Last week, editors and writers of The Manila Times met a party of officials from Isuzu Motors Philippines led by Executive Vice President Takashi Tomita, who had some extraordinarily frank words on the Aquino Administration’s oft-stated goal of expanding vehicle manufacturing in the Philippines.
“It is too late for government to do anything” to support the sector before the formal declaration of the Asean Economic Community (AEC) at the end of the year, Tomita said.
The litany of complaints shared by Mr. Tomita was neither new nor unfamiliar. High production costs, thin supplies of locally sourced parts and materials, free trade arrangements that increase the competition from imported vehicles, poor transport infrastructure, and general government cluelessness when it comes to setting any sort of industrial policy are points that are raised—sometimes in diplomatic terms and sometimes not—by every automaker with a significant presence in the Philippines, even the most optimistic.
Back in early 2011, the Aquino Administration announced that it was planning to develop a “roadmap” for the auto manufacturing sector, as well as many other business sectors. The effort to create an auto industry roadmap finally got underway—several months behind schedule—in 2012, and although a draft was supposedly completed last year, the Department of Trade and Industry (DTI) withheld it for “fine tuning,” which is apparently still ongoing. At last report, industry executives were hopeful the roadmap would be presented “soon.”
Dithering around to produce a policy that will be outdated by the time it can be implemented seems at this point to be a blessing in disguise, given the completely unrealistic aspirations the proposed roadmap contains. The biggest bone of contention is the resetting of the investment level eligible for tax incentives (which are being reduced): To qualify, a manufacturer must maintain a production level of 40,000 units per model per month; for auto operations other than vehicle assembly, the minimum qualifying investment is $60 million (P2.67 billion).
Those conditions will not be retroactively applied to existing manufacturers, of course, but Isuzu’s Tomita and others in the industry worry that they will curb any new investment. As an example of how ridiculous the qualifying threshold is, Tomita pointed out that the best-selling locally assembled vehicle, the Toyota Vios, only moves about 25,000 units per month.
Potential new assembly capacity will certainly not be encouraged; the export threshold, or the point at which expansion beyond the demand of the local market becomes cost-effective, according to Tomita, is about 100,000 units per month. If the gap between domestic sales potential (20,000 to 25,000 units per month, perhaps) and that ‘export threshold’ were much closer, expanding capacity would make sense; it certainly does not now, however, not when the Philippines is already surrounded by vehicle-exporting countries.
And because of the high buy-in demanded of non-manufacturers—businesses like parts manufacturers and builders of components like engines and transmissions—very few of those will be attracted to the local sector, either. This is an even bigger disincentive to expanding production capacity, because it prevents the supply network from growing. For some manufacturers, parts supplies have become so thin at times that they have had to resort to importing completely knocked-down (CKD) vehicles, complete vehicles in disassembled form.
What is happening now, and has been since about 2010 according to Tomita, is that the Asean auto manufacturing sector has developed its own sort of integration, well ahead of the efforts to launch the AEC. Parts, components, and assembly are shifted around the region to take advantage of cost benefits; a car assembled in Sta. Rosa may have bits sourced from six or eight different countries: Transmission and electrical wiring from the Philippines, engine from Japan, body panels and trim parts from China, exhaust components from Indonesia, tires from Korea, lights from Thailand, and so on.
Asean integration will presumably reinforce that supply network by loosening restrictions on the flow of goods throughout the region, but what it will also do is reduce the costs of vehicle importation, putting added pressure on the local industry. As it stands now, importation may be more cost-effective than local assembly; growth in auto sales (which have been robust over the past couple of years) have been accompanied by local production levels that have stagnated or even declined a little, Isuzu’s Tomita said.
It is worth mentioning again that the views expressed by Mr. Tomita are common throughout the industry; despite the issues facing the industry, the Isuzu official, like most of his industry counterparts, seems generally satisfied that his company is prospering to the extent that the local environment allows. But the frustration at the apparent lack of seriousness behind the Administration’s “roadmap” is still evident.
The impression one gets from listening to a variety of knowledgeable viewpoints like Mr. Tomita’s is that the government’s plan was developed without consideration of competitive factors in other countries, and has been so long delayed that the only possible outcome is the dissolution of the local auto manufacturing sector – the only difference actually releasing the roadmap and trying to implement it would probably make is to accelerate the pace of collapse.