Cashing in the chips
THE FUTURE IS STILL BRIGHT FOR THE ELECTRONICS INDUSTRY
IN THE PHILIPPINES

By David L. Llorito
Research Head

Arthur Tan, president and chief executive of Integrated Microelectronics Inc. (IMI), which belongs to the Ayala group of companies, sees a bright future for his industry. In the first half this year, IMI’s revenues rose 16 percent and he expects business to grow even more. For the full year, IMI’s Philippine operations will likely record an 18-percent increase in revenues from 2005, he boasted.
           
Established in 1980 during the Marcos era, IMI has grown into a global company in 26 years, manufacturing a wide range of products such as optical drives, liquid-crystal displays, hard-disk drive subassemblies and power electronics for printers for original equipment manufacturers (OEM) worldwide. These products are produced in its facilities in Laguna and Cavite in the Philippines, in Shenzhen, Jiaxing and Chongqing in China, in Singapore and in the US, where it has a low-volume prototyping facility in Tustin, California.
           
Tan said IMI’s products could be found in many electronic devices that have become part of people’s daily routine—from personal computers and mobile phones to DVD players, barcode readers and even electronic toothbrushes.
           
“IMI continues to expand facilities in the Philippines to accommodate the increase in volume orders from our customers. We also recently expanded our facilities in China,” said Tan.
           
“Our subsidiary Speedy-Tech Electronics just commenced operations of its fourth plant in Chongqing, China. We are studying expansion in other low-cost locations like other parts of China, Vietnam and Indonesia,” he added.
           
IMI’s experience reflects the continuing growth of the Philippine electronics industry, which was once dismissed by analysts as a potential loser because of China’s entry into the World Trade Organization. Because of China’s low labor costs, analysts argued that electronics companies operating in the Philippines would all close shop and flock to China.
           
But that doomsday scenario for the sector didn’t materialize.
           
“While it is true that the electronics industry in China has grown tremendously over the past five years, China is not the answer to all the electronics manufacturing needs of the original equipment manufacturers worldwide,” explained Tan. “The Philippines maintains competitive advantage in complex electronics assembly like the assembly of optical disk drives—including DVD, CD and combination CD/DVD drives—and hard-disk drives.”
           
Among the global industry leaders that maintain operations in the Philippines are US tech leaders International Business Machines Corp., Intel Corp., Gateway Inc., Hewlett-Packard Inc., Motion Computing, Dell Inc. and Averatec Inc., Japan’s Toshiba Corp., Matsushita Electric Industrial Co. Ltd. and Fujitsu Ltd., Taiwan’s Acer Inc., China’s Lenovo Group, and South Korea’s Samsung Electronics Co.

Various products

Industry statistics shows that each year, the Philippines’ electronics industry produces 72 million magnetic heads, 36 million digital signal displays used in cellular phones, 30 million hard-disk drives, 11 million liquid-crystal displays, and eight million optical disk drives for these OEMs.
           
“We are competitive in design and product development,” Tan said. “Intel and Texas Instruments tap Filipino engineers for IC [integrated circuits] packaging design. [Japanese semiconductor maker] Rohm [Corp.] uses Filipino engineers to design ICs. Lexmark employs Filipino printer software designers. IMI develops short-range wireless connectivity devices. Big multinational companies, including Philips, Toshiba, Panasonic and Fujitsu, continue to do business in the country.
           
“Whenever we ask them why they continue to do business here and why some of them even expand their operations, they all point to the quality of Filipino workers as their main reason for their continued presence in the country,” he said.
           
The electronics industry has transformed the Philippine economy in just a few decades, according to Ernie Santiago, executive director of the Semiconductor and Electronics Industries in the Philippines Inc. (Seipi).
           
Currently, the industry directly employs more than 400,000 workers and each year, it sends out $27 billion worth of exports, equivalent to 66 percent of the country’s merchandise exports. These are mostly components and devices, electronic data processing products, consumer electronics, automotive electronics, communications and radar, office equipment, telecommunications, control and instrumentation, and medical and industrial instrumentation products.
           
“In 1975 close to half of the country’s exports are agriculture-based; now 66 percent are electronics,” Santiago said. “We have come a long way from an economy of coconut chips to an economy of microchips.”
           
The Philippines electronics export value is equivalent to about 2 percent of global production, and about 5.5 percent of the total value of the Asia-Pacific region.
           
In terms of volume of production, the Philippines, industry leaders conceded, lags behind China, South Korea, Malaysia, Singapore, Taiwan and Thailand. Nevertheless, the Philippines seems to have carved significant niches in certain electronic products.
           
“We supply10 percent of the world’s semiconductor manufacturing business,” said Santiago. “We supply 50 percent of the world’s production of two-and-a-half-inch hard-disk drives, and 10 percent of the world’s production of three-and-a-half-inch hard-disk drives. And most leading [electronics] companies are here with us. Intel is here in the country producing Pentium microprocessors, Texas Instruments producing the DSP or the Digital Signal Processor. One hundred percent of the brain of cellular phones—of Nokia phones—is done here in the Philippines by Texas Instruments.”

Early believers

Having attracted the world’s biggest global electronics companies early in the game played to the overall strength of the Philippines’ electronics industry.
           
For instance, eight of the world’s 30 top chipmakers are in the Philippines—Texas Instruments, Intel, Philips, Fairchild, Analog Devices, Sanyo, On Semi and Rohm. Many of these big chipmakers followed Intel, which established its assembly and testing facility in Makati in 1974.
           
Four of the largest producers of hard-disk drives (HDDs) are in the Philippines: Hitachi, Toshiba, Fujitsu, and NEC.
           
In a study, Gwendolyn Tecson, economics professor at the University of the Philippines, said these HDD producers came in the mid-1990s in response to endaka or the sharp appreciation of the yen that rendered Japanese manufacturing firms uncompetitive, forcing them to scramble for low-cost locations in Southeast Asia.          
           
The entry of the four Japanese HDD majors was accompanied by the relocation of a number of Japanese suppliers between 1994 and 1996, the study said. Among them is Nidec Philippines Corp., which entered the Philippine market in 1995, although HDD-related spindle motors started production only in 1997. Also included on the list are Luzon Electronics Technology Inc., a 100-percent-owned subsidiary of Hitachi Metals Inc.; Tsukuba Philippine Die-casting Corp., San Technology, Mette, Sunpino and Precision Technology or Pretech, Tecson said.
           
She added that Singaporean-owned CAM Mechatronics also began producing HDD components in 1995. Laguna Electronics Inc., a company belonging to the Tsukiden Group and established in 1993, set up a second plant dedicated to assembly of IBM-licensed high-capacity HDDs, for NEC HK, with commercial operation starting late 1998.
           
“[The major HDD manufacturers] have cited three factors, namely, the strategic location of the country, the relative abundance of workers, particularly of engineers and technicians, and worker trainability especially in terms of their English language proficiency,” she said. “On the other hand, the supplier firms chose the Philippines to be near the majors.”
           
Major players in other segments followed. Cebu Mitsumi, for instance, now has 17,000 employees in Cebu City, the biggest single employer in the Philippines, producing computer peripherals like CD-R, CD-RW and optical pickup. Amkor Anam, which employs 8,000 workers, produces integrated circuits. Epson and Lexmark, producers of terminal printers and printheads, are also operating here.

Filipino-owned firms

According to Seipi’s Santiago, what is encouraging is that the presence of these major players also encouraged the growth of domestic and Filipino-owned companies such as PSI Technologies, Fastech, Team Electronics and IMI. These companies are producing a variety of electronic products, including time recorders, power supplies, automatic voltage regulators, alarm systems, GPS tracking devices and testers.
           
Currently, the entire electronics industry, Santiago said, has 883 firms, 28 percent of which are Filipino-owned. The Japanese continue to dominate with a 30-percent share, followed by South Korea (10 percent), United States (9 percent), Europe (7 percent), Taiwan (4 percent), Singapore (2 percent) and other nationalities (8 percent).
           
In 2005 the decision of Toshiba to transfer its laptop manufacturing facility in China caused great concern for the industry, fueling speculations that other big players might follow. But by early 2006, it was clear among industry players that such fears were unfounded.
           
“They moved their manufacturing plant to China to be closer to the market, not because of the Philippines,” said Santiago. “It’s a company consolidation strategy thing. They have to be closer to the market [China] for laptops. At the same time, they consolidated their disk drives manufacturing capability here in the Philippines.”
           
Terry Pacis, Intel Philippines’ manager for external relations, stressed that electronics is a capital-intensive business. Intel, for instance, has invested $1.5 billion in facilities for microprocessor and assembly test, flash assembly and test, chipsets assembly and test, flash silicon design and logistics warehouse.
           
Decisions by major players, she said, are influenced by numerous factors, such as availability of technical expertise and are not just centered on wages. The trend instead, she explained, is for major players to establish their presence in several locations to reduce risks. Besides the Philippines, Intel operates other test and assembly plants in China, Malaysia and India.
           
Santiago said that despite Toshiba’s pullout of its laptop computer production, investments in electronics continue to come in. He hopes the industry could get another $1 billion in investments this year and achieve a 10-percent growth rate in exports for 2006.
           
“We do not have good roads, we do not have a better peace-and-order situation,” he said. “Other countries have better governance. But the point is they are still here. Why? Because we have good people.”