Report No. 280-PH Industrial Development Problems LE C P And Prospects in the Philippines (in two volumes) Volume 2 Review of Selected Sub-sectors March 19, 1974 Industrial Projects Department Not for Public Use Document of International Bank for ReconstrueItion and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Report No. 280-PH
Industrial Development Problems LE C PAnd Prospects in the Philippines(in two volumes)Volume 2Review of Selected Sub-sectorsMarch 19, 1974
Industrial Projects Department
Not for Public Use
Document of International Bank for ReconstrueItion and DevelopmentInternational Development Association
This report was prepared for official use only by the Bank Group. It may not be published
quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility
for the accuracy or completeness of the report.
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INDUSTRIAL DEVELOPM4ENT PROBLEMS AND PROSPECTS
IN THE PHILIPPINES
TABLE OF CONTENTS
Page No.
VOLUME II - REVIEW OF SELECTED SUB-SECTORS
V(i) ENGINEERING INDUSTRIES ........... ....... 1
V(ii) SHIPBUILDING INDUSTRY ................... 12
V(iii) AGRICULTURAI. MACHINERY AND EQUIPMENT .... 31
VI. PULP AND PAPER .. ......... ....... ...... 40
VII. TEXTILES ANDi GARMENTS .... o...... 70
VIII. FOOTWEAR INDUSTRY .... .-.-. .-. . . .... ....... 80
TABLES - V(ii)-1 to VIII-1
V(i). ENG[NEERING INDUSTRIES
Introduction
5.1 For purposes of this report, engineering industries may be definedas comprising the following groups of the ISIC classification:
35 - Manufacture of metal products, except machinery and transportequipment;
36 - Manufacture of machinery, except electrical machinery;
37 - Manufacture of electr:Lcal machinery, apparatus, appliances,and supplies; and
38 - Manufacture of transport equipment.
5.2 In the Philippines, the earliest firms in this area of endeavorwere companies which established themselves to provide construction, erection,maintenance and repair services to industries employing mechanical equipmentsuch as sugar factories, mining and (land and sea) transport enterprises.Some of the largest firms engaged in "engineering" have grown from thisbackground; they continue to thd!s day in their original pursuits, butthey have generally added capabilities for the manufacture of a wide varietyof spare parts as well as new equipment requiring a relatively low level ofsophistication, such as mining ctarts, centrifugal pumps, chain and pulleyblocks, etc. Not only size (up to P 150 million annual revenue), but alsoequipment and skills available in some of these firms are impressive. Capa-bilities include well-equipped ferrous and non-ferrous foundries, large andwell-maintained machine tools, and employees - workers, foremen and engi-neers - with the requisite skills.
5.3 In the area of land transport equipment, the automobile industryis in the process of transition from purely assembly operations to selectivemanufacture of major components for both domestic and export markets underthe guidelines of the "progressive car manufacturing program" (PCMP). Hither-to, a large number of assembly plants produced a wide variety of vehiclesfor the limited Philippine market, and domestic operations were limited toassembly and painting. Bodies for commercial vehicles and "jeepneys" wereconstructed in workshops on a small scale. Now under the officially spon-sored program, five manufacturers have been allowed to assemble a limitedvariety of vehicles in the Philippines subject to the condition that eachone will also manufacture an agreed list of parts, e.g. body panels, trans-missions, engine blocks, etc. for both home and export markets, and earn acertain percentage of the foreign exchange required for import of CKD pack-ages through exports.
5.4 Several firms are engaged in the manufacture of consumer durablegoods, such as air-conditioners., refrigerators and sewing machines. Inthis area, designs are invariably of foreign origin; and overseas companies
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generally are influential, either as owners or as licensors. Some plantsin this category are excellently equipped and obviously well managed. Incontrast with the appliance industry, the manufacture of industrial electricalequipment is not well developed. There is one maker of distribution trans-formers and one of small electrical motors. Capacity utilization is low(around 50 percent on a one-shift basis), due in part to high costs in compari-son with imports. In agricultural equipment, there existed, roughly 15 yearsago, some manufacture. In the 1960's, with more liberal import policiesprevailing, the manufacturers found it impossible to compete and closed shop,or turned to other products. At present, there is a re-emergence of firmsin this area, stimulated to some extent by the availability of designsspecially developed for use in less advanced countries. A few small firmshave emerged as support industries (e.g. tool and die makers); and a numberof companies are engaged in specialty markets, such as replacement partsfor crawler tractors, LPG (liquified petroleum gas) cylinders, weldingequipment, etc.
5.5 It can be said without hesitation that the Filipino worker hasunusual mechanical aptitude and trainability. As a result, it seems thatmanufacture proceeds efficiently and without undue scrap losses, eventhough equipment at times is rudimentary and partly "jerry-rigged". Someplants exhibit considerable ingenuity, adapting general-purpose machinetools for tasks which are usually reserved for specialized equipment. Theseadvantages, in combination with the prevailing relatively low wage levels,point to real possibilities for a profitable development of the Philippineengineering industry. It should be said, however, that with the exceptionof the work of appliance makers and the participants in the PCMP, operationsare currently largely of the "jobbing" type. Modern production methods areas yet little developed.
5.6 The fact that in the Philippines a considerable quantity ofplant equipment is idle or grossly underutilized, has been brought out bya number of observers. 1/ Most factories work for only one 8-hour shiftper day, and there are many which do not use a very substantial portionof their available equipment on a regular basis. As installed capacityis poorly utilized, it appears that there is an artificially high capital-output ratio in some industries.
5.7 The major identifiable building blocks available for further growthof the engineering sub-sector appear to be the metal working industry, theautomobile industry, and the shipbuilding industry. The farm equipment andindustrial electrical equipment industries are infant industries withpotential for growth in due course. The existing capability range of theseindustries is shown in the table below:
1/ "Survey of Idle Plants and Equipment in the Philippines", publishedby The Economic Development Foundation, Inc., Makati, Rizal,November 1972.
Metal-working industry Heavy castings Replacement parts for mining, Fabricated struct-Forg-ings sugar and other industrial ures
machinery Industrial pumpsBoilers, tanks etc. Mining cartsGrinding balls Welding equipmentLogging blocks and rigging Barges, etc.Train wheelsTractor undercarriage etc.
Passenger car industry Engine blocks Transmissions. engines Passenger cArRBody stampings Radiators Jeepneys
Leaf SpringsExhaust systemRepair Parts
Commercial Vehicle Industry Body/chassis TrucksRepair parts Buses
Shipbuilding Industry Ship repair parts Small shipsFittings and deck equipment Barges
BoatsIndustrial equipment
Electrical equipment industry Parts for repair and rebuilding AppliancesDistribution transformersSmall motors
Farm equipment industry Small engine (diesel) Power billersAttachments Irrigation pumpsReplacement parts Rice Hullers
Grain Dryers
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5.8 The shipbuilding industry and agricultural machinery and equip-ment are reviewed in some detail in Sections V(ii) and V(iii). Metalworking industries, car manufacture, industrial electrical equipment,machine tools, etc. are briefly discussed in the following paragraphs.
5.9 The metal working industry comprises a few large and severalsmall plants engaged principally in jobbing work. In the absence of anindustrial machinery industry in the country, the metal working industryperhaps comes closest to fulfilling this role, although its operation islimited to the making of replacement parts and sub-assemblies. Actually,the industry may be described as a group of general shops with foundry,machining and fabrication capabilities and, in this sense, is distinct fromregular manufacturing industries dealing with specific lines of products.The larger units are equipped to make heavy items, e.g. mining machinerycomponents, parts for logging equipment, train wheels, steel structures,etc. They are by and large vertically integrated, transforming scrap intofinished products. Collectively, theirs is an important presence inthe engineering scene. They keep industrial machinery in operation throughsupply of repair and replacement parts. As heavy engineering develops inthe country, they may be expected to play a key role. Some are beinglinked with the PCMP and other manufacturing programs as suppliers ofcomponents. The ability of these shops to make a successful transitionfrom jobbing to production operations will enhance in a major. way the indus-trialization process of the country, and efforts are underway to providethe necessary assistance; in this connection, the proposed. program at theMetals Industry Research and Development Center (MIRDC) should fulfill asignificant role, and it merits technical assistance and financial support.
Progressive Car Manufacturing Program (PCMP)
5.10 The program approved by BOI for the automobile industry is animportant example of the "sectoral" approach to industrial development inthe Philippines. It was developed after detailed discussion of problemsbetween BOI and industry representatives; and it is characterized bypragmatism on the part of all concerned.
5.11 The following major projects are in progress:
(i) GM-YF Motors - a transmission plant with machining and heat-treating facilities for General Motors vehicles..
(ii) Delta Motors - an engine plant with foundry and machiningfacilities to produce engine blocks and cylinder heads,in collaboration with Toyota Motors of Japan.
(iii) Chrysler Philippines - a transmission plant, in collaboration,with Mitsubishi of Japan.
(iv) DMG - local manufacture of selected car parts (e.g. chassis),with the assistance of Volkswagenwerk of West Germany.
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(v) Ford Philippines - a car body stamping plant in the MarivelesExport Processing Zone, Bataan; key facilities will include2,500-ton presses.
(vi) Major makers are a:Lso proceeding with their plans to producelight-duty utility trucks, typified by the Ford Fiera (a 3/4-tonvehicle selling for: around P 10,000) that was brought out inlate 1972 and has enjoyed early market success. These vehiclesare designed to minimize tooling costs and simplify manufacturingprocesses; the Fiera body, for example, is made of welded sheetmetal, and GM is working on a larger vehicle with FRP (glass-fiber reinforced p:lastic) body panels.
5.12 New production technologies will be introduced including hightechnology casting, machining with semi-automatic equipment, heat treating,etc., in addition to the spread of knowledge of production scheduling,quality control practices, and cost control methods. However, more impor-tant than these direct benefits will be the indirect benefits to the nationthrough the establishment of various supplier industries. The PCMF isimpressive for the way in which three variables - cost, domestic content andmarket - have been brought tcgether into what appears to be a viable program.The key elements of the program are:
(a) A flexible domestic content schedule, pegged to the realitiesof the domestic supplier capabilities; and
(b) Establishment of export-oriented sub-assembly productionparallel to the car manufacturing operation, providing adouble-barrel opportunity for supplier industry development.
5.13 The manufacturers themselves seem generally satisfied that theprogram will meet its stated goals. The two transmission plants (combinedcapacity over 100,000 units/year, with about 80 percent for export) areconsidering the feasibility of developing local sources of supply forforgings and castings. If this comes about, domestic contribution to thevalue of output would increase very substantially, as the cost of metal(pig iron and various types of steel) is only a small part of the value offorgings and castings.
5.14 Existing local supply capability includes radiators, leaf springs,exhaust systems, batteries andi tires, aside from non-engineering industryinputs such as weather strips, upholstery, carpets, etc. Plans are under-way to expand the list, in consultation with the major automobile manufac-turers so that the objectives of the PCMP may be speedily achieved.
5.15 From the standpoint of the development strategy, there is perhapsa good case for greater emphasis on trucks and buses. Truck and busmanufacturing is fairly labor intensive, and many components require lessprecision; hence the development of the domestic supplier sector shouldbe economically more feasible as well as advantageous. It should be
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possible to develop low-cost manufacturing facilities for frames, vanbodies, chassis, and shipping containers.
5.16 The overall prospects for automotive industries in the Philippinesappear to be good. The policy considerations reflected in the PCMP aresound; emphasis is placed on technically efficient and cost-competitiveproduction of selected items for both domestic and export markets, and theapproved assemblers are given considerable flexibility for import of itemswhich cannot be economically manufactured within the country. It is tooearly, however, to judge the economic consequences of the PCMP. Much willdepend on the behavior of the approved assemblers. If they manage theircomponents manufacturing facilities efficiently, export at a profit, andsell their vehicles (comprising considerable import value) at reasonableprices, the industry could grow fairly rapidly. Even though the Philippinedomestic market for automobiles is small, the industry could develop exportcapability for specific sub-assemblies, as in Mexico; and the rate of growthwould then be more rapid than that of any other industry, with the possibleexception of shipbuilding, discussed in Section V(ii).
Industrial Electrical Equipment
5.17 The principal items of electrical equipment for industry manufac-tured in the Philippines are small motors, distribution transformers, anda few related items of equipment for industrial and agricultural users ofpower. This pattern of growth is consistent with the trend in several otherdeveloping countries. The manufacture of light electrical equipment charac-teristically tends to establish itself early in the industrialization processbecause the products are relatively simple to make and there is a securedomestic market. In the agricultural sector, the demand arises in conjunc-tion with rural electrification and irrigation programs. In the industrialsector, numerous manufacturing operations require electrical motors andrelated equipment.
5.18 In terns of major manufacturing facilities, there is only onemaker of motors (fractional to 30 HP), with an installed capacity of 6,500units per year. In recent years, it has been operating at around 60 percentof capacity. A second manufacturer, scheduled to go into production latein 1973, was approved in anticipation of growth of demand, which has notyet materialized. For distribution transformers, there is one domesticmanufacturing facility that started operation in 1969 with an installedcapacity of 300,000 KVA. It makes conventional oil-immersed transformers(10 KVA to 330 KVA) for residential as well as commercial and industrialuses. Capacity utilization dropped from about 60 percent in 1972 toaround 50 percent in 1973.
5.19 The manufacturers mentioned above are, in a sense, monopolists inthe domestic market; but they have not been able to establish their positionin the face of competition from imports. Domestic products enjoy a nominallevel of protection of 30 percent ad valorem; but they complain that thisis not meaningful, as they have to pay the same rate on materials andcomponents which they have to import; and these account for 55 percent of
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the value of output in the case of motors and 65 percent for distributiontransformers. Indeed, for some items, e.g. insulated wire, they have topay even higher rates of duty. Moreover, as they are small producers, andhave to order small lots of wire or silicon steel and components, as wellas carry rather large inventories, their unit costs are higher than thoseof foreign producers. Philippine users of industrial electrical equipmentalso prefer foreign sources of supply because of brand preference, compatib-ility of specifications with original supplies, and greater variety ofchoices.
5.20 In view of the limited share of domestic value added in the totalvalue of output, the effective protection is probably about 11-12 percentof total value. It is arguable that this should be sufficient for theindustry, which also benefits marginally from the tax credit allowed tousers of domestic capital equipment for BOI-approved projects. There is,however, apparent need for closer coordination between this nascent industryand the national plans for power generation and distribution. Some of theproblems of the transformer manufacturing industry could be resolved throughadequate dovetailing of its production plan with the rural and urban elec-trification programs. The total public investment for power distributionin the next few years appears quite adequate to generate a substantialdemand for transformers. The problems facing the motor manufacturers aremore intricate, and they will need to focus much more closely on the choiceof ranges of capacity and design which can be manufactured efficiently forthe domestic market. Cost reduc;tion through more efficient purchasing andinventory control will also be necessary.
5.21 It is obvious that the industrial equipment manufacture has laggedconsiderably behind the electrical appliance production. A shift ofemphasis from consumer durables t:o producer goods may merit considerationin the context of the current industrialization strategy and the sizeof domestic market now available to the industry.
Machine Tools
5.22 Machine tools are generally defined as power-driven, metal-workingcquipment which are non-locomobile. Typical machine tools are lathes, mill-ing machines, shapers, drill presses, gear-cutting machines, etc. Disre-garding the manufacture of some drill presses in the 1960's by a firm whichhas since become defunct, no machine tool have been regularly manufacturedin the Philippines. 1/
1/ The emphasis is on "manufacture". A number of metal-working concernshave successfully rebuilt, for their own use, second-hand machinetools imported from abroad. Also some special press equipment wereencountered which had been mLde locally. Further, the defunct firmNASSCO had reportedly built some prototype lathes with a view toeventual manufacture.
5.23 In late 1969, position papers were written at the BOI on lathes,shapers and drill presses. On the basis of these papers, it was decided thatpioneer status should be available for the manufacture of these items. Thecurrent (6th) Investment Priorities Plan lists the production of 2,700shapers, 8,900 lathes, and 6,800 drill presses as possible. One entrepreneurhas been registered by the BOI for the lathes project; no other potentialregistrants have, so far, come forth. An analysis of the position papersand a discussion with the sole registrant in this category indicates thatthe inclusion of the three types of machine tools in the cited quantitiesin the BOI's planning may be based on a misinterpretation of Philippineimport statistics. These statistics (Category 715 - 01.01) show, for theyears 1962 to 1968, an average annual importation of about 12,000 units;this nuitber would indeed seem to furnish a basis on which to establisha machine tool industry. An examination of the import values, however,leads to an average c.i.f. value of $141 per unit; obviously, the averageitem in the category was not a lathe, or a shaper, or any similar item,for which a c.i.f. value of over $2,000 would apply.
5.24 The registrant of the lathes project who - quite understandably -Is considering merely the manufacture of one model (400 mm swing, 800 mmdistance between centers) feels that the Philippine market would not absorbmore than 100 units per year and even judges this quantity as rather optimis-tic, once the temporary demand for equipment needed in government spon-sored new training establishments has been satisfied. I,
5.25 A report published by the Economic Commission for Europe 2/stipulated an annual output of 700 to 1,000 tons (a typical machinetool will weigh around one con) as the "minimum profitab'le capacity" of aplant for metal-working machine tools, based on average conditions prevail-ing in 1965 in W4estern Europe. The economic viability of a plant designedfor an output.smaller than that must, therefore, appear extremely questionable.
I/ It should also be said that the above-mentioned registrant is at thistime quite hesitant to pursue the project he had planned to undertake.His idea had been to enter into the "progressive manufacture" of aparticular lathe now being made in India. However, in the course ofless than a year, the prices quoted by the Indian manufacturer forcomplete or partial kits of parts have risen by almost 100 percent(from about $1,100 to approximately $2,000 for a complete-kit); andthe probability of commercial success of the venture has shrunkcorrespondingly.
2/ The Engineering Industry and Industrialization, 1968 (U.N. SalesNo. 68 II.E/Mim. 21), as quoted on page 22 of UNIDO's monograph"Engineering Industry" (U.N. Sales No. E.69.II.E.39, Volume 4).
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Tools and Dies
5.26 The expression "tools and dies" is usually a catch-all for pressand forging dies, handling tools, drill and assembly jigs, fixtures ofvarious types, special gauges and many other non-standard hardware itemsneeded in modern manufacturing plants in order to make better use of per-sonnel and/or machine tools, :Lnsure interchangeability of mass-producedparts and "de-skill" operations. We use the term 'tools' to refer to allthese items. Tools are usualLy required singly or at most in a few units.The making of tools, therefore, requires the intelligent and careful workof skilled craftsmen. 1/ As already mentioned previously, Filipino workersappear to have good mechanical aptitude. In combination with prevailinglow wage levels, and a potential market, there appears to be scope forpromoting a tool making indust:ry.
5.27 Traditionally, the naking of tools has been an in-house activityof metal-working concerns, largely because the sub-contracting of thisactivity requires a more formal system of communication (drawings, specifi-cations, delivery schedules, etc.) than has been customary in most small-or medium-size firms. However, in the United States, and more recently inEurope also, the sub-contracting of tool manufacture has become an acceptedpractice. Due to a shortage of skills in the trade, specialty tool makerscharge high prices for their products; and even so, the timely availabilityof tools remains a perennial problem.
5.28 There exist now in the Philippines several small firms in thetool making business. They make up with skill and ingenuity what they lackin equipment; the tools made by them are generally acknowledged as being ofgood quality, and prices are favorable. 2/ They are trying now to obtainwork from the new major tool users, namely the progressive car manufacturingplants. If they can demonstrate their capability in this field, it appearslikely that major U.S. and European firms would be interested in the possib-ility of having some of their tools built under the conditions that thePhilippines is able to offer. One approach might be to induce a Europeanfirm to become part (perhaps even majority) owner of an efficient tool makingplant. Such a plant might, in addition to making tools for the parentorganization, also produce for other (probably Philippine) customers andgradually establish a reputation for this new industry.
1/ Through the use of "numerically-controlled machine tools", certaintools can now be made more or less automatically. However, at thistime, these processes are neither universally applicable nor, inmany cases, economical.
2/ One tool manufacturer said he has no difficulty selling his tools -equal in quality to imported ones - "for as many pesos as the importedones cost dollars", while still making an acceptable profit.
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5.29 One matter which, institutionally, may currently have a negativeeffect upon the growth of the tool making industry (and perhaps severalothers which have similar characteristics) is the fact that the BOI'sincentives must be based on "the analysis, synthesis and projections ofdata" concerning "specific products ... and the additional productioncapacities that must be induced .. 11 A tool maker (as well as a number ofother specialists who provide services, or articles which become part ofsomeone else's products) has difficulty in defining his "specific product"and has no other way to determine "production capacities". It is readilyadmitted within the BOI that Act No. 5186 was passed primarily with processindustries' in mind. It would seem that the rules might advantageously beamended to allow other industries to qualify more easily for benefits underthe Act.
5.30 In this context, it may be proper to mention that availability ofa capable tool making industry might also in another, more indirect way,help the Philippine economy: some of the existing manufacturing plantshave very good, and potentially very productive, major equipment, such aspresses, milling machines, etc. The tooling with which they are equipped,however, is in many cases rather primitive; as a consequence, the inherentcapability of the equipment is not fully utilized. The result can easilybe that more heavy equipment is bought, installed and seemingly kept busythan would really be needed. Better tooling would, in established plants,free some equipment for other work. In new plants, it may substantiallyreduce the required fixed assets investment.
5.31 It was also noticed that some shops have "open time" on majorequipment, and could therefore do sub-contract work for others. However,the difficulty of obtaining tools often leads to the importation of partswhich could be made locally if a tool making industry were in place.
Medium-Precision Instruments
5.32 Instruments have become so much part of everyday life that oneis not always consciously aware of their existence. Most automobiles havehalf a dozen separate indicating gauges (speedometer, odometer, fueltank gauge, water temperature gauge, oil pressure gauge), each of whichreceives its signal for a "sending unit". Most heating and cooling devices(air-conditioners, refrigerators, etc.) have thermostats; welding equip-ment has gas pressure gauges; and so on. While no specific data are readilyavailable to permit a definitive statement as to the economies of manufac-ture of such devices, it appears prima facie that the local advantages whichfavor establishment of a tool making industry (namely mechanical skills andlow wage levels) would also apply to the manufacture of instruments of thetypes mentioned. Complete manufacture of all parts may only be viable ifan export market can be developed; but even assembly from partly imported,partly locally-made components may be interesting.
Rebuilding of Second-Hand Machinery as a Business
5.33 As already mentioned, in a number of plants second-hand machinery
was seen which had been rebuilt with ingenuity and skill. Most of such mach-
inery was almost fully as efficient as equivalent new machinery; but its
cost, even including the rebuilding work, was much less. Both within the
Philippines and elsewhere, there exists a fairly active market for rebuilt
equipment, which generally is quite comparable for performance to new equip-
ment, though it may require more maintenance, and usually sells for much
less. Some equipment, particuLarly in the more advanced countries, comes
on the market not because it is worn out, but because an expansion of the
market or a technological reason makes newer or larger equipment more econo-mical. Again, with reference to the skills available and the relatively
favorable labor rates in the Philippines, there appears to exist a business
opportunity in this field. Organized in an efficient manner - perhaps in
cooperation with a major used equipment dealer overseas, the rebuildingof machinery and equipment could conceivably become a venture suitable for
location in the free-trade zone.
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V(ii). SHIPBUILDING INDUSTRY
5.34 According to the Board of Investments, there are approximately35 establishments engaged in shipbuilding and ship repair in the Philippines.Among these, 28 are located in the Manila Bay area and the rest in theVisayas and Mindanao. The majority are small boatyards, without any slip-way or shop facilities, engaged in the construction and repair of woopdenor steel vessels of average size under 200 GT. The demand for these vesselsis steady, and the boatyards are generally able to operate at or near full..capacity.
5.35 There are several intermediate-size yards capable of building andrepairing inter-island vessels such as light cargo ships and tankers up toa1,000 GT. Two yards have concentrated in new ship construction - theDynamarine Shipyard in Navotas and the Philippine Iron Construction andMarine Works (PICMAW) near Cagayan de Oro. In both yards, investment incapital equipment is minimal beyond the slipways, and the shipbuildingprocess is similar to that in the small boatyards. In this manner, theyhave been able to build ships cheaper than in most foreign yards, includingJapan. Their main customers have been the small shipowners; the large inter-island shipping concerns still prefer buying new or second-hand vesselsfrom abroad. Apparently, there has been a recent decline in new orders;Dynamarine reports a significantly reduced order backlog compared to 1972and the PICMAW yard appears largely idle.
5.36 The larger yards are all principally engaged in ship repair. Thelargest is the Bataan shipyard which is the only yard capable of drydockingand repairing ocean-going ships. It occupies one of the finest known sitesin the country in terms of deep water, shelter from the weather, proximityto a major shipping lane and availability of cheap power and skilled labor.It has a 10,000 GT graving dock equipped with two mobile cranes on railsand a 2,000-GT slipway. The plate forming, machining and outfitting equip-ment in the shops seem more than adequate. However, the yard has had ahistory of financial difficulties, and the facilities show age and neglect.Since the transfer of the yard from government to private ownership inFebruary 1973, some urgent repair and improvement of facilities appear tobe underway. The most important repair facility for inter-island shipsis the Cebu Shipyard in the south. In fact, this yard handles roughly70-80 percent of all inter-island ship repair. It has six slipways rangingfrom 200 CT to 4,000 GT. The 4,000-GT slipway, which is being completedthis year, is said to be the only major new installation built in thePhilippines over the past twenty years. The yard is generally well laidout and equipped. As in the case of the Bataan yard, the shop equipmentin the Cebu yard seems excessive with respect to the yard facilities.
5.37 Table V(ii)-1 lists the larger yards in the Philippines withslipway or docking capacity of 500 GT and above. With the exception oftwo graving docks (Bataan and Iloilo), all drydocking is done by means ofslipways. The slipways in most cases are minimally equipped; many do not
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even have a winch, lifting being done by means of mobile cranes or vehicles.Facilities for new ship construction are practically non-existent in allthe yards. Small inter-island ships have been built either on the ground,or on slipways not designed for such work. The state of the shipbuildingindustry may be summarized as follows:
(a) Shipbuilding in recent years has been limited to vesselsunder 1,000 GT (excepting barges); only small boatyards haveenough orders to mainc:ain a regular construction program.
(b) Over 1,000 GT, there are repair facilities only for ships upto 10,000 GT maximum; repair demand exceeds available capacity.
(c) No existing yard is properly laid out and equipped for con-struction of inter-island or ocean-going ships.
Maritime Fleet
5.38 The fleet in 1973 totals roughly 1.6 million gross tons, includ-ing about 0.8 million gross tons of ocean-going ships, 0.4 million grosstons of inter-island vessels, and about 0.4 million gross tons of barges,tugboats and fishing vessels. Attention in this study will be confinedto the inter-island and ocean-going vessels. Information on the tonnagedistribution, age and imports of the inter-island and ocean-going fleetis summarized in Tables V(ii)-2, 3 and 4.
5.39 In the inter-island fleet, almost 80 percent of the tonnage is inthe range 500 to 5,000 GT. As for the number of ships, there are roughly250 vessels over 500 GT. In the ocean-going fleet, ships below 5,000 GTaccount for about 20 percent of the total tonnage (52 ships); the bulk ofthe fleet (roughly 50 percent of the total tonnage and number) is composedof ships in the range 5,000 GT to 10,000 GT. As for the age of vessels,roughly 70 percent of the inter-island vessels and 40 percent of theocean-going ships are twenty years or older. Many, if not most, of theseships operate without certification of class.
Scope of Study
5.40 The unsatisfactory state of the shipbuilding industry in rela-tion to the fleet requirements of the country is recognized by the BOIthrough its listing of the shipbuilding industry in the Investment Priori-ties Plan (IPP) and its support to a National Shipbuilding Program. Underthe national program, the problemis of the maritime sector will be treatedin their totality, e.g. the shipping industry, the port facilities, themaritime fleet, the traffic and route regulations as well as the shipbuild-ing and ship repair capabilities. In the present study, however, theshipbuilding industry will be treated as a manufacturing entity, separatefrom the other elements in the maritime sector, to determine whether ashipbuilding proposition for the Philippines makes economic sense fromthe standpoint of market and cost factors. Although the need for shipsis great, it is not apparent, a priori, that the country should invest in
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the building of these ships rather than buying them from abroad. The issuesto be examined are:
(a) whether shipbuilding on a national scale is a viable economicproposition;
(b) whether the shipbuilding industry can develop as a healthy,low-cost manufacturing activity;
(c) whether an industrialization strategy organized around ship-building makes sense; and
(d) specifically, what sort of a program would be appropriatefor the country, based upon the above considerations.
The following study attempts to deal with these questions.
Some Recent Development
5.41 Under the Investment Incentives Act (RA 5186), the building ofinter-island and ocean-going ships is included in the Investment PrioritiesPlan as a "pioneer"1 industry and, as such, registered enterprises areallowed the full range of benefits covering access to foreign exchange,depreciation, tax exemption/credit, and tariff protection. The projectsin shipbuilding that have been approved or are under consideration by theBoard of Investment, as of May 1973, are listed in Table V(ii)-5. Onlytwo yards have been approved and registered by the BOI, under the "pioneer"category for building inter-island vessels. Their registered capacitiesare 6,400 GT and 15,000 DWT (corresponding roughly to 9,000 GT), respective-ly. No projects have been registered for building ocean-going vessels.
5.42 Under the new Tariff and Customs Code of the Philippines (TCCP),as amended by Presidential Decree No. 34 dated October 1972, parts forships, which were formerly allowed duty-free under Section 105(d) of theCode are now taxed at a minimum rate of 10 percent; and various items whichare or can be manufactured domestically have to pay 30 or 50 percent. Someshipbuilders claim that this has the net effect of penalizing the existingindustry, which constructs hulls and fits imported parts into them, forthe protection of a non-existent or nascent industry, namely the makersof ship parts. However, the claim is difficult to assess without detailedcost data. At first glance, the overall cost of encouraging domestic manu-facture of parts does not seem to be very high. It should be noted thatthe amended code imposes a 10 percent duty on ships entering under theirown power, which came in duty free earlier; and this element of protectionto the shipbuilding industry should offset substantially the cost of pro-duction to some domestic manufacturer of components, which would be for onlya fraction of local value.
5.43 As part of a comprehensive program to improve the shipping ser-vices, the Government drafted a tentative plan to construct 56 ships ranging
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from 1,500 to 4,500 DWT, (approximately 1,000 to 3,000 GT) over a period often years in accordance with the following schedule:
Phase I (First 3 years) 8 ships
Phase II (Next: 2 years) 8 ships
Phase III (Last: 5 years) 40 ships
The construction program is proposed to be undertaken at three shipyards- one each in Luzon, Central Visayas and Mindanao - the sites to be selectedby BOI on the basis of shipyardl capabilities and in accordance with theregional dispersal program of the Government. The program also calls forthe establishment of a Shipping Fund by the Development Bank of the Philip-pines to finance the purchase of ships built in local yards. This is con-sidered essential to sustain any domestic shipbuilding program, in view ofthe supplier's credit available to finance the purchase of foreign ships.
5.44 In February 1973, an 8-member Japanese team visited the Philip-pines to advise the Philippine Government on its 10-year Shipping Program.1Their principal recommendations on the shipbuilding aspects of the programare understood to be as follows:
(a) To start with, only ships below 1,000 GT should be built,and subsequently larger ships may be built as inter-islandport facilities are improved;
(b) Long-term, low interest loans should be provided for im-proving the facilities of shipyards selected to implementthe program (2 to 4 yards);
(c) The possibility of locally supplying ship plates from theIligan Integrated Steel Mills, and some ship equipment,such as pumps, heat exchangers, cargo-handling equipmentand electrical equipment from local sources should beexamined; and
(d) Existing ship repair facilities should be improved andexpanded.
5.45 A 2-member team from France visited the Philippines in March 19731/at the request of the BOI to suggest strategies and program for the modern-ization and development of shipbuilding and related industries in thePhilippines, and prepare a preliminary design of a typical shipyard forthe construction of inter-island vessels. This team estimated the marketfor new vessels as follows:
1/ The full report of this team was not available to the Bank mission at thetime of writing.
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Ocean-going vessels: 83,000 GT/year
Inter-island vessels: 72,000 GT/year
For ocean-going vessels, their recommendation is understood to be in favorof importing new ships initially, and favoring the establishment of a newshipyard of 40,000 GT annual capacity, at some time about 6 to 10 yearshence, to build 4 to 6 ships in the size range 6,500 GT and 10,000 GT.For inter-island vessels, they recommend: (i) building 12,000 GT in exist-ing yards, (ii) building 38,000 GT in two new yards or highly improvedexisting yards, and (iii) importing 22,000 GT (mainly specialized or sophis-ticated vessels). The 12,000 GT building program presumably meets the aimof the government 10-Year Program and can be started immediately. The38,000 GT program is to be started in 3 to 5 years, and may be broken downas follows:
16 vessels 600 GT 9,600 CT
10 vessels 1,000 GT 10,000 GT
4 vessels 2,500 GT 10,000 GT
2 vessels 4,200 GT 8,400 GT
38,000 GT
It is also understood that they further recommend that new constructionfacilities should be separate from repair activities, and have advisedthe establishment of new shipyards at new sites.
A Closer Look at the Market
5.46 In planning for the shipbuilding industry to date, attention seemsto have been focused primarily on the replacement demand of the inter-islandfleet. There is no doubt that the fleet is old; imposition of an effectiveinspection system could possibly condemn as much as one-third of the fleet.The question might be asked, what scale of shipbuilding can be sustained,once the replacement backlog is satisfied? Moreover, with reference toTable V(ii)-2 it is seen that roughly 70 percent by number of the inter-island fleet is composed of vessels of 1,000 GT or less. Such ships arewithin the capability of the existing yards to build (after some improve-ment). Is the replacement demand for ships of higher tonnages (above1,000 GT) large enough to support one or more new yards?
5.47 This point may be explored further by examining the replacementmarket for inter-island vessels over 1,000 GT. Table V(ii)-6 shows thebreakdown of these vessels by age in the tonnage ranges 1,000-2,000 CT,2,000-5,000 GT and over 5,000 GT. 1/ The assumption that all ships twentyyears or older will be replaced gives us (as a first approximation), thefollowing replacement tonnages (refer Table VI(ii)-6).
1/ The data was compiled from a fairly complete list of inter-islandvessels provided by the BOI.
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Replacement Tonnage of Inter-Island VesselsAll Sh:Lps over 1,000 GT Ships 1,000 GT - 5,000 GT
1973 - 1978 74,000 GT 62,000 GT
1978 - 1983 22,000 GT 22,000 GT
Total 96,000 GT 84,000 GT
The total for the period 1973-1978 includes all inter-island ships whichare now 16 years and older in Table V(ii)-6. The total for 1978-1983includes those now between 11 to 15 years. There are two possible sourcesof error in the total. The list: may not be a complete listing of all inter-island vessels, and some ships listed do not have an age record. Neverthe-less, accepting the above totals as a fairly representative approximation,the replacement market for inter-island vessels in the tonnage range1,000 GT-5,000 GT is estimated as being of the order of 84,000 GT over thenext 10 years.
5.48 The demand for new bottoms to meet the growth of inter-islandtrade is likely to be small. It has been suggested that no significantdemand for additional tonnage will be generated for some years to come(except for small vessels to serve presently neglected feeder routes) becausethe average load factor of the fleet is presently quite low (under 30 percent)and increased inter-island traffic can and should be met by improvements inefficiency, through replacement of old vessels, better ship maintenance,proper regulation of routes and frequency of service, etc. Also, some shipsto be taken out of service from the main routes through replacement wouldstill be useable on the less important routes, and provide buffer capacityfor adding to the total tonnage of the inter-island fleet.
5.49 The above analysis of the market for inter-island ships in thesize range of 1,000 GT-5,000 GT Lhen leaves us with a total demand for84,000 GT over the next ten years, which breaks down to about 62,000 grosstons over the first five years, ;nd only 22,000 gross tons over the sub-sequent five years. In the consLderation of a domestic shipbuildingprogram, some balancing of demand will be necessary to assure a rationalconstruction schedule; and in addition, allowance should be made for thefact that the totals include some types of ships that will not be economicalor technically feasible for const:ruction in the Philippines. Broadly speak-ing, this building schedule is in line with the government program for16 ships over the first five years, but considerably below the projectedprogram for 40 ships for the subsequent five years. It could probably bemet by improvement of facilities in selected existing yards; and it appearsthat the demand for new inter-is].and vessels alone may not justify anysignificant expansion in shipbui]ding capability beyond rehabilitationand improvement of existing yards.
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5.50 The ocean-going ships' market presents a different picture. Again,concentrating on ships above 1,000 GT, the market may be divided into re-placement and expansion demand. The replacement market is derived from thedata shown in Table V(ii)-6 and summarized below:
Replacement Tonnage of Ocean-Going VesselsAll Ships Ships Ships
Over 1,000 CT 1,000 GT - 5,000 GT Over 5,000 GT
1973 - 1978 230,000 GT 50,000 GT 180,000 GT
1978 - 1983 284,000 GT 28,000 GT 2563000 GT
Total 514,000 GT 78,000 GT 436,000 GT
Tonnage-wise, it is seen that the replacement demand for ocean-going vesselsin the size range 1,000 GT - 5,000 GT is roughly the same as that for inter-island vessels. The big market, as might be expected, is for ships over5,000 GT.
5.51 The expansion demand for the ocean-going fleet may be deduced fromforeign trade statistics. The calculations shown in Table V(ii)-7 illustratethe possible size of this demand under different sets of assumptions. Thefollowing assumptions have been made:
(a) Estimates for 1973 are based on statistics for 1971 and 1972.
(b) Total foreign trade is estimated to grow at 9.5 percent peryear, which is the average growth rate for the past decade.
(c) Two cases are considered. In one (Case A) the percentageshare of freight carried by Philippine vessels is assumed toremain constant at 10 percent; in the second (Case B) thePhilippine percentage share is assumed to increase graduallyto 20 percent by 1984.
(d) Shipping efficiency (or shipping space productivity) isassumed to increase gradually from 3.0 MT/GT-year to4.0 MT/GT-year by 1977, and then more rapidly to 7.5 MT/GT-year by 1984, as new ships will be added to the ocean service.
The results for all ships, and for ships in the range 1,000 GT-5,000 GT,(the latter being estimated at 20 percent of the total) are summarizedbelow (from Table V(ii)-7):
1973 - 1978 Case A 210,000 GT 42,000 GTCase B 630,000 GT 126,000 GT
1978 - 1983 Case A 10,000 GT 112,000 GTCase B 550,000 GT 110,000 GT
Total Case A 220,000 GT 154,000 GTCase B 1,180,000 GT 236,000 GT
Several comments are in order. The negligible expansion demand in the period1978-1983 under Case A is duie to the assumed rapid increase in shipping effi-ciency, which would be sufficient to take care of the 10 percent Philippinebottoms share of the expanding trade. This constant 10 percent share overthe next decade may not be a realistic assumption. The return on investmentof selected ocean-shipping companies in the Philippines suggests a figurearound 9 percent. Although this may not offer a strong enough argument byitself for expanding the ocean-going fleet, other reasons may be added,including the balance-of-payments argument. The freight payment to foreignvessels could attain a level of about $730 million by 1983, if the Philippineflag share remains at 10 percent assuming a low shipping rate of $10 perton on average. By increasing the Philippine share to 20 percent, about$75 million in freight payment could be diverted from foreign to domesticshipowners in that year. The net saving of foreign exchange, with allowancefor disbursements overseas aEs well as other foreign exchange losses such ascapital charges, may be estimated at 30 percent of the freight payments.1/For the example in Table V(ii)-7 the net saving could be about $25 millionin 1983. The total net savirng over ten years (1973-1983) could be over$100 million, accomplished by an addition to the ocean-going fleet of roughlyone million gross tons over the same ten-year period. To achieve thissaving, the country would have to acquire shipping capacity valued at about$300 million - allowing $300 per gross ton for a mixture of new and second-hand vessels; but the initial, cash outlay for this capacity may be about$60 million, on the assumption that a 20 percent down payment on averagecan attract 80 percent suppliers' credit. This exercise indicates apossible line of approach, which will need, of course, to be examined indetail for definitive conclusions. During 1973 the cost of steel for ship-building has risen sharply. Long term trends would have to be consideredand their implications analysed. It appears, however, a priori, that anincrease of the domestic flag share in foreign trade from the currentlevel (10 percent) to about 20 percent in the course of 10 years may be ajustifiable target.2/
1/ Consultants' estimate based on information from Philippine shippingfirms and other sources.
2/ In Indonesia, the domestic flag share in foreign trade was roughly25 percent in 1969/70, on a total ocean freight of 7 million Mt.The figures do not include the tanker fleet operated by Pertamina.
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5.52 The total replacement demand for inter-island and ocean-goingships, and expansion demand for ocean-going ships, for all ships over1,000 GT, and for ships in the size range 1,000 GT-5,000 GT are shown inTable V(ii)-8. Using the higher figures of Case B for the projected demandfor ocean-going fleet expansion, the demand for ships in the range 1,000 GT-5,000 GT over the next 10 years is summarized below:
Total Demand for Ships, 1,000 GT-5,000 GT1973-1978 1978-1983
From the above table, the replacement market alone over ten years totals162,000 gross tons, or at an average of 2,000 GT per ship, about 80 ships.The sharp decline in replacement tonnages between the first and the second5-year period is a consequence of the age distribution characteristics ofthe existing fleet. The lower "fleet expansion demand" in 1978-1983 is dueto an assumed more rapid increase in shipping efficiency from 1978. If ashipbuilding program were to be designed only for the replacement tonnages,some appropriate phasing of replacement schedule will be necessary to assurea rational construction program. The important point to note is that, withsome allowance for ship import, the replacement demand for ships in therange of 1,000 GT-5,000 GT would only sustain a shipbuilding effort of theorder of 10,000 gross tons a year, and this requirement can probably be metby existing yards, with some improvement of their facilities. Includingthe projected fleet expansion, however, the total demand over ten years isapproximately 400,000 gross tons. Even though many of the ships requiredwould be imported, this market could provide the basis for a major domesticshipbuilding program, provided sufficient economic justification exists.A possible program scope and schedule will be outlined in a later section.
5.53 From Table V(ii)-8 the market for ships over 5,000 GT is seen tototal approximately 1.4 million gross tons over the next ten years. As
might be expected, the total is composed almost entirely of ocean-goingvessels - about 450,000 gross tons of replacement ships and about 950,000gross tons of ships to expand the fleet. There is a negligible inter-islandtonnage of 12,000 gross tons. Most of these large ships will likely beimported. The domestic construction could concentrate on ships between5,000 GT and 10,000 GT, which comprise roughly 50 percent ocean-going fleetboth by tonnage and number. A home market of the order of 50,000 gross tonsper year, with ship construction starting around 1977/78, should provefeasible. This market plus export prospects could sustain a joint ventureshipyard with an experienced foreign shipbuilder. As a joint venture, the
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consideration of this proposition need not await the establishment of the
previously-discussed program for the construction of ships below 5,000 GT.
Rather, it should be advantageous to proceed with both propositions in
parallel, since they would complement each other.
Cost Factors
5.54 Information on new shipbuilding in the Philippines suggests that
vessels around 500 GT or less were built locally at a significant costadvantage over Japan or Singapore. This is rather remarkable, consideringthe physical conditions under which ships were built. Labor was substituted
for capital to an extreme degree, with investment in capital equipment
limited to simple slipways. The cost advantage will presumably decrease
with larger vessels, but since none was built in recent years, any assess-
ment of cost competitiveness will necessarily be speculative.
5.55 Since shipbuilding in the Philippines is an infant industry, it
can be argued that assistance of some form will be required for the sector
to grow. Nevertheless, judgment on such assistance must be based generallyon the industrialization strategy of the country, and specifically on whether
or not the sector can attain a competitive posture within some reasonable
time. A tentative shipbuilding proposition for the country calls for ships
in the tonnage range of 1,000 GT-5,000 GT. A benchmark case will be con-
sidered to help assess the proposition. The case is for building 3,000 GT
general cargo ships (4,800 DWT), which may serve inter-island routes or some
ocean routes, in a modern shipyard in the Philippines.
5.56 A breakdown of ship construction cost is shown below:
(Direct Material(Direct (( (Direct Labor( (
(Construction Cost ( (Other Direct CostsTotal cost ( (Indirect Costs
(General administrative costs
Under direct material, steel in. the form of plates, angles and bars comprises
about 20 percent of the total cost, but the price of steel also influences
the costs of prime movers and other ship components. The direct labor cost
is a function of wages as well as labor productivity. The other direct and
indirect costs include such items as utilities and supplies, depreciationand interest. It is estimated that these costs will be comparable between
the Philippines and Japan. This is not quite true, but may be acceptable
as a first approximation. For example, the depreciation cost can varygreatly from one shipyard to the next; some small yards in the Philippineshave gotten by with negligible investment in capital equipment. However,
in a properly-equipped modern yard, the depreciation value in the Philippineswill expectedly be only moderately lower than in Japan. The cost of supplies
and the administrative costs will generally be higher. Some shipbuilding
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cost data in Japan and Korea suggest a figure of $90/GT for costs otherthan direct material and direct labor, and this figure will be used in theanalysis of shipbuilding cost in the Philippines. For the sample case of3,000 GT general cargo ships, an approximate cost profile is shown in thefollowing table:
Analysis of Shipbuilding Cost3,000 CT (4,800 DWT) Cargo Ship
Cost of steel plates,angles, bars $ 324,000 356,000
Direct material cost(steel cost estimatedat 35% of direct material
cost for type of shipconsidered) $ 925,000 1,020,000
Material Cost/GT $/GT 308 67 340 75
B. Direct Labor Wage (mean) $/man-hr 1.50 0.25
Productivity measure man-hr/GT 40 80
Labor Cost/GT $/GT 60 13 20 5
C. All other costs, includesother direct costs, indirectcosts and general adminis-trative costs $/GT 90 20 90 20
D. Total Cost, A + B + C $/GT 458 100 450 100
The cost factors for a similar ship built in Japan are shown on the tableboth for comparison purposes and for providing a basis for checking theassumptions used in the estimation of the Philippine costs. The majorassumptions are:
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(a) Steel plates, angles and bars expressed in metric tons comprise60 percent of the ship gross tonnage for the size and type ofship considered.
(b) Total steel cost comprises 35 percent of the total direct materialcost.
(c) Steel cost in the E'hilippines is 10 percent higher than in Japan.
(d) Direct labor wage in the Philippines is one-sixth that in Japan.
(e) Labor productivity in the Philippines is assumed at 80 MH/GTagainst 40 MH/GT in Japan (productivity unit in shipbuildingis usually given as man-hours per gross ton, which is actuallya reciprocal of productivity).
(f) All other costs (other direct costs, indirect costs and generaladministrative costs) are combined and expressed as $90/GT.
The results show that the shipbuilding costs in the two countries can bequite competitive, with the higher direct material cost in the Philippinesoffset by lower direct labor cost. It might be noted that the direct laborcost in the analysis represents only the wage component and does not includemany of the overhead costs that are often expressed in terms of man-hours
and included under the heading of direct labor. For additional comparison
purposes, data on a 1,000 GT general cargo ship built recently in Koreagives the following percentage breakdown:
direct material 73 percent
direct labor 7 percent
all other costs 20 percent
100 percent
It will be difficult to compare the results of this analysis with any ship-
building cost data in the Philippines not only because of lack of data on
ships of this size, but also because any reported cost structure would
likely be distorted, for example, by idle capacity giving inflated laborcosts.
5.57 The benchmark case actually analyses the slhip cost on the basisof the sum of direct material and direct labor costs. The key variables
are the price of steel and labor productivity. Figure 1 shows the effecton ship cost of varying steel price and varying productivity. The Philip-
pines has no control over steel price. Its leverage to cost competitivenessis labor productivity. The calculations show that a productivity figureof less than 100 MH/GT coupled: with the low labor wages can make shipbuild-ing in the Philippine quite attractive.
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Strategic Considerations in Shipbuilding
5.58 The industrial scene in the Philippines, as a whole, is largelyconsumer goods oriented. Significant activity in heavy engineering is tobe found only in metal-working (jobbing plants), and ship repair. Theindustrialization process appears, however, to have reached a stage whichis appropriate for selective promotion of heavy manufacturing. Shipbuildingseems to be a natural priority choice. Aside from a long maritime tradition,the country already has excellent capabilities in metal fabrication and shiprepair, has one of the lowest labor wage rates among the developing nationsand there is a home market for ships that needs to be served. There will becompetition from the established shipbuilding countries (new as well assecond-hand ships) and also from such countries as Singapore, Taiwan andKorea, that are actively promoting shipbuilding. However, a program initiallyscaled to the home market should be a low-risk proposition. Shipbuildingwill also provide a natural end-product link for the established metal-work-ing industry. As the shipbuilding program develops, the metal-working in-dustry will not only have the opportunity to develop ship ancillary supplyactivities, but also serve as a source of engineering capabilities thatshipyards do not possess.
5.59 In the promotion of shipbuilding, there is need to bring about astructural change of the industry, from service-oriented ship repair tomanufacturing-oriented shipbuilding. Shipbuilding exists today in thePhilippines largely as a captive branch of the shipping industry, with themajority of shipyards owned by shipping interests. The shipowners view theyards primarily as facilities for servicing and maintaining their fleet.The situation favors growth of ship repair but could seriously constrainshipbuilding development.
5.60 The earlier analysis of the size and character of the market aswell as the level of productivity that needs to be attained (for shipsabove 1,000 GT) serves to identify in a general way the type of shipyardsthat are needed in the Philippines. The translation of demand tonnagedata into actual number and type of vessels is difficult because of thenumerous variable factors; and yet this information is necessary to deter-mine the scope of a recommended shipbuilding program for the country and themost efficient scale of shipyards. It might be helpful to deliberatelyshift the planning focus from shipyards to ships. The shipbuilding industryis most visibly represented by the shipyards, and it would be natural forattention in planning to be drawn to the accumulated problems surroundingthe yards. However, planning should start with a consideration of theships that will best serve the Philippine inter-island and ocean trade, andproceed from there to the determination of the most effective means ofbuilding these ships.
5.61 The concept of a standard all-purpose ship is interesting butbegs the issue. There is no logic for the Philippines to limit, a priori,its shipping service options or shipbuilding options. There is not enoughdata available to determine what types of vessels have performed best in
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Philippines water, or even as to what types of cargo enter and leave theports in different types of vessels. Without such information, it shouldbe difficult to justify the construction of "standard ships", since im-provement of shipping service requires not only replacement of old bottoms,but also specialization of service by type and speed of vessels. Moreover,standardization of ship design should not be a major concern in a countrywhere cheap labor is its primary asset. Ship design and associated tech-nologies can be imported and learned; the lack of these skills should notdictate the course of development of the industry.
5.62 Several countries today provide financial assistance in one formor another to promote their shipbuilding activities. Shipowners are primarilyinterested in the financial terms available to them. Shipbuilding loans andshipyard investment loans, at low or subsidized interest rates, may be neededin the Philippines as the country moves forward on the shipbuilding program.Construction subsidies which are designed to make up the difference betweendomestic construction costs and lowest cost available in foreign yards, maynot be necessary in the Philippines. The industry already has a nominal10 percent protection. This is offset to some extent by the tariffs, rangingfrom 10-50 percent on various ship components. As part of an adequate in-centives package, it may be necessary to provide shipbuilders with somecompensation for the duties payable on imported components, particularlythose that cannot be produced domestically at reasonable cost.
5.63 There is no domestic source of steel for ship construction in thePhilippines, and the industry would have to pay about 10 percent or more onsteel cost to cover freight and import handling charges. A rough costanalysis suggests that a modern Philippine yard may absorb this addedmaterial cost, but for the long run, it would need to explore the possibil-ities of securing shipbuilding plates at internationally competitive cost.
Shipbuilding Program
5.64 There is not much advantage in relating future shipbuilding programsto the existing shipbuilding activities in the Philippines. First of all,the existing industry is primarily a repair (service) industry. Next, therelevant types of ships to be considered for the future have not been builtin the past decade. Finally, the financial statements of major shipyards(earnings, profits, etc.) refer primarily to ship repair activities and notto ship construction. It might simply be noted that small inter-islandvessels (around 500 GT) were built in a couple of shipyards under quiteprimitive conditions with practically no capital equipment. Presumably,this will not be necessary when funds for shipyard development becomeavailable on reasonable terms.
5.65 The main thrust of a major new shipbuilding program will lilcelybe in the building of ships in the range 1,000 GT-5,000 GT. Market studysuggests that, for ships in th,is range, the inter-island traffic needsalone will not be large enough to support a major shipbuilding proposition.The proposition will need to consider ocean-going ships'. The combined
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demand for inter-island and ocean-going ship has been discussed inparagraph 5.52 above. Assuming that production could start in 1976/77,and that 60 percent of inter-island ship tonnages and 30 percent of ocean-going ship tonnages will be met from vessels built in domestic yards, thefollowing table shows the possible scale of shipbuilding operations:
By 1983, there could be room for shipbuilding capacity of 45,000 GT per yearin the country for building ships of 1,000 GT to 5,000 GT, at 90 percentcapacity utilization.
5.66 A parallel shipbuilding program is suggested for ships in therange 5,000 GT - 20,000 GT. The market for ships over 5,000 GT (ocean-going ships) has been estimated at around 1.4 million gross tons over thenext ten years. Presumably the bulk of this tonnage will be purchasedabroad. However, if 20 percent of the total were to be built locally, andassuming production starts in 1977/78, the following scale of shipbuildingoperation may be possible:
1977/78 1979 1980 1981 1982 1983
Production forHome Market('000 GT) 30 30 40 50 60 70
Export('000 GT) - - - 10 15 20
Total('000 GT) 30 30 40 60 75 90
By 1983, there could be a shipbuilding capacity of 100,000 GT per year forthe construction of ships in the range 5,000 GT - 20,000 GT, at 90 percentcapacity utilization. This proposition envisages collaboration withexperienced foreign shipbuilders.
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5.67 The two programs outlined above will provide the country with atotal shipbuilding capacity in the neighborhood of 145,000 gross tons peryear by 1983:
- 45,000 gross tons capacity for ships in the range 1,000 GT-5,000 GT
- 100,000 gross tons capacity for ships in the range 5,000 GT-20,000 GT
This scale of activity could support 3 or 4 shipyards, including at leastone joint venture. The main market will be the home market, but some shipsfor export may be possible beyond 1980. Existing yards are capable ofbuilding ships of around 500 GT; and the demand for ships below 1,000 GTcould be met through improvement and expansion of their facilities. In therelated ancillary sector, the contemplated shipbuilding activity couldgenerate demand, for example, lor welding rods of around 2,000 tons peryear, and for castings and forgings of around 5,000 tons per year. Inaddition, there will be demand for numerous domestically-available itemssuch as lumber, fittings, cargo-handling equipment, paints, etc. On the otherhand, there are items such as pumps, valves, etc. that are made locally forland use but may not meet the rigid standards for use on board ships forsome time.
5.68 It should be noted that a shipbuilding program will make a heavydemand on the capital resources of the country. The question might be asked,what are the economic benefits? Would it be more advantageous for thePhilippines to simply buy the ships and avail itself of foreign subsidiesand tied loans?
(a) The first answer to the "make vs buy" issue is the ship construc-tion cost. It was shown earlier that Philippine shipyards havethe potential to build ships competitively with Japan. Indicationsare that, once the learning stage is over, the shipbuilding in-dustry can develop into a low-cost manufacturing activity andcompete for orders from shipowners.
(b) By 1983, based on a labor productivity value of 80 man-hours/GT,the program will have created employment for 4,500 additionalworkers (direct labor) in the shipbuilding industry. The totalemployment effect will be greater, with indirect labor as well asnew jobs in related industries.
It does appear that shipbuilding on the scale indicated could be an attract-ive proposition for the Philippines. A more detailed examination of theproposition will be necessary to determine the types of ships to be built,the number and size of new shipyards, the construction program, and therelevant investment costs and blenefits.
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A Note on Possible Development in Boatbuilding Industry
5.69 The Philippines has a busy boatbuilding industry constructingfishing vessels, tugboats, cargo boats and native crafts. In the case of
the fishing vessels, the fleet numbers approximately 2,500 vessels, almost
70 percent of which are in the size range less than 50 GT making up a total
of about 100,000 GT. The Philippine Fisheries Commission estimates that an
additional 30,000 gross tons of fishing vessels will be needed; the annual
production is at the level of 5,000 gross tons per year. Many of the exist-
ing boatyards are shifting from the construction of wooden vessels to steel
vessels, but report difficulties with the supply of steel plates. It is
also noted that the construction of small vessels falls in the non-pioneer
category, and steel import for their construction is not exempt from duties.
5.70 Among the newer construction materials for boatbuilding are glass-
fiber reinforced plastic (FRP) and ferrocement. Fiberglass is relatively
costly, requires relatively sophisticated technology and skills, and is
known to be sensitive to tropical temperatures; therefore, its use in thePhilippines would offer no particular advantage over wood or steel. Ferro-
cement by constrast seems well suited to the Philippine situation. It is
superior to wood in its durability in tropical waters, and is cheaper than
steel or fiberglass. Some of its advantages are that:
(i) the basic raw materials are readily available (sand, cement ancdwire mesh),
(ii) much hand labor is required, boti) in the framing of layers ofwire mesh into desired shapes and ill the plastering of mortar
into the mesh layers (this may explain why many countries with
high-cost labor have not shown much interest); and
(iii) construction of simple crafts can be done on site, even in remote
villages, since the problems of logistics and the need for equip-
ment are minimal.
Perhaps, a major obstacle to its widespread acceptance has been psychological,
namely a tendency to equate ferrocement with ordinary reinforced concrete.A recent report of the U.S. National Academy of Sciences describes the
material as follows:
"Ferrocement is essentially a form of reinforced concrete,but it exhibits behavior so different from conventionalreinforced concrete in performance, strength and potentialapplications that it must be classed as a completelyseparate material ... Thin panels of ferrocement can
be designed to levels of strain or deformation, withcomplete structural integrity and water tightness, far
beyond limits that render conventional concrete useless."
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This is not to suggest that the Philippines should rush into mass construc-tion of ferrocement boats. Design specifications and standards on thematerial have yet to be developed, and experience needs to be gained as tothe proper construction techniques. Experimental ferrocement boats werefirst built by the Philippine Navy about five years ago. As in severalother countries that experimented with this new material, the results weremixed. Their difficulties were (a) unfamailiarity with the mechanicalproperties of the material, (b) absence of structural-design information,particularly with regard to specifications and standards, and (c) errorsin techniques of construction. Actually, the material becomes easy to use,once its basic characteristics are properly understood. In the People'sRepublic of China, thousands of small ferrocement sampans are in service(3-5 tonners); these were produced typically by unskilled workers in ruralcommunes at the rate of one a day when necessary. Larger boats are beingbuilt presently in S. Viet Nam. Of course, the standards will be morestringent for deep-water vessels. Ongoing investigations in the U.S. andin other countries suggest that detailed design specifications and standardswill be available soon. It is likely that within the decade, ferrocementwill compete favorably with wood or steel as a boatbuilding material; andPhilippine boatyards should be prepared to take advantage of the situation.
Conclusions
5.71 The most urgent need in the Philippines is for improving the inter-island transport service. Among the actions required will be progressivereplacement of old bottoms with newer ships designed specifically for thistype of service. Less urgent perhaps, but no less real, is the need toimprove and expand the ocean-going fleet. The issue for the shipbuildingindustry is whether ships can be built economically in the country to sustaina viable shipbuilding operation in response to these demands.
5.72 The construction of vessels below 1,000 GT should be considered asbeing within the capability of the existing shipbuilding industry; it willneed some improvements of facilities, for which financial assistance shouldbe provided. It seems appropriate to focus more attention on shipbuildingcapacity in the 1,000 to 5,000 GT range. In this range, the combined demandfor inter-island and ocean-going ships could total approximately 400,000 grosstons over the next ten years. This tonnage could provide the market basefor a shipbuilding capacity of about 45,000 gross tons per year by 1983.Analysis of shipbuilding costs suggests that, beyond the learning stage,this activity could be a competitive manufacturing activity.
5.73 A parallel program is suggested for the building of ships in therange 5,000 GT to 20,000 GT. A projected market for about 1.4 million grosstons over the next ten years could support a shipbuilding program withcapacity of 100,000 gross tons by 1983. The proposition would require technicalcollaboration with an experienced foreign shipbuilder; and a suitable finan-cial participation may be mutually advantageous. The prospect should beactively pursued.
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5.74 By 1983, these programs could add about 4,500 jobs in the ship-building industry (direct labor only). The total employment effect wouldbe m.uch greater, with indirect labor and jobs created in related industries.
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V(iii). AGRICULTURAL MACHINERY AND EQUIPMENT
5.75 For this report we define tractors as four-wheeled vehicles whoseprincipal purpose is to impart pulling force to agricultural implementsattached to them, and which are steered and operated by persons carried onthe vehicles themselves. A hand-tractor, in distinction, while used forsimilar purposes, is a relatively light-weight and low-power device, requir-ing for operation a person who guides it while walking behind.
5.76 Hand-tractors currently used in the Philippines may be classifiedinto three types:
Single-axle power tiller (Type I)
These power units are light-weight, usually with 4-to 6 hpgasoline engines. Rotary tiller blades are mounted on atransverse main axle which is directly driven by the enginethrough chain and sprocket. These tractors are often equippedwith pneumatic tires for dryland work or haulage applications.There is no differential mechanism in the axle and no provi-sion for steering clutches.
General power tillers (Type II)
This type of hand-tractor is usually equipped with an air-cooled gasoline engine of up to 8 hp capacity. It is equippedwith wheels and can perform several farm operations by adaptingconventional draft-dependent farm implements, such as plows,barrows, cultivators, etc. Tillers of this type have provisionsfor steering clutches, reverse drives, and multi-speed shiftingtransmissions.
Double-axle power tillers (Type III)
These have two drive axles; the tilling mechanism consists ofa series of knives attached to a rotating shaft installedbehind the main wheel axle. Although these tillers are notas versatile as the other two types, they are well suited totilling heavy clay paddy fields because of their sturdier con-struction and larger engines. Generally, these tractors areequipped with diesel engines of 6 to 14 hp. 1/
1/ See "Economic Aspects of Hand-Tractor Ownership and Operation" byBert Orcino (presented at the Seminar on Farm Mechanization inSoutheast Asia, Penang and Alor Star, Malaysia, November-December1972).
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5.77 Tractors, having a weight of usually above 2 tons, are not wellsuited to wet land farming. Their size and relatively large turning radiusmakes them unwieldy on small plots of land. Moreover, their capital costis such that their acquisition becomes economical only if a machine canserve about 30 (general work) to 70 (plowing and harrowinig only) hectares.For the typical Filipino farmer, owning only 2 or 3 ha of wet land, theuse of regular 4-wheeled tractor is, therefore, not a feasible approachto farm mechanization. This does not mean, however, that tractors areabsent from Philippine agriculture. They are used on sugarcane estates andin a variety of other suitable applications.
5.78 Disregarding tractors, whose manufacture in the Philippines isneither currently in progress, nor contemplated for the foreseeable future, 1/we are dealing in the agricultural equipment sub-sector essentially withthree major groups of equipment, namely:
(i) tractor-drawn implements;
(ii) self-powered soil preparation machines ("power tillers"); and
(iii) a number of relatively small (often transportable) devices forthe processing (threshing, winnowing, drying, etc.) of grain.
5.79 Tractor-drawn implements are, by definition, used in conjunctionwithi tractors; as their useful life is generally similar to that of tractors,the sale of these implements parallels the sale of agricultural tractors.From 1961 to 1971, agricultural tractor sales averaged 1,064 units peryear; in May 1973, the annual rate of sales was believed to be near 1,200units. The dominant importer of agri.cultural tractors, who is also anassembler (and to a small extent a manufacturer) of tractor-drawn implements,reports that about 2 implements have traditionally been sold per tractor.
5.80 The implements are of varying types, such as mold-board plows,disc plows, disc harrows, etc. (all "dead" devices) and cultivators, trenchdiggers, etc., which contain in themselves mechanisms driven through thetractor's power take-off (PTO). All these implements generally consist of:
(i) a robust frame welded or otherwise assembled from structuralsteel shapes,
(ii) the working elements made from wear-resistant steel,
(iii) anti-friction type bearings,
I/ Some tractors, mostly of U.S. origin, are imported in kits andassembled locally; the contributed value due to this assemblyoperation is about P 500 per tractor, an insignificant portionof the sales price of the unit, which is near P 60,000.
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(iv) some of them also have gearing and drive shafts,
(v) rubber-treaded wheels, and
(vi) hydraulic cylinders.
Actual manufacture (as distinct from the assembly of imiported kits) in thePhilippines is, at the present time, negligible. Therefore, import statis-tics will give a reasonable idea of the market;
Other agricultural machineryand appliances for preparingand cultivating the soil 1,098 520,598 2,006 1,098,944
Totals 1,834 840,566 3,444 1,609,640
Average Value ($/unit) 458 467
Imports of Tractors (units) 1,065 1,188
Source: Official Import Statistics of the Philippines.
5.81 From examination of the import data in light of the characteristicsof the implements mentioned earlier, it appears reasonable to conclude that:
(i) the average annual number of implements required will not beless than about 2,500 units;
(ii) about 80 percent of the implements required lend themselves tolocal manufacture; and
(iii) the average value of tractor-drawn implements is about P 3,000.
Hence the local market for tractor-drawn implements which can be manufactureddomestically would be worth about P 6.0 million. 1/
1/ 2,000 units at P 3,000 each.
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5.82 For the time being, all bearings and all hydraulic parts (withthe exception of some cylinders, which are now being manufactured loc-ally),as well as the wearing parts which require specialty steels, will ha're tobe imported. Gears (containing much "added value") can be made in thePhilippines. At least some of the structural steel shapes can be obtainedfrom local rolling mills. And there is a substantial labor effort involvedin the cutting, welding, driiling, assembling and painting of the units.Hence, locally contributed value will be substantial enough to make thelocal manufacture of agricultural implements an interesting project fromthe viewpoint of the Philippine economy.
5.83 Hand tractors or "Power Tillers" exist in several basic designs,as already explained. Tillers of the relatively complex "Type III" havebeen, and will continue to be imported; but their rapidly increasing price(now over P 16,000, compared to less than P 7,000 about four years ago) makesthem less and less accessible for the typical Filipino farmer. One companyin MIanila has obtained BOI registration for the progressive manufacture ofa Japanese tiller of this type. However, at this time, the company's effortsto increase the local content is far behind the agreed schedule.
5.84 The International Rice Research Institute (IRRI) at Los Banos,Laguna, has designed a power tiller which, while fundamentally of "Type II",is in certain respects functionally superior to the typical tiller of thistype and, in particular, uses constructional concepts which result inimportant advantages, including ease of manufacture without elaborate tool-ing, as well as (due to its simplicity of construction) excellent service-ability in rural mechanic shops. 1/ Persons knowledgeable in the field (inparticular some senior members of the Agricultural Productivity Commission)feel that the IRRI design is indeed a good one for the wet land method ofrice cultivation which prevails in many parts of the Philippines. 2/
5.85 At least 3 manufacturers in Manila have begun building slightlydiffering versions of the IRRI tiller under the BOI's incentive plan. Thesales price is around P 4,000 per unit. Even though this price will verylikely increase in the future, these tillers will cost substantially lessthan hand-tractors which have in the past been available in the Philippines.Current market size is believed to be for about 5,000 units per year, withpotential for considerable increases later on.
1/ IBRD Report 39a-PH, Volume IV, Paragraph 58, identifies "the lack ofadequate service facilities" as one of the principal causes that"large numbers of tractors and tillers (provided under earlier IBRDLoans) have had to be repossessed".
2/ "Daily cultivating capacity will be approximately one-half that ofstandard tillers, costing five times as much" (IBRD Report 39a-PH,Volume IV, Paragraph 70). At current prices, the IRRI tiller nowcosts closer to 1/4 rather than 1/5, of the competing standard tiller;but the statement remains essentially correct.
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5.86 Oricino 1/ has shown that for farms of an area of 4.2 haminimum to 50 ha maximum, the total cost of land preparation is least witha hand-tractor, compared with a "carabao" or a regular tractor. He has alsocalculated that roughly half of the cultivated area in the Philippinesconsists of farms having a size of 4-50 ha; and he concludes that thereappears to be a substantial potential demand for hand-tractors. Thisconclusion is reinforced by a cooperative field experiment held in thePhilippines, in which a three-crop total output of 23,500 kg/ha wasobtained in 315 days. Only 50 days were thus available for land preparationfor three crops, or roughly a fortnight per crop. While there is noevidence of an effect of mechanization on crop yield, the availability ofmachinery for rapid land preparation and harvesting may determine whethera farmer can realize this potential gain in output, 2/ as it take 3 daysfor the carabao to accomplish what a hand-tractor can do in one day. 3/
5.87 Despite the relatively low cost of the IRRI tiller, acquisitionwill still be a problem for the average farmer who owns no more than 2 or3 ha of land; and methods of cooperative ownership, or loans on lenientterms will be needed if a mass market is to be developed. The Philippineslags far behind comparable countries in the availability of power tillersper unit area of paddy; and with the substantially cheaper IRRI designavailable, the number of power tillers in the country should eventuallyincrease considerably. How soon this increase occurs, however, may welldepend upon the efforts which will be made to familiarize potential ownerswith the economic advantages of mechanized tillage, and to make availableto them the financial resources needed for the changeover. But if one mayassume that the necessary act:Lon will be taken in order to achieve greateragricultural output, then the scope for hand-tractor sales will increaserapidly to perhaps 15,000 per year by 1980.
5.88 While some observers object to the low mechanical efficiency (inthe narrow technical sense of the term) of the IRRI tiller, caused by theinherent mechanical inefficiencies of a roller-chain-and-sprockets trans-mission system, this design is; an integral and essential part of the low-cost machine. More to the point is the objection that the prime mover usedin the machine is generally a gasoline engine. Diesel engines not onlyhave the advantage of a flatter torque-speed curve (an indication of theavailability of more usable power in applications such as tilling, wherethe load varies from one moment to the next); but, in the absence of aspark ignition system, they are less complex, more easily serviced and less
3/ N. R. Decampo-Comparative economic analysis of experimental data onuse of tractor and carabao on wet land rice farming. PhilippineAgriculture, January 1969.
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prone to failure due to splashing water (a continual problem in floodedrice paddies). In a later part of this report, some comments will be madeon the subject of small internal combustion engines.
5.89 Miscellaneous (mostly transportable) Agricultural Machinery consti-tutes a group of relatively small devices specially conceived, or at leastadapted, for use in the Philippines. Included are grain dryers, threshingmachines, hammer mills, etc. A number of machines are currently in manufac-ture. The "konopak" rice mill is said to be "entirely successful in itsaim of replacing the inefficient imported 'Kiskisan' huller". 1/ An initialorder of 84 units is currently being built for the Bureau of AgriculturalExtension Services; and a follow-on order for 9,000 units from the NationalGrain Authority is expected. The machine has received a Philippine patentand foreign patents are reportedly being sought. The inventor and themanufacturer believe that the machine has good export possibilities. Itmust be said that in its present configuration the mill - just like theIRRI tiller - can easily be copied by any shop with basic machine-toolsand sheet metal working equipment. Whether foreign patents, if and when-ranted, will be an effective deterrent thereto, is questionable. If theanticipated order for 9,000 units indeed materializes, it might be possibleto justify an effort in "production engineering" and tooling which will allowthe Philippine manufacturer to produce the device considerably more cheaplythan would be possible for a small overseas manufacturer who has, as yet,no established market. However, at the present moment, this is conjectural.
5.90 A grain drver, also "recommended as an acceptable commercial drierfor 'palay' or corn by U.N. experts 2/ has had no market success so fardespite the fact that it is reported to have capability for saving a goodpart of the rice which is destroyed by rot in years when wet weather inter-feres witlh the sun-drying of rice. The problem is evidently financial orpossibly an organizational one: With a drying capacity of about 10 tons per24 hour day, the machine is considered the smallest unit of its Lype whichcan be built with reasonable economy, but is too large for the small farmerand, at a price of P 11,000, also much too expensive. The established ricemills are generally willing to purchase wet rice from the farmers - providedit is only wet, not spoiled - at about 25 percent lower price, as many ofthem do have rice drying facilities in their mills. Cooperative ownership -
for this rice dryer, as well as for power tillers - might be a feasibleapproach, and efforts to promote user cooperatives are in fact in progress(by the Extension Service of thle Agricultural Productivity Commission).
1/ Statement attributed to "'United Nations experts with the GrainDevelopment Center of the Philippine Government's Rice and CornAdministration" in the manufacturers' sales prospectus.
2/ Harry van Ruiten, Grain Milling Consultant, and John Rawnsley, GrainDrying and Storage Consultant, both from the Food and AgricultureOrganization of the U.N.
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Nevertheless, after an initial production run of 20 units, manufacture ofthe rice drying machines has - at least temporarily - been abandoned. Inas-much as the machine is said to be basically sound in concept and economicallyadvantageous, the fact that for the time being it is commercially unsuccess-ful in the Philippines would not necessarily preclude the possibility of itsbeing accepted elsewhere, proviLded the machine is indeed "an advance in theart" of rice processing. Hence, if patent coverage can be obtained, so thatdirect copying is not legally possible, the design might become a license-able item and result in a small. foreign exchange earning for the Philippines.It does not seem, however, that: the machine is of such novelty or commercialpotential that major promotional efforts would be justified.
5.91 Other machines in this category which are being made in the Phil-ippines (and successfully marketed) are feed mixers and hammer mills. Theseare simple, straight-forward designs (presumably derived from foreign makes),involving, as far as manufacture is concerned, structural and sheet metalwork, the making of a few shafts, and simple nut-and-bolt assembly.
5.92 IRRI has designed a number of devices which come under thiscategory, including paddy seeders, weeders, threshers, grain cleaners, etc.As already stated in IBRD Report 39a-PH, Volume III, paragraph 34, "Noneof these are in sizeable production, but they represent the first line ofproducts designed to be adaptable to the socio-economic requirements ofsmall paddy growers and technological capability of machine manufacturersin the Asian region". The mentioned products will, in all probability,gradually introduce themselves into the local agricultural scene. However,no mass market is foreseen; and existing manufacturing enterprises are wellcapable to undertake manufacture of these items in moderate quantities.
5.93 Low-Power Internal Comibustion Engines are required as prime moversfor many power-driven devices. For agricultural applications (power tillers,water pumps, threshing machines, etc.) preferred power ratings are around7 and 12 hp. At this time, no one manufactures engines of this kind local-ly. _11 Imports are generally d:Lvided between gasoline engines of U.S. manu-facture and diesel engines (of mauch heavier and costlier configuration)coming from either India or Japan. The principal advantages of availablegasoline engines are lightweighl: and low cost (a typical U.S.-built 8 hpunit sells for less than P 800). Truly comparable diesel engines areapparently not on the market. Diesel engines of similar power are of muchmore rugged design and sell for at least P 5,000. Were it not for thisvery significant price difference, many users would prefer diesels, dueto their more constant torque, lesser complexity, and their inertness vis-a-vis rain or splash water.
1/ The Japanese Kubota engine, and the Indian Kirloskar engine, themanufacture of which is currently being proposed, are not reallyin the class of engines here under discussion.
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5.94 The domestic annual market for small internal combustion engineshas been estimated by IRRI personnel to be in the range of "tens of thou-sands", perhaps as high as 50,000 units. There would be some export poten-tial, too. The current (6th) Investment Priorities Plan of the BOI lists"Small Gasoline Engines" as a pioneer project, with a measured capacity of68,000 units per year. In view of the well-justified preference by many ofthe users for a dies-el unit, and further considering that there is reallyno obvious inherent reason why diesel engines should cost so much more thancomparable gasoline engines (a small price difference will probably alwaysexist), it is felt that a well-conceived engineering project may quitepossibly lead to a low-cost design of a multi-purpose diesel engine whichcould find a wide market in the Philippines as well as other parts of theworld. The matter was discussed in some detail with personnel of the Agri-cultural Engineering Section of IRRI, who feel that the need in the firstinstance is for a diesel engine which is light in weight, and of horizontaldesign (to result in a low center of gravity). Ratings of 7 and 12 hp arebelieved to be the ones with the greatest potential demand. The engine shouldbe designed so that it can easily be removed from one machine (say a tiller)and connected to another (say a thresher), to assure maximum utilizationof this relatively expensive piece of equipment. It would be worthwhilefor an appropriate Government agency to investigate this possibility beforeapproval is granted for the manufacture of gasoline engines in large numbers.
5.95 Summary of Findings. While manufacture of tractors (4-wheel) isneither economically feasible nor contemplated at present, on account of thesmall volume of demand, there may be scope for the manufacture of tractor-drawn implements. The domestic market is currently valued at aboutP 6.0 million and will grow gradually. Any plan to manufacture implementsfor imported tractors will need active cooperation from the importing andmarketing agencies.
5.96 The market for power tillers, as also for other agriculturalmachinery required for small and medium-sized Filipino farms, e.g. riceand grain dryers, rice mills, etc. is small at present but growing. IRRIhas developed various simple designs and specifications especially suitedto the manufacture of machinery in small workshops and easy maintenance inprevailing conditions. Domestic capability for production of most itemsalready exists, but commercial success has not yet been achieved on anysignificant scale. The pace of growth of demand is dependent on governmentpolicy in the agricultural sector, particularly in respect of land holdingsand finance for farming. Wlile the prospects are not yet clear, it appearslikely that demand would grow only gradually, in response to felt domesticneeds; and the agricultural machinery sector will be able to expand itsproduction as required, provided access to sufficient financial and technicalassistance is allowed to it. There is need for coordinated planning foruse of machinery in the farm sector and domestic production of the machineryrequired.
5.97 The case of low-power internal combustion engines, which arealready listed in the IPP for the production of 68,000 units per year of gaso-line engines, needs to be re-examined. The principal demand for these
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engines comes from agricultural. operations, for which diesel engines arepreferred and appear to be technically more suitable. The problem of highcost of diesel engines (compared with gasoline engines of similar power)needs further technical examination. It may be possible to develop aneconomic diesel engine for the Philippine market; and the case should beexamined before any investment for production of gasoline engines (whichwould preempt the market) is allowed.
5.98 The investment and employment effects of development of agricul-tural machinery manufacturing are not likely to be substantial in thenext 5-7 years.
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VI. PULP AND PAPER
A. Present Status
6.1 The pulp and paper industry in the Philippines had an importantbeginning with the construction in 1941 of the world's first pulp andpaper mill based on bagasse. No further development took place until 1956,when a papermill to produce unbleached grades from imported pulp anddomestic waste paper was started in the Manila area. Following that,several small paper mills were built near Manila, together with oneintegrated pulp and paper mill on Bataan which was initially based onbamboo but converted to hardwood later. The picture at the end of the1960's was as follows: 1/
(a) one integrated bagasse-based mill with a capacity of10,000 MT/annum of printing and writing paper and5,000 MT/year of paperboard, Central Azucarera de Bais;
(b) one integrated hardwood-based mill (converted from bamboo)with a pulp capacity of 16,000 M./year and a paper capacityof 18,000 MT/year of printing and writing paper, BataanPulp & Paper Mills, Inc.;
(c) one non-integrated paper mill with a total capacity of56,000 MT/year of paper and paperboard based on importedpulp and waste paper, Manila Paper Mills, Inc.; and
(d) thirteen non-integrated paper mills with a total capacityof 69,000 MT/year of various grades of paper and paperboard,all using imported pulp, and some in addition using wastepaper. (Of these thirteen mills, six of the smaller unitsowned small pulp mills which were idle at the time of themission's visit.)
6.2 There has been a marked change in the situation since 1969,with the following developments:
(a) The start-up in late 1969 of the integrated pulp andpaper mill of Rustan Pulp and Paper Mills, Inc. Themill uses mixed short-fibre pulpwood, waste paperand imported unbleached long-fibre pulp. It has acapacity of 19,000 MT/year unbleached short-fibre pulp,5,500 MT/year of long-fibre pulp produced from abaca,20,000 MT/year linerboard and corrugating medium,and 4,500 MT/year paperboard;
1/ Source: Table VI-I.
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(b) The start-up, at the end of 1971, of the largest pulpand paper mill in the country by Paper IndustriesCorporation of the Philippines (PICOP). The mill usesmixed short-fibre puLpwood and imported long-fibrepulp in the production of mechanical pulp and bleachedand unbleached sulphate pulp. The mill has a capacityof 73,000 MT/year of newsprint and 63,000 MT/year oflinerboard and corrugating medium;
(c) The start-up, by Menzi Development Company, in early 1973,of a small integrated mill pulping abaca fibre and producingeither bleached abaca pulp for sale, or high-grade specialtyprinting and writing grades using abaca pulp and importedbleached short-fibre pulp. The mill has a capacity of1,600 MT/year bleached abaca pulp and 3,000 MT/year printingand writing grades; and
(d) The construction of zn integrated pulp and paper mill byUnited Pulp and Paper Mills, Inc., to be commissioned inlate 1973, using bagasse and imported unbleached long-fibre pulp. The mill has a capacity of 16,000 MT/yearof unbleached bagasse sulphate pulp and 28,000 MT/yearof sack kraft.
6.3 The total capacity of the industry at the end of 1973 will then beas follows:
- integrated pulp and paper mills: pulp, 189,000 MT/year;paper, 208,200 MT/year; andpaperboard, 7,500 MT/year
- non-integrated paper mills: paper, 105,500 MT/year; andpaperboard, 53,000 MT/year
In terms of numbers of mills built, the major development of the industrytook place between 1956 and 1966, with 13 of the 21 now existing millscoming into production in that period. Nevertheless, the emphasis at thattime appears to have been on the construction of small mills to saLisfybits and pieces of the domestic market. These nineteen mills have a com-bined capacity of only 122,500 MT/year paper and paperboard or about 33percent of the total paper and board making capacity. In contrast, between1966 and the end of 1973, 5 mills were built with a combined capacity of245,500 MT/year paper and paperboard or close to 66 percent of the total paperand paperboard production capacity of the country. The PICOP mill alone, at133,000 MT/year, has a capacity greater than the total of the 13 mills builtbetween 1956 and 1966.
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B. Xarket Prospects
Past Production, Imports and Apparent Consumption
6.4 Over the ten years ending 1971, apparent consumption of paperand paperboard products increased at an average rate of 8.1 percent perannum, as shown in the Table below. This period included, however, adecrease in apparent consumption in 1969 and 1970; dutring the seven-yearperiod ending 1968, apparent consumption actually rose at an average annualrate of 11.1 percent.
Paper and Paperboard Products, /Imports and Apparent Consumption (1961-1971) a
6.5 During the same ten-year period, domestic production rose at anaverage rate of 10.3 percent year year, while imports increased at an annualrate of 6.2 percent. In 1971, the CIF value of all paper and paperboard importsexceeded US$30,000,000.
6.6 During this 10-year period, domestic pulp production, other thansecondary pulp, was not a large factor in the country's requirements,reaching only 14 percent of the total demand in 1971. Secondary or regeneratedpulp, imported and domestically produced, has been the largest single factorin pulp consumption, at times exceeding 50 percent and never being lessthan 30 percent of the total pulp demand.
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Pulp Production, Imports and ApparentConsunption (1961-1971)
6.8 Over the period 1962 to 1971, per capita consumption increased at
an average rate of about 5 percent per year. At the same time, the per
capita gross domestic product in constant 1967 prices was increasing at a
rate of about 2.6 percent per year. Over the 1962 to 1968 period, however,
per capita consumption increasei at the rate of 6.7 percent a year compared
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to an annual increase in per capita gross domestic product of 2.2 percent. 1/In 1969 and 1970, there was a marked decrease, not only in the per capitaconsumption of paper products but also in the total annual consumption. Itseems likely that this was a temporary drop in the market similar to thatwhich occurred in other countries also in that period, the general businessrecession affecting Philippine exports and hence the level of businessactivity and paper consumption there. In 1971, per capita consumption againapproached the 1969 level.
6.9 For most countries, and for the world as a whole, per capita paperconsumption correlates very well with per capita income (see Table VI-10).If the Philippines had followed the "normal" pattern in the period 1962 to1969, per capita consumption would have increased from 4.9 kg to about 6.6 kg,a rate of about 3.4 percent per year. In this period the actual ratio ofconsumption growth to growth in GDP was 3.0 compared to a "normal" ratio of1.5. This subject will be discussed further in the following section.
Future Domestic Consumption of Paper and Paperboard
6.10 In the 1970 FAO report 1/ on Philippine forestry, the followingcomments were made:
"On Graph 14 are plotted the relationships between percaput GDP and per caput paper consumption for a groupof countries in Southern Europe,Latin America and Asia.It will be noted that a majority of countries follow veryclosely the trend line marked "Normal", but that a few -notably Philippines, Brazil, Costa Rica and Japan - areabnormally high consumers ..... Greece and Peru occupy ahigh normal position. There would seem to be threereasons for the abnormally high levels of consumptionin relation to income:
(a) a 'dual economy' - a highly commercialized sector withhigh consumption of paper with a vast rural area whichdepresses the per caput income (Brazil, Philippines);
(b) Very high levels of literacy and of newspaper circula-tion relative to per caput income (Philippines, Japan); and
(c) An important 'demonstration effect' from the heaviestpaper consumer in the world, namely the U.S.A. (Philip-pines, Japan, probably Costa Rica and Brazil).
1/ Source: Report No. 78-PH "Current Economic Position and Prospectsof the Philippines," April 20, 1973.
2/ FAO - FOR: SF/PHI 16 Technical Report 1, "Demonstration and Trainingin Forest, Forest Range and Watershed Management," Rome, 1970.
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Since all three 'reasons' apply to the Philippines, it seemsunlikely in the extreme that the consumption/income ratiowill fall to the 'normal' level in the foreseeable future.The lowest level of projection which could be entertained isone which follows the 'normal' trend but stays well above it."
The FAO graph referred to is produced in part with additional data inTable VI-10. The FAO report also gives levels of probable consumption for1975 and 1985. These are give1n below, together with BOI projections for1975 and 1980. The BOI projections were made by extrapolating plots ofpast consumptions for differenit grades and adding the values obtained.They have not considered population increase, and increases in GrossDomestic Product.
Projections of l'otal Paper Consumption(1,000 Metric Tons)
While, in fact, the FAO report would have shown higher per capita consumptionsat lawer per capita income leveLs than is evident from Table VI-1O, with thedata on consumption now availab:Le, it appears that the rate of growth ofconsumption decreases sooner tham the FAO projection expected. Coincident-ally, however, the per capita consumptions obtained by dividing FAO cdatson total consumption by population figures now available, correlates Vrery
well with per capita GDP as usecl in the present report. The Philippi;,-consumption trend appears to fall to the "normal" between 1980 and '1910'when the per capita GDP is expected to be about $350. The BnI projec (tii
are unusually low and fall well below the "normal" trend line for 1980.The projections used subsequently in this report are all based on the fcl-lowing calculation:
/a The estimated consumption could be significantlyhigher or lower, depending on the developmentof the Philippines economy and the degree of successof control of population growth.
Sources: Tables VI-8 and VI-10.
6.11 Over the 10-year period 1962-1971, the proportions of the variousgrades in the total paper consumption were as follows:
Paper Consumption by Categories 1962-1971(Percent)
Grade Range Average
Newsprint 18.5 - 28.4 24.1Printings and Writings 17.2 - 27.8 21.6Industrial Paper 26.4 - 33.5 30.0Paperboard 14.5 - 20.1 17.1Tissue and Others 4.6 - 8.8 7.2
Source: Tables VI-2 and VI-3.
During the period, the following trends were evident:
- industrial paper was increasing its share of the market,reaching its maximum in 1971, although there were pro-nounced fluctuations in the proportions in the mid-years.
- paperboard likewise appeared to be obtaining an increasingshare of the market, although the trend in the last fiveyears was erratic.
- the category - tissue and others - showed a consistentlyrising trend over the 10-year period.
- the proportions of the market obtained by the culturalgrades - newsprint, printings and writings, fluctuated widelybut both appear to be showing a downward trend.
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With the preceding points in mind, and considering the increasing industrializa-tion and per capita income in the Philippines, it appears to the missionthat the proportions of each category might be as follows in the next 10to 15 years.
Newsprint 10%Printings and Writings 19%Industrial Paper 35%Paperboard 18%Tissue and Others 8%
Using these proportions and the projections of total consumption inpara 6.10 above, the following consumptions by categories are derived:
Future Paper Consumption by Categories(1,000 metric tons)
Category 1975 1980 1985
Newsprint 84 115 160Printings and Writings 80 109 152Industrial Paper 146 201 280Paperboard 76 104 144Tissue and Others 34 46 64
Total 420 575 800
6.12 Neither the data on past consumption nor the projections of futuredemand include the substantial amount of industrial paper used in the pack-aging of bananas for export. In 1971, over 267,000 metric tons of plantainsand bananas were exported. At a usage of 100 kg of board per ton ofbananas, the container board used was in excess of 25,000 tons. Bananaexports are expected to increase and, if the linerboard and corrugatingmedium are produced in the Philippines, a significant increase in industrialpaper requirements would result.
Future Pulp Requirements
6.13 While total domestic self-sufficiency in pulp and paper making isconsidered impossible by 1975 and unlikely by 1980, it is conceivable thatself-sufficiency in paper making alone could be achieved by 1985. Inaddition, a much larger degree of self-sufficiency in pulp productioncould also be attained by that time. It is of interest, therefore, to deter-mine the pulp requirements for the years in question, based on the projectedpaper consumptions above.
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Future Pulp Requirements for Papermaking Self-Sufficiency(1,000 metric tons)
Pulp Grade 1975 1980 1985
Long fibre chemical- bleached 25 34 47- unbleached 44 60 84- total 69 94 131
Short fibre chemical- bleached 97 133 185- unbleached 76 106 146- total 173 239 331
Mechanical 79 108 150
Secondary 137 188 261
Total 458 629 873
Source: Based on pulp usages given in Table VI-9 and 1,000Kg air dry pulp per ton of printings and writings,and 1,100 Kg air dry pulp per ton of all othergrades.
Should the industrial paper for banana boxes be produced in the country, therequirements of both unbleached long and short-fibre pulp would be increasedby at least 15,000 and 10,000 MT/year respectively.
Philippine Supply and Demand
6.14 At the present time there are several projects, firm and otherwise,for expansion of the Philippines pulp and paper industry which will affectits position in the region and world markets. These projects are listedbelow:
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Projected Expansion Plans and New Mills
Company New Capacity and Description
Projects which could be effective by 1975
PICOP Addition of new dryers to expand papermachine capacity by 15 percent, thus adding11,000 MT newsprint and 9,500 MT industrialpapers per year
Manila Paper Mills Start-up of rotary digesters to produce6,500 MT per year long-fibre unbleachedpulp from rope, rags, etc.
Projects which could be effectlve by 1980
Manila Paper Mills Bagasse pulping installation to produce27,000 MT per year unbleached bagassepulp for own use.
Bataan Pulp & Paper Addition of new digester and auxiliaryequipment increasing bleached hardwoodpulp capacity by 10,000 MT per year.
P-lar-agon Paper Industries New mill to produce 24,000 MT per year ofpaperboard from purchased pulp and wastepaper.
Abaca Pulp & Paper Industries New mill to produce 66,000 MT/year abacaof the Philippines pulp for export.
Isarog Pulp & P,aper Co. New mill to produce 6,600 MT/year abacapulp for export.
Container Corporation of Addition of 12,500 MT/year of paperboard.the Philipp,nesp
Projects which could be effective by 1985
PICOP New installation to produce 100,000 MT/yearsemi-cghmiai.A pulp and corrugating mediumprimarily for export.
United Puip & Paper Mills Doubling of mill capa4ity adding 28,000MT/year of sack kraft.
Sources: Board of Investments, and discussions with individual producers.
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Of the foregoing projects, all those which would possibly become effectivebefore 1980 are reasonably firm with the exception of the Container Corporationexpansion.
6.15 With the projects listed above and better utilization of existingcapacity, projected supply, demand and supply-demand gap for papers andpaperboards would be as given below:
Paper and Paperboard Projected Supply,Demand and Supply-Demand Gap by Categories
(1,000 metric tons)
1975 1980 1985Supply Demand Gap Supply Demand Gap Supply Demand Gap
/a The possible PICOP production of 100,000 MT/year of corrugating medium forexport has been ignored in this calculation.
Source: Board of Investments.
Since many of the mills have the possibility of varying production to suitthe market, the supply-demand gap for each category can onily be consideredapproximate. Nevertheless, the total gap is equivalent to a daily pro-duction of 135, 565 and 1,160 tons in 1975, 1980 and 1985, respectively.
6.16 Using this data, it is possible to determine the potentialsupply-demand gap for different grades of pulp in the same years. Theresults of such a calculation are given below:
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Pulp, Projected Supply, Demand and Supply-Demand Gap by Grades(1,000 metric tons)
1975 1980 1985Pulp Grade Supply Demand Gap Supply Demand Gap Supply Demand Gap
/a Unbleached long-fibre pulp supply is based on PICOP's and Rustans currentplans to pulp abaca and other non-woody plant material with the hardwood,and by 1985 the utilization of plantation pine in the PICOP mill. Capacityof the 6 idle pulp mills is not included.
/b 30 percent recovery of total. paper use.
/c 25 percent recovery of total paper use.
Source: Based on pulp usages given in Table VI-9.
Should the industrial paper for banana boxes be produced in the country,the requirements of both unbleached long and short-fibre pulp would beincreased by at least 15,000 and 10,000 MT/year, respectively. Pulpsupplies for export are not included in the above table.
Export Markets
6.17 While exports of pulp and paper products have not been a sa: nificantfactor in the Philippine trade, they have been increasing recently. n1972 exports of pulp amounted to 959 metric tons (classed in officialstatistics as "pulp of straw, of fibres and rags," principally abaca pulp,the FOB values being close to $500/ton). More important was the dramaticincrease in exports of paper and paperboard and their finished products.In 1971 these totalled less than 1,000 tons with an FOB value of $390,000;in 1972 the quantity had increased to 10,860 tons with an FOB value of$1,960,000. 1/ The largest export product was paperboard (7,100 tons) withover 95 percent going to Japan.
1/ "1972 Foreign Trade Statistics of the Philippines" Bureau of Censusand Statistics, Manila.
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6.18 Discussions with different producers in the country indicate thatexports could increase in the following categories:
Corrugating medium - to Japan, Hong KongPaperboard - to Japan, Hong KongWrapping paper - to Hong Kong, Taiwan, KuwaitPrintings and writings - to Hong Kong, Malaysia
6.19 A recent report 1/ gives projections of chemical grade woodpulpsupply and demand for the three major producing and consuming regions inthe world. These projections are summarized below:
Projections of Pulp Balance(1,000 metric tons)
1975 1980 1985High Low High Low High Low
North America +3,160 +3,320 +4,450 +4,740 +5,940 +6,390Western Europe -1,890 -2,040 -2,790 -3,000 -3,910 -4,300Japan -1,410 -1,500 -2,520 -2,680 -3,380 -3,660
+ Net exportable.
- Net to be imported.
Thus, the estimated chemical grade market pulp deficit in Western Europe andJapan may grow over the combined regional and North American supply in sucha way, tthat mills with a joint daily production of approximately 500, 2,500and 4,000 metric tons are needed to fill the gap by 1975, 1980 and 1985,respectively.
6.20 In a more specialized area the report points out that "owing tothe advantages of integration, the non-captive production of unbleached kraftpulp, NSSC-pulp and groundwood is likely to have a decreasing share of thetotal volume." The implications of the foregoing for the Philippines pulpand paper industry will be discussed in the next section.
6.21 Future demands for long and short-fibre chemical paper pulp havealso been estimated by Sundelin. 2/ His estimates are as follows:
1/ Report FAO:PAP/72/5 Rev. April 1973. "The Present and Future Outlookfor Chemical Paper Grade Market Pulp," prepared for FAO AdvisoryCommittee on Pulp and Paper, 14th Session, May 1973.
2/ Sundelin A. "The International Market for Chemical Paper, Pulpto 1985" Report prepared for IBRD 1973.
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Estimates of Future Demand of ChemicalPaper Pulp from Wood and Non-Wood Materials
(1,000 ADMT)
1975 1980 1985Long Short Long Short Long Short
Fibre Fibre Fibre Fibre Fibre Fibre
Latin America 1,635 1,505 2,375 2,295 3,110 3,480Africa 300 405 455 560 715 770Asia & Far East /a 1,495 1,125 2,305 2,130 3,480 3,775Japan 3,675 4,495 5,190 6,095 6,955 7,840Oceania 805 280 1,170 390 1,615 540Western Europe 14,650 5,985 16,670 8,060 18,785 10,570North America 35,025 7,430 39,430 9,860 42,575 12,720
Total 57,585 21,215 67,600 29,390 77,235 39,695
/a Excluding Japan and Mainland China.
These projections are of interest to the Philippines in that theyillustrate the trends and expected shortages in the grades of pulp thatare required by the Philippine 'pulp and paper industry. It follows thatif surpluses of either short or long-fibre pulps are produced theyshould find a ready market in Japan and the South East Asia region.
Summary of Market Prospects
6.22 The data given in the preceding paragraphs and tables show thefollowing:
(a) Even if all currently known plans (firm and otherwise)for increased production are carried out, the Philippineswill have a need for increasing imports of all thecategories of paper considered, reaching a total of380,000 metric tons inT 1985. It is emphasized thatthe categories shown in the tables are very broadclassifications. Within any one category therewill be grades for which there will be surplusproduction capacity.
(b) With pulp usages based. on current practice in thePhilippines and in other countries, the Philippinescould develop surplus capacity for the productionof unbleached short fibre pulp, and surplus secondarypump supplies.
(c) Over the period considered the country may have decreasingdeficits of bleached and unbleached long-fibre pulp,and bleached short-fibre pulp; the decreases envisagedare 9,000, 25,000 and 15,000 metric tons respectively, by1985.
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(d) If complete self-sufficiency in pulping and paper-making is desired, by 1985, projected annual pulpsupplies will have to be increased by the followingamounts:
- Long-fibre chemical
bleached 37,000 tonsunbleached 54,000
- Short-fibre chemical
bleached 119,000 "unbleached 7,000
- Mechanical 81,000 "
- Secondary 61,000
(e) In addition to the domestic market there are increasing exportpossibilities for both long and short-fibre pulp in the nearbymarkets of Japan and South-East Asia. In light of currentexperience, it is evident that surplus production of many papergrades can also be sold in the same Asian markets. Exportprospects would, of course, depend on cost-competitiveness, andthis issue is considered in paragraph 6.40 below.
C. Raw Material Supply: Pulpwood
6.23 The Philippines' major pulpwood resource is in the stands of mixedtropical hardwoods. In 1971, 15.9 million ha, 53 percent of the landarea, were classed as forest land and, of this, 14.1 million ha were classifiedas productive or commercial forest land. Some 13.5 million ha of the com-mercial forest land is covered with dipterocarp forest. The major areaswere in Mindanao with 5.8 million ha, and Luzon with 5.1 million ha. Inaddition, of the sound commercial wood, 53 percent was in Mindanao. 1/
6.24 Mixed tropical hardwoods have not yet been widely accepted asa satisfactory pulpwood resource. The major objection to their use isthe large number of species in any one area and the consequent difficultyof producing a uniform pulp. This is particularly true for mills producingmarket pulp. As recently as May 1973 2/, comments were made by representativesof leading pulp producing and consuming countries to the effect that there
2/ FAQ Advisory Committee on Pulp and Paper, Fourteenth Session, Rome,17-18 May, 1973.
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would be no requirement for pulp from mixed tropical hardwoods for sometime to come, the additional fibre pulpwood being produced from plantationsof eucalyptus and other species. Such comments should not, however, dis-courage a study of the Philippine resource, with the special conditionsprevailing in the country (described in the following paragraph) and theevident demand for short-fibre pulp in Japan and South East Asia. Theproblems of non-uniformity of wood supply are not as critical in integratedpulp and paper making operations where suitable adjustments can be madethroughout the process.
6.25 In contrast to many other mixed tropical forest areas, thePhilippines is fortunate in that 66 percent of the sound commercial woodin the old stands are dipterocarp species and this proportion reaches 72percent in Mindanao. These dipterocarps supply most of the wood volumeexported from the Philippines .md processed in the country. Loggingand sawmill wastes of the speci:es form the major pulpwood resources for themills of PICOP, Rustan Pulp & Paper, and Bataan Pulp & Paper.
6.26 It has been calculated that the potential logging waste availablein the islands in the fiscal year 1971-72 was 4.4 million cubic meters,and sawmill waste, another 250,000 cubic meters. 1/ Over 60 percent of thelogging waste is found in Mindalnao. The total potential waste, 4.65 millioncubic meters, is equivalent to approximately one million tons of pulp.It must be emphasized that the 4.65 million cu. m. estimate is based onallowable cut and lumber production. The actual amount readily availablefor pulp production is far less, ready availability being interpreted asconcentrated supply in an area, making collection possible for a pulpingoperation of economic size. When it is considered that in 1971 there were353 logging firms and 349 sawmills, 1/ it is obvious that the obstacles toassembling wood waste at locations suitable for large-scale pulp productionhave been virtually insurmountable.
6.27 Two recent developments should help in overcoming the problemsof assembling wood waste, namely, the cancellation of the.short durationspecial timber licenses, and the proposal to reduce and eventually eliminatelog exports. Both these should encourage larger scale logging and woodprocessing industries and hence improve the availability of wood waste forthe pulp and paper industry.
6.28 The long-fibre pulpwood resource of the country is concentratedin the stands of native Benguet Pine (Pinus Insularis) in NorthernLuzon. The pine is estimated to cover an area of 200,000 ha. At present,there are two concessions in the area, assigned to Araneta and EasternPaper. Both concessions are due for cancellation in connection withthe program for rationalization of the pulp and paper industry. The Aranetaconcession covers 70,000 ha and is estimated to contain 6.1 million cu. m.of pine. The Eastern Paper area is estimated to contain about one-half
1/ "Philippine Forestry Statistics," Bureau of Forestry, 1972, and Boardof Investments.
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this amount of wood. The Bureau of Forestry estimates that the Araneta pinecould support a pulp operation of 240 T/day for 30 years, with plantationsto sustain a mill beyond that time. There is some difference of opinionbetween the Bureau of Forestry and some members of the pulp and paperindustry as to the actual extent of the pine resource and its accessibility.The FAO report on Philippine forestry was also pessimistic regarding the
possibilities of using the Luzon pine to support a kraft pulp mill.
6.29 A third potential pulpwood resource lies in the establishment ofplantations of both fast growing hardwoods and pines. At present, asfar as the pulp and paper industry is concerned, plantation work is beingcarried out by individual companies themselves. PICOP has a program toplant a total of 40,000 ha at a rate of 4,000 ha/year. The main speciesbeing used are Eucalyptus Deglupta, Albizzia Falcata and Pinus Caribbea.The company has established two nurseries and, in addition, is assistingindividual farmers to enter the tree-farming program through the provisionof Albizzia Falcata seedlings. Rustan Pulp & Paper has also embarkedon a plantation program using Albizzia Falcata and Kenaf. Bataan Pulp & Paperhas carried out experimental plantings with Albizzia Falcata and GmelinaArborea and is actively seeking land close to the mill where plantationscould be established.
Non-Wood Fibres
6.30 As with pulpwood, the Philippines has large resources of non-woodyshort-fibre materials - bagasse and rice straw - and limited resources oflong-fibre materials. At the present time, there is one mill utilizingbagasse for pulp production and a second mill is in the process of start-up.Bagasse is widely used as a pulp resource throughout the world, over 40mills with capacities in excess of 20 T/day each using it as a raw material.In 1971, sugarcane production in all of the Philippines was 23.3 millionmetric tons, 1/ equivalent to approximately 3 million metric tons of dry
bagasse. The major current use of bagasse is as fuel for steam generationin the sugar mills. Between 70 percent and 80 percent of bagasse is usedin this way leaving 0.6 to 0.9 million metric tons available for pulpproduction and other uses. Potential for bleached paper grade pulp at31 percent yield is, therefore, between 180,000 and 280,000 metric tonsper year. It would also be possible to replace some of the fuel bagasseat individual mills with alternate fuels such as oil or coal. In suchevent, the boilers of the sugarmill must be modified or replaced andbagasse sold at the equivalent fuel value. In the Philippines at thepresent time, one mill estimates, waste bagasse can be delivered at acost of P 4/ton whereas fuel replacement bagasse will cost about 10 timesas much. The increasing cost of petroleum products tends to make thisalternative less attractive than it had been previously. The problem withbagasse is similar to that with waste wood, namely the collection ofsufficient bagasse at a central point. This problem can be alleviated to
1/ Report No. 39a-PlH "Agricultural Sector Survey, Philippines," Annex 8,Sugar and Tobacco Production, May 2, 1973.
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a large extent if there is more than one sugar mill within a reasonabletrucking distance of one another. A further complication in the Philippinesis that ownership of the non-fuel bagasse is vested in the planters andany user of bagasse for pulp piroduction must come to a satisfactoryarrangement with the planters as well as with the sugar mills.
6.31 It has been mentioned above that there are at least 40 bagassepulp mills in the world with capacities of over 20 MT/day each. Ofparticular interest are the larger mills, of a type which could possiblyproduce exportable products. They are listed below:
Major Bagasse Pulp Mills
Mill and Location Capacity Process Product(MT/day)
Compania Industrial de 230 Soda Bleached and un-San Cristobal S.A., bleached pulp forMexico City, Mexico fine paper, tissue,
wrapping
Puerto Rico International Paper, 120 Soda Corrugating mediumArecibo, Puerto Rico
Ledesma S.A., 110 Soda Bleached pulp forArgentina printing and writing
Propal, Cali, 165 Soda Bleached and un-Columbia bleached pulp for
tissue, printing
Compania Papelera Trujillo, 150 Soda Unbleached pulp forTrujillo, Peru sacks, wrapping and
corrugating medium
Sociedad Paramonga, 150 Soda Bleached and un-Paramonga, Peru bleached pulp for
Source: UNDP-"Utilization of Bagasse, Review of Bagasse Technology," Sand-well & Company, December 5, 1969.
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6.32 Well over 50 percent of the Philippines cane and sugar productionis in Negros and in that area there are several large sugar mills which couldperhaps lend themselves to becoming centers for pulp production. One ofthese - Central Azucarera de Bais - already has a pulp and paper mill, andconsideration is being given to erection of a pulp mill at another, thelocation not yet having been decided.
6.33 A further short-fibre resource is the large quantity of rice strawin the country. While this is used as a raw material for pulp manufacturein many countries, it is inferior to bagasse and short-fibre woods. Inview of the large quantities of these available, rice straw does not meritconsideration in the Philippines pulp and paper industry at this stage.
6.34 It has been inferred earlier in this review that the Philippines islacking in long-fibre pulp resources. While the statement is true in general,it is also true that the country is an exporter of abaca fibre, a largeproportion of which is destined for the manufacture of pulp and paper products.Pulp produced from abaca fibre is superior in most respects to that producedfrom even the best coniferous wood. The pulp finds use in high qualityprinting and writing papers, specialty papers and non-woven fabrics. Theabaca fibre itself commands a high price, which in 1971 averaged $262/metricton. Abaca pulp consistently sells for more than $300/metric ton and mayreach $500/metric ton. Production of abaca pulp in the Philippines is carriedout at present in three small mills with a total pulp capacity of about14,000 MT/year. Abaca fibre production in the Philippines has beendeclining in recent years, exports having decreased from 78,900 metric tonsin 1966 to 50,200 metric tons in 1971. 1/ This factor together with apredicted world shortage has led to the organization of a committee tostudy and recommend steps for the rationalization of production of thematerial.
6.35 In the past, large-scale use of abaca fibre for pulp productionhas been hampered by the difficulties of harvesting, decorticating anddrying the fibre. Dry fibre yields under the best conditions are around 4 MT/haand pulp yields are of the order of 70 percent. Thus a 100 MT/day mill wouldrequire a plantation of close to 12,000 ha. In 1972, with a total area underabaca of 145,000 ha, actual fibre yields in the entire country averaged about0.75 MT/ha, with the best average yields of 1 MT/ha being attained in Southernand Western Mlindanao. Considerable work,has been carried out in the countryon improving the fibre yield per hectare and also making the harvesting, de-corticating and drying more efficient for use for pulp production. Experimentalplantations of an improved variety yielding up to 20 tons per hectare havebeen established and pilot plant work is now underway on recently developedequipment for harvesting and processing the plants. If this work provessuccessful, a mill to produce 65,000 MT/year of abaca pulp will be established.This mill will be based on new plantations of the improved variety. Such adevelopment will not, however, solve the country's long-fibre pulp shortage,
1/ Source: Board of Investments.
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unless there is a desire to use premium grade exportable abaca pulp in theproduction of normal commercial grade papers. Such a development couldoccur if Philippine paper producers continue to find it necessary to payexcessively high prices for imported long-fibre pulp.
6.36 Other possible sources of long-fibre pulp are commercial bananastalks and wild banana plants. The use of these has not been provencommercially but current shortages of long-fibre woodpulp, particularlyunbleached, has aroused interest in their possibilities.
6.37 In the past, bamboo has been used but as has been stated in SectionA, the only mill based on this resource was converted to pulpwood use. Forreasons that are not entirely clear, the bamboo resource was exhausted andregeneration did not occur. 1/
Secondary Fibre
6.38 An important and growing fibre resource in the Philippines as inother regions is secondary or recycled fibre. Sundelin 2/ states that theextent to which waste paper can be recovered and re-used in paper manufactureis dependent on economic as well as technical factors; the economic factorsbeing largely determined by a country's labor wages, per capita consumptionof paper and degree of urbanization. It has been stated that a practicallimit to waste paper use will be 40 percent of all fibrous materials usedin paper and board manufacture. 3/ This proportion is, of course, alsoaffected by the type of production. In the Philippines, more than 50 percentof the paper and paperboard produced is in grades which have used a veryhigh proportion of secondary pulp - namely industrial papers and paperboard.For that reason, secondary fibre usages over the 10 years ending 1971 have
often exceeded 50 percent of the total fibre used. With the development oflarge-scale wood and bagasse pulping facilities, and the production of a widerrange of paper grades, it is probable that the proportion of secondary fibreused will decline.
Other Raw Materials
6.39 With the exception of saltcake (sodium sulphate) and sodiumchlorate, the major pulping and bleaching chemicals are produced withinthe country. The two mills producing bleached chemical woodpulp haveelectrolytic plants producing sodium hydroxide and chlorine for bleachingpurposes. It seems likely that any future bleached pulp mills would alsomanufacture their own bleaching chemicals including sodium chlorate if the
1/ Source: Board of Investments.
2/ Sundelin, A. "The International Market for Chemical Paper Pulp to1985." Report prepared for 1BRD, 1973.
3/ Slatin, B. "Fibre Requirements of the Paper Industry in the Seventiesand Eighties," September 15, 1971.
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operation is large enough. Caustic soda sulphur stripping liquor isavailable to one mill from a neighboring oil refinery and proves to be auseful source of alkali and sulphur. The large number of minor chemicalsused in pulping and paper-making will probably continue to be imported inthe foreseeable future.
D. Cost Competitiveness of the Industry
6.40 The cost competitiveness of the industry will depend on a numberof factors, mainly mill size, fibrous raw material cost, labor and administra--tion costs, and selling price of the product.
6.41 Mill size will affect the investment per ton of product as wellas the labor and administration requirements. For example, it has beenestimated 1/ that a non-integrated newsprint mill in Canada producing 450 MT/daywould require an investment of $165,000 per daily ton and would have laborand administration costs of $20.90/ton. A mill double this size wouldrequire an investment of $150,000 per daily ton and would have the samelabor and administration costs. Perhaps more relevant in the Philippinescontext is the estimate of investment requirement per ton for a 500 MT/daybleached pulp mill at only 55 percent of that for a 100 MT/day mill.Similarly, the unit cost of a 200 MT/day non-integrated paper mill would beless than 50 percent of that for a 25 MT/day mill. An extreme example is therecently commissioned 10 MT/day abaca pulp and paper mill which requiredan investment of the order of $700,000/daily ton.
6.42 It was noted in Section A that the emphasis in the country priorto 1966 was on the construction of small mills. Mills of the size built atthat time, papermills of 1,000 to 5,000 MT/year could only be justified iflabor costs are extremely low or if an unusually high-priced product isplanned.
6.43 One comparison of efficiency is as follows for integrated pulp andpaper mills:
Labor Requirements for Pulp and Paper Production(Integrated mills)
Country Approximate Man-hours/ton Product
Canada 6The Philippines - 20,000 MT/year 36
- 140,000 MT/year 11
1/ IBRD Pulp and Paper Industry Sub-Sector Study - First Draft, 1972.
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That the relatively low wage rates prevailing in the Philippines have riotimproved the international competitiveness of the industry is evidenced bythe fact that in 1969, wages paid in the pulp and paper industry amountedto over 13 percent of the total zost of materials and labor 1/. This isapproximately the same as the proportion in non-integrated mills in developedcountries where wage rates are 10 to 15 times higher, and costs of materialsare, if anything lower. In the past, then, low wage rates have not resultedin any significant advantage to t:he Philippine consumer or export possibilities.However, as the data in the Table above show, economies of scale are resultingin a marked reduction in labor ccsts per unit of production. If the trendtoward larger mills continues, export possibilities could improve significantly,as unit labor costs would then be 1/3 to 1/2 of those in North America.
6.44 Fibrous raw material ccists are compared below:
Comparison of Fibrous Raw Material Costs(US$/ADMT bleached pulp)
Country Raw Material Cost
The Philippines- A mixed hardwood 47.85 /a- B mixed hardwood 37.30- C excess bagasse 3.80- D bagasse fuel replacement 25.00 /b
Brazil plantation eucalypt 27.00
Sweden birch 42.00softwood 65.00
Southern U.S. softwood 43.00hardwood 38.00
/a Cost in an integrated forest industry operation containssome costs which probably shou-ld be assigned to paperproduction, not to wood production.
/b Calculated on the basis of 1 ton fuel oil equivalent to16 tons of bagasse with no allowance for new boiler equip-ment in the sugar mill.
Source: Foreign data from IBRD Pulp and Paper Industry Sub-SectorStudy, First Draft, 1972.
Except in the case of bagasse, the Philippines at present has no real com-petitive cost advantage in fibrous raw materials. Nevertheless, if workproceeds on plantations of fast growing species close to mills, this picture
1/ "Annual Survey of Manufacturing, 1969" Bureau of Census and Statistics,Manila.
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could show a marked change with the wood cost approaching that of Brazil.In recent months the industry in the country with its dependence on importedpulp, particularly unbleached long fibre, has been paying a heavy penaltyboth in price and in irregular availability of supplies. Unbleached long-fibre pulp quoted at $156/short ton in mid-1972 is now priced at $230/shortton even to contract customers. Spot buyers are paying as high as$280/short ton. Unbleached sulphate pulp is becoming a scarce item onworld markets and at present there are only three reliable suppliers. ThePhilippines is a relatively small bbyer of chemical pulp - 31,000 shorttons in 1971, making it very susceptible to prIce increases and difficultyin obtaining supplies during times of high demand for pulp. In addition,the market is badly fragmented (20 buyers) and the country suffers in timesof world shortages. Such a situation can only have an adverse effect on thecompetitiveness of the industry.
E. Industry Efficiency
6.45 Observation of several mills in the country - both old and newleads one to believe that on the production side the mills operate asefficiently as those anywhere. While manning levels are high in total,manning in the production departments is on the same level as in morehighly developed countries. Mills are well-maintained and houselkeeping isgood.
6.46 In the past, there has been a problem of low utilization of papermachine production capacity, but this has been principally due to marketconditions. On the other hand, there is at present in six mills a totalof 22,300 MT/year idle pulping capacity. It is believed that this situationis due to the small size of the operation and the scarcity of raw materials -mainly abaca. It is doubtful that these pulp mills will be recommissioned,barring very exceptional circumstances.
6.47 One factor which has an adverse effect on mill efficiency is thepractice of scheduling a one-month shutdown each year. In the Philippines,there is no legal obstacle to a 365-day per year operation. While shutdownsfor routine maintenance are necessary, calculating rated capacity on 330 daysleads to a false picture of industry possibilities. As far as could bedetermined, this is the practice in all except two integrated mills. Actualannual production capacity of the other mills could be increased by at least5 percent through scheduling a 350-day operation, with one or two shutdownsduring the year.
6.48 Industry efficiency in locations outside the Manila area is affectedby serious turnover of supervisory personnel. The mills are in isolatedlocalities and there is considerable difficulty in counteracting theattractions of city life. Absenteeism is reported to be a problem in somemills, with some difficulty in creating a sense of sufficient responsibilityin workers. Paying higher than average wage rates does not seem to havesolved this problem. One further adverse factor is the shortage of highly-skilled maintenance men. While there is no shortage of men with good
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general skills, it is the belief of managers of the larger mills that thereis a country-wide shortage of specialists; to quote an example, welders areplentiful but welders who can do a good job on pressure vessels are scarce.Such a situation makes for longer interruptions of production due to
equipment failure and/or a larger investment in spare parts.
F. Development Plans
6.49 Firm plans for new mills and expansion of old mills are limitedat present. The new mills are as follows:
EstimatedCcmpa!ny Product Investment
Abaca Pulp & Paper Abaca pulp US$50,000,000Industries of the for export (1971 est.)Philippines 65,800 MT/year
Isarog Pulp & Paper abaca pulp N.A.Company for export
6,600 MT/year
Manila Paper Mills bagatsse pulp US$12,000,000for own use26,300 MT/year
Paragon Paper Industries coated paperboard N.A.23,900 MT/year
It can be seen that even though the mills planned are much larger in generalthan those built in the past, the tendency is to think small. The abacapulp mills are a special case, producing a high-priced specialty product.
The larger mill is planned to be based on an abaca plantation using the newhigh yield variety and new abaca processing equipment to dewater and preparethe fibre for pulping. The Board of Investments has logically requestedthat pilot scale work be carried out before mill construction is begun.The 1971 investment estimates for this mill, at approximately $44,000,000 fordirect capital, or $220,000/daily ton, appear to be high when it is consideredthat a 200 MT/day bleached wood pulp mill, with probably more complexequipment, would have required an investment of approximately $160,000/dailyton in 1971. The production of this mill is destined for export but it isnot certain that adequate market studies have been carried out. At present,there is only one mill expansion being planned: PICOP, through addition ofequipment, will increase production of both newsprint and kraft productsby 15 percent.
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G. Development Potential
6.50 In addition to the foregoing, other new mills and expansions arebeing considered by some existing and new producers. (i) Bataan Pulp andPaper, through the installation of additional pulping and evaporationcapacity for which the ori.ginal miLl was designed, can add about 10,000 MT/yearto its production of bleached short-fibre pulp. If the project materializes,it would be with be the intention to sell the pulp to other local millsand thus offset some of bleached short-fibre pulp deficit in the country.However, the mill has space for the installation of a second paper machineand, as the Zine paper market in the country develops, it would be logicalto utilize the additional pulp to obtain a share of the increased papermarket. These developments and, indeed, the continued operation of thepresent mill depend on an assured wood supply, which at the time of themission's visit in May was not in evidence. Bataan, at present, isproducing pulp somewhat above its own requirements, 5 to 10 tons per day,and is installing equipment for wet-lapping the pulp for sale. (ii) PICOPwhich has forest concessions in excess of its immediate requirements, isconsidering several possibilities for expansion. The one favored at presentis 100,000 MT/year of corrugating medium from semi-chemical pulp. Corrugatingmedium is not an attractive product for export unless wood costs areextremely low or a captive market is available. Preliminary discussionswith Japanese interests have been held with a view to assuring the market.(iii) United Pulp and Paper now starting production of bagasse pulp andsack kraft for cement bags, has a mill which has been designed for easyinstallation of equipment to double capacity to 56,000 MT/year. Withincreasing production and export of cement, this expansion will undoubtedlytake place. (iv) The Bureau of Forestry is accepting applications for a100,000 ha. concession in the Davao area. The concession would support amedium to large short-fibre pulping operation. Extensive plantation workwould be one of the conditions for granting the concession. It is under-stood that the applicant who will probably obtain the concession, intendsto begin with a mechanical wood products industry. (v) The two existingconcessions in the Luzon pine area are being cancelled and will be up forapplication. As has been noted earlier, this area presents some problemsin accessibility and the scattered nature of the resource. Plantationwork would also be required.
6.51 In the section on markets, it has been shown that the Philippinesitself could absorb as much as 119,000 MT/year additional bleached short-fibre pulp if the required papermaking facilities were installed. Inaddition to this, there will be increasing requirements for such pulp inJapan and other Asian countries. With the short-fibre pulpwood andbagasse resources which exist within the country, the possibilities ofmarket pulp mills cannot be ignored. It is doubtful that such a millusing wood could stand alone, but would have to be part of an overall forestindustries complex. The present government policies of discouraging logexports and encouraging mechanical wood industries will make greaterquantities of wood available. While uniformity of wood supply for marketpulp is essential, as has been noted earlier, this problem is not as serious
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in the Philippines as in other tropical countries. Experience at PICOP,Bataan and Rustan has demonstrated that pulp from the dipterocarps can besuccessfully used in many paper grades. If market pulp for export is tobe considered, this experience will be a useful background in a salescampaign.
6.52 In considering pulpwood, however, attention should not be divertedfrom bagasse. The concentration of this material on Negros greatly improvesthe possibilities of large-scale use for market pulp. Transportation andfuel substitution problems require examination, as do the problems of useof bagasse on a scale not hitherto encountered in the country.
6.53 At this time, a detailed study of the short-fibre pulp potentialof the country is required, including economic and financial comparisonsof bagasse and wood-based market pulp mills.
H. Rationalization of the Industry
6.54 The number of small mills in the country has been mentionedpreviously. Not only are these mills small but they produce a variety ofproducts to maintain their operation. Aside from the integrated mills atBais and Bataan, there are 8 mills with 11 paper machines with a totalcapacity of 42,500 MT/year for producing printings and writings. In addition,5 of these 8 mills, on the same machines, produce industrial papers suchas wrapping, corrugating medium and bag paper. Four of the 8 produce tissue.Such a mixture of grades produced on a single machine would be reasonablein a country with a limited market, and perhaps one or two mills mayhave been justified in the Philippines market at the time these millscame Into production. However, with consumption of printings and writingsin 1971 reaching 60,000 tons and of industrial papers at about 97,000 tons,it appears that steps should be taken to rationalize the production ofmills and to improve the efficiency, thus reducing the cost of paper to theconsumer. Rationalization could take place through consolidation of productionof, say, printings and writings at some mills, industrial papers at othersand tissue at those mills in which it is the primary product.
I. Employment Potential
6.55 The pulp and paper industry is not noted as a large creator ofdirect employment although in integrated operations supporting workers inthe wood supply area outnumber those employed in the mills. Nevertheless,if a pulp mill is associated with other wood-using industries, the additionalemployment in the woods operations will not be great. Mills using largeamounts of waste paper create significant employment in the paper collectionbusiness. The largest waste paper user in the Philippines with 700 employees(including transport workers), each month disburses for waste paper an amountequal to the monthly wages of 4,01)0 people. It is possible that direct
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employment, therefore, in the waste paper collection business for this one millwould be in the range of 1,000 to 1,500 persons.
6.56 The developments listed in para 6.14 and described in the pre-ceding sections could create 1,500 to 2,000 new jobs by 1980 and a further300 to 500 jobs by 1985. The developments based on the forest concessionsnear Davao and in the pine area of Luizon could create a further 1,500 jobs.These figures are for direct employment in the mills and do not includesupporting workers in pulpwood, bagasse and abaca supply. The additionaldirect employment in the industry with the foreseeable development would,therefore, be of the order of 4,000.
J. Investment
6.57 At the end of 1971, the total investment in the pulp and paperindustry was P 1.03 billion (over US$150 million). The projects listed inpara 6.14 would require a further investment of about $100 million, and anadditional $50 million by 1985. Should pulp and paper mills be built onthe concession near Davao and in the Luzon pine area, a further $100million to $150 million would be required. The total investment envisagedfor the industry is in the range of $150-300 million.
K. Government Policies
6.58 The pulp and paper industry is covered by both the InvestmentIncentives Act and the Export Incentives Act. All the mills built withinthe past 5 years are registered with the Board of Investments, and applica-tions have been approved in principle for two new abaca pulp mills and theproposed bagasse pulp mill. The regulations governing incentives do notplace any minimum limit on the size of mill for which incentives wi!ll begranted. While the Board of Investments has an unwritten standard of 50 MT/dayfor paper mills and 100 MT/day for pulp mills, the mission believes thatthe basis for these minima should be carefully examined and they should beraised, if necessary. Some variation will be required for specific products.It is recognized that establishment of universal standards would be difficultbut some effort should be made to establish minimum sizes and activeeconomies in unit capital cost.
6.59 Some applicants with export-oriented projects have in the pastbeen deficient in the study of potential markets. It should not be BOI'sresponsibility to carry out market studies for the applicants. Marketstudies for pulp and paper products require considerable specialist skillsand extensive knowledge of the industry. Applicants should be required toprovide adequate market data, obtained through the use of experienced marketconsultants, particularly where export incentives are involved.
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6.60 Earlier in this Annex mention has been made of the fragmentationof the Philippine pulp and paper industry. It should be noted that of the4 mills started since 1968, and the 5 totally new projects which couldbe effective before 1980 (a total of 9 in all), six involve firms whichwere not earlier engaged in forest industries or in pulp and paper. Eveneliminating the 2 abaca pulp mi]ls, the proportion is still 4 out of 7.It can only be emphasized again that small mills place an economic burdenon the country and every attempt: should be made to encourage existingrelatively efficient producers to expand to economic size, in preference toencouraging new investment in small mills. If at all possible, theincentives should be modified with this end in view.
Tariffs
6.61 Prior to the tariff reforms introduced in 1973, imports of paperwere subject to a wide range of customs duties. The new rates are moreuniform and follow a relatively simple pattern. Waste paper and scrapmaterials for paper making pay 1i) percent ad valorem; mechanical and chemicalpulps pay 20 percent. Most papers and paperboards pay 30 percent; andspecial products pay 50 percent or 70 percent. There is less scope fortechnical smuggling, which was widely prevalent earlier. Prices; of domesticproducts suggest that available protection is not fully availed of, whichis not surprising in view of the capability of major producers to competein export markets. A sample of domestic and import prices is given below:
Prices of Domestic Products and Imports for Certain Paper Categories(US $/PT)
Category Domestic Imports (FOB)/-
Bondpaper .659 519Kraft board 156 144Kraft paper 147 117
/a Freight and insurance will add up to 30 percent tothe cost of imports.
Source: Board of Investments.
To the extent that domestic paper manufacturers can export their products,they are eligible for rebates of customs duties paid on imported pulp. Asthere is some difficulty in accurately estimating the proportion of importedpulp used in exported papers, and delays in obtaining refunds are considerable,there is a demand for abolition of the import duty on long-fibre pulp, whichis in short supply in any case. The implications of such abolition on theprospects for domestic manufacture of long-fibre pulp would have to becarefully examined. In the meantime, to help the export of papers for whichproduction capacity may exceed domestic demand, the Government shouldexamine the possibility of allowing refunds of customs duties paid onimported pulp in accordance with some simple formula related to unit value.
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L. Financing
6.62 The minimum share of equity in ar. investment required by DBP forconsideratlon of a loan application is 25 percent, and, as would be expected,this minimum frequently becomes the target level and is not exceeded.With the large canital investment required in the pulp and paper industry,such a low level of equity participation can create problems. Debt servicein the early years of operation can effectively erase any profit, even inthose instances where no prolonged start-up problems occur. Where suchproblems do occur, as has happened in some cases, refinancing of start-up expenses (losses) is required, adding to the debt service load beyondprudent limits.
6.63 In approving applications, the Board of Investments should lookcritically at the cash-flow projections, particularly for the early years,and test project sensitivity to reduced sales, introductory price discountsand increased raw material prices. These items will be particularly criticalif a major share of the production is to be exported.
M. Sector Planning
6.64 The data presented in paragraphs 6.4 to 6.22 above have shown thatover the next decade there will be a growing deficit, reaching 380,000 MTin 1985, of paper and paperboard in the Philippines market, even afteraccounting for all firms and potential plans for industry expansion. Additionalfacilities to produce a total of approximately-360,000 MT per year of pulpwould be required to overcome this deficit.
6.65 Over the same period, there is expected to be a growing worldshortage of chemical paper grade pulp supplies, and of special interest tothe Philippines is the fact that this shortage will be particularly notice-able in Japan and South East Asia. With large natural short-fibre resourcesand apparently good growing conditions for plantation species for bothlong and short-fibre pulp, the country is in a favorable position not onlyto satisfy its own requirements but also to become a net exporter of pulpand paper products. The Philippines has a distinct advantage in thissphere over its near neighbors in already possessing a good basic pulpand paper industry and a work force with a level of education enabling itto easily master pulp and paper technology.
6.66 In the period being considered here, up to 1985, it is not likelythat expansions to achieve net export status will be possible; the time isripe, however, for a start in this direction. Factors requiring earlyattention are the following:
(a) Rationalization of the existing industry to improveoverall efficiency and competitive potential.
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(b) An organized program to develop low-cost, long-fibrepulp resources in areas carefully selected not only for
suitability for tree growth but also for transport, water
supply,.labor availability and environmental conditions
for industrial developmient.
(c) Forest concession policies designed to encourage the
establishment of large forest-based industries,including mechanical wood products, and pulp and paper.
At the same time, the policies should guarantee that
existing mills have adequate supplies for present and
future needs.
(d) Investigation of means to reduce the cost of natural(as compared to plantation) wood delivered to the mills.
Data in para 6.44 shows that present wood costs offer
no advantage over similar woods in Europe and North
America. Consideration should be given to tax concessions
on waste wood used for pulp and paper even when not
destined for export.
(e) Increasing emphasis on plantations of short-fibre pulpwood
species in areas which -meet the conditions as described above
for long-fibre species. Such plantations should permit areduction in the delivered wood cost.
(f) Detailed investigation of the bagasse resource particularlyon Negros with a view to examining its potential in com-parison to short-fibre pulpwood and to determining specificlocations which would be suitable for the construction of
large pulp mills.
(g) Development of procedures to discourage further constructionof small mills. Small mills built now will create a situation
where excessive protection is required which, in turn, may
lead to the constructiorL of further uneconomic units.
(h) Development of procedures which will encourage existing
producers to expand where this is economically advantageous
and where adequate raw materials are available.
(i) Encouragement of foreign investment in firms which have export
potential, to reduce the burden on domestic foreign exchange
resources, and also as a means of obtaining easier marketentry.
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VII. TEXTILES AND GARMENTS
7.1 These two industries are at a challenging stage of development,with bright prospects for a rapid expansion of output to satisfy require-ments in domestic and export markets. Each industry has its own specificproblems; but strong ir.ter-relationships bind them together for manypurposes. A summary of the structure of the industry is given inTable VII-1.
7.2 The textile industry was classified as an "overcrowded"industry in 1970 and its access to the various concessions allowed underthe Investment Incentives Act was restricted for about two years. Thisaction followed a slump in domestic demand, considerable "technical"smuggling qf foreign textiles into the country, and poor export performance.Since 1970, however, the position has changed markedly. The floating ofthe Peso produced a de facto devaluation, which is now measured at about72 percent against the U.S. Dollar. The devaluation of the U.S. Dollaritself against major trading currencies has further changed the positionof the Peso relative to these; and the extent of the Peso's devaluationnow ranges from 72 percent to about 120 percent in relation to variouscurrencies. In comparison, the Indonesian and Korean currencies have beendevalued only by about 25 percent and 30 percent against the U.S. Dollar;the Taiwan Yuan has remained stable, and the Singapore Dollar has beenupvalued about 10%. The relative position of Philippine goods in exportmarkets has, therefore, improved considerably. Difficulties in the domesticmarket have been successfully overcome, and the industry is now claimingexp2rt capability. A BOI study in 1972 supported this claim, and theindustry was removed from the "overcrowded" list. Expansion of existingmills is now permitted, subject to the proviso that at least 50 percentof new capacity will be exported; and new mills are entitled to all benefitsunder the Investment Incentives Act if they are located outside theGreater Manila area. During 1972, BOI received applications for approvalof 25 expansion projects and 11 new mills. These reflect the buoyancyof the domestic market for textiles as well as the export prospects. Itshould be mentioned, however, that the industry contemplates exports inthe form of garments rather than of fabrics directly, emphasizing the linkbetween the two.
7.3 The textile industry has complained of a number of handicaps.One complaint is about the quality of cotton received under PL 480arrangements with the US; but this seems hard to uphold. The poorquality of cotton received perhaps reflects a lack of buying competenceas much as the lack of choice associated with a tied supply. Anothercomplaint is the shortage of skilled labor for machine maintenance; butthe situation appears to vary from one plant to another, possiblyindicating managerial shortcomings as much as inadequacy of skilled labor.Considering the trainability of Philippine labor, the concentration ofthe textile industry in the Greater Manila area, and the relatively smallwage differential for skilled labor compared with ordinary labor -Pesos 12-18 vs. 8-12 - the problem does not appear intractable.
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7.4 A problem could, however, arise with the supply of domesticsynthetic fibres. BOI has approved the installation of two plants for themanufacture of polyester filament and staple fibre; one is in operationand the second is expected to start production in 1974-75. Protectivetariffs at 50 percent for filament and 30 percent for staple fibre havebeen imposed on imports; concessional rates are applied to cases wheretextile mills first use domestic supplies to the extent of availability.Duty drawbacks are sanctioned for imports used in exported fabrics andgarments, but: proof of such use is cumbersome, and refunds are consequentlydelayed. 1/ Expansion of the existing unit and competition from thesecond unit should, in due course, lead to some reduction in prices ofdomestic supplies; but internationally competitive prices are unlikelyfor some time to come. Administrative arrangements for sanction of dutydrawbacks need to be improved to protect export performance and potential.
7.5 The textile industry his been sharply criticized in the pastfor many shortcomings; and some iweaknesses persist. The major criticismsappear to be:
(a) product quality is often poor;
(b) delivery commitments are not met;
(c) mills do not extend even reasonable (sales)credit facilities; and
(d) there is inadequate attention to technicalproblems and product improvement.
Improvement will only be achieved with more competition, and there appearsto be some good evidence now on the desirability of encouraging expansionsof the better units and entry of new units into the industry. The extentto which the linkage of expansion of the industry with export performanceand regional dispersal may be expected to succeed is not yet clear, andwill need further examination by the BOI.
Garments
7.6 Statistical data on the garments industry are inadequate andconflicting. The Annual Survey of Manufacturers (1969) placed the numberof establishments with 20 or more workers under the headings (243) "wearingapparel" - (excluding footwear arid umbrellas), (244) "embroideries" and(245) "made-up textile goods" at 173, employing over 17,000 persons. A
1/ The administration of the duity drawback arrangement has been severelycriticized. Discussions with many firms indicated considerable dis-satisfaction. Firms registered with BOI have been able in recentoccasions to get reasonably prompt response; but most firms cannottreat the expected rebate in their cash flow estimates with anyconfidence.
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BOI survey for 1970 identified about 350 enterprises, of which only 14 unitsaccounted for 12,000 factory employees and 44,000 out-workers (in "unor-ganized" units). The current position is confused in statistical terms;but there appears little doubt that the officially recognized number ofworkers in the "organized" sector is a gross underestimate of the realsize and significance of the industry. A current BOI estimate places thenumber of employees in "organized" units at 54,000 and out-workers atabout 160,000.
7.7 The garment industry is located mainly in the Greater Manilaarea. About 70 percent of the total number of establishments, and all thelarger units, are located here.
7.8 The employment effects of the garments industry are particularlyimportant in light of the relatively small fixed capital requirements perworker. The possibility of using domestic structures by small units atthe sub-contracting level mean an even lesser capital commitment than wouldbe the case with an industrial operation. Nevertheless, the role of thesmall firm or production unit cannot be divorced from the larger industrialfirm, particularly in the export context.
7.9 The impact of the massive revision of the foreign exchange valueof the Peso has been mentioned earlier. The effect on export market poten-tial for garments is especially significant, as there is an existing size-able industry, and skilled labor supply, poised for expansion at currentmoney wage rates.
7.10 The garments industry has a dual character; there is an exportgroup supervised by the "Embroidery and Apparel Control and InspectionBoard", and another group historically geared to the domestic market butnow exporting to some degree. The former group is referred to, somewhatinaccurately, as the embroidery firms; the latter as the clothing group.The embroidery firms have to meet certain requirements under the relevantAct (R.A. 3137) establishing the Embroidery Board. The main operatingfeatures are as follows:
(a) The raw material is imported on consignment subjectto bond requirements amounting to 1.5 times thevalue of duties, taxes and other sums payableshould the material have been brought in fordomestic use. The bond is discharged againstexports.
(b) The supervision of the industry by the EmbroideryBoard with respect to:
(i) the examination of exports;
(ii) the allocation of quotas to firms underUnited States - Philippines Bilateral CottonAgreement; and
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(iii) the imposition of minimum mark-ups on laborcosts being 25 percent for handkerchiefs and30 percent for alL other items.
7,ll The embroidery firms have been dominant in the industry inpast years, but are beginning to yield some ground to three new groups.Many new firms have been registered with BOI under the Export IncentivesAct.. Some textile firms are see1;ing forward integration into garmentmak:.ng for export markets; and ncw foreign firms are appearing on thescene to develop exports from the Philippines to their established markets.
7.12 In mid-1972, there were 57 firms registered with the EmbroideryBoard. Since the imposition of nartial lay ,the number of firms has beenreduced as a result of inquiries made into their conduct with respect tomisuse of imports on consignment and other features of corporate behavior.Forty-one of the 57 firms were controlled by Filipinos whereas the remain-ing 16 were owned by foreigners. The embroidery firms rely heavily uponlinks with overseas principals; these provide raw materials on consignment.Some 65 percent of these principals were in the United States, and 25 per-cent were Hong Kong based. It appears that the bulk of these principals aremerchants dealing wholly or partly in the export/limport business. Compara-tively few - about 15 out of 135 principals recorded in mid-1972 - weremanufacturers of garments in their country of origin. For many principals,the Philippines is not the only source of imported supplies. Indeed, theprincipals control the working of the embroidery firms' output inasmuchas the records on trade indicate some thirty countries as recipients ofthis output; the United States is the most important outlet taking some90 percent or more of the total output.
7.13 The bulk of the output comes from American-owned or affiliatedembroidery firms; they provide about two-thirds of total sales. Theproduct lines and export performanice of the embroidery firms are shownin the Table below:
and men's wear 2.17 2.97 4.31 6.786. Infants' wear 6.87 8.15 10.63 10.757. Other items 0.79 0.35 0.54 0.64
TOTAL 28.88 38.49 35.26 36.22
Source: Foreign Trade Statistics of the Philippines.
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7.14 The disappointing export performance of the industry is a reflec-tion of the complex internal problems of the Philippines. The embroideryfirms have been criticized severely in the past for involvement in smuggling,e.g. failure to export the materials imported free of duty on a consignmentbasis for further working and re-export. Undoubtedly, some of the firmshave engaged in these practices. Yet there is no real evidence for thinkingthis was the case wit-4. t' e larg. fi-.,s actively conmitted to exports.Equally, there is no evidence to suggest that the firms prominent in ex-porting were operating at direct cost levels which placed them at a dis-advantage with respect to most other countries. The real handicaps appearto have been the inefficiencies and corrupt practices associated withcustoms and other administrative procedures. These shortcomings made itexceptionally difficult for plants to operate effectively as there weredifficulties with clearing consignment imports into plants and their gainingapproval for exports. Recent changes in administrative practices haveimproved greatly the working of the governmental structure. This helpsexplain the renewed confidence in the export growth prospects of the em-broidery group.
7.15 The inability or failure of the embroidery group to expandsignificantly during the latter part of the sixties has had importantconsequences:
(a) The quota under the long-term Cotton Textile BilateralAgreement with the United States has never beenfully used, and the shortfalls have been very con-siderable.
(b) The Embroidery Board is responsible for administeringthis quota; not all firms with quotas are embroideryfirms, but the great bulk are. The Board has notattempted to foster an "active" policy towards the useof quotas. There were no attempts to penalize forfailure and seek new firms willing to make the effortin export marketing. This situation probably reflectsthe administration shortcomings referred to earlier.
(c) This circumstance provides a very weak bargainingposition when negotiations for renewal of the CottonAgreement take place late in 1973.
7.16 The production techniques employed in the garment embroideryfirms reflect a variety of approaches. Some firms, such as those makingbrassieres, maintain the great bulk of their production within the plant.Many other activities, such as outerwear and handkerchief production,reflect differing combinations of factory labor and out-workers. Tenlarge firms dominate the industry. This evidence does suggest that thereare significant economies of scale to be gained in both production andmarketing. Long production runs on standardized items permit the filling
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of large export orders, the application of strict quality control techniques
and the full use of specialized equipment. There is only very limited
evidence available on production economies but this does suggest significant
cost reduction per unit of output with size. 1/
7.17 The degree to which the embroidery firms have provided a stimulus
to the domestic textile industry through the purchase of locally-madematerials is not great. In 1969 the embroidery firms bought P 8.7 million
of local materials, excluding containers and packing materials; but firms
bringing in items on consignment only used P 3.5 millions worth of local
textiles. The explanations for this are straightforward:
(a) the higher costs of many local materials - a situationthat changed with devaluation early in 1970;
(b) the poor quality of most local materials and yarnsin terms of both dyeing and shrinking, as well asstrength; and
(c) the failure to deliver at contracted times.
In recent years, there have been improvements, and local purchases have
doubled since 1969. The criticisms of the embroidery firms in not providing
a larger market for local mills have not been justified. The export firms
have to meet international marketing requirements and cannot afford to
substitute inferior products. However, the international market reflects
differing quality standards. So the scope for further substitution of
domestic materials - fabric and yarns - is considerable. The forward
integration of many textile mills into garments should accelerate thistrend.
7.18 The failure of the garment industry to expand in export marketsduring the late sixties raises a number of policy worries:
(a) It meant the foregoing of substantial opportunitiesf or export earnings.
(b) There was a loss of employment opportunities. Withsome 11,000 recorded factory workers in embroideryfirms during 1969, according to official series,and this is probably an underestimate, at a timewhen the cotton quota with the United States wasonly half-filled, this could have meant the "loss"of a similar number of job opportunities. A cal-culation of the impact on out-workers is impossible.
1/ It should be possible for this evidence to be searched out by the
Embroidery Board in light of the information available to them in
the foreign trade statistics and exchange data of the Central Bank.
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(c, The domestically-oriented garment industry ,withfew exceptions, had little interest in exportmarketing because:
(i) the local market was profitable;
(ii) there are significant barriers to entryinto exporting such as meeting designrequirements, product specificationsand delivery schedules.
(d) Only the large embroidery firms appeared capableof sustaining active participation in export market-ing; many, though not all, were foreign-owned orhad close foreign ties.
(e) The embroidery firms working on a consignmentbasis cannot be fully supervised with respectto earnings. The principals can take out profitsin the location most suited to their needs. Theycan also adjust production between plants indifferent economies.
7.19 There are explanations for this failure which reflect on thestructure of the industry rather than on just the attractions of the localmarket or the inadequacies of the government agencies. The embroideryfirm importing materials on consignment has a distinct advantage in termsof financial capital commitments in comparison with a local firm initiatinga market development. The real handicap seems to be the supply of workingcapital. This is a co mmn problem for much of Filipino industry. 1/ InTable VII-2, a series of calculations are provided for the capital require-ments of a firm employing about 100 production workers. There are three com-binations: the embroidery firm working on a consignment basis; the locally-owned firm relying upon domestic raw materials or paying for imports butoriented possibly to the export market; and the domestic firm concerned onlywith the local situation. In the first two cases, it is assumed that somesix months will elapse from initial production to the receipt of payments,while, in the third instance, only three months will go by. Furthermore,within each category, three estimates are provided - high, medium and low -which attempt to reflect two features:
1/ Filipino firms have suffered frequently from an erosion of liquidassets. The devaluation of early 1970 caught many firms in themiddle of expansion schemes and equipment costs rose dramatically.Even when the equipment was supplied on foreign credits, the Pesocost of repayments rose dramatically. More recently, high commodityprices have absorbed working capital.
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(a) Differences in the quality of the final product;this is partly reflected in the numbers ofsupervisory staff. 1/
(b) Alternate estimates of the cost of achieving agiven output.
7.20 The main aim of the comparisons is to look at the financialcapital required to initiate production. 2/ It could reflect the needs ofa new firm or the likely challenge to a firm switching towards an exportorientation. The calculations are based on two further assumptions aboutthe existence or otherwise of trade credit. The recent past experiencehas been the lack of credit facilities for small and medium-sized firms.Finally, it is well to bear in mLnd that these calculations should bemultiplied five or ten times or maore if one is thinking of the successfulfirms in the export trade. 3/ However, production, marketing and financialeconomies of scale do exist.
7.21 The following major points may be advanced in connection withthe estimates appearing in Table VII-2.
(a) The export consignment firm, usually foreign-ownedamong the large successful ones, has few worriesabout working capital. The fixed capital costsper worker are low comp,ared with other manufacturingactivities.
(b) The export consignment firm shifts inventory costsand financing onto the overseas principals. However,there is a cost associated with this in the form ofrelatively low added value per worker. Undoubtedly,the interest charges on this outlay are lower thanin the Philippines. It is not possible to detectthe extent to which this is reflected in pricemargins.
(c) When a Filipino firm atitempts to enter export market-ing independently, the cost of inventories is veryhigh compared to the embroidery firms. Indeed, theposition shown in Table VII-2 may be an underestimateinasmuch as no allowance is made for the cost ofcapital in use, other than on 90-day bills, in thisexercise.
1/ This evidence from factory visits and other discussions made explicitthe link between product quality, supervisory staff, and the valueof output.
2/ A further set of estimates could be provided illustrating the cashflow associated with the production assumptions.
3/ The largest embroidery firm had some 2,600 workers in its brassieresection by May 1973. Another had some 1,800 workers in this productline at that time.
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(d) There is a considerable advantage in concentratingsolely on the domestic market. Capital needs appearto be much less and the scope for setting up asuccessful operation is more within bounds.
7.22 The implications of this appraisal and other evidence from thegarments industry are substantial:
(a) The relatively low fixed capital outlays per workerin the garments industry disguises the substantialworking capital called for when export marketing ispursued. Such funding may come from autonomousgarment firms not having associations with othersegments of Filipino industry, but this will requiresubstantial underpinning by financial institutions.In view of the common worry to most Filipino firmsof the lack of sufficient working capital thepossibilities for achieving successful entry intoexporting garments independently of overseas prin-cipals does not appear to be bright.
(b) Export marketing seems likely to be the function,in the main, of large firms. Existing companiesengaged in textile manufacture are best placedto generate the resources needed for entry intoforeign markets because they may better commandthe financial resources to ensure a successfulstart-up. In this respect, the decision of the3oard of Investments to permit such forward in-tegration is correct, and most appropriate tothe possibilities for expanding employment rapidly.
(c) Assistance to the expansion of the industry mightcome in two ways: the provision of fundingarrangements to help with working capital require-ments and the establishing of factory buildingsfor leasing to medium-sized firms. Both types ofdevelopment support are directed towards entryproblems whereas existing export incentives arelinked mainly to subsequent production.
7.23 The appropriate role for the majority of smaller firms, say50 workers or less, does not appear to be in direct exporting. Thelesson of the embroidery firms is the dominance of the large companyin this sphere. Some specialized smaller firms will have a role to play.But for the bulk of local firms, contracting arrangements with majorexporters permits relatively easy entry because working capital require-ments are so much less.
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Conclusions
7.24 The importance of the textile and garment industries lies inthe substantial level of employment offered in these industries in con-junction with very substantial increases in earnings of foreign exchange.The failure to pursue these advantages to the full in the past was mainlya reflection of ineffective and uncoordinated government policies andadministration. This situation haas changed substantially since early 1970.
7.25 In sanctioning exparnsion of capacity of existing textile millsand installation of new mills in areas outside Greater Manila, the Govern-ment should keep a close watch on the costs and physical efficiencies ofthese export-oriented projects. At the same time, adequate measuresshould be taken to ensure: (i) efficiency of linkages with raw materialsupply - both domestic and imported; and (ii) proper utilization ofexport opportunities in markets limited by quotas as well as others.
7.26 For the export-oriented garment industry, help would be mostuseful in three spheres: (i) Financial credit to cover initial inventoryneeds of locally-owned firms not operating on a consignment basis forforeign principals; (ii) financial assistance for construction of factorybuildings, especially in areas selected as nuclei for regional dispersal;and (iii) easier access to raw materials, which would either be suppliedby domestic textile mills at internationally competitive prices or beimported. The current government policy would allow these facilities inexport zones, e.g. Mariveles. There may be advantage in allowing large-scale in-bond operations in somie other areas also where considerable laborsupply is available. Small-scale and sub-contracting arrangements wouldhave to depend on domestic supplies.
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VIII. FOOTWEAR INDUSTRY
Structure of the Industry
8.1 The footwear industry in the Philippines consists of two mainparts, rubber/plastic and leather, which differ from one another in anumber of significant ways. The rubber and plastic shoe industry consistsmainly of rather large firms (in the local context), because of the processtechnology and machinery involved. About 35 firms - 21 for rubber shoesand 14 for plastic shoes - are reported to exist. The ASM, which classi-fies the rubber footwear industry separately (but not the plastic footwearindustry) covers only 12 firms with 20 or more workers each for 1969. Theseincluded the largest firms and employed about 3,900 workers. Plastic shoefactories are rather smaller than rubber shoe plants in terms of employ-ment, and total employment in this section of the industry may not exceed5,000. A sample survey conducted by the Central Bank in 1970 indicatedthat the output of rubber and plastic footwear grew at an average annualrate of about 26 percent from 1964 on. Exports, which accounted for only200,000 pairs in 1967, grew fairly rapidly thereafter to exceed 1.2 millionpairs in 1970; but the rate of growth could not be sustained thereafter.It appears that domestic demand has increased rapidly in the past two yearsand proved more profitable than exports. The level of utilization ofinstalled capacity, which ranged 50-60 percent in the late 1960's, hasimproved considerably and may be around 80 percent now. The prospects forfurther growth appear to be good; domestic demand is growing at a healthyrate, and export demand should be even better than in 1970, because thechanges in values of currencies of countries that provided the majorcompetition, namely, Japan, Korea, Taiwan and Hong Kong, all favor Philippineexports.
8.2 The leather footwear section of the industry consists of a largenumber (about 800) of small-scale plants which employ over 8,000 workers,and a small number (about 15) of large plants which employ over 3,000 work-ers. More than 600 of the 800 small plants are concentrated in Marikinacity, a satellite town in the Greater Manila area; and almost all the largeplants are located in or around Manila. The industry as a whole is thusheavily concentrated in this one area. About 200 units located in otherregions are relatively small and do not produce a significant part oftotal output.
8.3 A sample survey of the footwear industry in Marikina (1970),which did not cover the really large-scale factories, revealed that75 percent of the firms in the city employed less than 20 workers each,about 20 percent employed more than 20 but less than 50 workers, andabout 5 percent employed 50 or more workers. While reliable data forother areas are not available, it is likely that small units are evenmore preponderant for the country as a whole than in Marikina.
8.4 The Marikina sample survey also showed that about 90 percentof the firms had fixed assets worth less than P 50,000 each, while thelargest firm had fixed assets exceeding P 7 million and two other largeunits had fixed assets exceeding P 1 million.
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Production
8.5 In small-scale units, leather shoes are manufactured by verylabor-intensive methods. Only a few basic machines are used for sewingand trimming. In larger plants, operations are mechanized to the extentof about 70 percent of the steps constituting the total process. Handworkby shoemakers contributes efficiently to production under a piece-ratepayment scheme. Over 65 percent of establishments have productioncapacity in the range of 200-500 pairs each per week, according to the1970 survey of the Marikina shoe-industry, whereas the two largest firmscan produce 5,000-6,000 pairs a week.
8.6 Capacity utilization for leather shoe manufacturing fluctuatesseasonally; production peaks twice a year, for about two months at a time,before Easter and Christmas; and at those times factories are operatedover their rated capacities. It is at the lowest level during the rainyseason, when only about 20 percent of capacity is utilized. The averageyearly capacity utilization was reported at 85 percent in 1970, and isprobably somewhat higher now. It should-be noted, however, that productioncapacity in this industry is a flexible concept, as firms, particularlysmall ones, rely mostly on human labor rather than machinery, and thenumber of skilled workers available is likely to determine the productioncapacity. Small overhead expenses, semi-mechanized operations, and thepiece-rate payment system appear to be the special characteristics of theleather footwear manufacturing industry, along with wide fluctuationsin production.
Exports
8.7 Although displaying irregularity, Philippine exports of footwearhave reached a level of US$1.25 million in 1972. Canvas and rubber foot-wear constitute the majority of exports, accounting for about 90 percentof the total value until 1970. Ihereafter, exports of leather shoesand sandals have shown a marked increase, while rubber footwear exportshave declined. In 1972 leather footwear accounted for 42 percent of theexport earnings (see Table VIII-1). The United States is the major foot-wear market for the Philippines. Eighty-nine percent of the total leatherfootwear exports were directed to this market in 1972. Italy and Spainaccount for 95 percent of the leather footwear imports Qf the United States,but the Philippine leather footwear industry has made a small place foritself in the same market, and has bright prospects for a substantiallylarger share, if the problems which the industry is facing can be resolvedspeedily and effectively.
Problems and Prospects
8.8 While foreign buyers are paying increasing attention to shoesfrom the Philippines, one of the major problems confronting them is thelimited supply capability of loca:L manufacturers and wholesalers. Exportorders can range from 150,000 to 5 million pairs per buyer, but the largestsingle plant can produce only about 350,000 pairs per year, and very fewsellers would take responsibility for more than 50,000 pairs at a time.
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Manufacturers' cooperatives could be useful, but the task of developingsuch organizations has made little progress so far. As a result, somelocal investors and foreign importers have developed plans to establishnew large-scale factories. An Australian firm has concluded a "consignment-processing agreement" with three local firms; a local firm has obtaineda license to manufacture shoes under an American brand name on a largescale for export. Another has established a factory in the Export Process-ing Zone at Mariveles, exclusively for export. These developments, togetherwith the p.ossiblle expansion of capacities of existing large-scale manu-facturers, may well change the present structure of the industry, whereinsmall-scale manufacturers dominate.
Raw Materials
8.9 The leather footwear industry in the Philippines uses both im-ported (75 percent) and locally tanned leather (25 percent); but the rawmaterials for the latter, i.e. hides and chemicals and dyes, are mostlyimported too. Not enough raw hides are available locally, and those avail-able are of inferior quality, due to poor handling of animals by domestic
livestock raisers and processors. Local leathers are so poor in qualitythat they are generally accepted only for certain low quality shoes andsandals. It appears, moreover, that the actual footage of leather suppliedis often 5-10 percent shorter than the amount of footage charged for bythe leather suppliers. Hence, local leather is generally consideredmore expensive than imported leather, even though surface appearancesindicate the contrary. Local leather is protected by customs duties:50 percent for cow leather and 70 percent for other kinds of leather.Leather for export production can be imported duty free under bond. Im-provement of cattle slaughtering practices, and in leather curing andtanning procedures should have high priority for technical assistance.
Marketing
8.10 In the past, shoe manufacturers have relied greatly on tradersto supply raw materials and to market their products. However, smallmanufacturers also have found this arrangement unfavorable to them, as
they had to pay high prices for their materials and allow large marginsto the sellers of their products. Hence, the larger manufacturers haveprogressively established direct access to retailers, while smaller unitshave jointly created corporations or associations for marketing. TheMarikina Shoe Marketing Corporation is the largest of these, with 127 mem-ber firms. These groups have created their own sales outlets in Manilaand Quezon City. Concentration of manufacturers in Marikina city andthe support of the Marikina Shoe Trade Commission of the municipality havecontributed to the success of the organizations. However, these organiza-tions have not yet been able to extend their operation to other areas.
Financing
8.11 The small equity base of most leather shoe factories has made itdifficult for them to obtain bank financing for expansion. Limited accessto borrowed funds for investment may affect adversely the small- and medium-
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scale manufacturers, who could otherwise benefit from the growing demand fortheir products. The needs of manufacturers for working capital are alsoincreasing, as material and labor costs rise faster than profit margins.An easier financing scheme for both working and investment capital is neededto promote the development of these small- and medium-scale shoe manufacturers.
Conclusion
8.12 The shoe industry has bright prospects, particularly for export.Development of the industry will contribute to: (i) greater foreign exchangeearnings; (ii) greater employment, based on labor-intensive productionmethods; and (iii) further regional development, which can be promoted bydevelopment of sources of raw material supply and, possibly, raw-materialoriented location of manufacturers. To realize these benefits to the economy,the Government should take positive steps to solve the problems of rawmaterial supply, financing, and organization for marketing in domestic andexport markets.
Table V(ii)-1
Shipyard and Ship Repair Facilities in the Philipines
Name and Location Facility Capacity Nature of Work
1. National Shipyards & Steel Corp. Marine Slipway 500 GT Small ships drydocking and repair.Port Area, Manila
2. Engineering Equipment, Inc. Slipway 750 Gr Construction of barges and tugboat.Mandaluyong, Rizal
3. El Varadero de Manila Slipway 2,000 GT Structural hull and underwater repairSangley Point, Cavite City work on service craft.
4. Dynamarine Shipyard Shipbuilding Way 1,000 GT Shipbuilding.Navotas, Rizal
5. Navotas Industrial Corp. Marine Slipway 500 GT Design and construction of tugboats,Navotas, Rizal steel barges, and fishing boats.
Activation and overhaul of steel bargesand diesel engines.
6. Bataan National Shipyard Graving Dock 10,000 GT Shipbuilding, ship conversion.Mariveles Slipway 2,300 GT Machinery overhaul and repair.
7. Cebu Shipyard & Engineering Marine Slipways 4,000 GT Shipbuilding and repair of ships, steelDocks, Inc., Cebu City, Cebu 2,000 GT barges, fishing vessels and tugboats.
8. Sandoval Slipway 1,500 GT Drydocking and repairCebu
9. Luzon Stevedoring Corp. Graving dock 2,000 GT Overhaul and repair of LUSTEVMCO's fleetIloilo Slipways 1,500 (T of barges (75 - 2,200 DWT) tugboats and
inter-island tankers10. Atlantic Gulf & Pacific Co. Marine Slipway 500 GT Shipbuilding and repair and overhaul
Poro Point of engines for all types of cormercialvessels. Work accomplished is consideredexcellent.
11. Philippine Iron Construction & Marine Slipway 1,000 DWT Construction of tugboat, barges, fishigMarine Works, Misamis Oriental boats, equipment fabrication, shipbuilding
Case A: Philippine Flag Share Maintained at 10%Case B: Philippine Flag Share Increases to 20% by 1984
Total Freight Carried by PhilippineForeign Vessels Shipping Vessel Demand
Year Trade Case A CaeB Efficiency Case A Case B'G00 MT 000 MT (MT/GT-Yr '000 GT '000 GT
1971 29,600 2,490 8.4% 3.0 820
1972 28,485 2,490 8.7% 3.0 830
1973 30,200 2,720 9.0% 3.2 850
1974 33,060 3,306 10 3,306 lo 3.4 970 970
1975 36,200 3,620 10 3,980 11 3.6 1,000 1,100
1976 39,640 3,964 10 4,750 12 3.8 1,040 1,250
1977 43,400 4,340 10 5,65o 13 4.0 1,080 1,410
1978 47,520 4,752 10 6,650 14 4.5 i,o60 1,48c
1979 52,030 5,203 10 7,800 15 5.0 1,040 1,560
1980 56,980 5,698 10 9,100 16 5.5 1,040 1,650
1981 62,400 6,240 10 10,600 17 6.o 1,040 1,770
1982 68,210 6,821 10 12,270 18 6.5 1,050 1,890
1983 74,700 7,470 10 14,180 19 7.0 1,070 2,030
1984 81,800 8,180 10 16,350 20 7.5 1,090 2,180
Table V(ii)-7
Fletansion Demand - Ocean-Going Vessels
Case A: Philippine Flag Share Maintained at 10%Case B: Philippine Flag Share Increases to 20% by 1984
Total Yreight Carried by PhilippineForeign Vessels Shipping Vessel Demand
Year Trade Case A _ Case B Efficiency Case A Case BCOO 1MT '000 MT % 'O0O MT % (MT/GT-Yr z000 GT '000 GT
1971 29,600 2,490 8.4% 3.0 820
1972 28,485 2,490 8.7% 3.0 830
1973 30,200 2,720 9.0% 3.2 850
1974 33,060 3,306 10 3,306 10 3.4 970 970
1975 36,200 3,620 10 3,980 11 3.6 1,000 1,100
1976 39,640 3,964 10 4,750 12 3.8 1,040 1,250
1977 43,400 4,340 10 5,650 13 4.0 1,080 1,410
1978 47,520 4,752 10 6,650 14 4.5 1,06C 1,48o
1979 52,030 5,203 10 7,800 15 5.0 1,010 1,560
19580 56,980 5,698 10 9,100 16 5.5 1,040 1,650
1981 62,400 6,240o 10 10,600 17 6.o 1,040 1,770
1982 68,210 6,821 10 12,270 18 6.5 1,050 1,890
1983 74,700 7,470 10 14,18o 19 7.o 1,070 2,030
1984 81 800 8,180 10 16,350 20 7.5 1,090 2,180
Table V(ii)-S-
ShiP Cost vs. Steel Prices and Labor Production
Cost of all MaterialCost of Cost of Material Cost of all Labor Pro- & Labor Total Cost
Steel Used Steel Steel (2.86 x C) Material ductivity Wage/Hr Wage/GT (E + H) Other Costs (I + .)Tons $/Ton '000 $ '000 $ $/GT Man-hrs./GT $ $/GT $/GT $/GT $/GT
l~~ ~ ~~ iw a~- - ii ;3_ 5 .................... .X_ t - .......... t:,
a - ~ ~ ~ ~ ~ ~ 2
-A-
----:-I:-7 ,+ -r A I--;,,-[ -i N t _l+t
_: a -Wze_Wv + :1.8 H+-X
- --A- 1-4 -- + -- + 1 1 W 4. 1 1I: - - It -jtL;~~~~~;. t l t ; : : --- -:t:J.;. .. \ \ :-: t:--$ t. t :- -- , t:Lt ............... r .........._-4-**-i _ '1 4__ . ...... _i ,- :- ................:- 1': - 4I I_ t V F t . - .
_~~~~~~ VN Ni-l-A- -- -- :- -----1lj i
_ < <- --- 1:1-1:t It L IXt.:-I-:1:tt. t,-1-+ W .. .1-1 -q'- --I -1'1'- '' '1' -.. .----1-1-- 11 ttt< < tXtt I fi X +1t - - 1- 1-1 X _ nt -t--r X F..i _ . .. W. t .EH . _ Xt--~~~~~~~~~~~~~~~~~~~~~~~~~-1-':'1 4It;- . 1 -F.,_ , ___.
.~~~ ~ ~ 1 ' :- ;... - . .. 1 1: -1 :1:4
Table VI-l
Philippine Pulp and Paper Mills
Kill Year on Rated Capacity Mr/YearNo. Stream P Paper Paperboar Raw Materials Products
1 1911-45 9,500 10,000 3,00) Bagasse, imported bleaohed long Printings end writing, paperboardfibre pulp, waste paper
2 1956 - 18,000 - IDported unbleached long fibre Induatrial paperspulp, waste paper
3 1958 - - 12,000 Imported pulp, waste paper Paperboard
1. 1959 - 1,100 - Imported bleached long and Tissueaort fibre pulp
5 1959 - 8,000 - Imprted bleached and unbleached Printings and writings, indus-long and short fibre pulp, waste trial paperpaper
6 1960 6,00 2 4,100 - Deported bleached and unbleached Printings and writings, indus-long and short fibre pulp, waste trial paper, towelling, tissuepaper
7 1961 - 16,000 - Imported mechanical pulp, bleached Printings and writings, indus-and unbleached long and short fibre trial paper towelling, tissuePulp
8 1962 1,800 2,700 - Imported bleached and unbleaohed Printings and writings, indus-long and short fibre pulp, waste trial paperpaper
9 1962 16,000 20,000 - Short fibre pulpwood, iaported Printings and writingsbleached long fibre pulp
10 1962 Sl-,000 2,700 - Imported mechanical pulp, bleached Printings and writingslong and short-fibre pulp, wastepaper
11 1962 5, 1s00 2,200 11,000 Imported bleached and unbleached Printings and writings, indus-long- and short fibre pulp, waste trial paper, paperboardpaper
12 1962 - 16,000 Iported pulp, waste paper Paperboard
13 1963 5,4OOV i,IA0 - Imported bleached long and short- Printings and writings, tissuefibre pulp, waste paper
14 1963 -2700 1,900V Imported bleached long and short- Industrial paper, printings and2,700- S,900&' fibre pulp, waste paper and writings
15 1966 - 5,4o00 Imported bleached long end short- Printings and writings, tissuefibre pulp cigarette paper, cellulose
vadding
16 1968 4/ 12,000 14,000 Imported bleached and unbleached Industrial paper, printing andlong and short-fibre pulp vaste writings, paperboardpaper
1/ Idle pulp millV Mill not operated since 19713/ Small pulp mill, 20 to 30 MT/day being recommIssioned for pulping waste rope rags etc.Sources Board of Investments
Table VI-2
Past Local Produition of Paper by Categories(1,000 MTI
Industrial Printing TissueYear Paper & writing Newsprint & others Paperboard Total
1/ Assuming an annual population groNth rate of 3.0% between 1971 and 1975.Assuming an annual population growth rate of 2.7% after 1975.
2/ Assuming an annual growth rate in GDP of 7.0% after 1971.T/ Using an exchange rate of US$1.00 = P. 3.93.Sources: Report No. 78-PH "Current Economic Position and Prospects of the.
Philippines" April 20, 197i3.Board of Investmnents
