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P H I L I P P I N E S

I N D U S T R Y D E V E L O P M E N T

F O R I N C L U S I V E G R O W T H

I N D U S T R Y D E V E L O P M E N T

F O R I N C L U S I V E G R O W T H

BOARD OF INVESTMENTSBOARD OF INVESTMENTS

2 0 1 4 I N V E S T M E N T P R I O R I T I E S P L A N2 0 1 4 I N V E S T M E N T P R I O R I T I E S P L A N

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M I S S I O N

We, the BOI family, are committed to generate local and foreigninvesments and develop globally competitive industries, thus, increasingemployment through the responsible use of the countrys resources,guided by the principles of private initiative and government cooperation.In pursuit of these commitments, we bind ourselves to render competentand efficient service with utmost integrity and professionalism. Ours is a

challenging task, yet with discipline and the guidance of an enlightenedand strong leadership, we shall move forward.

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2014 INVESTMENT PRIORITIES PLAN2014 INVESTMENT PRIORITIES PLAN

C O N T E N T S

Memorandum Order No. 74 dated 28 October 2014 3

Message of the President of the Philippines 4Foreword: Message of DTI Secretary Gregory L. Domingo 5

Executive Summary of the 2014 Investment Priorities Plan 7

The 2014 Investment Priorities Plan 11

I. Introduction 12The New IPP

II. A New Industrial Policy 14Reviving and Transforming Philippine ManufacturingA. The Manufacturing Resurgence ProgramAction Agenda

III. The 2014 IPP: A New Approach 19A. Evidence based and InclusiveB. Objectives and StrategiesC. The Evaluation Process

IV. Preferred Activities of Investments 24

Appendices 3

1 Sectoral Analysis 322 ADBs Top 20 Nearby Products Based onSophistication Level and Labor Intensity 80

3 Output Multipliers, Income Multipliers, EmploymentMultipliers, and Production Linkages 82

4 References 85

Memorandum Circular no. 2015- 01General Policies and Specific Guidelines to Implementthe Investment Priorities Plan (IPP) 2014 - 2016 87

A. Prefatory Statement 88B. General Policies 89C. Definition of Terms 96

D. Specific Guidelines 102ANNEX A - List of Less Developed Areas (LDAs) 118ANNEX B - Indigenous Raw Material 12ANNEX C-1 - Preferred Locations for General Hospitals

(levels 1, 2 and 3) 123ANNEX C-2 - Preferred Locations for General Hospitals

Level 3 126ANNEX D - Incentives for BOI-Registered Enterprises 127

S E R V I C E STo meet investors diverse requirements, BOI offers specialized services that include:

Supplying knowledge-based market information

Analyzing your business feasibility

Linking you to the services chain

Matching you with foreign and local businesses

Nurturing your expansion and diversication

Proling industries

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BOARD OF INVESTMENTS2

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2014 INVESTMENT PRIORITIES PLAN

Pursuant to Article 29 of the Omnibus Investment Code of 1987, as amended, the attached 2014 InvestmentPriorities Plan (IPP) is hereby APPROVED.

Further to the provision of said Article, upon effectivity of the IPP, all government agencies and entitiesare enjoined to issue the necessary regulations to ensure the implementation of this IPP in a synchronized and

integrated manner. No government body shall adopt any policy or take any course of action contrary to, orinconsistent with, this plan.

The Chairman of the Board of Investments shall render an annual report to the President on theaccomplishments and implementation of this plan.

This Order shall take effect fifteen (15) days after its publication in a newspaper of general circulation asrequired under Article 31 of the Omnibus Investment Code of 1987.

DONE, in the City of Manila, this 28th day of October, in the year of our Lord, Two Thousand and Fourteen

By the President:

PAQUITO N. OCHOA, JR.

Executive Secretary

MALACAAN PALACEManila

BY THE PRESIDENT OF THE PHILIPPINES

M E M O R A N D U M O R D E R N O . 7 4

A P P R O V I N G T H E 2 0 1 4 I N V E S T M E N T P R I O R I T I E S P L A N

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The past four years have seen the Filipino people come closer to thefulfilment of our great potential. After decades of being regarded as the SickMan of Asia, our country, by following the straight and righteous path, hastransformed itself into one of the fastest growing economies in the world,expanding at an average rate of 6.3 percent annually from the period of2010-2013. Achieving this dramatic turnaround, while overcoming a long listof challenges and enduring a series of disasters and calamities, lends credenceto the resiliency and strength of our people.

This performance has prompted the three major credit ratings agencies, Fitch,Moodys, and Standard & Poors, to grant the Philippines investment gradestatus, a category that proves our capacity to meet our financial obligations,and would allow us the wherewithal to further pursue our initiatives towardsinclusive growth. This year, Standard & Poors even gave us another ratingsupgrade, from BBB- to BBB with a stable outlook, believing that, in theirown words, ongoing reforms to address shortcomings in structural,administrative, institutional, and governance areas will endure beyond thecurrent administration.

In the latest round of international surveys, the World Banks Doing BusinessSurvey reports that the Philippines jumped 30 places to 108th out of 189

economies. The World Economic Forum has also improved its outlook on the Philippines. Since 2010, we have moved up 26 notchesin the global competitiveness rankings, from 85th to 59th, which puts us squarely on the top third of economies around the globe. Thecountry has also improved considerably in the Heritage Foundations Index of Economic Freedom, jumping 20 places since 2010.

All these manifest the basic truth that now is the best time to invest in the Philippines. I invite everyone to join the many companieswho are now enjoying the dividends of their confidence in the country. My administration is bent on making the Philippines even more

attractive to investors, which is why we remain committed to fast-tracking reforms, initiatives, and legislation that will facilitate the entryof new capital, improve business procedures, and enhance investor confidence in the country.

Beyond a mere guide for prospective investors, this Investment Priorities Plan (IPP) is an expression of our vision to create a moredynamic and progressive Philippines. Centered on the theme Industry Development for Inclusive Growth, this IPP aims to raiseinvestments in infrastructure, agriculture, education, and health. It likewise aims to create jobs higher up the value chain, enhance thecompetitiveness of local industries, and expand our industries capacity to generate opportunities. It also identies supply gaps in oureconomy and the geographical needs of the country to serve as the basis in granting incentives or other forms of support, so we may bringabout growth that is equitable, comprehensive, and inclusive.

This plan is crucial in sustaining the pace of our growth in the coming years, especially as we prepare our industries and our people for ourcountrys impending integration into the ASEAN Economic Community by the year 2015. Through this IPP, we will usher in a policy ofparticipatory development towards the attainment of our shared goals and the collective aspirations of the Filipino people.

The impressive results that we see today are the results of our push towards good governance. Imagine the heights that we can rise to if,together, we can give the Filipino people the means to maximize their abilities and demonstrate their limitless potential. Join us in reapingthe fruits of our resurgence in the coming years, as we continue our journey on the straight and righteous path towards the fulfilment ofour dreams and the realization of a truly just and prosperous society.

M E S S A G E O F T H E P R E S I D E N T O F T H E P H I L I P P I N E S

MALACAAN PALACEManila

BENIGNO S. AQUINO III

MANILA

October 2014

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F O R E W O R D

With its strategic shift of strategy towards industry development which it started in January 2012, the DTI-BOI has now taken aproactive role in steering the countrys industrialization, and thus a revisit of the annually published Investment Priorities Plan (IPP)became necessary.

This IPP effected major changes from previous IPPs as it takes off from Chapter 3 (Competitive and Innovative Industry and ServicesSectors) of the updated Philippine Development Plan (PDP) 2011-2016, wherein six (6) broad sectors, i.e., agro-industry, manufacturingIT-BPM, tourism, logistics and construction are prioritized. This will be a 3-year document that considers the end-of-plan targets of thePDP subject to an annual review.

With the updated PDP as its foundation, the IPP espousing the new industrial policy now serves both as a developmental tool forinvestment decisions of the private sector and a promotional tool for government to encourage first movers in new investment areas andto provide appropriate responses to the most binding constraints that prevent the entry of investments or industries from moving up thevalue chain. The new industrial policy aims to transform and upgrade the manufacturing industry with the long-term vision to develop

globally competitive industries supported by strong forward and backward linkages.

In developing the 2014 List, a decision framework for the prioritization of economic activities was adopted. The framework focused on thepotentials of the sectors to generate employment, move up the value chain, create spillovers and promote competitiveness in the marketas well as closing the supply or value chain gaps as indicated in the sectoral roadmaps and available studies. The most binding constraintsto the growth of the industries were identified and appropriate policy responses were recommended.

The IPP supports the thrust of the current Administration, thus, the theme Industry Development for Inclusive Growth, to emphasizethat the Philippines is focusing on industry resurgence to promote sustainable and comprehensive growth.

In this connection, the 2014 IPP contains the following priority investment areas:

1. Preferred Activities that include 4 broad sectors (manufacturing, agribusiness and fishery, services, and infrastructure and

logistics) and 4 specific activities (energy, housing, hospitals and PPP projects);

2. Export Activities that cover the production and manufacturing of export products, services exports and activities in support oexporters;

3. Activities with Special Laws that provide for either the mandatory inclusion of the activity in the IPP and/or the grant oincentives under E.O. 226; and

4. ARMM List, which encompasses priority investment areas that have been determined by the Regional Board of Investmentsof the Autonomous Region in Muslim Mindanao (RBOI-ARMM) in accordance with E.O. 458.

This IPP was formulated through a participative, analytical and multi-sectoral process. Four regional consultations were held in MetroManila, Cebu, Davao and Baguio City, along with four sectoral (manufacturing, services, infrastructure and power, and agricultureand fishery) consultations. There were also two inter-agency consultative meetings conducted, peer review sessions with the countrysleading economists, and on-line consultation to encourage the widest participation possible nationwide.

GREGORY L. DOMINGO Chairman, Board of Investments Secretary, Department of Trade and Industry

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BOARD OF INVESTMENTS6 BOARD OF INVESTMENTS6

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EXECUTIVE SUMMARY2014 INVESTMENT PRIORITIES PLAN

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The 2014 Investment Priorities Plan (IPP) wasformulated based on the updated PhilippineDevelopment Plan (PDP) 2011-2016 and the newPhilippine industrial policy. Its main objectives andstrategies are consistent and aligned with the PDPsprimary goal of inclusive growth and its strategiesfocusing on promoting investments in physicalinfrastructure, transparent and responsive government,and human development.

The 2014 IPP takes off from Chapter 3 of the PDP,which envisions globally competitive and innovativeindustry and services sectors that contributesignificantly to inclusive growth and employmentgeneration. The emphasis is on improved business

environment, increased productivity and efficiency,and enhanced consumer welfare.

The New Industrial Policy

Embedded in the IPP is the new Philippine industrialpolicy, which aims primarily to upgrade and transformthe manufacturing industry to create more decent

jobs. This strategic thrust provides the framework foran investment policy regime that focuses on improvingproductivity, developing human resources, and

upgrading technologies.Emphasis on reviving the manufacturing industrystarted in 2012 when the Department of Trade andIndustry (DTI) and the Board of Investments (BOI)engaged industry associations to craft industry/sectoralroadmaps, plotting their industrys contribution tosustain economic growth, among others. To date,29 roadmaps have been submitted to the DTI-BOI,including the Manufacturing Industry Roadmap(MIR) formulated by the Philippine Institute forDevelopment Studies (PIDS) based mainly on the

roadmaps submitted by various industry associations.

To enable manufacturing firms to upgrade, thrive andbecome catalysts and engines for sustained and inclusivegrowth, the industrial policy focuses on implementingvertical (sector or industry specific) measures andhorizontal (cuts across sectors) measures that addressconstraints to growth, and on institutionalizing

coordination mechanisms to ensure effective programimplementation. The long-term vision of the MIR is todevelop a globally competitive manufacturing industrysupported by strong backward and forward linkageswith both domestic and global supply chains.

Resurgence of Manufacturing

Complementing the policy of supporting themanufacturing industry is the ManufacturingResurgence Program (MRP), designed to revitalize thecountrys contracting manufacturing sector. The thrustis to intensify government intervention in addressingmarket failures and cumbersome business procedures.

The MRP is identified by the government as a priorityprogram under National Budget Memorandum (NBM)No. 118, and designates the DTI as lead implementingagency. Other government agencies involved are: theDepartments of Labor and Employment (DOLE),Science and Technology (DOST), Agriculture(DA) and Energy (DOE), and DOLEs TechnicalEducation and Skills Development Authority (DOLE-TESDA), Commission on Higher Education (CHED),Philippine Coconut Authority (PCA), National PowerCorporation (NPC) and the National Electrification

Administration (NEA).Through the implementation of the MIR, the blueprintof the MRP, manufacturing contribution to theeconomy is targeted to account for 30 percent oftotal value added and generate 15 percent of totalemployment by year 2025.

The New IPP 2014-2016 Process

The new approach of the DTI-BOI in the formulationof the 2014 IPP adopts an analytical framework anda more rigorous process of identifying the priorityeconomic activities to promote. The frameworkemploys a mechanism for evaluating the potentialcontribution of these activities and industries to createquality jobs, move up the value chain, diversify thecountrys industrial base, generate spillover effects,and engender a more competitive environment.

E X E C U T I V E S U M M A R Y

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From this evaluation, the most challenging issuespreventing the entry of new rms, and of existing rmsfrom moving up the value chain are likewise identified. Theprocess evaluates further the most effective governmentintervention to address these constraints either throughincentives or other policies and measures, or a combinationof both (the sectoral analysis is found in Appendix 1 of theIPP).

Strengthening the research process of the 2014 IPP is acore group of prominent economists that conducted peerreviews and a series of consultation sessions with the publicand private sectors and civil society. A total of four (4)sectoral/cluster, two (2) inter-governmental agency, andfour (4) regional sessions were conducted. In addition, thedraft 2014 IPP was posted on the BOI website for moreinteractive consultations with the public.

The 2014 IPP

The DTI-BOI pursues a more integrated approach thatembeds the investment strategy into the countrysindustrial policy and development plan. The newIPP focuses on competitiveness, skills development,technology upgrading, infrastructure modernization, andimprovements in overall business environment. Togetherwith the governance reforms and good macroeconomicperformance of the Philippines in more recent years,this bodes well for attracting investments and achievingeconomic transformation.

Success stories from other countries have shown thathaving the right fundamentals simultaneous with aninvestment incentive program - placed within the contextof national development strategies results in increasedinvestments. Research findings reveal that investmentincentives are seriously considered in making investmentdecisions. In particular, when political and economicstability, infrastructure, transport costs are equal, taxesexert signicant impact on enterprises.

In implementing the new approach, the DTI-BOI takes

a more proactive role by facilitating and coordinatinggovernment efforts to correct market failures andencouraging producers to take risks. By creating anenvironment conducive for business to flourish andembarking on initiatives to strengthen industries, thegovernment can promote the success of domestic firmsin both the local and international markets. A favorablebusiness environment will unleash the full potentials of ourindustries to take advantage of the market opportunitiesand become effective engines for sustained and inclusivegrowth.

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2014 INVESTMENTPRIORITIES PLANINDUSTRY DEVELOPMENT FOR

INCLUSIVE GROWTH

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I . I N T R O D U C T I O N

Since the Board of Investments (BOI) was established in1987 under Executive Order No. 226, the InvestmentPriorities Plan (IPP) has been the countrys basic policydocument that enumerated the areas or sectors of theeconomy that were deemed priorities of the state forinvestments and development. Government agenciesand the private sector referred to the IPP when makinginvestment decisions as well as promotional activities.

Every year, for the past 27 years, the IPP has beencrafted by the BOI in consultation with governmentagencies and the private sector. After enough time isgiven to stakeholders to write position papers, the IPPis then consolidated and finalized. Without fail, thefinal form of the IPP was a list of specific economic

activities and general economic categories (mostly, thelatter) declared as priority activities.

Based on this list, fiscal incentives will be granted by theState for enterprises that venture into these priorityareas, provided they qualify for certain criteria andfulfill the terms and conditions of their registration.

These incentives would typically include IncomeTax Holiday from 4 years to a maximum of 8 years,depending on whether the activity is pioneering or not,provided the registered enterprise meets the targets of

its project. Registered projects also have the privilegeof importing capital goods free of duties. Other formsof assistance are provided to BOI registered enterprisesto help ease their way into the business environment.

Although the IPP has served as a practical tool foridentifying the States priority areas and economicactivities as well as attract investors through incentives,there is a need to strengthen the IPP as a tool forindustrial development and economic growth. Hence,this new approach of the IPP of 2014-2016.

The New IPP

Aligned with the goals, priorities and strategies ofthe updated Philippine Development Plan (2011-2016), the IPP takes o from the six priority areasof economic activity under the PDP, namely: agro-industry; manufacturing; IT-BPM; logistics; tourism;and, construction.

Departing from tradition, the 2014 IPP attemptsto break down these general categories into specificeconomic activities that -based on industry studies,plans and roadmaps - are strategic or critical to completeor enhance a particular industry or products valuechain. In other words, applying a modified and morerigorous methodology, the 2014 IPP is more strategic,targeted and focused. The PDPs strategies, includinginvestment in physical infrastructure, transparent andresponsive government, and human development, arealso carried over to the new IPP.

Directly relevant to the IPP is Chapter 3 of theupdated PDP, which envisions a globally competitiveand innovative industry and services sector that

contributes significantly to inclusive growth andemployment generation. Three broad themes permeatethis chapter: improving the business environment,increasing productivity and efficiency, and enhancingconsumer welfare.

Consistent with these goals and themes, the new IPPapplies a framework of analysis that includes a setof criteria to identify the priority general or broadeconomic categories and specific economic activities.After this filtering stage is a process of understandingthe key or most binding constraints that hamper

growth and prevent more value added production.From this premise stems the analysis of which amongthe States reserve of policy tools and forms ofinterventions would be the most effective response toaddress these constraints, with fiscal incentives beingone of the interventions.

After conducting a thorough study of the prioritysectors, its subsectors and specific economic activities,and depending on the availability of quality industryroadmaps and studies, the 2014 IPP proceeds to

enumerate the activities the government shouldincentivize to meet national development goals.Although the general objective of the new IPP is totarget investment opportunities and needs that wouldfill gaps in the supply or value chain, boost sectors withlatent or obvious competitive advantage, and offsetmarket imperfections, broad economic categories onthe list of investment priority areas/activities will still bepresent, nonetheless. It is simply not possible to haveall the data and information needed to arrive at soundevaluation of each activity in the national economy.

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To address the information gap, a few novel featureswere crafted for the 2014 IPP. First is the principleof geographical application which determines therelevance and impact of an economic activity ina particular region, province or a cluster of localgovernment units. For instance, although a coldstorage facility is included in the category of agriculturalservices to be incentivized, a project of similar naturewill still go the evaluation process when it materializes.The BOI will evaluate it through a geographical analysisto determine if such a facility is lacking in the areawhere it is proposed to be constructed.

Second, instead of crafting a new IPP annually,the 2014 IPP will be a rolling three-year plan toensure continuity, consistency and predictability factors seriously considered by domestic and foreigninvestors. In order to improve the BOIs monitoring

and assessment system for a successful execution ofthe IPP over a three-year period, the new IPP will bereviewed annually.

Finally, there will be new mechanisms of coordinationand convergence among relevant government agenciesto ensure the eective and ecient execution of the2014 IPP, providing venues for enhanced partnershipand cooperation with the private sector.

These unique features and the new approach transformthe 2014 IPP from just a list of economic categoriesor specific activities to be incentivized into a policyinstrument that lays down the States industrial policystrategies, and the array of tools to be used to achievemeaningful and inclusive growth for priority industriesidentified in the PDP.

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I I . A N E W I N D U S T R I A L P O L I C Y

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Reviving and Transforming PhilippineManufacturing

A long hiatus in Philippine economic policymakingnecessitates the mainstreaming into governmentthought and action, a new approach to industrial policy.

In early 2012, the DTI and BOI called on the privatesector to craft industry roadmaps to envision the futureof their industries or sectors; identify short, mediumand long term goals; identify gaps in their supplychains; and propose recommended policy reforms andactions to grow their industries.

With DTI-BOI initiating and facilitating the industryroadmap project, the lead role of the private sectorin crafting their roadmaps is an innovation thatdifferentiates the new industrial policy from previousattempts of its kind in the country.

A second distinguishing feature of the new approachis its sharp focus or heavy emphasis on the countrysmanufacturing sector as a key result area.

The countrys experience over the past two decadeshas shown that we cannot leapfrog industrializationand that relying on the services sector alone will notbring about sustainable and inclusive growth. A secondleg, the manufacturing sector, is needed to support thecountrys economy.

The historical performance of our manufacturing

sector has, unfortunately, been weak, owing to theabsence of the economys structural transformation- from one that is agriculture-based to one that is

industry-led. Observers have noted that the countrysindustry sector has been quickly overtaken by servicesand that manufacturing has lagged behind those ofother countries in the region.

With the advent of the ASEAN Economic Communityin 2015, it is imperative to revive and transform ourmanufacturing industry into a catalyst to address the

challenges and seize the opportunities of an integratedregional economy. This is the essence and main thrustof the countrys industrial policy.

This new industrial policy aims to upgrade and transformthe manufacturing industry to one that addresses themost binding constraints to manufacturing growthstrengthen industries and improve the businessenvironment within which they operate.

Formulated within the context of the PDP and the newindustrial policy, the investment strategy focuses on

improving productivity, human resource developmentand technology upgrading.

A. The Manufacturing Resurgence Program

Adopting the policy objective to support themanufacturing industry, the national governmenthas allocated Php2.3 billion for the ManufacturingResurgence Program to support the implementationof the Philippine Manufacturing Industry Roadmap(MIR). As Figure 1 shows, the MIR aims to increasethe contribution of manufacturing from the current22 percent to 30 percent of total output and from 9percent to 15 percent of total employment by the year2025.

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2

0

2

1-2

0

2

5

globally competitivemanufacturing industry withstrong forward & backwardlinkages

OBJECTIVE : Industry Roadmap for Structural Transformation, Job Creation and Poverty Reduction

GOAL: A globally competitive manufacturing industry supported by a strong parts and components sector

TARGETS:Manufacturing contribution of 30% of total value-added and 15% of total employment

Figure 1. MIR Objectives: Industry Roadmap for Structural Transformation,Job Creation and Poverty Reduction

Long Term

Medium Term

2

0

17-2

0

2

1

shift to high value addedactivities

investments in upstream orcore sectors

link & integrate industrieswithin the economy

Short Term

maintain competitiveness ofcomparative advantageindustries

strengthen emerging products rebuild existing capacity ofindustries

2

0

14

-2

0

17

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In the short term (2014-2017), it is imperative tomaintain the competitiveness of our industries withcomparative advantage, strengthen emerging products,and rebuild the capacity of existing industries, especiallythose with strong potential to generate employment,address missing gaps, move up the product ladder andcreate linkages and spill-over effects in sectors such asautomotive, electronics, food, garments, motorcycle,

shipbuilding, chemicals, and allied or support industries.During this stage, the Philippines intends to deepen itsparticipation in regional and global production networksof the automotive, electronics and garments industries.

In the medium term (2017-2021), there will be ashift to activities with higher value added, increaseinvestments in upstream or core sectors (such as in theiron and steel and other metals industry, as well as inparts and components), and link industries within thenational economy.

In the long term (by 2025), a globally competitivemanufacturing industry with strong forward andbackward linkages is envisioned as the Philippines playsa vital role in the regional and international productionnetworks of automotive, electronics, garments andfood. Our target is for the country to serve as a hub forregional and global production networks.

Action Agenda

To achieve these goals the new industrial policy callsfor three basic action items or agenda: 1) proactivelyaddress the most binding constraints to manufacturinggrowth; 2) strengthen industries (raising industrycompetitiveness); and, 3) improve the businessenvironment.

These actions or interventions must be aimed towardsthe following elements: (a) vertical measures; (b)horizontal measures; and, (c) coordination mechanisms.Below is an illustration of these interventions.

a) Vertical Measures. To achieve the specific

objectives outlined in Figure 2, overcome themost binding constraints to growth, upgradeindustries and make markets work, thefollowing vertical or industry specific measuresare recommended:

1. Address gaps in industry supply chains;and,

2. Expand the domestic market base andutilize it to grow exports.

b) Horizontal Measures. To address the cross-cutting constraints, the following horizontameasures are recommended:

1. HRD and Skills Training programs. Designhuman resource development and trainingprograms to improve skills and formalliances with universities and training

institutions. With educated and well-trained workers, it will be easier to learnnew skills and enter new trades.

2. MSME Development and Innovation.SupportMSME development through appropriateinnovation incentives and mechanismssuch as common service and R&D facilitiesclustering, and industry-academe linkagesfor new product development and appliedtechnology for indigenous products/raw materials. Grants, loans, innovation

vouchers, and counterpart funding toinnovative firms and technical assistance topromote long-term research collaborationbetween universities and business are alsoimportant.

3. Investment Promotion. Pursue aggressiveand strategic promotion and marketingprograms to attract more investmentsparticularly foreign direct investmentsto introduce foreign technologies

Consolidate and intensify the investmentpromotion efforts of the BOI, PEZA, ClarkEconomic Zone, and Subic Bay FreeportZone.

4. Business Environment ImprovementImprove the business environment byaddressing smuggling, the high cost ofpower and domestic shipping (includingport charges), and inadequate transportinfrastructure. Expedite and facilitatethe implementation of Public-Private

Partnership (PPP) programs to financeports, airports, highways, electricitygrids, telecommunications and otherinfrastructure along with improvementsin institutional effectiveness particularly incurbing smuggling.

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5. Competitive Exchange Rate. Maintain acompetitive exchange rate to support andstrengthen the new industrial policy ofthe government. Manage the exchangerate in support of exports, prevent thesurge of capital inows and avoid excessiveappreciation of the peso.

c) Coordination Mechanism. Throughout theprocesses of industrial transformation andindustry upgrading, mechanisms are beingestablished to coordinate policies and necessarysupport measures to address obstacles to

the entry and expansion of domestic rms.Towards this, the Philippine governmentrevived the Industry Development Councilor the IDC, consisting of representativesfrom national government agencies andstakeholders from the private sector. TheIDCs primary task is to ensure the effectiveand efficient implementation of the countrys

Comprehensive National Industrial Strategy.This strategy will link manufacturing withagriculture and services; strengthen forwardand backward linkages in the economy; and,build globally competitive Philippine industries.

HRD & skills training SME development Technology upgrading,

innovation, common facilities Investment promotion Power, smuggling, logistics &

infrastructure Competitive exchange rate

Close supply chain gaps: - access to raw materials in

furniture, garments, foodprocessing

- integration mechanism forcopper, iron & steel andchemicals

Expand domestic market andexports: automotive andshipbuilding

open trade regime, sustainable macro policies, sound tax policies &administration, efficient bureaucracy, secure property rights

Figure 2. Three Elements of the Manufacturing IndustryUpgrading Roadmap

30% value added; 15%employment

COORDINATIONMECHANISM

HORIZONTAL

MEASURES

VERTIC AL

MEASURES

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I I I . T H E 2 0 1 4 I P P : A N E W A P P R O A C H

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A. Evidence based and Inclusive

Crafting the 2014 IPP began in the latter part of 2013with the traditional inter- agency consultations whichsurfaced official views of the different governmentagencies. The BOI also collated and analyzed data onthe different sectors of the IPP over the past five yearsto evaluate the economic impact of the incentives

provided. Indicators included the actual investmentsgenerated, the jobs created, and government revenuesfrom the projects. The result of these internal studiesand assessment were later on presented in the clusterconsultations to stimulate discussions and gatherfeedback.

An internal team was created to review all governmentdevelopment plans, industry roadmaps and studies, aswell as relevant empirical work on investment incentivesto ensure alignment and harmonization.

The evaluation process was prepared and subjectedto several peer review sessions with a core groupof the countrys prominent economists. Extensiveconsultations were likewise conducted with governmentagencies, the private sector and civil society through aseries of consultative workshops in the national capitaland key regional centers in the three main islandgroupings of the country. The evaluation process, alongwith its annexes such as the roadmaps, was posted inthe BOI website to elicit more feedback and comments

from the public. By far, this method has been the mostinclusive and participatory exercise ever conducted forthe IPP. Shown in Figure 3 is an illustration of the IPPprocess.

B. Objectives and Strategy

The 2014 IPP reinforces the PDPs focus on inclusivegrowth by setting specific objectives meant to optimizethe impact of incentives in attracting investments andgenerating employment opportunities. These are:

1. Increase employment opportunities byrevitalizing growth sectors, especially themanufacturing sector;

2. Promote higher value adding activities anddeeper MSME integration in the supply chains;

3. Strengthen participation in global and regionalproduction networks including the ASEANEconomic Community.

To attain these objectives, the IPP will employ thefollowing key strategies:

1. Support activities that generate high

employment, encourage inclusive businesspractices and foster stronger intra- and inter-industry linkages;

2. Raise productivity by upgrading technologyand developing industry clusters;

3. Identify and develop market niches to enableparticipation in the global and regionalproduction networks.

C. The Evaluation Process

Under Chapter 3 of the PDP, Competitive andInnovative Industry and Services Sectors the followingareas are identified for promotion in the medium-term: 1) Agro-industry; 2) Manufacturing; 3) IT-BPM;Logistics; 4) Tourism; and, 5) Construction.

Focusing on this list, the first step of this processdetermines if a particular economic sector or activitymeets certain criteria that are consistent with the IPPsstated objectives. This set of criteria helps assess thepotential of the industry, sector or activity to generate

the following:

1. Employment contribution. Labor intensityof an activity measured by its employmentmultiplier (see Appendices 2 [A2-2] and 3)and its contribution to the total employment.

2. Move up the value chain. Potential to move upthe global value chain and whether the activitypresents a latent comparative advantage (seeAppendix 2).

3. Create spill-over effects. Impact on output ofother sectors measured by output multiplier(see Appendix 3).

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UPDATED PDP 2011-2016

*Regional multi-sectoral consultations in Metro Manila, Cebu, Davao and Baguio City; Sectoral/Clusterconsultations for manufacturing, agriculture/fishery, sevices, and infrastructure/energy.

IPP Frameworkand List ofPreferredActivities

Intra & Inter-Agency

Consultations

BoardApproval

Approval bythe President

Multi-SectoralConsultations*

Figure 3. Process of Formulating the 2014 IPP

Sectoral Development PlansIndustry Roadmaps

Other SectoralStudies andResearches

On-line Consultation

Peer Review by a CoreGroup of Economists

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4. Create competition which is important toensure that promotion of the activity wouldnot impair competitive outcomes in both inputand output markets.

Note that the analysis takes the geographic contextinto account by defining markets based on products(good or service being produced) and geographic areas

(location of producers and consumers).

Once the economic sector or activity meets the setof criteria provided, the next step is to determine ifthere are gaps in the industrys supply or value chain(upstream, midstream or downstream) that preventor hinder the industry from growing or moving up thevalue chain. The identification of gaps in the industrysupply or value chain guides the government and theprivate sector in designing more focused and targetedinterventions.

The third step in the evaluation process is to determinethe obstacles preventing firms from investing in thepotential areas and upgrading the quality of theirproducts such as barriers or most difficult challengesthat may be discouraging firms from moving up thevalue chain. Based on research and the industryroadmaps, the different constraints are listed below.

1. High production cost, power, logisticsinfrastructure

2. Lack of raw materials or suppliers ofintermediate inputs

3. Lack of scale economies4. High risks for first movers especially for

activities requiring large capital5. Government regulations: franchises, licenses,

smuggling (due to inefficient regulation)6. Others: finance access, inability to comply with

international product standards and quality,lack of R&D, lack of skilled workers, lack ofcompetition, etc.

The fourth step is to determine the policy mix that willhelp address challenges to the entry of new firms andmove up the value chain and participate in regionalproduction networks. These are grouped into two broadcategories, namely:

1. Policy reforms, sound and reasonableregulations, and other non-fiscal interventions,

and2. Fiscal incentives with other non-fiscalinterventions and support

The policy mix will consist of horizontal and verticalinterventions as well as coordination mechanismsto allow firms and industries to increase theircompetitiveness, latch on to regional productionnetworks, increase capacity to export and enabledomestic firms (especially MSMEs) to grow anddevelop. Figure 4 shows an illustration of the evaluation

process to identify the 2014 IPP list of preferredactivities.

Introducing this new evaluation process brings rigorto the policymaking process for industry developmentand encourage more meaningful collaboration betweenthe government and the private sector in formulatingand executing sound policies and other interventionsthat would develop domestic industries, and preparethem for regional economic integration.

More important is the way the new approach improvesthe IPP formulation process and how the IPP is usedand perceived by the stakeholders and the BOI. From

just a list of economic activities that can be grantedincentives by the BOI as incentives administrator, thenew IPP is a strategic policy pronouncement of thegovernment, contributing to the national developmentgoals in the PDP, through a new industrial policy underthe stewardship of the DTI-BOI.

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FRAMEWORK FOR PRIORITIZATION OF ECONOMIC ACTIVITIES

INCENTIVES + OTHER POLICIES(WITHOUT INCENTIVES)

Figure 4. Evaluation Process

Y NHOW TO MAINTAIN

COMPETITIVENESS

1. Employment contribution?H, M, L2. Potential to move up the value chain, Latent comparative advantage? H, M, L

3. Spill over effects and forward & backward linkages? H, M, L4. Create competitive market? H, M, L

A SUPPLY GAP?

UPSTREAM MIDSTREAM DOWNSTREAM GEOGRAPHIC

POLICY RESPONSE

MOST BINDING CONTRAINTS

PREVENTING ENTRY AND/OR

MOVING UP VALUE CHAIN

HIGH PRODUCTION

COST

Power Logistics Raw Materials Lack of scale

HIGH RISKS

Huge capitalrequirements New technology

HUMAN CAPITAL

Skills gap Labor mismatch

GOVERNMENT

REGULATIONS

Licenses Smuggling

GOVERNMENT

POLICIES

Tax Labor Foreign Equity Restriction

OTHERS

Financing Competition Standards, quality, etc.

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I V . P R E F E R R E D A C T I V I T I E S O F I N V E S T M E N T S

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Using the evaluation process discussed in the precedingsection, the BOI reviewed all available national andsectoral development plans, industry roadmaps,sectoral studies and researches (see Appendix 4); andevaluated the comments and inputs from the variousconsultations, including a peer review with a coregroup of economists. Appendix 1 contains the sectoralanalyses made by the BOI.

The following activities comprise the recommended listof preferred activities for investments under the 2014Investment Priorities Plan:

I. Preferred List of Activities1. Manufacturing

a. Motor vehicles1(excluding motorcycles,e-bikes and golfcarts) and motorvehicle parts and components: Body panel stamping Engines, transmissions, and transaxle

Large injection moulded parts Bumpers; instrument panel; door

trims; center console; grill; wheelhouse finisher; lamps; shockabsorber; wiper motor/blade; enginemounts; electric power steering;combination meter; instrumentcluster; chassis & sub-frame; interiorfinishing; switches; seat mechanism;retractable seat belts; windowregulator; constant velocity joints/transmission; aluminium radiators;plastic fuel tanks; fuel pumps;brake system and components;evaporators and condensers; relays;flame laminated automotive fabric;door & rear view mirrors; automotiveglass; engine parts & assembly; andtransmission parts & assembly

Controller assembly, motor, andbattery (other than lead acid) forelectric vehicle

b. Shipbuilding including parts and

componentsc. Aerospace parts and components

1 Based on Logistics Efficiency Index

d. Chemicals Oleo-chemicals Petrochemicals and derivatives Chlor-Alkali Plants

e. Virgin paper pulpf. Copper wires and copper wire rodsg. Basic iron and steel products, stee

grinding balls, long steel products

(billets and reinforcing steel bars), andflat hot/cold-rolled productsh. Tool and Die

Simple, Compound and ProgressiveDies for metal stamping or metaforging

Molds for die casting, for plasticinjection or blow molding, glass blowmolding, forging, encapsulationmolds

Jigs and xtures for metal cuttingand metal forging

2. Agribusiness and Fisherya. Commercial production2

Coconut, corn, cassava, coeecocoa, fisheries, poultry and livestock

High value crops - rubber, spicesvegetables and fruits;

Emerging commodities sampalocjackfruit, peking duck, native pigssiling labuyo, peanuts, monggo, andachuete.

b. Commercial processing2 Extraction of higher value substances

from agricultural and forest-basedraw materials through bioprocessing;

Conversion of agricultural and sheryproducts, their by-products andwastes, to a form ready for furtherprocessing or final consumption.

c. Production of animal and aqua feedsexcluding those for game animalsfowls and other species for pet/leisurepurposes2

d. Production of fertilizers and pesticides2

e. Modernization of sugar millsf. Mechanized agriculture support

services2, e.g. harvesting, plowing, andspraying/dusting

2 Subject to geographical supply considerations. In the case of poultry and livestock production, this limited to areas in ARMM, Mindoro and Palawan.

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g. Agriculture support infrastructures2,e.g. facilities for drying, cold chainstorage, blast freezing, bulk handlingand storage; packing houses, tradingcenters, ice plants in Less DevelopedAreas, AAA slaughterhouses, AAAdressing plants

3. Servicesa. Integrated Circuit Designb. CreativeIndustries/Knowledge-Based

Services3: Animation Software development4

Game development Health Information Management

Systemsc. Ship repaird. Charging stations for e-vehiclese. Maintenance, Repair and Overhaul

(MRO) of aircraftf. Industrial waste treatment

3 Covers start-ups of small newly incorporated domestic players/enterprises only.4 Covers only those with own Intellectual Property that are developed for commercial sale.

4. Economic and Low-cost Housing(horizontal and vertical)5

5. Hospitals6

6. Energya. Exploration and development of

energy sources (including energy cropsor upstream biofuels)

b. Power generation plants7

c. Ancillary services

7. Public Infrastructure and Logisticsa. Airports and seaports (includes RO-

RO ports) for cargo and passengerb. Air, land and water transport (Limited

to brand new ships, aircrafts, seaplanes,RO-RO; buses, boats, mass rail -limited to capital equipment incentiveonly)

c. LNG Storage and Regasification

Facilityd. Bulk water treatment and supply

5 Based on a price ceiling of Php3.0 million and subject to geographical considerations.6 Subject to geographical considerations.7 Subject to capacity installation gap based on DOEs five-year supply-demand forecast or up to

2019, i.e., if forecast is 6000MW, then the first 6000MW capacity receives the incentives, andsaid installation gap will be divided among areas in Luzon, Visayas and Mindanao.

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8. PPP Projects

II. Export Activities1. Production and manufacture of export

products2. Services Exports3. Activities in support of exporters

III. Special Laws1. Industrial Tree Plantation (P.D. 705)2. Mining (R.A. 7942) (limited to capital

equipment incentive)3. Publication or Printing of Books/Textbooks

(R.A. 8047)4. Refining, Storage, Marketing and

Distribution of Petroleum Products (R.A.8479)

5. Rehabilitation, Self-Development andSelf-Reliance of Persons with Disability(R.A. 7277)

6. Renewable Energy (R.A. 9513)7. Tourism (R.A. 9593)

IV. ARMM List

The ARMM List covers priority activities thathave been identified by the Regional Board ofInvestments of the ARMM (RBOI-ARMM)

in accordance with E.O. No. 458. The RBOI-ARMM may also register and administerincentives to activities in this IPP for projectlocating in the ARMM.

A. EXPORT ACTIVITIES

1. Export Trader and Service Exporters

2. Support Activities for ExportersB. AGRICULTURE, AGRIBUSINESS/

AQUACULTURE & FISHERY

This covers the production of processedfoods (production of Halal meat andfoods), vegetable oils, food crops, integratedcoconut processing and plantationactivated carbon, production of beveragecrops and plantation, seaweeds productionand processing, fruit processing, aquaculture

(fish production and processing), young/sweet corn production, potato and sweetpotato plantation/processing, cutflowerproduction/processing, abaca plantation/processing, oil palm plantation/processing/refining and germinated oil palm seedsfeeds production, sugarcane plantation/processing and refineries, quality seeds

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and seedlings of fruit trees and otherplanting materials propagated asexually orby tissue culture, pearl culture/processing,production of livestock and poultry thatincludes processing, crocodile farming andprocessing, sericulture, feeds productionand production of plantation crops andother pharmaceuticals, medical herbs/

essential oil plants, biomass, rubber,carrageenan, mangosteen and moringa.

C. BASIC INDUSTRIES

This covers the production ofpharmaceuticals such as antibioticsand medical devices, textile and textileproducts, inorganic and organic fertilizersusing solid waste materials, exploration anddevelopment of natural gas and mineralresources which includes small scale asdened under P. D. 1899 (but to excluderiver beds in operations and processingof minerals such as beneficiation andother metallurgical methods) and cement

production of at least 1.0 million MTPYcapacity (clinker based).

D. CONSUMER MANUFACTURES

This covers processing of rubber productsto be integrated with plantation and leatherproducts.

E. INFRASTRUCTURE AND SERVICES

This covers public utilities withdevelopmental route of the five provincesand one city from ARMM and otheradjacent cities and provinces such ascommon carriers, electric transmission/distribution, electric motor vehicles andits parts and components, water supplyfacilities/waterways and sewerage systems,buses/cargo trucks, other specialized mass

transport systems, power generation likehydro power, geothermal and natural gas,and telecommunications with internationalgateways.

F. INDUSTRIAL SERVICE FACILITIES

This covers the following activities:common centers to include testing andquality control laboratories, training anddemonstration centers, tool shops and

similar facilities, metal casting, metalworking, furniture, ceramics and foodprocessing, petrochemical complex andindustrial gases.

G. ENGINEERING INDUSTRIES

This covers engineering products,electronics and telecommunicationproducts, fabrication of constructionmaterials and hydro power plants.

H. LOGISTICS

This covers shipping of cargoes (air, sea andland) and forwarders.

I. BIMP EAGA TRADE ANDINVESTMENT ENTERPRISES

This covers enterprises located or havetheir base of operation in the BIMP

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EAGA, namely, Brunei; Sabah and Sarawak in Malaysia; Malusu, Sulawesi, Kalimantan and Iringayain Indonesia; and Mindanao and Palawan in the Philippines, who shall invest and engage in economicactivity in the ARMM including SMEs.

J. TOURISM

This covers the establishment of tourism estate subject to guidelines developed jointly by RBOI-ARMM and the Department of Tourism ARMM, tourist accommodation facilities, tourist transport

facilities and development of retirement villages which shall include health and medical facilitiesincluding amenities required by the Philippine Retirement Authority (PRA) and subject to theguidelines to be approved by RBOI-ARMM in consultation with the PRA, the Department of Health(DOH), the Regional Planning and Development Office (RPDO) and other concerned agencies.

K. HEALTH AND EDUCATION SERVICES AND FACILITIES

The ARMM has the lowest indication in the country regarding health and education as reflectedin the Human Development Index. For this purpose, there is a need for incentives to be given toinvestors in the health and educational sectors such as putting up of private hospitals, medical clinicswellness centers, primary education, secondary education, tertiary education (colleges, universitiesand vocational - technical schools) and ancillary services including any and all health and education -

related investments.

L. HALAL INDUSTRY

The MTPDP 2004 2010 provided that ARMM shall be the production and processing center forthe Halal industry. ARMM being the only Muslim region in the country, has a comparative advantagein the Halal industry. Any Halal related business enterprises shall be covered. Halal refers to thepermissible products and services under Islamic Law.

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APPENDICES

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1 . S E C T O R A L A N A L Y S I S

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1. Manufacturing

The overall performance and contribution toeconomy of the manufacturing industry has beenweak and declining for the past two decades ofthe Philippines. With its GDP declining from 26.3percent to 23.7 percent and share to value addedand employment performing the same from 28.2

percent to 23.7 percent and 11.3 percent to 9.1percent, respectively, the manufacturing sectorhas failed to influence growth, employment andproductivity of the country.

Nevertheless, the industry remains to be themost important sector for long-term productiveemployment, revenue and value-added generationand innovation. The manufacturing sector remainsto be the largest sector of the country accounting21 percent of the total GDP in 2010 and generatingPhp3.4 trillion in 2009.

Now, the manufacturing sector continues toexhibit growth rates above 9.5 percent since thefirst quarter of 2013 and accelerated growth inthe fourth quarter with 12.3 percent compared to5.5 percent a year ago. Manufacturing even grewfaster than services reaching a full year growth of10.5 percent, nearly double the 2012 growth of5.4 percent.

The following subsectors contributed positively tothe growth of the sector: Chemical and chemicalproducts, which grew by 124.5 percent from 3.5percent in the previous year; Furniture and xtures,which rebounded to 72.8 percent from a decline of3.8 percent; Radio, television and communicationequipment and apparatus, 3.6 percent from 19.9percent; Beverage industries, 4.5 percent from2.7 percent; and Footwear and leather and leatherproducts, 17.5 percent from 24.5 percent.

On the other hand, the following subsectors pulleddown the growth of the sector: Wearing apparel,which plummeted 25.3 percent from 10.2 percent;Petroleum and other fuel products, which declinedby 18.8 percent from a growth of 3.1 percent;Miscellaneous manufactures, dropped by 15.8percent from 1.9 percent; Textile manufactures,further dropped by 20.4 percent from negative 6.9

percent; and Electrical machinery and apparatusdeclined further to 15.0 percent from negative13.5 percent.

Based on the studies of The Manufacturing Institute(TMI), the manufacturing sector has a multipliereffect of 1.4. For every liter of paint produced, itrequired a range of raw chemicals, raw materials

packaging like metal or plastic containers, printedpaper labels, delivery trucks, it required capitaequipment that grinds, blends filters and storesthe product. It employed chemists in laboratoriesengineers and operators to run and maintain theplant. It requires utilities like electricity and waterIt requires services such as financial, marketingsales and logistics services. Manufacturing is calledthe engine of the economy. Many services existbecause of manufacturing; and many service jobs

will disappear if manufacturing disappears1

. Thus, the revival of the manufacturing industry

could highly contribute in the attainment of thecommitment of the President to the Filipinopeople to pursue economic growth and generatemore employment. It is for this reason that for2014-2016, the government has declared theManufacturing Resurgence Program as a flagshipprogram. The manufacturing industry roadmapcrafted by the Philippine Institute for Development

Studies (PIDS) would be its main blueprint.

a. Automotive (Motor Vehicle Assembly andParts Manufacturing)

The motor vehicle industry represents asignificant portion of the global economicactivity with extensive upstream anddownstream linkages to many diverse industriesand sectors. The employment, skills, and exportpotentials associated with car production areenormous. The fact is, the top 20 industriaeconomies in the world are also the top 20auto producers; lending credence to the factthat no country has ever become a developedindustrial economy without an auto industryfrom Japan, to the United Kingdom, to Chinanot even the United States.

1 Based from an article of Mr. Bobby Batungbacal, Director, Federation of Philippine Industries, Inc., entitledThe Strategic Importance of the Philippine Manufacturing Sector dated October 6, 2011.

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In 2013, it posted a 16 percent increase inthe total number of four-wheel vehiclessold, that is, from 182,779 units in 2012 to212,414 units sold in 2013. The Philippineautomotive manufacturing sector, particularlycar manufacturing, has an annual capacity of200,000 units. Unfortunately, these facilitiesare highly underutilized at 36 percent. The

growing preference for CBUs, importation ofused cars, and smuggling of vehicles have allfactored in the decline of local production.

There are a total of four (4) car manufacturerscurrently operating in the Philippines ToyotaMotor Philippines Corp. (TMPC), MitsubishiMotor Philippines Corp. (MMPC), Honda CarsPhilippines Inc. (HCPI), and Nissan Motor

Philippines Inc. (NMPI). Ford Motor CompanyPhilippines (FMCP) used to manufacturevehicles in Santa Rosa, Laguna until December2012. FMCP closed its Philippine assemblyciting low production volume and lack of supplybase as the main reason of its closure.

Aside from car manufacturers, there are 14firms producing commercial vehicles suchas light trucks, trucks, and buses. MANAutomotive Concessionaires Corp., Pilipinas

Hino, and Universal Motors Corp. (NissanDiesel) dominate the truck and bus categorieswhile others focus more on the production oflight trucks.

The presence of these automotivemanufacturers in the Philippines gave birth tosome 272 original equipment manufacturers(OEM) supplying more than 300 parts andcomponent requirements of local automotivemanufacturers. Some of these parts andcomponents, e.g., transmissions, wiringharness, among others, are also exported.

In the case of electric vehicles (e-vehicles),the market is just starting to develop in thecountry. There are already a few that have

registered with the BOI to assemble e-trikes inanticipation of the implementation of the AsianDevelopment Bank (ADB) program for thesupply of e-trikes to several local governments.

Employment and Export Performance

The automotive and auto parts manufacturing

provides stable wages and working conditionseven across a range of other industry sectors.In the Philippines, the industry employs 8,000in the auto manufacturing and 60,000 in theauto parts manufacturing. Careers are alsooften long-lived; workers are employed foran average of 20 or 30 years. In addition, theindustry employs around 340,000 in theauto-supporting industries.

The auto parts industry has also generatedexports for the country, thus making it aforeign currency earner. In 2013, the industrysexport reached $3.3B which alone is already0.5 percent of the countrys gross domesticproduct.

There is still no local production of e-vehicles inthe country.

Latent Comparative Advantage and Potential to

Move up the Value Chain

The supply network of the automotive industryis characterized by a tiered structure. TheOEM is supported by a small number of firsttier suppliers which are also supported by othersuppliers. Tier 1, which is mostly large firms, issurrounded by lower tier suppliers. Tier 2 firmsmay be large or small and medium enterprises(SMEs) supplying parts, components and otherinputs to the next higher-tier suppliers. Tier 3

firms are at the lower-end of the value chain andare predominantly SMEs performing low-skill,low value added activities and manufacturingrelatively simple products. Higher level tiers1 and 2 are characterized by greater skill,technology, knowledge, innovative and valueadding and creation activity as well as pricing

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power and brand presence. Lower tiers 2 and3 are characterized by lower skill, technology,innovative and value adding activity and theneed to compete on cost. The activities of tiers3 and 4 are considered as relatively simple andrequire unskilled labor and standardized lowlevel of technology (Abonyi 2005).

The auto parts potential to move up the valuechain is also high, considering the capability ofexisting players and high trainability of Filipinoworkers and that there are 30,000 parts inevery vehicle, and currently there are 256parts manufacturers producing only over 300parts and components made of metals, plastic,rubber and composite materials for both theoriginal equipment manufacturer (OEM) andreplacement market.

Considering the current sentiment onsustainable development and fearful of theclimate change effects, the governmenthas made e-vehicles part of the priorities.Further, the Electric Vehicle Association ofthe Philippines (EVAP) has formulated itsroadmap that would see the Philippines as asignificant player in the global production ofe-vehicles.

Spillover Effects

Of the 256 parts manufacturers, 124 areconsidered first-tier manufacturers while theremaining 132 are mostly small and mediumenterprises that act as sub-contractors andserve as second- and third tier suppliers. Tier1 suppliers are multinational affiliations whileTiers 2 and 3 suppliers are mostly 100 percentFilipino owned companies.

Tier 1 suppliers are large firms with capitalizationof more than Php100 million and accountfor about 7 percent of the industry. They aremostly suppliers from Japan brought in byassemblers forming part of their verticallyintegrated operations. For example, ToyotaMotor Philippines is supported by large first tier

enterprises such as Aichi Forging metal/casting/forging), Fujitsu Ten (audio/electronics)Philippine Auto Components (electrical/meters), Technol Eight (metal parts), TokaRica Philippines (electrical/mechanical parts)Toyota Autoparts Philippines (transmission)and Toyota Boshoku Philippines (interiors/seatassembly).

Tiers 2 and 3 suppliers, on the other hand, formthe bulk of the industry mostly composed ofsmall firms with capitalization of Php5 millionand below. Most of them operate as mom andpop style suppliers with varying capabilities andsome real quality problems. These firms failedto develop as they have insufficient capital andtechnology that are necessary to improve theiproducts. They comprise the major players

of the industry and are the same companiesmanufacturing parts for OEM car assemblersand engaged in exporting activities. Themajor players in the automotive componentsmanufacturing sector are Yazaki-TorresManufacturing Corp. and United TechnologiesAutomotive Phils. (wiring harness); TemicAutomotive (Phils.), Inc. (anti-brake locksystem); Honda Parts, Asian TransmissionCorp. and Toyota Autoparts Phils. (automotivetransmission), Fujitsu Ten Corp. of the Phils

(car stereos) and Aichi Forging Co., Inc. (forgedparts). These companies are manufacturersof wiring harness; transmission; alloy wheelsradiator, leaf spring, and stamp parts; tiresand auto rubber parts. Almost 60 percent ofall parts manufacturers produce OEM partswhile the remaining 40 percent caters to thereplacement market.

The automotive industry generate skillsbase, comprising of mechanical, process andmaterials engineering, foundry engineeringfluid mechanics, CAD/CAM designers, weldersand fitters & turners, alongside specializationsin chassis systems and lubrication productsThere are also significant spillover effects of thisskills base into critical elements of the miningaerospace and possibly the defense sectors.

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Supply Chain Gaps/Binding Constraints

As mentioned earlier, there is lack of locallymanufactured parts and components and othersupport activities. Of the 30,000 parts tomake a car, only 300 are currently producedin the country.

Further, there is lack of scale in the productionby the car assemblers that lead to a costhandicap relative to the ASEAN competitorslike Thailand and Indonesia. This couldbe attributed to high logistics cost in theimportation of the large parts, particularly,the body shell and other large plastic mouldedparts.

The establishment of stamping facilities to

make these large parts require high capitalinvestments, and thus, production volumeswould have to be increased to make it a soundinvestment.

At present, there is a relatively small domesticmarket for the local producers. The concernon market size is further aggravated by thecases of smuggling and cheaper imports fromASEAN and China.

In the case of e-vehicles, the binding constraintis in the absence of batteries for such vehicles,i.e., batteries other than lead acid batteries,as well as control assembly. It is noted thate-vehicle batteries (e.g., lithium-ion batteries)accounts for 40-50 percent of the cost of thevehicle.

Policy Response

To address the above supply chain gaps andbinding constraints, the following interventionshave been identified:

Provision of incentives to investmentsin assembly operations with stampingfacilities and production of critical parts andcomponents;

Provision of R&D support to the parts andcomponents manufacturers;

Demand stimulation measures suchas refleeting of government vehicles,facilitation of franchising procedures, andstrict implementation of the ban on usedcars importation.

It may be noted that the Metals IndustryResearch and Development Council (MIRDC)of the Department of Science and Technology(DOST) has approved funding for a testingfacility for automotive parts and componentsin its compound.

b. Motorcycle

The motorcycle industry covers the

manufacture and assembly of motorcycles andits parts and accessories. For the year 2010,the motorcycle industry contributed Php8.2billion worth of value-added. In the same year,the industry produced around 1.052 millionmotorcycles, making the Philippines no. 8 inthe worlds motorcycle production, overtaking

Japan, and 4th in ASEAN, surpassing Malaysia.

There are five motorcycle companies that aremembers of the Motorcycle Development

Program Participants Association (MDPPA)and thirteen members of the Chamber ofAssemblers & Manufacturers of Motorcyclesin the Philippines (CHAMMP) all of which areregistered participants of the Motor VehicleDevelopment Program (MVDP).

The Philippines motorcycle density for 2011,i.e., the ratio of number of people for everymotorcycle, is 24:1. Untapped domesticmarket presents a healthy picture for theindustry. Even after saturation, Filipinos willcontinue to use motorcycles in various travelneeds and livelihood.

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Employment

The motorcycle manufacturing industryemploys around 5,000 personnel, andgenerates 3,000 additional jobs for its support/allied sectors.

Supply Chain Gap/Binding Constraints

The motorcycle industrys upstream sectorsinclude iron and steel, the metalworkingindustries, such as metalcasting and tool anddie, rubber, petrochemical and electricalindustries. Its downstream industries includethe dealerships networks and distributorsaround the country.

The most binding constraints preventing entry

and/or moving up value chain of the industryare as follows:

Underdeveloped local parts manufacturingsector;

Short model life cycle; Lack of testing facilities; Smuggling and proliferation of counterfeit

motorcycles and parts.

The steady rise in production of motorcycles

has led to increased demand for parts andcomponents. However, the industry has avery low localization rate. The local parts andcomponent industry has not been able tocapitalize on this demand increase and hasbeen highly dependent on imports for a varietyof critical parts and components. The localparts manufacturing on the other hand hasbeen hesitant to invest because of the shortmodel life cycle, in short, any investment mustbe recovered within 3 years before the model isphased out of the market thereby making theircomponents uncompetitive in terms of price.

Spillover Effects

The motorcycle industry, like the automotiveindustry, also generates skills base in areas ofmechanical, process & materials engineering,

foundry engineering, fluid mechanics, CAD/CAM designers, welders, fitters & turnersand lubrication products. Upstream from themotorcycle manufacturing there also lies anetwork of direct and indirect suppliers. Thereare the motorcycle supporting industriesthat include machinery and equipment, diesand moulds, metal stamping and die casting

and machining. Parts and componentsmanufacturing also has a place in the supplychain feeding motorcycle manufacturing, asfirst, second or third tier suppliers. Thus, thespillover effects of the motorcycle industrylike the automotive industry is also high.

The domestic market presents a healthypicture for the industry, such that the currentPhilippine possession ratio of 24:1 is an

appealing factor to the industry compared toother ASEAN countries where the density ofmotorcycles per person is near the saturationpoint. The situation offers tremendous growthpotential in the near future.

Policy Response

The domestic market presents a huge potentiafor growth with motorcycle density still farfrom our ASEAN neighboring countries. It is

therefore important to equip the industry tocapitalize on the opportunities, as well as facethe changes and challenges in a liberalized andopen market environment. This is where thegovernment can step in and provide the boostto the industry to increase their competitiveedge, especially in the motorcycle partsmanufacturing.

The following have been identified as possibleinterventions for the industry:

Provision of fiscal incentives to developcritical parts manufacturing and alliedindustries such tool and die, injectionmolding facilities;

Establishment of testing facilities; Strict enforcement of customs and IP laws.

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c. Electronics

The Philippine electronics industry beganin the mid-seventies when industrializednations relocated their production facilities tothird world countries in order to control theescalating cost of production. The Philippineswas an ideal relocation site due to its cost

competitive, highly-educated and English-speaking labor. Other factors includedthe countrys geographical location (beingat the crossroads of international trade),and attractive government incentives. Theconditions that encouraged foreign electronicscompanies to turn to the Philippines haveremained and have been further enhanced bythe countrys political transition to populardemocracy in 1986. Since then, the industry

has grown rapidly and overtook agriculture asthe leading export earning industry in 1996.


The Philippine electronics industry remainsto be the major contributor to the economy,accounting still for 40 percent of total exportsin 2013.

As of December 2013, in terms of employment,

the sector directly employs around 273,000and contributes around 1.91 million indirectemployment.

Latent Comparative Advantage and Potential toMove up the Value Chain

Semiconductor Manufacturing Services (SMS)account for 77 percent of all electronics exports,but include only back-end testing and assemblyas the country does not have manufacturingcapability for semiconductor wafer fabrication.The remaining 22 percent is comprised ofElectronics Manufacturing Services (EMS).According to SEIPI, industry trends identifyseveral EMS subsectors with high growthpotential: Medical/Industrial Instrumentation,Automotives, Consumer Electronics andOffice Equipment. Similarly, the Philippines

is the traditional top choice worldwide for Testand Assembly operations, but value-addingdoes not come from these operations, andinstead derives from semiconductor researchand chip design processes.

Sales from semiconductors will continue to beon a downward slide, as these are mainly legacy

products with declining profit margins thatare dependent on the industrys fast turnovertrend of cheaper and increasingly moreefficient products (similar to how the price ofUSB flash drives has gone down while memorycapacities have doubled). This means that thePhilippines will definitely have to focus moreon the electronics side to remain competitivefor the long term.

To this end, SEIPI, with the support of BOI,is currently in the process of securing fundingfor its proposed industry think tank project,entitled Product and Technology HolisticStrategy (PATHS), which aims to identifyproduct niches and an overarching long-termindustry strategy for the Philippine electronicssector over the next 5 to 10 years.

Spillover Effects

The Electronics industry has the highestglobal value chain (GVC) participation rate,with a share in foreign value added in tradeof all exports at 45 percent. This is becausethe products of this industry can be brokendown into discrete components that can beseparately produced, easily transported andassembled in low-cost locations.


Based on the current structure of the industry,the identified supply chain gaps include ICdesign, wafer fabrication and R&D in theupstream section and no manufacturingdiversification in the downstream. Constrainingthe development of the upstream anddownstream activities are the lack of highly-skilled workforce, high power costs, lack of

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technology and product innovation, financing,and SME product development initiatives.

Policy Response

To address the above constraints, the PhilippineCouncil for Industry, Energy and EmergingTechnology Research and Development

(PCIEERD) of the DOST approved fundingfor the establishment of the following facilities:

Advanced Device and Materials TestingLaboratory (ADMATEL);

Electronics Product Development Center(EPDC); and

Philippine Institute for Integrated Circuits(PIIC).

In addition, the government will develop SMElocalization programs (Big Brother- LittleBrother) to further enhance the participationof SMEs in the value chain.

Other interventions include human resourcedevelopment, reducing the cost of doingbusiness in the country (taxes, energy cost,logistics cost, etc.), and investment promotion.

d. Chemicals, Petrochemicals, and Oleo-

chemicals

The chemical industry is considered as oneof the pillar industries in any economy as itsupports all sectors of the economy, namely:agriculture, services, and manufacturing.The various chemical sub-sectors includepetrochemicals, oleo-chemicals, coatings andinks, adhesives, plastics, fertilizers, cosmeticsand personal care, soap and detergent.


Based on the Labor Force Survey (LFS)conducted by the Bureau of Labor andEmployment Statistics (BLES), the chemicalindustry employs a total of 176,000employees as of July 2013. The Samahan saPilipinas ng mga Industriyang Kimika (SPIK)

provided industry estimates on the number ofdirect workers for the following sub-sectorspetrochemicals3,000 direct workers; oleo-chemicals3,000 direct employees; and thechlor-alkali sector600 direct employeesHowever, industries which use their productsemploy huge numbers of employees (foodprocessing, healthcare, electronics, transport

and energy, construction and automotive).

The Philippine Chemical export performancehas been increasing. Based on the industrysexport performance from 2009 to 2013exports grew by 167.80 percent from US$969Million in 2009 to US$2.595 billion in 2013However, the industry is still a net importerof chemical products with a value of US$5.1billion imports compared to the export value of

US$2.3 billion, both as of October 2013.


There is a high potential for the industry tomove up the value chain given that it shalmake use of the latest available technology intheir operations. As an example, the expansionin chlor-alkali production capacity would bemaking use of the latest available technology

called the Ion Exchange Membrane (IEM)which will give more efficient and cleanerprocessing. The first naphtha cracker plant inthe Philippines has been constructed and wilcommence commercial operations in August2014. The said naphtha cracker will be thebase producer of the raw materials to be usedas feedstock by the midstream petrochemicapolymerization plants. Further, one of thecountrys vital assets, the coconut, servesas the major input for oleo-chemicals, i.e.cocochemicals, which are recognized as naturaand sustainable.

Spillover Effects

A wide window of opportunities exists fothe domestic chemical industry market asit exhibits strong linkages to industries such

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as agriculture, agribusiness and fishery,housing, cement, pharmaceuticals, andcreative industries. Petrochemical productsmay be used in construction, electronics,transportation, telecommunications,agriculture, packaging, and furniture. Chlor-alkali, which is an input for petrochemicals,may also be used in water treatment, batteries,

agrochemicals, electroplating and galvanizing,and pharmaceuticals. Lastly, oleo-chemicals,which are derived from coconut oil, can be usedin everyday products such as soap, cosmetics,pharmaceuticals, detergents, and foodproducts. The development of the Philippinechemical industry would give support tothe roadmaps of the plastics, automotives,electronics, and copper industry roadmaps,among others.


The nature of the industry that covers theupstream, midstream, and downstream sectorsmakes the network of the different sectorsan interactive partnership and competition initself.

The petrochemical industry is a strategicindustry in an economy. In most countries, the

development of the petrochemical industry isprimarily hinged first on supplying the domesticmarket resin requirements and subsequently,expanding capacity to cover export market tofurther achieve economies of scale.

Based on the Philippine Chemical Master Plan,the industry emphasized the importance of thefull integration of the petrochemical industrywhich includes the expansion of naphthaproduction and diversification of petrochemicalproducts, so as to help in achieving inclusivegrowth and sustainable socio-economicdevelopment. The need for the petrochemicalindustry integration is seen vital as there aregaps in the supply value chain that needs to befilled in.

The midstream petrochemical industry has 7major players which provide the needs of itsdownstream plastics industry consisting ofmore than 100 players. Due to the insufficientsupply of raw materials, the downstreamindustry is forced to import its requirement.Therefore, a supply chain gap in the midstreampetrochemical exists; and this will be partly

addressed by the Naphtha Cracker as itwill produce the raw materials ethylene andpropylene, to produce PE and PP. Other thanPE and PP, an expanded PVC production isneeded to meet domestic demand. The size ofa PVC expansion necessitates an economicalsupply of chlorine from a chlor-alkali plant.

In addition, the Philippines is currentlyconfined to only one component of the oleo-

chemical value chain, which is an ingredientmanufacturing. But the entire value chain isquite long, comprising of feedstock production,ingredient manufacturing, compounding andformulation, branding and packaging, logisticsand distribution, retail or direct marketing.

Policy Response

Having stable operations of the domesticpetrochemical facilities, leading to a steady

supply of ethylene, propylene, PE and PPmaterials, will help develop local olefins andpolyolefins demand and as such may lead to anincreased market size for the said products. Thiscreates the environment for having the currentfacilities undergo further capacity expansions,for which the granting of investment benefitswill play an important role in ensuring thesustainability of the industrys operations.

It is a known fact that chemical plant facilitiesare highly capital intensive and usually requireforeign technologies. Thus, it is not uncommonthat foreign investors are highly encouragedby governments to participate/invest onthese projects considering the huge capitalinvestments required.

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Other than incentives, there should beresearch & development (R&D) support givento the industry in order to be innovative, bothin its products and processes. Further, productinnovation and technological advancementsshould be supported by strong knowledge-based workers in the sciences. R&D supportshould then be supplemented with skill training

programs for chemists, scientists and engineerswho shall mobilize the industry.

Technical smuggling shall be addressed throughthe strict and proper implementation of customslaws. Lastly, investing in the construction ofpower plants and logistics infrastructure shouldalso be considered to address the concernsof high power costs and availability, as well aslogistics costs.

e. Shipbuilding and Ship repair

For the year ending 2013, the Philippinesregained its position as the 4th largestshipbuilding nation of the world in terms ofgross tonnage, with just a 0.3 percent edgeover Brazil.It is thus noteworthy that moreshipyards in the country are building more shipsof higher tons such as bulk carriers, containerships and passenger ferries. Investments in

shipbuilding facilities are seen to benefit thefood manufacturing, tourism, transportation,oil and steel industries.


One of the major contributions of the sectoris its employment generation. At present,the sector employs 45,038 Filipino workers,70 percent of whom belong to the skilledand semi-skilled category. Hanjin Philippinesalone employs 25,000 workers. Enhancinginvestments in the ship building and ship repairsector (SBSR) will surely generate additional

jobs for Filipinos. Based on the Input-Output(I-O) Analysis2, the sector has a simple globalemployment multiplier of 395. This means that

2Input-Output Analysis was prepared by the COMPETE Project and Center for Research and Communica-tion (CRC) with funding from the United States Agency for International Cooperation (USAID)

a one-billion peso investment in the sectocan potentially generate 395 jobs across thevarious industries.

The sector has also generated exports for thecountry, thus making it a foreign currencyearner. In 2012, the sectors export receiptsreached US$1.07 billion, which was already

0.7 percent of the countrys gross domesticproduct.


A latent strength of the sector which stilneeds to be fully taken advantage of is thecountrys strategic location to the shippingroutes of oceangoing ships serving the Asia-

Pacific region. Such strategic location couldbe translated into the country becoming a hubfor ship repair and dry-docking of oceangoingships, including fishing vessels operating ininternational waters. For this latent strength tobe realized, the countrys shipyards would needto be capable and competitive with neighbouringforeign shipyards, in servicing the dry-dockingrepair requirements of oceangoing ships.

Ship building, being a heavy industry with

high degree of technology immersion, offersan opportunity for foreign collaborationAccording to the Nomura study entitledAccelerating Foreign Direct Investments(FDIs) in the Philippines ShipbuildingIndustry, Japan seems to be the mostpromising to the Philippines in attracting FDIsin the SBSR sector, followed by Korea. Thestudy further indicates that Japan, China andKorea are potential markets for investmentsin shipbuilding. At present, the Philippineshosts some of the worlds biggest players inshipbuilding such as Japans Tsuneishi with itsCebu facility now its second largest shipyard.

A more concrete strength of the sector is thereadily available cheap and easily trainabletechnical and skilled manpower for shipbuildingand ship repair works in the country. Many

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Filipino workers have inherent skills forshipyard-related jobs like

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