Beyond “CREATE”

Indeed, CREATE is a step in the right direction – and is long overdue.

But let’s pause right there, given we are playing catch up. “We cannot solve our problems with the same thinking we used when we created them.” [Einstein]

Translation: CREATE cannot be the be-all and end-all. Beyond playing catch up, we are underwater because of the pandemic. How do we “build back better” to borrow from Biden a Boris Johnson original – per his claim?

So, let’s call a spade a spade. Our caste system has perpetuated our inward-looking bias. Why will we in the Philippine elite class not want that?

The blog always reminds us of the real world. We cannot keep to the old debate between “technocrats and politicians.” That is classic binary thinking. Relativism is what the world is about because of the dynamism of the universe. And why the hierarchy of human needs is inherent – and they are not linear but a continuum. Our primary need for nourishment does not cease, yet our need to be the person we are is dynamic. It is consistent with the character of this universe. Otherwise, Darwin sets in.

Why is the blog stressing these principles? Recall the Harvard Business Review article on the “Innovators DNA.” These principles are universal; they apply to both the public and private sectors. What it says is we must be seeking the “North Star” in our endeavors.

And the blog identified the photosynthesis phenomenon as its best expression. Those familiar with the blog may recall that beyond doing business – i.e.,  competing – globally, I have also done restructuring initiatives – starting from my days in the Philippines and extending to the developed markets.

A restructuring program recognizes a structure challenge, i.e., the business model is not sustainable. And that is so fundamental, yet we Filipinos over decades have not come to grips with this reality: the Philippines has a structural problem.

The above principles apply even in the spiritual realm, as the Franciscans would preach. And it comes from St. Francis. There is universal oneness that humankind must recognize – and that includes all living things and the environment.

So, let’s put CREATE side by side with Vietnam’s economic miracle – not the first but the latest example from our neighbors. Question: What will it take for us to learn from them? Answer: Our caste system undermines our ability to unfreeze our frozen minds – i.e., that is why we struggle to absorb new learnings.

Consider: “Vietnam’s Exports Jump in February as Samsung Boosts Shipments,” Nguyen Dieu Tu Uyen, Bloomberg, 28th Feb 2020.

“Vietnam’s exports jumped in February as Samsung Electronics Co. increased shipments of phones even as the novel coronavirus outbreak hurt the nation’s overall trade activity.

“South Korea's Samsung has started building a $220 million research and development center in Vietnam,” Khanh Vu, Reuters, 2nd Mar 2020. 

“Construction of the center in Hanoi will complete by the end of 2022, Samsung Vietnam said in a statement, adding that the center will employ between 2,200 and 3,000 people.

“Samsung is the single largest foreign investor in Vietnam, with investments totaling $17 billion, it said.

“The center as planned would be the largest of its kind in Southeast Asia and will enhance the company’s research capability in such areas as artificial intelligence, internet of things, big data, and 5G.

“Vietnam’s exports of smartphones and spare parts, mostly produced by Samsung Electronics, rose 4.4% last year (2019) to $51.38 billion.”

Let’s get back to CREATE. “CREATE puts cash in consumers’ hands and capital in the vaults of corporations to trigger an economic dynamism and revival not seen in the last 50 years.” [“CREATE: Creating a miracle,” Tony Lopez, Virtual Reality, manilastandard.net, 19th Feb 2021]

“With CREATE, we are lowering corporate income tax to bring it closer to the ASEAN region’s average. ASEAN has been the fastest growing economic region in the world.

“CREATE Act is perhaps the most extensive stimulus program and most immense tax reform measure ever crafted by Congress.

“Removing the uncertainty will be like opening the floodgates to investment. I expect at least P12 trillion in combined domestic and foreign investment over the next decade due to CREATE alone. About $90 billion of that will be FDI (foreign direct investments).”

Why does Vietnam matter? It is the latest among the neighbors that have overtaken us. And our inability to tap resources put us just ahead – but behind the rest – of these impoverished nations: Lao PDR, Cambodia, and Myanmar.

That is not surprising when we consider that Samsung Vietnam alone generates far more significant revenues than our eight top companies combined.

Why is that?

“Unctad rates poorly PHL capacity to tap resources,” Elijah Felice Rosales, BusinessMirror, 10th Feb 2021.

“THE Philippines has scored dismally in a United Nations index that measures the capacity of economies to take advantage of their resources to produce goods and services.

“The Philippines was rated 122nd out of 193 economies in the Productive Capacities Index (PCI) published by the UN Conference on Trade and Development (Unctad).

“The country scored 29.81 on a scale of up to 100, as it struggled to compete in the areas of information and communications technology, transportation, and structural reforms.

“According to the Unctad, the PCI surveys the productive resources, entrepreneurial capabilities, and production linkages that together determine the capacity of a country to produce goods and services and enable it to grow and develop.

“The Philippines flunked in these categories: institutions, 47.07; human capital, 43.99; energy, 27.86; structural change, 20.02; transport, 12.82; and ICTs, 10.35.”

Let’s get back to CREATE. Who will benefit most from CREATE? Our top companies will, despite the inclusion of MSMEs.

The question for these top companies must go beyond reinvesting the savings from CREATE. How will you raise your competitiveness and be in the league of a Samsung Vietnam, for example? 

Consider: Over 64% of Philippine exports comes from (a) electrical machinery, equipment, and (b) machinery, including computers. In the next category are fruits and nuts at 3.7%.

In other words, what industries are we putting in our crosshairs to get the biggest bang for the $90 billion that will come from FDIs? Recall we have 40 or so industry road maps.

We can’t wrap our heads around this fundamental given: the “vital few” or the Pareto principle.

We invoke academic or quantitative exercises – as in “CREATE will create miracles” – yet we never gather Pareto in the execution phase. Pareto’s was one of the earliest econometric models and has not gone extinct.

Here is what Procter & Gamble said in its latest presentation to Wall Street analysts. “Focused portfolio: from 170 brands and 16 categories to 65 brands and ten categories.”

And to leverage Pareto, their business units are down to 6 sectors. For many years, they celebrated their scores of billion-dollar brands until they hit a bad patch – going ten years – when they failed to grow. And an activist investor – schooled in portfolio management, i.e., Pareto – forced a shift in their paradigm. “We cannot solve our problems with the same thinking we used when we created them.” [Einstein]

They have gone even further. Procter & Gamble’s organic sales growth comes from their two biggest markets, the US and China, i.e., they are laser-like in their focus on these two markets.

But let’s get back to our top exports and learn from Vietnam.

Consider: “Apple will reportedly move 30% of AirPods production to Vietnam starting this quarter,” Alan Friedman, phonearena.com, 8th May 2020.

“Last July, trial production of the Apple AirPods started in Vietnam. At the time, the US-China trade war was the biggest news, and Apple looked to move 15% to 30% of its production outside of China.

“Apple will produce millions of its popular AirPods wireless Bluetooth earbuds in Vietnam, i.e., 3 to 4 million units or 30% of total classic AirPods production will come from Vietnam.

“For now, Apple is not moving the assembly of its premium AirPods Pro to Vietnam; introduced last October, the ‘Pro’ version of the AirPods includes noise cancellation to keep outside noises out and transparency mode when users need to know what is going on around them.

“The ‘classic AirPods’ are priced at $159.00 with a charging case and $199 with a wireless charging case. The mass production of AirPods in Vietnam started as early as March. The Vietnamese officials even granted special permits for a key Apple AirPods assembler to help the company bring in engineers to the country for smooth production during lockdowns.

“Most of the US companies, including Apple, are looking for non-China production. Some prefer Vietnam and some like Thailand, some in India, some in the Americas, and other Southeast Asian nations.

“Some believe that Apple will end up moving most of its production to Vietnam; Samsung produces about half of its phones in the country. Apple would have to make sure that it has access to a supply chain that could provide it with components in the quantity and quality that it needs.”

If our top companies are listening, does the Apple AirPod give us an opening to attract significant investment in the Philippines?

Here’s a quote from an earlier posting: “Consider how a small Guangzhou enterprise knocked on the door of my old MNC-company.

‘We come to you because you are the world leader in our industry. We want to partner with you. We cannot bring much, but we need your investment and technology so that together, the partnership will replicate what you have achieved worldwide.’

“Does that demonstrate how a “win-win” scenario would look? 

“This small Chinese enterprise quickly disarmed the behemoth [from the West] by positioning themselves as an equal – not inferior – to the foreigner.”

In other words, our economic managers and legislators must fine-tune CREATE so that we can stand confidently to an Apple AirPod, for example.

We must articulate our investment priority principles beyond “preferred or pioneering” industries to “must-have” to pump prime our creative juices.

And it starts with forward-thinking. 

Where we want to be is to leapfrog and match Malaysia’s GDP. That means we want to raise Philippine GDP by $200 billion. And we will do the analytics covering our top two exports. And one enterprise that we must have is Apple AirPod. 

Given the size of the market for AirPods, we can run the numbers and do scenarios: What options are there for us to commit the Philippines to a partnership with Apple AirPod heavily? That means we will better the Vietnam incentives, including a much lower tax rate that CREATE provides. How will that translate to incremental GDP and tax revenues? 

If the notional number is still below $200 billion, which of our other top exports must we pursue?

We must then create our version of the Pearl River Delta economic zone to ensure we have the ecosystem to sustain a significant undertaking.

That is a broad-stroke explanation of how we can create a confident game plan that will also toss the crab mentality that has yielded us suboptimal outcomes in our economic development efforts going decades. And it explains why we are the regional laggard.

We do want to see the day when Cambodia overtakes us as Vietnam did.

Indeed, CREATE is a step in the right direction – and is long overdue.

But let’s pause right there, given we are playing catch up. “We cannot solve our problems with the same thinking we used when we created them.” [Einstein]

Translation: CREATE cannot be the be-all and end-all. Beyond playing catch up, we are underwater because of the pandemic. How do we “build back better” to borrow from Biden a Boris Johnson original – per his claim?

Gising bayan!