Philippine Industrialization. Foreign and Domestic Capital 0195826205

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PHILIPPINE INDUSTRIALIZATION Foreign and Domestic Capital

YOSHIHARA KUNIO

Quezon Cl:y,Metro Manila

Ateneo de Manila University Press Singapore

Oxford University Press Oxford New York Tokyo 1985

Oxford Un1'toer5alfy Press

Oxford New York Toronto

Kuala Lumpur Singapore Hong Kong Tokyo De[hz` Bombay Caicutra Madras Karachi

Nairobi Dar es Salaam Cape Town Melbourne Auckland

and associates in

Beirut .Berlin Ibadan Mex:'c

re. See Bibliography: Maria Colayco for Philippine Refining Co., and Manila Cordage; Ed de ]esus for Engineering Equipment and Anion Trading; and Emili Raventos for La Compania General de Tabacos de Filipinas. 13. A copy is available at the American Historical Collection. 14. join: l'nzerrzalz'ona! Business Ventures in the P}z1IZzlppines, Research Project of Columbia University, July 1958. A copy is available at the Filipiniana Collection of the Ateneo de Manila University.

3

l r

:

-

OVERVIEW

Industrial Distribution

TABLE I gives the industrial distribution of the 25o companies. The

Iirst thing to be noted is that a fairly large number of companies are engaged in light manufacturing. There arc 61 companies in food, 8 in beverages and 12 in tobacco. These 3 industries alone account for about a third of the total. If textiles, pulp and paper products and rubber products are added, the proportion exceeds 5o per cent. In an industrial country, producers of machinery, basic metals and chemicals dominate the top strata of the manufacturing industry, and the proportion of the light industry is much lower. Another characteristic of the Philippine manufacturing industry is the presence of industry which processes agricultural products for export, which may be termed processing industry. Two in fruit processing (canned pineapples), 20 in sugar, 10 in coconut, 2 in industrial textiles, and 2 in tobacco belong to this category (36 altogether). The proportion (about 14.4 per cent) is certainly not high which shows that the processing industry has become relatively minor. Nevertheless, the fact that it is also not negligible is a unique structural feature of Philippine manufacturing.

Most companies in the Table belong to the import-substitution industry (industry founded to produce what was once imported) that resulted from the post-war industrialization policy, Critics of

this policy argue that it only promoted the packaging, mixing and assembly types of industry which are dependent on foreign countries for components and raw materials. While there is some truth in this criticism, one should also note that many industries are not of this type. The cement industry, for example, uses raw materials available mostly within the Philippines. The textile industry uses imported raw cotton, but this is also true for the textile industry in Japan and many other industrial countries. The Philippine textile industry undertakes the same activities (spinning, weaving, knit-

ting, and finishing) as the textile industry in industrial countries .

28

PHILIPPINE INDUSTRIALIZATION

TABLE I Industrial Distribution of Sample Companies Industry

No. of Companies

I. Food Dairy Products

5

2. Fruit Processing

2

3. Meat & Vegetable Processing

3 5

1.

4. Flour 5. Bakery Products 6. Cocoa & Coffee 7. Sugar

8. Coconut Products 9. Animal Feed Io. Syrup Concentrate I I . Seasonings 12..

Others

Total II. Beverages I . Liquor 2.

Beer

3 4 2o

IO

z 2 2

3 6I

5 I

3. Soft Drinks

2

Total

8

III. Tobacco

12

IV. Textiles I . Consumer Textiles

30

Industrial Textiles

4

2-

Total V. Pulp & Paper Products

34 IO

VI. Rubber Products I.

Tores

2. Footwear

3 3

3- Others

I

Total

7

VII. Chemicals I . Industrial Chemicals Fertilizer 3. Plastic Products 4. Paint 2.

5. Pharmaceuticals

6 3 2

6 I4

29

OVERVIEW

6. Toiletries~ 7- Matches 8. Others Total VIII. Petroleum Products IX. Non-Metallic Mineral Products I.

Glass

2.

Ceramics

3- Cement 4- Others

X. XI. XII. XIII . XIV.

5 2

3

41 4 3

3 9 I

Total

I6

Metals Machinery, Equipment 8; Components Transport Equipment Electrical Appliances Others

27

Grand Total

13 8 8 I 250

The degree of integration accomplished by the late I96os is also quite impressive- Car production, for example, a typical assembly operation, certainly required various imported components, but tyros and batteries were available within the country. In the case of

steel, some companies had rolling mills and smelting plants and supplied raw materials to producers of final steel products. Pro~ ducers of industrial chemicals supplied caustic soda to soap face tories and textile mills (for bleaching), and resins to paint and glue

manufacturers. The various containers (plastic, paper, jute, glass, etc. ) needed by producers of food and other products were also manufactured within the country. The most capital-intensive, import-substitution industry in the Philippines was petroleum refining. Originally the Philippines imported petrol and other petroleum products, but the government decided in the late 1940s to promote petroleum refining within the country. Caltex was the first to respond and its refinery started operation in 1954. In the early I96os, three more refineries started operation (Shell, Filoil, a joint venture between Gulf Oil and Filipino capital, and Bataan, a joint venture between Esso and Mobil). At this time the daily capacity of the four refineries was still small (about 73,ooo barrels a day), but by 1970, it had increased to

30

PHI LIPPINE INDUSTRIALIZ.A'llION

200,ooo barrels a day. Esso's investment in Bataan also led to the establishment of a fertilizer plant (Esso Standard Fertilizer). From the degree of integration and the establishment of capitalintensive industries it should be clear that Philippine industrialization in the late 1960s had progressed in many ways beyond packaging, mixing and assembly: but at the same time one should be aware of some missing industries. Producers of precision machinery, synthetic fibre makers, shipbuilding and repair companies which could cater for ocean-going vessels, aluminum smelters,

copper smelters, and integrated steel mills did not exist. Even today

many of these are still lacking. It may be argued that these are bound to be established as industrialization progresses further, but

some of the gaps are puzzling. In 1970, for example, there were no shipyards which could repair ocean-going vessels. Since in ]apart such shipyards were built relatively early, it cannot be argued that this industry is a latecomer on the stage of industrialization. One certainly has to understand the difficult environment in which industrialization has been promoted in the Philippines. A local copper mining company set up a joint venture with an American company to produce copper wires. It sent copper ore to Japan for processing and brought it back to produce wires. This

should be contrasted with the case of Sumitomo (Japan), which had an integrated operation at a fairly early stage of its development. This difference may be related to the fact that the Philippine copper mine was foreign-owned. A foreign company in genera] is less inclined to invest in integration, especially if the amount involvedis large. A more important reason, however, may be that when Japan was industrializirig, the optimum scale of smelting was much smaller than it is now, and thus it was easier and relatively less ex-

pensive to go into smelting. What was accomplished in import-substitution industrialization up to the late I 96os was the establishment of industries producing various final products and others producing raw materials. Industrial networks were formed to a certain extent, but there were various gaps in these networks since some industries were yet to be established and many of the existing industries lacked diversity, These gaps were 'dulled by imports. The networks centred on pharmaceuticals, electrical appliances, and machinery were particularly dependent on imports. However, this import-dependent structure need not be considered a sign of the failure of the importsubstitution policy. I t can be remedied by pushing integration

further and making the networks more complete.

31

OVERVIEW

Tilne Pattern Table 2 shows the distribution of the years of incorporation of the 250 companies. One tends to think of industrialization in the Philippines as a post-war phenomenon, but as the Table shows a substantial number of companies started in the pre-war period. Many of these were processors of agricultural products, such as sugar mills, a pineapple cannery, cigar producers, rope makers, and manufacturers of coconut oil and desiccated coconut. Twenty sugar mills are included in the sample, of which most were incorporated pre-war. Three mills were incorporated post-war, but two of these had started operation before the war. Binalbagan-lsabela Sugar, which was incorporated in 1947, arose from the merger of two sugar mills established in 1920.1 San Carlos Milling was incorporated in the Philippines in 1957, but it started operation in the early 1910s as a factory of the company of the same name incorporated in Hawaii. First Farmers Milling is the only one which was incorporated and started operation after the war. The rest were set up in the 1910s and 1920s.2 The history of the Philippine sugar industry starts in the Spanish period. By the late nineteenth century sugar was already an important Philippine export3 but it was not until the mid-nineteenth century, when British and American trading companies were given more freedom, that sugar became a major industry. By the end of the Spanish period, the Philippines was producing about 3oo,ooo tons of sugar a year, 5o per cent more than Hawaii whose sugar had been admitted duty-free to the United States." At this time, howTABLE 2 Year of Incorporation of Sample Companies Yea r -1909

1910-1919

No. of Companies I

I I

1920- 1929

18

1930-1941 1945-1949

12 20

1950-1954

54

1955959 1960-1964

69

1965-1969

Total

50 15 250

32

PHILIPPINE INDUSTRIALIZATION

ever, the Philippines produced mainly unrefined sugar (rnuscovado and panocha), and milling was done on a small scale. Modem mills or 'centrals' using the centrifugal method of production5 were set up after the United States acquired the Philippines. In 1909, the year of expiry of the Treaty of Paris which had given Spain special privileges in the Philippines for ten years, the United States passed the Payne-Adrich Tariff Act and admitted 3oo,ooo tons of sugar from the Philippines free of duty. This gave

the go-ahead to American capital interested in sugar production in the Philippines- Calamba Sugar Estate (the predecessor of Canlubang Sugar Estate), San Carlos Milling, and Mindoro Sugar Company (renamed Philippine Milling in 1932 and dissolved after the war) were set up in response to the Act. In 1913 the United States passed the Underwood-Simmons Tariff Act which freed all trade between the Philippines and the United States. This gave a tremendous advantage to the Philippines as a sugar producer and a large amount of investment was channeled into cane cultivation and milling. The other sugar centrals built pre-war were a response to the opportunities created by free trade with the United States. Tobacco was introduced to the Philippines via Mexico by Spanish missionaries in the last quarter of the sixteenth century and the plant thrived in many parts of the country." It was not, however, until the tobacco monopoly was established in the t78os that the Philippines became known as a tobacco producer. To raise its own funds and become less dependent on Mexico (which had funded a large part of the expenses in the Philippines up to that point), the government established a monopoly on tobacco farming, leaf collection, manufacturing, and marketing of finished products. The system lasted for almost a century before it was

abolished, by which time it had become inefficient. La Compania General de Tabacos de Filipinas, commonly known as Tabacalera, was established in 1881 to continue the export of leaf tobacco and take over the cigar factories owned by the Spanish government.7 Soon after it started handling other Philippine produce, such as abaca, copra, and sugar, and during the present century it diversified into agriculture, sugar milling, liquor production, shipping and paper manufacturing, and became a trade~centred conglomerate. Despite these manifold activities, however, the company is best known as a cigar producer. The factories in Manila which it bought from the Spanish government were welded into a single factory called La Flor de la Isabela which was one of the largest of its kind in the world at that time.

OVERVIEW

33

Though not so large as Tabacalera, Alhambra, Insular and Yebana were also three well-known cigar producers operating at the beginning of the century.8 Alhambra Cigar Factory was founded by the Swiss trading company of Kuenzle and Streiff. The company, renamed Alhambra Industries, is included in the sample . Insular and Yebana changed hands in subsequent years, and the two were merged as Insular-Yebana Tobacco in 195 I (also included in the sample). In the late I96os, Tabacalera and Alhambra were still famous as cigar producers, but the names of Insular and Yebana were not well known. In 1902 the United States Congress passed the Philippine

Organic Act, which contained a provision that limited corporate landholding to 1 coo hectares a piece. This provision discouraged American investors from establishing plantations in the Philippines. It did not, however, deter an American producer of canned

pineapples from doing so. The California Packing Corporation, known for its brand 'Del Monte', had been operating a successful pineapple business in Hawaii, and was looking for a new plantation site in another country since there was no room for expansion in Hawaii. To get around the 1 coo hectare limitation, the company established a Philippine subsidiary called Philippine Packing Corporation which leased from the government Io coo hectares of land in Mindanao. Planting began in 1927 and a packing plant was built in 1929. The Philippines had a virtual monopoly on abaca. Coarse abaca fibro is used for twine, matting and rope, particularly marine cordage because of its resistance to the action of salt water. Most of the abaca produced in the Philippines was exported in the form of

fibre, but there were a few large cordage factories in Manila in the pre-war period. Elizalde Rope started as Ynchausti Rope Factory in the mid-nineteenth century. Since Ynchausti y Cia (the predecessor of Elizalde & Co.) was a ship-chandler, it probably decided to produce its own cordage instead of continuing to rely on other producers. The entry of Tubbs into cordage manufacture followed a similar pattern." Originally, Tubbs was a ship-chandler in San Francisco, and this led to cordage production. Unlike Ynchausti, however, it phased out the ship-chandlery business and concentrated on cordage production (becoming Tubbs Cordage Company). During its first two decades, the company was importing abaca fibres from the Philippines and producing cordage in San

Francisco. But in the early I_92os Tubbs decided to set up a cordage plant in Manila, mainly to cater for its overseas markets. johnson-

34

PHILIPPINE INDUSTRIAI.IZATION

Pickett Rope Factory was another large rope producer in the prewar period, but it was bought over by Elizalde Rope and no longer existed in the late I96os. The Philippines exported copra during the Spanish period, but unlike sugar, abaca, or tobacco, copra was a minor export. It was during the American period that it became a principal export of the Philippines. Before 1915 copra was exported in unprocessed form,

but during the First World War, since the oil derived from copra (coconut oil) contained glycerins (which was needed to produce

explosive) and since it became more economical to ship oil than copra, a rather bulky cargo, many oil mills were established in the Philippines. Most of these, however, went bankrupt after the war. But with the passage of the United States tariff act imposing a duty

on foreign-made coconut oil, production in the Philippines became profitable again because it was enjoying free trade with the United States, and large mills were newly established. None of these oil producers were, however, producing coconut oil as a major product in the late 196os. All the sample companies classified as coconut producers were incorporated after the Pacific War. Some of them

started business before the war but they were relatively minor producers at that time. For example, Lu Do & Lu Yrn, the largest oil mill in the late 196os, was founded shortly before the turn of the century; but in its first few decades it manufactured oil primarily for candles and soap for the domestic market. At the end of the 1930s it became an exporter of coconut oil as well, but its pheno-

menal growth took place post-war." Desiccated coconut is a different case. All the companies but one listed as producers of desiccated coconut (see Appendix 2) were

either incorporated or started operation pre-war and most of them were major producers at that time. The largest was Franklin Baker Company of the Philippines. Franklin Baker, an American manufacturer and distributor of desiccated coconut, came to the Philippines in 1922 when duty was increased on the desiccated coconut imported to the United States. Until then Ceylon had been the principal supplier to the United States. Vavasseur & Co., a British trading company which had been operating a successful desiccated coconut plant in Ceylon, also set up a plant in the Philippines (Red V Coconut Products) to gain the benefits of the product's preferen-

tial status in the United States." Some companies in the import-substitution industry were es-

tablished before the Pacific War- San Miguel started producing beer in the early 1880s, and in the 19205 and I93os under the

OVERVIEW

35

dynamic management of Andres Soriano, diversified into icecream, soft drinks, and glass bottles. La Tondeiia, Tanduay, and many other liquor producers also started operation pre~war. Originally, liquor was distilled from nip ah sap, but when it was found that alcohol could be distilled from sugar molasses liquor production increased rapidly since molasses was more abundantly available. Madrigal's Rizal Cement started operation in the 193os. App Cement's plant in Cebu also dates back to the 1930s. Madrigal's other major factory, Philippine Cotton Mills, was destroyed during the Pacific War and was not rehabilitated. But the textile

mill established by the National Development Company in 1938 became Union Textile in 1965. Philippine Manufacturing Company (the predecessor of Procter & Gamble) produced-vegetable shortening ( Puricol, soap products and margarines. Philippine Match Company successfully competed with the import ofrnatches

from Japan. Atlantic, Gulf & Pacific ( A G & P) and Hof iron undertook the fabrication of various kinds of steel needed for their construction and engineering works. And Elizalde pioneered paint production in the mid-192os.

Other products manufactured pre-war included shoes, confectionery, ceramics, canned food, knitted goods, nails, screws and other simple metal products, cigarettes, soy-sauce, drugs, and small ships. None of the pre-war producers of these goods appear in the sample, though this is not because they were all smaller than those which do appear. For example, Toribio Teodoro's And Tibay

Footwear Factory was a very large manufacturer of footwear, particularly shoes, but it failed to grow post-war. Some goods were produced even in the nineteenth century because transportation cost per unit price was high. Beer and soft drinks are typical examples. Production of these goods started even without protection from imports. Textiles and cement, however, belong to a different category. It is true that transportation cost per unit price also tends to be high for cement, but without protection cement production was difficult. The Philippines had a free trade arrangement with the United States, but imports from other countries were subject to a tariff. Japan was the major supplier of cement and textiles and thus it was possible for the Philippine government to raise import duties to protect the home production of these goods. Before the Pacific War, even during the Commonwealth period, the government's attempts at industrialization were moderate. Its aim was to change the structure of the economy from purely

36

PHILIPPINE INDUSTRIALIZATION

agricultural to semi-industrial using Spain as a model. The major reason for this new strategy was not that industrialization was the key to development, but that a certain degree of industrialization was necessary to compensate for the decline of agricultural exports resulting from competition from other tropical countries. When he was president of the National Development Company, a government enterprise promoting industrialization, Ioaquin Elizalde explained the new strategy- as follows : One reason why we should not remain stagnant within the agricultural system is this: Because of our climatic and soil conditions we can raise

tropical products only, materials of high competitive range. The same are produced in many other tropical countries: Coconuts in the Straits, lava, India, Borneo, Celebes, etc; sugar in Java, India, Formosa; hemp in Sumatra; timber in Borneo; rice in Indo-China; jute in India; rubber in the Straits, Java, Brazil, tobacco in Turkey, Brazil and Sumatra. I t is, then, clear that if we would compete with any degree of success in the world's markets with the aforementioned countries, we are doomed to discard rapidly our present standard of civilization and descend as quickly to that of the 'coolie' as in Formosa, Singapore, lava and India. . . . The all-important item, therefore, to inject into our economy the desired stability, consists in the establishment and development, at the earliest possible date, of small industries to supply our home demand and consumption industries to produce for local use only, such as cotton

spinning, soap making, food products, dairy products, rice, fishing industry, wine products, beer, rubber goods, jute spinning, etc. With the progress of these industries, our imports from abroad would diminish and would compensate for the loss of our exports."

This should be contrasted with the following statement of Salvador Araneta, Secretary of Agriculture and National Resources during the Magsaysay administration and an ideologue of post-war industrialization.

Industrialization means economic progress, and an industrial economy like that of the United States OI' Britain should be our goal. Our economic policy must be industrialization in its fullest sense, including heavy industries. Th in is n e n my up asp rity, th t is, n r g owing tonal production. Industrialization is the common denominator for the progress

of the United States, Britain, Russia and China."

Soon after independence, the government made a concerted effort at industrialization. I t gave tax exemption, protection and low-interest finance and allocated foreign exchange to those who were willing to undertake industrial investment. This new policy

enabled the Philippines to establish new industries in dairy prod-

OVERVIEW

37

ucts, flour, cocoa and coffee, animal feed, syrup concentrate, corn oil, pulp and paper products, tyres, industrial chemicals, chemical fertilizers, plastic products, petroleum products, various metal products, machinery, transport equipment, and electrical appliances. Many of the companies in the sample belong to these newly

established industries. The older industries with pre-war roots also expanded rapidly in the new environment. Most companies in textiles, cement, canned food, soft drinks, paint and cigarettes were founded after the new

import-substitution policy was implemented, and grew rapidly under a protection programme. Of cement companies, for example, only Rizal Cement and Cebu Portland Cement (the predecessor of Apo Cement ) were operating in 1950. Responding to the opportunities created by the new policy, Philippine Portland Cement started operation in 1952, Bacnotan in 1954, Republic in 1957,

Universal in 1960, Filipinas in 1964, Mindanao Portland in 1965, Marinduque Mining & Industrial and Pacific in 1967, and Hi in 1968. As a result, imports had become minuscule by the end of the 1960s. In the case of textiles, import-substitution was completed earlier. The import of cotton yarn had become insignificant by 1961, and that of cotton fabric by 1963. Pattern of Ownership Table 3 shows the ownership by nationality of the 250 companies. Eighty-seven of them are foreign and 163 domestic. Of the 163 domestic companies, So are owned by Chinese and 83 by Filipinos. Thus, roughly one-third of the sample is foreign, another third is

Chinese, and the remaining third is Filipino. Foreign companies dominate in soft drinks and syrup

concen-

trate, dairy products, fruit processing (canned pineapples), pharmaceuticals, toiletries, other chemicals, petroleum refining, tyres, certain types of metals (steel fabrication, copper wires, and other non-ferrous metals) and certain types of machinery and equipment (construction machinery, telephone equipment, sewing machines, and electric light bulbs). Chinese companies dominate in coconut oil, some food products, tobacco (cigarettes in particular), textiles hosiery and knitting in particular), plastic products, footwear, glass and certain types of metals (tubes and pipes, merchant bars, wire rods, nails, bolts, etc., and containers). Filipino companies dominate in sugar, industrial chemicals, fertilizers, cement, certain types of metals (rolling mills, galvanizing plant, and tin plate), and are fairly strong in electrical appliances.

N

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vi

1-4

VW

AngloDutch

2

4

21

Total? Others (Fore:grz)

1-c

N

N

N

o

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I*

. .. .. . .

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in

N

1-1

N

m r~: >-1

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N

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N

1-1»
-4

N

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or

\n

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NO

do N

l-I »-4

is

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in

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N 1-4 H

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m m H

N I-I H

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m [ ` * N >-IQO 1-4 111 1-4

omFs'1'I(; CAP] IIAL: FILI FI NO

141

g. 1')isl:uss;ion of the Cojuangco family in this section is based on Carlos Quirino, "1`hc Cojuangco Family`, 1968 (unpublished). Io. Edgar Wickberg, The Chinese in Phz'[ippzrle Life, 1850-1398, New Haven, Yale University Press, 1965, pp. 3 1 2 . I I . See, for example, Edgar Wickberg, 'The Chinese Mestizo in Philippine Hi5tory', journal of Sourheaxl Asian History, 5.1.1964, and Alfred NIc(-Ioy, ' A

Queen Dies Slowly The Rise and Decline of Iloilo City , in Alfred McCoy and Ed .

do Iesus, ed., Philippine Sociuf History : Global Trade and Luca( Transfornzazz'on, Ateneo do Manila University Press, 1982..

Interview' with Maria Y. Perez-Rubio (24 September 1982). 13. Interview with Shuichi Yamashita of Sumitomo Corp. (zo August 1982).

12.

Sumitomo Corp. was supplying hot-rolled coils to International Pipe Industries

around 1970. 14. Mamoru Tsuda, 'Firipin ni okcru Kindaiteki Kogyo no Hatton to Shinko Zaibatsu no Kcisci', in Teiichi Ito, ed., Tonal Ajit: 111' okeru Kogyn Kezle1'5ha no Nisei, Tokyo, Institute of Developing Economies, 1980. 15. Arifin Siregar, 'Indonesian Entrepr