Connectivity and economy: How internet connectivity is driving economic growth in the Philippines

No longer known as the 'sick man of Asia', the Philippines has revitalised its economy in the past years, hitting nearly 7 percent growth in the first quarter of this year. The Philippine Statistics Authority (PSA) reported 6.9 percent GDP growth for the Philippines, ahead of China's 6.7 percent during this period. With internet use growing at a rapid rate, more business opportunities are expected to underpin economic growth.

Now the 33rd largest economy in the world, the Philippines, a vast archipelago of more than 7000 islands, has actively connected with the rest of the world, from pre-colonial barter systems, to modern day commerce.

Hover cursor over each region to view the provinces within.

Some of the country's major industries include electronics assembly, petroleum refining, manufacturing and business process outsourcing. In the information-hungry digital era, businesses must evolve to stay connected across the archipelago and the region, or risk being left behind.

Driving PH economic growth: Business process outsourcing and Micro, Small and Medium Enterprises (MSMEs)

One of the industries driving the country's economy is Business Process Outsourcing (BPO). USource Global Services, an outsourcing company based in the Philippines, providing virtual staff and teams for individuals and MSMEs, states that the Philippines has successfully surpassed India as the call center mecca since 2010, an achievement reinforced by bullish growth expectancy.

"""Millions of Filipinos work in the Middle East’s petroleum-exporting nations, but remittances and work has decelerated since the steep decline in fuel prices. Now Filipinos need only upgrade their skills and find work in the local outsourcing sector instead of doing menial labor abroad. US-based and European companies, in the current fluctuating economy, largely outsource to the Philippines to cut costs and remain competitive." -USource Global Services

The BPO industry is expected to generate 1.3 million jobs and achieve an annual growth of 17 percent in 2016, reflecting its stature as one of the country's most dynamic and fastest growing sectors. This continuing success is due to excellent infrastructure, cost competitiveness, adequate government support and the country's educated talent pool. A strong customer service culture is also credited for the success. When it comes to clientele, US-based companies account for 77 percent of the Philippines' BPO export while the remaining 23 percent is attributed to the countries from the Asia-Pacific region.

An Oxford Business Group article on the Philippines' BPO industry highlighted that "having grown at a compound annual growth rate of around 10 percent over the past decade, the BPO sector has become the country's largest source of private employment and the second-largest contributor of foreign exchange earnings after remittances."

The article also states that this industry has fuelled the growth of other sectors in the country. According to Gillian Joyce Virata, a former executive director at the IT and Business Process Association of the Philippines (IBPAP), each new outsourcing job created generates an estimated 2.5 additional jobs in retail, public transportation and other support services. With its significant contribution and multiplier effect, it is befitting to say that the BPO sector is a significant contributor to the well-being of the Philippines.

MSMEs are also strong contributors to the economy

MSMEs are widely regarded as another driving force behind the Philippines economy. Competition in this sector is both healthy and intense, creating jobs and fostering innovation. Businesses have to take advantage of technological advancements to stay relevant, especially when e-commerce is changing the business landscape today.

Jerry Clavesillas, Director of the Department of Trade and Industry's Bureau of Small and Medium Enterprise Development, has stated that the country's MSMEs are expected to achieve higher growth compared to other countries in the ASEAN region for 2016.

The role of MSMEs in boosting the PH economy

Based on 2014 figures provided by the Philippine Statistics Authority (PSA), there are 946,988 establishments in the Philippines. Of these, 99.6 percent are MSMEs while the remaining 0.4 percent are large enterprises. Of the total number of MSMEs, 90.3 percent are micro enterprises, 9.3 percent are small enterprises, and medium enterprises make up the remaining 0.4 percent.

The same report reveals that wholesale and retail trade, repair of motor vehicles and motorcycle industries make up the majority, or 46.4 percent of the MSME industry. The accommodation and food services sector accounts for 13.5 percent followed by manufacturing at 12.5 percent. The government has recognised the value of MSMEs and has encouraged these enterprises to list themselves on the Philippines Stock Exchange (PSE), at a qualifying benchmark of 15 million Philippine pesos ($320,000).

SME Spotlight: Aling Taleng's Halo Halo & 7th Media

Image source: Aling Taleng's Halo Halo Facebook

Being an entrepreneur is an enticing prospect but to be successful requires knowledge of your customers' needs. Filipinos love their food and MSMEs in the food industry have always had a staple presence in the country.

Halo-halo is a popular Filipino dessert and one of the more successful businesses is Aling Taleng's Halo Halo. The stall started out in 1933 operating right in front of the founder's doorstep. Through the years, its unique recipe won over many fans and today the business has expanded into a restaurant that not only serves the iconic dessert but other Filipino-specialty fare as well. It has even taken on to the world wide web with its social media accounts, engaging and expanding its fan base to include those outside of the Philippines.

The business's leap from the streets to the internet is not unique. Rather, it is an essential progression for MSMEs in the Philippines to achieve recognition and more importantly, success. Aling Taleng's Halo-Halo is a real-life illustration of the evolution and changing landscape of marketing and audience out-reach and engagement – from traditional word-of-mouth methodology to more digital forms of communication.

One company that started out utilising digital platforms to great success is 7th Media Digital, a full-service digital development and production company, offering web development and graphic design among its diverse portfolio of services. Its long list of impressive clients includes Fortune 500 companies from across a range of sectors. The company prides itself on providing solutions that European and US companies can bank on to achieve a digital presence in Asia.

These examples emphasize the importance of digital tools and stable connections for MSMEs in the Philippines to achieve success.

Seeing a bright future for e-commerce

The Philippines is the fastest growing smartphone market in the ASEAN region. Smartphone penetration in the Philippines is expected to hit 54 percent this year. In the first quarter of 2016, 3.5 million smartphones were shipped to the Southeast Asian archipelago nation. With increasing smartphone penetration comes a myriad of opportunities for e-commerce retailers. From being known as the texting capital of the world, the Philippines is now an economic well for businesses capitalizing on online opportunities. Online statistics portal Statista estimates 30.3 million users in the country's e-commerce market currently, with this number rising to about 48.8 million by 2021.

Two of the e-commerce standout successes in the Philippines are online retailer giants Lazada and Zalora. When Lazada began operations in the Philippines back in 2012, it faced an insurmountable task. Credit card penetration was below 4 percent and spending power was dismal compared to her Southeast Asian neighbors.

But the country does have a mobile and internet savvy population which Lazada banked on. The calculated risk paid off and today, Lazada Philippines has become one of the top websites in the country, according to SimilarWeb, a website traffic and mobile analytics portal.

"""If you believe that the concept of e-commerce is universal, and not just a western country thing, then the experience of other countries provides a glimpse of what's in store for the country." -Paulo Campos III, Founder and CEO of Zalora Philippines

Modern Filipino digital habits have driven success for Zalora Philippines. With higher digital technology adoption, the online fashion and lifestyle retailer posted double digit growths in 2015 since its launch in 2012.

While traditional retail remains a competitor, according to Statista, an online statistics portal, the number of e-commerce users in the Philippines is expected to reach the 46.1 million mark with an annual revenue growth expectancy of 20.67 percent till 2020.

The country's e-commerce market is evidently teeming with opportunities for retailers, and to this end, businesses are adopting technologies to help them connect to customers better, as well as keep up with the competition.

The credit card conundrum and mobile wallet solution

For a populous country such as the Philippines, the Credit Card Association of the Philippines reported that there were only 6.9 million credit cards circulated in 2015. This explains why e-commerce retail sales account for only 1 percent of the total same sector sales in the country.

Lack of trust is often cited as one of the main reasons. According to Inanc Balci, co-founder and chief executive officer of Lazada Philippines, even those with credit cards prefer the cash-on-delivery option (COD) when it comes to online purchases. This is substantiated by the fact that most of Lazada's transactions are COD. With the expected rise of e-commerce users, a wide window of opportunity opens for the mobile payment segment.

Increasing smartphone penetration in the Philippines has paved the way for mobile payment services such as GCash, developed by Globe Telecom. GCash allows individuals to make online payments without the need for a credit card and has become the most subscribed platform for e-commerce merchants and retailers in their bid to reach out to more customers. With GCash, the mobile phone is turned into a virtual wallet, enabling customers to experience safe and convenient money transactions at the speed and cost of an SMS.

Creating e-commerce platforms for budding entrepreneurs and MSMEs

Networking in office

Besides the lack of credit card ownership and usage in the country, entrepreneurs and MSMEs face another issue in the e-commerce world: Limited Operational Funds.

There are a growing number of aspiring entrepreneurs who maximize various free platforms to showcase their products. However, free does not necessarily translate to easy, as it can prove more time-consuming to manage operations from these sites, while juggling day jobs.

Globe myBusiness, the SME arm of Globe Telecom, wants to provide a simple and fuss free solution for every Filipino entrepreneur to own an e-commerce platform to showcase their brand.

In 2015, Globe forged a partnership with Shopify, an e-commerce software for online stores and retail point-of-sale systems. Shopify is a cloud-based, multichannel commerce platform designed for MSMEs. Merchants can use it to set-up and manage their stores across multiple online and offline sales channels.

"""Being with entrepreneurs every step of the way has always been part of our mission at Globe myBusiness. The looming digital age requires us to offer innovative business solutions to SMEs so that we can help them run their operations smoothly and more efficiently. With Shopify, we continue to make our customers’ digital journey easier with an e-commerce platform complete with end-to-end operations support and accessible payment gateway, logistics, advertising and marketing services. We are excited to be partnering with Shopify to shape and redefine the future of retail in the Philippines." -Martha Sazon, Senior Vice President for Globe myBusiness

Shopify makes it easy for anyone to build and manage their online store by providing analytics, customer data and design features. Online sellers can now have an accessible and affordable portfolio of solutions that lets them reach more customers at a very affordable monthly price.

Connectivity is key to MSMEs and the BPO industry

The improved quality and efficiency of telecommunication infrastructure in the Philippines as a result of the sector's liberalization in the early 1990s has encouraged greater competition. This has been cited as a crucial factor for the success of the BPO industry in a study by the World Bank. Improved connectivity is also behind the successes of MSMEs. But the work is far from over.

An increased demand for digital connectivity calls for continuous improvement to infrastructure. With faster and more reliable internet, MSMEs and BPO companies will be able to operate more efficiently, generate more income and embark on expansion plans; all of which can only mean sunnier days for the Philippines economy.

Leading the drive for a digital nation

Connectivity is crucial for businesses to stay connected with customers and ahead of the competition. Globe Telecom, a major provider of telecommunications services in the Philippines, has embarked on a nationwide infrastructure program to enhance the country's internet experience for homes and businesses.

Since 2015, Globe information and communication technology (ICT) arm, Globe Business, has been serving top IT-BPO companies in the Philippines. Seven of these IT-BPO companies were in the list of top 10 earners by revenue. In addition, Globe Business recorded an 81 percent penetration of IT-BPO companies with its roster of business products and solutions.

As a driver of better and faster internet experience in the Philippines, Globe has called on the government to help develop broadband services by investing in internet infrastructure in rural and far-flung areas, so as to achieve the country's economic development goals and social inclusion among all communities.

According to Globe President & CEO Ernest Cu, broadband development is particularly relevant in communities where even basic infrastructure services such as roads and bridges are lacking. "Studies and experience have shown that broadband access creates significant impact on the development of marginal areas as this allows the community to conduct business with people all over the world, get information on education, health and government services," said Cu.

Telecommunication operators like Globe, however, are unable to deploy infrastructure in rural areas due to business viability issues. "There are a lot of localities in the country that cannot be reached economically. What we propose is for the government to build the infrastructure, such as submarine cables, and then rent these facilities out to telco operators," he said.

Globe plans to allocate the bulk of the $750 million capital expenditure that it has set aside for the year to deploy fiber optic cables in 20,000 barangays, or Filipino districts, across the country. About 2 million homes nationwide are expected to benefit from faster and more reliable internet access with this infrastructure. The project is estimated to take 5 years and will extend network coverage to areas that currently have spotty service or no connection at all. Investments relating to its fiber deployment alone could reach up to $2 billion within the five-year period.

Globe has also rolled out its Wireline Data Network Expansion and Modernization initiative for corporate customers. The five-year investment project amounting to $495 million will utilize the Software Defined Network (SDN) which enables clients and partners to adjust their bandwidth requirements through a portal. Network Function Virtualization (NFV), a new technology, will be utilized as part of this initiative. NFV eliminates the need for hardware and routers. Firewalls, load balancers and other network functions will run on Cloud. For businesses, this means saving on costs, flexibility in product development and better user experience.

Globe Business' Nationwide Wireline Data Network Expansion and Modernization will increase resiliency and reliability of business and enterprise connections particularly for BPO firms and MSMEs, as they expand operations to create jobs outside of the nation's capital region.

Embracing the future of MSMEs and enterprises in the Philippines

The dependence on digital tools is a global phenomenon that will probably never see its sunset, particularly for businesses. The availability of such tools has made it easier for anyone to realize their entrepreneurial aspirations. Millennials are stepping up to the plate and starting businesses from their own backyards and this trend is set to rise. More women are launching and operating enterprises, something which was never thought possible decades ago.

These and other trends are changing the way we live. Everyday consumer activities such as shopping, commuting, watching movies, listening to music, and ordering take-out food will one day take place solely online. It is critical that businesses in the Philippines stay abreast of developing technologies and trends.

For Globe, stable connectivity remains key in achieving and sustaining a prosperous nation as it provides a myriad of opportunities for large corporations and MSMEs to expand and reach out to global markets, and adapt to trends where necessary, to thrive and flourish. With its newly-minted vision of seeing a Philippines where families' dreams come true, businesses flourish, and the nation is admired, together with a renewed mission of creating wonderful experiences for people, giving them the luxury of choice, the tools to overcome challenges, and freedom to discover new ways to enjoy life, as well as the telco's new purpose of treating people right to create a Globe of good in everything that it does, Globe remains a partner to every Filipino business in its journey to success.

Discover more:

This page was paid for by GLOBE TELECOM. The editorial staff of CNBC had no role in the creation of this page.