New growth segments emerge in the Philippine electronics industry

Prior to the business process outsourcing (BPO) boom that took hold in the early 2000s, the semiconductor and electronics industry had served as the country’s main economic growth driver for nearly four decades. At its peak earnings in 2010, with export receipts of $31.44bn, it accounted for 61% of exports, a ratio that by 2013 had dropped to 40% ($21.8bn). “Although we still make up the largest export category, our concern is not about percentage contribution, as we are happy to see other export categories grow as well, but about the fact that overall the industry is on the cusp of a downtrend,” Dan C Lachica, the president of the Semiconductor and Electronics Industries in the Philippines Foundation (SEIPI), told OBG. Demonstrating the importance of reversing this downtrend, a hypothetical scenario study conducted by the University of Asia and the Pacific in 2013 found that if the industry was to disappear entirely, GDP would fall by 28%. In terms of employment creation, SEIPI measures the number of direct and indirect workers that the industry is responsible for at 2.1m. Lachica pointed to the need for joint government and industry intervention and the formulation of a national strategy that provides the country with a compelling competitive proposition.

CHANGING FORTUNES: In the 1970s, electronics manufacturers began shifting their production facilities to emerging economies in pursuit of cost savings, and the Philippines became a desired location for component manufacturing due to its cost competitiveness, widely spoken English and proximity to large Asian producers of finished goods. The government also created a framework of incentives for prospective investors, which in 1995 were transferred under the auspices of the Philippine Economic Zone Authority. By 1996, the semiconductor and electronics had surpassed agriculture as the country’s largest export earner.

The industry is divided into two categories. The semiconductor manufacturing service (SMS) grouping comprises semiconductor components and devices for which the Philippines has earned a global market share of around 10%. This is the larger of the two segments, and in 2013 accounted for 73% of electronic exports, according to figures from SEIPI.

The second category, electronics manufacturing service (EMS), includes computer-related products, office equipment, consumer electronics, telecoms, communications/radar, control and instrumentation, automotive electronics and solar/photovoltaic.

Leading global SMS producers with an active manufacturing presence in the Philippines include Texas Instruments, ON Semiconductor, Amkor Technology and NXP, while Samsung, Toshiba, Western Digital, Canon and Epson constitute some of the more recognisable global brands in the EMS field.

OBSTACLES: In recent years, a confluence of factors including rising power tariffs and subsidy reductions, logistics bottlenecks and a shortage of raw materials has prompted some companies to exit the country and relocate. “In terms of productivity, the Philippines is one of the highest in ASEAN. Unfortunately, because of the way energy costs are structured in the Philippines, they do not allow the country to supply a more diverse product mix because more and more of the requirements for high quality and reliability entail a certain level of automation using energy-intensive equipment. As a result, to move up the value chain would put the Philippines at a disadvantage versus its regional neighbours,” Arthur R Tan, president and CEO of Integrated Microelectronics, told OBG. A major blow came in 2009 when Intel closed its semiconductor plant. Whereas during 2010-12 average annual investment in the industry was in the $2bn range, this figure dropped to $919m in 2013. According to SEIPI, every P1bn ($22.5m) of investment in the industry contributes between 620 and 1408 jobs to the economy.

Integrated circuits, circuit boards and data storage producers have long been the mainstay of the electronics industry. Most Philippine-based players took a hit in 2013 as they were focused on desktop and laptop computer components while demand shifted to tablets and smartphones. The first half of 2014 offered some relief to the industry as a whole, as risings costs in China and a territorial dispute between China and Japan contributed to exports increasing by 4.2% year-on-year for the period, according to analysts.

ADDING VALUE: According to Lachica, due to prohibitive power costs, barring a few exceptions, most of the Philippines’ SMS industry centres around testing, assembly, cleaning and packaging. SEIPA measures total electronic imports as accounting for 21% of the import total from January through to August 24th, and based on data from the World Bank, imported parts make up in excess of 80% of the value of the Philippines’ electronic exports, a reflection of the fact that components undergo limited value-adding assembly and packaging before being sent abroad. These are activities that Lachica labels as low-margin, commoditised, and more susceptible to price and demand swings. In addition, they are considered to be more mobile in the sense that factories can more easily pack up and leave to a more affordable destination. To facilitate a transition up the value chain, the Department of Trade and Industry has formulated an electronics industry road map that aims to increase annual exports to $37bn by 2016, $52bn by 2022 and $112bn by 2030. The road map seeks to “guide the electronics industry as it moves up the value chain, develop new growth areas within the existing sector and enhance its competitiveness to seize opportunities that will be available with the ASEAN economic integration”. Interventions identified include “capacity-building, research and development, policy reform, and harmonising existing mechanisms and institutions”.

PRODUCT DIVERSIFICATION: Running parallel to revitalising the SMS space is a strategy to boost the share of EMS devices, and here particular promise is being shown in the office equipment and automotive components subsegments. Office and desktop printer exports are categorised as office equipment by the Philippine Statistics Authority and accordingly export figures are not reflected in semiconductor and electronics data. If they did, they would provide a rosier picture for the industry, with exports jumping 137% in 2012 and a further 5.7% in 2013. Recent investors in the office segment include Epson, which opened a $110m inkjet printer plant in 2011, and Brother, which completed a $54m inkjet cartridge plant in August 2013 and is building a $62m inkjet printer and printer-copier-scanner plant. Canon announced in 2012 it would spend $220m on a laser printer facility.

ON THE RIGHT PATH: Cheaper electricity and lower wages make it difficult to compete with the likes of Vietnam and Indonesia in the lower-value assembly and package space. Thailand, with strong inter-industry linkages, established infrastructure and a reputation for quality, is positioned as the region’s leader when it comes to high-technology semiconductor activities. For Lachica, this leaves the Philippines with little competitive alternative but to deliberately hone in on a niche, similar to what Malaysia has done with wafer fabs.

In order to ascertain the product lines and technologies where the country’s electronics industry can carve out an economically rewarding niche, Lachica believes it necessary to study where the global industry is headed in terms of future end-product demand and identify a technological trend that the country possesses the competencies to exploit. SEIPI has commissioned a research assessment called Product and Technology Holistic Strategy and is seeking funding and support from outside parties such as the US Agency for International Development. It will also be calling on local government agencies to leverage the study’s outcomes and recommendations to guide investment promotion and industry marketing as well as influence infrastructure investment decisions. The education system, meanwhile, will be tasked with matching their science, math and technology courses. Although the study has not yet ended, areas of the electronics industry that are earmarked for global growth include advanced robot systems, an automotive electronics market that is moving towards autonomous driving systems, the smart energy market, and connected devices and wearables.