Start a Business in the Philippines

So, you figure you are going to pack up your bagss and sell off your stuff and head on over to the Philippines and start a small business? Live off the income until your retirement cheque comes in? Got yourself a nice Filipina Asawa and you have been there on vacation a few times and love the place? Right?

Why not? A few thousand bucks over here goes a lot further than back home. You don’t need to be Bill Gates to have a nice little earner paying the monthly bills. Or do you?

First of all, if you have never run a business before, what makes you think you can run one in a foreign country? If you can’t handle the paperwork back home, this place will be a nightmare. You might think you will hire a qualified local to do the messy stuff and you’ll just play the role of know it all expatriate businessman.

Sounds good and it can be done. Most likely you already have that brother-in-law, sister-in-law, cousin, uncle, aunt or other relative of the wife in mind. After all, you probably paid for them to go through college and get that degree in business management. Just remember the standards of education here are not what they are back home.

Unless you paid serious money and sent them to one of the top Universities like UP, University of the Philippines, or Santo Thomas, the odds are their qualifications are shaky at best. Even if they know what to do, they might feel “shy” about actually making decisions and taking responsibility. It’s a cultural thing.

They may have spent more time marching around at ROTC or preparing for the colleges’ entry to some Quest or festival than real study. Some of the subjects might be taught a little differently than what you would presume. English for example. Just because he or she did four years of college level English doesn’t mean they speak it. They might be too shy and embarrassed about making mistakes. It happens and it doesn’t make sense to us but this is the Philippines.

Perhaps you have some previous business experience and feel you can apply that to the local market. Perhaps you can, perhaps you can’t. If you presume the industry you have spent forty years in back home is the same industry here, you might be in for a shock.

We also need to take into account the Filipino Factor. In this case, it has been my experience through interviewing dozens of ex-pats over here that the number one cause of business failure is not lack of cash, expertise or a lousy market. It is the Filipino. Most businesses, especially small ones, require Filipino involvement. This is where things start to go wrong.

The reality is that I have been told so many times I’ve lost count, that you should never go into business with a Filipino. Who told me? Filipino’s! Foreigners are too polite or too worried about being labelled racist to say it straight out unless they have been here a long time and happen to have successful businesses.

Those long term, successful businessmen will tell you the same story. They got screwed over until they cut the Filipino’s out of the loop in all the major areas or they were very fortunate and met decent Filipino partners. They manage things very tightly and are always on the lookout for a new angle they can be scammed from. They have one Filipino to manage the rest of the staff and they closely manage the manager. Do they trust this Filipino? Only as far as they can be bodily lifted and thrown, usually. If it is a relative or their domestic partner, probably less.

I have a good mate from New Jersey, Michael L. He has been over here for three or four years and owns three pawn shops and a bar. He had other businesses but family members ripped him off so he closed them. He’s closing the pawn shops due to losing over P2 million in two years. He’s closed the bar after it was broken into and ransacked, most probably by a former employee who knew where to look for the good stuff.

Michael is sharp, he’s experienced and connected and nobody’s fool. The point is, no matter how sharp he might be he was taken to the cleaners by those he should have been able to trust. After all, he was giving them a living and a good one at that, on a plate. But they were greedy. They saw ways to clean him out and they did. Nothing personal, just business, Filipino style.

Having said that, I want to make it very clear I have Filipino friends who are the most honest people I know. Warm, kind and wonderful. But I wouldn’t go into business with them. Some are closer than family to me. I don’t want to risk the relationship by bringing money and temptation into the arena. They are the ones who advise me never to go into business with them or any other Filipino, among others.

Are there success stories with foreigners going into partnership with Filipino’s? Of course there must be but I haven’t heard of any, at least not on the small to medium scale. When you delve deeper into the successful businesses that do have Filipino partners you find some common denominators.

Usually the Filipino’s are merely front people or dummies. There are Anti-Dummy laws here to curb this activity but like anything else they can be interpreted to one’s advantage. Dare I say circumvented? The real power in the business remains firmly in the foreigner’s hands. After all, he would have put in most if not all of the money in the first place.

If the Filipino partner is real and actively engaged in the business, then he will be a minority stock holder. The majority of the stock will be held by the foreigner and his spouse. Or the Filipino will be that spouse and it is a family business all along.

The other factor is that the business is a big one with lots of money and maybe even part of an international corporation so it is not what we are talking about. By small business I mean anything that costs from zero to US$100,000 to get going. At the upper end we are talking serious money. Most people would look around the US5,000-20,000 mark when contemplating starting something over here.

Let’s pause a moment to look at the current laws regarding foreign ownership of a business here, or levels of investment. Depending upon your Visa, you might not be able to actually manage or run a business. Even with a 13A Permanent Resident Visa you need a Work Permit to be employed.

I do believe you can own a business and be on the premises, but be careful how you describe yourself to the authorities. Things change from time to time and place to place, so make some inquiries locally when you do your own research. Whatever you do, pay your taxes! They aren’t much compared to some countries but if you avoid or evade them you will be made an example of.

Foreigners are prohibited from 100% ownership of a business in many categories of industry and service unless you export at least 70% of your production or invest US$200,000, or are set up in a Special Export Processing Zone. Setting up in a SEPZ takes at least the high end of our investment ruler so I won’t worry too much about that.

Some industries totally prohibit foreign investment, mainly related to National Security. Others are allowed only a total of 40% foreign ownership and the list of these is so loosely written they can be interpreted to include virtually everything. On top of this there is a long list of professions which foreigners can not practice such as Doctors, Dentists, Lawyers, Accountants, Engineers etc unless employed by a foreign company or by a local company with a valid work permit. You can’t hang up your shingle and start raking in the peso’s. You might get away with consulting, but be careful.

Foreigners are prohibited from engaging in a lot of primary production businesses, all retail businesses, unless they are part of a mega-chain worth millions in sales in their home countries and most infrastructure service industries like transportation. That means you can’t legally operate a jeepney or taxi etc. Fishing is out. So is land and sea transportation. Lots of things.

Of course this is designed to prevent the rich foreigner from waltzing in and monopolising the local economy and forcing the micro businessmen and women that form the backbone of commerce here into bankruptcy. Protectionism in other words. Forget the fact the market place is saturated with sari sari stores and bakeries and anything else.

Ignore the local habit of setting up shop next to a dozen identical businesses selling identical goods at identical prices with the display looking exactly like every other store. You can’t do it. You can’t even set one up somewhere else amidst a bunch of stores selling something else and display differently to the other stores in your industry. It just isn’t done. Nobody would buy from you. They would be too shy, read scared, to break the chain!

People who do well here usually manufacture something and take advantage of the cheap labour force. Then they export the finished product back home and get paid in hard currency. Furniture is a major line in this category, also native handicrafts and there is a growing market for higher tech goods in the cell phone and computer industries. Competition from major companies working out of China and Vietnam is cutting into some of these businesses, but they are still the best bet.

The trick is to identify the target product and set up a distribution network back home before you leave. Have proven dealers and agents selling the goods for you and get paid in Dollars or Euro’s or Sterling. Of course there is only so much cane furniture the western world can handle, but that seems to be a big hit here in Cebu. One day the raw materials might run out, as is happening with rattan and even bamboo getting harder and harder to source at the right price and consistent quality.

You also have to have the right standards to compete in the western marketplace, so quality control means always being on top of things. On a smaller scale, some people utilise the web and sell goods on e-Bay and similar auction sites. The hassle is finding the right product that won’t be too heavy to ship or else the freight costs more than the item. Plus you need to set up a payment system that will allow you to get the money into the country.

Tourism and food are two other favourite industries for the budding ex-pat tycoon. Most ex-pats who do make a bundle started out as a sideline while still on the big ex-pat salary package.

Everybody thinks at one time or another about opening a restaurant. Think again.

If you intend to show the locals how quality food should be served, then make sure you are in a location that will support people willing to pay for such standards of excellence. Most Filipino’s won’t. You are limited to ex-pat watering holes like Angeles City, Baguio and Boracay or major cities like Manila and Cebu, maybe Davao.

Makati, Alabang and so on already have a plethora of upscale eateries with more added every time you turn around. You are talking serious investment here if you want to give yourself a chance to succeed. Again, if you didn’t run a great restaurant back home, what makes you think you can do it here? My mother has been in the food business all my life and most of hers and I have worked first hand in the kitchen, behind the bar and on the floor and I know what makes a restaurant work. But I don’t think I would try one here.

Why? Well firstly I don’t have the money to do it big and bold. Even cosy ambience has to be done correctly or else it is doomed to fail. I don’t have the money and I don’t have the expertise. Working in a restaurant is one thing, running a successful and popular venue something else entirely.

When you get away from the major locations you run again into the Filipino Factor. The simple fact is they like their native cuisine. All five dishes of it. OK, maybe I am being a little harsh but there are too many Carenderias around the place. They all have five large pots set up out front and serve up the same lukewarm soupy dishes with rice. Or else it is BBQ. Pork, chicken, fish, whatever. Same stuff everywhere.

Your average Filipino eats the same food every meal every day with little variety. They keep variety for special occasions like weddings, birthdays and Fiesta’s. When they eat out they eat the same things they eat at home, the only difference is the fact they are eating out. Eating out is more a way of showing off that they can afford to eat out, or reminding the people hanging on to the salary of the breadwinner that he or she is bankrolling their existence.

Many families have one or two earners feeding up to a dozen siblings, aunts, uncles, Lolo’s and Lola’s etc. If they go out for a meal then everyone goes and it is a chance for the earner to re-establish the respect they are due for being the breadwinner.

In the province, chicken is kept for guests and special occasions. Unless I am there at meal times, the chickens at my in-laws house live a carefree existence. If the kano son in law doesn’t come around then pork and chicken are what’s eaten at Fiesta time. The rest of the diet is rice, small bits of fried/dried fish, a few vegetables and corn meal. Banana-Q is a treat, BBQ’d bananas with maybe a little sugar on them. Fruit is taken from the trees around the house and meals are small and hopefully frequent.

So when it comes to eating out, most people don’t. When they do it is at a BBQ stall or Carenderia. Even the big food halls in the major malls are different to ours. Where we would have a Chinese, a Thai, a BBQ and a Mexican amongst many others like fast foods, Lebanese, health food etc; these places have only Filipino food vendors. Even the one titled “Shanghai Wok” at Ayala sells the same Filipino food the rest of them do!

They all have the same five pots out the front, next to BBQ meats and fish on sticks displayed on banana leaves with a serrated edge cut into them. Boiled chicken or pork pieces with the bone still left in, sour soups, little stews of veggies. Its all the same.

The important thing to remember for the budding gourmet is that the supply is responding to the demand. Filipino’s are very loyal to their cuisine. Personally I don’t find much that I like and would be happier, from a gastronomic point of view living in Thailand or Malaysia, even China. But if you want to do business in the Philippines then your customers, in the main, will be Filipino’s and they want the same things everybody else is selling.

You could try selling western food but unless you set up where there are a lot of westerners then get ready for some slow lunch times. The cost of western food sends the prices up beyond what the average person wants to pay. Look at the Pizza Hut. A pizza there will set you back more than what the average office worker makes in a day. So how do they stay in business? Well they sell a lot of spaghetti. So does McDonalds, KFC and Jollibee. When they sell pizza it is often to the small but growing middle class market in the cities. You don’t see any Pizza Huts in provincial towns. Even Greenwich, the local excuse for a pizza place sticks to the major urban centers.

Maybe the set up cost of buying that pizza oven, or the numerous ingredients required hikes up the costs. Whatever the reason, pizza’s are expensive here. If you serve western food then the basic ingredients might be available at the local market, but the sauces and condiments are all imported and cost real money.

Westerners don’t, generally, like Filipino bread. It is too sweet. That is because Filipino’s don’t butter their bread. They can’t afford to. So they add sugar to the mix. Dairy products are fairly recent additions to the diet and not as wide spread as the importers would like. There is not much of a dairy industry in the Philippines so most milk, butter and cheese is imported from Australia and New Zealand. Locally made Magnolia brand goods taste different to the imported stuff and are more in keeping with local preferences.

Real “fresh” milk is available in the major cities. Elsewhere it is called “fresh milk” but it is actually UHT, Ultra Heat Treated milk. A recent interview with a milk manufacturer in a Manila newspaper reported that “fresh milk” sales are just 1% of all milk sales in the country. UHT milk is not much more, with most families that actually include some form of milk in their diet use powdered milk. Although quite expensive itself, powdered milk is cheaper per litre than UHT and is heavily promoted by the manufacturer’s. Their advertising claims include statements about how their product will increase the child’s brain power and height.

Given every tree around my place seems to have a goat tied to it, I always wonder why there isn’t a thriving goat milk market here. Nobody makes goat’s milk or cheese that I have found. My wife says nobody would buy it. Why? They just wouldn’t. They also don’t breed the goats for the high quality wool we get from them in the west. Why? It’s too hot for woollen garments here and so the native goats are not the wool producing varieties. The return on the wool is not worth the cost to shear the goat.

Carabao’s are used for some milk products but on a tiny scale, mainly ice cream. As for dairy cows, I haven’t seen any and the meat cows they do have are never milked. Dairy products simply aren’t part of the diet, historically.

So any attempt at opening a restaurant with western food needs to be where lots of westerners and well heeled Filipino’s will be and these places will offer a lot of existing competition. Setting up close to a major University might help as college students from better off families have the spare cash and the will to try new things. Otherwise, stick to the native cuisine. So as I said, unless you have experience in the restaurant game, think again.

I had the idea of making some hot dog stands and felt it would do well. One look in the meat freezer at the supermarket shows a dozen different brands of hot dogs overflowing from the chest freezers. But selling them on the street like back home would require locals to change from their own, native fast foods. I still think it would work, but as the wife disagrees I will leave the business plan in the “pending” file.

Someone once wrote in to a Living in the Philippines web site asking about starting up a lawn mowing business. Lawn mowing can be very lucrative and easy to organise. But in the Philippines? I haven’t seen any lawns to mow. Those who do have grass around their houses also have helpers and gardeners with little else to do but get out the scissors and snip away!

Looking for a suitable business here is no different in some ways than doing it at home. The disposable income available is less, and more restricted geographically. Luckily those areas are easy to identify, if somewhat saturated. Get hold of the local Entrepreneur and Small Business magazines and do some reading. Look at the web sites for the newspapers and check the classifieds for businesses for sale.

When it comes to buying an established business you have to ask yourself why is it for sale? Be prepared for some illogical answers. You will not get the truth, no matter who is selling it. A part of the culture here is not to say anything that might offend, this includes giving the truth if you believe the truth will hurt. It is bad enough when you ask for a coke and they smile and say OK and then the coke never appears because they don’t have any. Telling you this would upset you and make them lose face. Better to just tell you what you want to hear and hope you are smart enough and courteous enough not to ask what happened to the coke you ordered an hour ago. When it comes to major purchases such as a business, it can go beyond irritating and into the realm of expensive.

Negotiations to buy the business are not straight forward either. Don’t expect to ask direct questions and get direct, if any answers. You are only embarrassing them, maybe even questioning their character. Don’t try to understand this, just accept it as the way it is. Of course your USA educated wheeler and dealer might treat you as a westerner, but then we’re back in the high end of business buying again. At grass roots level it will be a circuitous path you follow to get any information at all.

Personally I think buying a business here is buying someone else’s problems. Start your own from the ground up and then sell it to someone else. Let them inherit the drama’s and rich local colour. There are some businesses that do well when purchased as a going concern, but these are run by people who know what they are doing and sold to people who know what to do to keep it that way. As I have already stated, if you couldn’t run a successful business back home then don’t try it here.

There are two basic levels of small business here. The first level is the subsistence business. Usually this is started to give the in-laws and immediate family of your spouse an income stream while you remain back in Shinbone, Arkansas or Kickacanalong West Queensland and make real money. You keep having to bail the relatives out with cash injections and wonder how many more times you will have to do this. Things would be different if you were living there full time. You’d make the thing profitable!

You probably would do ok if you could sack the staff and work it yourself. Of course the staff are all family and you are prohibited from working in that business by law or reason of Visa, so it won’t happen. The business will run down to a consistent level of poor performance and nobody will care so long as the rice and fish appear three times a day and there is a few veggies from time to time.

These sari-sari stores that every second house has sprouting out of an annex with a hole in the fly screen and a sign advertising Jenny Store and Coca Cola make bugger all money. Firstly there is enormous competition. Secondly the mark up on stock is very slim or else the customers will go somewhere else. You have to man the store from morning till night and are lucky if you clear P100 a day. This is fine for Filipino’s but a foreigner might find it hard to live off.

Take a bottle of Coke for example. You have to buy it, refrigerate it and then make sure you get the bottle back. You buy it for P6 or P7 and sell it for P8. Beer you buy for P13 and sell for P15, maybe P18 if you are lucky. Beer is more expensive than Tanduay Rum. You can buy a bottle of rum and two small bottles of coke, Sprite or the local equivalents, (Jaz and Sparkle in Cebu) for the cost of two beers. You pour the lot into a plastic jug and you and several mates get drunk. You won’t get the same effect from two beers shared around four amigo’s!

You stock up on junk foods and single serve packets of everything from aspirin to coffee to shampoo to toothpaste and drape them from wire hangers. Each one sold might net you a peso. You have some fast foods to sell on the side and make some extra cash. Even if you get ten customers an hour each spending P20, your total profit will be after a twelve hour day, P240-P500. And nobody gets 120 customers a day. Out of the profit you need to pay a helper, electricity, rent maybe, gas to get you to the Prince Warehouse to restock and so on. If you made P15,000 (US$300) a month you would have the biggest, busiest sari-sari store in the country.

I have a piggery I operate with my in-laws. The piggery cost P100,000 to construct including septic tank, water tank and fly screens. We can hold up to 30 pigs in five pens, usually we handle 20 at a time. When the summer comes we cut back as feed prices rise and eat into the profits.

We make between P200 and P1000 net profit on each pig, sometimes more if we sell it for Lechon (roast pig)rather than by the kilo. Selling requires Papa to stay with the pig at the slaughter house until it is slaughtered, weighed and he is paid. If he didn’t then we would get cheated.

Mama handles the buying and the selling and does most of the cleaning and feeding. She can guess a pig’s weight by looking at it and is rarely more than two or three pounds off. I let her decide which business to get into when I offered to set them up in something income producing. Do what you know is the tried and tested maxim. Mama knows pigs.

We had 8 die from disease spread by birds before we got the screens in place. Even with Mama and Papa knowing the business, I had to show them how to keep a simple ledger and how to work out what each pig was costing and how much we made from them and so forth.

So when we sell our pigs I get a little pocket money and the in-laws get a living. I didn’t do it to live off, but for them to have an income. If you want to live off pigs you need at least 100, preferably 200 and you better know what you are doing. You have to work the farm and be there all the time. You can’t be an absentee landlord and farmer and expect to make any money.

We also have a small Lot we bought for P75,000 for 2000 square metres. We have cut down and sold the coconut trees for lumber as they were getting too tall and nobody would climb them for the nuts. My first P100 I ever made here was from coconuts. Eventually coconut palms fall down and if they damage a neighbours house or land you might get a huge bill for damages. Better to cut them down and sell off the lumber, but make sure you get a permit from the Barangay Captain.

We also have some fruit trees on the Lot and we sell the fruit to family in the area to remind them not to steal it. This year we will plant corn which will augment the pigs and also bananas for the cash. I would like to plant mango trees but it takes five years for them to become harvestable and we have nobody to tend them. If we lived on the Lot then fine, but Mango’s need watering and protecting from thieves. We could fit 20 trees on the lot which in time would yield up to P2million a year in fruit, not bad if you can wait the five or six years for the first crop.

The secret with primary production is to know what you are doing, or have someone you trust who does. Then you have to work the land yourself and supervise everything. You must be there all the time. Don’t forget you can’t own the land, only the wife can (Filipino citizens). You can lease for 50 years with a 25 year option, though.

Tourism is another area many get into. I did and was burnt by our Filipino partner’s greed. With the current world situation and the fact the Philippines have never been a major tourist destination for one reason or another, domestic tourism is the only reliable market in this industry. Unless you have solid contacts back home to feed you a constant supply of tourists, things can get very bleak.

There are also laws as to what you can do here. The smart way is to lease the land and build the resort, then be a partner in the operating company that rents the resort from you. That way you keep an eye on the operators directly, plus if they mess up they have a year by year contract and you sack them and form another corporation. You keep control of the land, the buildings and inventory and also of the management of the place and abide by all laws.

Don’t rely on Kevin Costner’s “build it and they will come” theory of development strategy. You need to aggressively promote and market the place and bus the guests in if need be. The low season can be as long as half the year or more and every time the Abu Sayyaf kidnap someone on far away Basilan, trade suffers. If the NPA blow up a telephone tower ten islands away you eventually hear the explosion. Empty resorts can be very quiet places, indeed.

SARS hasn’t helped. Saddam Hussein and Osama Bin Laden have a lot to answer for too. What will be the next blow to tourism? At least if you develop your resort or facility for domestic tourists you can be sure you will always have a market. Filipino’s like to go to resorts on their vacations and days off and the country is full of them. Many can’t afford to go anywhere else or qualify for a Visa for overseas holidays, even if they have the airfare.

When it comes to the Filipino tourist be prepared for a self sustained family group. They will bring all their own food and drink and leave nothing but their garbage scattered around. They will buy very little and if the entry fee is too high or accommodation rates don’t allow every one to cram into the room then they will go elsewhere. You have to tailor your resort for their tastes and way of vacationing. This means a low net return per head!

Whatever business you attempt, invest small amounts at a time, minimise the risks in other words. I still think pigs are the best bet. Get a nice little property near the sea, build a modest house and a huge pigpen. Fill it with 100 piglets and 5 sows. Have the sows artificially inseminated by the local vet. By the time they pump out 50 or so piglets, the rest have fattened and are ready to go. Hire a couple of locals to do the hard work and keep a close eye on everyday goings on. Spend as much time on the beach or under coconut tree with your family as you can. That’s about as good as it will ever get!

Whatever business you choose, you will need a plethora of permits. A Mayor’s Permit, Barangay Clearance, BIR (Bureau of Internal Revenue) permit and any industry specific permits such as health clearances for food outlets etc. Employing people as a foreigner will mean complying with the DOLE (Department of Labor and Employment) regulations, even if most Filipino owned businesses don’t follow them. There are SSS Social Security System requirements for some industries. All the permits and regulations change from time to time and region to region. Despite what the “book” says, it can often be a case of who you deal with at the time.

At any government office you will find “Fixers”, offering to get everything you need for a price. Don’t touch them. They are illegal and because you are a foreigner it will come back to haunt you. If you are starting to form the opinion that, despite the official government stance of encouraging foreign investment the reality is different, then you are right.

This is a country that is proud of its independence. Unfortunately it needs foreign investment as much as it needs the billions of dollars sent back to the country as remittances from the salaries of the millions of Overseas Filipino Workers (OFW). Logic would dictate making it easier to invest here, national pride dictates otherwise.

This is a great country to live in if you have a solid income, preferably from an offshore source. Many people live here and run e-businesses on the internet and do well. Quite a few have prosperous businesses operating in the country and dealing with the locals, but it takes time, effort, money and an appreciation of the culture to reach that point.

The best advice I have to offer, as it was offered to me and has proven sound, is to come here and find somewhere you like to live. Then live there for a year or so before even thinking about opening shop. Research the market and the needs of the customers before deciding what to do. Above all, this is not a place that looks kindly on people who come here for the first time and try to make things happen.