BOTH the Philippine automotive industry and the government’s economic team are in a complete state of denial about the impending disaster the country faces in the Duterte administration’s proposal to increase the vehicle excise tax.
Over the past few years, the automotive sector has grown rapidly, keeping pace with improving economic conditions for a considerable part of the Filipino population, which now has an identifiable middle class. Until the proposed increase in vehicle excise taxes was announced, the local industry was upbeat; the assumption was that growth would continue for the foreseeable future. Without any real evidence to contradict that point of view, the industry went into aggressive expansion mode, introducing new makes and models to the market at a rapid pace and expanding their distribution networks.
A somewhat unique aspect of the growth of the industry in the Philippines is that it is not driven by value; cars are more expensive here than they are in other countries. For example, the most basic compact sedan model Toyota offers in the US (the Yaris, which we know here as the Vios) is about 17 percent cheaper than a Toyota model with virtually identical specifications (in this case, the Corolla Altis) in the Philippines. For higher priced cars, the difference is even more extreme; a Volkswagen Touareg SUV in the Philippines costs about 67 percent more than its US counterpart, and at the bleeding edge of the luxury scale, an Aston Martin Vanquish S coupe costs roughly 228 percent more than it does in the US (where its price, depending on the car’s features, is in the neighborhood of $300,000).
Even with some manufacturing done here and relatively more economical import supply chains (most of the imported cars here come from nearby factories on the Asian mainland), the only vehicles that can be said to be priced reasonably in the Philippines are those whose specifications are considered below acceptable standards almost everywhere else, if not in terms of durability and efficiency (this is one of the few places in the world where new cars equipped with engines with lower than Euro 5 fuel specifications are being sold), then at least in terms of features.
What all that means is that the automotive industry here has found success under somewhat tenuous conditions, although they have been working rather well until now. Mass manufacturers such as Toyota and Mitsubishi are earning healthy revenues based on volume, while mid-range to upper-end brands such as Ford and Mazda are doing okay by marketing to a substantial niche that wants and can afford something a little better than commonplace. At the higher end, the smallest segment in volume terms in any market, the industry here has been typical – insulated to a great degree to changes in fortune in the wider economy so long as it can offer products at prices that are as approximately relative to the incomes of people in the upper 1 percent or so of the population as they are in other places.
With the new vehicle excise tax scheme, either the House version which follows the original 200-percent increase on the most expensive cars proposed by the Department of Finance, or the Senate version that dials that back a bit to a 120-percent increase, the tenuous formula for everything above the lowest price range is destroyed; even if a customer has the money, the cost for any new car above the most basic level will be so far above the value of the actual asset (which in the case of cars, is an asset that depreciates rapidly anyway), that purchasing a car would instantly represent a punishing financial loss.
Passing either version of the car excise tax, which will probably happen sometime in the first half of next year, will have three consequences.
First, it will simply eliminate most of the current automotive industry. Cars are a low-margin business, anyway – a typical auto dealer can expect a net profit of somewhere in the neighborhood of 5 percent – and every brand that has products priced at P1 million or more will no longer have a business case for offering them here.
Second, it will flood the country’s roads with cheap, substandard vehicles, because that market segment will suddenly become much larger. People will still want vehicles. They will still need them, because public transportation development continues to be a low priority despite the “pa-cute” mantra of “Build, Build, Build”; and so now the customer, who before would buy one nice car and double up or book an Uber ride on coding days, will buy two cars.
Third, it will completely sabotage the government’s revenue projections, and as a consequence, its plans for infrastructure spending. Those projections are based on a steady state forecast for the automotive sector, not taking into account the virtually guaranteed contraction the new tax will cause. Thus, what we will be left with is an economy that is suddenly missing a key growth engine, streets and highways clogged with even more vehicles, and even less money to do anything to try to solve that problem.