Auto manufacturing in the Philippines is an endangered species

An observer's look at the state of Philippine automobile manufacturing

By now, you'll have most likely read about the impending closure of another Philippine automotive manufacturing plant: the one of Honda.

The decision to close must not have been an easy one for Honda. The factory was opened in 1992 as Honda's only manufacturing facility in the Philippines. The facility built a variety of cars from CKD parts kits throughout its 28-year history, all of which would have had the letters “PAD” on the VIN.

Before Honda Cars Philippines built the City (all generations since 1996) and the BR-V (since 2018), the factory actually produced Civics, which began with the fifth-generation model. That included the hatchback that had no power-anything and that 1.2-liter PH12 engine. The factory also built the sixth generation Honda Civic, otherwise known as the EK, as well as the seventh-generation model. Most notably though, the Honda Santa Rosa factory also rolled out what could be the last most exciting car ever made in the Philippines: the B16A-powered Honda Civic SiR.

But the Honda factory has had to endure a lot of hard times. They faced problems when the Asian financial crisis hit in 1997, but still, they built cars. The factory kept going even when the global financial crisis slammed markets in 2009, but they still made cars. They were even hit when a double disaster in 2011: first when Japan was hit with a massive quake and an even more destructive tsunami, and then floods critically affected their production in Thailand. Those two disasters hurt their unit imports and, more importantly, parts supplies as Honda's Philippine manufacturing operations depended on parts from suppliers abroad.

Many are speculating why Honda had to shut down. There are theories it was the tax reform law or even a feared takeover by militant unions. In the end, it was the lack of volume that really must have been the final straw.

The plant itself has an annual production capacity of 30,000 units, but even with two models being produced in the BR-V and the City, they were only doing about a third of that. In 2018, Honda built 7,088 units of the City as well as 4,959 units of the BR-V; which accounts for a total of 12,047 units or just 40% of the maximum capacity. In 2019, the numbers dropped to 5,717 City units and 4,003 units of BR-V for a total of just 9,720 units; that's a drop of 19%, and it means that their production was just 32.4% of their overall capacity.

Numbers don't lie, and no amount of press releases can really mask or “euphemize” those kinds of digits. No business can ignore how keeping the factory open is actually dragging the bottom line. And so the decision to close it came and Honda had to really look beyond the sentiment, the history, and even the fact that almost 400 associates at the plant now face an uncertain future.

To put that in perspective, we can look at Honda's factory in the United Kingdom which makes the Civic Type R (and other Civics). That factory has a capacity of 160,000 vehicles per year, and in 2019 it produced 109,000 vehicles total or about 68% of the maximum. Yet Honda still decided to close it in 2021. Brexit was primarily the issue, but if they had to close a factory that's doing much better than half its capacity, why does ours make business sense to keep open?

We really saw this day coming; we were just hoping sales would improve enough for Honda to keep the factory open. That's why we like coming up with articles that highlight locally made models because vehicle production in the Philippines -whether it be CKD assembly or full manufacturing, stamping included- needs our full support. We want you to know which models are made in RP because that really should be a major factor in purchases, but that's a tough ask when colonial mentality is a real thing here, specifically the belief that foreign ideas, concepts, and products are better than one's own.

At this point, it may be too late to ask for a 100% Filipino automobile brand and company beyond jeepney manufacturing operations like M.D. Juan (they make Willy's-style jeeps too), Sarao Motors, and coachbuilders like Centro, Almazora, and Santa Rosa. Having a Filipino automobile company with international-grade manufacturing would be the dream, which is why personally I'm a bit envious of Vietnam: they now have their own homegrown car company called Vinfast.

We do still have a few car manufacturers by foreign brands in the Philippines, but here's a lesser-known insight: they are all in danger.

Every vehicle built in the Philippines is uncompetitive. We're not referring to quality control (actually, ours is very good); we're talking about a cost handicap that exists with vehicles that roll out of domestic assembly lines.

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. That means that every Toyota Vios, Mitsubishi Mirage and Mirage G4, Honda City, Honda BR-V and Nissan Almera that rolls out of the assembly line cost about PhP 75,000 more than if it came from a factory in other ASEAN nations.

$1500 or PhP 75,000 may not seem like a great amount to some, but multiply it by the production run of the Vios and Innova in 2019 of 53,975 vehicles and the number you'll get is staggering: $80,962,500. Converted to pesos, that's a PhP 4.1 billion penalty towards a company's gross revenue.

There is a combination of factors that make up that penalty, and it's best to compare how manufacturing in the Philippines differs greatly from the Detroit of Asia: Thailand.

The first is the infrastructure. They built things to support the economy, specifically exports. They built more infrastructure compared to us over the decades. The airports are bigger. There are more rail lines. There are more highways. There are more ports, and more efficient at that. The late King Rama IX oversaw many of these projects during his tenure, and he pushed for them.

Their operations and setup costs are lower. Corporate taxes are lower. The major parts suppliers already set up shop there, much more than ours, so there's no need to import. Minimum wages are slightly lower too. The companies (foreign as they may be) can actually own the land they put their factories on. Power costs are also reportedly lower; they have new power stations on the way, while we spent 30 years repaying an unused nuclear power station.

The government's processes are also reportedly easier to deal with. Visas are easier. Travel is easier. Permits are supposedly easier to process. Policies are geared to make it attractive for foreign investment, particularly in job-generating enterprises. And to think they had a military junta in charge of the government for a while.

Thailand also sought to protect its domestic auto industry by imposing taxes on cars not made by Thais, and the government gave locally-made vehicles an advantage with tax incentives, particularly the single cab pick-up trucks. The previous administration did try with the CARS Program or the Comprehensive Automotive Resurgence Strategy Program of the Department of Trade and Industry, but it only grants a $1000 incentive per vehicle produced in the Philippines. That means the $1500 blow isn't eliminated, it was just softened.

Just about the only advantages we can think of that manufacturing in the Philippines has is our geographic location as well as our ability to speak English.

The truth of the matter is, manufacturing automobiles in the Philippines is in danger and has been for decades. The CARS Program also sought to attract new car companies to produce vehicles in the Philippines, but no car manufacturers took the deal. Just recently the Hyundai Motor Company announced that they were establishing their first Southeast Asian factory, but they'll be building it in Indonesia, not the Philippines.

Volkswagen was actually in talks with the Philippine government a few years back, up to and including a visit to Germany by senior government officials -including former president Benigno Aquino III- to try to get VW to come to the Philippines to put up a factory and be the hub for the region. Nothing happened of it, and so in a bid to make their models more affordable, VW opted to go China thanks to the new free-trade agreement (FTA) that ASEAN has with the PRC.

Sad as it is to say (and even though the companies will unlikely admit it) the Philippines is already seen by the industry as an importer, not an exporter or a manufacturing hub. 

We know this because when we ask senior executives of car companies abroad during motor shows and press conferences about if they have plans of setting up manufacturing or assembly in the Philippines, all we get are overly politically-correct phrases meant to dodge those bullets. Not in our lifetime, is what they were not saying.

We can also refer to the numbers, and they don't lie. We consulted with our colleague over in Thailand: Pan Paitoonpong of Headlightmag.com. He says that 3 out of 4 vehicles sold there are made there and that even in the premium and luxury sectors, more than 50% are made there as well.

Referring to Philippine sales figures in 2019, about 4 out of every 5 cars sold are complete built-up (CBU) imports. Only about 1 in 5 are locally-built.

And now we're losing Honda's automobile manufacturing, and crucially, losing jobs and a positive impact on the GDP. The announcement came a year after Isuzu decided to stop assembling the D-Max in the Philippines for the same reasons and focusing on building bigger trucks. Honda's announcement was also reminiscent of when Ford decided to stop manufacturing operations here at the end of 2012. Ford actually exported vehicles like the Focus, Escape, and Tribute, but that didn't last either. That factory is now Mitsubishi's, and they will try to export the Euro4-revived L300 to other developing markets but have yet to actually ship units abroad.

Mind you, it's not just the nearly 400 Filipino jobs at the Honda factory that are being lost, it's all over the manufacturing supply chain; yes, the local parts suppliers are losing a key customer. That means more lost jobs and more losses to the GDP.

Can it be turned around? Possibly, but it will take a lot of time. The business environment for automobile manufacturing has to be significantly improved in terms of infrastructure, government policy, reduced overheads, easier access for exports, so on and so forth. For the Philippines to hold on or even expand vehicle manufacturing -and the parts industries that come along with it- the carmakers have to get offers that they honestly can't refuse.

We can also start a little smaller. If you're in the market for a new vehicle and the choices include a locally-made one, lean towards it. There are more jobs on the line.