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Philippine outsourcing awaits Duterte-Trump effect

January 23, 2017

Business from the US has driven a long boom in the Philippines’ flagship outsourcing industry, but potential political threats to ambitious growth plans now loom in both countries. 

Global companies are scrambling to work out whether tough talk from Rodrigo Duterte and Donald Trump, the Philippine and US presidents, will mean trouble if they run operations in the Philippines. 

The election of the two outspoken presidents has raised an unexpected hurdle to the Philippine outsourcing industry’s goal to almost double revenues by expanding the range and geographic spread of the services it offers. Executives hope the new leaders will not target an industry that has helped push economic growth towards regional highs. 

Bong Borja, Asia president of Alorica, a US-headquartered outsourcing company, said he was confident the industry was fundamentally strong and would not be hurt by the political rhetoric. But he admitted that “it’s something we can’t really control”. 

The Philippine IT and business process outsourcing industry generated annual revenues of about $22bn, or more than 7 per cent of gross domestic product, in 2015, covering functions from telephone customer service to accounting. The industry employs more than 1.1m people directly, with an estimated 70 per cent of its business coming from the US. 

The sector is targeting annual revenues of $40bn and 1.8m jobs by 2022, according to an industry paper published last year. Companies are expanding into new business lines such as animation and spreading operations from Manila to provincial areas that offer lower costs, the security of geographic dispersal and a better quality of life.

The first political cloud for the industry appeared when Mr Duterte, who took office in June, began a succession of attacks on Manila’s longstanding ally, Washington. He announced the Philippines’ “separation” from the US in October and has denounced Washington for allegedly treating Manila like a dog on a leash. The Obama administration mostly shrugged off the barbs. 

Danilo Reyes, chairman of the IT and Business Process Association of the Philippines, an industry body, admitted Mr Duterte’s remarks had caused some US companies to ask whether they should press on with expansion plans, and even whether their investments were safe. But he said businesses felt more comfortable now Duterte administration officials had made positive statements about a sector named as one of five strategic industries. 

“Despite the rhetoric, the agencies of the government have not really changed their position or their policies,” he said, citing advantages, including tax holidays of up to six years and no tariffs on imports of essential equipment. “That gives us confidence we will continue to grow and have the support.” 

But a further complication for the outsourcing sector has emerged after Mr Trump’s US election win in November on a platform that included criticism of businesses who moved jobs offshore. He has since issued warnings to manufacturing companies against setting up operations outside the US. 

The Philippine Economic Zone Authority’s tally of approved investment pledges dropped 26 per cent to 218bn pesos ($4.4bn) in 2016, in part because of remarks by Mr Duterte and Mr Trump, according to local media reports.

Charito Plaza, the authority’s director-general, was quoted as saying the leaders’ comments had caused some outsourcing companies to put investment plans on hold. The authority did not respond to a request for comment. 

John Forbes, a senior adviser at the American Chamber of Commerce of the Philippines, said the political uncertainties would “bear down on optimism for near-term growth” of the outsourcing sector. He contrasted the worries with the way the industry road map “brims with optimism and plans for the future”.

Via FT