Entering the Philippine market is relatively easy in the beginning. There are many agents and distributors willing to do business with newcomers. Culturally the Philippines is the easiest, most Western-like country in Asia. Moreover, the people have preferences towards Western and Japanese products. Filipinos associate high quality and price, and certain uniqueness with European products. Finland has a neutral image, if any.
The most important thing in selling to the Philippines is to be present. It is absolutely necessary for a company not represented itself in the country to have a local partner, since the business is strongly based on personal relationships that require frequent contacts. Visiting old clients every other year is not sufficient. Besides the footwork, the partner also masters the local habits and is able to deal with the necessary "third party commissions". For a Finn it can be difficult to handle these properly and at the same time penetrate into the social networks.
Experience shows that there is a "grace period" for a newcomer when he is allowed to get acquainted with the locals. If the acceptance of the others is not gained during this time, the community will slowly force the intruder out of the setting.
Agents are widely used among Finnish companies since they offer a low-cost, start-up alternative. Agent commissions in the Philippines are at the normal level, but the agent might have some additional costs related to securing the contract. These "third party commissions" range from a couple of hundred dollars up to tens and hundreds of thousands depending on the size of the deal. It is wise to leave these to the local partner since it is possible to get caught breaking the law. Bribing is usually done with inferiors and seldom with the deciding presidents themselves. It is important to note that in most everyday situations, it is not necessary to take the wallet out of the pocket.
Negotiations with domestic companies can be time consuming and things tend to progress at a slower pace than Finnish companies are used to. Surprises are common as the competitors may have succeeded in achieving the competitive edge with questionable means.
Often the counterparts are influential families with Chinese or Spanish origin. Their decision making is more rapid and the business relations are built on a long term, relationship basis. The name of the family is very important for the future of the business and one has to pay attention to avoid some of the families with bad reputations. There is literature available on this topic. A good family name is the best guarantee for successful cooperation.
Settlement can be made by letters of credit (L/C), documents against payments (D/P), documents against acceptance (D/A), open account (O/A) arrangements, or on a direct remittance basis. Letter of credit (L/C) is the most used payment arrangement (over 60%) among Finnish exporters. Letter of credit is widely accepted and recommended for use to minimize risks.
The Philippines requires a SGS inspection for all imported goods. This preshipment inspection will be undertaken by the local SGS Inspection Services office prior to shipment from the country of the exporter.
SGS inspection includes:
SGS makes recommendation to the Philippine customs concerning the value and tariff classification. The idea is to aid local customs and decrease corruption. The interests of the trading partners are also protected.
As a general rule all goods valued over USD 500 FOB have to be checked. There are exemptions for used or second grade goods, or goods that will be temporarily taken to the Philippines for trade exhibition or maintenance use, but it is still necessary to have proof of their value from the customs of origin.
The Philippine government takes care of all the direct expenses caused by the inspection. Preshipment inspection has to be taken into consideration when making service contracts with Philippine companies. Goods arriving in the country without the inspection are subject to seizure.
The role of the exporter is to contact the local SGS office to schedule the pre-shipment inspection. Some time has to be reserved for this, but there are also fast lanes for emergency situations. Letter of Credit is a good method of payment as its opening automatically triggers the SGS in the exporting country.
For some exporters SGS inspection represents additional bureaucracy and costs. For others, it merely represents increased security with the trading transactions. The government has a contract with SGS until 1998 and there is speculation that it wouldn't be renewed. For example, Indonesia recently stopped requiring SGS inspection from its imports.
The cheapest way of transporting goods between Finland and the Philippines is by sea. There are no direct connections between Europe and the Philippines. The goods will be shipped from Finland through Hamburg and Hong Kong or Singapore to the Philippines in about six weeks. The possible destinations in the Philippines are Manila, Cebu, and in the future, Subic Bay. The freights are cheaper to Asia compared with the freights back to Europe due to the trade imbalance. In general, the shipments cost less to Asia than to North or South America.
Air transport is more expensive. The country offers two alternative international airports, Manila and Cebu. The Ninoy Aquino International Airport in Manila is quite saturated, but a new terminal will be built before the end of the the 1990s. Clark and Davao Airports will gain international status by 1998. Air transport is getting more popular with the new electronics assembly industry needing fast and efficient means of transportation.
The inland transportation system is poor in the Philippines and only 54% of the freight is transported by roads. The road network is poor and rural areas can be hard to reach. Of the total road network only 18% is asphalt or concrete covered and only 64% is suitable for all-weather use. The Metro Manila area suffers from too much road traffic. The railroad system is almost nonexistent and cannot be used for transportation. There are only 840 km of railroads and only 54 out of 850 freight car units are available for daily service. Sea transport is important and is responsible for 46% of inland deliveries. There are close to 100 ports, but only the six biggest account for 80% of commercial use. In general inland transport can be quite expensive compared with international freight.
A key aspect of the government's economic reform program is to liberalize the import control system by gradually opening up the economy to foreign competition. The program calls for a shift away from quantitative restrictions towards a primarily tariff-based import control regime. Further liberalization of import regulations can be anticipated when the authorities bring trade policy into line with the WTO agreement. Around 90% of all product categories are freely importable items, which do not require prior approval from the Central Bank.
Currently, the tariff structure is four-tiered: finished goods produced locally are subject to a 30% tariff rate, those not produced locally, 20%, while intermediate goods and raw materials are subject to 10% and 3% tariffs respectively. However, some 200 strategic products, including tobacco, rice, coconut, sugar, fresh fruits and certain luxury consumer goods remain subject to a 50% tariff rate. Value Added Tax (10%) is further included in the price. Generally, lower tariffs are available for goods covered under multilateral agreements such as WTO, APEC and especially AFTA. AFTA agreement will lower significantly the tariffs in the future, targeting an average of 2.6% by 2003, and the Philippines as a member country offers a strategic entrance to this region.
The dutiable value of imports is based on domestic wholesale price combined with the FOB expenses. This Home Consumption Value (HCV or Fair Market Value) can differ from the actual contract price and can cause problems to companies selling cheaper than for their domestic markets. With the projected ratification of the WTO agreement in July 1996, valuation of imports will be based on Transaction Value (TV) which is the value of the good as reflected in its export receipt.
A local partner can be very useful when dealing with the customs. The recommendations given by the SGS Inspection Services are not binding and it is possible that further difficulties may arise. The local customs is subject to corruption and time needs to be reserved for additional delays.
The exports to the Philippines from Finland outweigh the imports. Besides the traditional food and textile industry products, the Philippines is an interesting source for almost any kind of goods requiring labor-intensive production. The products range from semiconductors, jewelry, handicrafts, clothes, furniture and decorations.
Fairs and other trade shows are an important source of information on the local goods. Buying is not necessarily an easy task since Philippine companies are not very well organized and locating the responsible person may be time-consuming.
A company had just began exporting to the Philippines. They had selected a new agent and immediately sent him full a inventory of their products. This was intended to speed up the start-up of the selling process.
What happened was that the inventory disappeared and the company never heard of its agent anymore. Lesson: Check backgrounds and start carefully with building trust. Also, check that you don't accidentally choose the same agent your competitor is using. This has also happened!
How to Find an Agent
Case: SGS inspection of spare parts
A company had delivered investment goods to the Philippines successfully. However, the buyer/operator of the equipment had trouble in the maintenance. A service contract was made where the foreign company agreed to supply spare spare parts and to be responsible for service.
The machine broke down and the company needed to supply the spare parts from abroad. It took some time, however, since it had not been anticipated that the spare parts would also need to be inspected by SGS prior to shipment.
Case: "Third Party Commissions" in the Customs
A Finnish company was working on a turn key -project in the Philippines. During construction, machinery and materials were to be delivered from Finland. In one case the shipping documents were lost in the customs and the receiver was not allowed to identify the product by visual examination. This led to negotiations, the result of which was that the inspection was allowed after some extra fee was paid to the customs officer. After the payment, the missing documents were immediately found.
Case: In Trouble with the Local Companies
A Finnish agent had an idea to import special Philippine juice to Finland. He contacted a local manufacturer, one of the biggest companies in the Philippines. He wasn't able to locate the person responsible for the exports of these juices within two weeks. The usual problem is that you have to go through a dozen secretaries.
Another time the agent tried to contact a Philippine company by sending a fax. This wasn't easy, because the secretary didn't cooperate and give the fax number of the company without a specific reason.