The Philippines: Competing with China and Vietnam

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One of the possible areas the Philippines can explore is chip and firmware design. Although the chip designer population is still small relative to its neighbors, big companies like Sanyo, Bit Micro, Numonyx, Rohm, and Canon (CAJ), and smaller startups like Symphony Consulting and Blue Chip, are designing chips and firmware using local talent. At the University of the Philippines, students and faculty members are designing chips and sending them for fabrication to TSMC (TSM) in Taiwan, courtesy of a grant by Intel.

Cost Savings in Local Suppliers

Another way to improve its value-added proposition is for the Philippines to try to localize some of the equipment and materials requirements of high-tech multinationals. Purchasing managers from these multinational companies are always on the lookout for better, faster, and cheaper suppliers for their needs. A year before Toshiba pulled its laptop assembly operations out of the Philippines, the company announced it was trying to localize some of its suppliers, presumably to save on costs. If it had succeeded in localizing enough of its suppliers, they could have acted as an additional buffer against Toshiba's eventual decision to pull out from the country. It would have also kept some jobs intact, even with the pullout, as supplier contracts (particularly for equipment and materials) do not necessarily terminate when a factory pulls out.

From my experience as a former chip industry engineer and analyst, a breakdown of the accounting costs of assembling and testing a microchip in Asia will reveal that most of the costs associated with chipmaking are really from the capital costs of the equipment and the direct materials (such as multilayer printed circuit boards and plastic molding compounds) that go into the chip, and not from electricity or even labor costs.

But to be able to come up with a local tech sector composed of these sophisticated, locally developed equipment and materials suppliers, the Philippines needs to develop and nurture the technology entrepreneurs who will eventually supply their products to the Intels, Toshibas, and TIs of the world. It requires a Silicon Valley-type innovation ecosystem where technology entrepreneurs are supported by universities, research laboratories, technology suppliers, patent laws, and angel and venture capital.

Moving Beyond Contract Manufacturing

Malaysia, Taiwan, China, Singapore, and Korea have done the same in the past and have executed it successfully. One Malaysian equipment supplier I worked with during my stint as an engineer at Intel started out as a machine shop, then slowly worked its way up to become a sophisticated equipment supplier to companies like Intel and Motorola (MOT). In the U.S., of course, Intel and Microsoft (MSFT) saw their fortunes change when they became suppliers for IBM (IBM) in the '80s. To some extent, some of the local electronics manufacturing companies like Integrated Microelectronics and Ionics are moving beyond contract manufacturing to become original device manufacturers and eventually original brand manufacturers like what HTC in Taiwan and Ningbo Bird in China are doing.

It is not easy, but companies like Intel and TI have been in the Philippines for three decades now, and yet their purchasing power for locally developed technology suppliers has barely been touched. No single country or company can dominate the whole spectrum and permutations of equipment and material needs for the sector. Therefore, companies and countries can simply pick the equipment and material niches they want to specialize and do business in.

For the Philippines to think it can still win the cost game using only the traditional metrics like labor and electricity against countries like Vietnam and China is simply sheer folly. To expand its electronics and semiconductor sector vis-à-vis the rest of Asia, it should seriously pursue a higher-value-added strategy premised on beefing up the number of MS/PhD degree holders, doing higher-value-added activities like chip design, and localizing equipment and materials to make itself more attractive to the tech giants.

Dennis Posadas is the Editor of Cleantech Asia Online, an opinion site for clean energy developments in Asia. He is also the author of Jump Start: A Technopreneurship Fable (Singapore: Pearson Prentice Hall, 2009) and Rice & Chips: Technopreneurship and Innovation in Asia (Singapore: Pearson Prentice Hall, 2007) and is a Manila-based tech columnist.