DEMAND AND SUPPLY - Boo Chanco (The Philippine Star) - February 15, 2019 - 12:00am

How did our neighboring countries like Thailand, Malaysia, Indonesia, and now Vietnam manage to industrialize while we are still struggling? Many of the vehicles in our streets were made in Thailand and Indonesia.

It’s the same thing with the steel industry. I remember a joke one of my professors in college made about the Philippine steel industry as nothing more than beauty parlors that add the curls in G.I roofing sheets.

Maybe it is because of the Filipino First import substitution strategy we have had from the ’50s. Our so called “infant” industries got significant protection through high tariffs and non-tariff barriers to entry.

As a result, consumers suffered having to buy lower quality products at higher costs. Several decades later, our “infant” industries refused to grow. Protection gave them no incentive to adopt new technology and improve efficiency.

So we failed to industrialize. Our car manufacturing industry is a joke. Outside of labor, we import practically every component used in making a car.

We used to manufacture tires here, something that should come naturally because we grow, or used to grow rubber in Basilan. Now, the original tire manufacturers are gone.

Nationalism was used by vested interests from the oligarchy and the narrow minded left to justify protectionist policies. That kept us away from industrialization.

To compensate, we talked about leapfrogging from agriculture to services, bypassing the industrial stage. We started exporting labor abroad instead of manufactured goods. The BPO sector started to grow the service sector, but it is an industry that can be here now and elsewhere tomorrow.

Many economists have been warning that our strong dependence on OFWs and BPOs is not sustainable. We need a third leg: manufacturing.

Economist Bernardo Villegas once said “there was no question that a country with as large a population as the Philippines would never be really considered industrialized if manufacturing does not constitute a fair share of the Gross Domestic Product (GDP) and employing a significant percentage of the labor force.”

Villegas noted that “through the years, manufacturing in the Philippines would average a little over 20 percent of GDP (compared to 30 percent or more of most of our neighbors) and nine percent of the labor force (compared to more than 15 percent of our peers).  In any modern economy with a large domestic market, economic progress is associated with an increasing share of the manufacturing sector in the economy.”

One reason manufacturing never took off in this country is our failure to have an honest-to-goodness integrated steel mill. We had one in the ’60s that was integrated only in name. Government took that over after it had financial difficulties, but failed to get it going too.

It was privatized and ended up with some Indian investors. Today it is a pile of junk that ought to be melted down to free valuable real estate in Iligan for something useful.

There is no doubt that a thriving steel industry serves as the backbone of a country’s industrialization.

Villegas pointed out that “iron and steel were of the essence of the first industrial revolution that occurred in England in the last decades of the 19th century.  The irony is that the world is now in the fourth stage of the industrial revolution (the digital age) and the Philippines has not yet developed a strong domestic steel industry.”

Perhaps, Villegas suggested, one other reason why we failed to develop a good steel industry is the limited market. Understandable because a large portion of the Philippine population lives below the poverty line and does not have an effective demand for steel products. 

But it should be different today with our consumer driven economy. We have a growing middle class and a population that was last counted at 107 million. This should be, Villegas mused, big enough to constitute a viable market for a local steel industry to flourish. This is also probably why this idea of an integrated steel mill here is gaining investor attention.

I found out early this week that from out of the blue, China’s largest steel company contacted Ben Yao of Steel Asia expressing interest in a joint venture to put up a real integrated steel mill here. Ben told me that they visited the Phividec Industrial Park in Cagayan de Oro and signed a Memorandum of Understanding to set up a $4.5 billion steel mill there.

The Chinese company, Hebei Iron and Steel (HBIS), is state owned and the 4th largest steel company in the world. They are currently in the feasibility study stage and should be able to make a decision to invest this year.

Once they get going, it would take three to five years to implement the project in two phases. The facility will be able to produce crude steel of up to eight million tons.

They will be able to produce steel for use in many industries such as automotive grade steel; special steels for engineering machinery; appliance grade steel; food grade steel; construction grade and high strength construction steel; aerospace engineering steel; nuclear power steel; shipbuilding and marine engineering steel and railway steel.

But there is a problem. In the course of doing their feasibility study, they found out that we have little or no quality standards for steel products and implementation of the standards that we have is spotty. There is also a significant gray market and some smuggling of substandard steel products. It is not a level playing field.

Actually, substandard steel products are a danger to life in our earthquake-prone country. DTI is responsible for the formulation and enforcement of standards but it has had problems doing this.

Anyway, if this investor comes in, it will be a big feather on the cap of DTI Secretary Ramon Lopez and President Duterte can report fulfilling a dream. Secretary Lopez must simply make sure our loose governance doesn’t scare away a major investor in a segment of our economy that’s pretty basic.

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco.

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