• Uncertainty in the auto sector

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    Ben D. Kritz

    IN these interesting days of the Duterte era, there is in some industries an unusual mood, a combination of sincere optimism and deep uncertainty. The best way to describe it, perhaps, is a feeling that good things will happen under Duterte, but at the same time, the feeling is tempered with a bit of apprehension over what those things might actually be.

    This is certainly the case for the local auto industry, which is one of the most vibrant business sectors in the country now. In front of the public or the media, the message from virtually every industry player is the same: 2016 was a great year, we’re excited about 2017, and we are sure we’re going to do even better.

    But offstage, the conversations that take place around the banquet table, at the bar, or outside, in the smoking area, have a different tone. The optimism is real; no one believes their business is going to diminish or that industry growth, as a whole, will slow, but nearly everyone admits that it is nearly impossible to forecast growth for this year or the next few years.

    There are four issues of current concern to the automotive sector: The proposed increase in the vehicle excise tax, the proposed increase in the fuel excise tax, the Duterte administration’s policy (or lack thereof) with respect to supporting the local automotive industry, and finally, albeit to a lesser extent than the others, government policy toward public transportation.

    The suggested adjustment to the original vehicle excise tax proposal, which would raise the maximum price for cars subject to the lowest tax rate from P600,000 to P1 million, softened some attitudes toward the Department of Finance’s plan, but the balance of opinion is that the excise tax initiative is still unfair and even a bit irrational.

    “Obviously, the government needs to raise revenue, especially if it is going to lower income taxes,” one executive told me. “But we feel like we’re just low-hanging fruit, and they really haven’t thought this through. It doesn’t make sense to pitch the tax plan as both a revenue-generating measure and a vehicle or traffic-reduction measure.”

    The problem is this: The luxury car market—brands like BMW (where I spent most of my career), Mercedes, Volvo, Porsche, Audi, Jaguar, etc.—is largely insulated from economic changes. There is a small but reliable market for high-end cars, made up of customers who are wealthy enough to afford them no matter what the larger economy is doing, and an increase in the vehicle excise tax, even if it hits the high-end market the hardest, is not enough to diminish it. Revenue to the government will increase, certainly, but only by a small amount, given the relatively low volume of sales.

    At the same time, taxes are being kept low on less expensive cars; therefore, there is no real financial disincentive to buying a car for customers in that market. Because the tax is relatively low, so is the additional revenue the government realizes from it, unless the volume of sales increases by a significant amount—which in turn, completely defeats the “vehicle reduction” intent of the new tax plan.

    A similar contradiction is perceived with the proposed fuel excise tax increase, which is also being proposed as both a revenue-generating and traffic-reduction measure. First, there are too many exemptions—for public transit vehicles, service vehicles like school transports, and some commercial vehicles—granted to segments that have relatively constant traffic volume.

    “Right there, they’re completely ignoring the contribution to congestion from all those to focus on private cars, which is only doing the job halfway, if reducing traffic volume is a serious objective,” a representative from a Japanese automaker told this writer.

    Over the short term, higher fuel taxes may lead to a drop in traffic, but “as early as the next model year, we’re coming out with engines that are significantly more fuel-efficient than what is available this year,” he said. “And that trend toward greater fuel economy is going to continue.” That means that if traffic volume remains constant, revenue from fuel taxes is going to gradually decline. On the other hand, if the fuel economy of new cars improves at a rate faster than the annual inflation-indexed increase in fuel excise taxes, ownership will be more affordable, and the number of cars will increase. Government revenues from fuel taxes will increase as well, but again, just as with the vehicle excise tax, they will do so at the expense of the objective to reduce traffic congestion.

    One suggestion made by several auto executives was that the fuel and vehicle excise tax proposals be separated from the larger tax reform package. “Everything is part of one proposal,” one dealership manager observed. “It doesn’t seem like these measures got the attention they really deserve because of that, and that’s probably true of other parts of the tax package as well. Better that they break it up, and deal with the issues individually.”

    Given that the focus of the administration is on its tax reform plan, broader policy toward developing the auto industry is being completely ignored at this point. “The government is really missing an opportunity right now,” the president of one local auto group said. “There are several manufacturers that are taking a close look at the Philippines, at the very least as a new market and in some cases as a possible manufacturing location, but no one has any idea what the government’s intentions are. If they wait too long, they’ll go elsewhere.”

    For the local players, the safest course seems to be to “wait and see;” dealer networks are still expanding and sales forecasts—though presented with stronger disclaimers about their margins of error—are still positive, but all this activity is the result of planning over the last two to three years, and not from clear signals from the current government. If there aren’t any of those clear signals forthcoming within the next few months, the rosy outlook for the local auto sector may begin to lose a bit of its luster.

    ben.kritz@manilatimes.net

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