Sourcing & Manufacturing in the Philippines: An Introduction

This is the fourth article in our series where we explain the most interesting manufacturing destinations in Southeast Asia. The Philippines is one of the top three candidates together with Indonesia and Vietnam, something we will cover later in this article.

The topics covered include the benefits and disadvantages of setting up manufacturing in the Philippines, what products are manufactured here, the most active economic regions, and its free trade agreements.

Philippines Overview:

• Population: Around 110 million
• Capital: Manila
• Bordering countries: Maritime borders with China, Indonesia, Japan, Malaysia, Palau, Taiwan (ROC), and Vietnam
• Major cities: Manila, Quezon, Davao, Cebu, Caloocan

Benefits of Manufacturing in the Philippines

Having one of the fastest growth rates in Asia, the Philippines competes with Vietnam and Indonesia to attract foreign manufacturers. Even if the countries have similarities, there are also areas where the countries have significant differences.

Languages, political systems, and geography all play a big part in this. Let’s start and review the major benefits of choosing the Philippines as your manufacturing location.

Low labor costs

The primary reason why companies relocate production to the Philippines is thanks to the low labor costs. Wages are on a similar level to Vietnam and around a third on average compared to China.

As mentioned in our article about manufacturing in Vietnam, it’s important to highlight that wages increase at a slower pace compared to China as well.

The low inflation and rising productivity in Southeast Asia also encourage foreign companies to enter the region, as there’s much room for development.

The large and young labor pool

The Philippines has a population of around 110 million people, which is set to reach 142 million by 2045, according to the government. At the same time, the median age is just 25.7 years, compared to Vietnam at 32.5 years and Indonesia at 29.7 years.

43.7 million were part of the labor force as of 2020, a number that will increase greatly in the coming years. Urbanization also increases at a fast rate, playing an important part in the manufacturing industry.

Manufacturing capabilities

Agricultural products, tobacco, and textiles accounted for much of the country’s production but have shifted to more high-tech manufacturing. The main exports can be found in the electronics industry, including semiconductor production.

Manufacturers of electronics should have the Philippines at the top of their list if considering Southeast Asia as a manufacturing location.

High English proficiency

Together with Malaysia and Singapore, the Philippines has a significantly high English proficiency level. English is an official language together with Tagalog and the government mostly operates using the language.

Two-thirds of its population speaks English fluently and is one of the largest English-speaking countries globally. Naturally, it’s easier to do business in this regard as you won’t come across communication issues as easily.

What are the disadvantages?

Operating in emerging markets on the other side of the globe can be challenging due to long distances and cultural differences. Nearshoring has become a frequent topic among American and European companies who want to bring manufacturing closer to end markets.

Below you can find some notable disadvantages of choosing the Philippines as a manufacturing destination, some that can be affected and some not.

Infrastructure inefficiencies

One outspoken reason that hampers investments is infrastructure inefficiencies, which have put constraints on both poverty reduction and economic growth. Even if there’s relatively high access to electricity and water, service levels have not kept up with the high population growth and urbanization.

Having said that, many infrastructure development projects are on the way and the government has put infrastructure as a top priority. Its infrastructure development plan is considered a benefit of investing in the country.

According to IMF, more than 6% of the GDP has been invested in infrastructure, compared to 3% from 2011 to 2016.

Natural disasters

The Philippines is one of the most natural hazard-prone countries worldwide, including tropical cyclones, floods, earthquakes, and volcanic eruptions.

We also see that natural disasters tend to have a greater impact on the society and economy due to migration, unplanned urbanization, global climate change, and population growth.

Power outages and flooding can disrupt business activities seriously and it’s important to thoroughly analyze a potential manufacturing destination before making a selection.

What products are manufactured in the Philippines?

Let’s review the major manufacturing industries that should be of interest to foreign companies, and what products are manufactured.

Electronics

Electronics accounts for more than 60% of the Philippines’ exports in terms of value, making it the most important manufacturing sector nationally. In the 1970s, Western companies sought to relocate production to counter rising costs and the electronic industry has been active since.

Since then, the industry has continued to grow and develop, making the country a primary choice in Southeast Asia.

Most of the electronics manufacturers can be found in Metro Manila, Calabarzon, and Cebu. The top importing countries and cities were as follows in 2021:

• Hong Kong – 20.03%
• USA – 13.82%
• China – 12.45%
• Singapore – 9.24%
• Japan – 7.23%

Examples of firms with a presence in the Philippines include Texas Instruments, Toshiba, ON Semiconductor, and IMI Electronics.

Semiconductors

Semiconductor manufacturing is a major contributor to the electronics industry. According to the Department of Trade, around 73% of the electronics companies provide Semiconductor Manufacturing Services (SMS) and the remaining 27% provide EMS capabilities.

You can find more than 500 semiconductor and electronics companies nationally, and it’s also becoming a growing player in IC design. Another industry to keep your eyes on is the medical device industry that benefitted during the pandemic.

Mining and mineral processing

The Philippines is rich in minerals, including gold, nickel ore, and copper. Yet, mineral extraction has still been a minor contributor in terms of employment and contribution to the GDP. This is partly related to a four-year ban on open-pit mining, which was lifted by the government in December 2021.

Only 5% of the mineral reserves have been extracted but more than a third of the land area is considered as having “high mineral potentials”. The Philippines is the biggest exporter of nickel ore to China, a mineral that will become increasingly important with electrification.

Pharmaceuticals

The pharmaceutical industry is the fastest-growing at more than 8% per year, outperforming the overall country growth. 14 of the 20 biggest pharmaceutical companies have a presence in the country.

The growing domestic need for medicines and tax perks are some of the reasons why the industry is interesting. Many ingredients and herbs used in medicines are grown in the country, which further spurs the demand to set up manufacturing here.

Shipbuilding

The Philippines is one of the biggest shipbuilders globally and where much of the manufacturing activities are concentrated in Cebu. This primarily includes bulk carriers, containerships, and tankers.

The biggest exporters are both foreign-owned, including Hanjin from Korea and Tsuneishi from Japan.

Industrial Regions & Cities

The most active regions in terms of manufacturing and GDP contribution can be found in four areas: Metro Manila, Calabarzon, and Davao.

Metro Manila

Metro Manila comprises 16 cities and one municipality, making it the most important area in terms of economic output. More than 24 million people live in the urban area with Quezon City accounting for almost 3 million.

Quezon City is referred to as the ICT capital due to the many Economic Zones and IT parks located in the city. Ranked as the most competitive city for business over several years, it also has the best economic development potential, cost-effectiveness, and quality of life.

Looking at the City of Manila, we find much production of industrial-related products, including chemicals, electronic goods, clothing, food, beverages, and tobacco products.

Calabarzon

Calabarzon has become an increasingly important city for the manufacturing of products. It currently has the highest concentration of manufacturing, including automotive assembly, semiconductor production, electronics production, and other high-tech industries.

The city is also a major producer of agricultural products and contributes to 17% of the country’s GDP, ranking in third place.

You can find most of the automotive assembly operations in Laguna, electronics and high-tech industries in Batangas and Cavite, while Rizal is important for garment manufacturing.

Davao

Davao is the third-biggest city in terms of population and an important economic hub.

Contrary to the other mentioned cities above, Davao is located on the island of Mindanao and is part of the East Asian Growth Area. Much of the country’s agricultural production can be found here including bananas, pineapples, coffee, and coconut plantations.

The Philippines’ Free Trade Agreements

Thanks to being a member of ASEAN, the Philippines has free trade agreements with China, India, Japan, South Korea, Australia and New Zealand through The Regional Comprehensive Economic Partnership (RCEP).

The Philippines-EFTA (Iceland, Liechtenstein, Norway and Switzerland) also came into force in 2018.

In 2008, the Philippines – Japan Economic Partnership Agreement (PJEPA) was introduced which is the country’s only bilateral free trade agreement. Contrary to Vietnam, the Philippines doesn’t have any free trade agreement with the EU yet.

Summary

The Philippines is one of the most populous and biggest economies in Southeast Asia with a comparatively old manufacturing industry to peers like Vietnam. Most of the manufacturing can be found in the electronics and semiconductor industries, which have been active since the 1970s.

Some of the major benefits of relocating manufacturing to the Philippines are its large and young labor force, low labor cost, manufacturing capabilities, and infrastructure development plans. At the same time, the country struggles with natural hazards, productivity issues, and currently underdeveloped infrastructure.

Most of the manufacturing operations are concentrated in the central parts of the island of Luzon, where major cities like Quezon City and Manila are located. We also find major shipbuilding activities in Cebu, and the city of Davao is important for agricultural production.

The country is predicted to be one of the fastest-growing in Asia in the coming years. This will give many opportunities for foreign investors that want to relocate production, getting access to its large and English-speaking workforce.

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