V. MARKETING U.S. PRODUCTS AND SERVICES A. Distribution and Sales Channels National Center The country's national center and capital is Metropolitan Manila. Manila provides the entire country with a variety of specialized central services. It also serves as an inter-regional center for all the northern provinces and a major center for a large immediate hinterland. It is the country's nerve center of industrial and financial activity, transportation and communications, trade, and educational services. Approximately 85 percent of Philippine foreign trade passes through the Port of Manila; 90 percent of imports enter this Port to be distributed to the other principal cities via trucks and inter-island vessels. About 90 percent of all Philippine industries are located in the greater Manila area in three major locations. The first, an area of heavy industry, is situated along the banks of Pasig River, which flows through the city and the port area into Manila Bay. Cargo discharged from vessels in the bay is often loaded on barges and lighters for transport via the Pasig River to the industrial area. The second industrial district, containing medium-sized plants, is located about 15 miles outside of Manila at Antipolo, in the Marikina Valley. Supplies and raw materials are generally carried from the port area by truck. The third major industrial area is located in Makati, currently the central business area in the country and the most prosperous of the Manila suburbs. In addition to small manufacturing plants, a considerble number of distribution centers, trading firms, and commercial banks are located here. Makati is also a shopping area for higher income residents. Interregional Centers In addition to Manila, the other major interregional centers are Cebu City, Iloilo, Davao, and Zamboanga. Cebu City, the third largest city in the Philippines, is the prime trading center in the southern part of the archipelago. Its hinterland is mainly accessible by boat. Iloilo shares with Cebu the servicing of the country's central area. Davao, the second largest city in the Philippines, enjoys a trade monopoly in Southern Mindanao, due mainly to the presence of land and water connections with nearby provinces. Zamboanga functions partly as an interregional center. Transportation to the hinterland is almost entirely by water since there are only a few roads along the peninsula. Major and Secondary Centers Furnishing the archipelago with basic economic, political, and social services are about 40 major and 35 secondary centers situated throughout the Philippines. These are comparatively small, with populations of up to 60,000. Their importance lies in the fact that they render essential urban services to their respective territories. Most of these centers are on the coasts and a number of them are medium-sized ports. B. Use of Agents/Distributors; Finding a Partner Agent/distributor arrangements, whereby a U.S. manufacturer/exporter appoints a Filipino company or individual to promote and sell its products, are common in the Philippines. Given Filipino affinity for American products, Filipino companies generally are eager to pursue discussions once they have examined a U.S. firm's product literature and have determined that there is a market for the product. They offer useful information to the American firm on pricing its product for the Filipino market. Filipino agents/distributors perform a full range of functions, including negotiating sales transactions, directing the physical movement and storage of the product, and providing product services ultimately to deliver the product to final buyers where, when, and in the quantities they want it. U.S. manufacturers and their Filipino agents/distributors are bound by a contract which should contain the following key elements: 1. General Provisions: Identification of parties to the contract, duration of the contract, conditions of cancellation, definition of covered goods, definition of territory or territories, and sole and exclusive rights; 2. 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, advertising and sales promotion, responsibility for claims/warranties, and inventory requirements; 3. Rights and Obligations of Distributor: Safeguarding manufacturer's interest, 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 Filipino laws that impede termination of an agent/distributor contract, should either party wish to do so. Contracts usually specify that 30 days' notice must be given in the event of cancellation. There is no typical profile of a Filipino agent or distributor. Firms can range in size from small (fewer that 25 employees handling only 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 Filipino firms focus only on the Metro Manila area, whereas others also service provincial commercial centers such as Cebu, Davao, Iloilo, and Baguio. Any Filipino agent/distributor should be registered with the Philippine Securities and Exchange Commission. U.S. firms seeking agents or distributors in the Philippines are highly encouraged to use the services of the U. S. Foreign Commercial Service, Manila, such as the "Agent/Distributor Service" or "World Trader Data Report." C. Franchising U.S.-based franchises have found profitable niches in the developing Philippine market. The first U.S. franchise was established more than 15 years ago, and to date over 20 U.S. franchises are registered with the Philippine Department of Trade and Industry. Registered companies include industry giants such as McDonald's, Dunkin' Donuts, Goodyear Tires, and 7-11 convenience stores. The majority of franchises operating in the Philippines are in the fast food and restaurant business. Other U.S. franchises operating with different arrangements offer auto repairs, hearing aids, and "trade name" franchises licensing intellectual property. The typical franchise operates under a master license agreement, where a single entrepreneur controls a geographic territory, and in turn licenses other business owners to operate individual franchise locations. Some franchises, including McDonald's, retain a majority of their own outlets and use employees as managers. The trend among U.S. franchises operating in the Philippines, however, is away from use of employees, and toward reliance on local entrepreneurs as owner- operators. A study completed in 1992 under the auspices of the U.S. Agency for International Development concluded that four industries offer excellent opportunities for future U.S. franchises: business aids and services, food and beverages, and printing. Other areas offering good prospects include: automotive parts and services; cosmetics and toiletries; children's stores, furniture and products; equipment rentals; health aids and services; hotels and motels; laundry services and dry cleaning; maintenance, cleaning and sanitation services; security systems; and water conditioning. D. Direct Marketing Direct marketing or the multi-level marketing approach is a popular mode of selling products in the Philippines. U.S. firms such as Tupperware, Avon, SaraLee, High Desert and Encyclopedia Britannica have established distributorship networks in the country. The legalities of direct marketing are covered by the Consumer Code of the Philippines, and this type of business practice is restricted to 100 percent Filipino-owned corporations. However, foreign firms can engage in wholesale activities and then sell to Philippine distributors. The Direct Sellers Association of the Philippines has 18 members. E. Joint Ventures/Licensing An increasingly common method for enterprises embarking on business operations in the Philippines is through joint ventures with local enterprises. There are two compelling reasons: the joint venture reduces the amount of capital the investor must put up, since a local partner shares in the capital requirements of the new business; and if the proper local partner is selected, the joint venture provides the new business with important local marketing know-how and management skills. Philippine law on joint venture corporations states that where activity to be undertaken is partially "nationalized", the foreign entity is limited to equity participation where the prescribed majority shall be held by Filipinos. Nationalized means reserved for ownership by Filipino citizens only. The Bureau of Patents, Trademarks, and Technology Transfer under the Department of Trade and Industry is the government body that approves and supervises all licensing/technology transfer agreements. The term technology transfer refers in the Philippine context to contracts or agreements entered into by and between domestic Filipino companies and foreign/foreign-owned companies involving the transfer of systematic knowledge for the manufacture of a product, or the application of a process; rendering of a service, including management contracts; licensing of all forms of industrial property rights including marketing/distributorship agreements involving the license to use foreign trademarks, tradenames and service marks and other marks of a proprietary nature. Included in the foregoing arrangements are local distributorships, export marketing agreements that involve the licensing of foreign trademarks, and retainerships of foreign firms or individual technicians for the rendering of management and/or technical consultancy services as part of the technology transfer or licensing agreement. So that royalties may be remitted in full, net of taxes, at the prevailing exchange rate, royalty, or technical service contracts between residents and non-residents (payment for which is based on the value of the article manufactured, used, or sold) must be registered with the Bangko Sentral ng Pilipinas (Central Bank). To be entitled to registration, foreign investors must meet the following conditions: 1. The contracts must provide for a fixed term of not more than 10 years with no automatic renewal clause; renewal is allowed upon prior approval of the Technology Transfer Registry (TTR). An indefinite term may be allowed for royalty-free agreements and arrangements for the outright purchase of technology. 2. The contract must not contain the restrictive business clauses identified under section 12 of the Rules, one of which is those which restrict directly or indirectly the export of the licensed products under the technology transfer arrangement, unless justified for the protection of the legitimate interest of the technology supplier such as export to countries where exclusive license to manufacture and/or distribute the licensed product(s) have already been granted. 3. Royalties/fees not exceeding 5 percent of net sales shall be granted automatic approval provided the technology transfer arrangement involves the transfer of technology through the licensing of patents and/or knowhow and trade secrets. Higher than 5 percent royalty rates may be approved subject to a determination of the reasonableness of the requested fee. 4. The contracts must also contain requisite provisions as provided in Section 13 of the Rules, which among others include that the laws of the Republic of the Philippines shall govern the interpretation of the contract and in the event of litigation the venue shall likewise be the Philippines. Withholding taxes on all payments relating to the contract would be for the account of the licensor. A bonus royalty of two percent of net foreign exchange earnings may be allowed if the technology supplier commits to assist the technology recipient in the export of the licensed product(s). F. Steps to Establishing An Office A business enterprise must comply with the following requirements before it can start operations: 1. Apply for registration of the business name with the Bureau of Domestic Trade; 2. Register with the Securities and Exchange Commission if a partnership or a corporation; 3. Apply for a Barangay permit and Mayor's permit to operate in a chosen locality of business; secure municipal license (Export Processing Zone Authority enterprises excluded); 4. Register with the Bureau of Internal Revenue to obtain Tax Account No., Value-Added-Tax Registration No., and individual residence certificates for owners/incorporators; 5. Register employees with the Social Security System, Medicare, and Department of Labor and Employment. The essential forms of business organization in the Philippines are sole proprietorships, partnerships, and corporations. Other less common business forms include joint stock companies, joint accounts, business trusts, and cooperatives. A foreign entity, depending upon the nature of its intended activity in the Philippines, may establish and register any of the following: a branch, a subsidiary, a licensing and franchising agreement, a joint-venture agreement, and a regional headquarters. G. Selling Factors/Techniques There are several invaluable sales tools which U.S. suppliers should employ in order to maintain market leadership. Americans should exercise due diligence in the selection of their local distributors, agents, or representatives, since they are important market links. After selection, U.S. suppliers must provide full support to their local representatives. Periodic visits to the Philippines should be conducted by U.S. suppliers to keep abreast of developments in the industries they are serving, to touch base with their local representatives to discuss problems or to devise marketing techniques, and to visit customers. There should be a strong emphasis on regular customer calls by local representatives in order for them to identify sales targets or opportunities. Training programs for customers and distributors, advertising and product promotion support, and participation in trade fairs, exhibitions and product seminars are of lesser importance but nevertheless are needed in order for U.S. suppliers to maintain leadership in this highly competitive market. H. Advertising and Trade Promotion The Philippines is a brand-conscious market. Advertising plays a significant part in promoting the sale of most goods, particularly nondurable consumer goods. Most of the current 107 advertising agencies have patterned their organization after American advertising agencies. The availability of inexpensive, mass-produced transistor radios and the growth of radio stations throughout the country have made radio the unrivalled mode of communications in the Philippines. It is the least expensive mode to reach the rural population. Almost two-thirds of all families have one or more radios. While television has grown rapidly in the last decade, it is concentrated mostly in Manila and other urban centers. Almost half of Manila's families own a television set, but only five percent of all Filipino families own a television. The high cost of television sets and the absence of television stations in many parts of the country make television viewing a "remote" possibility in rural areas. Over 20 national daily newspapers, all published in Manila, provide domestic and international news, as well as an expanding standard medium for advertising. The widest-circulated paper is the Manila Bulletin. Other widely-read newspapers are the Manila Times, Manila Chronicle, Philippine Daily Inquirer, Philippine Star, and Manila Standard. The widest circulated tabloids are People's Journal, People's Tonite, Daily Globe, Tempo, and Balita. Business Journals include Mining & Engineering Journal, The Energy Manager, Computer Times, Computer World, Garments and Textiles Association Journal, Construction Industry Association of the Philippines Newsletter, and others. I. Pricing Product In most instances, price is the primary consideration in the purchase decision of Philippine buyers. However, in some cases the quality of the product as well as the after sales service/support, and availability of spare parts, supersede price as a primary criterion. End-users prefer American-made products if they can afford them because they are well known for high quality and durability. While the reliability of U.S. products works to the advantage of U.S. suppliers, they should nevertheless be concerned with cheaper prices being offered by third- country competition. U.S. manufacturers and suppliers should be flexible in their prices and, where appropriate, should be prepared to provide end-users in different income brackets with alternative products. J. Sales Service/Customer Support Next to price, after sales service and support are extremely important factors to marketing success in the Philippines. It is imperative for U.S. vendors to provide this support during and after the warranty period in order to satisfy their customers. End-users talk to each other, and word-of-mouth can either make or break a U.S. product. K. Selling to the Government The Philippine Government itself is a large direct importer (usually through competitive bidding) of many essential products, including road building and maintenance equipment, cement, machinery and equipment for various government projects, and military and defense equipment. Government agencies pattern their regulations and procedures after those of the Bureau of Supply and Coordination of the U.S. Government's General Services Administration. The major government purchasers are the National Power Corporation, National Electrification Administration, National Housing Authority, National Irrigation Administration, Local Water Utilities Administration, Metropolitan Waterworks & Sewerage System, Department of Transportation & Communication, Department of Public Works & Highways, and the Department of Defense. Philippine Government procurement regulations permit a foreign company to bid on government procurement only if it maintains a registered branch office or a registered resident agent in the Philippines. The first step in obtaining Government business is to be placed on the Bidder's Mailing List of the agency with which the applicant is interested in doing business. This is done by sworn application accompanied by certified copies of the company's application for the Certificate of Registration issued by the Philippine Bureau of Commerce, articles of incorporation, a receipted franchise tax bill, an up-to-date financial statement, and other attachments, as required. Application forms of the various procurement agencies are substantially the same in most respects. All procurements of the Philippine military agencies are undertaken directly from manufacturers, except in the following cases: 1. When the manufacturer's marketing policy does not allow direct sales to its customer, the Philippine Government may procure from the sole or exclusive distributor of the firm's products. 2. Foreign procurements may be undertaken through a duly licensed local representative of the foreign manufacturing firm. However, procurement from agents, brokers, import-export firms or any intermediary which has been engaged for the express purpose of making any particular sales will not be authorized. 3. Government-to-government transactions require registration and accreditation of manufacturers and suppliers. A list of accredited suppliers is published annually and updated quarterly. In addition, foreign contractors are allowed to participate in the construction of only internationally bid and foreign-financed/assisted projects in the Philippines. For this purpose, foreign contractors must apply to the Philippine Contractors Accreditation Board (PCAB) for a special license which is issued on a project-by-project basis. L. Protecting Your Product from IPR Infringement In order to protect their products from intellectual property rights (IPR) infringement, U.S. manufacturers and suppliers should register their patents, trademarks, and brandnames with the Bureau of Patents and Trademarks located at 5th Floor, Department of Trade & Industry Building, Sen. Gil. J. Puyat Avenue, Makati, Metro Manila. The Philippines was moved from USTR's special 301 "priority" watch list to the regular watch list following an agreement signed in April 1993 between the two Governments which significantly strengthens protection of IPR in the Philippines. The Philippines has so far implemented the administrative/executive items on schedule. However, it has failed to introduce comprehensive legislation to Congress by June as it agreed to do. Therefore, while administrative enforcement of intellectual property rights has improved, especially in the video sector, IPR owners who must have recourse to the courts experience slower and less certain enforcement. A list of Philippine lawyers specializing in IPR cases is available from the U.S. Embassy's Economic or Commercial Section. M. Need for a Local Attorney It is advisable to have contracts and agreements executed in the Philippines so that the laws of the Republic of the Philippines shall govern the interpretation of the these documents, and in the event of litigation the venue will likewise be the Philippines. Legal documents notarized by Philippine lawyers can be authenticated by the U.S. Embassy Special Consular Services Branch. The use of a local attorney is highly recommended for U.S. firms who wish to establish an office in the Philippines, in order to obtain easier access to the various government offices involved. For firms maintaining operations in the Philippines, it is advisable to retain a local attorney or law office to handle legal matters. A list of recommended lawyers is available from the U.S. Embassy.