The Philippines: Competing with China and Vietnam

Technology columnist Dennis Posadas says the Philippines can no longer compete on the basis of cheap labor. It must switch to a higher-value strategy

By Dennis Posadas

The Philippines, like many countries in Asia, relies significantly on electronics and semiconductors for job growth and export earnings. According to the Semiconductor & Electronics Industries of the Philippines, the local industry advocacy group, the sector currently earns around $31 billion annually in exports and employs around 460,000 people. The industry in the Philippines dates back to the 1970s and 1980s, the years of the first wave of manufacturing outsourcing to Asia by the electronics and semiconductor industry. Companies like Texas Instruments (TXN) and Intel (INTC) took advantage of cheaper wages to transfer labor-intensive assembly operations such as chip inspection, packaging, and eventually chip electrical testing.

The three-decade strategy of wooing foreign semiconductor/electronics multinationals to locate in the Philippines mainly through a cost carrot has worked well. But emerging signs indicate that a major strategy shift for the Philippines is long overdue. While TI has a new chip factory in Clark, a former U.S. Air Force base north of Manila that is now a free-trade zone, the country is becoming less attractive for some electronics manufacturers. Companies like Toshiba, for instance, have moved their laptop manufacturing operations from the Philippines to China; others are looking closely at Vietnam, where Intel has a new plant.

Unlike neighbors Malaysia, Singapore, and Taiwan, the Philippines has never pursued a serious higher-value strategy approach to electronics and semiconductors, preferring instead to rely on the country's status as a cheap manufacturing destination to attract investors. The key parts of this strategy are the export processing zones, tax- and duty-free areas designated by the government since the '70s to attract factories (and therefore jobs) in various places around the country. The idea was for a foreign multinational to import the sophisticated equipment and material that go into a chip, hire local labor, and export the products back to home while keeping costs down until a cheaper location came along.

Seasoned Engineers Are a Must

Aside from the typical concerns about political stability and business climate, cost considerations are extremely important in considering where to locate a major high-tech factory. But as high-tech manufacturing becomes more sophisticated and technical problems become harder to solve, one important consideration that these new semiconductor processes require is access to large pools of seasoned engineers and scientists with graduate degrees. Another consideration is access to suppliers of equipment and materials.

To shift to this new, higher-value-added strategy, the Philippines needs to make sure that industry works closely with key universities. This also means the Philippine government really needs to beef up its efforts in science and technology education. The Engineering Research & Development for Technology consortium, a group of seven universities led by the University of the Philippines to increase the number of master's and PhD degree holders in engineering and the sciences, is a right step in this direction. So if the Philippines really wants to show it can offer value to these big technology names, it should work on beefing up the numbers of engineers and scientists and have them work closely with industry.