Monday, Jun 26, 2017
Industry & Trade | Asia-Pacific | Philippines

Philippines industry

Driving innovation to become a global player


1 month ago

Arthur Tan, CEO of Integrated Micro-Electronics, Inc.
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Arthur Tan

CEO of Integrated Micro-Electronics, Inc.

Integrated Micro-Electronics, Inc., also known as IMI, is one of the leading global providers of electronics manufacturing services (EMS) and power semiconductor assembly and test services (SATS) in the world. CEO, Arthur Tan, speaks to The Worldfolio about industrialization in the Philippines and IMI’s business operations.

The new Philippine leadership represented by President Duterte sets its objectives to play a more crucial role within the region. The Philippine economy was a top performer in South-east Asia in 2016, according to a November report from rating agency Standard & Poor’s (S&P), due to its growing middle class, a business process outsourcing (BPO) boom and expansionary fiscal policy that emphasises public infrastructure. GDP growth was on track to reach 6.5%, up from the 5.9% posted in 2015. All of these factors place the Philippines now on the verge of an economic transformation that will project it to be the 16th biggest economy in the world by 2050 as predicted by HSBC. What is your expectation on the new administration’s 10-point economic agenda, 2017 budget, proposed IPPs and tax reform and what impact do you expect on the investment climate?

The 10-point agenda of the President focuses on keeping the momentum of the economic growth of the country. I like the idea that none of the major points deviate too much from what we have already started with the previous administrations.

Under the management of Governor Tetangco of the Central Bank, the monetary policies in terms of managing inclusion and manpower supply for the economy, has already proven itself to be positive as our first quarter results still managed to fight trending global rhetoric, not just in the Philippines but also in the U.S. and Europe.

Here in the Philippines, we are witnessing actual policy changes that set the bases for what is to come. So far the government had not made significant policy changes. One significant reform that is on the table right now is the tax reform package, in which the government looks for ways to off-set different social investments, infrastructure expenditure, returning focus on agriculture and moving the economic centre away from Manila to the rest of the country.

All these policies are good but they come at a price.  We have to figure out how to balance the budget from a revenue perspective. How these individual markets will be affected by those changes will be evident. We will then see if it will be significant enough to sustain the growth of the country.

Our resilience as a country is evident in the fact that we are still one of the largest consuming markets, second to Indonesia within the ASEAN – and that carries a lot of weight considering the continued dependence on the remittances. The overseas Filipino workers are able to withstand the host country’s economic issues and are able to actually adjust and still continue to send money back to their relatives in the Philippines. Sectors such as BPO and manufacturing are other key drivers of strong domestic consumption.

There may also be some effects on our economy, depending on how the US manages theirs. Roughly 25% of our GDP could be affected by it. The good part is that the Philippines is not on the US government’s priority list in terms of trade barriers. This gives us a certain advantage when their traditional trading partners are looking for alternatives.

In this context, I can speak from first-hand experience as I am overlooking operations in Mexico, Europe and China, aside from the Philippines. The effects of protectionist rhetoric can already be felt while the Philippines continues to be attractive. However, one of our concerns is logistics. Our country is surrounded by water; it has to be able to develop strong infrastructure that is able to manage international and domestic supply chains.

 

The Philippines has taken a more active role towards Asia this year as the chair of the ASEAN, it also follows a refocus towards regional integration as stated by President Duterte at the end of 2016 which was then followed by a series of high level visits to countries such as China and Japan. We have already witnessed some of the impact of this policy shift with Japan’s recently announced 1 trillion-yen investment pledge. What impact do you expect to see from deeper regional integration? Since Japan ended 2016 as the largest source of FDI and the second biggest trading partner to the Philippines, what kind of synergies do you see between the two economies?

Prime Minister Shinzo Abe is doing well in setting the tone on how Japan is going to step up in this globalized world with internal and external policies.

In terms of the ASEAN, one of the many challenges the prime minister has to face is competition with China, as they are also trying to penetrate the ASEAN as a financial leader. In the past, Japan has been predominantly the ASEAN’s financial leader.  

From a Philippine perspective, we have a very long history of working with Japanese customers and companies. Even on a government policy level, we have had a significant amount of synergies in investments, especially in connection with JPEPA.

The shifting focus of policy-making is a result of the recent geopolitical trends. There is also evidence of a closer relationship between the Philippines and China. However, opening up the Philippine economy to the Chinese market will not be as easy as expected. There are major influences to be considered such as the Chinese brand, their infrastructure, ease of doing business and even history.

Our policies are poised to make them more Japanese-friendly than any other ASEAN country. The Philippines is the only country to have signed a Free Trade Agreement (FTA) with Japan (JPEPA). Therefore, we are already a step ahead of the rest and Japan is going the right way in looking beyond their own market, using the market knowledge they have acquired over the years with corporations such as Mitsubishi, Toshiba and Hitachi as leverage.

 

In 2016 Japan finished as the Philippines’ second biggest trading partner. What makes the Philippines so attractive for Japan?

The Philippines is taking advantage of its status within the ASEAN while Japan Inc. is currently looking for ways to penetrate this trade bloc, trying to find a bridge to tap into the market.

Thailand could be very attractive for them as it has a significant amount of FDI from Japan, especially in the automotive and industrial market. Other options would be Malaysia or Indonesia. Nevertheless, again, there are historical and intrinsic values to be considered such as what the Philippines is able to offer in terms of demographics, literacy, communication, retention, etc. Under these conditions there is especially one that is very important for Japan and that is, long-term relationships. Under JPEPA, the Philippines can establish this, making it attractive for Japan.

 

As a newly industrialized country, the Philippines is still an economy with a large agricultural sector, however, services have come to dominate the economy. Much of the industrial sector is based on processing and assembly operations in the manufacturing of electronics and other high-tech components. The Philippine semiconductors and electronics industry is the largest contributor to the country's manufacturing sector accounting for 41% of total exports and employing 2.2 million workers. How would you describe the manufacturing sector of the Philippines and how ready is it to play a part in the fourth industrial revolution? How important is the sector in order to develop the country towards a knowledge based and inclusive economy? What do you consider are the main opportunities for Japan Inc. within the sector?

We were one of the pioneers in contract manufacturing when it started in the early 80s. We were able to evolve with different technology trends and develop the economy. That is very similar to what has also happened in other countries such as South Korea, Taiwan or Singapore.

Although the country has been evolving significantly, the issue that we are facing now is that the Philippines has remained in that role of a simple “contract manufacturer.” It is true that we are still very active in contract manufacturing but it has become less about assembly work and more about engineering to a level where new processes that are developed here have been transferred to Japan.

Initially, processes were transferred here and we were taught how to follow them. After many years of scaling up our engineering, we are now able to produce and develop new product processes that can be exported to other countries. As an example, inside IMI we have lead process engineers that are developing the next generation processes that are now being exported to Europe, China and Mexico.

There is also a significant transition that is evident. Unfortunately, we have been in this business for such a long time that it is now a challenge to change people’s perception about the Philippines as being more than just a contract manufacturer. A market that has already recognized our potential are the companies in the U.S. that used to just do back-end assembly work here in the Philippines. They have now transitioned to front end R&D and design work for products that are released globally. I think Japan Inc. should take notice of this.

 

Many Japanese companies that compete with South Korea and China specifically on price offering, are starting to shift manufacturing plans outside of Japan but are keeping R&D in the country, meaning that they are moving their assembly plants to the ASEAN. What other synergies besides bringing the cost of the product down do you see for Japanese and the Philippines manufacturing industry?

The change in the way the products are being consumed will drive that discussion. The cost of bringing the assembly over to the Philippines based only on cost is not sustainable. There has to be another value added to it.

We realized that in general, there are few differences among popular products. If we take the iPhone as an example, Steve Jobs figured that out and as a result he created the iPhone. When you set a manufacturing process based on one product, one colour … one button and then you multiply that by millions, you can operate on a different manufacturing scale. Japan has been doing that so well using robotics automation.

Nevertheless, the consumer market does not want the same product for everybody. Even Apple had to adapt to that and started producing many different iPhones with different colours. This means that if your core competencies lie solely in pure automation, you cannot compete with someone who can shift on demand. This is what the Philippines thrives on. We are such an innovative and creative culture, that we can manage this transition of working on a hybrid situation with some level of automation and some level of highly-skilled work. The combination of both is what will make you succeed.

The manufacturing of the future is not going to be purely robotics. Of course it will be on some level, but “mass customization” is going to be the ruler at the end of the day. That can already be seen across all the different product ranges. There are so many varieties of iPhones, shoes, cars, coats, etc. They are all the same but they come in different colors, textures, shapes, etc.

To cater to these needs, you need to have a globalized supply chain and a diversified manufacturing skills in order to compete.

 

As one of the leading global providers of electronics manufacturing services Integrated Electronics proudly represents the Philippine electronics industry. With a presence in 10 countries the company is now the 6th largest global provider of electronic manufacturing services to the automotive industry. The recent acquisition of VIA Optronics will reinforce its position for 2017. Could you walk us through the key milestones which have made this success possible and what will come next for IMI in the international arena to consolidate your position?

When I joined the company in 2001, it was the largest Filipino manufacturer of Japanese products. It already had the quality manufacturing label that the Japanese would accept even though it was a Filipino-run company. Unfortunately, it only operated in the Philippines. For me to acquire new costumers and grow, the challenge was not just to convince them that the company was capable of producing their next generation products or enable the evolution of their manufacturing, but also to convince them to build those in the Philippines. From 2005 onwards, we began to deploy Filipino talent in other countries.

This seems to play in our favor even more now, as today you have to have a variety of some products that have been built in the actual country where it is going to be consumed.

IMI holds on to this particular business strategy, and that is the reason we are now capable of producing in all the major markets, taking advantage individual FTAs. Recently, we started building in Serbia, and the site is set to be operational by 2018. Why Serbia? Because Eastern Europeans are going to experience demographic growth and beyond that we feel that there will be a normalization of economic policies with Russia and the rest of the world. Therefore, there will be some economic growth that will need to be served. Serbia is one of the only countries that has FTAs that cover both sides Russia and Europe, so we are poised to produce there. Similar goes for our operations in Mexico and a small facility in California.

Jeffrey Immelt, the CEO of General Electric, captured it very well when he was asked about changes in policy. I believe in what he said when he explained that all these people who talk about how easy it is to change policies and put barriers have never actually operated down on the ground producing and consuming products. Once you realize what it is you need to build a car, a house, infrastructure and so on, you will find out that it is all connected. Many times we do not realize that at the end of the day it is the market that drives policies. The question is always: Is the consumer willing to pay for the costs that arise from these changes?

 

Additionally, to what you have already mentioned, having been working with Japanese for many years and knowing how they pay a lot of attention to the manufacturing process and how protective they often are of it, how did you manage to penetrate that market and what is it that you bring to your Japanese clients that they cannot find domestically.

I have to give credit to the ones before me. When I arrived, we were already predominantly doing business with Japan. I realize that the companies that work with IMI see that the company reflects the integrity, trustworthiness and longevity of the Ayala Group. The other thing that often is not highlighted enough is the community side of the business. It is utterly important to take care of your people and the nation and to make sure that you are protecting the environment by working in a sustainable way with the resources that you are consuming.

When we started, we did not have the skillset that we have now and I have to give credit to our Japanese partners who gave us the knowledge-based training that allowed us to get where we are today. The same thing happened to many other companies and yet they have not evolved. Therefore, credit goes to the management team of IMI and the support from Ayala Corporation to see beyond our capabilities of just producing parts profitably and adopting a long-term vision, to make a difference and grow as a part of the value chain. Besides providing employment we want to be a part of the products and innovation that can be seen in the world and become a global player.


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