Arthur Tan, President and CEO, Integrated Micro-electronics: Interview

Interview: Arthur Tan

How can the Philippines capitalise on the availability and low cost of labour?

ARTHUR TAN: High energy costs represent an inhibitor for certain types of manufacturing in the Philippines; however, operations that are not generally energy intensive can be built onshore, particularly those requiring a certain level of quality and productivity, as these factors generally depend heavily on labour. The Philippines needs to target areas of manufacturing that require high production quality, achievable through skilled human labour, in order to capitalise on the country’s stable labour pipeline and lower labour costs. Although neighbouring manufacturing strongholds like China enjoy lower energy costs, the rising cost of labour prohibits these countries from hosting operations that require skilled manual work.

In terms of productivity, the Philippines has one of the best ratings in the ASEAN region. Unfortunately, however, because energy costs in the country are so high, it is not practical for the Philippines to supply a more diverse product mix. Quality and reliability standards for more advanced products necessarily require automation and the use of energy intensive equipment. As a result, to move up the value chain would put the Philippines at a distinct disadvantage in comparison to other neighbouring countries.

How can domestic manufacturers expand production to include full product development?

TAN: If one looks at the domestic manufacturing sector, it has always been centred around components rather than products, unlike in regional neighbours. Looking worldwide, electronic manufacturing service (EMS) providers that have the capability to produce a full product – the systems, metal enclosures, plastics and cables – are in countries like Bulgaria, the Czech Republic, Mexico and China, where the required infrastructure is already in place. The Philippines has not been able to implement the necessary government policies or foster an entrepreneurial mindset that will encourage either conglomerates or small and medium-sized enterprises (SMEs). The latter is especially important, as SMEs have the potential to become a crucial part of the manufacturing value chain.

Lack of government support in developing this area of the economy has meant that the presence of the domestic electronics industry has been due, largely, to efforts by multinational corporations; 70% of manufacturers in the Philippines are multinational. Conversely, Indonesia and Malaysia – within which more than 50% of manufacturing firms are domestic – cater to the same global market, though mainly through domestic companies.

In what ways can innovation and entrepreneurship among SMEs be encouraged?

TAN: There should be a clear mandate in regards to the type of manufacturing or industries the country wishes to promote, and then this should be translated into human capital development. If the Philippines wants to move into upscale value-added work, the educational system needs to train more researchers and developers. However, if a greater emphasis is to be placed on labour-intensive industries, then the education system needs to focus on developing dual degree programmes in technology. Malaysia, for example, has the ability to move into upscale production, however, with a population of 25m, it should look into developing labour-intensive industries that can absorb people and move the economic needle.

Many EMS providers in the Philippines focus on developing well-trained talent but, unfortunately, most of that talent moves abroad. Domestic Industries need to be established that can entice these people back. If the country produces engineers and there are only call centres and a limited number of engineering firms to work for, this human capital will inevitably continue to leave the Philippines and move abroad.