AI threatens to dislodge Manila in the economic revolution

By Daniel Moss

Gazing down at the bustle of Manila from the upper floors of a skyscraper late one evening, it’s easy to feel like you are near the center of one of the great industrial transitions of the past few hundred years. This is the heartland of outsourcing, a practice that’s held costs down for some of the world’s biggest corporations — and helped make the Philippines one of Asia’s top performing economies over the last decade.

Like all great transformations, the shift has brought tensions and displacement alongside considerable bounty. It’s also generated a growing number of imitators eager for a slice of the expanding trade in services. While headlines frequently, and often simplistically, proclaim the demise of free exchange in merchandise and the cantonment of investment along national-security lines, transactions in services are doing better than fine. Relative newcomers, such as South Africa and Poland, hold considerable attraction. The Philippines needs to take great care that the apex of its success doesn’t presage a decline. That would be a major setback for a nation that missed the big manufacturing supply-chain boom of the 1980s and 1990s that benefited neighbors like Malaysia, Thailand and Singapore.

Think of the Philippines workforce and chances are you picture what’s politely referred to as the business process outsourcing, or BPO, industry: call centers. These have grown into increasingly sophisticated outfits handling insurance claims, debt collection, financial services, even engine design for planes. Subtract the Philippines and its competitors from modern capitalism and life becomes more difficult for the likes of United Airlines Holdings Inc, JPMorgan Chase & Co and Cigna Group.

These ought to be the best of times for back offices. The business has grown to around 8 per cent of gross domestic product from almost nothing in 2000. But in interviews with industry groups, executives and employees on a recent trip, I detected a note of anxiety. Strides in artificial intelligence are jeopardizing jobs and business. When I first reported on call centers in the Philippines in 2020, the risks seemed largely theoretical, something for the long horizon. Sure, people recognized AI’s usefulness — and downside. But they took comfort in the things that AI couldn’t yet do: empathy, talking to irate customers, figuring out workarounds to problems. And having conversational English, with an American tinge.

That era is passing, according to Mylene Cabalona, president of BPO Industry Employees Network, a call-center union. “Software is being used to improve service, but it is costing people their jobs,” she told me at a cafe after finishing her shift at one of the world’s largest banks. “Some get severance, some not.” Has the bot become the enemy? “Yes. We are unable to stop AI.”

There’s no point resisting AI’s march, but you can fight not to lose your edge. Some low-level positions, such as customer service that involves answering the phone quickly and dealing with rudimentary questions, have become commoditized. Increasingly, they can be done anywhere. Sophisticated voice software negates the need for at least some human interaction with a Western-friendly accent. About half the information technology and BPO roles in the Philippines are “low-skill jobs” that involve answering calls and dealing with inquiries, according to the International Labor Organization. AI-powered machines can do this with great accuracy, it warned in a 2020 report.

Still, the machine isn’t about to sweep all before it, said Arnold San Miguel, chief operating officer of Outsource Accelerator, a BPO firm nestled amid high-rise towers in the Manila neighborhood of Pasig, as the evening shift got underway. Clocks on the walls of the 41st floor point to time zones in Asia and America. Staffers clad in hoodies and jeans are settling in, but this isn’t like a college dorm. There’s the hum of a regular corporate office coming to life: conversations, the clack of fingers at keyboards. Street-art designs on a wall testify to the firm’s role in the business of disruption.

“People say robots will take the jobs, but the robot needs people to look after it and maintain it,” San Miguel explained. “It would be a challenge if you want the robot to become a developer,” for instance. Key to prospering in this industry — like many — is to diversify and move up the value chain. Expanding areas for outsourcers, such as real estate appraisals and even kitchen blueprints for yet-to-be erected buildings need expertise that can’t be simply delegated wholesale to a computer program.

The question is whether the Philippines is up to the next phase of development. One compelling complaint from employers is that a core attraction is being undercut: the ability of young Filipinos to read and write English. They blame the school system. That’s a shock for a nation that’s been a magnet for companies, mostly because citizens are fluent and have a broad familiarity with American culture, a legacy of the US role as colonizer and now security patron.

Local media in October reported foreign investors’ concerns about receding language fluency. The Philippines slipped four notches to 22nd out of 111 nations in a widely watched yardstick of English proficiency for 2022. It clung to second place in Asia, behind Singapore. This is a terrible time to be falling behind on the basics, and addressing this slide ought to be a priority for President Ferdinand Marcos Jr. (The industry also contends with pockets of unrest; a labor organizer was murdered last year.)

Services trade is galloping ahead, and the most dynamic aspect is a category known to economists as “Other Commercial Services,” which includes Indian information technology outsourcers and Philippines call centers. “OCS mostly takes place electronically and so is profoundly affected by digital technology,” Richard Baldwin, a professor at the International Institute for Management Development in Lausanne, Switzerland, wrote in a paper for the European Central Bank’s summer retreat in 2022. “The role of emerging markets is fast gaining pace.”

Other countries are nipping at the Philippines’s heels. South Africa is making aggressive strides. The scene there got an enormous boost in 2010 when Amazon.com Inc. set up a call center in Cape Town to service clients in the US, UK and Germany. Government grants play an important role in wooing investment and, like the Southeast Asian island chain, South Africa burnishes its case with low costs and great English.

The disruptor is being disrupted. Like any industry, the temptation is to stick with practices and a business model that worked well at first. The problem is that can be a path to obsolescence.

The Philippines has the advantages of a young tech-savvy workforce and a linguistic heritage that should position it well — if it can keep up. Meanwhile, train an eye on where BPO money is going, and don’t let anyone assert, without fear of contradiction, popular ideas about the passing of globalization. It’s alive and well in Manila.