BRACING FOR THE CHALLENGES,OPPORTUNITIES OF AEC.

It is a game changer, maybe the biggest in Asia since China joined global trade at the turn of the millennium, as the unification of the 10 economies of Asean create an economic powerhouse with more than 600 million people and a combined GDP of $2.5 trillion.But is the Philippines or are Filipinos, who will comprise one out of every six Asean residents,ready to capture the opportunities and hurdle the challenges posed by the AEC? Embracing the One Asean concept requires a change in mindset, something that has yet to be imbedded in the Filipino psyche. Ask a man on the street what he thinks about Asean and chances are you won’t get anything but a blank stare. Most micro, small and medium enterprises in the Philippines have yet to be oriented on the basic building blocks of AEC.While the dismantling of borders within Asean may heat up competition, it also means a bigger market potential even for small industries in this day and age when Internet has made cross-border marketing and distribution of goods and services easier.As far as the level of sophistication is concerned among institutions, Filipinos lag behind the Thais,Singaporeans and Malaysians, said Manuel Salak,a Filipino banker based in Singapore who works as managing director in charge of commercial banking clients and corporate finance at ING Bank.“In different sectors, if you want to be a part of one community, there is this practical consideration that your own guy should be able to play in the same league. It’s like basketball,” Salak said.“The basic principle is you need to have two mindsets. First, it will happen and second, how much time was given for safety net preparations?”he said.The good news for the Philippines is that at the top-tier corporate level, awareness appears to bemuch higher. Most of the country’s top conglomerates have long prepared for regional competition. Many are intensifying offshore expansion programmes to widen market reach and diversify revenue streams, with the AECadding impetus to their efforts.“The most important aspect of the Asean integration is changing our mindset,” said Jollibee Foods Corp. chief finance officer Ysmael Baysa. “I believe that what Asean integration will do is accelerate infrastructure development.”Since 2004, Jollibee has been undertaking an overseas expansion programme while growing its domestic business. It acquired a number of local brands like Chowking, Red Ribbon and Mang Inasal while also gobbling up overseas brands,mostly in mainland China and Vietnam.“If you’re looking at Asean integration only now, you’re too late,” JG Summit Holdings senior vice president and chief strategist Bach Johann Sebastian said.JG Summit is one of the Philippines’ largest conglomerates with business interests in air transportation, banking, food manufacturing,property development, hotels, retail,petrochemicals and power generation. It started its regional expansion 20 years ago. Its food manufacturing arm, Universal Robina Corp., is one of the few Philippine corporations with an expansive Asean footprint.In terms of new markets, Sebastian says JG Summit is looking at Myanmar which offers huge growth potential.“For the airline business, we will probably operate out of the Philippines for a while despite the airport constraints here but there are many opportunities across Asean. As Asean capitals open up their sky policy, that’s going to be more of an opportunity for Cebu Pacific 

[JG’s aviation unit] because it will widen the market for us and we can operate mainly out of these countries,”Sebastian said.The Ayala group, one of the biggest and oldest conglomerates in the Philippines, has likewise expanded to Vietnam in real estate and water utility businesses through subsidiary Manila Water Corp. It also has real estate concerns in Myanmar and Vietnam.Metro Pacific Investments Corp., the investment holding corporation of Hong Kong-based investment management and holding firm First Pacific Co., Ltd., is involved in power generation in Singapore and in the toll-road infrastructure business in Vietnam and Thailand.Conglomerate San 

Miguel Corp., Southeast Asia’s largest food, beverage and packaging company which has diversified into other concerns such as infrastructure and telecommunications, has been aggressively investing across the region over the past years.

Asean champions

While traditional MNCs were born in Europe, the US and Japan, there is now a new generation of “emerging market champions” coming out of Asia, particularly Asean member-states like Indonesia, Thailand and the Philippines,according to London-based Marc Merlino, head of Citi’s global subsidiaries group.“The traditional path is they will go regional first,and when they become comfortable in their region, they start aspiring to go global,” says Merlino.

Another good thing going for the Philippines, he says, is that it is coming from a strong macroeconomic backdrop, which means that its turnaround story can be appreciated for quite some time provided there is no reversal in its current growth momentum. “As the rest of the world struggles with growth, I think the relative attractiveness of the Philippines growing at 5-6 percent is quite strong,” says Merlino, likewise citing the nation’s population of 100 million people and its consumption-driven economy. “Companies that are looking to tap that growth and benefit from it are certainly very focused on establishing and expanding their presence in the Philippines.”ING Philippines country manager Consuelo Garcia says: “There are a number of things that resonate well with investors. We’re excited that the Philippines is entering a demographic sweet spot.This is the start of our year. If the government plays its cards right, you’ll have a decade of sustainable growth… Investors see the market as a consumer market and all the privatisation efforts are also attracting a lot of expertise.”Philippine Trade Secretary Gregory Domingo shares the view, saying he is optimistic Philippine industries will be able to actively participate in regional trade and global value chains.The country’s Department of Trade has been helping local industries prepare for both the tougher competitive environment and the opportunities that the AEC will present by boosting their capabilities and enhancing their efficiency, as well as continuously harnessing the skills of the local labour pool.However, the unification of Southeast Asian economies underscores the need for the Philippines to build infrastructure to sustain growth in the years ahead. Only when growth is sustained for decades can more people be lifted out of poverty.“We have to build. We have to build fast. We have to build plenty,” stresses Guillermo Luz, co-chair of the National Competitiveness Council representing the private sector.The Philippine government acknowledges the need for the country to boost investment in infrastructure and to deepen financial markets.Asean integration is also seen requiring huge investments in human capital. Although the English proficiency of  Filipinos is a big advantage,which has catapulted the country into a major offshoring and outsourcing hub, major 

investment is needed to ensure Filipinos become productive participants in the integrated market.A good starting point was the country’s adoption of the K-12 education programme, which requires at least one year of kindergarten education, six years of elementary education and six years of secondary education.If and when more Asean companies set up shop in the country, local firms will have to brace for higher overheads. The newcomers are expected to poach skilled people, which will likely drive wages higher in the short run.

Meanwhile, a lot still needs to be done to open up the domestic economy. One reason why the Philippines is getting a smaller share of foreign direct investments compared to its neighbours is that there are so many restrictions prescribed by the basic law of the land.“Sure, these Constitutional limits are being circumvented anyway, through the use of dummies or multiple layering of ownership, and other creative schemes. But this only results in ‘adverse 

selection,’with those investors willing to make a mockery of our laws, coming here,” said Calixto Chikiamco, 

president of the Foundation for Economic Freedom (FEF), a think tank of prominent economists and socio-political thinkers.To transform Philippine growth from a consumptiondriven one to an investment-driven kind and to signal to the world that the country is open for business, FEF believes the Philippines must lift the Constitutional restrictions on foreign ownership in mass media and advertising, educational institutions, land ownership,public utilities and the exploitation of natural resources,except as provided by law.“We need not fear that Filipinos will lose out in competition by opening up the economy. Time andagain, Filipino-owned enterprises 

have shown that they can compete with the best of them, like Jollibee, and even thrive in foreign shores,” 

 

Chikiamco said.