With more than half of Japanese companies in the Philippines not making any new investments this year and next, the new coronavirus disease 2019 (COVID-19) is prompting firms to diversify their supply chain at a time when the country’s cost competitiveness as a manufacturing site is waning.
The 2020 Japan External Trade Organization (JETRO) Survey on Business Conditions of Japanese Companies in Asia and Oceania report on the Philippines showed only a third of respondents are planning to expand their business, while 57 percent expect “the status quo” and only 8 percent consider downsizing.
The proportion of compan1ies expanding is also much lower than in 2019 of 52 percent.
The survey done between August and September 2020 covered 133 Japanese companies of which 59 are manufacturers and 74 are non-manufacturers.
The ratio of respondents that consider decreasing their employees doubled in 2020 to 17 percent from 8 percent in the 2019 survey.
The report showed majority chose the status quo. In 2021, one third of respondents will increase local staffs.
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.
Some 80 percent of respondents think their market size after COVID-19 would be same or slightly smaller than that before COVID-19.
The report also showed two-thirds of respondents believe that economic recovery will be realized in 2021.
The survey also showed 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.
According to JETRO, Japanese companies are building more resilient supply chain against disaster like COVID-19 JETRO said it is now conducting a program to strengthen overseas supply chains of Japanese companies, under the supervision of the Ministry of Economy, Trade and Industry, Japan.
“As COVID-19 caused functional failures of global supply chains due to the overconcentration of production bases, we are helping Japanese manufactures to diversify their manufacturing functions in various countries to avoid the risk,” JETRO said.
The report said although Japanese manufacturers are trying to raise local procurement, 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,” JETRO said.
The report identified the concerns raised by Japanese companies.These include: decrease of order from clients; static development of new customers; burdensome tax procedures;
volatile exchange rate of the peso against the US dollar;
rising wage;insufficient skills and ability of local staffs;
time consuming custom clearances and; rules related to custom clearance are not informed to officials concerned.
The respondents also said digitalization in the Philippines has not made significant progress due to lack of skilled human resources; insufficient telecommunication infrastructure; high cost for digital transformation, etc.
JETRO said Japanese firms find compensation of Filipino labor reasonable and tax incentives favorable – both superior when compared to those offered in other countries.
However, the respondents said the Philippines as an investment destination has its negative points:
unstable politic and society; problems caused by insufficient infrastructure (expensive electric power; frequent blackout; chronic traffic congestions; unstable and slow
telecommunications; poor port facilities); difficulties on 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.