Report: clustering a powerful solution to productivity, logistics cost challenges

November 02, 2018 News

Developing regional economic clusters leveraged on a province's competitive advantage could create more trade and eventually lead to lower logistics and utilities costs in the Philippines, according to a policy brief sponsored by stakeholders, business groups, and foreign chambers of commerce.

Policy Brief No. 8 titled, "Seaports and Shipping," which was published by the Joint Foreign Chambers of Commerce (JFC) and sponsored by local business and port industry groups, said that "a powerful way to drive productivity is for regional governments to work with their private sectors to promote cluster formation by strengthening and building upon existing or emerging clusters, where competitive advantage and product or service differentiation already exists."

Citing a 1998 Harvard University professor Michael Porter, the policy brief said that clusters, by their nature, support productivity, which when ramped up will determine whether the region will provide the jobs and opportunities needed for their people to prosper.

"Clusters are geographic concentrations of interconnected companies and institutions in a particular field. Clusters encompass an array of linked industries and other entities important to competition. They include, for example, suppliers of specialized inputs such as components, machinery, and services, and providers of specialized infrastructure," Porter explained.

"Clusters also often extend downstream to channels and customers and laterally to manufacturers of complementary products and to companies in industries related by skills, technologies, or common inputs. Finally, many clusters include governmental and other institutions — such as universities, standards-setting agencies, think tanks, vocational training providers, and trade associations — that provide specialized training, education, information, research, and technical support," he added.

Porter noted that Silicon Valley and Hollywood may be the world's best known clusters. The California wine cluster, as another example, includes commercial wineries with a wide ecosystem supporting its needs.

Thai clustering system

Within the Association of Southeast Nations (ASEAN), the report noted that a good example of a country with a highly developed regional cluster system is Thailand. The cabinet and the Thailand Board of Investment proposed the Cluster-based Special Economic Development Zones Policy, which came into effect in 2015 with five clusters. The Thai-government gives industry-specific incentives to each cluster.

The largest of the clusters, the Automotive and Parts cluster, hosts some 4,000 companies, and turns out 2 completed vehicles each year, half of which are exported, making Thailand the 12th largest automotive industry in the world.

The policy brief said each cluster with a clear productivity outcome would also be able to design its infrastructure needs for logistics, including air and seaports in its vicinity.

"The cluster would benefit from economies of scale for costs like shipping, electricity, other utilities, raw materials, and other supply/value chain costs," the policy brief noted.

It added that the cluster would also drive dynamism in innovation and start-ups and provide constant support in meeting evolving market demands. 

Suggested economic clusters

In a presentation during a JFC event last September, A. Magsaysay Inc. president and chief executive officer Doris Magsaysay-Ho also recommended the creation manufacturing and industry clusters in each region to create trade volumes, lower shipping costs, and make the country more competitive.

Recommended regional clusters include Clark-Tarlac-Subic-Pampanga-Zambales, Batangas, Cebu, Coron, Aklan, Davao, Leyte, Sarangani, General Santos, and Phvidec Industrial Estate (PIE) in Cagayan De Oro. 

The Clark-Tarlac-Subic-Pampanga-Zambales region has potential clusters (such as mango production in Zambales) that could be developed into a robust trading hub. This could lead to more frequent ship visits into the area, with some staying for repairs, as Subic can also be a shipbuilding and a ship repair hub. Subic currently has three shipyards. 

Batangas could be zoned into food processing and manufacturing clusters, while Cebu has many opportunities for clusters in the furniture industry. The report noted that the furniture manufacturers that are already spread around the city could be consolidated into a planned area near a new modern port. 

Coron and Aklan can develop tourism clusters aside from local food and fisheries activities. Davao, which is already an important cluster for banana and other agricultural products, can be further expanded and better planned.

PIE, which is operated by the Phividec Industrial Authority, is a large government-owned industrial estate with power plants located within its area. With the rich agricultural province of Bukidnon nearby, PIE can be developed as a food processing and cold chain logistics hub. 

Also, government-owned, the Leyte Industrial Estate has a large land area that can be turned into a coconut cluster, while Sarangani and General Santos with their long coast line can plan a fisheries cluster. 

Setting up infrastructure

Airport, port, and logistics infrastructure in various regional cluster areas should be developed to address the needs of each kind of good and facilitate trade traffic, the report said. 

"Most importantly, the cluster by its nature must aim to scale up, produce larger volumes, attract larger ships, and lower costs to become competitive in global markets," the report added.

In addition, the report suggests that competitive incentives, including fiscal, that will attract domestic and foreign exporters to locate in selected product clusters, should be provided by the government. 

The policy brief was authored by Ho; European Innovation, Technology and Science Centre president and European Chamber of Commerce of the Philippines pioneered by Henry Schumacher; and Arangkada advocacy and research specialist  Bettina Baustista, with Royal Cargo president and CEO Michael Raeuber as technical adviser. A roundtable discussion on clustering was also conducted with different business groups and port industry stakeholders. - Roumina Pablo

This article was originally published in PortCalls Asia last November 2, 2018.