Investment News Analysis Trade

Politicisation on an industrial scale

If you want an example of mixed signals, you’ll be hard pressed to find a better one than this. According to Dan Lachica, president of the Semiconductor and Electronics Industries in the Philippines, Inc (Seipi), there is concern that Philippine President Rodrigo Duterte’s less-than-flattering comments about the US administration of Barack Obama are having a negative impact on semiconductor/electronics manufacturers in the Philippines. He believes it’s the reason for the industry having “lost momentum”. In the next breath, however, he’s proclaiming possible record exports of these products for this year.

So which is it? Has the industry lost momentum or is it soaring to new heights? These two statements aren’t just incompatible with each other, they’re oxymoronic.

Recently Lachica told Bloomberg Markets that there is deep concern among American companies over Duterte’s anti-Washington remarks. “Investments have been held and orders have been canceled. Hopefully, it doesn’t get to the point that they shut down,” he said. This, of course, flies in the face of a statement by Finance Secretary, Carlos Dominguez. He reported that no American company is leaving the country and assured top US business leaders that economic relations between the Philippines and the US remain very much intact.

If the sentiment expressed by Lachica is true, however, and we are very skeptical about that – so far, like Dominguez, we haven’t heard of a single US semiconductor/electronics maker pulling out of the Philippines – then this will be music to the ears of the Taiwanese; one of the world’s largest semiconductor/electronics producers. Taiwan is keen to impose a much bigger footprint on the Philippines in terms of trade and investment and this is a sector where it could do it quickly and benefit hugely from offshore production. The same goes for the South Koreans. And all that would be extremely bullish for the industry locally.

The problem with the sort of loose concerns being touted by Lachica is that they can become self-fulfilling; i.e., if you tell people they should be concerned they’re likely to become concerned even though they had no such concerns previously. He says that investments have been “held”, but gives no proof of that – no figures, no names of sector players, nothing. The same goes for his claim that “orders have been cancelled,” which is even more perplexing. Unless customers are cancelling orders for ideological reasons – that they disapprove of Duterte’s rhetoric to such an extent that they’ve decided to source their products elsewhere – this claim seems to have little context.

But here’s why we’re really skeptical. In July 2015 – that’s a full year before Duterte’s election, Lachica was already downplaying the outlook for the electronics sector. Seipi had downgraded its growth target from 5-7% to a modest 3-5%. This has since been further downgraded to 2-5% in what looks like a further effort to lower expectations.

But one year ago, he couldn’t use Duterte’s rhetoric to explain why his industry – the Philippines’ largest export earner – was having growth problems. At that stage, Duterte hadn’t even come on the scene. Instead, he blamed lower demand from China, Japan and the European Union for the industry’s contraction – more specifically, China’s economic slowdown with annual growth then predicted to fall to 7%, and volatility in Europe caused by the Greek debt crisis.

These may well have been credible factors for lowering the growth target, but anyway he had to say something; in May 2015 total receipts from Philippine electronic exports – US$2.35 billion worth – had fallen by 7.5% from US$2.55 billion in the previous May. But when the year was over and the numbers were in it was a very different picture. Electronics exports rose 7.9% from the previous year – from US$26.79 billion to US$28.92 billion. In other words, the gloom didn’t materialise. And Lachica looked good – the industry had well surpassed expectations.

Back in 2012 – Lachica was appointed Seipi president in 2010 – the organisation had also lowered its growth estimates; on that occasion, from 5-6% to flat. Zero percent growth. What actually happened was worse. The year’s electronics export earnings slid by 5.19%. The reason for that, according to Seipi, was a depressed export market, weak consumer demand, high power-costs and the strong local currency. That last argument it can’t use now; in fact the weaker peso should help exports.

Now to his other signal where Lachica strikes a decidedly positive note.  “We gave a range of two to five percent for 2016 which would be in the neighborhood of US$30 billion, even US$31 billion. So there’s a possibility of seeing us hit again the old peak of US$31 billion [reached in 2010]. This is spurred by expansion, new products, and new technologies of our member companies,” he said, adding “We are seeing a lot of potential growth areas…”

So from that statement we can gather that the Philippine semiconductor/electronics sector is firing on all cylinders. The fact is we are now in November and have clearer data on which to more accurately predict the year’s growth. In September, for example, electronics products shipped saw an increase of 3.6% over the previous September; exports of semiconductors increased by 2.7%, Sept ’15 to Sept ’16. Same thing between last August and this August: electronics up 11.6%; semiconductors up 11.2%.

Setting low targets is a well-known business strategy to manage expectations. If they come in or around the target figure, then management will have been proved right to set the target there. If they come above that figure, they will have exceeded market expectations and the health of the industry will look even better. And, of course, external factors – often unpredictable ones – will always affect the outcome. That’s business everywhere.

But when business is politicised, that puts a whole different spin into the mix and, ultimately, that can’t be helpful for the sector over which Lachica presides, or any sector, or the economy as a whole. In this case, Lachica’s assessment was based on one view – possibly his own; possibly influenced by the American Chamber of Commerce which has put out a number of statements regarding Duterte’s policies, like this one which it released in September.

“The American Chamber of Commerce of the Philippines voices growing concern over developments that could harm the long-standing optimism of American business to invest in the Philippines,” it said. “Certainly, the illegal drug menace is a serious threat in the Philippines, as it is in the US and elsewhere. However, the increased number of killings during the heightened anti-drug campaign is harming the country’s image, as portrayed by international media, and some investors are now asking whether this campaign reduced the rule of law”.

So there we are, the American Chamber is just another voice in the Washington-led anti-Duterte chorus – the biggest, of course, being the Washington-driven international media which the Chamber offers as some kind of proof for its assertions. We believe, however, that the volume will be turned down considerably once Donald Trump becomes US President Trump in late January.

Our advice to the Chamber – which will be as welcome to it as its advice to the government – is to remain outside the domestic affairs of the Philippines. Unless the Chamber is a listening post for the CIA and an agent provocateur for the same – of course, we would never suggest that, Heavens no! – the internal affairs of the Philippines are a matter for the Philippine administration. Mr Lachica, who spent some 16 years in the Obama love-land of Silicon Valley, might also want to depoliticise his appraisal of his industry.

Both the Chamber and Lachica could do worse than take on board what Trade Secretary, Ramon Lopez, said recently – that Duterte is not anti-American, he’s anti-interference and that the president is committed to promoting the Philippines as an investments destination and to protecting the interests of investors – and that will certainly include American investors.

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