Manufacturing Summit
3 December 2019, The Peninsula ManilaHotel
As delivered

News - 131219_SPCH_ManufacturingSummit

Ladies and Gentlemen, magandang umaga po sa inyong lahat!

Frankly, I’m a bit surprised that the hall is quite full. Yesterday, sabi namin ni Usec. Fita, “Usec. Fita, with the storm coming baka mamaya 50 na lang ang umattend and puro DTI pa.” That shows really the passion of the manufacturing sector. Palakpakan po natin kayong lahat.

You know I have a talk parang si President Digong baka ma-skip ko na ito. I’ll focus on the chart. I understand that I will have some PowerPoint charts. But really what emanated us to prepare this chart which we presented to the Economic Development Cluster only last Thursday is the fact that there is a need really to revitalize the Manufacturing sector. Bugbog na bugbog ang Manufacturing sector. We were telling them (EDC) that there is really a need to support the manufacturing sector.

Ganito po ‘yan 30 years ago when we were younger and our hair was black – more black or at least there’s still some hair ‘yung iba nawala na. We are undergoing this phase of tariff reduction. Naalala nyo ‘yun? Tariff Reform Program. Dr. Clarete, you were part of that. I was also part of that frankly because in my previous life prior to the private sector I was part of the Economic team, I was a junior staff then. But as a true-blooded economist or educated as an economist, we all believe in this principle of free market and liberalization as the way to move forward to improve the competitiveness of the industries.

So, the back of my mind we were all pushing for import liberalization and that’s fine economic policy. But of course, the reality, in the real world, we all realized as we were liberalizing, and you know tariff rates before were 50% to 100%. Remember those days in the 60’s? Because the team there was import substitution. We want everything to be produced in the country. But of course, the trend of liberalization came in liberalization and globalization. You need to lower the tariff rates and we were all just good boys of course we followed it faithfully, I would say.

And we started trim down the tariff rates from the levels 50 to 100% and gradually bringing it down to 40 to 30, 20 and maybe an average of 10% now maybe an average of 10 to 20%. And we were trying to correct the tariff distortions where in inputs tariff rates are higher than the output tariff rates. So many things that we were correcting.

And while we were doing that, of course, we participated in ASEAN where tariff rates have been brought down again further ahead of the MFN rates. We realized that it’s not a fair world. We were seeing other countries probably delaying the tariff reduction more delay than our reduction. We were seeing other countries supporting the industries as

they bring down the tariff rates. Supporting means giving funds support to the different industries in their respective countries.

In the Philippines, we were good boys as mentioned we continue to bring down the tariff, but no support was given to the Manufacturing sector. So unfair. And that we are realizing as you know we enter the private sector as well and seeing the reality that the game is not fair. So, given a chance to be back here again in government I guess have more polished perspective and I see how the countries tariffs have been brought down and we are seeing a lot of support given to their industries. So that compel to have a reassessment on how we are doing things in the country. At least for the past several years our manufacturing sector at times have been growing.

There is a chart here you can see there. Relatively speaking Philippines have been showing good respectable growth rates. Growing at some points in time. In 2013 for example, the 10.3% but we’ve seen with likes of China, Thailand, especially Vietnam growing also double-digit and much faster. And now we’re now seeing Vietnam really growing double-digit even up to this point. And we all know how their industries has being protected or supported.

However, the recent scenario would tell us, because of the global developments like the growing US-China trade war leads to a global slowdown that is affecting everybody. But other countries which are more upward oriented – higher export orientation versus their GDP. They are the ones now really affected to the point that you’re seeing China, India, Thailand and Singapore even exhibiting negative growth rates for the 2019. But everything started also slow down starting 2018. So, you can sense that you’re seeing the impact of this global trends.

There’s a bit of right spot in the Philippine growth story our investment figures continue to go up. IPA- approved investments in 2016-2018 is now PHP 730 billion, 57.3% higher than the average in 2013-2015.

BOI registered 76% of total IPA-approved manufacturing investments in 2016-2018. BOI has been beating record levels. I remember in 2017 I think we hit record level of about PHP 617 billion. It’s a record level for the past 50 years. History of BOI. That PHP 617 billion further grew to PHP 915 billion in 2018. And 2019, we already hitting PHP 1 trillion. Ganun na po kalaki ang BOI-approved investments natin and the year is not yet over. So, there’s a strong surge in investment and there’s a big jump as well in manufacturing investment.

And our presumption here is that there’s much greater confidence in the current administration of President Duterte. And at the same time the industry seeks some support from government. You know the kind of support that we are giving now is basically limited to three areas: Incentives, the little safeguards that we can do whenever there’s an import surge, there’s anti-dumping issue or the need to goods of countervailing duties. But safeguard measure is the one most often used nowadays. And the third one of course

would be protecting standards through standard compliance. We’re limited to those. We’re not giving much to the manufacturing in terms of clear fund support.

But at least I will say that the industry is a bit more appreciative. Medyo madali naman silang sumaya as long as you help them on the standard compliance, as long as you provide the necessary trade remedies and incentives on certain sectors. But we want more. We want to give more. And this is really the ____ of our presentation that we made last week at the Economic Development Cluster. So therefore at least we’re seeing for the future, some growth on the manufacture investment that will give us more capacity for the future.

The reason why I also so passionate to this one is that whenever we hear this news in trade deficit the issue of our trade deficit is link to the industry development especially now that we are enjoying fast growth brought about by improve domestic demand. And why is the domestic demand improving? Because we are investing a lot on infrastructure the BUILD, BUILD, BUILD.

Now, the construction GBA is growing double digit. When the budget was delayed for the first 2 quarters, we suffered a slowdown. And I think second quarter even went negative. Now it’s back on track double digit growth I think 16.8% for construction. It’s pulling up the industry sector.

Manufacturing also growing but on a slower phase but that domestic growth if you don’t have domestic capacity to supply the domestic growth, where will it come from? Imports. So now, with the domestic economy growing so fast it is now supported by huge imports. And our exports are fairly flat. At least May, June, July ‘yung exports natin was going against the tide. All countries are posting negative exports only Vietnam, Philippines posting positive so medyo reverse because our exports to GDP is about only 15%. So, we’re least affected in this US-China trade war.

So, with exports fairly flat, now the imports basically are filling up the gap. Strong demand is coming not from the domestic capacity but really from imports. So, anong summary? We really have to increase the domestic capacity to support the growing demand of the economy. We should be prepared. But if there are no investments in the manufacturing where do the domestic capacity come from? If there is no support to manufacturing where will do the domestic capacity come from? If there are no support on standards or on import surges, we are not correcting the situation then you can just expect that manufacturing will not grow. So that’s the basic issue. But at least with this support that we’re giving at least on the safeguards and the standards some bright spots in manufacturing investments.

So BOI-approved investments in manufacturing at least PHP 409 billion in 2018. Double the total investments registered in the last 5 years. BOI registered investments to address supply chain gaps and to reduce import dependence. We’re now trying to build the basic industries that we lack.

For example, the group from China the HBIS, in partnership with Steel Asia for example we’re trying to make this integrated iron steel operation that will allow us country to produce hot rolled coils with annual capacity of about 4.5 million metric tons, iron slabs with annual capacity of about 600,000 metric tons.

Without this local production, you can imagine that all these are now being imported. So that’s the big difference. Steel Asia with the PHP 65.8 billion investment to produce the nails, staple wires, paperclips all these are now imported. We will just have to build our capacity to do this steel products and this is not to only on steel you can look into all industries and you can see where the gaps are.

Another good news at least on electronics. Wistron manufacturing arm of Acer and Ever Win some facilities will be transfer from China to the Philippines. So, all other countries are slowing down and their manufacturing sector including of course the Philippines to a certain extent brought about by the US-China trade war. The rising global protectionism and the global slowdown.

There are sectors that declined and you will see declines from furniture, petroleum, paper and paper products, communication equipment. Now, we all know this all growth constraints, so government has started to address many of these programs. For example, the lack of raw materials which is usually the concern of those in the agri industry. The need to strengthen the value chain. While we are trying to manage the growth for example the processing and the manufacturing side whenever we try to experience the growth all of a sudden we don’t have the materials to supply the needed inputs to those manufacturing industries. So many of these would be in the agri business, food processing.

So, there’s a need to strengthen the value chain and it’s a good thing that we have the support now of the DA Secretary William Dar who also believes in the industry clustering approach and the value chain approach in developing local industries. For now, we are developing the BOI Investment Priorities Plan. We have now the Local Supplier Development Program. On the efficient and competitive power cost, these industries are included in the BOI Investment Priorities Plan, incentivize renewable, non-renewable & promoting energy efficient technologies in manufacturing.

For example, in the non-renewable energy segment, there are now 20 approved projects generating 2,000 jobs. For renewable energy, 180 approved projects with 6,921 employment generation.

On HR development, there’s an upskilling and increasing productivity efforts. Industrial Human Resource Capability Building -upskill/reskilling our workforce towards Industry 4.0 and also providing training facilities for SMEs to encourage them to prepare for the Industry 4.0.

For efficient logistics, because we are now benefitting from the aggressive infrastructure development program. We have also aligned our requirements industry especially

connecting industry plants to market through this program that we have with the DPWH where they will prioritize building of roads that will connect industrial plants to the market. So, it’s not only now at the sector the farm to market roads but industry farms to market roads. There is a pending proposal for a new legislation that will regulate shipping rates, eliminate corrupt practices with the EODB law and of course instituting a stricter Philippine National Standard and addressing also the PNS on shipping and transport.

For addressing smuggled, substandard and counterfeit as mentioned by Dr. Aranza, actually what we did is to strengthen the standard compliance system. A lot of products have been removed from that system and we are bringing back these products for reason cited. We have to protect the consumers from proliferation of sub-standard materials. The first objective is for consumer safety.

For example, on steel, whether you bring 500,000 or 20,000 metric tons they only inspect 3 bars from that shipment. So, we in the Bureau of Product Standards the Consumer Protection Group and the Industry Development Group rationalized that system and they still on an ISO certified mechanism. And now we have brought up a higher sample size whenever we do the product standard test. So, stricter. So right now, instead of 3 bars for 20,000 metric tons for example it’s now 50 bars for 20,000 metric tons. So, there’s a bigger sample size.

And also, what we are instituted is to strengthen the system. Aside from the (PS) Certification of the plant, we now do pre-shipment and we also do post-shipment. So that is really an effort. Of course, sabi ni Presidente to protect the consumers safety comes first. So, we are instituting the system of pre-shipment and post shipment. Very strict. And we do the rounds of monitoring regularly with the help of the Industry Group and ensuring more safety for our products.

So aside from steel we are now doing it for cement. We’re trying to do it on glass but we we’re injunction. There was a TRO but we are fighting it. And we’re just telling especially the consumers – this is for you. We’re trying to give you more safety. Also, the steel cement these are very crucial for building structures. So, we’re talking of preparing for the big one.

We had the strong earthquake in Mindanao. In other countries, when you hear of 6.5-7 intensity magnitude a lot of people would die when buildings really collapsed. When can say at least in the Philippines there’s less of that. Di naman zero but at least there’s just a few buildings. So, in a way the result of keeping up to standard the products. So, it’s very important that we institute this policy and also of course very important therefore we add more products that would be critical to consumer safety.

So aside from the steel and cement, the glass they are now ongoing consultations especially mandated by the President on hollow blocks, so we have started on that. We will be adding the roofing material as well as plywood, tiles. So very important that we ensure the consumers safety and of course what we are trying to remove also would be the fair-trade practices. If these sub-standard materials proliferating the market, they

provide a fair-trade competition to the legitimate and standard abiding local manufacturers. A fair competition kasi they can charge low prices sub-standard materials.

Of course, there’s just a smuggling although we admit that it is not yet done. Mabigat na problema po ‘yan. But at least the customs has started to bring more standards. NBI is working closely with the Bureau of Customs. Like the fuel marking for petroleum products. A lot of revenue leakage without this fuel marking system. So, this will in a way again address the smuggling issue in the trade system.

There are successful industrial policies in Thailand and Malaysia that resulted in manufacturing reaching over 30% share of GDP. The blue line you see there is the Philippines. Its fairly flat and a bit slowing down as manufacturing share to GDP. This is because in other countries you can see a bit of upward slope. They are supported aside from the usual incentives, standards and smuggling trying to address those issues.

Thailand would have their industrial restructuring program supported by soft loans, technical assistance to their industries. In Malaysia, budget allocation of RM2.5B. In the Philippines, there’s a limited adjustment program. And then the liberalization I guess it went too fast. Unfortunately, we are now bound especially the tariff liberalize in ASEAN those are already committed.

So, if you look at the next chart, you can see there the program by other countries like Vietnam in terms of program support they have the National Technological Innovation Fund and Science and Technology Development Fund. In the Philippines, we only launched the Philippine Innovation Act fund under the Philippine Innovation Act only this year.

Malaysia, they have the Industry 4RWD Transition Fund, Innovation Loan Fund, Industrial Digitalization Transformation. In Thailand, they have Competitive Fund. In Indonesia, they have the 2020 Industry 4.0 Funds when it comes to subsidies, grants and loans. At least the Innovation Fund now mandates US$20 million or PHP 1 billion support but this is not only for manufacturing. This will include all other industries. In Vietnam, there’s a US$ 45 million support, 50% deduction commercial interest rates for innovation loans. In Malaysia, you have there a total of about US$1.2 billion support. In Thailand, US$ 331 million in support. In Indonesia, US$ 178 million support.

We have the program in raising the industry innovation entrepreneurship ecosystem. We promote research commercialization, integrating production system, ease of doing business, upskilling and reskilling of workforce, innovative SMEs and startups. We have this nice Inclusive Innovation Industrial Strategy (i3S) but the problem is that no strong program fund support is in place and this is the one that we will now strengthen and try to bring here more program support. That will also support the 15 priority industries for domestic and export market as part of our i3S. These are the industries where we believed we build a comparative advantage. The country has a big potential which we considered strategic. So, this includes electrical and electronics, IT-BPM, agri-business, transport, logistics, construction, creative industries, auto and auto parts, tool and die, iron and steel,

shipbuilding, RORO, innovation, R&D, tourism, aerospace parts, chemicals, furniture, garments, climate change, environment and of course e-commerce.

Specifically, the priority activities we will start with electrical and electronics, automotive especially when we talk of Eco-PUV program – Public Utility Vehicle, electric trikes, electric buses, the battery industry that support the electric vehicle industry. For the Eco-PUV we are now have submitted a draft EO for the President’s approval that will give support to the manufacturers that will participate in the Eco-PUV program to support the Department of Transportation’s Eco-PUV modernization. So, the Public Vehicle Modernization Program. So, we shall be doing the standard phase new look of the Jeepneys which we can imagine is similar to a mini bus where people can stand up, the doors is on the side, Euro4 engines and eventually leading of course into the electric vehicle. We will develop also a similar support program for the electric vehicle.

Other priority activities will be on metal products, machinery and equipment and aerospace parts and the Maintenance, Repair, Overhaul Industry. In promoting industrial projects of course I’ve mentioned Eco-PUV, the EV incentives moving forward we try to develop for of the CARS-like incentives. When we say the CARS-like there will be program support for every unit produced.

That’s the only way that we can support also the industry. It will not be performance-based. Not physical incentive but really more of a support program that we really promote manufacturing and improved volume and we give the incentive on the production. And that is again through for the other types of the vehicles.

Our National Development Corporation will develop a co-investment program to co-fund innovation projects to develop new products, new capabilities. And funding assistance for developing and testing technology projects. And support also to companies that are shifting to Industry 4.0.

These are the other initiatives that will require funding from Industry 4.0 roadmaps preparation, having an academy, developing an Industry 4.0 pilot factory, Philippines as an AI Center of Excellence and upskilling and reskilling of our workforce.

So, in summary, we would like to secure our Manufacturing Revitalization and Transformation (SMaRT) Program. The guiding principles will have to be performance based and any support that we will think will have to be performance based, targeted, time-bound and transparent. Now, what to support of course those adopting industries of 4.0 technologies, those upgrading the process, upgrading their product, upgrading their service, especially those new business models.

The selection criteria & guidelines will basically include global value chain upgrading if there is greater social benefits and externalities. Adoption of Industry 4.0 technologies to catalyze manufacturing industry and emerging industries, clusters, value chain activities and industrial development in rural areas. And how to support, of course we will apply different tools will be soft loan, reduced trade barriers for inputs.

Of course, in food processing we’ll now talk of sugar as a main component to many of our food processing especially food exporters. So, sugar again is always an issue because sugar prices doubled at the world market price and really giving a lot of disadvantage to our producers. Fund support to be also through grants, vouchers, incentives.

And Usec. Fita mentioned about CITIRA and what we can tell is what we have a very good CITIRA draft now. The new version will be filed by Senator Pia Cayetano. Integrating many of our improved provisions. Provision that we have discussed internally as we have been telling you that we’re discussing with the DOF and with the other agencies what would be more effective and win-win type of support for industries. But you all know that the basic benefit of this would be for the industry sector in general when it comes to lowering the corporate income tax rate from 30% to 20%. And now, for new industries there will be more incentives. For new companies that will be registered under the SIPP there will be more incentives that will be added there.

So, its not true that the incentives will not be removed or taken away. In fact, the incentives are being enhanced especially for new projects. And of course, for the existing projects that are benefitting from incentives we have worked on a more gradual transition for all the existing locators. Of course, the other support that will continue to be on the incentives, the standards, as well as safeguard measures.

And we have proposed a budget it will be in the vicinity of about Php 30 billion improving what we have right now of Php 1B to support the Small, Medium and large companies for the next 3 years.

So, with that we hope we can revitalize the manufacturing sector and the sector that can create more jobs, better income for the Filipinos and helping achieve the vision of our President Duterte in giving comfortable lives for the Filipinos.

Maraming Salamat po and Good morning!