SMEs and e-COMMERCE In Three Philippine Cities

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.......................................................... 18 1. Industry/Sectoral Classification Across Cities............................................ 18 2. Specific Business Categories Across Cities.............................................. 20 3. Business History and Trends: Highlights................................................... 23 Drivers of Change in Business Focus............................................... 23 Business Performance Since the 1997 Economic Crisis.................... 23 Strategies for Business Growth........................................................ 23 Export Trends................................................................................. 24 4. S-W-O-T Analysis................................................................................... 26 a) Internal Factors........................................................................... 26 a.1) Main strengths of business vs. competitors............................ 26 a.2) Main weaknesses of business vs. competitors........................ 26 b) External Factors: Main business obstacles and threats.................. 27 B. Business Size ................................................................................................ 27 1. Employment........................................................................................... 27 SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 2 2. Asset Size.............................................................................................. 28 3. Capitalization.......................................................................................... 28 C. ICT Infrastructure Use .................................................................................... 28 1. Telephone Use.................................................................................... 28 2. Facsimile Use...................................................................................... 28 3. Mobile Phone/Cell Phone Use.............................................................. 28 4. Use of Short Messaging System (SMS)................................................. 28 5. Use of Other Electronic Handheld Devices............................................ 28 6. PC Use............................................................................................... 29 D. SME Perception on the Importance of the Internet and E-Commerce to Business .................................................................. 30 E. SMEs' Perceived Barriers to Increased ICT Usage...........................................32 1. External Barriers.................................................................................. 32 2. Internal Barriers................................................................................... 32 IV. Overview on Internet Use: Patterns and Trends...............................................33 A. Number of Years of Internet Use ....................................................................33 B. Place of Use and Acces..................................................................................33 C. Extent of Internet Access................................................................................34 General Internet Usage ...............................................................................34 Extent of PCs Connected to the Internet .......................................................35 Extent of Employee Access to the Internet ....................................................36 D. Type of Internet Connection............................................................................37 E. Internet Speed Evaluation...............................................................................38 F. Use of Internet Service Providers (ISPs)..........................................................38 1. Number of ISPs Used ..............................................................................38 2. Reasons for Choosing an ISP ..................................................................38 3. Evaluation of Current ISP .........................................................................39 G. Driving Factors and Perceived Benefits of Internet Use and Its Applications.......39 V. Internet Applications: Patterns and Trends......................................................40 A. Communication..............................................................................................40 1. Frequency of Use and Purpose of Use..................................................... 40 2. Average E-mail Time............................................................................... 43 3. Importance Rating of E-mail in Business................................................... 43 B. Research/Information Search..........................................................................44 C. Downloading Software/Documents..................................................................45 D. Advertising/Promotion....................................................................................46 E. Average Internet Surfing Time.........................................................................46 F. Importance Rating of other Internet Functions..................................................47 G. Importance of Internet as Reflected by Monthly Expenditure.............................48 V. Development of Websites.................................................................................48 A. Introduction....................................................................................................48 1. Companies with Websites........................................................................ 48 2. Companies without Websites................................................................... 49 B. Nature and Purpose of Websites.....................................................................50 C. Importance of and Driving Forces for Developing and Maintaining Websites......51 D. Maintaining and Updating Websites.................................................................52 1. Frequency.............................................................................................. 52 SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 3 2. Budget and Cost..................................................................................... 52 E. Importance Rating of Websites .......................................................................53 1. In General ...............................................................................................53 2. Importance Rating of Websites to Promotion .............................................53 3. Importance Rating of Websites to Sales ....................................................54 4. Importance Rating of Websites to Procurement .........................................55 VII. e-COMMERCE...................................................................................................55 A. e-Commerce.................................................................................................55 1. Nature of Online Transactions ..................................................................55 2. Mode of Payment for Online Sales ............................................................57 3. Mode of Payment for Online Purchases ....................................................57 4. Profile of the Market .................................................................................58 4.1 Top Domestic and International Buyers ...............................................58 4.2 SME Concerns with Selling Online ......................................................58 5. Transaction Patterns and Trends ..............................................................58 5.1 Mode of Transactions .........................................................................58 5.2 Type of Goods Purchased ..................................................................59 6. Origin of Goods/Services Purchased ........................................................59 7. Issues and Concerns on Buying and Purchasing Online .............................60 B. Profile of SME Users of E-Commerce Sites ....................................................61 C. Profile of E-Commerce Sites Used by SMEs...................................................62 D. Nature and Purpose of E-Commerce Sites......................................................62 E. Importance of and Benefits Derived from E-Commerce Sites............................62 F. Issues and Concerns of SMEs on E-Commerce Sites&&&&&&&&&&&.64 VIII. Internet Banking...............................................................................................67 A. Profile of SME I-Banking Users......................................................................67 B. Profile of Banks Engaged in Internet Banking &&&&&&&&&&&&&&..67 C. I-Banking Functions.......................................................................................69 D. Issues and Concerns about I-Banking.............................................................69 E. Intentions to use I-Banking in the Next 12 Months............................................70 F. Reasons for not Considering to Use I-Banking in the Next 12 Months...............70 IX. Non-Users of ICT..............................................................................................71 A. Sample Profile...............................................................................................71 B. Driving Factors and Considerations on ICT Use in Business.............................72 C. Issues and Concerns of the Traditional Non-User Market.................................72 D. The Prospective User Market.........................................................................73 1. Website Importance .................................................................................73 2. E-Commerce Importance .........................................................................74 X. Summary and Conclusion................................................................................75 XI. Case studies.....................................................................................................78 XII. Policy Implications and Recommendations......................................................82 SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 4 List of Tables Page Table 1. Distribution of Sample by Area................................................................15 Table 2. Number of Firms by Business Category.................................................19 Table 3. Metro Manila Exporters by Specific Business Category.........................21 Table 4. Metro Manila Non-Exporters by Specific Business Category.................21 Table 5. Cebu Exporters by Specific Business Category.....................................21 Table 6. Cebu Non-Exporters by Specific Business Category.............................22 Table 7. Davao Exporters by Specific Business Category...................................22 Table 8. Davao Non-Exporters by Specific Business Category............................22 Table 9. Manner of Export of Firms Across Cities.................................................24 Table 10. Business Strengths versus Competitors...............................................26 Table 11. Business Weaknesses versus Competitors..........................................27 SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 5 List of Figures Page Figure 1. Survey Sample by Business Category/Major Industry Sector...............18 Figure 2. Business Performance Since the 1997 Economic Crisis......................23 Figure 3-A. Manner of Export for Metro Manila.....................................................25 Figure 3-B. Manner of Export for Cebu.................................................................25 Figure 3-C. Manner of Export for Davao...............................................................25 Figure 4. Ownership & Use of ICT Components...................................................29 Figure 5. Ownership of PCs with Internet..............................................................29 Figure 6. Ownership of PCs with LAN...................................................................30 Figure 7. SME Perception on the Importance of the Internet for Philippine Business Today&&&&&&&&&&&&&&&&&&&30 Figure 8. SME Perception on the Importance of the Internet for Philippine Business in the Future&&&&&&&&&&&&&&&&.31 Figure 9. SME Perception on the Importance of e-Commerce for Philippine Business Today&&&&&&&&&&&&&&&&&&&.31 Figure 10. SME Perception on the Importance of e-Commerce for Philippine Business in the Future&&.&&&&&.&&&&&&&&.32 Figure 11. Internet Usage......................................................................................35 Figure 12. Percent of Company PCs Connected to the Internet..........................35 Figure 13. Percent of Employees with Access to the Internet..............................36 Figure 14. Percent of Employtees Given Training in the Use of the Internet.......37 Figure 15. Speed of Internet Connectivity.............................................................38 Figure 16. Evaluation of Current Internet Service Provider..................................39 Figure 17. Frequency of Using the Internet to Communicate with Suppliers.......40 SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 6 Figure 18. Frequency of Using the Internet to Communicate with Customers.....41 Figure 19. Frequency of Using the Internet for Internal Communication..............42 Figure 20. Frequency of Using the Internet for Internal Information Management/Knowledge Sharing.&&.&&&&&&&&&&&&&42 Figure 21-A. Average e-Mail Time per Month ......................................................43 Figure 21-B. Average Number of Hours Using Internet........................................43 Figure 22. Importance of e-Mail in Running the Business....................................44 Figure 23. Frequency of Using the Internet for Research/Information Search.....45 Figure 24. Frequency of Using the Internet for Downloading Software................45 Figure 25. Frequency of Using the Internet for Advertising/Promotion................46 Figure 26-A. Average Surfing Time per Month.....................................................47 Figure 26-B. Average Number of Hours Surfing...................................................47 Figure 27. Importance of Other Internet Functions in Running the Business.....48 Figure 28. % Share of Internet Presence of Companies w/o Websites...............49 Figure 29. Inclination of Firms to Develop Own Website......................................49 Figure 30. Purpose of Company Website.............................................................51 Figure 31. Importance of Website to Promotion....................................................54 Figure 32. Importance of Website to Sales...........................................................54 Figure 33. Importance of Website to Procurement...............................................55 Figure 34. How Does a Company Sell Its Goods Over the Internet.....................56 Figure 35. Mode of Payment for Online Sales......................................................57 Figure 36. How a Company Purchases Goods Over the Internet........................58 Figure 37. Type of Goods Purchased Online........................................................59 Figure 38. Mode of Payment for Online Purchases..............................................59 SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 7 Figure 39. Percentage of Online Purchases from Domestic Companies.............60 Figure 40. Percentage of Online Purchases from Overseas Companies.............60 Figure 41. Purchasing Online................................................................................61 Figure 42. Concerns About Purchasing Online.....................................................61 Figure 43. Whether or Not a Company is Part of an e-Commerce Portal/SIte....62 Figure 44-A. Importance of e-Commerce Portal/Site for Promotion.....................63 Figure 44-B. Importance of e-Commerce Portal/Site for Sales............................63 Figure 44-C. Importance of e-Commerce Portal/Site for Procurement................63 Figure 45. Whether or Not Considering Being Part of an e-Commerce Portal&..65 Figure 46. Reasons for Not Joining an e-Commerce Portal/Site..........................65 Figure 47. Plan to Use e-Commerce in the Next 12 Months................................66 Figure 48. Reasons for Not Using e-Commerce for the Next 12 Months.............67 Figure 49. Duration of Use of Internet Banking.....................................................68 Figure 50. Banks Used for Internet Banking.........................................................68 Figure 51. Reasons for Choosing a Bank for I-Banking Purposes.......................69 Figure 52. Types of Internet Banking Functions Used..........................................69 Figure 53. Reasons for Choosing a Bank (SMEs Planning to Use I-Banking).....70 Figure 54. Reasons for Not Considering I-Banking in the Next 12 Months..........71 Figure 55. Non-Internet Users 9 Intent to Use the Internet (Near Future)..............72 Figure 56. Non-Internet Users 9 Reasons for Using the Internet (Near Future)....72 Figure 57. Non-Intrnet Users 9 Reasons for Not Using the Internet.......................73 Figure 58. Non-Internet Users 9 Intent to Develop a Company Website...............74 Figure 59. Non-Internet Users 9 Intent to Use e-Commerce in the Near Future....74 SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 8 e-Commerce has the capacity to provide all types of business enterprises with the capability to grow within and across borders to a seemingly unimaginable extent. But will e-commerce be a domain of large corporations alone? Or will small and medium enterprises (SMEs) be able to reap the benefits of e-commerce as well? In 1999, the Gartner Group estimated e-commerce business in the Philippines at US$9.15 million and it is forecasted to grow to US$992.4 million by 2004. How much of the projected e-commerce pie would be accounted for by SMEs - the acknowledged backbone of the Philippine economy? This study seeks to document the current level of Information and Communications Technology (ICT) utilization and e-commerce use among SMEs in the Philippines. It also seeks to identify perceived impediments or obstacles for SMEs 9 greater use of the same for business purposes. It begins with an overview of the state of e-Commerce in the Philippines. The second section discusses the result of a purposive survey of ICT and e-Commerce use among SMEs in three major Philippine cities, namely Metro Manila, Cebu and Davao. In order to develop deeper insights on the issues, the survey is completed with case studies of e-Commerce use by SMEs. The concluding section seeks to define the policy issues that will help increase SME use of ICT and e- commerce. II. An Overview of the State of Philippine E-Commerce: Issues and Trends The relatively underdeveloped information infrastructure and the legal/regulatory environment in the Philippines are generally considered as obstacles to the rapid growth of e-commerce in the country. A. The Network and Physical Infrastructure Issues Communications The Philippines 9 information and telecommunications sector can be divided up in the following sub-sectors: telephony, cable, satellite, broadcasting and print/media. For 70 years, the Philippines had a private monopolistic telecommunications industry where a telephone subscription wait averaged 10 years. The deregulation of the telecommunications industry in the mid-1980s in the country has paved the way for a burgeoning information and communication technology industry. Since the industry 9s liberalization, teledensity per 100 people has improved four times from 1.21 in 1993 to 4.66 in 1996. This number doubled again within a year to 8.07 and further increased to 9.12 in 1999. 1 In 2001, the teledensity increased again to 10.91. SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 9 To date, there are 11 international gateway facility (IGF) operators (companies that provide international long distance calls), 7 cellular mobile telephone system operators, 15 paging service operators, 12 inter-exchange carrier licensees (companies that service other carriers 9 traffic using their own network), 74 local exchange carriers (companies that offer landline services) and 191 Internet service providers (ISPs) nationwide. 2 The government implemented the Service Area Scheme (SAS) in 1993 to address the low teledensity in the rural areas. Under the SAS, new cellular licensee holders were required to install 400,000 landlines within 3 years, international gateway facility operators to install 300,000 landlines and for those firms with licenses for both cellular mobile and gateway facilities, 700,000 lines. The SAS mandates a certain portion of these new landlines to be installed outside urban centers. Through the SAS, there are currently 6,634,934 installed landlines all over the Philippines. 3 The increase in cellular mobile telephones is more remarkable. Since 1996, cellular mobile subscribers jumped 600% from 959,024 subscribers to a little over 6 million in 2000 4 . Today, there are more cellular phone subscribers than there are landline subscribers. The popularity of cellular phones can be attributed to two factors: 1) the introduction of prepaid services - which made cellular services more affordable and now accounts for 70% of the entire cellular mobile market in the country 5 and 2) the rise of short messaging service (SMS), more popularly known as "texting". SMS is even more popular than voice service. A few years after its introduction, SMS has transformed the Philippines into the texting capital of the world, with enthusiastic cellular mobile phone subscribers sending an estimated 30 million text message a day - more than the total of text messages sent in the whole of Europe in the same period! Liberalization and deregulation led to a vastly improved telecommunications situation in the country. But challenges still remain. The current configuration of the physical infrastructure in the Philippines is still fairly concentrated in the metropolitan areas. Internet Usage and PC Penetration The Internet was introduced in the Philippines in 1994. At that time, the government was the sole provider of Internet access. Today, there are an estimated 191 Internet service providers with a total nationwide subscriber base of only 1,850,000. Most ISPs are concentrated in Metro Manila, Cebu, and Davao. About 20% of these ISPs are concentrated in areas with economic processing zones 3 Sta. Rosa in Laguna, Cavite, Clark and Subic. 6 Today, the Government is no longer an ISP. According to AsiaBizTech, estimated Internet usage in the Philippines in January 1999 is 200,000 and expected to rise to 900,000 by 2002. NUA Surveys, on the other hand, cites figures from Yu Ming Chin of Asia Online and puts the Philippines 9 Internet user base at 320,000. The article from AsiaBizTech suggests that the Philippines will need a user base of at least 500,000 people to have a viable e-commerce economy. 7 At the end of the year 2000, the Philippines registered 680,000 Internet subscribers. 8 According to the Gartner Group (2000), the Philippines 9 consumer PC Internet penetration is at 3,457,282 and the 2003 forecast is 11,640,669 users; while the SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 10 business PC Internet penetration is currently at 5,722,307 and the 2003 forecast is 31,554,048 users. As Internet users increase, so do their demands for better, sophisticated technologies to carry voice, data, and video services. This has prompted carriers to begin working on their own broadband infrastructure. It has also been suggested that wireless Internet access is going to be more popular in the Philippines than PC-based Internet access. Wireless Internet access in the Philippines is still in its infancy, generally limited to wireless application protocol (WAP) in cellular mobile phones. General Packet Radio Service (GPRS) has only been introduced early this year. GPRS is a new packet- switched technology developed for use with cellular networks and based on the GSM platform, so it complements existing services such as WAP and SMS (short message service). It is said to give a taste of 3G, the technology for mobile communications that is expected to mature between 2003 and 2005. 9 The increasing need for data services has prompted demand for broadband Internet technologies. Broadband is an calways-on d, high-speed connection Internet technology. By 2006, industry estimates that 50% of the Philippines 9 telecommunications market will be accounted for by data services. 10 The Philippines has fixed and wireless broadband capabilities. Cable Internet provides high-speed, two-way capability to deliver video, voice and data to the TV and PC. Cable is still the undisputed leader of broadband Internet service through such companies as Destiny Cable, SkyInternet and Broadband Philippines. Digital Subscriber Line (DSL) technology, though it has less capacity than cable, is increasing in popularity because it uses existing telephony copper wires in delivering high-speed data to the home. DSL is also an calways-on d Internet access without tying up the phone line. Telecommunications companies such as Globe, PLDT, Digitel, and Eastern Telecom are currently offering DSL both to corporate customers and residential subscribers. However, the present state of DSL in the Philippines could only allow a few areas for high-speed connection, concentrated only within certain areas within the major cities. And the increased demand for broadband Internet service is also expected to result in a need for more transponder space. Hence, the satellite has become a very important point-to-point, and point-to-area instrument in transferring information over broad and narrower ranges of populations. The Philippines currently has one satellite in orbit 3 AGILA 2 launched in 1997 by Mabuhay Philippines Satellite Corporation (MPSC), dubbed as the most powerful satellite in the Asia Pacific region. It offers cost-effective and high-speed Internet access (backbone & distribution) by capitalizing on strategic partners with teleports in Oahu, Hawaii. Hawaii is considered the gateway to the US where a majority of the worldwide Internet bandwidth is hosted. 11 Notwithstanding, PCs connected via dial-up connections, is still the most prevalent way for Filipinos to access the Internet. 12 SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 11 e-Commerce e-Commerce in the Philippines is mainly dominated by B2B transactions using propriety protocols and private lines, such as EDI systems installed in huge retail chains such as Shoemart and Makro; and large multinational corporations such as Unilever and Nestle. As of July 2001, the Philippines 9 online trading market has 35 major buyers and more than 100 major suppliers traded with 6,000 transactions volume for e-procurement and e-bidding costing of US$40 million worth of products and services. 13 This e-marketplace is fueled by procurement and is dominated by BayanTrade. BayanTrade is a B2B e- procurement hub in the Philippines founded in June 2000, a joint venture among the Philippines' top 6 conglomerates namely Aboitiz Equity Ventures, Inc., Ayala Corp., Benpres Holdings, Corp., JG Summit Holdings, Inc., PLDT and United Laboratories, Inc. BayanTrade has a buyer base to over 150 companies and suppliers to nearly 350 companies. In its first 10 months of operation, BayanTrade held over 250 e-bidding events and processed over 11,000 purchase orders. B2C transactions in the Philippines are limited to the purchase of books and software online through such popular overseas e-commerce sites as www.amazon.com . There are only an estimated 3 million credit card subscribers in the Philippines. This low credit card penetration combined with unfriendly policies by local credit card providers helps explain the slow e-commerce uptake in the country. Security concerns have also led to higher interest charges on credit card purchases using the web. To address concerns with credit card fraud, virtual shopping malls such as www.estore- exchange.com , www.myayala.com , and www.infinitymalls.com , which allow online shopping by offering online payment alternatives to the credit card, have sprouted in recent years. For example, payment in www.myayala.com can be done through re- loadable e-cash (a card that stores cash and where the amount of the item gets debited upon submission of a pin number). Also, since www.myayala.com has the same owner as the Bank of the Philippine Islands (BPI), one can make purchases online and have the total amount of the goods purchased debited from one 9s savings account at BPI. One alternative mode of payment gaining popularity is smart cards, which are currently being used in various stages in Hong Kong, Malaysia and Singapore. B. The Policy Framework: Legal, Regulatory and Institutional Issues The Philippines recognizes the importance of communications to national development. Article XVI, Section 10 of the Philippine Constitution states : "The state shall provide the policy environment for the full development of Filipino capability and the emergence of communication structures suitable to the needs and aspirations of the nation and the balanced flow of information into, out of, and across the country, in accordance with a policy that respects the freedom of speech and of the press." The passage of the Electronic Commerce Act (R.A. 8792) on June 14, 2000 placed the Philippines on the map of e-commerce. At the time of the signing, the Philippines was only the third country in Asia to have an e-commerce law. R.A. 8792 addresses the SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 12 many significant legal and policy challenges of fully engaging in e-commerce in the country. First, it gives validity and legal recognition to electronic documents, electronic signatures and electronic transactions. Second, it facilitates the admission of electronic documents and electronic signatures as evidence in case of disputes. Third, it outlaws and penalizes unauthorized access to information and interference in communications systems (i.e., hacking, introduction of viruses, etc.). 14 The e-commerce law is further enhanced by the Implementing Rules and Regulations on Electronic Authentication and Signatures signed in September 2001 for cthe issuance of clear, transparent, predictable and enforceable rules to clarify and ensure the legal validity and enforceability of electronic signatures and contracts will encourage and promote the development of electronic commerce in the Philippines, enhance its competitiveness in the new economy, protect the consumer, and encourage efficiency and transparency in commercial transactions. d This allows the private sector and government to engage in secure online transactions. However, the sector envisioned to be most affected by electronic commerce - the banks 3 is still waiting for the Bangko Sentral ng Pilipinas (BSP), to finalize its own IRR for banks and non-bank institutions performing quasi-banking functions. Despite the enabling policy framework of the Philippines for e-commerce, various constitutional and policy barriers to foreign investments in information and communications systems remain. A significant constitutional barrier to the development of e-commerce in the Philippines and to the ICT industry in general is the foreign investment limitations set for public utilities and mass media. The Constitution specifically indicates that the operation of a public utility should be at least 60% Filipino-owned. 15 Moreover, the ownership and management of mass media is climited to citizens of the Philippines, or to corporations, cooperatives or associations wholly owned and managed by Filipino citizens. d 16 Furthermore, under the Telecommunications Act of 1995 (R.A. 7925) and the Constitution of the Philippines, a single company is prohibited from engaging in both telecommunications and broadcasting under a single franchise. These foreign investment barriers can be a deciding factor on the cost of Internet access, especially in the Philippines where capital intensive infrastructure development, especially with the importance of broadband to e-commerce development, is too costly for domestic companies to shoulder given the high cost of borrowing. Another barrier is the absence of a central governing body for information and communications technology. The creation of a Department of ICT is seen as crucial in developing and promoting a viable policy and legal environment, as well as an effective and efficient regulatory regime that will help shepherd the Philippines to the forefront of the global information economy. C. Sector Overview of Philippine SMEs SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 13 Despite the many studies conducted on the state of SMEs in the Philippines, no agency 3 government or otherwise - has been able to develop a complete database of SMEs operating in the country. Nor has there been an attempt to develop a comprehensive S- W-O-T analysis for the entire SME sector so that the appropriate policies can be created for its growth and development. Nevertheless, government has been active in promoting and developing the sector through the passage of significant policies. The Magna Carta for Small Enterprises (R.A. 8289) is the landmark legislation aimed to foster a dynamic SME sector, particularly emphasizing rural and agri-based manufacturing activities. This law principally aims to facilitate SME development by simplifying procedures and requirements and include an active private sector in SME policies and programs. This law created the Small and Medium Enterprise Development Council and the Small Business Guarantee and Finance Corporation, and mandated a national budgetary allocation of 8% for SME development. A law (R.A. 7882) was also passed providing assistance to women in SMEs, engaged in manufacturing, processing, service and trading. Under this program, government- financing institutions are mandated to provide assistance to women entrepreneurs and NGOs engaged in developing women 9s enterprises. The contribution of SMEs to the Philippine economy cannot by underestimated. According to a study: As of 1995, the number of business establishments operating in the Philippines both in the manufacturing and service sector was recorded at 243,487. Small and medium enterprises (SMEs) accounted for 99% of the figure, with large enterprises making up the remaining 1%. While SMEs extensively outnumber the country's large companies though, it is the latter which registered the bigger share at 68% of the total census- value added. In terms of employment, SMEs in both manufacturing and service sectors accounted for 67% of all jobs generated totaling to more than two million. Thirty three percent (33%) of employment was posted by large enterprises. By industry sector, food processing generated the most jobs contributing 25% of employment created, followed by wearing apparel at 21%, fabricated metal products at 5%, furniture at 4% and wood products at 3%. There are no available statistics on the actual contribution of SMEs to exports. It is estimated though that 60% of all exporters in the country belong to the SME category. SMEs are able to contribute in exports through subcontracting arrangements, linkage with large firms or as suppliers to exporting companies. 17 The following are the primary support organizations for the SME sector 18 : SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 14 Bureau of Small & Medium Business Development (BSMBD), a specialized agency under the Department of Trade & Industry (DTI) responsible for the promotion and development of SMEs in Philippines. This organization initiates projects and packages assistance program for SMEs and implements it with the involvement of regional offices administered by DTI. The University of Philippines Institute for Small-Scale Industries (UPISSI), established in 1966 for the purpose of assisting and promoting the development of small enterprises in the Philippines, is a training, research and development organization actively engaged in SME promotion activities. The Philippines Chamber of Commerce & Industry (PCCI) is the apex organization of all business chambers and associations in the Philippines. The government recognizes it as the sole official representative and the voice of the entire private business community. PCCI promotes the interest of the business community through Government representation and advocacy work while providing business and trade services. 19 To further push SMEs toward the utilization of e-commerce, the Department of Trade and Industry (DTI) is drafting an IT Plan for SMEs , a strategic plan designed to increase e-commerce competence among SMEs by providing training, promotion and support programs. DTI has acknowledged that the SME sector is the key to making e-commerce flourish in the country. Among the many programs DTI plans to offer to SMEs, it will provide assistance specifically in the following: e-commerce awareness seminars, identifications of e-marketplaces, setting up of local SME portals, promotion of SMEs with backroom services, and an e-readiness survey among SMEs. III. SME and eCommerce Survey A. Background and Rationale of the Study This study seeks to provide a snapshot of SMEs and e-Commerce in the Philippines. It also seeks to explore whether SME exporters are different from non-exporters SMEs in terms of ICT and e-Commerce Use. One hypothesis that would be explored is the role of competition (particularly global competition) as a driver of ICT uptake among SMEs in the Philippines. Aside from giving a clearer picture of the extent of ICT usage among SMEs, this survey also hopes to shed light on the many issues and problems faced by SMEs and help in the identification of the specific barriers that hinder the growth of SMEs in the Philippines. While a nationwide survey on SME use of ICT is ideal, a number of significant factors prevent such a study from being done. The most significant obstacle is the lack of a nationwide database on Philippine SMEs. Generating such a list would have been too time consuming and expensive. An alternative to such a national database would have been the list of all SME members of the Philippine Chamber of Commerce and Industry (PCCI), the country 9s largest chamber that boasts of having a large number of SME members across the country. Unfortunately, PCCI also does not have a list of all its SME members. Given this, a survey of the extent of ICT usage among SMEs in three major SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 15 cities in the Philippines where a majority of SMEs are said to be located became the reasonable alternative. But the lack of a list of SMEs in these cities (Metro Manila, Cebu and Davao) made representative sampling difficult. Thus, the decision to do purposive sampling. Following the survey results, case studies of e-commerce projects engaged in by SMEs in Metro Manila, Cebu and Davao would be drawn. This will serve as a useful aid for policymakers and the private sector in drafting policy initiatives for greater ICT uptake among SMEs. B. Objectives of the Study The specific objectives of the study are the following: 1. Primarily, to determine the extent of ICT usage among SMEs in select major cities in the Philippines: Metro Manila, Cebu and Davao. 2. To determine whether SME exporters in the select cities are more inclined to use ICT in business compared to non-exporters. 3. To be able to identify specific barriers or obstacles to the greater use of ICT by SMEs in select cities. 4. To have a clearer perception of the issues, problems and concerns of SMEs in select cities with regard to ICT use and patronage of e-commerce as a mode of doing business. 5. To provide policymakers with relevant implications on policy initiatives and incentives to encourage wider ICT use among SMEs in the Philippines. 6. To provide a fairly reasonable foundation for policy recommendations regarding the promotion of ICT use among SMEs. C. Scope and Limitations of the Study 1. Survey Area and Period The actual field survey was conducted within the period covering November 28, 2001 to March 15, 2002 in three (3) major cities in the Philippines: Metro Manila (or the National Capital Region or NCR), Cebu City and Davao City. The field survey was outsourced to Trends NFO, a professional organization with experience in market research and polling. 2. Survey Respondents The respondents of the survey, selected purposively, include representatives of small and medium scale enterprises (SMEs) in the aforementioned three (3) major cities. 3. Survey Sample Size and Distribution Below is the distribution of the sample by area: Table 1. Distribution of Sample by Area SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 16 Exporters Non-exporters Total Metro Manila (NCR) 100 99 199 Cebu City 99 75 174 Davao City 50 75 125 Total 249 249 498 The initial survey sample size was a set at 500 respondents. However, 2 of the interviews were spoiled because of a field survey error. 4. Survey Sampling Scheme Initially, sample establishments were generated from government listings and SME membership lists 3 particularly the Department of Trade and Industry List on SME Exporters and the membership lists of the Chamber of Commerce and Industry in the given three cities. However, due to the limited number of SMEs in the available lists and perceived inaccuracies (as to addresses and telephone numbers, among others), it was decided to purposively find SMEs to fill the sample quota. This was conducted through a door-to-door search to determine whether or not an establishment is a qualified SME. D. Methodology The survey was conducted in 3 major phases: 1. Pre-survey phase, which includes the following: a) Sample Construction; b) Questionnaire Formulation, Pre-testing and finalization; and c) Training of Field personnel 2. Actual Survey Phase, which include the following corollary activities: a) Supervision and monitoring of field interviews; b) Spot-checking; and c) Field Editing 3. Post-survey phase, which include the following: a) Retrieval and Data Processing; b) Data Analysis and Report writing; and c) Drawing and Writing of Case Studies of Best Practices. PRE-SURVEY PHASE Sample Construction The sample was constructed by initially consulting government lists (particularly, the DTI list on SME exporters) and membership lists of the different Chambers of Commerce and Industry of the three cities. The survey-sampling frame will be restricted to include only SMEs in Metro Manila, Cebu and Davao. Due to the inadequacy and inaccuracy of the available lists, purposive sampling was done to fill the sample quota. SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 17 Questionnaire Formulation, Pre-testing and Finalization For purposes of comparability, the survey questionnaire was based on the Indonesia questionnaire, appropriately revised to adapt to Philippine conditions. The revised questionnaires were pre-tested. Comments and suggestions turned in after pre-testing was incorporated before finalizing the questionnaire. Moreover, language experts translated the English version of the questionnaire into Filipino and Cebuano. Each language translation was translated back to English by another set of experts to ensure that the message was conveyed accurately. Training of Field Personnel Training of field personnel was conducted in three central locations: Quezon City, Cebu City and Davao City. A maximum of two days office training was held to orient the field personnel on the nature, purpose and other basic details of the project. ACTUAL SURVEY PHASE Supervision and Monitoring of Field Interviews Supervisors were commissioned to observe, follow-up and check interviewers, of which at least 10% of the latter were observed by the former. They report to the field manager to ensure that field logistics were received promptly and administered properly. Spot-Checking Spot-checking was conducted at various stages of the fieldwork: " The first one after about 30% of the interviews was completed; " The second after 60% completion; and " The third one immediately after 90% completion. During spot-checking, at least 20% of the unsupervised interviews were re- interviewed/back-checked. If serious errors persisted after 20% spot-checking, the original interviews were invalidated and respondents re-interviewed. If some questionnaires were found to be incomplete or had inconsistent answers, the interviewer was asked to go back to the respondent so that the questionnaire could be completed and/or corrected as the case may be. Field Editing After each interview was completed, the interviewer was asked to go over the responses to check for consistency. All accomplished interview schedules were submitted to the assigned group supervisor, who, in turn, made the necessary editions and/or corrections as deemed fit. SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 18 POST SURVEY PHASE Retrieval and Data Processing An office editor was commissioned to conduct a final consistency check on all interviews prior to coding. A codeframe was designed to organize the coding of data from the raw questionnaires. Interview sheets were edited/checked twice by office editors before information was encoded. A data entry computer program verified and checked the encoded data for consistency before data tables were generated. Data Analysis and Report Writing An analysis of the processed data was conducted and a written report, incorporating a comprehensive discussion of the survey results and corollary analysis of the same, was done by the Digital Philippines research team. Drawing and Writing of Case Studies of Best Practices Culled from the available respondents and based on the survey results, case studies on best practices of e-commerce by SMEs in the three select cities have been drawn. IIII. Profile of the SME Sample: Survey Results and Analysis A. Background and Nature of Business 1. Industry/Sectoral Classification Across Cities The survey sample consisted of representatives from three major industry groups, namely: the Industry/Manufacturing Sector, the Service Sector and the Agri-business Sector. The results show that most firms in the sample belong to the industry/manufacturing sector. Of the 498 respondent firms, " 54.6% (272 firms) belong to the industry/manufacturing sector " 39.8% (198 firms) belong to the service sector " 5.6% (28 firms) belong to the agri-business sector 0%20%40%60%80%100% Exporter Non-Exporter Exporter Non-Exporter Exporter Non-Exporter Metro Manila Cebu City Davao City Figure 1. Survey Sample by Business Category / Major Industry Sector Industry/Manufacturing Service Sector Agri-Business SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 19 Of the total firms surveyed in Metro Manila (199 firms), " 51.8% (103 firms) are industry/manufacturing firms " 45.7% (91 firms) are service firms " 2.5% (5 firms) are agri-business firms Of total firms surveyed in Cebu (174 firms), " 64.4% (112 firms) belong to the industry/manufacturing sector " 32.2% (56 firms) belong to the service sector " 3.4% (6 firms) belong to the agri-business sector Finally, of total firms surveyed in Davao (125 firms), " 45.6% (57 firms) are industry/manufacturing firms " 40.8% (51 firms) are service firms " 13.6% (17 firms) are agri-business firms Table 2. Number of Firms by Business Category Metro Manila Cebu City Davao City Industry/Manufacturing 103 51.8% 112 64.4% 57 45.6% Service 91 41.7% 56 32.2% 51 40.8% Agri-Business 5 2.5% 6 3.4% 17 13.6% TOTAL 199 100.0% 174 100.0% 125 100.0% Half of the total respondents are exporters. Of total exporters (249 firms), " 78.3% (195 firms) are industry/manufacturing firms " 12.9% (32 firms) are service firms " 8.8% (22 firms) are agri-business firms Of total non-exporters (249 firms), " 30.9% (77 firms) belong to the industry/manufacturing sector " 66.7% (166 firms) belong to the service sector " 2.4% (6 firms) belong to the agri-business sector Of total Metro Manila exporters in the sample (100 firms), " 71% (71firms) are industry/manufacturing firms " 26% (26 firms) are service firms SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 20 " 3% (3 firms) are agri-business firms Of total Metro Manila non-exporters in the sample (99 firms), " 32.3% (32 firms) belong to the industry/manufacturing sector " 65.7% (65 firms) belong to the service sector " 2% (2 firms) belong to the agri-business sector Of total Cebu exporters in the sample (99 firms), " 93% (92 firms) are industry/manufacturing firms " 3% (3 firms) are service firms " 4% (4 firms) are agri-business firms Of total Cebu non-exporters in the sample (75 firms), " 26.7% (20 firms) belong to the industry/manufacturing sector " 70.7% (53 firms) belong to the service sector " 2.7% (2 firms) belong to the agri-business sector Of total Davao exporters in the sample (50 firms), " 64% (32 firms) are industrial/manufacturing firms " 6% (3 firms) are service firms " 30% (15 firms) are agri-business firms Of total Davao non-exporters in the sample (75 firms), " 33.3% (25 firms) belong to the industry/manufacturing sector " 64% (48 firms) belong to the service sector " 2.7% (2 firms) belong to the agri-business sector A majority of exporters are in industry/manufacturing: 71% (71 firms) of total exporters in Metro Manila, 93% of total Cebu exporters (92 firms) and 64% of total Davao exporters (32 firms). On the other hand, a majority of non-exporters are in the services sector: 65.7% of total Metro Manila non-exporters (65 firms), 70.7% of total Cebu non-exporters (53 firms) and 64% (48 firms) in Davao City. A significant share of the Davao exporter sample is accounted for by the agri-business sector with 30% (15 firms) of total Davao exporters. 2. Specific Business Categories Across Cities Metro Manila Exporters The Metro Manila Exporter Sample consisted of very diverse businesses. Most firms in the sample are manufacturing firms accounting for 10% of the sample. Next in line are firms engaged in food processing and the making of handicraft products, each having 7% of the sample, followed by furniture manufacturing with 6%. Firms into garments and SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 21 cargo/freight forwarding, each registered 4% of the sample. The remainder accounts for various types of businesses sharing 1-2% of the sample. Table 3. Metro Manila Exporters by Specific Business Category Specific Business Category Percentage (%) Share Manufacturing Firms 10% Food Processing 7% Handicraft Products 7% Furniture 6% Garments 4% Cargo/Freight Forwarding 4% Others (each with 1-2% of the sample) 62% TOTAL 100% Metro Manila Non-exporters From the Metro Manila Non-Exporter Sample, the largest number of firms are engaged in the printing business with 10% of total non-exporters in the city, followed by construction contractors and/or supply firms with 9%, trading firms accounting for 7%, realty firms with 6%, hardware supply with 5%, and food processing firms with 4%. The remainder is shared by the other types of businesses, each having 1-2% of the sample. Table 4. Metro Manila Non-exporters by Specific Business Category Specific Business Category Percentage (%) Share Printing 10% Construction Contractors and/or Supply 9% Trading 7% Realty 6% Hardware Supply 5% Food Processing 4% Others (each with 1-2% of the sample) 59% TOTAL 100% Cebu Exporters 32% of Cebu exporters are engaged in the furniture business: 14% are makers of rattan furniture; 6% is engaged in making wrought iron furniture; while 12% accounts for makers of other types of furniture. 19% of the Cebu Exporter Sample account for sub- contractors/suppliers of fashion accessories. 10% of the sample account for firms involved in the handicraft business. The remainder accounts for the other types of businesses each having 1-4% share of the sample. Table 5. Cebu Exporters by Specific Business Category Specific Business Category Percentage (%) Share Furniture 32% Rattan Furniture 14% Wrought Iron Furniture 6% Other types of furniture 12% Handicraft 10% SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 22 Others (each with 1-2% of the sample) 39% TOTAL 100% Cebu Non-exporters From the Cebu Non-exporter sample, 10.7% belong to the hotel business, followed by 8% engaged in the restaurant business. 6.7% are in the cargo/freight forwarding business. The same number of firms (6.7%) is in the printing business. 5.3% are in dealership of appliances and the remainder accounts for the rest of the firms, with 1-4% from each business category. Table 6. Cebu Non-exporters by Specific Business Category Specific Business Category Percentage (%) Share Hotel Business 10.7% Restaurant Business 8.0% Cargo-Freight Forwarding 6.7% Printing 6.7% Dealership of Appliances 5.3% Others (each with 1-4% of the sample) 62.6% TOTAL 100.0% Davao Exporters 16% of the firms in the Davao Exporters sample are engaged in handicraft making, followed by 12% engaged in the buying and selling of banana fruits. The rest accounts for firms belonging to other businesses, each with 1-4% share of the sample. A significant number of firms in the remainder are engaged in agri-business. Table 7. Davao Exporters by Specific Business Category Specific Business Category Percentage (%) Share Handicrafts 16% Trading of Bananas 12% Others* (each with 1-4% of the sample) 72% TOTAL 100% *Firms in this category are industrial/manufacturing firms and agri-business firms Davao Non-exporters From the Davao non-exporter sample, 8% is engaged in dealership of appliance merchandise followed by 6% engaged in printing and another 6% in the hotel business. 5.3% of the firms in the sample are in security services while the same number of firms (5.3%) are into selling cars. Firms in various businesses, each registering 1-4% of the given sample account for the rest. Table 8. Davao Non-Exporters by Specific Business Category Specific Business Category Percentage (%) Share Dealership of Appliance Merchandise 8.0% Printing 6.0% Hotel Business 6.0% Security Services 5.3% SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 23 Car Dealership 5.3% Others (each with 1-4% of the sample) 69.4% TOTAL 100.0% 3. Business History and Trends: Highlights Drivers of Change in Business Focus Only a very small percentage (3.8% or 19 firms) of the total number of respondents changed their business focus. Of these, there are twice as many exporters (2.6% or 13 exporter firms) than non-exporters (1.2% or 6 non-exporter firms). Of the total 498 firms that changed their business focus, only: " 1.8% (9 firms) of which considered improving the quality of service to enhance customer satisfaction " 1.2% (6 firms) of which were driven by the need to expand and further develop their business Business Performance Since the 1997 Economic Crisis Of the 498 firms in the sample, over half claimed that the 1997 crisis did not hurt them nor affected their business. Specifically, " 42.3% (211 firms) attested that they have performed worse since the economic crisis " 38.6% (192 firms) said that there was no change in business performance " 17.9% (89 firms) said that they have performed better despite the crisis. Strategies for Business Growth Of total firms in the sample (498 firms), about 85% identified intensified marketing efforts and increasing quality as the leading strategies for growth: 0%20%40%60%80%100% Exporter Non-Exporter Exporter Non-Exporter Exporter Non-Exporter Me tro Ma nil a Ce bu Cit y Da va o Cit y Figure 2. Business Performance since the 1997 Economic Crisis Better No Change Worse Newly Established SMEs and e-Commerce in Three Philippine By Digital Philippines for The Asia Foundation ______________________________________________________________________________________ 24 " 46.4% (231 firms) indicated various intensified and strategic marketing/promotional efforts as a major strategy for business growth " 39% (194 firms) designed business strategies with the goal of increasing the quality of products and services and enhancing customer relations " 9.6% (or only 48 firms) indicated resource management/development " 8.2% (41 firms) saw the merit of employing competitive pricing as a strategy " 5.8% (29 firms) indicated the need for strategic planning and proper management " 1% (5 firms) stress the importance of maintaining company reputation and stability in business " 4.2% (21 firms) have other strategies aside from the aforementioned Export Trends Firms from the Metro Manila exporter sample export an average of 53.8% of their products. More specifically, of the 99 Metro Manila exporter firms: " 27.3% (27 firms) export 91-100% of their products " 15.2% (15 firms) export 1-10% of their products " 10% (10 firms) export 41-50% of their products " 9.1% (9 firms) export 11-20% of their products " 9.1% (9 firms) export 21-30% of their products " 8.1% (8 firms) export 81-90% of t

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