Japanese businesses in the Philippines expect 2021 will be better than 2020 where 35 percent of their business expect negative operating profit, but have been bothered by poor local supply base for many parts and raw materials resulting in weakened cost competitiveness and unstable politics.
This was revealed in the “2020 JETRO Survey on Business Conditions of Japanese Companies in Asia and Oceania” report where 133 Japanese firms in the Philippines participated, including 59 manufacturers and 74 non-manufacturers. The survey, conducted in August-September 2020, seeks to promote understanding on the current situation of Japanese firms in the Philippines.
As for operating profit in 2020, 43 percent of respondents expect “surplus,” while 22 percent expect “even” and 35 percent expect “deficit.” Some 60 percent of respondents think that their operating profit in 2020 will be worse than 2019, but 2021 will be better than 2020.
One third of respondents are planning to expand their business, while 57 percent expect status quo and only 8 percent consider downsizing.
The ratio of respondents that consider decreasing their employee doubled in 2020, but majority chose “the status quo.” In 2021, one third of respondents will increase local staff.
Due to the COVID-19 pandemic, two third of respondents believe that economic recovery will be realized in 2021. Some 80% of respondents think their market size after COVID-19 would be same or slightly smaller than that before COVID-19. Almost half of respondents revised their business strategies/models amid the pandemic, such as the promotion of work-from-home or telework. Some Japanese manufacturers diversify their production base in many countries so that they can strengthen their global supply chain.
The report also said that 29 percent of surveyed firms expect to recover in the first half of 2021 and 39 percent in the second half while 15 percent said they expect to recover in 2022 yet.
Notably, the report said that Japanese manufacturers are trying to raise local procurement but they still need to import many parts and raw materials from abroad. “Accumulation level of suppliers in the Philippines is much lower than that in neighboring countries. Production cost of Vietnam gets lower than that of the Philippines. The international cost competitiveness of the Philippines gets weaker than last year, while many respondents can no longer find any room for cost cut,” the report said.
Many respondents are also bothered by insufficient skills and ability of local staff, burdensome tax procedures, volatile peso rate against the US dollar, decreased orders, static development of new customers, and rising wage.
Japanese businesses also observed that digitalization in the country has not made significant progress due to lack of skilled human resources, insufficient telecom infrastructure, and high cost for digital transformation. The Philippines though has the most cost competitive country in terms of salary rate for engineers in the manufacturing sector but Vietnam offers most competitive rate for workers, managers and managers in the manufacturing sector. Indonesia is most competitive in salary rate for staff and managers for non-low manufacturing.
As an investment destination, many Japanese firms pointed out the following challenges of the Philippines: unstable politics and society; insufficient infra with expensive power cost, unstable and slow internet and poor port facilities; difficulties in local procurement of parts and raw materials; low accumulation level of business customers; concerns about safety and security; inconsistent implementation of administrative rules by each official; complicated procedures for obtaining permits and tax practices; and natural disasters.