When we say that a vehicle is proudly made in the Philippines, that's not a sentiment merely for the sake of sentiment.
A vehicle model being manufactured in the Philippines, whether it be from imported complete knock down (CKD) kits or full manufacturing (i.e. includes body panel stamping), means jobs for people (both for the manufacturer and for the suppliers in the parts chain), long term growth for the economy, and a boost for the industry.
But assembling cars in the Philippines isn't easy or even economically feasible, so much so that Isuzu Philippines Corporation will be ceasing the local assembly of the D-Max pick-up later this year.
Joseph Bautista, Isuzu's head for sales, spoke to AutoIndustriya.com about the planned cessation of D-Max production in the Philippines and, judging by our conversation, there are three key reasons why.
1. CKD production can't adapt fast enough to customer needs
While the tax reform law (TRAIN) was favorable in terms of excise on pick-up trucks, it had the unintended consequence of shifting consumer preferences for them. Bautista said that the TRAIN law raised the prices of cars and SUVs, and so customers shifted to pick-ups to become more of lifestyle vehicles rather than workhorses.
Such a shift, according to Isuzu's head for sales, meant that consumers were looking for more features and more standard equipment as opposed to more commercial customers that wanted basic utility vehicles. Being a vehicle assembled from CKD parts from Thailand and from local suppliers, making quick adjustments to meet consumer demands simply was not possible, as explained by Bautista.
“Because the D-Max is a CKD, we could not adapt quickly enough. You have to consider suppliers and the lead time for retooling.” said IPC's head for sales. “If your market is workhorse, it's easy. But the shift to lifestyle means you have to adjust very fast.”
2. High overhead costs for local vehicle assembly
Producing a vehicle in the Philippines is, sadly, faced with a lot of difficulties, the greatest of which is cost.
The cost of utilities in the Philippines is no easy thing to overcome. The high prices of (primarily) oil-dependent electricity is perhaps the prime consideration, along with higher labor costs. There are also duties to deal with; while CBU (Complete Built-up Units) and CKD kits have no tariffs, there are parts you have to import at 1%, and the suppliers also have to import raw materials for their localized parts and accessories, which isn't covered by the AFTA. The extra cost on parts because of duties means that local vehicle manufacturers get parts and accessories at higher prices.
The cost penalty is no joking matter.
“There was a BOI study that showed that producing a vehicle in the Philippines is about $2000 more expensive than other countries,” said Bautista.
A $2000 penalty for producing one vehicle is a big loss, especially since that amounts to about PhP 110,000 (thereabouts) per car. That a penalty that is passed on to consumers.
3. Economies of scale versus Thailand
But the biggest hurdle for Isuzu (and for any other local vehicle assembler) to get past is the sheer volume and subsequent economies of scale of vehicle manufacturing in Thailand.
Thailand is the regional automotive manufacturing powerhouse, and all major automobile brands have factories there to serve the ASEAN Free Trade Area (AFTA) and other partner regions. Even car manufacturers in larger countries like Australia have been shuttering their factories to import from Thailand.
The primary reasons include lower labor costs and utilities. All the parts suppliers are there too, making them the preferred hub for vehicles, especially pick-up trucks, in the region.
The economies of scale has caught up with Isuzu, as it had with other manufacturers like Ford when they shut down their manufacturing in Laguna.
“In terms of cost, malaki ang diperensiya namin kumpara sa (there's a big difference compared to) Thailand,” continued Bautista. “We cannot compete with their scale.”