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Matthews Asia Snapshot

Designed in California, Made in Manila

Week of July 06, 2012

When I saw the hit animation film “The Incredibles” a few years ago, little did I know that some of the animation was done by artists in the Philippines. Pixar, the American film studio that outsourced this work to the Philippines, is just one of many global companies to have taken advantage of the island nation’s thriving business process outsourcing (BPO) industry—contracting out work related to back office operations for cost savings.

The BPO industry began emerging in 2000 and has grown at a rate of 30% over the last decade. While it accounts for only 5% of the Philippines’ gross domestic product, it ranks third in generating foreign exchange for the country, behind only tourism and remittances. It is also a key generator of new jobs in the Philippines, creating work for more than 638,000 employees in 2012. That figure is estimated to grow to 1.3 million by 2016, according to the Business Processing Association of the Philippines. Most of these jobs are currently located in Manila, but an estimated 150,000 jobs are located in other so-called “next wave cities” such as Cebu.

BPO services can be largely categorized into “voice” and “non-voice” services, with “voice” involving customer sales, technical support or other call center work. The animation industry epitomizes the evolution of BPO services in the Philippines, which has moved up the value chain from simpler call center services to increasingly complex work such as medical transcription and accounting. In 2010, the Philippines became the world’s top provider of BPO voice services and ranks second in non-voice services after India. Job attrition rates are generally higher for voice-related services as the work often requires nighttime shifts to serve a global customer base in varying time zones. Attrition falls considerably for non-voice services in which employees can work more typical hours with more career development opportunities as their skills and experience increase. The typical profile of the average BPO employee is a college-educated woman in her mid-20s who generally earns a starting salary of a few hundred dollars a month and receives some health and other benefits.

On a recent trip to the Philippines, I toured one BPO center located in a posh Manila office building attached to a shopping mall that catered to overnight BPO workers with 24-hour services. Security at the office building was tight, assuring a high level of confidentiality since BPO employees may have access to sensitive customer information.

Coincidentally, on my return flight home, the top story on the front page of the local newspaper featured BPO-related news: a major U.S. West Coast bank announced plans to send back office work from California to the Philippines. Global firms will likely continue to be attracted to the Philippines’ large pool of college-educated workers, relatively low costs and multilingual skills.

Teresa Kong, CFA
Portfolio Manager
Matthews International Capital Management, LLC

The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Past performance is no guarantee of future results. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews International Capital Management, LLC (“Matthews Asia”) and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.