PHILIPPINE MANUFACTURING INDUSTRY ROADMAP and GLOBAL VALUE CHAINS Rafaelita M. Aldaba Ateneo de Manila University Professional Schools, Rockwell, Makati City November 12, 2014

Outline Objective: implications of GVCs on the growth & development of PH manufacturing Global Value Chains Manufacturing Performance Philippine Manufacturing Industry Roadmap Services Vision and Strategy Future Implications

Part 1: GVCs STAN SHIH’S SMILE CURVE HIGHER CONCEPT, R&D SALES, AFTER SERVICE DISTRIBUTION DESIGN VALUE ADDED BRANDING MARKETING MANUFACTURE LOWER TIME Opportunities for upgrading & diversification in both upstream & downstream in goods & services Strategic positioning in the GVC

Distribution of value for Iphone Source: Kraemer et al 2011 GVCs require high quality services embodied in production & increasingly outsourced US (Apple) captures 58.5% of Iphone sales price Korea: 5% Japan: 0.5%; China: 1.8% Most value: product design, software development, product management, marketing & other high wage functions kept by Apple Trend: dispersion of functions

Distribution of Value for Ipad Source: Kraemer et al 2011 For Ipad, US: 30% & 15% distribution & retail Korea: 7%, Taiwan: 2%, China: 2%

Auto Global Value Chain FUNCTION R&D & DESIGN MATERIAL SUPPLY PARTS SOURCING PARTS INTEGRATION ASSEMBLY MARKETING & SERVICES COST FOR AUTOMAKERS Low to medium: 10% Low: <10% High: 40-70% Medium to high: 20% (R&D, model design- Toyota, Honda, etc.) Standardizers Material suppliers Component specialists Integrators 1st tier Assemblers Distributor Exporter Glass, rubber, plastic, steel, textile, electronics Body panels, mechanical & electrical Wheels, tires, seats, engines, transmission

Global auto production network Source: Toyota Motor Corporation Toyota’s IMV Project: transmission (Phils. & India), diesel engine (Thai), gas engine (Indonesia)

Electronics GVC

Part 2: Impressive Growth Performance PH as ASIA’S NEW ECONOMIC TIGER PH growth rate: 6.8 (‘12), 7.2% (’13, 2nd to China 7.7%) H1 (’14): PRC 7.45%, MAL: 6.3%, PH 6%, INO 3.8%, TH -0.1%

Manufacturing Resurgence Industry growth: 7.3% (‘12); 9.3% (’13, highest) Manufacturing resurgence: 5.4% (‘12); 10.3% (‘13); 8.8% (H1’14)

WHAT MAKES PH DIFFERENT Market Opportunities Growing market & middle class: demographic sweet spot Labor Young, English speaking, highly trainable workforce Moderate wage increases Operating Environment Strong macroeconomic fundamentals Political stability, business/consumer confidence Policy Focus New Industrial Policy & a more pro-active Government Industry programs to support manufacturing resurgence Philippine Economic Zone Authority, Board of Investments, Subic, Clark: investment facilitation, investor care Improved competitiveness ranking (World Economic Forum) Rank #52 in 2014-15 from rank #59 WHAT MAKES PH DIFFERENT

Part 3: Roadmap for Structural Transformation Vision: globally competitive manufacturing -Rebuild capacity existing industries, strengthen emerging industries, maintain competitiveness of comparative advantage industries -Participate as hubs in regional & global production networks for auto, electronics, machinery, garments, food -Shift to high value added activities, investments in upstream industries -Link & integrate industries -SMEs & large enterprises Phase III 2022-2025 Phase II 2018-2021 Phase I 2014-2017

Strategic Actions, Complementary Measures Required Components Materials Skills Energy Capital Digital technology 30% value added; 15% employment Horizontal measures Coordination mechanism Vertical measures Close supply chain gaps Expand domestic market & exports HRD & skills SME development Technology upgrading, innovation, green growth Investment promotion Power, smuggling, logistics & infrastructure Competitive exchange rate Equates to use of electronics/computer/telecoms techniques (ICT) to add to manufacturing capabilities open trade regime, sustainable macro policies, sound tax policies & administration, efficient bureaucracy, secure property rights, institutions that promote adaptive research & patent regime, access to finance & technology for SMEs

Services Vision & Strategic Actions Vision: globally competitive services sector to create quality jobs and to move up value chain Logistics ,Telecommunications, Finance, Energy, Water Crucial for competitiveness improvement, production networks & GVCs Increase investments in infrastructure services Services embedded in manufacturing R&D, design, logistics, financial, marketing, distribution, after-sales services Move up to high value added services in GVCs Investment promotion Regulatory & policy environment HRD, skills development, SME support Industry-academe linkages, Innovation Address horizontal issues

Manufacturing: Comparative Advantage Motor vehicle Engineered Products Motor vehicle: body panel stamping, engines, transmissions, transaxle, large injection molded parts E-vehicles: controller assembly, motor, battery, charging stations Shipbuilding & Aerospace: parts & components Chemicals: oleochemicals, petrochemicals & derivatives, chlor-alkali Auto electronics, LED, solar, office equipment, communication radar, Electronic Data Processing, office equipment, consumer electronics Virgin pulp paper Copper wires & copper wire rods Basic iron & steel products, long steel products, flat hot/cold rolled products Tool & die: simple, compound, & progressive dies for metal stamping & forging; molds for die casting, plastic injection or blow molding; jigs & fixtures for metal cutting & forging Food Processing/Manufacturing

Services: Comparative Advantage Pool of skilled workers: main source of strength Current comparative advantage : IT-BPM Potential comparative advantage Creative/knowledge-based services Services embedded in manufacturing Medical tourism, Tourism & travel related Educational, recreational, cultural & sporting Aircraft maintenance, repair, &overhaul Ship repair Distribution (retail, franchising) Construction & engineering Transport support Energy, Public infrastructure & logistics, Public Private Partnership projects Energy: exploration & development of energy sources, power generation Public infrastructure & logistics: airports, seaports; air, land & water transport, water treatment & supply

IT-BPM Services from PH IT Application services Business Process services Engineering services App dev’t & maintenance Application development AD integration & testing Application maintenance System integration Analysis, Design Development Integration & testing Package implementation IT Infrastructure Services Help desk, Desktop support Data centre services Mainframe Network operations IT consulting Software product development New product development System testing Localization/Support Gaming Horizontal processes Contact centers Human resources Finance & accounting Supply chain: procurement logistics management Industry/vertical processes Banking & insurance Telecom Public sector, Utilities Health care, High-tech Oil & Gas, Consumer prods Knowledge Process Outsourcing Business research, financial research Animation Data analytics Legal process & patent research Other high-end processes Manufacturing engineering Upstream product engineering Concept design Simulation Design engineering Downstream product engineering CAD/CAM/CAE Embedded software Localization Plan & process engineering Architecture design Design process Building Management models

How to move up the GVC Competitiveness: technology & human capital upgrading Types of Upgrading: process, product, functional, chain GVCs deepened globalization by affecting both manufacturing & services Services embedded in manufacturing Required components for manufacturing: Materials, Skills, Energy, Capital, Technology Human resource development & skills trainings Power issue Investment promotion Manufacturing innovation ecosystem, link R&D to business, new product development (3D printing could boost innovation) GVC-oriented industrial policy

With or without AEC, we need to pursue a new industrial policy to make our industries competitive and create an environment conducive to private sector development. This could lead to more investments, increased competition, more innovation, increased productivity, sustainable & inclusive growth, & more & better jobs! THANK YOU!