What will the local automakers do about the new tariff?

What a way to start the new year.

Yesterday, January 4, 2021, the Department of Trade and Industry (DTI) has just issued a statement that imposes a cash bond of PhP 70,000 (about USD 1,457) for every imported Passenger Car and PhP 110,000 (about USD 2,290) per imported Light Commercial Vehicle. So not only will we expect prices to go up, it's put a dent on sales projections set by automakers for this year... projections that have actually yet to be released to us.

So, what's the plan now? Well, that's the thing, many of the industry players are in a state of shock.

PH auto industry blindsided by DTI

When we asked several manufacturers their reaction and what their plans are following the announcement, the general response was surprise. “We will review it first" was the common response for our queries for their reactions. To say they were blindsided by the new safeguard is an understatement.

With that, it seems that none (or likely, very few) of the automakers knew of this new ruling coming. One of our resources described the announcement as gulatan or shocking. So if you think that it had been planned all along, most of the car manufacturers are just as surprised as you are.

Because of the cash bond, it throws a curveball at whatever plans manufacturers had for 2021. An additional tariff of PHP 70,000 and PHP 110,000 may not sound like much for multinational car companies, but multiply that by the number of units they bring in is heavy for any importer and distributor. 

PH auto industry blindsided by DTI

We expect the extra cost will have to be passed to the consumer; as to how much of it, we're still unsure. Suggested Retail Prices will likely be adjusted, or product planners might have to re-spec cars to keep prices reasonable. If you're wondering why we don't get all the options in local-spec models, the taxes play a major part in that. This could also mean some cars might get less standard features once the plans take effect.

But why did the DTI introduce this new rule? It's a response to a petition from the Philippine Metalworkers Alliance (PMA). According to them, it's to safeguard local automotive manufacturing, or at least what's left of it. The PMA also stated that the domestic motor vehicle manufacturing industry is being seriously harmed by the influx of imported vehicles.

So, why aren't more manufacturers setting up plants here? If anything, the opposite is happening. Last year, Honda and Isuzu shut down their assembly lines in favor of importing cars from Thailand. To put it bluntly, it's more expensive and uncompetitive for automakers to build cars here than import them.

At the moment, there are only five manufacturers assembling cars in the country, namely Foton, Hyundai, Nissan, Mitsubishi, and Toyota.

PH auto industry blindsided by DTI

As mentioned before, every vehicle built in the Philippines costs an extra $1500 (more or less) to make compared to if it was made in other Southeast Asian countries like Thailand, Malaysia, or Indonesia. Taxes here are also higher compared to our ASEAN neighbors. Thailand, for instance, has lower corporate taxes, faster processes, and more incentives. That's why the CARS Program was initiated as a means to reduce the cost handicap with a subsidy provided that the automaker can reach the high production and sales volume requirements. 

Will the "safeguard measures" result in an improvement? That remains to be seen for the short term. But it has sent a shockwave throughout the Philippine auto industry which is already ailing from a painful 2020. And given that the existing major vehicle manufacturers are also importers, the safeguard may have compounded matters even further.