The resilient growth and lasting significance of the Philippines’ manufacturing sector

By Mhicole A. Moral, Special Features and Content Writer

The manufacturing industry in the Philippines continues to be a vital pillar of the national economy, contributing approximately 19% of the gross domestic product (GDP) as of 2022. Employing about 7% of the country’s labor force, the sector is not only a significant source of employment but also a dynamic driver of economic growth.

In a forecast reported by McKinsey & Company, the manufacturing sector in the Philippines is projected to grow in tandem with the national GDP at a rate of around 6% between 2023 to 2024.

The BusinessWorld Economic Forum, with the theme “PH Next: Growth Drivers,” further discussed predictions about the future of the Philippine manufacturing landscape and the opportunities and challenges ahead last May 22 at Grand Hyatt Manila.

Maria Veronica F. Magsino, Deputy Director-General for Finance and Administration of the Philippine Economic Zone Authority (PEZA), emphasized their role in fostering a conducive environment for manufacturing growth.

“We, at PEZA, believe that we have strong pull factors in the country that enable us to attract investments, and because of our huge market potential and favorable business regulations, the Philippines remains an attractive base for offshore activities,” the PEZA executive explained.

Ms. Magsino referred to the recent surveys by the Japan External Trade Organization (JETRO) and Japan Bank for International Cooperation (JBIC), which highlight these advantages. They cited high productivity, lower labor costs, and strong regulatory support as key factors.

PEZA’s operational model further enhances this appeal by offering a ‘one-stop, non-stop’ shop for permits and services, ensuring efficiency and minimal red tape.

“We aim to create a more competitive business environment by simplifying processes, enhancing transparency, offering targeted incentives for sustainable development, and others. These include ensuring regulatory coherence, reducing regulatory burden, and addressing trade barriers through engagements and partnerships with the government, as well as the private sectors alike,” said Ms. Magsino.

Meanwhile, Olivia Limpe-Aw, President and CEO of Destileria Limtuaco & Co., Inc., provided a nuanced perspective on the manufacturing sector, acknowledging both its vast potential and the significant hurdles that the country needs to overcome.

She pointed out the discrepancy between the manufacturing and services sectors’ contributions to GDP, suggesting that the former has more room for substantial growth. For instance, the Philippines has a large domestic market that can drive manufacturing demand with a population of 119 million and the highest annual population growth rate in ASEAN.

However, Ms. Limpe-Aw said that one major issue in the sector is the underutilization of natural resources and the skills gap in the labor force. She also highlighted the regulatory complexities that manufacturing companies face, such as needing various permits and communicating with multiple regulatory bodies.

“It’s really that gamut of licenses and regulatory bodies you have to deal with. So, imagine if you are a startup company, it becomes really difficult for you to undertake any manufacturing. So, the easiest way is to just import. But if we keep importing goods, we won’t have the multiplier effect that our country needs,” she added.

Moreover, infrastructure and energy costs are additional barriers. High energy prices deter manufacturing investments, emphasizing the need for affordable and reliable energy solutions. While improvements in telecommunications are under way, further enhancements in infrastructure, such as roads and supply chains, are necessary to support the sector’s growth.

Strategic investments for holistic growth

Ms. Magsino highlighted the role of Special Economic Zones (SEZs) in the Philippines, which are designed to create a conducive environment for business operations, distinct from the outside economic landscape.

PEZA facilitates the movement of goods and services within these zones by managing the necessary permits and regulatory requirements. The PEZA executive emphasized that this streamlined process helps ecozone locators — businesses operating within the zones — comply with government regulations more efficiently.

Currently, PEZA focuses on activities that add significant value: “Right now, we follow the investment priorities plan, but inside the [economic] zones, we push for high-value activities, [such as] mineral processing. We do not register extractive industries for incentives but encourage manufacturing industries to process the minerals that are mined,” Ms. Magsino explained.

She also highlighted the priority sectors like pharmaceuticals, medical and healthcare services, and renewable energy. PEZA has seen these sectors as critical to reducing operational costs and ensuring sustainable development within the economic zones.

On the other hand, Ms. Limpe-Aw advocated for leveraging local resources to produce goods domestically, thereby reducing dependency on imports. She pointed out that trade liberalization in the 1990s led many manufacturers to turn to importing due to cost advantages. However, current geopolitical challenges and rising shipping costs necessitate a shift back to local production.

“I think generally in business, it would be advisable to produce what you already have in this country,” Ms. Limpe-Aw emphasized. “If we have a lot of this type of raw material, it would be better to manufacture and process it here, and then sell it here or export the excess.”

Creating a conducive manufacturing environment

Over the past three to four years, the manufacturing sector has experienced a growth rate of 3%, according to Ms. Magsino. Even if the growth is relatively slow compared to other industries, PEZA remains committed to enhancing the sector’s performance by providing vital services to locators (businesses operating within economic zones).

“We do not only register export activities, but rather, we would also be welcoming manufacturers or activities geared towards the domestic market. So, one is information [dissemination], and two, we are trying to bring down the cost,” she added.

Ms. Magsino emphasized the importance of upskilling the workforce to meet evolving industry demands. PEZA is partnering with various institutions to bridge the gap between locators and domestic manufacturers through initiatives like reverse trade fairs. These events enable locators to source products locally, enhancing the overall manufacturing ecosystem both inside and outside the economic zones.

PEZA is also collaborating with banking institutions and multilateral agencies to ensure that locators have access to necessary knowledge and resources. “We have partnered with them to be able to bring information, to bring knowledge to our locators, as well as get our locators even compliant with the requirements on environment in the global market,” she said.

Meanwhile, Ms. Limpe-Aw expressed optimism about the potential for growth in the manufacturing sector, stressing the need to simplify processes and create a more business-friendly environment. She pointed out that the complexity and risk associated with manufacturing deter many potential entrepreneurs.

“There’s a lot of risk to manufacturing. You may produce a good, a particular product, but you’re not sure if it’s going to take off. So, if we make it more conducive and simpler for businesses, I think there’s no reason why we can’t be bigger than what we’re doing now,” said Ms. Limpe-Aw. “We should really grow that [contribution to GDP] number. We should really be bigger than that, given our domestic market and our potential to export.”

Regarding the impact of artificial intelligence (AI) on manufacturing, Ms. Limpe-Aw acknowledged the wide range of manufacturing activities, many of which are labor-intensive and not easily automated. Hence, she believes AI will not replace jobs but rather shift the nature of work, eliminating mundane tasks and enabling workers to focus on more critical functions.

Ms. Magsino shared a similar view, suggesting that AI’s integration into manufacturing will necessitate reskilling the workforce to adapt to new technologies. She believes AI will complement human labor rather than replace it, potentially creating new economic activities and employment opportunities.

She added, “I do not think it will do the thinking portion in an economic activity; that should still be left to humans. In addition to that, if the activities would make use of AI, then it will bring forth other activities, other economic activities where human labor will also be helpful.”

Strengthening the manufacturing sector

Reflecting on PEZA’s 29 years of service, Ms. Magsino noted the agency’s role in fostering collaborations between the private sector and the government. These partnerships have been instrumental in driving economic growth and supporting the expansion of various industries within the country.

She also acknowledged that the dynamic nature of both global and domestic markets necessitates a continuous evolution of strategies: “[PEZA] will continue what we are doing. That is for the short term. But of course, as we go along, as technology moves forward, as new demands for new activities are required, we will adjust to that.”

Meanwhile, Destileria Limtuaco, a company with a rich 172-year history, has proved the relevance of manufacturing industry in the country’s development: “For as long as there are consumers, there is always room for growth for the manufacturing sector,” said Ms. Limpe-Aw.

Both leaders emphasized the importance of the manufacturing sector in the broader economic context. They called for concerted efforts to strengthen the industry, recognizing its potential to drive substantial economic benefits.

“Let’s not forget manufacturing. Let’s not forget the brick-and-mortar industry. We can’t eat digital products, but we can eat the food that we manufacture,” said Ms. Limpe-Aw. “We have a lot of young people. We have to absorb them in the labor industry. We have to absorb them in the economy and make them productive members of society. After all, manufacturing is one of the industries that can give and contribute to the biggest multiplier effect in our economy.”