Why I chose to base my company in the Philippines, and not in Singapore or Hong Kong

"Incorporation, plenty of local talents, great place for low burn rate, high income tax but offset by low salaries, opportunities everywhere, relatively low competition, and an inexpensive and exciting place to live" Mr. Mario Berta's, Founder and CEO of Flyspaces, points why he chose the Philippines to base his company.

I’ve lost count of the number of times I’ve been asked “Why the Philippines?” especially by big regional companies that notoriously pick either Singapore or Hong Kong to base their headquarters. It was always somewhat a hard sell when I explained to potential investors why I decided to base my company, FlySpaces, in Manila.

By working at Rocket Internet for nearly three years, I received the great opportunity to build companies in Southeast Asia. The region has magnificent and fascinating diversity and various entry barriers, regardless of the industry.

In this article, I will share why I chose to build a company in the Philippines. I will also share some tips on how you can do it yourself.

 

First things first: Incorporation

The Philippines unfortunately does not score very high in ease of doing business. Based on The World Bank’s data, it received a score of 99 (a score of 1 means the country has the most business-friendly regulations), lagging far behind the world’s leading countries like Hong Kong and Singapore, which received a score of 4 and 2, respectively.

Nonetheless, doing business in the country is easier compared to its neighbors like Indonesia. In Indonesia, it can take you two months to have all the paperwork in place, assuming that you are not operating in a restrictive industry (ex. banking), which may require more approvals. In the Philippines, you can be done with the paperwork in less than a month.

The easiest thing I found is to get a law firm that specializes in incorporating foreign-owned entities. These firms are generally a one-stop shop. They also process visas for foreign workers and take care of other administrative matters. Hiring a local law firm will also help you ensure that you avoid any confusions with specific local government policies.

The Philippines, like other SEA countries, has various foreign ownership restrictions. But if you want to incorporate an ecommerce or B2B business, there are no restrictions. Back to Indonesia, it recently set a 49 percent cap on foreign ownership of small ecommerce businesses despite the government’s initial statement of opening up the sector 100 percent.

It is also much easier to get immigration visas in the Philippines for foreign workers compared to Singapore. In an attempt to ensure companies have a Singaporean core, the city-state has gradually made it more expensive and tedious to bring in foreign workers. They also began raising the required salaries for foreign workers to further tempt companies to hire locally, as they found 40 percent of the workforce is made up of foreign workers. But with minimum salary requirements relatively low (approximately US$1,000 per employee), it is easy to access foreign talent in the Philippines.

Capital requirements again vary by industry and if foreign ownership restrictions are applied, you can register 100 percent of foreign entities with just US$177,000 for most tech companies. This capital can then be used as working capital for the company. This avoids it being frozen or stuck in a government bank account.

 

Local talent is the key to succeed

It is well-known that Filipinos are by far the best English speakers in Asia. With a high literacy rate of 95.9 percent, the country has one of the most competitive workforces in SEA. In general, the best talent have studied in reputable schools and are fully bilingual. This reduces any lost-in-translation scenarios while hiring and training local staff. Filipinos are also extremely creative and social people, so they excel in skills like sales, marketing, and customer service.

Linked to this is the unique office culture in the Philippines, where Filipino values of friendliness and hospitality are evident. This means that on top of salary, employees look for a certain work culture that promotes not only hard work but also close relationships. I found that food is the universal unifier in the country. In fact, it is often the key to a successful meeting. And in the office, it is quite common to see potlucks or cakes brought in to celebrate birthdays or promotions of co-workers.

The big flow of talent in and out of the BPO industry helps to make Filipinos great at learning new processes, but it does not necessarily encourage the development of new talent and problem-solving skills. These skills, along with others, can be learned in many high-growth Filipino startups. Overall, Filipinos exhibit a thirst for knowledge and learning that I have not witnessed anywhere else in the world. With the right guidance and training, you can create a high-performing and effective team with them.

The challenge I found with hiring local talent is competition. Large Filipino companies can afford to pay them more than a young company can offer. They give them more holidays and other perks and benefits like life insurance. Although the landscape is rapidly changing, the local talent still prefer to work for more established companies, as they have the impression that large companies are more stable and have less risk.

Linked to this is a general brain drain. Many of the best local talent end up leaving the Philippines, thinking that there are better career opportunities abroad. But here’s my trick: I built my team from people I already knew and had working relationships with. From there, we’ve been able to grow our team by attracting like-minded, high-energy people.

 

Great place for low burn rate

With 11 people working out of our Manila office (three of them are expats), our total burn rate on salaries is approximately US$15,000 a month. You can understand that when running a business in English with this total salary expenditure, you can keep your burn rate lower than in cities like Singapore.

The only expensive item compared with other SEA countries is internet, which is extremely slow and costly. The global average broadband speed is 6.1 Mbps. But the Philippines only averages at 4.3 Mbps. Singapore’s average is 17.2 Mbps. Moreover, one of the major broadband providers in the Philippines offers 100 Mbps for almost US$50, whereas in Singapore a 1 Gbps plan costs only US$36. So, in the Philippines, you get less for more.

 

High income tax but offset by low salaries

The taxation on payroll averages around 30 percent. So, if you pay US$700 net, your total cost would be US$1,000 gross. But it can reach 32 percent, depending on an individual’s net income. Likewise, corporate tax stands at 30 percent.

In Singapore, individuals are similarly taxed at a progressive rate. However, this only reaches 22 percent, with corporate tax fixed at only 17 percent. The high taxes in the Philippines are due to various agencies that are involved in the process (especially the local government and the Department of Labor and Employment).

Nonetheless, the high taxes are offset by the lower principal on salaries as mentioned earlier.

 

Opportunities everywhere

Even though the Philippines was once labeled the “sick man of Asia,” it has experienced unparalleled growth in the last seven years. It has become the fastest growing economy in the region, surpassing China with a GDP growth of 6.9 percent in 2016. IMF has predicted this growth to continue.

Combined with a median age of 23.4 and over 1 million babies born every year (not necessarily a good thing for the GDP per capita), the Philippines is seen to be among the top 10 biggest economies in the next decade. Consequently, there are opportunities everywhere: F&B, transportation, real estate, tourism, services, consumer goods, and so on.

The region is still young in terms of the ecommerce market, with only 1 percent of total retail gross merchandise volume generated online. However, it is predicted to grow by leaps and bounds. By 2025, the Southeast Asian ecommerce market will be worth US$238 billion. And more specifically, the e-market in the Philippines is predicted to reach US$19 billion.

Going hand in hand with this is the startup roadmap introduced in 2015, which aims to create 500 startups with a total funding of US$200 million by 2020. Even if to date, there have been issues with the implementation of this roadmap, it forecasts a promising attitude from the government in relation to the startup industry in the Philippines.

The other opportunity is that even though many Filipinos are already shopping online and are familiar with ecommerce, they are currently only engaging with foreign companies due to a lack of local options. So, there is an opening for local companies to fill the gap. A study by Google and Temask on the status of ecommerce in Southeast Asia predicts that the Philippines will experience a 10-year compound annual growth rate of 34 percent.

With current internet users estimated at 60 percent of the population, combined with the growth of the economy and the relatively low market saturation, it’s the perfect time to set up an ecommerce business.

 

Relatively low competition

As opposed to businesses involved in communications or job hunting, the Philippine startup scene for online marketplaces is still in its infancy.

But the country is starting to see more and more tech startups emerging, and due to the relatively low market saturation, each of these businesses have found their own gap in the market to fill. For instance, ZipMatch is an online real estate matching platform that aims to make it easier for people to find their dream homes. First Circle is another tech startup that emerged recently, providing short-term working capital for SMEs. Similar to this is Acudeen Technologies Inc., a P2P marketplace that offers discounted receivables to SMEs to ease cash flow problems.

All of these tech companies have achieved market leadership positions in their respective industries because they have tapped into a specific gap without stepping others’ toes. This has also made it possible for me and some of the other tech founders in the Philippines to meet up for dinner at least every quarter to catch up with each other.

 

An inexpensive and exciting place to live

As a foreign founder, you need to keep not only your company but also your personal burn rate low, especially in the early stages. Manila is similar in price to cities like Bangkok and Jakarta, where rent for a one-bedroom apartment in a nice area starts at around US$600 per month. In Singapore, you can expect to pay a minimum of US$2,000 per month.

Even though Manila has been labeled as a concrete jungle, polluted and with heavy traffic, I personally love the vibrancy of the city and found that it is more similar to Jakarta than Bangkok.

The country is praised for its hospitality, making it easy for people from all backgrounds to feel at home. In my observation, Filipinos greet everyone with warmth, making everyone feel like they are a part of the barkada (a group of friends). Filipinos also love karaokes. The nightlife is always fun. The Philippines is also home to some of the world’s best islands and surfing destinations, which are all just a short and cheap flight away. There are also options for quick weekend adventures.

These are just a handful of examples the Philippines has to offer, which, in addition to its affordability, makes it the best place to live and work in my opinion. HSBC’s Expat Explorer Survey in 2016 revealed that the country is the number one place for expats to have an active social life.

 

Conclusion

I am a big fan of the Philippines. It is my home and the center of my economic activities. It does have many challenges in various aspects, but the net result is it is an amazing place to live, work, and play!

The market for tech entrepreneurship still has a long way to go but it is a great time to get in. Filipino conglomerates are making major investments in younger companies. I believe that more and more conglomerates will look into this space now for investment and acquisition.

Finally, if you manage to get your team right (which is the hardest part), the opportunities will be endless.

 

Converted from Philippine peso. US$1 = PHP 50.57.

Converted from Singapore dollar. US$1 = SGD 1.36.

 

Source: https://www.techinasia.com/talk/why-i-chose-philippines

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