The Production Of An Alternative Construction Material Economics Essay

To prepare an industry study of all the construction materials currently being used in housing and commercial developments.

To review the waste management system in the Philippines and look for areas that are sustainable sources of PET materials.

To identify the current drivers and trends of the real estate and construction industry, as well as the Non-government Organizations (NGOs) in order to explore the viability of introducing the EHB products for their construction needs.

To prepare a business model for each market segment, namely: (1) Non-government Organizations (NGOs) and (2) Real Estate Developers and Contractors.

This MRR is focused on the following market segments: real estate developers, construction companies and NGOs. The study is limited to the Philippines specifically the National Capital Region (NCR) and provinces within a 130 km radius. Other construction materials that have the potential to be used with PET flakes aside from the concrete hollow block are excluded from this study.

This MRR focuses on the Ecoblock venture into the Philippine market through the NGOs specifically on housing and development programs; and eventually cater to the local real-estate developers and contractors. Hence the desired outcome of this MRR would be a venture strategy considering the economic conditions, market outlook, competitive analysis, risks analysis and capital sourcing.

President Aquino’s State of the Nation Address (SONA) last July 2010 highlighted the importance of Public-Private Partnerships (PPP). [] The PPP was seen as an important strategy for infrastructure development. It has also been estimated that the pipeline of PPP projects (infrastructure projects for transportation, water, power, health, and agriculture) for the year 2012 will amount to USD 5.49B.

Another factor that can have an effect on these projects is the upcoming election in the year 2013 that can increase government spending on infrastructure developments. Lastly, the issue of corruption (specifically in government infrastructure projects) is seen as an important political factor in the construction industry of the Philippines. The corruption issues of the Philippines regarding infrastructure was discussed during Finance Secretary Cesar Purisima’s meeting with Ernie Bower, the senior adviser and director of the Center for Strategic and International Studies in Washington DC. [] In this meeting, it was cited that the PPPs program of the Philippines will be able to address the current issues on corruption. According to Purisima, the right infrastructures should be accompanied by forward-looking policies for the Philippines to be competitive through highly-viable and promising ventures. It was also made clear that corruption is a major factor that will hinder the government to increase spending for infrastructure projects.

As shown in Figure 1, the Philippines’ gross domestic product (GDP) decreased from 7.6% in 2010 to 3.7% in 2011. This is due to the negative export growth rates in 2011 that was influenced by the global economic conditions particularly the economic and financial crises in US and Euro countries [] . The domestic factors on the other hand include the decreasing demand and negative growth rate in agricultural production and the under spending of the government in infrastructure projects. Based on the GDP projections of the International Monetary Fund (IMF), Asian Development Bank (ADB) and World Bank, the Philippine economy will slightly improve in 2012 due to the support of growth in private consumption (higher OFW remittances), investment, and government spending [] . However, if the debt woes in Europe will worsen and the recovery of the US economy will not be sustained, the Philippines will experience lower exports and foreign investment that may lead to lower GDP growth. Considering these factors the Philippine government must be able to increase government spending on infrastructure projects to prevent the economy to slow down further.

As shown in Figure 2, even if demand in the economy is lower in 2011 due to the lower GDP growth rate, overall prices still increased which was brought about by the increase in prices of petroleum in the global market. [] Looking at the disposable income of Filipinos, if the overall prices increase, the purchasing power will tend to decrease. This might affect the amount of disposable income that might be allocated for house purchase. Based on Figure 2, inflation is lower in the 1st quarter of year 2012.

Meanwhile, the 91-day Treasury bill interest rate decreased when the Bangko Sentral ng Pilipinas (BSP) attempted to stimulate economic growth. The peso-dollar rate remained stable due to the increase in inflow of remittances. The stability of the peso-dollar rate is very important in the construction industry due to the fact that some of the materials being used in construction are imported. The instability of the peso-dollar rate will affect the price of these materials.

As shown in Figure 3, construction output in 2011 went down. This is due to the under spending of the government in infrastructure projects. [] The construction-to-GDP ratio decreased from 5.7% to 5.2%. The increase in government spending can increase the GDP for the coming years.

Growth of other industries will also open opportunities for the construction industry. As shown in Table 1, the tourism industry, the Business Process Outsourcing (BPO), and the mining industry are continuously experiencing growth which may lead to more construction projects. For the tourism industry alone, 47 hotels with 14,000 rooms will be constructed by the year 2013. [] 

Due to the Philippines’ stronger financial position, the Standard and Poor raised the Philippines’ international debt rating to one notch below investment grade (BB+). [] According to the DBS Group, the Philippines can achieve investment-grade credit rating with a year or two. Once this is achieved, more investments will flow to the country.

The social factors that we will be considering in this study will give emphasis on the population growth rate, age profile, and housing backlog in the Philippines and try to correlate them with the construction industry in the country.

As of July 2011 the Philippines has an estimated total population of 103.775 million and out of this, 11.86 million reside in the National Capital Region (NCR). The Philippines has an average population growth rate of 1.9% and the NCR has an average population growth rate of 1.78%.

The majority of the population in the Philippines belongs to the working class (15-64 years: 61.1% or 62,201,170 as of 2010). This is the portion of society who are about to start their own families until those who are about to retire from their respective careers. People in this segment are also the ones who have the capacity to invest in residential developments.

As of 28 December 2011 Philippines’ housing backlog is currently 3.6 million. [] The government will tap shelter agencies like the Housing and Urban Development Coordination Council (HUDCC), the Housing and Land Use Regulatory Board (HLURB), the Pag-ibig Fund, the Social Housing Finance Corporation, the National Housing Authority, the Home Guaranty Corporation, and the National Home Mortgage Finance Corporation to reduce the housing backlog by 50% with an annual target of 350,000 housing units. To achieve this, the Aquino administration highlighted the need for more PPP programs to use the underutilized government lands. The insufficiency of available funding resulted to this housing backlog. The government needs Php 1.7 trillion to address the Philippines’ housing needs.

In 2011, several typhoons and flash floods occurred in the Philippines between May and September. The Department of Social Welfare and Development (DSWD) will develop recovery and rehabilitation projects for victims of flash floods in NCR and other provinces with a total of 187,008 families. Also, projects will be developed for the victims of typhoons that entered the country, which affected 1.4 million families [] .

Last June 28, 2012, the general membership meeting of the Philippine Constructors Association (PCA) was held to discuss the current issues that the industry currently faces. In this meeting, innovation was considered as a driver of productivity. According to Executive Director Cosette V. Canilao, the players of the industry must be able to re-evaluate their resources and processes to make it more efficient, responsive and relevant to the present stringent requirements of the industry. [] Regarding PPP for infrastructure projects, the government must demand from its private partners new technologies that will accelerate delivery time while ensuring public safety. However, Canilao also recognized the fear of “being the first to try something different”. With this, he emphasized that those players who will not invest in technological innovation might be left behind at bidding time.

According to the Department of Public Works and Highways (DPWH), the Philippines may adopt new construction trends in Japan, particularly on the latest technology on roads and bridge construction. [] The construction and engineering technologies from Japan through the Japan International Cooperation Agency (JICA) will help the Philippines build disaster-resilient infrastructures that would mitigate the effects of climate change.

Technological innovation in the Philippines doesn’t only happen with government projects, private manufacturers of construction materials also try to innovate the products and processes to improve the product offering. Cement manufacturers like the Holcim Group created a green sustainable solution for cement. [] The company is trying to minimize the impact of cement manufacturing in the environment. The company focuses on bringing down carbon dioxide (CO2) emissions by reducing the clinker factor by using mineral components as alternative materials. [] Innovation on the use of raw materials was accompanied by improvement in the process namely: (1) use of alternative fuels; (2) co-processing; and (3) quarry habilitation policy. Co-processing is considered as a globally accepted technology that helps the company process water streams in the cement kilns to properly dispose hazardous industrial wastes. [] The quarry habilitation policy would ensure that the quarry sites can be used productively by the community before they are completely mined out. Holcim Philippines was the first company to submit a Final Mine Decommissioning and Rehabilitation Plan to the Department of Natural Resources (DENR), which will serve as a blueprint in restoring quarry sites.

Land development and construction have a direct impact on the environment wherein land conversion from agricultural to urban and residential greatly reduces bio-capacity (ability of the land to produce food and other resources for the society). [] Because of this, sustainable land development is becoming more important in the construction industry. The World Wildlife Fund (WWF) and Ayala Land, Inc. (ALI) developed an ALI Sustainability Framework to chart, monitor, and report the company’s progress in sustainable land development. The increasing awareness about environmental impact of construction activities will eventually affect the way residential and commercial developments are built.

In 2006, the Philippine Green Building Council (PHILGBC) was formed as a national non-profit organization through the alliance of building and construction industry leaders from the private and public sector. [] This organization was formed to ensure an ecologically and economically sustainable industry. This resulted to a local green building rating system that is now called Building for Ecologically Responsive Design Excellence (BERDE). The BERDE scheme will serve as a benchmark for all property developers in the country.

Last August 17-19, 2011, the first Philippine International Total Green Movement Exhibition and Conference was held at the SMX Convention Center, Mall of Asia Complex in Manila. The joint venture of the Philippine Constructors Association, Inc. (PCA), Global-Link Exhibitions Specialist, Inc. (GESI), Philippine Society of Ventilating, Air-conditioning, Refrigerating Engineers, Inc. (PSVARE), Philippine Center for Environmental Protection and Sustainable Development, Inc. (PCEPSDI), and Society of Manufacturing Engineers (SME) Manila, created the Green Philippines 2011. [] This event featured four exhibit segments on construction (Green Construct), manufacturing (Green Manufacturing), lifestyle (Green lifestyle), and energy (Green Energy). Also, last August 16-17, 2011, the 2nd Sustainable Building Technology Conference was held that invited international sustainability experts to discuss the best practices for a green industry. These events would show that the players in the construction industry are already leaning towards environment friendly development projects.

The construction industry is one of the most hazardous and risky occupations in the country. With this, the Department of Public Works and Highways (DPWG), the Department of Interior and Local Government (DILG), the Department of Trade and Industry (DTI), the Department of Labor and Employment (DOLE), and the Professional Regulation Commission (PRC) signed a Memorandum of Agreement last May 4, 2011 to strengthen the campaign to minimize accidents in construction activities. This MOA aims to “promote the welfare of construction workers and prevent the recurrence of construction-related incidents, notably the ones that recently killed or severely injured workers early 2012. [] Also, this MOA is an off-shoot of DOLE Department Order No. 13 (which provides the Guidelines Governing Occupational Safety and Health in the Construction Industry) and aims to intensify the holistic and extensive execution of the policies and programs set forth in D.O. No. 13 in construction sites”.

The construction industry in the Philippines is currently leaning toward ecological friendly materials due to the global campaign to save the environment. The materials that are available range from pre fabricated walls and blocks to bricks that is considered to be the oldest building material used. The pre-fabricated walls and blocks use polystyrene as an aggregate that is added to the concrete mixture to produce a lighter and insulating product. Reinforced fire bricks are also one of the common construction materials that are used in construction of homes. Reinforced bricks are made of industrial wastes such as rice hull, coal ash, silt, mud and clay.

The existing market for pre-fabricated walls and blocks are the contractors for commercial buildings and high-rise residential buildings. There are also some contractors that use pre-fabricated materials for home construction but the homeowners still prefer to use concrete hollow blocks (CHB) because of the high cost of the pre-fabricated material. The walls are pre-ordered by the contractor and are sometimes manufactured on site to avoid delivery expenses. On the other hand, the reinforced firebricks are used in home construction. This material is usually specified by the people who belong to the higher class of society mainly because of the price of this construction material.

Pre-fabricated walls are used in exterior and interior applications in building construction. The lighter wall means that the foundations of a building project could be smaller due to the reduction in weight that the foundation needs to support. Installation time for the pre-fabricated wall is shorter compared to using conventional materials in wall construction. The product is smoother and does not need additional plastering (only the joints require additional concrete) because of the smooth finish that these walls generally have. The pre-fabricated walls also serve as good insulators that result to less energy consumption. A notable disadvantage of using this product, aside from the cost, is that the sizes that are available are only limited and could not be cut to size. The advantages of using reinforced fire brick in construction is that it uses less cement and is stronger than concrete. Bricks are also weather resistant and are considered to be ideal in tropical countries like the Philippines because it slowly absorbs heat to keep the inside of the house cooler. Bricks do not need cement plastering and the walls do not need to be painted. The disadvantage of using this material is the high cost. Even if it requires less cement and no paint the cost of the material is still higher compared to common construction materials used.

In the Philippines, CHB remains as a backyard industry because it is easy to produce, especially the non-load bearing CHB. The CHB can be produced manually by using an improvised mold. In producing a non-load bearing CHB, a mixture of sand, gravel, cement, and water can be manually compressed using the improvised mold.

There are three reasons why CHB is still being used in construction, namely: (1) cost; (2) availability; and (3) ease of installation and handling. CHB still remains as the a cheaper choice in construction of a concrete house. As a backyard industry, CHB is available nationwide with similar product specifications. Lastly, CHB is a traditional product. With this, majority of the laborers or construction workers are familiar with CHB in construction. The familiarity of the laborers with a product is the main reason why CHB is still being used.

The demand for quality, economy, and completion time are the major considerations for all construction projects that usually dictate the choice of technology [] . The traditional construction material currently being used for construction projects is the CHB. Based on the interview with key players in the real estate industry, another alternative is the pre-fabricated walls. For fabricated walls, the entire wall is built off- site or on-site before installation as compared to CHB that are stacked one on top of another. In the Philippines, only 5% are using prefabricated building material in housing construction [] .

Over the years, different types of construction materials have been offered containing recycled plastic, such as PVC pipes. Recycling is especially important for thermoset polymers since this form of plastic cannot be reheated and melted back to liquid form.

In the Philippines and in other countries, shredded plastic has been used as aggregates for bricks and construction blocks. Most of these, however, are not widely offered commercially and are not load bearing.

The demand for this product is readily accessible in most areas and the market is sensitive only to the price relative to the quality of the product they receive. At present the 4-6inchconcrete hollow blocks prices are standard for all and vary only between the volume suppliers and the backyard suppliers because of their respective approach to the business. The buyers of the product favor the suppliers who are nearer to them (because of transportation costs) and if satisfied with the quality they retain their suppliers. However there are instances where the buyer changes suppliers in lieu of quality issues for this reason, industry rivalry will be considered medium.

The technical skill and labor required isn’t advanced nor does it require highly specialized machines to deliver the product, the only obstacle is the cash required to: 1) purchase the hollow block maker and; 2) to secure working capital requirements. The cost of a concrete block mixer is between Php30,000-P40,000, and a mold container would be approximately Php5,000 per piece. Normally a block maker can start a small-time business with 6 molds which is equivalent to Php30,000 therefore a backyard business can start at a Php60,000 investment excluding working capital.

The disadvantage of this practice is it sacrifices the quality/durability of the blocks due to the lack of compression of the block being formed thereby resulting in a lower PSI rating. The difficulty in securing funding for this particular business is high because the business is not unique while the returns in this type of business do not instantly translate to high growth profits. The local venture capitalists who provide seed capital to startups look to sunrise industries such as the BPO sector and IT services delivery, or the next big website investment. The prospects of a potential participant to capture market share will primarily be on their ability to reduce the cost of their concrete hollow block while maintaining a reasonable quality and service. In order to achieve this, the potential participant must have a large base of clients in order to achieve economies of scale in their production of quality products and a person who will provide assistance to the client to ensure proper delivery and satisfaction, a backyard hollow block maker will not be able to be competitive and for this reason the threat of new entrants is rated as medium taking into consideration these factors.

Some projects outsource their hollow block while others make it onsite. While it is preferred to buy the product in order to avoid the cost of investment and taking into consideration that there is abundant supply for this product (but at varying prices depending on which type of supplier: backyard supplier, volume supplier or a wholesaler, and depending on the volume purchase of the buyer the bargaining power of buyer is medium given the availability of a quality product in the market.

The demand for reasonably priced hollow blocks are assumed to be growing at 10.5% and construction materials 5.4% which supports the argument that demand is good. Another consideration is that the real-estate residential development is in the form of condominiums and they make use other products such as pre-fabricated walls instead of hollow blocks. The construction boom doesn’t directly translate to increased hollow block use and the prices of hollow block are generally stable therefore for these reasons the supplier’s bargaining power is low.

The bargaining power of cement and sand suppliers remain low since there are abundant sources for these suppliers. The PET flakes suppliers have a medium bargaining power since they are less abundant than the cement and sand suppliers. Moreover, the local PET suppliers have different methods in shredding and cutting the plastic such that those suppliers that have the ability to shred PET flakes at a certain size have a stronger bargaining power than others.

For the low cost housing sector and other housing projects hollow blocks are still preferred. The emerging sector of high-rise residential projects make use of pre-fabricated products and gypsum boards however the market share of these products is only 5% for construction materials, therefore the threat of substitutes are rated medium.

The success in this industry will be in the costing of the product and the quality. In order to reduce the overall cost of the product there is a need to meet operation efficiency and effective marketing in order to achieve economies of scale that will bring down overall costs for our firm while producing a good quality product.

Opportunities

Emphasis on PPP programs for government infrastructure projects

Good forecast for the tourism, BPO, and mining industry

Movement towards sustainable community development

The use of plastic as an aggregate is not yet widely introduced in the Philippines

The high amount of investment on PPP programs is seen as a good opportunity for the construction materials industry. For year 2012, several PPP projects are in the pipeline, namely: (1)14 projects on transportation; (2) 2 projects on utilities-water’ (3) 2 projects on power; 1 project on health; and (4) 2 projects on agriculture that amounted to USD 5.49B will increase the demand for construction materials. These PPP programs will also serve as an opportunity for private companies to increase their annual construction projects.

The growth of three industries, namely: (1) tourism industry; (2) BPO; and (3) mining industry will also contribute to the growth of the construction materials industry. The increasing annual foreign tourist arrivals and domestic travelers opted for the increased in resorts, hotels, and condominiums. The increase in number of accommodation facilities was accompanied by the Republic Act of 9593 or Tourism Act of 2009 wherein the roads that are not initially classified as national but lead to tourism sites, airports, and seaports will be improved which will be included in the DPWH budget for 2012. [] For the BPO, construction of commercial buildings is also expected to increase to meet the demand of the industry. The investment of the Mines and Geosciences Bureau (MGB) would show that the mining still remains as a promising industry (Table 1). Investment on mining would result to more office sites and barracks for mining companies.

The movement towards building more sustainable developments is seen as an improvement for the construction industry. New technologies for products and processes will help improve the viability of construction projects in the Philippines. By focusing on the impact of construction of the environment, the need for environment-friendly products may increase as the industry try to include the society’s welfare in planning construction projects.

The use of plastic as an aggregate is currently being used in Germany. However, this new aggregate is not yet widely introduced in the Philippines. This is seen as an opportunity for the company to introduce a product with more benefits than the existing products in the market.

Threats

Competition (large companies)

Emergence of new products

Competition especially against large competitors is seen as a major threat because these companies are already established in the industry. New companies that may introduce new products in the market may face difficulties especially if these products are not patented. Large companies can simply launch the same product at a larger scale. The availability of funding for these large companies will give them an advantage to produce more products. The more products a company manufactures, the opportunity to capture a larger market is bigger. Also, large companies can be seen as good suppliers for developers and contractors who want a steady supply of materials.

Even if CHB currently remains as the primary choice for wall construction, emergence of new products as a substitute may pose as a threat for the CHB market. Even if only 5% in Philippines uses prefabricated building components in housing construction, the boom in the construction industry may increase the market for pre-fabricated walls. Across time, if more housing developments will be built using pre-fabricated walls, the demand for CHB may decrease.

The cost of the EHB is at P5.90 per unit. The cost of direct labor is the largest at P2.52 per unit, followed by raw materials at P2.12 and factory overhead at P1.26. The key assumptions for these figures are assuming that 2,991,150 units of hollow blocks will be manufactured for the year. The hollow blocks will be used for 5,175 houses which represent only a conservative 5% of Gawad Kalinga’s projected housing projects. The cost of EHB at the end of the third year of operations will be at P4.94 assuming that quantity manufactured has grown to 4,307,206 units. The cost savings is achieved mostly on the labor side at P1.91 per unit (24% savings from P2.52per unit) brought about by more productivity. The hollow block machine’s full capacity for one year is 9,000,000 of hollow blocks, therefore as long as quantity improves to no greater than this amount, economies of scale can be achieved since there is little reason for labor and overhead costs to increase.

Currently the market price for concrete hollow blocks is at P13.30 per unit which is 56% more than the cost of our EHB, the EHB is projected to sell at the CHB market price therefore we feel this cost is competitive enough to be in business. The pricing of EHB will not be lower since the EHB is a superior product compared to the CHB nor will be priced higher since the market may still be critical of the product in its launching phase therefore the best entry strategy is to price it aggressively at par with the CHB market price

There is a 21% cost savings per square meter with the use of EHB versus CHB. This is based on Table 2. The addition of PET flakes lessens the requirement for both cement (27% less cost) and sand (32.7% less cost). Additional savings is realized from the labor cost on painting, layering and plastering in hollow block aggregate components, which lead to an overall reduction in cost per square meter.

The Filipino construction materials market experienced an annual growth of 6.54% but is expected to witness a more sustainable growth of 5.36% until year 2015 [] . Being a supply-driven industry, supply of construction materials come from local suppliers based on the location of the project. However, with the boom in the construction industry (10.5% average annual growth rate), smaller projects like GK projects experience shortage, as the growth of the construction materials market is no longer in line with the growth of the construction industry [] .

The demand for quality, economy, and completion time are the major considerations for all construction projects that usually dictate the choice of technology [] . The traditional construction material currently being used for construction projects is the CHB. Based on the interview with key players in the real estate industry, another alternative are the pre-fabricated walls. For fabricated walls, the entire wall is built off- site or on-site before installation as compared to CHB, which are, stacked one on top of another. In the Philippines, only 5% are using prefabricated building component in housing construction [] .

The listed NGOs have varied purposes such as education grants and medicine grants while other NGO’s would specialize their purpose for specific causes such as medicine for the blind and social welfare for coconut farmers (UCPB foundation). The target clients for EHB Philippines in the NGO industry are those companies that have a budget for housing or infrastructure projects. The listed NGOs in the country have a typical annual budget ranging from Php208,000 to Php1.16 Billion depending on the size of the NGO and this budget is shared with the NGO’s other purposes such as education, poverty, social welfare and training development among others. Therefore, conservative assumptions must be made when estimating how much a typical NGO would allocate for the construction materials budget.

The first step was to select from the Philippine Council for NGO Certification (PCNC) the NGOs that specifically state in their purpose they engage in housing, disaster management, and financing projects geared towards improving living conditions. Once the NGO have been filtered through its purpose the second step is to get their recent annual budget size. The current size of the NGO market for EHBin terms of annual budget is Php6.16 Billion [] . From this amount, the assumption for conservative purposes is that the allocated budget for housing would be at the range of 5-10%, which represents P308-P616 million. The range of Php 308 to Php616 million represents a conservative assumption on the budget of the various NGOs for housing and disaster management related projects. Assuming the hollow block costs of a housing project would typically constitute 30-40% of the project, then the estimated NGO market for EHB amounts to Php 92.4 to Php246.4 million.

In a more optimistic scenario it can be assumed that the allocation for housing projects from the target NGOs would be at 20-30% of their total budget, this brings up the allocated housing budget to Php 1.23 to Php1.84 billion. Using the same assumptions of the construction materials budget at a 30-40% range, this fetches a figure of P369-736 million.

The profitability in this market is high since the fundamental nature of the NGO is non-profit seeking and thereby the services and products they intend to purchase will most likely be based on the donations they have already secured and have budgeted annually for the year.

The key success factors in capturing the NGO industry are 1) Network and Business Relationship 2) Discount and 3) Fast Delivery. In order to comply with these factors, it is important for EcoBlockPhilippines, Inc. to establish a strong relationship with the NGOs and this can be in the form of discounts for housing and disaster management [] related projects. The company’s strategy is to build brand equity as a business that works closely with the NGO sector with the goal of addressing the improvement of Filipino living conditions by providing a superior product at a competitive price.

One strategy is for EcoBlockPhilippines, Inc. to invite these various NGO’s for a cocktail party in AIM in order to introduce the company and tie-up with them for their housing projects by providing superior construction materials at special prices.

The two latter factors are to be accomplished by instilling a strong culture by upper management and process improvements under the Lean culture. At present, the current global climate in Asia continues to undergo massive shocks and changes which had resulted in lost lives, homes and further leading to the rehabilitation of areas in order to regain what had been destroyed. In the Philippines alone, the Ondoy (Typhoon Ketsana) [] tragedy rendered many cities flooded at levels never experienced before thereby causing people to lose their homes. Philippine President Arroyo declared a state of calamity” encompassing most of Luzon after at least 86 people were initially reported dead in landslides and other incidents.Flood water levels reached a record 20 feet (6.1 m) in rural areas. As of October 24, 2009, at least 464 deaths in the Philippines were officially reported from the typhoon. In another recent incident, in August 2012, the southwest monsoon rains [] had even surpassed the flood levels of the Ondoytragedy. These two separate incidents show the changing global climate brought about by the global warming phenomenon [] . Both natural calamities have amounted to extraordinary amounts of damages [] in the billions of pesos and the response from both the government and private sectors have improved in year 2012 since the Ondoyevent has served as a strong reminder for the country to always be prepared in case of prolonged rains brought about by today’s climate.

The positioning in the NGO market will be by way of introducing EHB Philippines as source of Green and environment-friendly products that are readily-available in order to address the nation’s housing and disaster management-related projects. The EHB’s benefits will reduce the overall cost since the promise of savings will be in the form of lower construction costs. For disaster management purposes, EcoBlock Philippines, Inc. marketing strategy is to give a special price as its donation to the community in trying times. The disaster management primary marketing strategy is to build the EHB brand as a brand with a strong social responsibility that aims to be the partner of NGO’s that will readily provide construction materials at a lower than market cost in order to assist the Philippine community in its rebuilding process.

From 2007 to 2010, the Housing and Land Use Regulatory Board (HLURB) issued a license to sell to a total of 358,000 house and lot units in the Philippines. As shown in Figure 5, after the 54% growth from 2007 to 2008, the number of units launched for the next two years remained between 95,000 to 105,000 units.

In the National Capital Region (NCR) and the nearby provinces within a 130-km radius, 76,219house and lot units were launched between 2010 and 2012with 27% average annual growth rate. As shown in Figure 6, the number of units that were launched decreased by 55% between 2010 and 2011. However, a 110% increase was achieved for the second quarter of year 2012. This year’s total number of house and lot units might still increase due to the release of license to sell for the third and fourth quarter.

The major issue that can be considered for the private real estate developments is the involvement of the architects, engineers, and contractors. The planning stage of a development project would include the preparation of the master plan by the architects. The architectural plan will be prepared which will include the types of materials that will be used for the houses. These materials will be coordinated with the engineers to verify the materials. If a new type of material will be used, different tests will be required from the supplier based on the engineers’ assessment. Once all of these are verified, this information and the plans will be coordinated with the contractor. The role of the real estate developer is to approve the plans based on the recommendations of the architects and engineers and to verify if the projected cost will adhere to their own projections.

The endorsement of a new product will come from the architects. The quality will then be verified with the help of the engineers. Lastly, the costs that will be incurred will be approved by the developer.

There are two success factors, namely: (1) quality, and (2) cost. Quality is very important in mass construction. This is one of the reasons why the approval of a new product may take some time. The quality of a product should be verified for this product to be used in big real estate developments. The cost factor can come in two scenarios. First, the new product can be more expensive but in can shorten the construction time.This would mean that savings on labor will be realized. Second, the new product can be cheaper with the same quality but the construction time would be the same. The savings will come from thedecrease in the cost of construction materials.

Major considerations for purchase

The demand for quality, economy, and completion time are the major considerations for all construction projects that usually dictate the choice of technology [] . The traditional construction material currently being used for construction projects is the CHB. Based on the interview with key players in the real estate industry, another alternative is the pre-fabricated walls. For fabricated walls, the entire wall is built off- site before installation as compared to CHB which are stacked one on top of another. In the Philippines, only 5% are using pre-fabricated building component in housing construction [] .

The Filipino construction materials market experienced an annual growth of 6.54% but is expected to witness a more sustainable growth of 5.36% until year 2015 [] . Being a supply-driven industry, supply of construction materials come from local suppliers based on the location of the project. However, with the boom in the construction industry (10.5% average annual growth rate), smaller projects like GK projects experience shortage as the growth of the construction materials market is no longer in line with the growth of the construction industry [] .

Market Acceptance

Market acceptance is dependent on the potential customers who include real estate developers, contractors, architects, engineers, NGOs, and the government. Based on the interview with key players in the industry, each customer has several considerations in choosing a construction material. Developers have three considerations before adapting a new technology: (1) quality of the product, (2) speed of installation, (3) costs. The quality of the new product should be similar or even exceed the quality of the existing material. The quality of the product should be reflected on the finishing of the wall. The new product should also be easy to install. Any new technology should be easily used by the laborers. The familiarity of the laborers with a product is the main reason why CHB is still being used. The third consideration is the most important as the new technology should either be at par or should lower the cost of construction.

In considering a new product, engineers will always look at the tests to verify if a product satisfied standard and the cost. The architects and contractors’ will considerany new technology that is easy to use and shorten installation time to speed up construction.

For NGOs and the government, the cost of material is the main consideration. Lessening the cost of materials could reduce the total construction cost of granted houses.

Market Segmentation

Market will be segmented based on location (NCR and nearby provinces within the 130-km radius of the manufacturing facility) and the primary consideration for choosing the construction material for a project: (1) NGOs; and (2) real estate housing projects.

Target Market

EHBs will be offered to NGOs and real estate developers. These NGOs from PCNC that seek to improve the Filipinos’ living conditions through housing, disaster management, and financing projects. For residential projects, the company will also target architects and contractors as key influencers for the choice of construction materials.

Marketing Positioning

EHB will be offered as an eco-friendly product which is a better alternative to CHB with additional benefits for (1) homeowners (insulating properties and less water absorption); and (2) NGOs and industry players (ease of usage, shorter construction time, and lower wall construction cost by 21%). For NGOs, EcoBlock Philippines, Inc. will serve as the partner that will readily provide construction materials at lower than market cost in order to assist the Philippine community in its rebuilding process. For real estate developers and key influencers, EcoBlock Philippines, Inc. will become a source of innovative products that will contribute to the improvement of the construction process.

Strengths

EHB has more benefits than the regular CHB

EcoBlock Philippines, Inc. is a flat organization

The company’s strength is on the product itself. EHB’s features make it a better product than the existing hollow blocks in the market. Due to lighter weight, lesser re-bar and cement, and easier handling and installation, the use of EHBs will speed up construction time. It will also lower construction cost through savings in labor and other construction materials.

As a start-up, EcoBlock Philippines, Inc. will have a flat organization which is considered as a strength primary due to the ease in the decision making process. Being a small organization, the flow of information would be faster. As the company gears toward product development, employee involvement is important to be able to improve the product being offered.

Weaknesses

EcoBlock Philippines, Inc. is a new company

EcoBlock Philippines, Inc. will start as a small-scale business

EHB is easy to copy

Being a new company, it will be harder to compete against larger established companies as a supplier. For each construction material, contractors and developers prefer one supplier per project. It may be difficult for a new company to get a contract if the clients would prefer their existing suppliers. Also, clients may be reluctant to do business with a new company that offers a new product that is not yet tested by the market.

Being a start-up, funding would be difficult for the company because banks don’t usually provide loans for start-up companies. The company will employ 100% equity resulting to a small-scale business. This is seen as a weakness because the company will be competing with large companies who can manufacture a larger volume of products. It may be difficult for the company to attract customers with a large volume requirement. Immediate expansion may also be difficult compared to larger companies who have more access to resources to obtain capital.

As mentioned in the company’s threats, it is more difficult to compete with large companies if the product cannot be patented. This serves as the company’s weakness because the product can be copied. Even if the company will be one of the first to introduce this product in the market, this no longer be seen as an advantage if large companies decide to offer a similar product.

Maxi-Maxi Strategy (Strengths-Opportunities)

The Maxi-Maxi Strategy focuses on how the company will be able to widen the exposure of EHB. To feature the benefits of the product, the company will participate in events for construction materials to showcase the product to the key players in the industry (architects, contractors, and developers). Brochures will be distributed in these events as marketing collateral to establish product recall. The company will also try to feature the product in websites of organizations in the construction industry.

Mini-Maxi Strategy (Weaknesses-Opportunities)

Direct selling is considered as a good strategy to minimize the weaknesses by taking advantage of the opportunities. By setting-up appointments to present the product, the company will be able to show the benefits of using a new aggregate that can contribute to the promotion of sustainability for community development. This strategy will also take advantage of the construction boom in the Philippines.

Maxi-Mini Strategy (Strengths-Threats)

To be able to minimize the threat of large companies, EcoBlock Philippines, Inc. can develop a design for the hollow block that can be patented. With the additional benefits that the company offers, a patented design will increase the barrier to entry. Using an interlocking design, the company will offer regular and corner blocks with a provision for horizontal rebar. As part of product development, this design will ensure the quality of wall construction, particularly on block alignment.

Mini-Mini Strategy (Weaknesses-Threats)

For this strategy, it is very important for the company to establish relationships with clients to be able to get contracts from established developers. The goal is to plan a buying experience that will create loyal customers.

Product development is the main strategy to minimize the threats to the company. After introducing EHB, the company will develop a new product with a design that can be patented. The company will still maintain the features and benefits of the first product. The existing product using PET flakes can be easily copied. However, if the company can be able to develop a new design for the plastic aggregate, this will increase the company’s competitive advantage against competitors.

Product

EHB will be offered in the form of 4-inch interlocking blocks: (1) regular block; and (2) corner block.

Price

EHB will be priced at Php13.30 per block or at par with CHB. EcoBlock Philippines, Inc. aims to increase the price of EHBs at 2% per year or together with the price increase of CHBs in the market. NGOs will be given a 5% discount regardless of volume.

Place

EHB will be directly sold to the target market for housing projects located in NCR and nearby provinces (within 130-km radius of the manufacturing facility).

Promotion

NGOs

EHB will be introduced directly to NGOs and some government institutions specifically discussing the benefits of the product particularly the effect of using the EHBs on the total construction cost. Events will be organized to invite NGOs to the Asian Institute of Management (AIM). In these events, the company will be introduced and tie-ups will be established such that constant supply at special prices will be offered.

Real Estate Developers, Architects, and Contractors

EcoBlock Philippines, Inc. will participate in conventions that are held annually by the United Architects of the Philippines (UAP) and the Philippine Contractors Association (PCA) to showcase the product to key players in the real estate industry. Brochures will be distributed in these events. EHB will be featured in websites specifically in the website of UAP and PCA. The company will also set meetings with industry players to present the product. After one year, EHB will be advertised in engineering and architecture publications.

Process

The company will have sales officers that the interested clients can contact. The clients can order directly from the office with a lead-time of at least one week before delivery of the EHB. In the event that a client places an order less than one week before delivery the sales officer will accept the order depending on the amount of the current inventory of EHB. The sales officer will get information about the client like the contact person, company name, name of contact, type of project, project duration, EHB requirement per day, frequency of delivery and other information that are relevant to the ordering process and for the profiling of the client. The sales officer assigned to the client will inform the contact person on the terms of the company. The terms that will be discussed include discounts (for NGOs) and the required 50 % down payment before the order is processed. The sales officer will also serve as the relations officer to the client to inquire about the product and create a different buying experience for the company or the NGOs involved.

“EHB is an environment-friendly product that serves as a better alternative to CHB. A product of good quality that shortens construction time and reduces the use of rebar and plastering materials for NGOs, real estate developers and contractors who continuously seek for superior products in the face of increasing costs of construction materials.”

Eco-Block Philippines Incorporated aims to introduce an environment friendly alternative to the construction materials market in the Philippines. The company will offer a cheaper product that will benefit the developers of housing projects by lowering the total cost of a housing project by almost 20%. Another purpose is to reduce non-biodegradable waste material in the landfills of the National Capital Region (NCR) by reusing these materials as an aggregate in manufacturing an alternative product to CHB. The venture will also aim to provide construction materials at a lower price to NGOs who provide homes to the marginalized sector of society and price the product at par with the CHB to private developers of housing units. Establish a manufacturing facility to produce 1,650,000 units of EHB per year on the first year of operation.

Eco-Block Philippines is currently in the process of having the company registered with the Securities and Exchange Commission (SEC) and recently opened a corporate account with the Bank of the Philippine Islands (BPI). The prototype EHB has been tested at the University of the Philippines for compression strength and the results will be released by mid October. Ecoblock Philippines is also in the process of looking for a ideal location for the manufacturing facility. Product tests with the Department of Science and Technology (DOST) will be started by the first week of November.

Product Description

The Ecological Hollow Block (EHB) is an alternative for the common Concrete Hollow Block (CHB), which is the most widely used construction material in the market. The EHB’s dimensions will be comparable to the CHB to allow ease of use and acceptability in the construction industry. Using non-biodegradable material as aggregate the resulting block will be stronger and lighter compared to a CHB.

Features and Benefits

Environment. The use of EHBs will help reduce non-biodegradable wastes in dumpsites and landfills. ADB estimates that Metro Manila produces 6,700 metric tons of garbage per day, and that 2.25% of these are PET bottles.

Better quality and lesser construction costs. The use of EHBs will increase the quality of construction, decrease construction time, and decrease overall construction costs. While maintaining the same load-bearing capacity, a typical EHB (15.5 x 6 x 7.8 inches) weighs only 8.6 kg compared to a concrete hollow block, which weighs 16 kilograms. This lightness of the EHB allows a structure to use lesser steel reinforcement (rebar), lesser foundation and thinner columns for support. EHBs may also be molded to interlock each other for easier installation. Furthermore, EHBs are also smoother, which requires less cement for finishing and results in fewer defects. Due to lighter weight, lesser steel and cement, and easier handling and installation, the use of EHBs will speed up construction time and will lower labor costs for construction. For a typical 30-square meter dwelling, construction or real estate companies may save an estimated twenty one (21%) percent in wall construction costs.

Benefits for end-users. In addition to the psychological value of owning an environmentally friendly house, end-users may potentially benefit from the lower construction cost of a house, which uses EHB.

The aim of product development is to be able to develop a new design that can be patented. There are two designs that the company will focus on, namely: (1) design of EHB as an interlocking block; and (2) design of the plastic that will be used in the blocks. These designs will hopefully give the company two patents.

For the design of the EHB, the company will develop a new design of the regular and corner blocks. These new design will focus on the interlocking portion of the block to ensure block alignment for wall construction.

Initially, the company will use shredded PET flakes for EHB. In developing the design of the plastic, the company will look for other plastic materials that can be used as an aggregate that can be mixed with PET. The intention is to mix different types of plastics that can be melted and molded. With the help of an industrial engineer, the new design will be develop that will serve as a better aggregate. This new aggregate will increase the structural integrity of the product.

The Company will source its cement from existing cement companies in the National Capital Region (NCR) that is closest to the plant to minimize delivery costs. The type of cement will be Rizal Super Portland cement that contains Philippine tuff/volcanic ash, which increases strength and durability. [] A total of 1,474 kg or 37 bags of cement is required per day.

The company will be using lahar as a substitute for sand in manufacturing the EHB. This will be sourced from the quarry site in Concepcion Tarlac and will be delivered directly to the plant. The cost of lahar is Php3,500 per truck load that contains 18 to 20 cubic meters (m3) of lahar (Php 175.00 – 194.44/ m3). This is enough to produce 2,500 – 3,000 units of EHB. A total of 38 m3of lahar is needed per day or 2.12 truckloads per day.

The company will source the shredded PET from suppliers in NCR and Batangas City that are capable of supplying 40 metric tons (MT) of shredded PET per month. PET bottles for raw materials are the most common consumer plastics and typically used for packaging such as containers for drinks, cosmetics, detergents and pharmaceutical products. PET bottles can be processed into “PET flakes” and used to make clothing, carpets, strapping, or again into PET bottles. [] A study published by the Asian Development Bank (ADB) found that 6,700 MT of waste is generated daily in Metro Manila, 15% (1,005 MT) of which are plastic. [] Out of this volume an estimated 150.75 MT (15%) are PET bottles and only half of these are currently being recycled.

To produce 5,288 units of EHB daily, the venture requires 71.5kg of shredded PET bottles per day or 22.3 MT per year, which is only 0.04% of the total amount of PET bottles discarded in Metro Manila per year.

Raw Materials

The manufacturing of EHBs requires cement, lahar and shredded plastic from PET bottles for raw materials. These will be delivered based on a Just-in-Time basis to lower material inventory costs. The cement and lahar will be sourced directly from manufacturers and the quarry site, respectively, while the shredded PET bottles will be sourced from independent suppliers in the NCR and Batangas area.

Direct Labor

The manufacturing plant will operate for eight hours per day and will have six days of operation per week. This will require a total of 8 labor hours per day (2,496 labor hours per year) to be able to meet the average annual capacity of 1,650,000 units of EHB with an average cost of Php1,935,752.00. Ten (10) employees will be needed to operate the equipment. Loading the raw material into the concrete mixer will require 2 laborers, operating the hollow block maker will require 5 operators and transferring the blocks from the machine to the curing area requires 3 laborers. We will also hire a civil engineer and an industrial engineer to monitor the daily operations of the plant and the quality of the products.

Factory Overhead

The annual factory overhead is Php240,000.00, which will cover electricity requirements of the equipment and the costs of water to produce the EHB.

The plant is capable of manufacturing a maximum of 6,610 units of EHBs per day at full capacity (12 hour plant operation). During the first year of operations, the plant will only manufacture 5,288 units per day.

The raw materials-shredded plastic, cement and lahar -will be fed into the cement mixer manually where water will be added to produce a mixture. From the cement mixer the resulting mixture will be transferred into the cement hollow block maker via a conveyor, and will be molded into the finished EHBs. The hollow block maker can produce a maximum of 550 units of EHBs per hour; only 9.6 machine-operating hours are needed per day to produce the budgeted 5,288 units per day. After molding, the blocks will be moved to a dryer to remove excess moisture content, and will be allowed to set for 1-2 days depending on weather conditions. The plant has allotted 3,500 square meters of open space for the curing process and for finished goods inventory.

The Company aims to deliver EHBs right after curing to reduce handling costs of inventory. The company will sub-contract the delivery services to customers. The inventory will be limited to 5 days worth of EHB to serve as buffer for rush orders or unexpected events that may directly affect the production schedule.

For the first year of operation, the company will have a total of Php 4,624,392.50 in other expenses. These expenses include rent of the factory (Php 1,440,000.00), legal and licensing fees (Php 126,000.00), admin and office supplies (Php 50,000.00), gas and oil (Php 2,280,600.00), utilities expenses (Php 240,000.00), repair and maintenance of equipment (Php 313,792.50), and depreciation costs of machinery (Php 170,000.00).

The lean system will be applied in EHB Philippines with the goal of ensuring high quality while keeping costs low and improving the delivery time in the process. In order to enforce an effective lean system, the upper management will be the first to