Philippines Vows to Defend Outsourcing Empire as China Rises

(Bloomberg) -- The Philippines' $23 billion outsourcing empire is facing mounting risks: China is rising quickly as a competitor, the government wants to cut some incentives and a siege in the south of the country is worrying investors.

“We need to put our act together,” Rey Untal, head of the Philippine association of outsourcing companies, said in an interview in Manila. “The other countries know how big this IT business process outsourcing pie is globally and they want to increase their share. This is not a static world.”

Armed with a high-level of English proficiency, a young population and cheap labor, the Philippines has emerged as one of the global leaders of outsourcing with companies such as Accenture Plc among those who've invested. But its position is now under threat with China ranked ahead of the Philippines in terms of competitiveness, advisory firm Tholons said in a June report.

“It really is a significant wake-up call,” Untal said on July 28. “It's good in a way. Sometimes you need to be jolted. Many of the countries that compete with us directly are enhancing all the parameters that make them competitive -- talent, infrastructure, incentives.”

In recent years, China has built state-of-the-art technology parks and funded universities to offer courses specifically on outsourcing. China is targeting $100 billion of outsourcing revenue by 2020, focusing on digital, high-technology services, according to a plan by the Ministry of Commerce.

Million Philippine Jobs

The IT Business Process Association of the Philippines is aiming for $39 billion of revenue by 2022. The industry is the country's biggest source of private jobs, according to London-based research and consulting firm Oxford Business Group, with more than a million workers in 2016.

Aside from competition, the industry is also bracing for a government plan to reduce some tax incentives. The finance department plans to submit a bill to lawmakers to remove the preferential tax rate on salaries of some executives working in regional headquarters including those of outsourcing companies. 

At the same time, rising security risks in the south could damp appetite for expansion in the provinces. The government is waging a protracted battle with Islamic State-linked militants in Marawi City, and has placed the island of Mindanao under martial law until the end of the year.

“Business process outsourcing is very important for dollar supply, especially now that the country might slip into a current-account deficit,” said Michael Enriquez, chief investment officer at Sun Life of Canada Philippines Inc. in Manila. “There's a lot of threats to the growth of the sector, but BPOs will continue to prosper here as long as there's government support.”

The risks of a slowdown in outsourcing coupled with faltering remittances and higher trade deficits may exacerbate the weakness in the peso, Asia's worst performing currency this year. The central bank is forecasting the nation's first current-account deficit in 15 years in 2017, removing a key support for the currency.

“The challenges we have are already significant,” Untal said. “We don't need additional challenges.”

--With assistance from Xiaoqing Pi

To contact the reporter on this story: Ditas Lopez in Manila at dlopez55@bloomberg.net.

To contact the editors responsible for this story: Niluksi Koswanage at nkoswanage@bloomberg.net, Nasreen Seria at nseria@bloomberg.net, Karl Lester M. Yap