PHILIPPINE ELECTRONICS ∙ IT INDUSTRY AND IT POLICIES

Asian Electronics and IT Policy Symposium

Seoul, Korea 11th October 2012

Philippine Demographic Profile

The Philippines is an archipelago of 7,107 island 3 island groups namely

Luzon, Visayas & Mindanao

Total land area of 299,764 sq.kilometers.

The Philippine coastline adds up to 17,500 km.

17 regions, 81 provinces, 136 cities, 1494 municipalities and 41,995 baranggays (which is the smallest political unit into which cities and municipalities in the Philippines are divided)‏

Estimated population of about 103 Mn as of end 2011.

Geographic features of the Philippine Archipelago poses a unique challenge to providing basic telecommunication services to the mass population.

BASIC SOCIO-POLITICAL ECONOMIC FACTS

OFFICAL NAME : REPUBLIC OF THE PHILIPPINES CAPITAL : MANILA LOCAL TIME : GMT + 8 HOURS PEOPLE : FILIPINOS ARE PREDOMINANTLY OF MALAY DESCENT ALTHOUGH MANY HAVE MIXED ANCESTRY SUCH AS CHINESE AND SPANISH LANGUAGES : PILIPINO (derivative of Tagalog) and ENGLISH ARE OFFICIAL LANGUAGES INCLUDING SOME 150 MORE NATIVE LANGUAGES, VERNACULARS AND DIALECTS PREVAILING RELIGIONS : ROMAN CATHOLIC (83%), PROTESTANTS DENOMINATIONS (8%), MUSLIM (4.6%), IGLESIA NI KRISTO (2.3%) ESTIMATED AVERAGE LIFE EXPECTANCY : 70 YEARS FOR MEN AND 74 YEARS FOR WOMEN (UN 2008) MONETARY : PHILIPPINE PESO (WITH MULTI-CURRENCY ACCEPTANCE FOR LOCAL TRANSACTIONS GOVERNMENT : PRESIDENTIAL (EXECUTIVE) WITH BICAMERAL CONGRESS AND SENATE AND INDEPENDENT JUDICIARY MEMBERSHIP

Source : BOI

ELECTRONICS SECTOR VALUE PROPOSITION OVERVIEW • BACKGROUND

The Philippine electronics industry began in the mid-seventies when industrialized nations relocated their production facilities to third world countries in order to control the escalating cost of production. Other factors included the country’s geographical location (being at the crossroads of international trade), and attractive government incentives. The conditions that encouraged foreign electronics companies to turn to the Philippines have remained and have been further enhanced by the country’s political transition to popular democracy in 1986. Since then, the industry has grown rapidly and overtook agriculture as the leading export earning industry in 1996. Source: BOI and NSO

Industry Coverage The Philippine electronics industry covers the following sub-sectors:

Semiconductors/Components and Devices (Pentium III, DSPs, Integrated Circuits, Transistors, Diodes, Resistors, Coils, Capacitors, Transformers, Lead Frames, PCB)

Electronic Data Processing (EDP) Equipment (computers, peripheral storage and input/output devices with products such as laptops, desktop PCs, printers, computer monitors, drives: hard disk, optical, ZIP, CD-ROM)

Office Equipment (photocopiers, fax machines, and electronic calculators);

Telecommunication Equipment (telephone sets, modems, copper communication cables, and fiber optic cables)

Communications and Radar (cellular phones, pagers, closed circuit television (CCTV), CB transceivers, radar detectors, marine and line mobile radios.

Control and Instrumentation (test and measuring instruments such as oscilloscopes, signal generators, ammeters, voltmeters, ohmmeters, cross talk meters, etc.)

Medical and Industrial (X-ray and other medical applications, railway signaling, security and fire alarms)

Automotive Electronics (car stereos, anti-skid brake systems (ABS), and car body electronics); and

Consumers Electronics (TV sets, VCD players electronic games, radio cassette players and karaoke machines) Source: BOI and NSO

CHARACTERISTICS OF THE ELECTRONICS INDUSTRY ESSENTIALLY ENGAGED IN ASSEMBLY AND TEST

MANUFACTURING AND HIGHLY TECHNICAL, LABOR INTENSIVE ACTIVITIES

Source: SEIPI Membership Survey

Export Oriented Dominated by NMCs

Growing Base of Components Supplier

High Quality

High Productivity

PROFILE OF TYPICAL ELECTRONICS COMPANIES

ISO CERTIFIED RUNS AT 3 SHIFTS A DAY

BETTER COMPENSATION PACKAGE

NON-UNIONIZE WITH LOW TURNOVER

LOCATED IN ECONOMIC ZONE OR BOI REGISTERED

OPERATES WITH CLEAN ROOMS AND FULLY INTEGRATED MANUFACTURING FACILITIES

PRACTICES THE BEST KNOWN METHODS IN MANUFACTURING

(JIT, TQM, 5S, QPIC)

CAPABILITIES RANGE FROM IC PACKAGING, PCB ASSEMBLY AND FULL PRODUCT ASSEMBLY

IN-HOUSE TRAINING CAPABILITY

Source: SEIPI Membership Survey

Exports The Philippine electronics industry remains to be the major contributor to the economy, accounting for 49.45% of the total Philippine exports equivalent to US$ 23.72 billion for the year 2011. Exports of electronic products dropped by 28.17% from US$28.501 billion in 2008 to US$22.182 billion in 2009, as a result of the global economic crisis during that period. However, the industry posted a 41% increase in exports from US$22.182 billion in 2009 to US$31.079 billion in 2010.

The summary of Philippine merchandise exports by major product grouping is as follows (Amount in Billion US$):

Group 2010 2011 %Change

Total Exports to All Countries

51.497

47.967

-6.86

Electronics

31.080

23.722

-23.76

Semiconductors

23.831

17.723

-25.63

Electronic Data Processing

5.484

4.243 -22.64

Automotive Electronics 0.380 0.786 106.70

Consumer Electronics 0.293 0.237 - 19.09

Office Equipment 0.242 0.225 - 7.20

Communication/Radar 0.695 0.338 - 51.37

Control Instrumentations 0.039 0.030 - 23.45

Medical/Industrial 0.035 0.035 14.22

Telecommunications 0.078 0.100 28.62

Source: NSO (Note: Numbers do not add up due to rounding off)

The biggest destinations of electronics export products, are primarily the markets of Japan, USA, China, HK, Singapore, Korea, Netherlands, Thailand, Taiwan and Germany. Among the top export markets, only exports to China and Thailand have increased. Electronic exports to Singapore suffered the biggest decline of more than 41% from US$ 7,318.94 Million in 2010 to US$ 4,277.38 Million in 2011.

COUNTRY OF DESTINATION

EXPORT VALUE (US$ MILLION 2010 2011

CHANGE

Japan 7,841.29 8,860.90 13.00

USA 7,559.11 7,091.27 -6.19

CHINA 5,724.47 6,094.45 6.46

HK 4,335.69 3,697.69 -14.72

SINGAPORE 7,318.94 4,277.38 -41.56

KOREA 2,243.11 2,195.44 -2.13

NETHERLANDS 2,429.53 1,743.74 -28.23

TAIWAN 1,751.96 2,002.68 14.31

GERMANY 2,657.26 1,685.18 36.58

TOTAL 43,643.99 39,552.35 -9.38

EXPORTS BY SECTOR

IMPORTS MAY-JUNE 2012

Investments Investments climate in the Philippines is very liberalized. 100% foreign ownership is allowed in certain areas of investments. In 2010, investments in the industry reached its highest value at US$2.27 Billion.

Investments in Electronics Industry

Source: BOI & PEZA

Employment The Philippines remains to be the number one supplier of knowledge-based jobs and workers worldwide with an immediately available labor force of 32 million and over 100,000 engineering, IT, and technical graduates every year. Direct employment in the industry registered a growth rate of 5% from 476,000 in 2009 to 500,000 in 2010. As of June 2011, direct employment in the industry is recorded at 516,000.

Figure 4: Direct Employment in Electronics Industry

Source: SEIPI

HUMAN RESOURCES • Quality The Philippines is an ideal relocation site due to its highly educated and competent English-speaking labor; excellence in customer service and communications skills; and highly skilled manpower pool. • Costs The table below shows the annual base pay of the semiconductor and electronics sector workers. Individual employee performance is still considered as the most common criteria for granting base salary increases in the industry.

SIZE OF AVAILABLE LOCATION FOR INVESTMENTS The size of available location for investments is shown in Table 4.

Table 4

AVAILABILITY OF PARTS AND COMPONENTS The industry is a growing base of components supplier. It can be said that the industry is highly competitive as multiple players are found in each sub-sector. The presence of a growing base of components supplier boost the country’s image as ideal relocation site as there will be a lesser need to look for component parts outside the country. These complements the industry as it offers a wide variety of products and services ranging from IC Packaging, PCB assembly and full product assembly.

MINIMUM INVESTMENTS COSTS There is no minimum investment costs for new locators / new business registrations as long as their financial standing can support or maintain its operations. MARKET

OPPORTUNITIES/POTENTIAL CLIENTS

Integrated Industry-Government Strategy for Market Growth Shift from its present electronics product portfolio to Electronics Manufacturing Services

(EMS) and later to other segments of the electronics value chain which offers spillover/linkage opportunities

Investments promotion for Solar Power, Aerospace, Automotive, Medical and Military Companies

Supply Chain Development Supplier Development/Matching (for robust supplier base)

GOVERNMENT SUPPORT / POLICIES Applicable Investment Policies

Omnibus Investments Code of 1987 (EO 226) Investments Priorities Plan - Entitlement to Incentives

- Equity Ownership - Equity Requirement - Regional Dispersal of Industries - Exemption from Locational Restriction

Special Economic Zone Act of 1995 (RA7916)

Industry Programs

Human Resource Development - Unified Competency Development -Unified Microelectronics Program for MicroED/ERDT university participants - IC Design Training Program (RP-Taiwan Collaboration)

Industry Development - Test/ Test Development Industry Profiling - Supply Chain Analysis of the Philippine Electronics Industry

Investment Promotions - Integrated government-industry strategy for market growth Aggressive Industry Marketing Campaign - Policy Alignment

Manufacturing Excellence Drive - Best practice sharing - People productivity programs - Power/water conservation and cost reduction

Incentives (BOI, PEZA, SBFZ) Board of Investments Under Book I of the Omnibus Investments Code, BOI-registered enterprises are given a number of incentives in the form of tax exemptions and concessions. These are: 1. Fiscal Incentives

Income Tax Holiday (ITH) - 6 years- new projects with pioneer status - 4 years- new projects with non-pioneer status - 3 years- expansion/ modernization projects

6 years- new or expansion projects in less developed areas/ 30 poorest province Duty Exemption on Imported Capital Equipment Spare parts and Accessories Exemption on Wharfage Dues, Export Tax, Duty, Impost and Fees Tax Exemption on Breeding Stocks and Genetic Materials Tax credits (for export producers only) Tax credit on tax/duty portion of domestic breeding stocks and genetic materials Tax credit on raw materials and supplies Additional Deductions from Taxable Income Additional deduction for labor expense Additional deduction for necessary and major infrastructure works

2. Non- Fiscal Incentives Employment of foreign nationals Simplification of customs procedures Tax and Duty-free Importation of Consigned Equipment for a period of 10 years Privilege to operate a Bonded Manufacturing warehouse 3. Incentives for Regional Headquarters and Regional Operating Headquarters in the Philippines. Philippine Economic Zones Authority PEZA provides the following fiscal incentives for existing PEZA-registered enterprises-Export enterprises registered with the Export Processing Zone Authority

Income Tax Holiday (ITH) – 100% exemption from corporate income tax - 4 years ITH for Non-pioneer Project - 6 years ITH for Pioneer Project

3 years ITH for Expansion project (ITH applies to incremental sales) Upon expiry of the Income Tax Holiday - 5% Special tax on Gross Income and

exemption from all national and local taxes. Tax and duty free importation of production equipment and machineries, breeding

stocks, farm implements including spare parts and supplies of the equipment and

machineries. Exemption from export taxes, wharfage dues, impost and fees VAT Zero Rating on local purchases of goods and services, including

land- based telecommunications, electric power, and water bills Exemption from payment of local government fees such as Mayor’s

Permit, Business Permit, permit on the Exercise of profession/Occupation/Calling, Health Certificate Fee, Sanitary Inspection Fee, and Garbage Fee.

Subic Bay Metropolitan Authority Subic Bay has a veritable edge as an investment area because of its Freeport status. It is considered a special customs territory where there is free flow of goods and capital equipment. Investors in Subic enjoy these following business incentives and privileges:

Exemption from all local and national taxes such as ad-valorem and excise taxes. Investors are only required to pay a corporate tax of 5 percent from their gross adjusted income. Subic Bay Freeport Enterprises (SBFEs) may also avail of tax holidays if they register with the Philippine Board of Investments (BOI).

Duty-free importation of raw materials, supplies, capital equipment and other items for consumption within the Freeport.

Foreign investors may invest up to 100% equity in almost any economic activity in the SBF except for businesses where foreign ownership is limited by the Constitution.

There are no foreign exchange controls in the Freeport and full repatriation of profit is allowed. .

The SBMA also processes and grants special resident and investor visas. A foreign investor with an investment of at least US$250,000 may be granted a Subic Special Investor Visa. Temporary work permits and Subic Special Work Visas could also be granted to foreign nationals subject to certain requirements

Support/cooperation of Industry Associations The Board of Investments works closely with the various semiconductor and electronics associations:

Semiconductor and Electronics Industry of the Philippines, Inc. (SEIPI) Electronics Industry Association of the Philippines, Inc. (EIAPI) Philippine Appliance Industry Association (PAIA)

EXISTING PLAYERS Multinational companies who have put up their firms in the Philippines include Intel and Texas Instruments from the United States, Continental Temic and NXP (formerly Philips) from Europe, Sony, Toshiba, Hitachi and Fujitsu from Japan, Samsung from South Korea and Acer and OSE from Taiwan.

EXISTING SUPPORT INDUSTRY The Board of Investments also works closely with Advanced Researched Center for Development, Inc. (ARCDI). ARCDI provides high-quality and cost effective training and competency development support to semiconductor and electronics industry players. It offers training modules on specific competency areas, which are centered on industry requirements.

GLOBAL TRENDS Breakthroughs in Printed Electronics. Printed electronics would make increasing demands for greater quality and process controls, particularly since the range of production processes is widening (WT Technical Research, Finland). Components like optoelectronic devices, sensors, indicators and power sources can be integrated with printed systems on web, sheet or foil, Professor Kopola said. This is the case with OLED displays, signage, solar cells and miniaturized fuel cells. Merck Chemicals (Chilworth, England), the organic electronics subsidiary of Merck KGaA of Germany,is concentrating on the development of materials and printable formulations for organic electronic applications, and is involved with partners in projects for the co-development of printing processes and of components and devices. Over the next few years, matching materials with the most suitable and cost effective processes is likely to be a priority among companies in printed electronics in Europe.

Opportunity in the Solar Industry. Solar energy is one segment in printed electronics in which there are rising hopes of a major breakthrough in terms of technology and production processes. Germany is currently a worldwide leader for the application of solar cells for the generation of heating and electricity. In Philippines, SEIPI reports that the presence of Sunpower, Solaria and now Firs Philec Solar Corporation in the country brings awareness on the time to recognize the solar industry. Extending from SMS to EMS to Solar should be considered.

Green Campaign. European reaction to an ever-growing mountain of discarded cell phones, computers, televisions, MP3 players, and other electronics equipment has put companies in China and elsewhere in a scramble to respond. Two recent European Union (EU) directives aim to boost recycling of old electronics, curtail use of hazardous substances in manufacturing, and improve the environmental performance of producers. These tough "green" regulations could serve as trade barriers to electronics exports from China, the world's third-largest trading country.

IT Policies

The Philippines has laws for any and all aspects of business, politics, and social protection. Its leaders have anticipated the need for proactive legislation necessary to bring the country to the forefront of development. As such, the Philippines is among the first in Asia to legislate an electronic commerce law. The move is expected to jumpstart the nation’s economy and propel it towards its goal to be the e-services hub of Asia.Anyone, regardless of nationality, is welcome to invest in the Philippines in almost all areas, and up to the extent of 100 percent ownership. The laws governing investments include the areas of Legal, Education and Manpower Development, Telecommunication Infrastructure, and Institutions. The Philippines Electronic Act of 2000 (E-Commerce Act 2000) The Investment Priorities Plan (IPP) The Special Economic Zone Act The Intellectual Property Code of the Philippines Policies Related to General Business

The Philippines Electronic Act of 2000 (E-Commerce Act 2000) This landmark legislation sets up the legal infrastructure that now governs online transactions in the Philippines, thus paving the way for the full proliferation of e-commerce in the country. As it is based on the Model Law on Electronic Commerce drafted by the United Nations Commission for International Trade Law (UNCITRAL), it also prepares the Philippines for full participation in global e-commerce. Its highlights include: -Legal recognition of electronic documents, signatures and transactions -Penalizing of cyber crimes such as hacking into, altering, forging, inflicting damage on, violating the secrecy of, and illegally misusing electronic documents sent, received, stored or compiled. -Mandating of government agencies to be e-commerce-ready in two years -Download the E-commerce Act 2000 and its Implementing Rules and Regulations

The Investment Priorities Plan (IPP) The Investment Priorities Plan (IPP) of 2000, which is implemented by the Philippine Board of Investments, seeks to achieve countrywide development through globally competitive industries. Incentives and investment areas specific for information technology services are listed in the Guidelines for IT services, which presents the procedure for the registration and administration of incentives under Executive Order 226.

The Special Economic Zone Act The Special Economic Zone Act of 1991 or Republic Act 7916 establishes the legal framework and mechanisms for special economic zones (ecozones) such as information technology parks. The law, which is implemented by the Philippine Economic Zone Authority (PEZA), grantsincentives for companies locating in ecozones.

The Intellectual Property Code of the Philippines The Intellectual Property Code of the Philippines as approved under Republic Act 8293, enhances the protection of intellectual property rights (IPR’s), privacy and data security.

Philippine Technology Transfer Act of 2009

The Republic Act No. 10055, entitled "An Act Providing the Framework and Support System for the Ownership, Management, Use, and Commercialization of Intellectual Property Generated from Research and Development Funded by Government and for Other Purposes" also known as the "Philippine Technology Transfer Act of 20Policies Related to General Business Other laws relevant to the investor’s business activities include: Republic Act 8756 and its Implementing Rules and Regulations which amend the Omnibus Investment Code of 1987, lay down the procedures for any multinational company to establish regional or area headquarters in the Philippines. Foreign Investments Act of 1991 seeks to promote foreign investments in the country. The Act lays down the procedures for registering enterprises that do business or other activities in the Philippines. The Retail Trade Liberalization Act of 2000 or Republic Act 8762 and its Implementing Rules and Regulations, lay down the terms for retail trade business in the country, including provisions for ownership by foreign investors.

The General Banking Law of 2000 or Republic Act 8791 allows foreign ownership of local banks. The country’s central bank, the Bangko Sentral ng Pilipinas (BSP), acts as the supervisory body in charge of implementing this law. The Revised Securities Exchange Act of 2000 strengthens the supervisory and monitoring powers of the Securities and Exchange Commission over the Philippines stock market. This was signed into law on July 19, 2000. Telecommunications-related laws implemented by the National Telecommunications Commission strengthen its policy and regulatory framework on telecommunications. Republic Act (R.A.) 7925 seeks to promote the development and the delivery of Philippine telecommunications services, and R.A. 6849 provides for the installation of public telephones in all municipality in the country.

MEMBERSHIP IN INTERNATIONAL ORGANIZATIONS United Nations (UN) Association of Southeast Asian Nation (ASEAN) Asia Pacific Economic Cooperation (APEC) Asian Development Bank (ADB) World Trade Organization (WTO) World Bank (WB) International Monetary Fund (IMF) International Atomic Energy Agency (IAEA) International Labor Organization (ILO) Inter-Parliamentary Union and with evolving diplomatic and economic engagements.

THANK YOU!!!!

TO GOD BE THE GLORY….

MADONNA C. ESTRELLES Information and Communications Technology Office

Republic of the Philippines