(UPDATED) In the past few weeks a number of foreign firms – Nokia, Wells Fargo, and Honda – announced their decisions to pull out of the Philippines.
Nokia is closing its R&D facility at UP-Ayala Land Technohub due to “tough market conditions” which have forced them to consolidate in fewer locations worldwide. Between March and September this year they will be leaving some 700 workers jobless.
Wells Fargo, a financial services company, is also withdrawing its tech operations in the Philippines and relocating about 700 jobs to India. (Jobs in other operations like back office support will, however, remain.)
Why are all these firms leaving? Although global factors are at play, the Philippines’ business climate and government policies are also partly to blame.
The role of global factors is most evident in the case of Nokia and Wells Fargo. Our government could’ve done little to prevent their exodus.
For one, Nokia’s glory days are long gone, with its smartphone market share plummeting from around 50% in 2006 to almost zero in 2019. In the market for 5G networks, Nokia also faces tough competition from the other tech giants like Huawei and Ericsson.
All these have forced Nokia to embark on massive job cuts worldwide, even at its headquarters in Finland.
Wells Fargo’s exit is also understandable if you look at the global context.
With the rise of digital banking, lots of financial companies are increasingly consolidating their tech workforces in fewer countries to be more efficient.
But you should also note that Wells Fargo is reeling from a massive financial scandal: in 2016 they were discovered to have created – over the span of a decade – millions of fraudulent savings and checking accounts without their clients’ consent.
Just last Friday, February 21, Wells Fargo agreed to pay a $3-billion fine to settle its civil and criminal liabilities. This scandal conceivably figured in their Philippine pullout.
Taken together, the exits of Nokia and Wells Fargo will lead to 1,400 lost jobs, mostly in IT. The challenge now is for the Philippine government to attract new foreign investors that could absorb the displaced workers in this sector.
Sadly, the Philippines is losing its competitiveness in the global investment stage.
First, government is pushing for a new tax measure called Citira (Corporate Income Tax and Incentives Rationalization Act). Although Citira aims to gradually reduce the corporate income tax rate from 30% to 20%, it also aims to “rationalize” or make stricter the incentives received by foreign investors.
Until Citira is signed into law, investors are reportedly – and understandably – postponing their investments in the Philippines.
Second, Duterte’s foul attacks on big companies like ABS-CBN and Maynilad perversely signal that laws, regulations, and contracts in the Philippines are malleable, and that government can change the rules of the game on a whim.
This, to me, is the bigger deterrent to foreign investments – even more than Citira’s non-passage.
Economies of scale
Honda’s exodus is more interesting and concerning because it better reflects the unattractiveness of our country as an investment destination – along with our government’s policy shortcomings.
Put simply, they can’t sell enough cars to justify the continued operations of their Sta Rosa factory. Although it could ideally produce 15,000 cars in a year, that factory produces only about 8,000.
By underutilizing their factory, Honda could not achieve so-called “economies of scale” – they could lower costs per car by relocating to other countries (like Thailand or Indonesia) where facilities are more advanced and market demand more robust.
Rather than spend millions of dollars to upgrade the local factory, it would make sense to simply relocate.
Note that failure to achieve economies of scale has also hampered other car makers in the past. For pretty much the same reason, Ford decided to leave the Philippines in 2012.
Some people also lay the blame on the government’s flagship tax reform law called TRAIN (Tax Reform for Acceleration and Inclusion).
By slapping higher taxes on automobiles – ostensibly to help reduce congestion and pollution – TRAIN inevitably hit the car industry hard.
Last year total passenger car sales grew by a measly 0.2%. But some brands were hit harder than others: in the same period Honda’s sales fell by as much as 12.7%.
TRAIN also seems to be contradicting another government program called CARS (Comprehensive Automotive Resurgence Strategy).
Started in 2015 by the previous administration, CARS aimed to jumpstart the Philippine car manufacturing industry by providing billions of pesos worth of incentives to car manufacturers who can commit to produce a certain number of cars in a span of 6 years.
But only two car manufacturers, Toyota and Mitsubishi, were large enough to participate in this program and meet its production quotas. Honda’s production is too small by comparison; after all they could produce only two models: BR-V and City.
As a result of these government policies, it makes much more sense for smaller car companies like Honda to import cars than produce them on Philippine soil.
To prevent the exodus of other embattled car manufacturers, the government must align its policies better and create a friendlier business environment.
Following Honda’s announcement, the Department of Trade and Industry is mulling higher “safeguard duties” or taxes on imported cars.
But government better be careful: if this policy makes car parts much more expensive, too, it will only hurt car assemblers and possibly prompt them to close shop and leave the country as well.
The last thing we need right now are more backfiring policies.
Prepare for the worst
It’s bad enough that foreign direct investments are fleeing the Philippines, for one reason or another. (The graph below shows that such investments have been faltering since middle of 2018.)
On Wednesday, February 26, the Philippine Stock Exchange Index lost P401.5 billion in market value following heightened market jitters. (READ: Will novel coronavirus also infect the Philippine economy?)
Whether or not such a pandemic will come to pass, we must ask: How can government stem the further outflow of foreign investments? Can it look after Filipino workers hurt by the exit of foreign firms? How can we reduce the heightened uncertainty spooking potential investors?
Let’s just hope enough people at the top are minding these questions. – Rappler.com