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Resilient amid a global slowdown

Manufacturing, which accounts for about half of the country’s industrial sector, grew by 4.4 percent in the second quarter of the year. While this was a slowdown compared to the 5.7 percent posted in the same period last year, Trade Secretary Ramon Lopez said the sector remained resilient amid a global slowdown that was weighing heavily on the world economy.

External demand, he explained, has generally been dampened by weaker economic and manufacturing activities in many countries due to the escalation of global trade tensions, especially between the US and China. This has increased policy uncertainty and disrupted the global value chain.

For Rizal Commercial Banking Corp. (RCBC) Economics and Industry Research Division head Michael Ricafort, Brexit-related uncertainties, among others, have also led to slower global trade and a slowdown in Philippine exports and related/allied manufacturing activities.

On the domestic front, the El Niño phenomenon since the onset of the year has led to challenges for agriculture and domestic food manufacturing. “The proposed rationalization of fiscal incentives may have also caused some slowdown in the manufacturing sector,” Ricafort added.

The Comprehensive Income Tax and Incentive Rationalization Act bill, recently approved by the House of Representatives on third and final reading, seeks to lower corporate income tax to 20 percent from 30 percent. It also proposes to remove some of the incentives enjoyed by firms. Ricafort said the proposed rationalization of incentives needed to be addressed to provide certainty.

Despite these challenges, Lopez said the sector’s outlook remained positive — buoyed by a reduction in oil prices and the end of El Niño. The government initially aimed for 8-10 percent manufacturing growth until 2022 but Lopez said a 6-7 percent was “more doable.”

“For one, the reduction in global oil prices and the end of El Niño would improve the supply-side situation. The electricity rate cuts that transpired in recent months may help revive manufacturing output in the near term, especially if these persist in future months,” he said.

“The appreciation of the Philippine peso vis-a-vis the US dollar is bringing down import costs and will help reduce the cost burden of the local manufacturing sector. Moreover, global demand for and production of manufactured products may bounce back, which bodes well for domestic manufacturing firms’ export orders, for as long as global trade policy uncertainties begin to dissipate,” he added.

Lopez said optimism was also being drawn from a strong domestic market and a growing consumer base, with the middle class segment getting bigger. Taking advantage of new and emerging technologies could also spur growth and the Trade chief said manufacturing firms should innovate and undertake digital transformation to be ahead of the curve and competitive. To help firms adapt, Lopez said the government had asked Siemens Philippines to help provide digital solutions to domestic manufacturing firms.

“[The] DTI (Department of Trade and Industry) is committed to continuously increase the manufacturing industry’s contribution to GDP (gross domestic product). Just like in Singapore, we can consider technology providers like Siemens as a digital transformation partner that will inspire a digital revolution in the Philippines, one company at a time,” Lopez added.

Siemens established its first fully integrated Digitalization Hub in Singapore in 2017. Supported by the Singapore government, the hub supports the digitalization efforts of Southeast Asian companies involved in urban infrastructure, industry, energy and healthcare.

For the Philippine food and beverage industry, the company devised a “Digital Factory” that simulates machines and plants, which helps factory managers find ways to streamline their business. Lopez said the concept could be adapted in other industries. He added that instead of physical models and tests, companies could use artificial intelligence to create a “digital twin” of a product and conduct tests virtually, thus reducing costs and wastage.

The DTI and the Board of Investments (BoI), in collaboration with the Philippine Trade and Investment Center-Berlin and Siemens, are also exploring a collaboration to produce a Philippine Roadmap focused on smart manufacturing. “While the initial identified areas for participation in the roadmap included rail, intelligent transport systems, future grid and building technology, a composite team from BoI provided inputs that would possibly focus the roadmap in upscaling the Philippine manufacturing sector through promoting the benefits of Industry 4.0 among local industries,” Lopez said.

For RCBC’s Ricafort, the government’s massive infrastructure program could also boost the domestic factories.

“The manufacturing sector would also benefit from the government’s increased spending and further development of the country’s infrastructure, such as more road networks, bridges, seaports, airports, railways and mass transport systems … [that will] address the challenges on congestion and improve overall productivity … [and] make the country’s economic growth and development more sustainable over the long-term,” he said.

Ricafort also highlighted the importance of innovation that, “especially focused on higher-value chain activities which would require the greater use of technology and higher-skilled workers and professionals, would lead to much more greater gains in productivity for the manufacturing sector … [and provide] a source of competitive advantage … vis-a-vis other Asian countries that have lower cost of production … [plus] a special niche for the country in the global supply chain.”

“Furthermore, the use of innovation through further automation would lead to greater productivity gains for the manufacturing sector in terms of better quality, increased output, and more cost savings, and greater profitability, as well as greater occupational safety standards.”

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See more at: The Manila Times

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