Potential growth driver

A major boom in the technology sector is being anticipated as a result of the emerging “new normal” of social distancing and working online globally. This will create a huge demand for ever-more sophisticated communication gadgets such as computers and mobile phones and tablets. Among the countries forecast to benefit from this resurgence is the Philippines. Moody’s Analytics, a subsidiary of Moody’s Corp. that focuses on nonrating activities such as economic research, recently said the Philippines is among the countries in the region well-positioned to benefit from the surge in global consumer electronics demand in the short term, and also from the potential longer-term effects of the ongoing global tech battle and concerns regarding intellectual property theft, particularly in China.

If that assessment is right, and the government and private stakeholders proceed to play this particular set of cards right, the technology sector can become a major contributor to the country’s bid to return the recession-battered economy back to its growth path.

The electronics industry was the country’s main economic growth driver for nearly 40 years before the resurgence of the business process outsourcing sector in the early 2000s. It was reported to have peaked in 2010 with export earnings of $31 billion, or about 60 percent of the country’s total exports. This ratio, sadly, hardly improved from there. In 2020, electronics remained the Philippines’ top export product, but it accounted for about half of all shipments abroad. Exports of electronic products shrank 7.6 percent to $37 billion last year due mainly to the impact of the COVID-19 pandemic.

The reason for the rather disappointing performance the past decade is that present conditions have become very different from those in the 1970s when the Philippines was a desirable location for companies shifting their production facilities to emerging economies, where production costs were low. The Philippines then enjoyed cost-competitiveness with its affordable and English-speaking workforce, and was nipping at the heels of the major producers of finished electronics goods in Asia, notably Japan, Hong Kong, and South Korea. Among the big names in the industry with a presence in the Philippines for the assembly of their computer-related products, office equipment, consumer electronics, telecom gadgets, etc. were Intel, Texas Instruments, Toshiba, Canon, Epson, and Samsung.

Then stagnation set in. Stakeholders were prevented from upgrading or moving up the value chain by prohibitive power costs. Many remained focused on assembling imported raw materials that had little value-added. The World Bank earlier estimated that imported parts then made up more than 80 percent of the value of the country’s electronic exports. Aside from increased electricity rates, logistics problems and shortage of raw materials also led many companies to leave and relocate mainly to China and Vietnam, where labor and power costs were cheaper.

Fast forward to 2021: Moody’s noted that the Philippines, Malaysia, and Thailand are the countries in the region most deeply integrated with the global electronics industry, creating substantial value at the “processing and assembly stages of intermediate goods.” This, however, is exactly what economists have been concerned about all along. While the electronics industry does create value at the processing and assembly stages, the actual value added by the Philippines to the end product is very little.

The government and private stakeholders need to work on a strategic and comprehensive long-term plan to enable the industry to take advantage of the projected boom in technology exports; done right, this could allow the Philippines to ride a major growth trajectory. The new fiscal incentives system contained in the bill awaiting President Duterte’s signature can be a good starting point to attract more foreign technology companies to relocate their production facilities here out of China. Another area to focus on is how to bring down electricity and other production costs for the industry, since moving up the value chain requires equipment that are considered power-intensive. Amid the current health and economic crises, the country needs to take advantage of this distinctive growth opportunity; specifically, the government’s prompt and decisive hand is required to get all stakeholders in the local tech sector to work on making the most of the sea change happening in the global digital economy.