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The Five
Percent Factor
By Michael Alan Hamlin
October 13, 2003
There are many reasons why President Gloria Macapagal-Arroyo's
announcement that she will "defer her retirement" and
seek re-election elicited little more than a bored yawn from the
business community and investors last week. For one, the decision
has long been expected. For another, until she is re-elected Ms.
Arroyo still lacks the political mandate she requires to implement
dramatic reforms.
The administration and some analysts have tried to
suggest that the announcement will reduce political and economic
uncertainty, and should reassure foreign investors. In fact, investors
interested in the Philippines don't really need reassuring. And
those that aren't interested - principally low value-added manufacturers
of all types - are unlikely to ever be interested in the Philippines
again. High labor costs, dramatically overpriced power, and intrusive
regulation simply make the Philippines strategically inhospitable
and therefore uncompetitive as a destination for the kind of foreign
direct investment that is being plowed into China, for instance.
Investors who like the Philippines are attracted by
two factors. First, telecommunications and Internet infrastructure
is world-class, and increasingly affordable. This is the result
of liberalization during the administration of former president
Fidel V. Ramos, and substantially reduced regulation of the sector
since that time. Increased competition and freedom from energy-sapping
bureaucracy has resulted in the evolution of some of the best communications
infrastructure in Southeast Asia.
Second, as we've observed before in this space, the
Philippines offers investors a highly attractive workforce. Not
because it's the cheapest or among the cheapest in Asia, which it
is not, but because it's smart, educated, English-speaking, and
culturally Western-oriented. Together, these factors have made the
Philippines one of the two most popular destinations in the world
- along with India - for e-Services like business process outsourcing,
engineering and design, and of course, contact centers.
Unfortunately, like all success, the Philippines' success
is marketing itself as a world-class e-Services center has created
new problems, and most of those problems have to do with one of
its principal success factors: people. Take contact centers for
instance. Bong Borja, who is president of both local contact center
associations and heads up PeopleSupport's operations in Asia, recently
told me that there are now 20,000 contact center seats in the Philippines,
which translates into slightly more than 30,000 jobs.
The starting salary for those jobs is about twice what
a new factory worker or a bank clerk can earn, so there are lots
of applicants. But according to Borja, only about five percent of
call center applicants have the English-language skills required
to land a job. He explained why that's become an increasingly serious
problem: "The Philippines graduates around 400,000 college
graduates a year," he said.
"And five percent of 400,000 is 20,000. But the
call center industry expects to grow 100 percent this year,"
he explained. So even "if all 400,000 of those graduates apply
for a job, the industry will be 10,000 people short of demand for
call center representatives in 12 months." This suggests that
investors will begin to look elsewhere, and that the Philippines
will be unable to sustain investment in e-Services regardless of
who is president come May 2004.
Unless, of course, the ratio of applicants accepted
by call centers and other e-Services providers goes up. That's unlikely
to happen, though. Borja made it clear that call centers can't afford
to lower their standards when it comes to English-language skills.
In order to sustain its leadership role as a center for e-Services,
therefore, the Philippines must very quickly enhance the quality
of education.
That's a concern that the e-Services sectors have been
working with key government agencies and educational institutions
to alleviate for quite some time. The call center association, for
instance, has worked with local universities and vocational schools
to develop special courses designed to prepare students for a career
in the industry. Public school curricula, in both the liberal arts
and vocational schools, have been revised to place increasing emphasis
on English, math, and science. And of course Ms. Arroyo has restored
English as the principal language of instruction in public schools.
But while progress is being made, the pressure is on.
India graduates half a million engineers alone every year, and is
the Philippines' principal rival for call center investment. Meanwhile,
new market entrants - from China to Fiji - are intently working
to increase their shares of the investment pie. Like all competitive
advantage, the Philippines' is set to quickly erode if follow through
in improving educational standards falters.
Improving those standards will reduce uncertainty about the sustainability
of the Philippines' e-Services competitiveness in a tangible, measurable
way. And the administration shouldn't forget that this election
year.
(Michael Alan Hamlin is the managing
director of consultancy TeamAsia and the author of three books on
Asian economies and companies. His latest book is Marketing Asian
Places, of which he is a co-author (Wiley, 2001). Write him at mahamlin@teamasia.com.).
Copyright © 2003 Michael Alan
Hamlin. All Rights Reserved.
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