Foreign chambers cite obstacles to manufacturing growth

THE Joint Foreign Chambers of the Philippines (JFC) has listed a number of constraints that are hampering the manufacturing sector from sustaining the steady growth that it has experienced in the last five years.
“While existing data spark optimism, industry players are cognizant that a number of constraints hamper the sector’s upward trend,” the group said in a policy note.

The joint chambers — whose members are the Philippine business chambers of the United States, Australia, New Zealand, Canada, Europe, Japan and South Korea — said these issues cut across the diverse sub-sectors under manufacturing.

JFC listed these as high power costs, congested ports, labor costs, bureaucracy, taxes and broken linkages in the supply chain. Manufacturing is also wary of the country’s non-inclusion in the Trans-Pacific Partnership (TPP) — the free-trade agreement whose major proponent is the US, the foreign chambers said.

“The electricity cost in the Philippines remains among the highest in Asia,” the group said, adding that Manila has the third most expensive power cost in terms of residential tariff, generation cost, grid charges, and electricity taxes.

The chambers classified electricity as among the top issues along with the country’s congested seaports at Manila and Cebu, which it said “significantly impact transportation and logistics efficiency, as well as manufacturing industries that highly depend on goods passing through ports.”

Labor cost is another issue frequently cited by manufacturers as affecting their competitiveness, the chambers said, noting that the minimum wage in the Philippines is higher than several neighbors in the region with a big supply of workers such as Vietnam, Myanmar and Cambodia.

“Textile and garments, both labor-intensive industries, are the most affected by this issue. However, there are labor shortages in Malaysia and Thailand so in both countries companies must pay above the minimum wage for entering workers, but this is not so in the Philippines,” the chambers said.

They also “government bureaucracy experience” cited as a turn-off for manufacturers who had to deal with numerous permits, licenses and multiple steps, as well as submit hundreds of documents when securing regulatory requirements.

“An astonishing 7,500 products require import and permits by multiple agencies,” the chambers said.

They cited a report from the International Finance Corp. that ranked the Philippines as having the highest tax rate as a percentage of profit in the Association of Southeast Asian Nations (ASEAN). At 43%, the country’s ratio is way higher than Indonesia’s 30%, Thailand’s 28% and Cambodia’s 28%.

Another constraint is the broken linkages in the supply chain, especially for those in the supply chain manufacturing industries.

“Weak backward and forward linkages or poor access to raw materials compel manufacturers to rely on imported parts and intermediate goods. This situation hampers the ability of companies to move up the value chain,” the chambers said.

A new addition to the challenges faced by manufacturers is the signing of the TPP on Feb. 4, 2016 as this could result in trading partners moving to TPP member countries.

“In the textile and garments industry, some buyers from TPP signatory-countries are said to have expressed preference to transact with manufacturers located in TPP countries,” JFC said.

One of the features of the TPP is the elimination of tariffs on thousands of product lines traded among TPP signatory countries US, Japan, Australia, New Zealand, Canada, Chile, Mexico, Peru, and four ASEAN countries Malaysia, Singapore, Viet Nam and Brunei.

JFC said a large part of the manufacturing sector are micro, small and medium enterprises (MSMEs), which “continue to face competitiveness challenges and need the strong support and intervention in terms of access to capital, market, technology, and human resources.”

“To maximize the sector’s potential, and address issues and challenges hampering its growth, broad approaches applicable across sub-sectors must be pursued,” the chambers said.

JFC recommended addressing the high cost of power through tax credits and discounts; prioritizing infrastructure critical to industry growth; providing support to labor-intensive companies through wage subsidies or waiver of minimum wages; and streamlining regulatory processes.

Other recommendations include proving support to MSME development by giving them access to technologies and facilities and establish more economic zones while keeping the incentives offered to locators.

“Since the 1990s, manufacturing’s average growth rate in terms of gross value added has been steadily increasing. From an average of 2.5% growth in 1991-2000, average growth reached 4.1% for the period 2001-2010. In the last four years, average growth exceeded 7%,” JFC said. –Victor V. Saulo, Businessworld, http://www.bworldonline.com/content.php?section=Economy&title=foreign-chambers-cite-obstacles-to-manufacturing-growth&id=124050