It's hardly the new China, but Manila's Ayala-led science park—in a country culturally close to the U.S.—could appeal to U.S.investors
If you're an investor thinking of putting some money into research and development in Asia, you're probably going to look at China and India, maybe Vietnam. It's unlikely you're considering the Philippines. The country is known for its call centers, and the semiconductors which make up 70% of its exports, thanks to factories like Intel's (INTC) semiconductor packaging plant. But the Philippines isn't exactly a hotbed of innovative startups and entrepreneurs.
Dennis Posadas is trying to change that. A 40-year-old electrical engineer and alumnus of the University of the Philippines, Posadas spent 14 years working in the semiconductor industry— for Analog Devices (ADI) and Intel. In 2005 he left his job as a technology business analyst for Intel and joined the Ayala Foundation, the philanthropic arm of Ayala Corp. (AYYLF), one of the largest conglomerates in the Philippines.
Ayala Land, one of the group's companies, has started building a $120 million science park on the Metro Manila campus of the University of the Philippines, with the first buildings due to be finished by the end of the year. Posadas is offering his expertise to help nurture the development of entrepreneurial companies there. Ayala and the university now operate one high-tech business incubator for local startup companies, and have plans to open more.
Calling All VCs
It won't be easy. When it comes to raising startup funding, the deck is stacked against Filipino entrepreneurs. "Here in the Philippines—and in a lot of Third World countries—the infrastructure is really [more] suited for big business," he says.
It's not hard for large companies to get bank loans, but try finding investors interested in putting up capital in exchange for equity. "If you were to hold a convention of loan officers, you would probably need a big hotel to host all of those people," says Posadas. "But if I were to call a meeting of all the VCs [venture capitalists] in the Philippines, I would only need a small conference room to get all of them in."
And the few VCs there are in the Philippines aren't investing big sums of money. William M. Valtos Jr. is president of ICCP Venture Partners in Manila, one of the most active VC funds in the country. He estimates that last year venture capital firms invested about $20 million in Philippine companies. "It's pretty small," says Valtos, whose firm typically invests about $3 million per transaction.
Struggling for Acceptance
That's peanuts compared to China. An influx of funding saw a brisk increase last year—VCs bet $920.7 million on Chinese information technology companies alone, up 34% from 2005, according to a Feb. 13 study from Dow Jones (DJ) VentureOne and Ernst & Young (see BusinessWeek.com, 2/15/07, "VC Players Look East, To China").
U.S. venture capital funds, for example, are helping boost the growth of China's chip design industry, funding new fabless companies such as Beijing-based Vimicro (VIMC), a leading designer of semiconductors for PC cameras. The industry is also growing in India, where Taiwan Semiconductor Manufacturing (TSM) recently opened an office in order to be closer to the country's new chip designers.
But in the Philippines is struggling to win acceptance, says Victor B. Gruet, chief executive officer of three-year-old chip design startup Symphony Consulting. His goal, he says, was to model the company on some of the successful Taiwanese companies that design integrated circuits (ICs) and become accepted as a partner.
Former U.S. Colony
"I thought it would be easy to join the Taiwan IC design supply chain," he says. "But it's difficult because we are not known to be part of that supply chain." Today, Symphony has just a handful of employees. The difficulty, he adds, is "…getting known and getting accepted [so] that we can do these things."
While China, India, and Vietnam get all the headlines, Valtos argues that there's still a role for the Philippines. Other countries are less expensive—engineers in the Philippines cost on average 15% more than in China, for instance—but he says that the legacy of U.S. rule in the Philippines makes the country attractive. "We are the only former U.S. colony in all of Asia," Valtos says. "Conducting business in a factory, training practices, the social aspect, cultural aspect— all that does provide a lot of comfort" for U.S. businesses.
People involved with the new Ayala-led project are hopeful that the science park can be a catalyst for change. "We have quite a few people who have been converted to this idea that it's important to incubate science and technology," says Posadas, who points to the success that Taiwan had after the government opened its first science park in Hsinchu (home to Taiwan Semiconductor, among many others) in the 1980s. "After they did that, their GDP [gross domestic product] suddenly skyrocketed."
Still, people at Ayala working on the new science park and high-tech incubators know the challenges they face, and are realistic about what the Philippines can offer. "We're not under any illusion that we're going to go out there and compete for a huge percentage of the venture capital that is going to China," says Bill Luz, executive vice-president of the Ayala Foundation. "We just don't have the headcount; the physical number of engineers is not anywhere near what we'll see in India or China."
Instead, he says, the Philippines should target niche areas, especially ones tied to the country's strength in call centers and business process outsourcing. "The volumes will not be big," Luz says. "But there is potential."