Factory Asia ‘disrupted’: Policy implications for PHL

More from author

Japan in climate emergency, yet PHL still in business as usual

IN response to the mounting risks posed by global warming, the...

Yes, Mr. President, government has not done anything to stop illegal logging, mining

IN a situation briefing on the large-scale flooding that hit Cagayan Valley...

Rethinking economic integration: Will Asean choose another growth path?

On November 5 to 7, over 1,200 delegates from over a hundred...

Asia today accounts for about 40 percent of the world’s GDP.  Based on this figure, McKinsey Global Institute (Asia’s Future Is Now, July 2019) has declared that the 21st century is indeed Asia’s century.

Asia’s economic surge in the last four to five decades is attributed  by ADB economists to the transformation of the region as the world’s  factory, with China assuming a leadership role.  John West of the Asian Century Institute (Asian Century on a Knife-Edge, 2018) describes Factory Asia as follows:

“East and Southeast Asia is criss-crossed by a dense network of GVCs for a wide range of manufacturing products, notably electronics, automobiles, machinery and clothing. Each country specializes in tasks according to their comparative advantages.  Hong Kong and Singapore tend to specialize in logistics and finance, and be home to corporate regional headquarters.  Japan and Korea focus on branded product designs and high-tech companies, and Malaysia and Thailand specialize in mid-range manufacturing.  Thailand has become a regional manufacturing hub for the automobile industry in particular, being used by companies like Toyota, Mazda and Ford. China specializes in product assembly and lower-skilled manufacturing, although it is now graduating to higher value-added activities. Bangladesh and Cambodia are very active in clothing manufacture, while Indonesia and Mongolia are rich in natural resources.”

The GVCs referred to above are the global value chain facilities in Asean and other Asian-Pacific countries established by the multinational companies (MNCs). The pioneer GVC MNCs from Europe, the United States and Japan succeeded in atomizing industrial production in the 1970s-1990s, dividing it into two major clusters: the capital-, knowledge- and skills-intensive cluster and the labor-intensive, low-tech cluster. The former was retained in the developed countries, while the latter was outsourced to developing countries.  Most of the GVC investments have been captured by host countries through the establishment of special economic zones or export processing zones where duty-free re-export manufacturing is encouraged.

The leading players in Factory Asia are Japan and China, that is, Japan as the leading outsourcer (especially auto parts manufacture and auto assemblies) and China as the leading assembler of almost every imaginable industrial product. With its “mercantile innovation” culture, China has also made huge advances in technological upgrading and has succeeded lately in doing some industrial outsourcing herself across Asia.

Is Factory Asia sustainable?  Can the present constellation of GVCs in Asia keep growing uninterrupted?

There are signs that Factory Asia is highly vulnerable to economic, political and technological disruptions. 

First, Factory Asia’s leading market destination, the United States, has become protectionist.  In fact, Donald Trump, with his America First battle cry, has launched a vicious “trade war” against China.  This trade war has a weakening impact on US-China trade, with some observers even predicting a global recession resulting from this war.

And there are other trade conflicts that are roiling global and regional markets.  For example, the much-publicized Regional Comprehensive Economic Partnership (RCEP), projected to become the world’s biggest free-trade agreement, got bogged down with the withdrawal by India, whose domestic farming and manufacturing sectors lobbied against a China-dominated RCEP.  On the other hand, within the RCEP, two countries are so distrustful of each other they de-listed each other as a “trusted trade partner”.  These are Japan and South Korea.

However, the immediate problem for some Asian countries, the Philippines included, is that most of the GVC facilities are interlinked or “networked” with one another. In the case of the electronics industry, a series of assembly work and testing makes it possible for electronics GVC investors to assign assembly work in different countries based on skills and technology sophistication obtaining in these host countries. 

Somehow, the Philippines, due to lack of a clear industrial vision in the past, has remained stuck at the low end of the electronics assembly ladder (since the 1970s!).  This explains why in certain years the leading export destination for Philippine electronics were Singapore and Malaysia, which were engaged at a higher sophisticated level of assembly, testing and even industrial application. Today, the leading export destination is China, which has become the “final-stage export platform” for electronics and other GVC products coming from different Asian countries.  The reported decline in Philippine electronics exports is due to the slowing Chinese economy, which, in turn, is partly due to the US-initiated tariff war against China.

The disruption threat is coming not only from America with the inward-looking policy of Trump. Other GVC export destinations in Europe have also become inward-looking or protectionist. 

And then there is another disruption threat: the global advances in automation and robotization.  Some labor-intensive GVC industrial processes are now vulnerable to possible “reshoring”.  This is amply illustrated by the success of Adidas of Germany in building in 2017 a factory in Germany and another, in Atlanta, USA.  Adidas once had a giant shoe factory in Novaliches.

Given the foregoing, a developing country that is organizing its economy by focusing mainly on how to increase its participation in the GVC system of the MNCs is facing an increasingly uncertain future.  In the case of the Philippines, it has been trying to lure GVC investors for nearly four to five decades under the Neda’s so-called “labor-intensive export-oriented” (LIEO) industrial strategy, shortened in the 1980s to “export-oriented industrial” (EOI), with limited success.  Alarmed by the poor Philippine industrial performance, the ADB itself has been nudging the Philippines to be more forward-looking in industrial programming and to scale up its participation in the GVC system.  In a way, this ADB advice means abandoning the existing neo-liberal policy framework of simply opening up the economy’s trade and investment regime, with the hope that more GVC investments shall flow into the country.

But given the uncertainties facing the GVC system of Asia today, is the GVC-scaling-up strategy the best or the only policy option for the Philippines?   How about going into non-traditional GVC industries and, yes, domestic-oriented industries?

Right now, the DTI focus is on how to persuade Japanese auto makers to assemble more cars in the country by offering fiscal incentives to those who can assemble a certain number of vehicles per year.  The idea is for Japan to replicate what it did for Thailand, which has been transformed into a major auto hub in the region, manufacturing over two million vehicles a year with the support of over 2,000 car parts makers.  In contrast, the Philippines, once  a  leading car assembler in Southeast Asia, has just only over a hundred active car part makers, half  of which are doing parts production on a part-time basis.

But are the Japanese willing to develop a “complete” auto hub in the Philippines to compete with the existing Japanese-led auto  hubs in Thailand, Indonesia, China and other Asian countries?  And what is the future for the old-style car assembly when the race today world-wide is for the production of cleaner e-vehicles at affordable rates?  In short, are there no other policy choices in car assembly and parts production? How about consolidating further the niche that the Philippines has developed in wire harness production?  As DTI reported, the country accounts for over 20 percent of the global demand for wire harness.  The biggest Philippine factories today are the wire harness factories.

The whole point is that the economic-technological threats shaking Factory Asia, felt Asia-wide, requires our industrial policy makers to go back to the drawing board to craft a more holistic, realistic and balanced industrial program that is not wholly dependent on the existing  but crumbling GVC system.

- Advertisement -


Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.

- Advertisement -

More updates

SMART SOLUTIONS FOR SMARTER BUSINESS | Unleashing the fullest potential of Filipino enterprises

Cortex Enterprise Solutions was built to empower Filipino businesses to be on par with the digital...
- Advertisement -

Expert advice

One problem that we have faced has been trying to decide what information about the pandemic is accurate and what is not. This is not about “fake news.” It is trying to differentiate between experts holding different opinions. Anyone who believes there is a final scientific answer about wearing...

The term of the Chief Justice

The reported early retirement plan of Chief Justice Diosdado Peralta created a ripple of disbelief not only in the judicial circles but also in the public at large. This follows the early retirement of Associate Justice Priscilla Baltazar-Padilla last month due to her reported physical disability. She was appointed to the highest...

Be the light in this Advent season

Brothers and sisters, are you enjoying the cool breeze that usually comes at night? It is undeniable that the Christmas season is upon us, the day we as Christians are most excited about. Last Sunday, the new calendar of the Church began and we...

The untapped potential of our blue economy

IN July 2019, at the beginning of the 18th  Congress, we filed Senate Resolution 10, calling for the appropriate Senate committees to conduct an inventory and inquiry into the government’s initiatives related to our seas and oceans. Our primary aim in calling for such an inventory was to formulate a comprehensive national...
- Advertisement -

More updates

Expert advice

One problem that we have faced has been trying to decide what information about the pandemic is...

In case you missed it