Flavor of the month

Manufacturing is resurgent. But what happened to the seven industry winners from Arangkada Philippines proposed by the JFC? Sugar was once upon a time flavor of the month, so was garments and semiconductors?

Now it’s manufacturing? It is growing because investors are finding China’s costs are rising. And while semiconductors still account for 42% of exports or 8% of GDP, total manufacturing is 22% out of the 31% contributed by industry – and manufacturing is comprised of a number of industries. And regionally if not globally manufacturing is less about finished products but a function of the supply chain involving several countries with the efforts orchestrated by major manufacturers like those of auto. For example, auto electronic parts is one of PHL’s major manufactured products that go into a broader supply chain process. 

That’s my takeaway from the Philippine economic briefing I attended c/o Eagle Watch where two-thirds of the presentations would be what in Wall Street is called “technical analysis.” For example, every economic forecast from the different institutions in Q3-2014 was overstated, meaning we missed to deliver the forecast. Also, the economy is still skewed to specific regions: Luzon, from Hacienda Luisita down to Metro Manila and Calabarzon account for 2/3 of the economy; but with Cebu and Davao plus Cagayan de Oro, altogether they would represent the bulk of PHL’s $272 billion economy.

And one-third of the briefing, to distinguish it from the technical analysis piece, would be the “fundamental analysis” – or what’s behind the numbers like price stability, jobs and personal income as well as leadership as in what must be the profile of the next president; and finally what critical legislations must be enacted if PHL is to continue to grow at a-7% clip – e.g., the competition law; the FOI; Customs systems simplification; foreign ownership restrictions in public utility, etc.

Beyond the non-mention of Arangkada Philippines is the non-mention of how we must prioritize manufacturing. Didn’t we say Juan de la Cruz has been defined by “crab mentality” or “pusong mamon” – because we can’t say no and want to be everything to everybody? And are we then misinterpreting what “inclusive” means? Granted that many of the manufactured products are for domestic consumption, are they truly unique that despite AEC other countries wouldn't want to compete right in our own backyard? If indeed they see a big enough market in the Philippines, what will stop them from coming over?

In the meantime, if the Luzon region and beyond referenced above would confirm Pareto’s econometric model or 80-20 rule, i.e., a major chunk (20) in a given universe will account for the majority (80) of the outcome, shouldn’t we figure out within manufacturing, which industries must be the priority? Given the Aquino administration has a poor batting average with PPP, and since it is now in what everyone calls its last two minutes, the question must be asked: when will the many industry roadmaps that are under development become actionable? When the administration was new, I applauded the efforts of the Dept. of Agriculture as it plunged into developing a roadmap. And as everyone knows, agriculture remains a major challenge.

More to the point, could we truly support 40 or 50 industries – even when they all have roadmaps? Germany is the world-standard in manufacturing and they have fewer or 13 industries that they consider world-beaters. As importantly, if we speak of a regional supply chain, what must be the benchmark in our efforts to exploit manufacturing? For example, take Thailand, where the contribution of industry to GDP is almost equal to that of services at the 40%-range.

Thailand is known as the Detroit of Southeast Asia. We produce electronic parts, they make cars. And in PHL, services account for 57% of GDP with industry lower at 31%. In other words, we have to drill down and test the hypothesis that manufacturing is essentially supply chain, not finished consumer products. That is to say, we better benchmark our vision of the future for manufacturing versus what Thailand has achieved. They have a better track record; while we are still at the level of the analysis. Put another way, where are we, where do we want to be, how will we get there? Look with the end in view so that we don't miss the forest for the trees.

We cannot assess manufacturing’s potentials by simply assuming FDIs will move from China to PHL. For example, Japanese manufacturers that left China chose Indonesia over PHL. We need to focus where the biggest bang is and understand what the competitive drivers are. Beyond ease of doing business, competition is a hard nut to crack, i.e., either a product is preferred by the consumer or not. We must confront the challenge of competitiveness where it truly matters? For example, Procter & Gamble sold 100 of their brands and will henceforth focus on the balance of 80 from their portfolio. In other words, even the once industry model of competitiveness can’t bite more than they could chew. Or have we in PHL developed an alternative econometric model to that of Pareto?

Indeed manufacturing has to be viewed in the broader context of competitiveness. That is to say, it is beyond our success model of a third-party provider like we’ve been in garments, semiconductors, OFWs and BPOs. And competitiveness can be as fundamental as delivering basic rational benefits to the consumer – or be higher in the value chain, with higher value-added as in more functional or emotional or experiential benefits, e.g., lifestyle. Even higher in the value chain is “creative destruction,” which is way beyond conventional wisdom, a very hard lesson that Nokia and BlackBerry had to learn. Or take IBM, the owner of the most number of patents in the world; they must have done both the technical and fundamental analyses of their business many times over before Apple came. Yet Apple upended the dominance of IBM. How did a college dropout do it? For one, as he told Walter Isaacson, who wrote his biography, “When behind, leapfrog.” And he would add, focus . . . simplify . . . connect the dots (from end to end.)

The conventional wisdom of growing PHL’s GDP by 7% on a compounded basis will take us a generation to be a developed economy as confirmed by international agencies. Sadly, our rhetoric re inclusive growth will remain as such if we don’t develop a new paradigm in managing our economy. In the meantime, we must benchmark the elements of our economic output against those of our neighbors; and if, for example, we want to make a major dent on poverty, we need to raise GDP by 50% or double GDP per capita.

If we want the next president to understand economics in order to be effective, let us remember that the most recent two were a professor and student-graduate from the economics community. And if economists don’t have the answers to all the questions, we better give credit to the JFC for developing Arangkada Philippines because that is a good example of what this blog has called egalitarian – i.e., it was an open, transparent and diverse process having tapped a cross-section of PHL’s society. And successful problem-solving and similar creative pursuits can be attributed to an egalitarian atmosphere, even in Deng’s China. When Deng signaled the opening of China and fleshed out China's modernization vision, he had different groups organized into teams and they came up with the game plan. And PHL has yet to find a visionary leader like Deng Xiaoping.

While in the economic briefing the income drivers of the economy or GDP were discussed, we still need to compare and contrast what portfolio we have today versus what we must have to truly accelerate economic growth – beyond doing quarterly growth forecast. For example, the bulk of GDP is still accounted for by OFW remittances, BPOs and semiconductors. What must our portfolio be? And why?

Great leaders transformed the world because they were visionary leaders. They demonstrated community sense and were committed to the common good. And in the process, they could not be “pusong mamon” nor tolerate “crab mentality” because they understood the fundamental given of scarcity of resources. And finally, before Pareto was Christ, who admonished the Jews to toss their 300 tenets and focus on the two Great Commandments. That thought came the first time I stood in front of ex-socialists that wanted to learn the ropes of the free market – that problem-solving must be principle-based to generate a sense of purpose.

[This posting captures the points I made during the briefing; copy furnished and acknowledged by a presenter.]