The number of imported cars being sold in the Philippines is on a steady rise, while the number of locally-assembled cars in the Philippines has been on a decline. The most recent automaker to pull out its local manufacturing is Nissan with its Almera. And then just a year ago, Honda ended local production of the City and BR-V. Only a handful of cars remain committed to Philippine manufacturing, namely the Toyota Vios and Innova, Mitsubishi Mirage G4 and L300, Hyundai H350, and Foton’s range of light commercial vehicles (LCV).
In order to fully understand why the Department of Trade and Industry (DTI) imposed such safeguard measures on imported vehicles, we need to take a look at who is most affected by the influx of imported cars and why automakers are in favor of producing cars in nations like Thailand or Indonesia.
As to why the safeguard measures were imposed, the DTI says the decision comes from the petition for safeguard measures filed by the Philippine Metalworkers Alliance (PMA) when it found out that increased importation of passenger cars and light commercial vehicles “is a substantial cause of serious injury to the domestic motor vehicle manufacturing industry”.
The provisional safeguard measures will be through the form of cash bonds amounting to P70,000/unit for imported passenger cars and P110,000/unit for imported light commercial vehicles (LCV). The provisional safeguard measures will take effect for 200 days from the issuance of an order by the Commissioner of Customs and while the case is under formal investigation by the Tariff Commission. How much of the added cost will be passed on to consumers is still unknown at this point.
But why are automakers in favor of countries like Thailand or Indonesia in the first place? Firstly, this has nothing to do with our lack of quality or craftsmanship. As a matter of fact, Filipino-made products have such a high-quality standard. But the key driver as to why most automakers do not consider assembling cars in the Philippines is mainly due to various economics of scale.
With Thailand being the largest producer of automobiles in the ASEAN region and also accounting for the highest share of imported cars in the Philippines, let’s take a look at what makes them more advantageous. Based on the World Bank’s 2020 Ease of Doing Business Index, Thailand has a score of 80.1, placing them at 21st among the 190 countries measured and sixth among Asian countries. The Philippines? Our score is 62.8, placing us at 95th, which is definitely a massive gap from Thailand. Sure, this is a sizeable leap compared to its ranking of 124th in 2019, but it’s still a long way before we achieve what Thailand is capable of.
There are a number of reasons why Thailand is far ahead of us when it comes to ease of doing business. The first is that it’s simply easier to register and operate a business there. Foreign companies are also able to fully own the land where their factories will be built. In the Philippines, a foreign company has to form a partnership with a local business in order for this to be possible. And then there’s the issue of bureaucracy or red tape, though the creation of Anti-Red Tape Authority (ARTA) by the Philippine government is one of the main reasons why the Philippines improved its ease of doing business rankings in 2020.
Let’s not even talk about our corporate income tax (CIT) of 30 percent, which is the highest in the ASEAN region. It was only when a pandemic struck that the Philippine government decided to create plans to lower the CIT through a tax reform called the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.
Up next is infrastructure. From the get-go, Thailand was able to foresee its need for a robust system of roads, railways, airports and seaports in order to handle the expected increase in economic activity. In addition, electricity, internet, and utility costs are much cheaper in Thailand. It’s no wonder the OEM parts suppliers that a certain car manufacturer partners with can and will most likely choose to build their factory in Thailand instead of ours.
As a result of these aforementioned factors, cars that are produced in the Philippines face a cost disadvantage when compared to countries such as Thailand. Just how much more expensive? According to our friends from AutoIndustriya, cars manufactured in the Philippines cost around US$1,500 (around PHP75,000) more than if the cars were to be manufactured in Thailand or Malaysia. Multiply that to the total number of units they sell annually and the added cost will definitely eat into their revenue.
Lastly, another factor to consider when choosing to build cars in a certain country is demand. One of the reasons why it’s feasible to produce the Toyota Vios and Innova here in the Philippines is because there’s a huge demand for these two vehicles. Honda Cars Philippines’ former manufacturing plant in Sta. Rosa, Laguna operates below capacity, thus making it more economically sensible for them to import the Honda City from Thailand instead of producing just a few numbers here in our country. Running a factory isn’t cheap, especially when we remember the fact that utility costs in our country are higher than what our ASEAN neighbors offer. It especially doesn’t make sense to run a factory either when the revenue from the number of cars sold can’t recuperate the cost of running that factory.
At this point, one may argue that the Philippines isn’t the only country that creates such policies in order to protect its local industry. Yes, that is true. As a matter of fact, Thailand and Malaysia have higher taxes on imported cars versus CKD cars. But the problem with our scenario is that local manufacturing, at least in its current state, is already at a disadvantage when compared to other countries. Adding tariffs to imported cars alone won’t improve the state of the Philippine auto industry. In fact, in the short- to medium-term, this will further dampen demand for new cars, and this is coming from an industry that suffered a massive sales decline of around 40 percent on average. Whereas Malaysia implemented a 100 percent tax cut on CKD cars and a 50 percent tax cut on imported cars in order for their automotive industry to recover from the effects of the COVID-19 pandemic, our country did the exact opposite.
Moreover, with only a handful of cars being built in the country, these cars definitely won’t be enough to meet every consumer’s needs and wants. You can’t expect someone that hauls goods from one city to another to consider a Philippine-made Toyota Vios over a Thai-built Toyota Hilux, right?
Now, you may argue that the government is doing something to attract carmakers to build their cars here in the Philippines through the previous administration’s Comprehensive Automotive Resurgence Strategy Program (CARS), but even that wasn’t enough to attract significant investment. Only two automakers signed up: Toyota with their Vios and Mitsubishi with their Mirage G4. The program will offer incentives to these two automakers if they are able to produce 200,000 units of the said vehicles within six years. But with the drop in sales due to the coronavirus pandemic, the country’s top two automakers are at risk of missing their production targets.
So, to answer our original question, will DTI’s safeguard measures on imported cars help or hurt the Philippine auto industry? Definitely. The best way forward is to let the automotive industry recover first to pre-pandemic levels. As it stands, this policy created by the DTI is a hindrance to the automotive industry’s road to recovery. And within this period of recovery, what the government should do is to create policies and improve the infrastructure that will further improve the country’s ease of doing business rankings. CREATE is already a good step forward, but it will take more than just a tax reform to attract foreign investment and thus, potential new car production.
Additionally, local parts suppliers should be able to innovate too, and the first step to this is to not solely rely on new car production. This could be through the creation of spare parts or accessories for cars that are already on the road. After all, the most resilient businesses out there that stood the test of time are innovators that are able to adapt to economic changes or shifting consumer demands. For instance, stricter emission regulations mean that combustion engine cars will inevitably be banned at some point worldwide. Since this is the case, what do you think should the suppliers of combustion engine parts do in order to survive? Innovate and adapt to electric car technology, of course.
In the end, there really needs to be a deeper connection between the government, the automakers, and the parts suppliers. And this should also be matched with policies and infrastructure to make it first and foremost attractive to foreign investors to consider the Philippines as a production hub.