Countryside Dispersion of Industries
Countryside Dispersion of Industries
By SteelAsia Chairman and CEO Benjamin O. Yao
POST-WAR, the Japanese had this saying “steel is the rice of industry”. With its economy in ruins, Japan began rebuilding key industries in the 1950s, including steel, a mother industry for manufacturing resurgence. Within a decade Japan was at an industrial inflection point that later catapulted it to the position of the world’s 2nd largest economy. Other Asian countries followed this model with similar results in terms of an industrial inflection point, Taiwan and South Korea in the 70s, China in the 90s and the up and coming Vietnam fairly recently.
Measuring steel usage intensity in kilograms per capita, like an economic barometer, the Philippines is NOW at the same industrial inflection point. We are at a moment in time where a decision to act or not will mean a big difference for our country.
The Philippines DOES have some unique challenges, particularly its geography. Our archipelagic geography has disincentivized regional investments due to the high cost to access even nearby island markets. With few opportunities, the resulting diaspora to Metro Manila further weakened industry building capabilities of our countryside, while testing the carrying capacity of the Greater Manila Area. Naturally investments favor bigger markets and the developmental markets took a low priority. This is a vicious cycle that needs to be broken.
It is not too late.
A.O. Number 18 directs our government units to hasten the development of infrastructure and human capital in the countryside, much needed, though the private sector, the industrialists, can do, and should do their part.
In steel, the outdated concept centralizing production in giant steel complexes covering hundreds if not thousands of hectares, has been overtaken by the more efficient solution of dispersion of capacity to serve smaller geographic niche markets. Countryside steel mills are so much more appropriate for our geography.
While avoiding further congestion in Metro Manila is a good enough reason to move out of the city, dispersing steel capacity to regional markets creates big cost savings for regional builders and consumers, as these customers enjoy Manila prices.
These are significant savings. For example, the total logistic cost of shipping steel from Manila to CDO is around 50% more expensive than shipping from Russia to the Philippines. That is another issue that I will not get into now, but regardless, the ultimate solution to enjoying the lowest possible logistic costs is to produce in the countryside, products that are meant for the countryside. Our regional customers thus enjoy our nationwide “one-price” and JIT service.
IN SteelAsia, we call our steel plants “community mills”.
The product produced by our community mills are reinforcing steel bars or rebar, used in construction of all kinds, infrastructure- such as highway roads and bridges, housing, and commercial or office buildings. Considering Philippine population and country potential for economic growth, it becomes easier to take an investment position for regional capacity rated for future demand rather than present demand. Around six years ago we made the decision to operate 2 rebar mills in Mindanao totaling 750,000 tons per year of capacity. We knew that the market demand of Mindanao at the time was only 250,000 tons. But we believed in the potential of growth of Mindanao and took the challenge to support this growth with high strength construction steel. Today our mills are running at full capacity and we are investing in more Mindanao rebar manufacturing capacity and in other provinces as well.
My company makes construction steel. One of the new things exciting me today is our expansion into new steel products that we don’t produce in the Philippines. We have strong consumption of many different kinds of steel products.
Examples of these are H or I beams for bridges and other elevated land infrastructure, sheet piles for ports, reclamation and inter-island bridges, and heavy angles for communication and transmission towers. Yet we import 100% of these- at a high cost. With the latest generation technologies, we can lower the cost of these products and are currently in the process of building two mills to produce these products by 2021/2022.
Another interesting product is wire-rod. The Philippines imports 800 thousand tons per year and doesn’t produce a single ton. With domestic wire-rod manufacturing many SME can develop using wire-rods as a raw material. Products like nuts & bolts, screws, wire and nails, steel cables, welding rods, machine parts, mesh, everyday items and more can be manufactured in the Philippines. We are in the process of putting 3 wire-rod mills, in Tarlac, Candelaria Quezon and in nearby Villanueva Misamis Oriental. Wire-rod mills can accelerate the development of countryside industry growth and provide even more jobs for the community. Wire-rod is a mother product for many industries that local businessmen or entrepreneurs can benefit from.
The establishment of resource heavy manufacturing, provides an immediate opportunity for existing businesses to grow, and new business to open. Small and medium enterprises within the community thrive on the operations of a mill. Our company for instance, doesn’t own a single truck.
Completely outsourced, a typical community mill would need 100 truck trips per day, 7 days a week, and becomes a marvelous opportunity even for a start-up entrepreneur with 1 or 2 trucks. With the establishment of industry, the community’s economic growth is rapid- even exponential. Business growth for supplies and services is not limited just to corporations or even SMEs. We have had the experience of local women’s cooperatives supplying our knitted gloves or a local group formed to supplies safety shoes.
The number of jobs created by countryside industry development comes more from businesses that support plant operations and downstream activities in the supply chain. For the steel industry, the rule of thumb is for every 1 job within the plant, there are around 5 to 6 jobs created outside of the plant. Each community mill generates around 1,600 jobs inside and outside the plant.
Countryside industry development is inclusive. For instance, in our community mills, more than 70% of the available jobs do not require a college degree. This not only reduces local unemployment and migration to Manila, but it also reduces the counter-productive activities of the unemployed, such as resorting to criminality or fixers at City Hall and such. In SteelAsia we employ many capable and productive individuals who are not even high school graduates.
The question of qualification is easily addressed by training and development. Investing in skills development and on the job-training has sustainable and multiplying rewards, particularly when hiring locally from the countryside. Prior to operation of an expansion project, SteelAsia’s new local hires receive training in our other plants where their skills are developed in classroom, laboratory and on-the-job training. They return to their locale and participate in the installation of equipment and eventually take on the role of operators of the mill.
The hiring of more experienced equipment operators, technicians and engineers is also NOT an issue. Our own employees, men and women, who originally sought more opportunities in Manila are more than happy to be transferred back to their home provinces. We place great importance in this because we believe that local employment is the most sustainable and bears fruit in terms of the retention of organizational knowledge.
Many highly capable technicians and engineers leave to work abroad particularly in the Middle East. These experienced experts would like nothing more than to be home with their families, if not for the lack of opportunity here.
Countryside industrialization provides the opportunity to keep knowledge and skills in the Philippines- for Philippine use.
In SteelAsia we benefit from this reverse-migration. Many of our plant managers, department heads, engineers and technicians, returned to the Philippines to fill vacancies in our new expansion mills. Yes, you have to pay them better than industry average, but they are worth it, adding much know-how to the company’s organization knowledge.
In the past we supplemented our training with overseas training particularly in Germany at a steel manufacturing school. This did have a high cost. Lately we engaged the same German school to set up a curriculum for the Philippines. SteelAsia will open its first steel training school this year in Batangas and we will replicate this in the rest of the countryside.
Finally, I would like to emphasize that the most inclusive manner to grow countryside development is to involve in all aspects local or community interests. It is the most sustainable way and from a business perspective, ensure survival and profitability in the long term.
To spur growth of more businesses through product availability and lower costs, the local market must be a priority. We also need to make sure that downstream industries will benefit from our investments and grow alongside us eventually into industry leaders.
Favor local suppliers and service providers. They will be able to level up their capability with close cooperation and communication. Let local suppliers know your high quality and service standards and they will rise to the occasion.
Work closely with the schools. They are the future – a long term investment in countryside industrialization. Partnership with the academe can allow the school to tailor their learning activities to industry requirements. Academe are also R&D partners that play a role in continuous improvement of technologies, processes and market solutions. Graduates are the industry’s future employees, suppliers, customers and enablers.
It should go without saying that the national and local government are vital in enabling all of this and this brings us back to AO Number 18.
For the private sector, learn to rely and depend on all these stakeholders in win-win, give and take relationships. Support them and they will support you. This we believe is the only way to ensure long-term success and profitability.
*Delivered during the 1st Philippine Industrial Summit in Mindanao on November 27, 2019 at the Limketkai Luxe Hotel, Cagayan de Oro.