July 3, 2014 12:00 am JST

Call-center clout dialing up prosperity

CLIFF VENZON, Nikkei staff writer

SM is building a megamall in Cebu, which is a center of strong growth.

MANILA -- Lingering optimism in the Philippine government is spilling over into the business sector, prompting plans for investment on a massive scale. And while the country's consumption-driven expansion remains healthy, new pillars of growth are starting to emerge.

     SM group, the nation's biggest conglomerate in terms of market value, leads the retail, real estate, and banking sectors. The group earned 27.5 billion pesos ($628 million) last year, far higher than the 17.4 billion pesos it made five years earlier. Its revenues, meanwhile, ballooned to 253.3 billion pesos from 147.5 billion pesos in 2008 on aggressive expansion.

     SM, the largest retailer in the country, was operating 48 malls in the Philippines last year, up from 33 in 2008. This means the company was building three shopping centers every year, with some cities hosting more than one SM Mall. The group was also operating five malls in China as of the end of 2013.

     On average, around 3.5 million people shop at SM every day, according to company data. But the group still sees room for growth in the domestic market, recently unveiling a five-year plan for its property ventures under SM Prime Holdings. This involves spending 500 billion pesos to double SM Prime's revenues and sustain double-digit profit growth.

     The plan aims to bring the number of malls to 74 in the Philippines alone to nearly double the number of residential units and hotels in the next five years.

     "I am positive that growth in the Philippines will continue," said SM Prime President Hans Sy, son of SM founder Henry Sy, the country's richest man. "I still believe the Philippine market is far from saturated."

Outsourcing growth

SM's businesses are hinged on strong domestic consumption in the Southeast Asian nation of nearly 100 million people. According to government data, consumption alone comprises around three-fourths of the economy.

     This consumption has been driven largely by the money sent home by Filipino expats, which stood at a record $22.8 billion last year. Historically, about 10% of the country's GDP growth has been from workers living overseas sending money back home to their families. But there is a new driver of growth: the flourishing business process outsourcing sector.

     Revenues from overseas remittances are much higher than those generated by the BPO sector, but BPO revenues are rising three times faster and are now at nearly $20 billion a year.

     While BPO services have been around since the 1990s, it was only in the early part of the new millennium that outsourcing opportunities gained ground in the Philippines. The sector is growing rapidly, riding on an outsourcing trend in the U.S. and Europe, where many crisis-hit multinationals are seeking to cut operating costs.

     The Philippines is establishing itself as a major BPO center by offering the same services that made India's outsourcing industry so successful.

     Political stability and fiscal health under the current administration of President Benigno Aquino pushed the bank lending rate to below 6%, less than half the 40-year average. The low capital cost, coupled with a series of incentives, such as tax breaks and duty exemptions on imported equipment, have boosted investment in BPO. There are now hundreds of service providers. As of the end of 2013, around 900,000 young professionals with an average age of 25 were working in BPO companies, according to Gigi Virata, senior executive director of the Information Technology and Business Process Association of the Philippines.

     The Philippines is the world's second-largest BPO services provider after India, Virata said. But with its English-speaking labor force, the country is fast becoming the world's favorite outsourcing destination. Call centers, which make up the biggest part of the BPO industry, employ around 450,000 workers taking calls day and night from around the world. The rest of the sector provides various services, including those related to information technology, engineering, medical transcription and billing.

     The Philippines' BPO industry, which comprises 5% of the country's GDP, has been growing at a pace of 25% over the last seven years, according to Virata. By 2016, it is set to become a $25 billion industry employing 1.3 million people, a tenth of the global BPO market.

     "Every week, or almost every day, we entertain inquiries from clients and those potential locators who want to set up office here," Virata said.

Knock-on effects

The vibrant BPO industry has not only boosted consumption, it has become a key growth driver for the real estate sector.

     Property consultancy firm CBRE said demand for BPO office space is expected to continue fueling real estate growth in the Philippines, as it has for the past several years.

     And as BPO drives the property sector, SM is revolutionizing mall development.

     Moving away from the typical mall design, which focuses mainly on retail shops, the group is now pushing "lifestyle malls," which also include residential units, offices, leisure properties and hotels. The strategy is to bring retail and residential spaces closer to where BPO and other businesses are located, as their workers tend to have higher disposable incomes.

     The SM Mall of Asia Complex in Manila, the first shopping center built under the lifestyle mall format, has been hailed as a success, with 500,000 to 1 million daily visitors and almost all of the condominium units in the area sold out.

     The 67-hectare complex is anchored by a 406,000 gross floor area mall housing 750 shops, with three condominium projects, two office buildings, a convention center and a sports arena also built in the area.

     Following the success of Mall of Asia, SM is replicating that design in the island province of Cebu by investing nearly 50 billion pesos for the 34-hectare SM Seaside City Cebu.

     "The growth of the Visayas region is very, very strong, and Cebu is on the center of that strong growth," said Joy Veloso, vice president of SM's Visayas operations.

     SM Seaside City is less than 5km from another huge SM shopping center in Cebu City.

     Like Mall of Asia in Manila, SM Seaside City will be anchored by a 400,000 gross floor area, six-floor shopping center and supplemented with condominiums, hotels and office spaces.

     "We don't have the space anymore to accommodate the tenants. The demand is there, so we are trying to provide supply," Veloso said.

     "The growth is really right at our doorstep. The growth (that) used to be enjoyed in Metro Manila is now here in Cebu particularly. A lot of the BPO companies are already in Cebu and are expanding in Cebu," she added.

A rising tide

Meanwhile, Ayala group, the Philippines' oldest conglomerate, has also reaped the benefits of the improving economy.

     The group's strategy now is to foray outside its core businesses -- financial services, property development and telecommunications -- and invest heavily in infrastructure. The timing appears just right, as the Philippines is trying to catch up with regional peers.

     Jaime Augusto Zobel de Ayala, the conglomerate's chairman and CEO, said the company was spending at least $800 million up to 2016 to beef up its infrastructure portfolio.

     For this year alone, the company is setting a record capital expenditure budget of 148 billion pesos.

     Ayala has already won two contracts for projects under the government's public-private partnership program, one for an expressway and one for a railway ticketing system. It is set to bag two more: a 65 billion peso railway expansion project and a 35 billion peso tollway construction and operation contract.

     Ayala is also making its way into the power generation business, aiming to build 1,000 megawatts of generating capacity by 2016 amid increasing demand for electricity.

     "The sustained positive momentum in the economy has, to a large extent, helped shape the Ayala group's growth strategy over the past few years," Jaime Augusto Zobel de Ayala said.

     "Our combined group capital spending has expanded aggressively over the past five years amounting to nearly 500 billion pesos, as our core businesses in real estate, banking, telecommunications and water distribution executed aggressive growth strategies to seize investment opportunities in their respective sectors."

     The company targets a profit of 20 billion pesos by 2016 from around 13 billion last year, as it expects business to remain robust.