Plaza as saying.
Raw materials constraints
In the report, Plaza cited the reliance on China for parts and raw materials as a factor hindering potential relocation of these companies.
“Many countries (are) still reliant on China for the components — from electronic parts, to textiles, to raw pharmaceutical materials — needed for production,” Plaza said in the report, adding that almost 50 percent of raw materials used by manufacturers in the economic zones in the Philippines come from China. “When suppliers in China closed earlier this year, many manufacturers had to stop operations, although some still had sufficient inventory to allow them to continue operations for a while,” Plaza told OBG.
On a more positive note, Plaza pointed out that once export-oriented manufacturers set up a base in the country, they serve to stimulate local enterprise as small and medium enterprises integrate into their supply chains, which can enhance manufacturing self-sufficiency over time.
Taking such factors into consideration, many businesses looking at relocation will have to assess any costs associated with establishing new supply chains for components, or delays in production brought on by disruptions in China.
Next wave after POGO
Those sentiments are shared by David Leechiu, Leechiu Property Consultants president who said the Philippines
many companies around the world are now starting setting up new supply center all over Asia.
“We think that most of this manufacturing will bypass the Philippines but we think customer service operations that are run and owned by global corporations in China will look at the Philippines for disaster recovery,” Leechiu said in a webinar hosted by the Nordic Chamber of Commerce of the Philippines last week.
Leechiu said companies in China are deleveraging their concentration risk after the lockdown imposed on China cities in response to the COVID-19 pandemic.
“What is exciting this lockdown of China, it has reminded people of the concentration risk in supply chain they have in China. They may not open 10,000 employees per company, maybe 200 jobs in the Philippines to service China but that is going to happen across thousands of companies that will discover the Philippines as a viable alternative back-office, disaster recovery office, for China they will do that by importing talents of China in the same way that the POGO (Philippine offshore gaming operations) sector has done,” he added.
Leechiu said about half or 60 percent of the 450,000 POGO employees in the Philippines are Chinese, which gives confidence for other China companies to set up shop in the country.
“The fact that they have so much scale in the Philippines has told many companies that the Philippines is a viable place to import labor from China, and do Chinese operations servicing China from the Philippines. And that should be exciting, because these will be high paying jobs and better profile of labor coming form China,” said Leechiu, calling it “the next phase of investment of China and Chinese-based companies into the Philippines.
