[Ask Henry] – Running A Business in the Philippines

Question 1:  “My Filipina wife and I love your stories … we live north of Seattle… anyway I was interested in your previous piggery and now your land in Bohol… we realize there is no way you can purchase property there in the Philippines … are you leasing or what ?” — From Brian

Question 2:  “Hi Henry, now you’ve been in Philippines and have got to know the place better, what have been your experiences or you’ve heard from others about owning a business or starting a business in Philippines? what’s been the pro’s and the cons?”
— From Rob

Henry:  I’ve been running a bit behind in answering my reader mail so I figured I’d respond to two questions on the same topic here; business in the Philippines.  I’ll share my thoughts, for better or worse and leave it up to you to decide what you want to do when you get here.  I’ve spoken with both expats and local Filipinos about business here and these are the things that I will share here.

Honestly, the first thought that comes to mind when I think about starting a business here is, “Bad idea.”  I’d say that ever since I turned an important corner in my life back in 1985 I have been a huge supporter in running one’s own business.  Prior to 1985 I had always believed that security was found in finding a big company and working as an employee.  I won’t go into all the details of what changed my mind but suffice it to say that for the last three decades I’ve been a full-fledged believer in owning your own business.  I don’t think it’s for everyone.  But I do believe that the challenges and rewards make it a noble pursuit to make a mark in the free market exchanging goods or services for a net profit.

Now, that being said.. I still believe that for most people, starting a business here is not a good idea.  For one thing, running a business in any country is full of challenges.  You have the local competition to deal with, creating demand, marketing, cost of staff, inventory and all the basics that make running a business not for the faint of heart.  That’s just coming out the gate in any business in any country.

Now.. add to that the fact that many people who come to the Philippines to either retire or semi-retire have never run a successful business in their home country.  Here, you better be ready or you will get eaten alive.  Because not only do you have the issues to deal with that I just mentioned, you have cultural paradigms at work here that you will not see coming and which can literally cripple even the best-laid business plan.

So why do so many expats get the idea to start a business here, only to learn this lesson the hard way?  Well, I kind of imagine it a lot like this.  Let’s call the expat, ‘Bill’.  Bill is a savvy, good natured guy who decides to make a new life for himself in the Philippines.  After finding a wonderful young Filipina wife and having a few kids.. life is good.  He’s got plenty coming in from his social security, retirement or pension funds and has lots and lots of time on his hands to enjoy his family and home life.

But then one day Bill gets kinda bored.  He looks around and sees so much opportunity here in the Philippines.  He sees that many people here are running a small business with no formal education and on a shoe-string budget.  Surely, with his extra dough and creative mind he could start up a small business that would occupy some of his time while making him some extra dough on the side.  He starts to think even larger and figures he will fund a business and employ some of his wife’s relatives who always seem to be in need of some cash.  It all seems to make such perfect sense.  On paper.

It is true, there is a lot of opportunity here.  And the path for starting a business here is fairly straightforward.  There are less obstructions than you would run into than say, starting a business in the U.S.  Very little regulation except when it comes to the BIR.  The Bureau of Internal Revenue.  Very much the same thing as the U.S. IRS department.  Only much, much more interested in grabbing every last taxed peso it can get it’s hands on.  One rule for instance is that if you make a certain amount of revenue in the previous year, but then the following year.. business is not so good; well the BIR likes the higher amount you first got taxed on and if you make less this year the only way you’re going to pay a lesser tax is if you go through a process to request for an Audit.  Otherwise, it’s assumed you earned at least as much as last year if not more and your tax remains level.  They are not interested in you ever paying less tax.  And if you ask for an audit, they will want a receipt for LITERALLY every.. single.. peso you took in.

Another thing about the BIR is that they are not so keen on the idea of deductions.  It costs money to make money, we all know that.  I’m sure there are some things you can deduct.  But a Filipino friend of mine has a hell of a time getting any deductions because the system is not oriented to reduce taxes.  It really is a tax-hungry beast that demands it’s pound of flesh.  And not once a year.. but every Quarter.

When you look at the big picture it makes sense that the Philippines is so incredibly focused on monitoring every peso made.  In most countries much of the tax revenue is carried by property tax.  But here, even though everyone pays property tax who owns land.. it isn’t much because there is a very small middle-class.  A minority are ‘rich’ and a vast majority are living 2nd or 3rd World lifestyles.  So that puts a lot of demand on taxes from the business sector.   And that’s not even factoring in many people who are locally called ‘Squatters’ who live in rural areas or government land with no record of title and pay zero taxes.  They simply live on unclaimed land.  And there are lots of them.  Entire business projects have been placed on hold for years in order to find a resolution to relocating Squaters from a given area that they’ve claimed in mass numbers.

And that’s just the tax scene.

The next big killer for expats when running a business here is probably the most frustrating of all; The Culture.  I don’t know that I could pinpoint exactly where it stems from but here in the Philippines it is easy to find workers who do what they are told, but extremely difficult to find people who make good ‘Managers’ of a business.  What I’ve observed is that Filipinos are very creative, very resourceful and very enthusiastic.  But all that business savvy that you take for granted?.. good luck finding someone you can trust to run the store.  Yes, you could run things yourself.  But is that why you came to the Philippines?.. to personally run a store 10+ hours a day, six or seven days a week to cut a profit?

One example of this is in the simple concept of Gross versus Net receipts.  You and I both understand that there is no profit unless the operating costs are paid and there is a surplus after that.  One expat was telling me of how he set up his wife’s family with a water-filtration business.. trained them how to operate it and left it in their hands.  Money came in, but nothing was set aside for maintenance, utilities or general operating costs.  All money coming in was seen as ‘profit’ and spent in quick order on a daily basis.  The business that was supposed to give them a way to make an earning became a subsidized money-pit at the expat’s expense.  It would have been less trouble to simply cut them a check every month in all reality.

Another issue is the cultural concept of what I will politely call, “comparative valuation“.  You might know it more as Theft but, ‘tomato’-‘tomahto’ when you’re here in the Philippines.  I’m not saying all Filipinos are thieves, that’s not what I’m saying.  In fact the huge Catholic culture here is in large part what gives the people here such a strong work ethic and salt-of-the-earth, friendly experience here.  But there is a rampant thought process here which holds to this rationalization;  “It’s not stealing if they have so much to spare.”  And yes, they are talking about you.. the expat.

And so unless you take some serious security measures do not be surprised if your tally of the inventory does not match either what’s on the shelves or what supposedly sold that month.   Your goods and services seem to little by little disappear into thin air.  It may be from your workers figuring there are so many bottles of soda in the store.. a few every week to family and friends and taking some home is not a big deal.  Or perhaps some free online time in your internet cafe to certain kids because, after all, the computer wasn’t being used and they need it to study.  A Filipina friend of mine ran a Sari-Sari store from her home and had to watch inventory like a hawk down to each last bottle of rum and bag of rice.  When she took a one month vacation she returned to find the shelves almost empty and zero profits because the workers somehow spent it on ‘store related expenses’.  But this was little compared to an expat who told me of a pig farm he owned out in the province.

He had bought a truck for use on the farm and visited the farm every few weeks to see how things were going with the Filipino caretaker he’d hired.  On one visit he noticed the truck was gone and asked if it was in the shop for repairs.  Nope.  The caretaker had sold it, without any approval or notification to the owner.  When asked, “Why?” his caretaker’s only response was, “I needed some money.”

This brings me to an update on my own Piggy-Farm experiment over in Bogo, as asked about in the above question by a reader.

Back in April of 2012, prior to my arriving in the Philippines, I decided to invest in some Momma Piggies to make some extra income on a piggy-farm in Bogo owned by a good friend of mine.  I worked out the numbers and they looked good.  A litter of piggies was usually anywhere from 7 to 14 piggies and each one could be fed and sold at market in three months for the equivalent of $120 each.  That adds up to a lot of pesos.  So I bought three at first and a fourth one later.

Now, in any business I know it takes a year or more to turn a profit due to fixed investment costs.  My partner paid for the land, electric and water as well as the initial stalls for the piggies to breed and live in.   It has now been a year and there is still no profit in sight.  For one thing, once again.. we had problems with our caretakers we’d hired.  We initially only needed one person to handle the five pigs aside from the vet and occasional breeder.  He was a man in his 30’s with a heart condition looking for easier work than the sugar cane fields he’d been working.  We offered him triple what he’d been making in the cane fields and he readily took the job.

Skip forward about three months and now we were paying both him and his wife, again, triple what anyone in the province was getting paid for a very light workload.  Plus we gave them free rent on the property.  My partner then decided to buy a female cow that was pregnant.  Naturally the caretakers convinced my partner that it was ‘customary’ that the first calf always belongs to the caretakers.  Customary or not, I was against the idea.  On top of this, the caretakers then began asking for more money on the basis that, “We already spent the money you gave us.”  Yah, try giving that line to your employer back home.  Pretty soon the money we wired for pig-feed was never enough.  Mostly because, the kept spending it.  We fixed that by setting up a credit with the feed store and paying them directly each month.

And then we had our first litter of piggies.  Well, wouldn’t you know it?.. half of them died a month later.  The farm was about a 2 hour’s drive from where we were at so we took their word for it.  I’ve been to the farm several times and haven’t seen a piggy graveyard anywhere.  But that was just the beginning.  Every litter we’ve had, one way or another at least 40% of the piggies end up ‘disappearing’.  I guess Aliens from other planets fly in at night and beam them up.  Aliens just love that pork lechon, y’know.

Then the day came we got the big news.. the 30 year old caretaker with the heart problem fell down dead one morning on his way to feed the pigs.  Sad news.  But that same afternoon we were already getting threats from the new widow that we needed to compensate her “in a large way” for her husband’s demise.  She basically believed the farm now belonged to her because.. he died on the farm, therefore.. the farm belongs to her now.  I know, totally insane logic but out here she had no problem convincing the whole barangay that she had a valid claim.  And this was aside from (a) paying them both great wages for the area (b) his heart condition was long-standing (c) they were embezzling money and (d) they had already gotten over two month’s advances on both their paychecks.  Not to mention they wanted a free baby cow.

It was a nightmare but eventually we paid her some money to move off the property and brought in a friend of my partner to be the new caretaker.  We’re still losing piggies despite switching to a supposedly ‘healthier’ hybrid Piggy.  Well, that bionic-hybrid-piggy up and died on us after two months.  And this was despite the fact that since we began the piggery we’ve had a veterinarian make monthly trips to monitor the farm vaccinations, housing and feed.  In fact, it was the veterinarian who sold us the hybrid piggy.  (He finally agreed to refund half the money when my Filipina partner went totally ape-sh*t on him.  Never piss off a Filipina, by the way.)

I also think the relatives of the widow sneak in and poison the pigs late at night out of sheer spite and envy.  All the pigs have the same food and conditions so it strikes me as suspicious that a completely healthy pig just dies over night for no apparent reason.

Now, here we are at a full year and I’ve lost track of how many piggies we have.  Last tally I got was somewhere around 10 Momma piggies and about 40 to 50 baby piggies with still more on the way.  That means any profits from selling the previous piggies went to the Feed bill (these animals eat like pigs) and paying for construction of more pig stalls to house them properly.   My partner still believes we’ll see some profit once all the stalls are built and if we can get past our high mortality rate losses.  Me, I’m still convinced the new caretaker is making a little extra on the side selling out bootleg piggies from our farm.  Call me cynical and suspicious, but like I said.. where’s the massive Piggy Cemetery where all these dozens and dozens of pigs are getting buried?  The ground out there is hard as a rock and nobody’s been complaining about having to dig holes every week.  It just don’t add up.

The trips to the piggy farm in Bogo are a nice get-away to the province and my partner is not only a blast to hang out with but is willing to shoulder the costs of this experiment.  I’ve told her that our ‘Plan B’ if this turns out to be a total bust is to liquidate all the piggies (and there are a lot of them) and convert the land into a produce farm of some kind.  Find out what there’s a demand for.. coconuts, bananas, mango, corn, whatever and grow that instead.

CONCLUSION

Just in case you figure you’d struck upon an idea for a business here that is totally original, you may want to check it with my little list of ones that seem to keep popping whenever I’m discussing business ideas with locals or expats;  Laundry biz, Net Cafe, Piggery, Massage Parlor  Sari-Sari Store, High Interest Lending Biz, Filtered Water, Chinese Import Goods (99-cent Store Items), Coconut (Buko) Juice Stand, Hot Dogs, Cantina, Clothing Store, Laptop Repair, BBQ Resto and any of these ‘booth’ vendor ideas that are run inside the mall traffic areas; Fried Chicken, Potato Snacks, Squid Balls, Siomai, Cell Phones, Donuts, Hamburgers, Tempura, Fresh Fruit Smoothies, Meat-filled Waffles, Mini-Pizzas.. and let’s not forget either the big franchises such as Jollibee, McDonald’s, KFC, etc. or last, but not least.. opening up your own restaurant serving up great food such as American, Mexican, Greek, Irish, Indian, Korean or Chinese dishes.

All of these can be found literally on and between every street corner and mall by the dozens.  Competition is fierce in these markets and the only way you’ll make a go of it is if you can afford to match the local prices.  So, before you do pull the trigger on a business.. run the numbers!!  See what your competition is charging.  Ask yourself how much of their local market you can expect to gain.  Better yet, go where there is no competition such as out near the province areas on the edge of town.  Be the only laundry or pizza place for miles and that will help.

Can an expat run a small business here and make a profit?  I’m sure they can.  I just wish I had some examples to give you.  Perhaps you, the readers are expats running a profitable business here in the Philippines and can give some balance to the challenges I’ve presented here.  I’m not trying to be negative, like I said.. I’m a big believer and supporter of the entrepreneur.  And that’s why I want to share with you what to expect before you blow your nest egg making the same mistakes others made.

Personally, for my own 2 pesos.. here is one of two suggestions for making money here.  The first is;  “Do it online.”  Now, making money online is no walk in the park either and there are a lot of scams out there waiting to take your money with some ‘sure-fire’ method.  But to me, doing a brick-and-mortar business here introduces all sorts of issues.  Aside from the BIR, you have the issue that as a foreigner you can only own and finance 40% of any business you run here.  That’s right, you need to be a minority-shareholder, essentially a silent partner in your own business.  A Filipino citizen has to have the 60% majority ownership of your business.  Most smart expats get around that by naming their Filipina wife as their partner of course.  But if you’re either not married or don’t trust your wife (which is bad news already).. all I can say is ‘Good Luck’ finding a partner who doesn’t end up screwing you over legally since they have the 60% ownership on the biz.  You can set up a Corporation and go that route.  Which introduces more filings and bureaucracy so.. good luck with that too.

Or.. there’s one second suggestion I have which is the smartest way to go.  And that idea is; LAND.

Presuming you have a Filipina wife, in my estimation the only business I would even think of doing out here would be land development.  You can’t purchase land, but your Filipina wife can.  You can be on title, but you have no controlling rights.  If you love her and planned on leaving her something for after you’re gone then it’s all good.   Land is extremely inexpensive here and there are several routes you can take.

One is to build a series of studio/apartments just big enough for 3 or 4 people.  Keep it small, simple.  If you build a huge house your market to rent to will largely be foreigners to keep it cost effective, but your tax rates will be higher and their expectations of living conditions higher as well.  But smaller studio-apartments like I rented in Mactan.. there’s a waiting list for both locals and expats wanting a clean, secure place to live.

Another route is building a multi-story business suite building.  I would prefer it was medical and law oriented and let businesses rent each suite out each month.  Another idea is to make it a generic, single-operation place of business for rental and collect on the lease as one business after another makes a go of it.  Because there’s no shortage of foreigners looking to start up a killer business idea so.. you might as well be the one selling the picks and shovels while they focus on finding the gold.

And I’d be remiss if I didn’t mention every man’s dream job; Owning Your Own Bar.

There is at least one guy I know who is really “living the dream” and his name is Joe.  He’s on the island of Mactan and he along with his brothers in the last few years have built the most awesome of party-central locations I’ve ever seen.  You can check out a video I did of his place here; Chicago Joe’s Bump And Grind Disco Dance Club.  That place has everything, you gotta see the video if you haven’t already.  All the booze, money and pretty girls he can handle while owning his own bar in the Philippines.  But Joe and his partners are a rare bird.  There’s a place in Mango Square, I believe it’s called the ‘Cobra Bar’.  That place changes hands about every 3 years from what I’ve heard and always gets bought back by the same Filipino owner.

Story goes that it sells for about $45,000 USD.  I mean, think about it.. 45K to own your own rocking bar in the Philippines already licensed, with massage, pretty girls, booze stocked, karaoke and a prime spot in town?  Expats are on that like white on rice.  And then reality sets in.  Every challenge I’ve mention plus.. some issues with what it costs to avoid being raided that I won’t go into much detail here.  They say when you own a truck you never lack for friends.  Well, here.. when you own a bar you never lack for people who need their cut.  Next thing you know, the expat is begging someone to buy him out.  And wouldn’t you know it?.. it’s always been the same guy who sold it to him in the first place.

The Philippines is kinda like the Wild West in some ways.  Full of opportunity.. seems like the sky is the limit.  But you better have some solid business experience under your belt and have some trusted, local connections who can help smooth the path for you if you plan to succeed.

Update:  The day after posting this article.. the cow died.  Stopped eating, wouldn’t drink water and then just gave it up after a day despite a visit from the Vet.  That’s at least a 12,000 Peso loss right there.  Such is life on the farm.

Henry “Reekay” V.
www.lifegoeson.net