Is there hope for manufacturing?

FOR ALMOST two decades now, doomsayers have been declaring that manufacturing is a dying sector in the Philippines and that we will soon be reduced to a trading economy. Various reasons are cited for this dire prediction. Prominent among them is the emergence of China as the now widely acknowledged “factory of the world.” This comes from their abundant cheap labor and a number of domestic distortions (like an artificially weakened currency) that make China’s costs of production much lower than elsewhere. China can thus easily underprice anyone in the manufacture of virtually anything that requires a lot of labor to produce.

I recall a conversation I had with a Filipino furniture manufacturer in an international trade exposition in Germany many years ago. While she was pleased with the orders coming in briskly then, she pointed to a Chinese exhibitor nearby and whispered, “By next month, they would have already copied my designs and will be selling the same furniture at half my price.” This seems to illustrate the predicament our local manufacturers face with their Chinese counterparts.

Then there are those who blame trade liberalization, which, in the face of the Chinese juggernaut, is seen to exacerbate the already difficult situation manufacturers face. But I must point out that the trade liberalization we have undertaken since the 1990s never eliminated tariff protection. We continue to maintain a 30 percent import tariff on finished manufactured products. This means that our domestic manufacturers can still compete even if their costs of production are up to 30 percent higher than those of competitors overseas. The question is whether this 30 percent margin is not enough breathing space for our domestic producers. Is the artificially induced cost advantage of China bigger than 30 percent (could it be even 50 percent, as claimed by the furniture exhibitor above)?

To many others, smuggling has actually been the bigger, even the main, culprit. The evidence of the prevalence of the problem is within plain sight. It is seen in large discrepancies between our officially recorded imports from China and what China has recorded as exported to us (the latter has reportedly been a multiple of the former!). It is seen in the wide discrepancy between annual new motor vehicle registrations, and the sum of locally manufactured and legally imported vehicles (with the latter being far less than the former). And it is seen in dirt-cheap goods being sold at places like the famous 168 Mall in Divisoria, which has been the subject of raids by authorities supposedly to flush out and confiscate smuggled products. One rumor going around was that such manufactured products could be sold at give-away prices because they were merely used as a screen to conceal the “real” cargo of illegal drugs within the container vans that they came in.

Another legitimate reason why our domestic manufacturers suffer a cost disadvantage is the high cost of electric power, often cited to be second only to Japan, and our generally inferior infrastructure which raises the cost of doing business here. Still another factor raising the cost of doing business has been cumbersome government processes, graft and corruption and inconsistent policies, including occasional reversals of executed contracts. With so many things leading to higher costs beyond the control of domestic manufacturers, can they in fact compete and survive as a major sector in the Philippine economy? Is there hope for Philippine manufacturing?

The answer would seem to be yes, if one were to consider the good news from the early part of this year. The manufacturing sector grew by an almost unbelievable 21 percent in the first three months of this year. The biggest growth boosters were food manufactures, electrical machinery (which includes electronics exports) and petroleum refining. Other strong growers were leather products, transport equipment, chemical products, rubber products and furniture and fixtures, all of which grew at annual rates exceeding 20 percent. Can their growth be sustained?

I would answer yes, for three reasons. First, food demand will continue growing indefinitely with our growing population. And as average incomes rise, food tastes also move toward more processed forms of food products, implying that this largest subsector in the manufacturing sector will continue to be an important growth driver in the future. Second, even with China’s emergence as “factory of the world,” the Philippines maintains a comparative advantage in manufactures where design is key, such as high-end garments, furniture and houseware. Filipino designs are highly sought after in Western markets as our designers, compared to their Asian counterparts, are known to be better-attuned to Western tastes. We have Kenneth Cobunpue, dubbed “furniture designer for the Hollywood stars,” and Monique Lhuillier, now an international fashion designer of note, to show for it—and there are many more who are hitting it big in global markets. What about that furniture exhibitor’s lament that the Chinese can quickly copy our designs? It simply suggests to me that our design-based manufacturers cannot afford to stand still; they have to keep ahead of the game, constantly innovating with new designs.

The third reason for my confidence is that the bad governance that traditionally led to smuggling and the other problems cited above now promise to be addressed more convincingly by the new government. And if this trust is not misplaced, then we could expect manufacturing to be able to recover the lost ground of recent years. –Cielito Habito, Philippine Daily Inquirer

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E-mail: cielito.habito@gmail.com