Philippines Destined to be Asia’s Next Tech Tiger?

June 9, 2014 Posted by ASEAN Briefing Reading Time: 5 minutes

By Merel van Steen

The Philippines may have the fastest-growing economy in Southeast Asia, but it also has the slowest internet speed in the region. Despite this, some foreign investors believe they may have spotted an opportunity that could turn the country into Asia’s next tech tiger.

The Philippines is quickly becoming one of the hottest e-commerce markets in the ASEAN region. The country stands out from other ASEAN countries for having the fastest growing Internet population in the world, with 531 percent growth over the last five years.

The total number of internet users in the Philippines, an estimated 37 million people, makes the country the single-largest English-language online market in Southeast Asia. This alone is a critical advantage for foreign online retailers: companies entering the market have significantly less work to do in adapting their sites to the local language, culture and market.

Amazon.com, for example, ranks among the top 20 most visited sites among Filipinos, despite having no local presence in the country.

Filipinos are also the biggest users of social media worldwide, and the most common activities completed on smartphones in the country include posting frequent status updates and checking news feeds.

Several key characteristics of the Filipino economy present an especially lucrative market for online sales. Recent figures indicate that over 70 percent of the Philippines’ GDP comes from consumption. This is in stark contrast to the export-driven economies seen in much of Asia. The Philippines also performs considerably well in terms of logistics, where foreign companies such as FedEx and DHL have consistently lowered prices while streamlining the delivery of consumer goods.

Considerations such as these should play a central role in any foreign investors’ strategic plan, and ultimate decision, to enter into the country’s e-commerce market.

On paper, the Philippines has all the key ingredients necessary to transform the country into an emerging tech tiger: a fast-growing middle class with money to spend, low labor and operating costs, and a 100-million strong, largely English speaking, population addicted to social media.

Internet Speed

In practice, however, there are a number of key problems that must be addressed before the Philippines’ e-commerce market can reach its full potential.

According to recent estimates, the Philippines has the slowest internet speed in the entire ASEAN region, with a mere 3.6 Mbps. This is far below the regional average of 12.4 Mbps and the global average of 17.7 Mbps. These slow internet speeds, combined with patchy mobile coverage, have led to frustration among smartphone and computer users alike.

In response to these concerns, Smart Communications, a wholly owned mobile phone and Internet service subsidiary of the Philippine Long Distance Telephone Company (PLDT), has begun increasing 4G coverage throughout the country, with a target of providing internet speeds of 7.2 Mpbs in all towns and cities by the end of the year, according to their head of public affairs, Mon Isberto.

In a hearing of the Senate Committee on Trade, Commerce and Entrepreneurship, Senator Loren Legarda also expressed a common concern about the unreliable and expensive Internet in the country.

The committee, which began investigating the country’s slow internet speeds following a resolution filed by Senator Bam Aquino, aims to analyze the impact of lagging internet network development on doing business in the Philippines.

Payment Systems

Low banking and credit card penetration in the Philippines has been a factor hindering the growth of e-commerce in the country, with the most used form of payment being cash-on-delivery.

Lack of trust from Filipinos in the IT and banking infrastructure makes for low levels of trust and confidence in paying online. Additionally, buyers feel the need to ensure quality by physical inspection and like the comfort of dealing with known vendors. This is only gradually improving with the spread of ATM machines, direct debit and prepaid cards options. These options will help move more of the market away from individual buyer-to-seller sales and toward larger centralized retailers.

With only a mere 27 percent banking penetration and two percent credit card penetration, entrepreneurs have had to get creative to take advantage of the country’s online tech market. For example, Norris Jay Perez, creator of Apptivate, built a platform that allows smartphone users without credit cards to buy apps online. Currently, only 3 percent of online consumers use his application in the country, but he believes he is tapping into a large market with plenty of room for growth. However, spotty mobile coverage and slow Internet speeds are hindering adoption, according to Mr. Perez.

Coins.ph is another platform that provides financial services for people without bank accounts. Ron Hose, owner of the company, says that while each country is unique, there are big fundamental problems that are common across emerging markets, such as lack of access to education or the fact that people do not have bank accounts.

“If you solve one of these needs, then the market is larger than any one of these countries. If you can solve banking for people in the Philippines, you can solve it for 500 million people in Southeast Asia,” he says.

While he believes the lack of good Internet will slow down economic growth in the Philippines, he says it is not going to slow down tech entrepreneurs. E-commerce is still a small part of the country’s economy, but it is growing in leaps and bounds and is the perfect sector for entrepreneurs willing to build not just a business, but also an industry from the ground up.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email philippines@dezshira.com or visit www.dezshira.com.

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