October 3, 2000, BusinessWorld, Industries now hurting from weak peso, by Patricia L. Adversarial,

During hard times, some try to cope by recalling how things could be worse. But Arthur Dy, a garments producer, can't remember now how the latest round of peso depreciation could fare lightly with the previous ones his business went through in the last 30 years. 

Depreciation, this time around, came with two companions -- high oil prices and globalization, which brought down tariffs and opened the floodgates to cheap imports. 

Back then, Mr. Dy said, whenever the peso depreciated, local manufacturers like him simply passed on the added cost to consumers. When the peso depreciated in 1974, 1976, and 1983, there was enough demand to sustain increased prices. But that's not the case anymore, he said. 

"Our costs of production have increased but the consumer's purchasing power is lower. We're squeezed," said Mr. Dy, who owns Mega Shirts Garments Manufacturing. 

"We're also not able to absorb the increased costs now simply by raising our prices because supply has grown bigger than demand with globalization," said Mr. Dy, who is also president of the Garments Manufacturers Association of the Philippines. 

"The demand is there, but it's not increasing because of the crisis," added Felix K. Maramba, president of the Philippine Association of Flour Millers. 

"People have less disposable income. Usually, we post our highest sales towards the fourth quarter of the year, but we haven't seen the expected increase," he noted. 

With a depressed market and reduced purchasing power, most local manufacturers like him are strapped for options. 

Survival no longer dictates that they raise their prices because that would kill them outright. 

"There's nothing that we can do. We cannot increase our prices. If we do, nobody would buy and we'll end up worse off than we were," said Mr. Maramba, who is also president of Liberty Flour Mills, Inc. 

IMPORT-DEPENDENT

Most local manufacturers are still heavily dependent on imports. The garments industry is 70% to 80% dependent on imports for their material components, Mr. Dy said. 

As large consumers of industrial fuel, the rise in crude prices has also affected their production costs. 

Imported tin comprises 75% of the cost of each can, said Henry A. Tañedo, president of Tin Can Manufacturers Association of the Philippines. Since the National Steel Corporation (NSC) closed in November 1999, 100% of tin used is now imported. 

While tin prices in the world market have been steady, the peso depreciation and tariff increases have raised the cost of imported tin, said Mr. Tañedo, who is also vice-president of Philcan Industrial Corp. 

Import duties on tin were raised to seven percent from three percent, mainly to help the NSC. With NSC's closure, the government has yet to lower tariffs to help tin can makers offset the drop in the peso's value. 

And as with the garment industry, tin can producers consume large quantities of industrial fuel. Prices of liquid petroleum gas have risen by 54% this year, Mr. Tañedo noted. 

Meanwhile, input costs in the rubber industry, which include labor, power and raw materials, have increased by 20% to 30%, said Pablito Chua, president of Philippine Rubber Industries. The rubber industry has three subsectors: tires, shoes and sandals and belts. 

While world prices of raw materials have dropped by 10%, the reduction was not able to cover the more than 50% increase in cost due to the peso depreciation, as well as the rising cost of labor and power, said Mr. Chua, also vice-president of Philippine Belt Manufacturing. 

For their part, flour millers import 75% to 80% of raw material, which is mainly wheat. Costs have increased 10% from last month, but millers cannot increase prices because sales will suffer further, Mr. Maramba said.  

In the steel wire industry, 100% of raw materials (wire rods) are imported. These raw materials comprise 80% to 85% of total costs; the rest comprise labor and power costs. 

A BusinessWorld source in the industry who requested anonymity, said prices of imported raw materials are steady, but costs are rising because of the currency's depreciation. 

Landed costs have increased five percent to eight percent from last month and this year alone, while costs have gone up by more than 20% for the sector. Manufacturers who are already hard put to cope with increased costs due to depreciation also face a shrinking market because of alleged smuggling and rampant dumping of imports. 

"Smuggled items are a direct assault on our products," Mr. Dy said. 

He added the garment industry has been on the downtrend since 1992 -- since the start of globalization. Import tariffs on garments have gone down from 35% to 40% to five percent to 10%, he said. 

Like the garments industry, the steel wire and rubber sectors are also hit by smuggled goods and stiff competition from imports coming from the region. 

COPING MEASURES

Some manufacturers cope with the higher costs by using cheaper materials and getting materials from non-traditional sources. 

Mr. Ty has begun adding polyester content to lower the cost of producing cotton shirts. At least for his price-sensitive C and D market, "you have to compromise quality to maintain your price." 

He also notes that other manufacturers are shifting lines -- those who cater to the B and C market have begun shifting to the C and D market. 

The peso depreciation, however has nothing to do with the shift in lines, he clarified. "For the industry, the biggest blow is globalization. Peso depreciation? It has painful effects on our costs, but we don't feel the pain anymore because we already have been dealt the most painful blow-globalization," he said. 

Tin can makers like Mr. Tañedo said "they are studying the possibility of down gauging the tin used for paints and thinners since we cannot increase our prices. This move, if implemented, could save five percent of total cost of producing a can." 

They are also sourcing cheaper sources of raw materials from non-traditional markets. However, he declined to say from which markets -- for competitive reasons. 

This move, he said, could reduce costs by 10% to 15%. Materials from these markets, however, have to be sorted as these are no longer A-1 materials. 

CUT COSTS

Costs could also be reduced by being more efficient in production. At the plant level, process are being reengineered to maximize human resources like assigning one person to handle two machines instead of one, Mr. Tañedo said. 

He also said that some tin can producers have shortened the work week from six to four to five days. Some have also shifted to the manufacture of plastic containers in response to market demand. 

Still, any cost savings from being more efficient in production are not able to offset the hefty increases in cost inputs. 

"If the exchange rate does not improve, we'd have to increase our price by 10%. This increase will not even cover our costs," he said. 

The last time the company increased its prices was two years ago. Philippine Belt, which is said to command 30% to 45% share of the local market, copes by exporting to other countries. 

The company plans to increase its exports to the North America, Australia and the Middle East to take advantage of increased margins from exports. 

Mr. Chua said their margins have increased to 10% from five percent as a result of the depreciation. At present, exports comprise 30% of its total production. "Still, the increase in margins from exports is not enough, so we really have to increase our prices," Mr. Chua said. 

His firm is contemplating another price increase -- probably less than five percent. The belts producer increased prices by 10% in the past two years. 

LIMITED OPTIONS


But Mr. Dy of Mega Shirts who makes garments for the C and D market said "they may not also push through with the planned five to eight percent increase in their prices this Christmas because our consumers cannot afford it." Mega makes shirts for the price-sensitive C and D market. Prices of its shirts range from PhP25 to PhP45. The company has maintained its prices since 1997. 

Local garment makers cannot also increase prices because of competition from the flood of imports, Mr. Dy said. 

Neither can tin can makers like Mr. Tanedo increase prices because of the depressed market. 

Sales of canned goods like sardines are hardly moving because of depressed demand. 

"It used to be that canned sardines were a poor man's meal. But not anymore because noodles are cheaper," he said. 

An industry source from the steel wire industry said that "construction activity is still sluggish. It's better for us to just break even or incur losses than close shop and lose jobs. We're not talking about margins anymore, but survival." 

The sector already increased its prices by 10% early this year. He said his company's production volume and sales dropped 50% from 1998. "We expect next year to be the same. We hope it will be the same, and not worse." Reducing production volume to cut costs is out of the question for garment producers like Mr. Dy, who said they have to maintain their volume -- or lose market share. 

Flour millers also said "even if we're losing, we have to continue production -- we still have to pay laborers. Cost-cutting is the only way to cope. If you stop operations completely, the cost of depreciation will kill you," Mr. Maramba said. 

Some companies however, have closed shop or stopped operations completely, said Antonio Garcia, president of the Federation of Philippine Industries (FPI). The FPI, however, does not have figures on the number of firms that have either temporarily closed shop or reduced production because of the peso depreciation. Mr. Garcia, who is also chairman of Chemical Industries of the Philippines Holdings, however, gives his own case as example. 

He said that operations at his Bataan Polyethylene Corp. plant closed down temporarily in April because of the high cost of procuring raw materials. The plant resumes this month at 60% capacity. 

The government, he said, could help reduce the cost of doing business here by cutting bureaucracy and red tape. The passing of the Omnibus Power Bill should also be prioritized to help reduce power costs.