Discusses distribution network from how products enter to final destination, including reliability of distribution systems, distribution centers, ports, etc.
Metro Manila is the commercial capital of the Philippines. It is composed of 17 cities and is where the Philippines’ national importers and distributors are located. Within Metro Manila, Makati City, Ortigas Center in Mandaluyong City, Bonifacio Global City in Taguig, Asiana in Pasay City are considered central business districts (CDB). These CBDs are home to many multinational company headquarters, commercial bank head offices, and high-end shopping establishments.
Outside of Manila, other major regional commercial centers are Province of Pampanga, Baguio City, Cebu City, Iloilo, Davao and Batangas. Cebu City, the third largest city in the Philippines, and Iloilo are the primary trading centers for the middle portion of the archipelago (the Visayas Region). Davao, the second largest city in the Philippines, enjoys a near-trade monopoly in Southern Mindanao, due to the numerous land and water connections to nearby provinces. The Port Statistics data released by the Philippine Ports Authority (http://www.ppa.com.ph/) shows total foreign ship calls of 119,814 in 2020 (from 500,919 in 2019). Here is the breakdown of the 2020 foreign ship calls per region: Manila / Northern Luzon: 1,004; Southern Luzon: 529; Visayas with 199; Northern Mindanao: 166, Southern Mindanao: 417.
Most of international cargo traffic is handled in the ports located in Manila; the Manila International Container Terminal (MICT), and South Harbor. MICT is operated by the International Container Terminal Services, Inc. (ICTSI), a Philippine-based international port operator with operations in 20 other countries (including the U.S.). South Harbor is operated by Asian Terminals, Inc. (ATI), a Dubai-based company.
The use of local agents or distributors greatly improves the opportunity for market success. There are currently two types of importers in the Philippines: stocking distributors and indenters. Stocking distributors are bound by a contract to buy and sell a prescribed number of items as stated in their agreement with the foreign supplier. Indenters, on the other hand, act as brokers between foreign suppliers and the end user, thus saving on capital outlays for expensive equipment and avoiding the need to stock high-priced products. Usually, a buyer who orders from an indenter already has the financing for the goods. Customers will often open a letter of credit (L/C) for direct purchase from a foreign exporter. Under these arrangements, the local representative or agent gets a commission for the sale, known as an indent sale. Indenters also handle after-sales service support.
In selecting local firms as agents, a U.S firm should consider whether the local firm is an accredited vendor of its target customer(s). Several large Philippine corporations have a “vendor accreditation process” in place. Only those listed as an accredited vendor are informed of upcoming procurement projects. For Government projects, potential local distributors should be knowledgeable on relevant Philippine and U.S. laws, specifically, Republic Act (RA) No. 9184 or the Government Procurement Reform Act (GPRA), and the U.S. Foreign Corrupt Practices Act (FCPA). U.S. companies should work with a local firm that has experience participating in Philippine Government bids. Many U.S. firms use the U.S. Commercial Service’s International Company Profile (ICP) program to assess a prospective agent’s capability and reputation in the market.
Using an Agent or Distributor
Agent/distributor arrangements are common in the Philippines. Local companies are often eager to pursue discussions once they have examined a U.S. firm’s website/product literature and have determined that there is a market for the product.
Contracts between U.S. manufacturers and their Filipino agents/distributors typically contain the following key elements:
- General Provisions: Identification of parties to the contract, duration of the contract, conditions for cancellation, definition of covered goods, definition of territory or territories, and, whenever necessary, sole and exclusive rights;
- Rights and Obligations of Manufacturer: Conditions of termination, protection of sole and exclusive rights, sales and technical support, tax liabilities, conditions of sale, delivery of goods, prices, order refusal, inspection of distributor’s books, trademark/patent protection, information to be supplied by the distributor, marketing, advertising and sales promotion, responsibility for claims/warranties, and inventory requirements;
- Rights and Obligations of Distributor: Safeguarding manufacturer’s interest, intellectual property rights, payment arrangements, contract assignment, customs clearance, observance of conditions of sale, after-sales service, and information to be supplied to the manufacturer.
There are no laws that impede termination of an agent/distributor contract, should either party wish to do so. Contracts usually specify that 30-day notice be given in the event of cancellation, or as mutually agreed upon by both parties. Standard agent commissions range from 5% to 10% but vary by industry. Legal assistance in drafting and enforcing contracts is highly recommended.
A prototypical Philippine agent or distributor profile does not exist. Firms can range in size, from small (fewer than 25 employees handling a few specialized products on behalf of a limited number of manufacturers) to large trading companies handling a wide range of products and suppliers. Some firms focus on the Metro Manila area, whereas others provide additional service to provincial commercial centers such as Angeles/Clark City, Bacolod, Cebu, Cagayan de Oro, Davao, Iloilo, and Baguio, either directly or through a network of dealers, retailers, sub-agents, and/or re-sellers.
Local agents and distributors working with foreign suppliers often employ forward sales or indent arrangements. In a forward sales arrangement, distributors place an order from the foreign supplier and then sell the product to the local end-user or customer. Under an indent arrangement, end-users or customers directly place orders with the supplier. The indenter then receives a pre-determined commission for each successful sale. In some instances, distributors and/or their respective dealers also maintain inventories to serve the recurring requirements of major customers.
Corporate agents/distributors must register with the Philippine Securities and Exchange Commission (SEC). Sole proprietorship agents must register with the Department of Trade and Industry (DTI).
U.S. firms selecting a Philippine representative should consider, among other factors, the following: (a) whether the distributor has sufficient financial strength to maintain appropriate stock, provide effective after-sales service, or offer competitive payment terms; (b) whether the representative’s geographic sales area covers strategic markets in the Luzon, Visayas, and Mindanao regions; and (c) their experience in the sector or with similar products or services.
U.S. firms seeking agents or distributors in the Philippines are encouraged to use the services of the U.S. Commercial Service Philippines, which include International Partner Search (IPS), International Company Profile (ICP), and Gold Key Service (GKS). More information is available at: https://www.trade.gov/export-solutions.
Establishing an Office
The principal forms of business organization in the Philippines are sole proprietorships, partnerships, and corporations. Other less common business structures include joint stock companies, joint accounts, business trusts, and cooperatives.
Multinational firms, depending on the nature of their intended business activity in the Philippines, may avail of the following modes of entry into the Philippine market: subsidiary, regional headquarters (RHQ), regional operating headquarters (ROHQ), branch office, and representative office.
For more information on business registration requirements, and incentives for each mode of entry, you can access the information from the Philippine Board of Investments: https://boi.gov.ph/how-to-setup-business/setting-up/enterprise-types/.
The Covid-19 pandemic took a toll on the Philippine Franchise industry. According to the Philippine Franchise Association (PFA), it is forecasted that the local franchise sector is set to lose around 90,000 in 2021. This is a 45% decline from the 200,000 outlets in 2020. The association foresees that the industry will bounce back in 2025 with around 250,000 outlets present in the country.
However, according to the PFA, there is an opportunity for foreign franchisors that serves the health and beauty sectors. This provides an opportunity for U.S. franchisors to look at the Philippines as a potential market. The country boasts a large population and a preference for U.S. brands can help attract businesses to the country.
One hundred percent foreign ownership is allowed for Philippine retail trade enterprises (which most franchise outlets are) provided they comply with the pre-qualification requirements and meet all the following requirements under the Retail Trade Liberalization Act of 2000 or Republic Act (RA) 8792:
- upfront paid-up capital of $2.5 million or more, provided that investments for establishing a store is not less than $830,000 or
- (b) specializing in high-end or luxury products, provided that the paid- up capital per store is not less than $ 250,000.00 (Section 5 of RA 8792). No foreign equity is allowed in Retail Trade Enterprises with less than the above-mentioned capital.
Under the Intellectual Property Code of the Philippines or Republic Act No. 8293, franchisors do not have to register their franchise agreements if these agreements do not contain any of the prohibited clauses under Section 87 and do contain all the mandatory provisions under Section 88 of the IP Code. The law also removed the ceiling on royalties. Royalty payments may be remitted through any Authorized Agent Bank (AAB) of the Bangko Sentral ng Pilipinas (BSP) or the Central Bank of the Philippines.
Franchise agreement clauses prohibited under Section 87 are those that:
- Impose upon the licensee the obligation to acquire from specific source capital goods, intermediate products, raw materials, and other technologies, or of permanently employing personnel indicated by the licensor;
- Reserve the right to fix the sale or resale prices of the products manufactured based on the license;
- Contain restrictions regarding the volume and structure of production;
- Prohibit the use of competitive technologies in a nonexclusive technology transfer arrangement;
- Establish a full or partial purchase option in favor of the licensor;
- Obligate the licensee to transfer for free to the licensor the inventions or improvements that may be obtained using the licensed technology;
- Require payment of royalties to the owners of patents for patents that are not used;
- Prohibit the licensee to export the licensed product, unless justified for the protection of the legitimate interest of the licensor such as exports to countries where exclusive licenses to manufacture and/or distribute the licensed product(s) have already been granted;
- Restrict the use of the technology supplied after the expiration of the technology transfer arrangement, except in cases of early termination of the technology transfer arrangement due to reason(s) attributable to the licensee;
- Require payments for patents and other industrial property rights after their expiration or termination arrangements;
- Necessitate that the technology recipient shall not contest the validity of any of the patents of the technology supplier;
- Restrict the research and development activities of the licensee designed to absorb and adapt the transferred technology to local conditions or to initiate research and development programs in connection with new products, processes, or equipment;
- Prevent the licensee from adapting the imported technology to local conditions, or introducing innovation to it, if it does not impair the quality standards prescribed by the licensor;
- Exempt the licensor for liability for non-fulfillment of his responsibilities under the technology transfer arrangement and/or liability arising from third party suits brought about by the use of the licensed product or the licensed technology; and
- Other clauses with equivalent effects.
The following are the mandatory provisions required under Section 88:
The laws of the Philippines shall govern the interpretation of the contract and, in the event of litigation, the venue shall be the proper court in the place where the licensee has its principal office;
- Continued access to improvement in techniques and processes related to the technology shall be made available during the period of the technology transfer arrangement;
- In the event the technology transfer arrangement shall provide for arbitration, the Procedure of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations Commission on International Trade La w (UNCITRAL) or the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC) shall apply, and the venue of arbitration shall be the Philippines or any neutral country; and,
- The Philippine taxes on all payments relating to the technology transfer arrangement shall be borne by the licensor.
In the Philippines, a distinction is made between direct marketing and direct selling. The basic difference lies in the closeness of contact. Whereas direct marketing is usually conducted through phone, e-mail, direct mail or courier, direct selling involves personal contact with a prospective customer. Direct sellers typically visit customers at home, at the workplace, or at points of contact other than a permanent retail establishment.
The direct selling medium covers a wide array of products, including cosmetics, apparel, food supplements, fashion jewelry, books, appliances, home items, personal care products and toys. A direct seller may present to one or several customers at a time.
In recent years, the multi-level marketing approach to direct selling has become increasingly popular. Multi-level Marketing is a form of direct selling. This approach involves a “down line” system in which a direct seller recruits other into his network, provides training and mentorship to the downlines, and earns a fee or commission based on the productivity or sales of the network. The basic difference is that the multi-level marketing companies generally allow their independent direct sellers to earn overriding commissions from the sales of their downlines up to several levels deep.
The Direct Selling Association of the Philippines (https://www.dsap.ph) currently has 36 members. U.S. firms such as Amway, Avon, Herbalife, Tupperware, Nu Skin, Mary Kay, Reliv, 4Life Research, Forever Living, Max International, Neolife International, New Image, Sunrider, Unicity, Xyngular, Youngevity, and Young Living have established direct selling distributorship networks in the country.
Foreign businesses can operate in the Philippines through joint ventures with local enterprises. The Philippine Government (GPH) does not require the submission of licensing/technology transfer arrangements for approval and registration by the Intellectual Property Office. Voluntary submission is strongly encouraged to ensure compliance with Sections 87 and 88 of the Intellectual Property Code, since non-conformance with Section 87 on Prohibited Clauses and Section 88 on Mandatory Provisions automatically renders the arrangement unenforceable. The Intellectual Property Office (IPOPHL) may allow exemption from conformance with Section 87 and 88 after an evaluation under the provisions of Section 91 on Exceptional Cases.
The Intellectual Property Code of the Philippines defines technology transfer arrangements as contracts or agreements involving the transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service including management contracts; and the transfer, assignment, or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for the mass market}. Distributorship agreements will be included in the coverage if this includes the licensing of trademarks.
Major global express delivery firms are actively doing business in the Philippines. Average delivery time from large U.S. cities is three days. However, it may take longer depending on specific origin and destination, customs clearance procedures, and express delivery service capabilities.
The Philippine Bureau of Customs has published a guide for MSME’s for de minimis importation: https://customs.gov.ph/customs101-guidelines-on-de-minimis-importation/.
It is wise for a U.S. company to confirm the reputation of its potential Philippine distributor, agent or representative prior to entering a business relationship. To help with this important process, the U.S. Commercial Service in the Philippines offers the International Company Profile (ICP; International Company Profile (trade.gov)) program. The ICP provides information on Philippine companies, including general business information, background and product information, key officials, references, financial data/creditworthiness information, and reputation. For more information, or to order an ICP, please contact the U.S. Commercial Service Philippine office at email@example.com. Alternatively, you may visit a U.S. Department of Commerce office (Commercial Service Offices in the U.S. (trade.gov).
After a careful selection of partners, U.S. suppliers should be prepared to support and work closely with their local distributors, agents or representatives.