Manufacturing is an important sector for the Philippines.

It generates high employment,

value-added, as well as innovation. It has the highest multiplier effect to the economy compared
to other sectors.

Manufacturing was recorded to grow by 3.7% in the fourth quarter of 2019. The growth was
mainly attributed to the expansion of Food Manufactures (8%), Chemical and Chemical Products
(14.5%).

Challenges

Opportunities and Threats Emerging Gaps and Challenges

T1. Occurrence of global
pandemic like Covid 19
T2. Economic Recession
O.1 Macroeconomic
Management
O.2 Economic Openness
2023-2025 2025-2028
Skilled labor shortage
Rapid Technological
Advancements and shifting
to use of automated
machines than human
workforce
Cybersecurity
Supply chain management

O.3 Accelerating the Equipment Costs and cost

transition to the digital of acquiring new customers
economy

First, manufacturing. The declining manufacturing share reflects the country’s trade
reforms, which lowered the incentives for the sector (and measured its value added
at closer to international prices). It also tells us something about the competitiveness
of tradable goods activities. A proxy indicator of international competitiveness in
manufactures is the country’s share of some key manufactures in global markets. To
illustrate, we choose electronics parts and components, final electronic products,

garments and footwear. These have been the backbone of the successful early-
stage East Asian export-oriented industrialization drives, on the basis of a

comparative advantage in the production of (unskilled and semi-skilled) labour-

intensive activities. Table 3 reports these shares for the Philippines and four ASEAN

comparators from 1990 to 2019.

18 Most countries have been losing their market

share owing to the rise of China. However, the Philippines had performed quite
strongly during the 1990s’ decade of policy reform, with its share rising in electronics
and garments. But in the twenty-first century, its shares have declined significantly,
except for final electronics goods. By contrast, latecomer Vietnam has been the
regional success story, with its shares rising dramatically in all three sectors.

8.1 Macroeconomic management

This has been a major policy success of the Philippines in the democratic era. A
professional and independent central bank, the BSP, was established in 1991,
enabling the country to navigate successive economic shocks, until the 2020
pandemic crisis. In contrast to the boom-and-bust growth patterns through to the
mid-1980s, the country has not had a single balance of payments crisis for almost 30
years, despite two major external crises (the AFC and GFC), a decade of volatile
global monetary conditions since the GFC, and periods of domestic political
turbulence. It is no exaggeration to state that this is arguably the country’s most
important policy reform during the democratic era. The work of the BSP has also
been supported by greater fiscal prudence for most of this period, and a better
supervised financial system.
This greater macroeconomic prudence resulted in the Philippines having substantial
economic buffers as the COVID-19 crisis hit.25 It had more fiscal and monetary policy
space than many developing economies, and it was able to embark on both a substantial fiscal
stimulus (at least by developing country standards) and lax
monetary policy settings without unduly alarming international financial markets. The
government’s two major fiscal packages in 2020 were the equivalent of almost 5 per
cent of GDP, while the BSP lowered interest rates progressively by two percentage
points, as well as eased bank reserve requirements and did other monetary
loosening measures (IMF 2021). The BSP also effectively navigated through the
period of financial market volatility in March 2020. It followed international practice by
resorting to unconventional monetary policy measures that involved the purchase of
government securities on the secondary market.

8.2 Economic openness

More open economic policies have been gradually introduced since the late 1980s,
overturning the earlier and prolonged period of comprehensive import substitution.
The merchandise trade regime, in particular, has become more open, driven by the
intensive and prolonged analytical work undertaken by many of the country’s leading
economists, which gradually penetrated the policy and business worlds and found
political champions.

26 Even reform in the highly politicized rice sector is finally

underway as the process of tariffication of trade barriers proceeds (Tolentino 2021).
Reform at the borders has been accompanied by reform behind borders. Major
microeconomic reforms that dismantled long-established monopolies were
introduced during the Ramos presidency, and these have been maintained.
Fortunately, the traditionally closed telecommunications sector was liberalized just in
time for the country to exploit opportunities in internationally traded services in that
sector. Without them, the BPO success story would not have been possible.

8.4 Accelerating the transition to the digital economy

The COVID-19 pandemic has highlighted the crucial importance of the digital
economy; it also greatly accelerated its use. Internet usage has a dominant presence
in the Philippines, from the BPO sector to various forms of social media that bring
together the vast international Filipino diaspora. The country is reportedly one of the
world’s highest users of Facebook on a per capita basis. During the crisis, the
internet became indispensable everywhere for remotely running offices and
households and enabling communities to stay in touch with each other while in
lockdown. People have been able to work, school and shop from home. While the
face-to-face contact will resume after the pandemic, many of these trends are now
entrenched and will define much of the future economic and societal intercourse.
The challenge for the Philippines is to ensure that the benefits of the digital economy
are available to everybody, regardless of socio-economic status, occupation and
geographical location. Currently they are not. The pandemic has exposed and
highlighted the country’s large digital divide. Manila’s middle-class households may
have been able to work from home, have their children educated via the internet,
avail of tele-health, and have food delivered to their doorstep, but poor households in
Western Mindanao—and many other regions—have not been as fortunate. The
adults have been forced to work outside the house, exposing them to heightened
health risks, and the children have missed out on schooling, both because of weak
or non-existent home internet (and electricity, in many cases) and because the public
school they attend does not have the resources to quickly adapt to digital learning. In

other words, the digital divide has exacerbated the country’s pre-existing socio-
economic and spatial inequalities. The Philippine digital economy is unrecognizable from
that of 30 years ago when
Singapore Prime Minister Lee acerbically quipped that “98% of Filipinos are waiting
for a telephone, and the other 2% are waiting for a dial tone.” As noted, the country
has been able to support one of the developing world’s most vibrant and innovative
BPO sectors. But it is underperforming on both efficiency and equity grounds. Table
7 provides some comparisons with other middle-income ASEAN countries. The
Philippines has the lowest internet penetration, well below all but Indonesia. Its fixed
broadband network has limited coverage, is costly and slow compared with all of its
neighbours, except Indonesia. Its mobile network performs better, but still lags
behind ASEAN middle-income best practice. Moreover, these figures do not draw
out the inequality of internet provision, both between households and within the
business sector and between the major corporates and small and medium-sized
enterprises. For instance, the 2019 survey of the Philippine Statistics Authority found
that internet access is 20 percentage points higher in urban than in rural areas. The
difference is even larger—roughly 40 percentage points—between the National
Capital Region (NCR) and the country’s poorest region, the Bangsamoro
Autonomous Region.

The demand for manufacturing products has shown a slight increase during the second half of
2021 in the Philippines, with new orders stabilizing following the continuous decline since the
start of the COVID-19 pandemic. However, the country's supply chain has yet to recover at the
same pace as the manufacturing demand, resulting in material shortages that hinder the recent
productions. The Philippines' manufacturing production has currently stood in a declining
position since May 2021, causing industry players to become hesitant in the sector's outlook.

Manufacturing Challenges in Philippines

As a result of the material shortages, the Philippines' input costs are experiencing the fastest rise
since 2018. Firms are now required to set higher prices for clients, eventually driving demands
downwards. However, as countries reopen their economies and allow for import and export
transactions, new order inflows are starting to stabilize at a modest pace. Today, larger
manufacturing firms are approaching an inventory-heavy purchase to secure raw materials at a
stable price to raise their pre-production holdings and scale back on their topline numbers.

Since August, the orders reduction rate has fallen to a more modest pace due to the rise in
export sales compared to the previous period. In addition, businesses in the Philippines have
been able to hold employments and maintain production despite the freight delays and container
shortages happening in the global supply chain. Firms are now anticipating longer lead times and
purchasing stocks to secure supply as demands recover.

Manufacturing Growth in Philippines

The Philippines' manufacturing industry's growth will rely on the macroeconomic recovery, led by
the government to release policy reforms and expansionary fiscal programs to provide
employment, upskill workers, expand social protection, and implement an active labor market. As
the economy slowly regains footing and the citizens gradually get vaccinated, its manufacturing
outlook optimizes. Firms will soon obtain their pre-pandemic level capacity, requiring them to
rehire employees to cater to growing orders and provide a more stable financial security for the
Philippines after the pandemic.

Even though risks and opportunities linger in the Philippines manufacturing sector,
manufacturing players are now emphasizing innovation and digitalization to enhance resiliency.
Technologies can improve supply chain visibility and reliability within the process, considering
the supply chain still stands as a significant pain point for the industry. However, while
digitalization and innovation are important, the Philippines still need to build a strong foundation
on investment regulatory framework to proceed with nationwide digitalization and improve the
investment climate.
An example of how digitalization can revolutionize the Philippines' manufacturing industry is the
Smart Industry Readiness Index (SIRI) program. The SIRI program can act as an effective tool in
catalyzing the digitalization of manufacturing companies by providing objective and
comprehensive evaluation on production facilities, eventually helping companies prioritize which
element to transform digitally. The SIRI program emphasizes the lengthy digital transformation
process that manufacturing companies have to go through. Therefore, a prioritization matrix
from a globally accepted standard can become the benchmark on a step-by-step approach for
companies seeking to shift their operations digitally gradually.

Experts see that the manufacturing industry will face the following key issues:

2. Changing and navigating new business models

Embracing new business models may be necessary to adapt to the new normal. For
example, you can transition from being purely product-centric to service-centric using
an “Anything-as-a-Service” (XaaS) model. You may change your selling models from
indirect to direct using digital platforms — or a mix of these models, which nearly
60% of manufacturers have adopted.

But implementing a new business model requires a deep understanding of how to

navigate it; otherwise, you will not reap its full benefits. One of the crucial steps is
harmonizing siloed factory functions and systems to embrace a new model without
friction, and address issues including:

 How to empower field sellers to articulate the full value of servitized

equipment
 How to ensure that your direct and indirect channels are well-aligned
strategically
 Find a way to orchestrate sales, marketing, and service units for deeper
customer visibility
 Address the complexities of simplifying experiences and processes

2. Operational changes to meet drastic changes in demand

Drastic changes in demand may require drastic changes in manufacturing plant’ s

operations.

Take pharmaceutical companies, for example. Some had develop products that can
help alleviate the impact of the pandemic, resulting in major changes in production
and supply chain operations. Moderna, for one, built new facilities and outsourced
the production of its COVID-19 vaccine. The upshot? Greater complexities.

Compliance complexity is just one of the many pain points of changing gears and
stretching the production and supply chain. You need to ensure that contract
manufacturers also comply with all regulatory requirements. Data management
issues will become more complex as you add more tiers to your value chain.

3. Fiercer competition

The supply war will be fiercer in the next normal due to scarce raw materials and
digital talents.

 Recruitment issues
Barbara Morgan, Lubrizol Life Science Health General Manager and CDMO,
told Pharma Manufacturing that talent wars are going on as a result of the
“push for additional capacity.” A NAM survey revealed that almost 50% of
member manufacturers are having trouble hiring the right talent.
  Sourcing and Procurement issues
The sudden surge of demand for medical and essential goods during the
pandemic resulted in stockouts and increased competition for raw materials.
In the cell and gene therapy landscape, for example, demand for raw
materials increases as development and trials approach late stages. But
Bryan Gillis, Rubius Therapeutics Vice President of Manufacturing and Head
of the Smithfield, RI site, said several new suppliers will emerge to compete.

4. Greater compliance complexities

Aside from regulatory requirements, the approaches that regulators use constantly
change as well.

According to Chris Harvey, Vice President of Crisis Solutions at Stericycle Expert

Solutions, regulators will adapt to the new-normal by using current and new remote
approaches — “from records-review to product-sampling and quality testing.” This
can have significant implications for your data management. You should proactively
align your data management strategy with the new approaches regulators will use.

5. New-normal work setup

When the pandemic ends, the production floor and backend units may not operate in
the same way they used to. Production may become fully automated or a mix of bot
and body to meet new-normal health protocols such as social distancing. Backend
units may be remotely managed by people working from the safety of their homes.

This new-normal arrangement requires a seamless information flow across the entire
value chain. Machine-to-machine, machine-to-human, and human-to-human
communications must be frictionless to ensure higher productivity, uptime, seamless
collaboration, and faster decision and execution. But according to McKinsey, most
companies still employ manual data collection. McKinsey suggests using digital
solutions that allow for automated data collection, which can help remote workers get
insights and manage factory performance in real-time.

Overcome these issues using Mareana’s Manufacturing Data Hub (MDH)

This is the “constant normal”: Data will remain king. Dealing with new-normal issues
is easy if you have the right data infrastructure in place. Mareana’s Manufacturing
Data Hub can help you enable a truly data-driven factory that is not only smart but
also adaptive to changes. It enables your factory to automatically reboot, repurpose,
and reinvent operations based on immediate and actual needs. It helps build an
adaptive factory that is pandemic-proof and new-normal-ready.

Contact a data expert to learn how Mareana’s Manufacturing Data Hub can help you
prime your smart factory for the new normal.