Feb 262013

Late last week, a buzz was created in the Japanese business community by Sumitomo Corporation on the growing attractiveness of the Philippines to Japanese investors. Sumitomo issued a press release that declared “among Asian nations where many Japanese manufactures have invested, the Philippines has been gaining power as an exporting nation…”

Sumitomo cited our “attractive tax incentives as well as rich human resources equipped with English language skill.”  Sumitomo went on to say that “in line with this trend, since 2011, the foreign direct investment from Japanese manufacturers to the Philippines has been increasing.”

Thus, Sumitomo announced it has decided to launch an expansion project of an industrial park south of Manila it co-owns with the Lopez Group’s First Philippine Holdings. Sumitomo says it “believes the Philippines will further increase its position as a strategic location for export-oriented industries compared to other Asian nations…”

The Sumitomo press release received wide attention in the Japanese and international press. The Asahi Shimbun reported that Sumitomo “has begun expansion work at the First Philippine Industrial Park in Manila, to add approximately 100 hectares of property for leasing and allow for additional factories to be constructed upon completion.”

The Financial Times, on the other hand, observed that Sumitomo’s move means “a fair amount of this newer investment by Japan Inc is happening at the expense of China, as companies balk at spiraling labor costs after the flare up over a tiny chains of islands in the East China Sea.”  

The FT also noted “Japan’s total FDI stock in the Philippines stood at just over $10 billion at the end of 2011, according to government data, more than five times the level of a decade earlier – a rate of growth exceeded only by investment in India (13x), China (8x) and Thailand (6x) over that period, within Asia.”

Business ( Article MRec ), pagematch: 1, sectionmatch: 1

The fresh interest of Japanese investors in the Philippines is also because of efforts of Manuel M. Lopez, Philippine Ambassador to Japan, to highlight positive developments in the country since the new administration took over. Since he arrived in Tokyo, Mr. Lopez has been constantly meeting with key Japanese industrialists, using his extensive relationships developed from his previous position as Meralco CEO.

Ambassador Lopez e-mailed me from Tokyo his reaction to the Sumitomo story: “Just the fact that the following Japanese companies are going to commence operations this year and at the same time employ thousands of Filipinos is a testimony of what we have been working on… companies such as Murata – chips maker for semiconductor industry… Brother and Canon, both in the printer sector, Bandai – big toy maker, Fuji Optical – makers of optical lenses, Furukawa – maker of wiring harness for automobiles. These are some of the big ones. Uniqlo – the biggest retailer in Japan opened last year in MOA, and is planning 10 new stores in the coming year. There are many smaller ones, and others are about to sign up. Mitsubishi Motors is one. They presented to the President their plans for expansion in the country last week.”

First Philippine Industrial Park (FPIP) which is owned 70 per cent by the Lopez Group and 30 per cent by Sumitomo was established in 1996 in Santo Tomas and Tanauan City in Batangas. It has a total developed land area of about 350 hectares with exports in 2011 of about $1.41 billion.

FPIP has until recently been managed almost from the start by Hector Dimacali. Hector, who is more popularly known as the husband of the owner of the Mary Grace pastry shop chain, nurtured the park’s development through the tough Asian economic crisis and the years during the Arroyo regime when the country’s reputation among foreign investors was at its lowest.

Before he retired last month, Hector presided over the inauguration of the facilities of big locators including Honda, Nestle, Canon, Brother among others. He also successfully negotiated for the expansion of the industrial park by acquiring an adjoining property owned by San Miguel.

Dimacali established a water treatment and distribution facility within the industrial park as well as ready built factories for those who want to establish operations quickly. Under his leadership, FPIP became a model industrial park among those operating under the auspices of PEZA.

The role of Sumitomo was essentially on the marketing side and the Lopez Group was responsible for operations. Sumitomo was supposed to use its global business networks and accumulated experiences of more than two decades in the industrial park business to win locators in FPIP. But even Sumitomo’s clout couldn’t overcome the country’s sad reputation during the Arroyo years.

FPIP currently has 67 locators, including 37 Japanese firms and approximately 30,000 employees on site. In launching this expansion project, Sumitomo said it believes the Philippines will further increase its position as a strategic location for export-oriented industries compared to other Asian nations.

The FT notes that Sumitomo’s bullishness means “Japanese companies will continue to steer funds into faster growing, more dynamic economies – even as the recent depreciation of the yen makes investment back home that little bit more attractive.”  

Yasushi Fukuda, general manager of Sumitomo’s overseas industrial park division noted that wage hikes and worker shortages are driving Japanese companies to consider diversification of production facilities, the FT reports. “And where better than the Philippines, where about 97 percent of Japanese companies with overseas operations are yet to venture?”

The FT also reported that “It is not just the Hondas and Canons that Sumitomo is looking to lure. It is considering offering factory facilities for lease, with logistics and procurement support, as a way to encourage small and mid sized Japanese businesses to set up shop.”

It looks like we are not going to miss this wave of Japanese industrial investors as we did in the past. The flood threat in Thailand is also at the back of investors’ minds now and that explains why they are looking for back-up locations.

Cost of labor is also a big factor, according to the FT. “China is getting expensive already. Monthly base salaries for manufacturing workers in China grew by roughly 40 percent over five years to $328 as of October 2012, according to the Japan External Trade Organization.

“By contrast workers get $253 in the Philippines, $145 in Vietnam and $53 in Myanmar. This year Japanese companies expect to pay Chinese factory workers 10 percent more than in 2012, says Jetro, double the equivalent rate of increase in the Philippines.”

If we handle this opportunity well by further improving the business climate as suggested by Arangkada and other initiatives of business chambers, the country’s job creation potential will be drastically enhanced.

But that requires our politicians and regulators to think like investors too. Silly bills like that one that wants to mandate profit sharing can only turn off potential investors at a time when we need them most. After all, we already have tough labor laws and mandates like 13th month pay, PAG-IBIG Fund contribution, SSS that escalate employee cost beyond basic pay.

Investors can be encouraged by reducing red tape, cost of power and fixing the restrictive economic provisions in our Constitution and modernizing our airports and other basic infrastructure. As was pointed out, 97 percent of Japanese industries with foreign operations have yet to think of investing here. Happy as we should be to get those who invested in FPIP, there are more out there if we play our cards right.

Poor Japan

Someone sent me this one but it is not clear how old this anecdote is. Regardless, the lesson is clear and timeless even for us… given our surplus of lawyers too.

Three monkey wrenches have been thrown into Japan’s well-oiled economic machine. It’s only a mater of time before that powerful engine of productivity begins to sputter and fail.

What could cause such a sharp turnaround? High interest rates? Increased unemployment? Lower productivity? No, it’s something much more economically debilitating – and permanent.

Three American lawyers have become the first foreign attorneys permitted to practice law in Japan. What’s more, two of them are from New York!

The decline has begun.

Japan has one attorney for every 10,000 residents, compared to the US ratio of one attorney for every 390 residents. For every 100 attorneys trained in Japan, there are 1,000 engineers. In the United States, that ratio is reversed.

But a law that became effective permits foreigners to practice in Japan for the first time since 1955. Already, an additional 20 American and six British lawyers have applied for permission to open practices in Japan.

If anything can slow the Japanese economy, it’s the presence of American attorneys. What better way to even our balance of trade than to send Japan our costliest surplus commodity?

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco

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