New growth threshold for auto industry

The Philippine auto industry is on the threshold of major changes and reforms that could lead to the full development of what remains one of the country’s few major industries.

The first impetus is the revival of the global auto industry. Global car sales surged a robust 25 percent in the first quarter this year and by another 13 percent in April year-on-year.

The global auto industry has returned to profitability, with the five largest auto manufacturers posting earnings of US$5.5 billion in the first quarter of 2010, according to the Global Auto Report of Scotiabank.

The improvement represents a sharp turnaround from annual losses averaging in excess of US$22 billion from 2007 through 2009. Profitability improved in every region last quarter, especially in North America, with the five largest automakers returning to profitability in the region.

Asia is the market

However, despite the turnaround in North America, Asia remains not only the auto market with the greatest potential, but is already the most profitable market in the world.

For the Philippines, the major impetus has been the resiliency of the Philippine economy which was one of the only four Asian economies that survived the global recession in 2008 and 2009.

In 2009, the Philippine econo-my posted a growth rate of 1.1 percent and then surged suddenly to a growth of 7.3 percent in the first quarter—the best first quarter leap in almost three decades.

The growth rate forecast for the whole of 2010 has now been almost doubled—from 2.5-3.5 percent to 5-6 percent. This an amazing news—but it failed to grab page one headlines. It does hide the fact that the world—and even our own government —has consistently underestimated the Philippines and its economy.

Robust remittances from some ten million Filipinos living or working overseas account for the resiliency of the Philippine economy. Remittances were supposed to decline in 2009, per World Bank projections. Instead, remittances rose and will rise again this year to soar past $18.3 billion.

Why is this so? The Filipino is English-speaking, highly skilled, productive, warm and caring. “Nobody can replace the Filipino worker abroad,” says Harvard-educated economist Bernie Villegas.

In turn, strong remittances have provided the necessary fillip to domestic consumption and demand, including for cars.

The local auto industry, per figures of CAMPI, sold 132,444 units in 2009—the year when sales were supposed to be down. Instead, the 132,444 showed an increase of 6.4 percent.

In the first five months of 2010, auto sales zoomed a frenetic 37 percent, prompting CAMPI to nearly triple its sales growth forecast, from 4 percent set in the early part of the year to 11 percent this June.

This means the total 2010 sales will rise from 137,774 originally projected to 147,013—a 9,236-unit difference and an increase of 14,569 units year-on-year (up from a previous projected gain of just 5,330
units over 2009).

BizNewsAsia, using anecdotal evidence, believes total industry sales could scale upwards of 160,000 units, or even 180,000 units—surpassing the record 162,095 units sold in1996—just before the Asian Financial Crisis.

There is just so much money lying around, according to financial analysts. San Miguel Corp. President Ramon S. Ang says he has had no difficulty raising the equity and the borrowings to fund the conglomerate’s major acquisitions—despite the prospect of sovereign bankruptcies in Europe and the consequent return to quality lending.

Henry Sy’s SM Investments Corp. has ramped up its mall construction pace from three malls a year to as many as six malls a year, a doubling despite the fact that each mall costs P2 billion to build.

In fact, SMIC group has allotted P200 billion in capex over the next five years or P40 billion per year. “Most of the money we need, we have already raised,” says SMIC CFO Jose Sio.

The Philippine commercial banking system has P5 trillion in deposits. Only less than P3 trillion has been lent out as loans, leaving more than P2 trillion parked in unproductive places (like government IOUs).

The $18 billion annual OFW remittances, figures Bansan Choa of I-Remit, represent only 35 percent of the total income of overseas Filipinos. Nearly $12 billion is unremitted every year—parked in overseas investments.

MVDP impetus

Another impetus is the New Motor Vehicle Development Program (MVDP). It could open the floodgates for new players because they no longer need to invest so much in assembly and or manufacturing facilities to participate in the local auto industry.

At the same time, the Philippine-Japan Economic Partnership Agreement (JPEPA) will allow the duty-free entry of Japanese-made vehicles with engine displacement of three liters and above—the segment of high-end cars and SUVs. –TONY LOPEZ, Manila Times

E-mail: biznewsasia@gmail.com