Midyear Economic Update

Philippine IT-BPO Industry

Benedict Hernandez

BPAP CEO, President CCAP

September 17, 2012

ITIT--BPO Growth ProspectsBPO Growth Prospects

• Philippine IT-BPO growth prospects remain strong in 2012

– 100% of mid-large companies expect to grow in 2012; 52% expect growth >15%

– Contact centers continue to be number 1 and will grow higher than forecasted 15%

– IT, Corporate Services, GICs, Healthcare will continue to grow faster (grew 41% in 2011)

– Philippines cited amongst top IT-BPO destinations, along with India, China, Malaysia

– Growth is inclusive and continues to spread-out nationally

• 20% YOY growth , alongside service and market diversification possible given

– Continued intensified PPP efforts in human capital development initiatives

– Maintained competitive & predictable incentives, especially given currency moves

– Sustained regulatory environment, ease of doing business, peace and order

– Address perceived country risk issues, especially on disaster prevention and response

– Improved country marketing given competition activities

• 2016 stretch target of $25Billion in revenues and 1 .3 million direct employment attainable give above conditions

• Good governance means good IT-BPO business

1

The Philippines’ ITThe Philippines’ IT--BPO industry has grown rapidlyBPO industry has grown rapidly

Philippine IT-BPO industry size2006–2011; US$ billion

x% YoY Growth

1 Philippines IT-BPO market as percentage of global offshore services market, in revenue termsSources: BPAP, ACPI, CCAP, GDAP, HIMOAP, PSIA

# FTEs(~‘000) 240 370 423 525

Global share 1 5% 6% 6% 7% 8%

3.2

4.8

6.1

7.1

8.9

11.0

2006 2007 2008 2009 2010 2011

~50%~26%

~16%

~25%

2 Copyright ©2012: BPAP. All rights reserved.

FTEs Revenue(US$M)

%inc.

fr ’10

Voice BPO 416,000 7,400 21%

Non-voice BPO/KPO

128,650 2,058 24%

ITO 49,908 993 37%

Health Info Mgt & Care

24,700 277 172%

EngineeringServices

9,030 172 5%

Animation 8,640 128 -10%

Game Development

1,391 8 13%

TOTAL FTEs 638,319 11,036 24%

~24%

300 638

8%

Reasonably optimistic outlookReasonably optimistic outlook

• 91% of 155 respondents expect to grow

• No firm with >1K expects to reduce

• 66% expect growth by 11% & up, 52% by 16% & up

Growth forecasts of 155 IT-BPO Companies in the Phi lippines in a March survey

Strong indication of increasing diversification

Growth of ITGrowth of IT--BPO industry means economic BPO industry means economic growth of the entire Philippinesgrowth of the entire Philippines

7,000

Current FTEs

55,000

123,000

Absorptive capacity

Cordillera-Ilocos Hub• San Fernando, La

Union

• Dagupan• Baguio

1

Current FTEs

42,000

Absorptive capacity

Central Luzon Hub • Angeles/Clark

• Cabanatuan• Olongapo/Subic• Tarlac City

2

17,000

Current FTEs

86,000

223,000

Absorptive capacity

Western Visayas Hub • Bacolod

• Iloilo City

3

21,000

Current FTEs

39,000

69,000

Absorptive capacity

Central Visayas Hub • Cebu City

• Lapu-Lapu City• Mandaue City• Dumaguete

• Tagbilaran

39,000

Current FTEs

35,000

63,000

Absorptive capacity

Absorptive capacity at current yield rates

Additional capacity at targeted yield rates

NCR

7,000

75,000

4

Current FTEs

Theoretical capacity

1.4M

402,000769,000

Davao-GenSan Hub5

National Capital Region

75% of IT-BPO jobs are in NCR, with only 25% of PH graduates; IT-BPO is biggest private-sector job creator and employer in many tier 2 ‒‒‒‒3 cities

Reasons Why Philippines Is Top Offshore BPO LocationReasons Why Philippines Is Top Offshore BPO Location

6

• 3rd-largest English-speaking country, 12 th most populous country• 90+ million population, 39+ million work force• 500,000+ college graduates per year; 93% literacy r ate• Western-based legal and accounting curriculum and c ertification

Scalable Educated Talent Pool

• Labor costs for English-speaking professionals amon g lowest in the world• All-in costs among lowest in the world• Predictable and manageable inflation

Cost Competiveness

• Abundant low-cost & high quality real estate in sev eral urban areas• Reliable, redundant, low-cost telco infrastructure• Reliable power and building 100-200% back-up as a s tandard• Available 24/7 low cost transportation

Excellent Infrastructure

• Government support in education, locator support (P EZA, ICTO)• Income tax holiday (4-8 years), 5% tax on GI post h oliday, VAT exemption• Comprehensive BPAP Road Map 2016 to achieve 20% YOY growth

Government Support & Public-Private

Partnership

• No. 1 in Voice: customer care, tech, financial serv ices, sales, collections• Mature/growing industry-specific and cross-industry capability:

IT, F&A, HR, Health & Care BPO, Procurement, Banki ng, Utilities, Telco• Primary English-based services plus other Asian and European languages• Analytics & KPO capabilites

Proven Track Record

Philippines’ incentives are comparable to India and ensure cost Philippines’ incentives are comparable to India and ensure cost competitivenesscompetitiveness

* 8% if company avails full benefit of tax holiday f rom operating out of Special Economic Zones (SEZ)Source: Everest Group (2012)

Effect of cumulative incentives on per-FTE costsAverage annual FTE cost savings; US$ per FTE

400-450

800-950

Philippines India

Cost post-incentives

Incentives

Incentive % of per-FTE cost

1,400-1,600

14,000-16,000

13,000-15,000

Example for a 1,000 FTE voice BPO setup in 2009 and ramped up over 5 years

~9% 3-8%*

� Incentives are an essential component of geographic evaluation by new investors

� Effect of incentives ensure competitiveness with key competitors such as India

� Cost attractiveness is the ‘ticket to play’ for new service offerings/markets

1,200-1,400

Effective cost per FTE post-incentive

Effective incentive per FTE (for all investors)

Tax incentive per FTE (only for companies setting up in Special Economic Zones)

Promising Promising MainstreamMainstream

DevelopmentalDevelopmental Not Sustainable

Unprecedented PPP Effort In Human Capital DevelopmentUnprecedented PPP Effort In Human Capital DevelopmentBP

AP

Le

d &

M

anag

ed

Me

mbe

r/P

artn

er L

ed

Com

mun

ityLe

d

Conceptual R & D Pilot Scale

TESDA TM+ TESDA TM+ P18m P18m

TESDA ITWSPTESDA ITWSPP416M P416M

Quezon LGUQuezon LGUP2mP2m

BPAP SMP BPAP SMP Pilot P1mPilot P1m

DOSTDOST--SEISEIP8m P8m

Alvarez SMPAlvarez SMPFast TrackFast Track

P54m P54m CHED CHED P125mP125m

ADB KM Hubs ADB KM Hubs P27m P27m

TALENT DEVELOPMENT

DOSTDOST--ICTO T3ICTO T3P10mP10m

QCPU LGUQCPU LGUP2mP2m

Various LGUVarious LGU

Se

lf Fu

nde

d

FEU Fern FEU Fern P1mP1m

Total 2012 Project Value P668m impacting: Total 2012 Project Value P668m impacting: •• 106,157 Students (Direct)106,157 Students (Direct)•• 51,690 Students (Indirect)51,690 Students (Indirect)•• 2,730 Trainers2,730 Trainers•• 5,532 Teachers5,532 Teachers•• 44 Academe Partners44 Academe Partners•• 283 TVI Partners283 TVI Partners

$25B Case Attainable Given Continued Government Support$25B Case Attainable Given Continued Government SupportIn human capital In human capital dev’tdev’t, fiscal & regulatory policy, infrastructure, fiscal & regulatory policy, infrastructure

1,312K 2,250KIndirect jobs 3.2M

% of GDP 4.7% 6.9% 8.6%

1,700K

5.2%

2011E2010 Accelerated Case 2016

Base Case 2016

Low Case 2016

525K 900KDirect

jobs 1.3M680K

Philippines IT-BPO industryUS$ billion

US$15 billion

2.4 million• Direct: 0.7M• Indirect: 1.7M

₱820 billion• Direct: ₱328B• Indirect: ₱492B

US$20 billion

3.1 million• Direct: 0.9M• Indirect: 2.2M

₱995 billion• Direct: ₱398B• Indirect: ₱597B

US$25 billion

4.5 million• Direct: 1.3M• Indirect: 3.2M

₱1,290 billion• Direct: ₱516B• Indirect: ₱774B

Export Revenues

Jobs

Taxes on Wages

640K

1,600K

5.4%

2008

What’s At Stake?

Vs Base Case, Accelerated Case adds from 2012 to 2016:

� 1.3 million jobs

� $14B export revenue

� ₱295B taxes on wages

Recession proof

2009

25%17%

4.4%3.7%

423K372K

1,057K930K

26%22%