SRML’s Presentation on Investment Opportunities in the Philippines
Distinguished members of the Japanese business community, Officers and Leaders of the SMBC Nikko Securities, my fellow officials in the Philippine government, konnichiwa!
I am pleased to take part in this Virtual Roadshow to present a brief update on the Philippine economic situation and investment opportunities for Japanese investors.
Japan and the Philippines have maintained good bilateral relationship for 65 years now. Our close ties have been evident in our trade and investment relations.
Despite the pandemic, Japan has remained our country’s 2nd major trading partner with a total trade of USD18.65-B (approx. JPY2.0-T), first export market, and 2nd import supplier in 2020.
Japan has also maintained its position as the Philippine’s 2nd major trading partner for the first semester of 2021. Total trade between our two countries has significantly improved by 21% amounting to USD10.34-B (JPY1.14-T) as compared to the same period in 2020 with USD8.56-B (JPY913.75-B).
Last year—even with the pandemic—the Board of Investments reached the second highest level of project approvals in the agency’s history with approved investments totaling USD20.55-B.
In 2020, Japan ranked fifth on the top foreign sources of projects approved by our Board of Investments with USD25.04-M worth of pledges or 2.60% share to the total BOI-approved investments. The investments pledges were for real estate activities as well as wholesale and retail trade.
From January to July this year, Japan placed fourth on the top foreign sources of BOI-approved projects. Japanese pledges amounted to USD16.99-M which were intended to fund real estate as well as transportation & storage activities.
Japan has consistently been among our top five sources of investment pledges for years now.
In terms of IPA-approved investments in 2020, Japan ranked as the fifth top source of foreign investments with pledges amounting to USD188.95-M (P9,376.1-M; JPY20,176.67-M) or a share of 8.4% of the total IPA-approved investments of the country.
For the first quarter of 2021, Japan was the top source of IPA-approved investments and started strong with USD215.36 million worth of investment commitments. This is a 738.63% increase from the approved investments during the same period in 2020 (USD25.68-M; P1274.29).
With the COVID-19 pandemic and its economic impact, the way forward for us is to build back better and stay the course to have a better future for our country. Our goal is for Filipinos to live in a modern, dynamic, and responsible Philippines.
We have further refined our priorities to rebuild the Philippine economy’s robust growth through the industrial strategy known as REBUILD PH! or “Revitalizing Businesses, Investments, Livelihoods and Domestic Demand. This strategy is aimed at jumpstarting and reinvigorating the economy by revitalizing consumption and enhancing production capacity.
On the demand side, it starts with government support via economic stimulus to keep jobs. This is important to attract more production activities and create a better business environment for investments. On the supply side, we seek to enhance production capacities in the agriculture, industry, and services sector to help build our export competitiveness and manage imports.
This creates a virtuous cycle of sustained and growing economic activity with strong domestic linkages.
Recently, our GDP posted a growth of 11.8% in the second quarter of 2021. This was the highest GDP growth since the fourth quarter of 1988 which posted a growth of 12.0%. The main contributors to the increase, were Manufacturing, with a 22.3% increase; Construction, 25.7%; and Wholesale and retail trade and repair of motor vehicles and motorcycles, 5.4%.
Through the years, Japan has contributed to the manufacturing industry of the Philippines, ranking as the third source of BOI-approved investments in manufacturing from 2014 to July 2021.
It may also be noted that the country maintained its Manufacturing Purchasing Managers’ Index (PMI) above the 50 neutral mark in July, i.e., at 50.4, coming from the 32 level last year.
Zooming in on the manufacturing industry, the Philippines’ strong linkages in the global supply chain make us an ideal complementary location for manufacturing activities, especially in electronics, automotive, aerospace, medical devices, appliances, bicycles, among others.
The Philippines is your ideal gateway within the ASEAN, being strategically located in the region and offering preferential trade arrangements through our bilateral and regional free trade agreements (FTA) to the rest of key Asian countries (Japan, Korea, India, Australia, New Zealand) and through the Generalized Scheme of Preferences (GSPs) with the EU, Canada, and Russia.
There are several investment opportunities for you in manufacturing but allow me to highlight a few subsectors that you may seriously consider in the next slides.
The Philippine semiconductor and electronics industry remains to be the top contributor to our economy. It is export-oriented, accounting for about 62% of our total exports last year (USD39.67-B or JPY4.24-T). It was also the 3rd largest contributor to our manufacturing gross value added (GVA) accounting for 10.8% of the total.
The industry hosts about 500 global semiconductor and electronics companies including major international players such as Analog Devices, Texas Instruments, and ON semiconductors, employing 3.2 million direct and indirect workers. It has a growing base of competitive IC Design companies that provide services to the worldwide IC ecosystem and employs more than 1,200 engineers. We are also happy to note that there are Japanese electronics companies in the Philippines that have been with us for more than 20 years such as ROHM (31), Sharp (41), Panasonic (53), Tsukiden (27), Nidec (25), Epson (22), and Canon (23).
Additionally, medical devices electronics manufacturing is also a growing industry supported by existing supply chain for manufacturing.
While our industry is better known for backend semiconductor assembly, testing and packaging (ATP), the Philippines has already proven its competence in Electronics Manufacturing Services (EMS) and Original Design Manufacturing (ODM).
Among our capabilities in EMS are components and sub-assembly, box-build assembly, new product introduction and complex equipment assembly. This covers products on sectors such as computers/peripheral, office equipment, telecommunication equipment, communications and radar, control and instrumentation, medical and industrial, automotive electronics, e-vehicle, and consumer electronics.
Capabilities in Design and Development services are also being developed and implemented by the industry such as design for manufacturing, digital front-end design, full custom analog design and layout, test development, product engineering, die and wafer processing, die design, layout and verification and automation capabilities.
Moreover, IC Design is the next frontier of the semiconductor and electronics industry in the Philippines as we envision a globally competitive electronics hub by 2030.
Lastly, the Semiconductor and Electronics Industries in the Philippines, Inc. (SEIPI) is pursuing the Product and Technology Holistic Strategy (PATHS) project. Over the next five to ten years, we are focusing on the manufacturing of the following: drones, autonomous vehicles, smart home devices, virtual reality devices, digital health devices, micro satellite, wearable solar devices, augmented medical devices, 3D printer, and collaborative robots.
On top of a successful hub for semiconductor manufacturing services (SMS), medical devices manufacturing is also a growing industry backed by the presence of supply chain for manufacturing such as tool and die, chemicals, semiconductors, plastics, and metal parts necessary in the production of medical devices and its parts. We also have industries and existing facilities like the Electronics Product Development Center and Advanced Device and Materials Testing Laboratory to support manufacturing, product design and research and development.
Growth in the field of medical devices in the PH is expected to be driven by government’s initiative to upgrade and build more healthcare facilities to support the projected demand from 2025-2040. The local medical device market is projected to have a compound annual growth rate of 8.8% and would rise to USD884.3 million (P44,004.54 million; JPY 97,261.33 million) by end of 2024.
The Philippines’ prime attributes of cost efficiencies, intellectual talent, and market accessibility are well aligned with the challenges of the electronics industry, in terms of (1) Design and Innovation through Research and Development; and (2) Trade Redirection and market access.
Moreover, manufacturing companies in the Philippines were able to shift operations and produce surgical masks, coveralls and ventilators. As of December 2020, we have a local production capacity of 10.2 million medical-use coveralls, 22.6 million pcs. of N95 masks, 57.7 M pcs. of N88 masks, and more than 6,000 units of ventilators per month. These have passed international PPE testing standards.
We are blessed with rich and diverse agricultural resources. We offer a variety of fresh fruits and vegetables, high value live marine products, coconut, and other healthy and natural food and beverages. Japan remains our key partner in this sector, and we are always on the lookout for partners and investors that can also aid us in the production and value-adding activities of the sector, such as agricultural technology, logistics, and marketing. Among countries in Southeast Asia, the Philippines is thus far geographically the closest to Japan. The geographical proximity between the two countries combined with strengthened bilateral relations enable the PH to deliver its best quality fresh products smoothly to Japan.
In fact, Japan is the first and second largest export and import partner of the Philippines, respectively.
The country’s rich natural resources favor all year-round production of agricultural and fishery products.
The industry contributes 19% of the Philippines GDP, 27% of the total employment, and 9% of total exports or USD6.5 billion.
The country has already established strong global presence on key commodities for exports such as banana, fresh/dried (second); coco-based products (first); pineapple, fresh/dried (second); prepared/preserved tuna (fifth); carrageenan (second); pineapples, prepared/preserved (10th); frozen yellowfin tuna (fourth); crab, prepared/preserved (fourth); mango, fresh/dried (10th); and fresh/chilled yellowfin tuna (seventh).
The construction services sector is among the fastest growth-driver industries, with total demand domestically and overseas growing exponentially in the last 20 years. The sector contributes 5.2% to the Gross Domestic Product and USD10.1-B to the Gross Capital Formation. The total employment in our construction sector stands at 4.3 million as of June 2021. The average annual compensation for construction employees is at USD5,331 (JPY585,760).
Also, the construction sector has diverse market players. As of 16 March 2020, there are 15,322 licensed contractors in the country. Based on the projections of the Philippine Construction Industry Roadmap, this number may be increased to 30,000 and 46,000 by 2022 and 2030, respectively.
The average construction cost in the first quarter of 2021 was valued at USD243 (JPY26,700) per square meter. Residential building constructions for the said period had an average cost of USD248 (JPY27,250) per square meter while non-residential building constructions had an average cost of USD 239 (JPY26,261) per square meter.
The Construction industry also boasts of its strong linkages to other industries. It has the second highest output multiplier of 2.2. which means that a one peso-investment in construction will, in return, generate a total of PhP2.2 to the national economy inclusive of all direct and indirect effects.
Total value of construction works is estimated at USD 1.6 billion (P79.62-B/JPY175.80-B) for the first quarter of 2021.
In the domestic setting, we see the following opportunities for the construction industry:
A. The Build Build Build – The period of 2017-2022 is seen as the “Golden Age of Infrastructure” of the Philippines. The Duterte Administration is committed to push through with allocating USD94.9-B (JPY10.43-T) in total to fund the Build Build Build Program. Various agencies initially identified 75 infrastructure flagship projects (IFPs) in 2017, and later revised it to 104 projects in 2020 and 119 in 2021.
B. The Housing Backlog – According to the Housing Industry Roadmap commissioned by one of the leading housing developers’ associations in the Philippines, the country’s housing backlog is expected to reach 12.4 million housing units by 2030. Of which, 7.7 million units belong to the affordable housing segment while 78,705 units and 11,767 units of mid-cost and high-end housing, respectively.
C. Office Space Requirement – Real estate expert Colliers International projects the demand for Office Spaces for 2021-2025 estimated at 368,600 sq.m.
D. Transport Sector Demand – With the growing economy, expansion of the country’s transportation infrastructure requires and investment of USD 100 billion (JPY10.98 trillion) for the next decade.
E. Supply Chain Industry – The supply chain/ logistics industry needs to invest at least USD14.07-B (JPY1,537.11-B) in the next 10 years to expand the capacities of its warehouse and cold storage facilities as well as container yards and integrated logistics depots.
F. Power Demand – The same positive outlook of high growth is seen in the power sector. The planned installation by 2030 of up to 20 GW in new power supply capacity to meet increasing energy requirements of the economy will necessitate the building of more than 20 new power plants based on the Power Development Plan 2016-2040. The next stage in the projected capacity expansion up to 2040 is more than triple in cumulative additional capacity of that of 2030.
G. Demand for more healthcare facilities – With the recent COVID-19 pandemic, we have seen the urgency of improving the health systems and infrastructure in the Philippines. The Philippine health system is limited to cope with the growing number of confirmed and suspected cases. The current hospital bed-to-population ratio is at 1:984
Our country has competitive advantages in the clean and renewable energy sources like geothermal, hydro, wind, biomass and solar energy. There is still a lot of possibilities for continuous shift to renewable energy to help curb the continuous use of imported fuel. Allow me to discuss where we are now in the Renewable Energy efforts.
Based on the report from HSBC Global Research, the Philippines is the second (second) best investment destination for renewable energy in Southeast Asia with resources that can generate up to 3,000 gigawatts (GW), and a highly liberalized active spot market. The country’s goal to achieve clean energy is highly supported by the government through policies such as the Renewable Energy Act of 2008.
Currently, the country has a total of 927 RE projects with potential capacity of 31,783.16 MW, 99.97% of which is for commercial use. Meanwhile, the installed capacity has reached 5,695.82 MW as of March 2021.
Consistent with the accelerated efforts to push for environment-friendly and sustainable fuels under the clean energy scenario, the bulk of the capacity additions come from renewables, natural gas, other low carbon and highly efficient technologies. More specifically, our Department of Energy (DOE) aims at least 10,000 MW of additional capacity in renewable energy by 2040.
Noting our current and potential capacity to support RE requirements, there are many opportunities for both existing and prospective Japanese firms to seriously consider. We also noted that Japan ranks 2nd (55 out of 316 companies as of June 2021) on the list of countries with the highest number of RE100 members. Japanese firms that are already operating in the country such as Ajinomoto, Epson and Murata may explore sourcing out their energy requirements from Renewable Energy Suppliers under the Green energy Option Program (GEOP) of the DOE or establish RE Project for own-use under Republic Act No. 9513. They may even sell their excess capacity to other users under the Net Metering Program. Similarly, those that are planning to locate here may also consider those options to meet their energy demands.
Moreover, under the National Renewable Energy Program (NREP), our government targets at least 35% RE share in the power generation mix by 2030 and works to drive RE share to greater than 50% by 2040, dominating the mix.
Prospective investments from RE are expected to come from the 25 candidate RE zones (CREZ10) with highest concentrations of high-quality wind and solar resources combined with demonstrated interest from project developers. The CREZ involves a proactive transmission planning approach, which aims to connect CREZ to the power system. Thus, these zones open the opportunities for private sector development and reduce investment barriers by directing transmission development and RE developers to the country’s most promising RE opportunities.
The 25 selected CREZs across the Philippines have an estimated gross capacity of 152 GW of wind and solar photovoltaics (PVs) potentials. The zones also include an estimated 365 MW of geothermal, 375 MW of biomass, and over 650 GW of hydropower capacity distributed across the Luzon, Visayas and Mindanao systems. The gross RE resources represent an upper bound assessment for each zone.
For services we have a track record of collaboration with Japan in animation, engineering and architectural design. There are areas of opportunity for Japanese investments in logistics, smart manufacturing, electronics design services and Internet of Things (IoT).
Japan and the Philippines also complement on several areas of manufacturing industry for healthcare products such as PPEs, medical devices, and pharmaceutical products which are important during this pandemic era. Other preferred areas are in the manufacture of auto & auto parts, construction materials, electronics, chemicals, shipbuilding, and aerospace parts.
In summary, let me state the following:
- With decades-long friendship and partnership, Japan has continued to be one of the country’s biggest trading partner and investor. This remained unscathed throughout the years and through the pandemic.
- The Philippines has a strong manufacturing and services sectors contributing significantly to its GDP. Hence, the country is ready to Make It Happen for Japanese manufacturers that rely on innovative product design, high quality standards, and world-class manufacturing workforce.
- There is wide scope of business opportunities for prospective and existing Japanese investors, particularly in manufacturing (electronics & semiconductor, medical devices, and agribusiness), construction, services and renewable energy, among others.
Before I close, let me say that we also welcome new Japanese investments in infrastructure projects where there is government push through President Rodrigo Roa Duterte’s BUILD, BUILD, BUILD Program.
Thank you once again for this opportunity. Arigato gozaimasu! ♦
Date of Release: 7 September 2021