The Deloitte study entitled, “The Future of the Philippine Automotive Industry” premised its conclusion on some advantages and disadvantages prevailing in the country over its competitors.
These advantages include an already established presence of several global automotive players in the country, a strong auto components sector, capable workers, English language proficiency, a domestic market that is ready to take off, and government understanding on the importance of the auto manufacturing industry to the economic development of the country.
“These advantages are real and could support the development of a world scale industry,” said Jon Stanford, lead author of the Deloitte report.
Stanford said that after the economic recession that left the automotive sector badly scarred, thus global auto players need to rebuild.
While Thailand is the clear beneficiary of much of the investment in the auto industry in the ASEAN region, will the industry want to put all of its eggs into one basket? The automotive market in the ASEAN region is expected to reach 2.5 million in 2010.
“There are clearly some risks in doing so. By allocating significant investment to develop a second production hub some of these risks could be offset,” the study said.
The study noted that global auto players need to develop a second hub in the region because if something happens in Thailand, which exports half of its 1.5 million unit annual production not just to other ASEAN countries but also to Australia and other markets, businesses would definitely suffer.
The effects of free trade together with the impact of the global financial crisis means there will be significant commercial pressures on companies to rationalise their production centres within regional and global supply chains.
The key question now is where the global auto players will place their future investment dollars.
According to the study, Indonesia is the Philippines’ closest competitor. At present, Indonesia exports 85,000 CBU units to ASEAN. The Philippines though has only one volume CBU exporter in Ford Philippines.
Indonesia could play host to many car companies given its much faster growth and large domestic base, but it is not giving much focus on its auto industry.
But there are several challenges that the Philippine auto industry is also facing including small and slow growing domestic market, small scale vehicle assembly plants, high rate of growth of CBU imports (CBU share of the market has grown to 50 percent from 13 percent in the past five years), high level of second hand imports in last decade, weak local components supply base due to lack of scale, high logistics and energy costs, significant cost competitiveness disadvantage, reduced protection against imports from Japan (JPEPA), and approaching intra-ASEAN free trade as a result of AFTA.
Stanford noted that while the Philippine auto industry has a strong auto parts sector with internationally competitive firms, it needs a viable assembly industry operating at scale.
“We believe that the Philippines industry currently faces a cost disadvantage, on average, of at least US$1,000 per car relative to Thailand. Many of the problems identified above contribute to this cost disability, but the fundamental reason is lack of scale,” he said.
TO DO LIST
Stanford said that if the Philippines were to become a second regional hub for automotive production, there has to be a concerted effort between the government and the industry.
“The government should develop a time-bounded package of incentives to provide the industry with a breathing space in which to invest and achieve efficient scale, because government cannot give incentives without reasonable commitment from the industry,” Stanford stressed.
For now, however, Stanford said, “I got no sense if the industry is seeking to do that.”
Stanford said that the study has listed specific measures for the government to implement, but said it is still confidential.
Assuming that all the plans and measures are implemented, the study said the local auto production is expected to reach 500,000 by 2020 of which 40 to 50 percent is exported and a local content level of 60 percent creating a global scale auto industry.
In terms of impact to the overall domestic economy, the Deloitte study modelling results point to the Philippines’ real GDP would be 6.3 percent higher than otherwise, average real wages throughout the Philippines economy would be 10.4 percent higher, employment would be 2.5 percent higher than otherwise, investment would be 6.5 percent higher, private consumption (a proxy for economic welfare) would be 4.4 per cent higher, aggregate exports would be 12 percent higher, and the impact on the consumer price index would be zero.
On the other hand, if an industry status quo is observed, Stanford said the Philippines can kiss its local auto industry goodbye in three years with a strong adverse impact on GDP due to job and revenue losses.
THE REVIEW
The Deloitte study is just one of the inputs in the crafting of the new MVDP, but the review was not without pain because while all the MVDP participants favor to revisit the old program, opposing views cropped up undeniably to protect each own interests.
The division of the industry, which presented a solid front under CAMPI, was made clear as the review of the program goes into full swing. The 18-member CAMPI is a composite of CKD assemblers with CBU business and pure CBU traders. Those with similar interests grouped together.
CAMPI led by Elizabeth H. Lee had withdrawn its P100,000 contribution to the $500,000 study the industry had commissioned to the Deloitte.
Lee’s family is both an assembler and distributor of the Nissan commercial vehicles. The group is also the exclusive distributor of Volvo, GM and Hyundai in the Philippines.
Some CAMPI members were also dismayed over the initial Deloitte proposal calling for the imposition of a quota system wherein the volume of importation of CBU is tied up to the volume of locally assembled units, the grant of $1,000 subsidy for each locally assembled unit, among other issues. These moves are seen to favor the local automotive assemblers and stunting the growth of CBU importers, the group said.
The division was later confirmed as the main proponents for the commissioning of the Deloitte study finally came out and formally organized themselves as the Philippine Automotive Competitiveness Council Inc. (PACCI), which is composed of the country’s major car assemblers that are also members of CAMPI.
PACCI members are Toyota Motor Philippines Corp., Ford Motor Group Philippines, Mitsubishi Motors Philippines Corp., Isuzu Philippines Corp., Honda Cars Philippines Inc. Together they account for 90 percent of the country’s total auto production volume.
Some disgruntled CAMPI members have complained of haste by which the program is being crafted.
This prompted DTI Secretary Peter B. Favila to order a thorough consultation with all the industry stakeholders including the “talye” sector.
The BoI has already missed its target to come up with a new MVDP. The target has been moved to end January, a month-long delay from the December 30, 2009 deadline.
Trade and Industry Undersecretary and Board of Investments managing head Elmer C. Hernandez said the BoI, which administers the program, is still finalizing the new industry blueprint.
The previous auto programs were a failure. The domestic auto industry failed to develop even under a protected environment where other competitors prosper. Now that the ASEAN free trade zone is in effect and the upcoming zero tariff regime with other regions are ready for implementation, the entire trading landscape has changed dramatically.
Thus, it is imperative that the new MVDP will work under a free trade area where the name of the game is survival of the fittest. This is a make or break period for the industry.
Create a weak and lousy MVDP and we can kiss this manufacturing industry goodbye sooner. –BERNIE CAHILES-MAGKILAT, Manila Bulletin
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