Economies of Scale: the case for ASEAN Regional Cooperation

Title

Creator

Patolot, Miguel Z.

Language

English

Source

Business Day Special Report March 27, 1974

Year

1974

Rights

In Copyright - Educational Use Permitted

Fulltext

Page 4 Business Day March 27, 1974 Economies of_ Scale THE CASE FOR ASEAN REGIONAL COOPERATION By MIGUEL Z. PATOLOT VS $ millions at 1967 prices Estimates of production and apparent consumption of certain manufactures, 1967 Gross value of production (1) Exports (2) Imports of manufactures Import shares in total sales (%) (4) + (5) (6) (7) Domestic sales (1) - (2) (3) finished (4) intermediate products (5) Total sales of finished products (3) + (4) (6) Textiles Indonesia 119-7 0-5 119-2 881 10-8 207-3 47-8 Malaysia 16-7 4-8 11-9 38-2 4-9 501 861 Philippines 195-3 4-4 190-9 27-0 10-2 217-9 17-1 Singapore 2-7 4-3 -1-6 76-7 15-3 75-1 122-5 Thailand 151-2 5-1 146-1 750 13-6 221-1 40-3 ASEAN .. 485-6 191 466-5 305-0 54-8 771-5 46-6 Chemicals and chemical products Indonesia 69-3 36-5 32-8 24-9 30-7 57-7 96-4 Malaysia ............................ 126-8 59-3 67-5 47-6 28-9 115-1 66-5 Philippines ............................ 395-9 64-0 331-9 65-5 57-5 397-4 31-0 Singapore ............................ 38-1 19-0 19-1 47-7 16-3 66-8 95-8 Thailand ............................ 104-7 1-2 103-5 77-6 44-2 181-1 67-3 ASEAN............................ 734-8 180-0 554-8 263-3 177-6 818-1 53-9 Machinery, except electrical Indonesia ............................ 8-3 8-3 760 — 84-3 90-2 Malaysia ............................ 12-6 1-4 11-2 73-3 — 84-5 86-7 PhilippHes.......................... 22-8 01 22-7 262-7 — 285-4 92-0 c ’ 11-9 1-0 10-9 47-0 — 57-9 81-2 Tl-0 188 2 88-8 ‘ ^76-7 ; 1 Elect, icai machinery arid and supplies Indonesia .......................... 3-5 0-4 3-1 46-9 — 50-0 93-8 Malaysia ............................ 13-7 2-8 10-9 48-8 — 59-7 81-7 Philippines 78-0 — 78-0 59-3 — 137-3 43-2 Singapore 14-3 5-7 8-6 580 —» 66-6 87-1 Thailand ............................ 19-9 0-4 19-5 69-6 — 89-1 78-1 ASEAN .. -.. 129-4 9-3 120-1 282-6 — 402-7 70-2 Transport equipment Indonesia^ 22-0 0-5 21-5 55-2 8-5 76-7 83-1 Malaysia 25-0 0-2 24-8 47-1 21-9 71-9 96-0 Philippines ............................ 108-9 0-6 108-3 128-4 34-5 236-7 68-8 Singapore ............................ 31-4 120 19-4 17-4 15-6 36-8 89-7 Thailand ............................ 120-8 0-1 120-7 119-8 21-6 240-5 58-8 ASEAN............................ 308-1 13-4 294-7 367-9 102-1 662-6 70-9 DELGADO DROTHERS HOTEL CORPORATION a BO I-registered service exporter The Progressive Car Manufacturing Program Is only gng of the basic approaches towards the realization of an ASEAN industrial complement ation program. Other regional orient ed projects being deve loped by the Board under a local content formula are: appliances and apparatus, including tel ecommunications, rubber products, phar maceuticals, electric power generating and distributing equipment, qhemicals and petro chemicals, agricultural machinery, building materials, processed foodstuffs and dry cell batteries. The Board is current ly working on a Prog ressive Truck Manu facturing Program and a Progressive Electronic Manufacturing Program. Last year, the Board also launched the Progressive Motorcycle Manu facturing Program. All these three prog rams have their res pective regional linkages. The Board is working on the assumption that each of the other countries will contribute their share in setting up facil ities for the complete manufacture of trucks, motorcycles, r.nd elecEconomic se- se "It makes economic sense to establish within the region various indus trial plants which would be economically sized and internationally com petitive,” BO I Chairman Vicente T. Paterno said. If each of these plants were to serve the market requirements of two or more countries of the region, produc tion costs could be reasonably in line with international prices, in contrast to a plant which, even if serving the requirements of the largest of the individual markets, would have internationally uncom petitive costs of pro duction, Paterno pointed out. "There are enough items mentioned in the United Nations report (on the areas for eco nomic cooperation among the ASEAN countries) to form a regional shopping list of package deal projects," the BO I chairman said. These are: fertilizers, both nitrogenous and phosphatic; carbon black; caprolactam; DMT; ethylene glycol; soda ash; sheet glass, newsprint; sealed refri geration compressors; steel; small engines; and typewriters. Soda ash plant To underline the benefits that may be derived from this region ally cooperative form of industrialization, Paterno described how a region ally based soda ash plant can be worked out in order that Southeast Asia can be self-suffi cient in glass items: "The raw materials for soda ash manufac ture are principally salt and limestone. All of thSoutheast Asian coun tries have salt making capabilities and limes tone fa found in every one of the countries The process of mak;i ig soda ash is classic, was already essentia described in the text books of my elementary chemistry classes, which I attended in the late 1930's. "Since the raw mate rials are or could be available in every one of the countries in South east Asia, and the pro cess of manufacture is standard, why does no soda ash plant exist in the region? "The answer is found in the comparison of consumption in each of (Continued on page 6) 4th Floor, Manila Hilton Hotel Tels. 49-93-22 or U.N. Avenue cor. Orosa St. 40-60-11 loc 202 Ermita, Manila 203 US$MHIion at 1970 pricey ECONOMIES OF CAPITAL COST, RESULTING FROM REGIONAL PROJECTS Capital cost of regional 1980 Capital cost Capital cost group of na tional plants with same capacity in in 1980 Capital cost of regional project as percentage of cost of group of national projects with equal capaci ty % Nitrogenous fertilizers 220.0 245.2 Phosphatic fertilizers 22.9 30.0 76.3 Carbon black 10.2 19.3 52.9 Caprolactam 36.3 '53.2 68.2 D.M.T. 40.9 64.0 64.2 Ethyelne g\l Ethylene glycol 14.6 21.1 69.2 Soda ash 39.0 70.3 52.7 Sheet glass (a) 11.7 20.8 56.2 Newsprint (b) 142.7 200.2 71.3 Sealed Compressors 11.0 12.8 85.9 Small engines 13.9 21.9 63.5 Samll engines 13.9 21.9 Typewriters 22.0 34.8 63.2 Steel 135.4 170.6 80.0 Total 720.6 964.2 74.7 Page 6 March 27, 1974 Complementation more economical (Continued from page 4) the countries, compared with the annual output of a plant of minimum efficient size, as given in the UN study. The largest consumption of soda ash of any ASEAN country in 1970 was 44,000 tons and in 1980 would be 104,000 tons, whereas a plant of mini mum efficient size was estimated at 360,000 tons per year. On the other hand, total ASEAN consumption of soda ash in 1970 was 116,000 tons, estimated Because we care for your healthwe invested an additional P12 million to expand our facilities. With the completion of our P12 million expansion program, we have one of the most modern manufacturing facilities for the production of intravenous fluids and other pharmaceutical specialties in all Asia. The fact is, with our new and modern equipment, 95% of all Abbott medicines we market here will now be produced locally - assuring their easy availability at a much broader scale and at prices well within the reach of all. And just as we pioneered in the manufacture of I. V. fluids (we still are its main source in the Philippines), our enlarged laboratories will be pioneering in the production of new and better pharmaceuticals to protect and preserve your health better. True to our corporate slogan, "Health Care World Wide”, all the pharmaceutical specialties we make meet the highest standards of quality established for all of Abbott’s laboratories anywhere in the world. We have kept our commitments to you and all Filipinos by our expansion program. This, too reaffirms our faith in the economic stability and continuing development of our country. We look forward to serving a healthier Philippines. ABBOTT LABORATORIES (Philippines) 102 E. De los Santoe Ave., Mandaluyong, Rizal to rise to 310,000 tons by 1980, so that by 1982 total ASEAN con sumption would more than absorb the full out put of an economic sized plant in the region. "Such a regional plant would be able to produce soda ash under 1970 conditions at an estimated price providing an acceptable rate of return of capital of $50 per ton compared to a world price then of $56.50, CIF ASEAN port (also at 1970 freight rates). Delivered price to the other coun tries of the region would be higher to the extent of the freight cost from the plant to the other countries. Such a region al plant would have a capital cost of $39 mil lion, compared with an aggregate cost of $70 million if each of the countries were to build plants sized to the con sumption of their indi vidual markets. Each of the country plants would have a unit cost of production substan tially higher than that of the regional plant. The UN study estimates that the average unit cost of production in the coun try plants would be 65 per cent higher than the unit cost of production in the regional plant. "I believe that if this study were to be con ducted under 1973 con ditions, the economics of the . regional plants would be even more at tractive. Costs of manu facture of soda ash are even higher now in the industrial countries due in part to the much tighter standards being imposed on pollution and the consequently higher costs of manu facturing due to pollu tion control. Freights have also risen very subs tantially from the deve loped countries to Southeast Asia." UN view The BOI argument supports the UN view that Southeast Asia should, through various cooperative agreements, attempt to be self-suffi cient in major import items which it is in the best position to produce. The bulk of manu factures required by Southeast Asia continue to be imported and paid for in primary products. For chemicals and chem ical products alone, the Philippine dependence on imports of theseitems is as much as 6C per cent. Spiralling prices of semi-manufactures and capital equipments have recently created pressure** on the ASEAN countrie to produce more fo exports. So far, thi foreign exchange earn ings of Malaysia, the Philippines, Thailand, Singapore and Indonesi continue to depend on a relatively small number' of commodities. For instance, a UN^ survey noted that Indo-" nesia, Malaysia and Thai land each depend for substantially more than" half their export income on their three largest exports. The level of im ports that can be fin" anced will depend upon the extent of success iff developing new sourcesof, export earnings in the form of other primary products, of semi-manu factures and of finished manufacturers. Mote awareness This situation haf created further aware nesi* wfef the necessity F emblarking on an indu trial complementatio plan that will lessen th. impact of world prices on the already high in flation rate in the re gion. Chairman Paterno said that complement5 arity agreements are alsc another avenue for r( gional industrialization.’ "By complementarity, we mean the exchange of industrial products or components thereof among the different countries of the region;’ generally in the same industry sector," he said’ Paterno said that an example of complement arity can be found in the automotive industry.4 "Proposals have been presented to Malaysia Philippines and Thailand for the manufacture of various components of< automotive rear axles in each of the countries," he added. These components would be exchanged among the countries and the complete rear axles would be assembled from these components in each of the countries.^ "Thus the component manufactured in each country would be pro duced in a volume equal to the demand for rear axles in all the three countries, and each com ponent manufacturing* facility would enjoy advantages of scale greater than if sized for the individual market alone," he said.

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