There is a big issue brewing in the Philippine auto industry.

On the first working day of 2021, the Department of Trade and Industry (DTI) released an order that they will be implementing safeguard measures against automobiles imported as completely build-up units or CBUs. This move was justified by the DTI as an attempt to protect local automobile manufacturing.

The DTI is legally empowered by Republic Act 8800 to protect Philippine-made products against similar or competing imported products via safeguard measures, and that is what they will do. For 200 days the DTI will require a PHP 70,000 safeguard bond for every passenger vehicle and PHP 110,000 for every light commercial vehicle imported from most of the major countries our market sources them from, with some exceptions depending on vehicle type and country of origin. The 200 days will be used to buy time for the concerned government agencies to investigate and meet about what to do in the long term.

On the surface, it may seem like the whole thing was triggered by the petition from the Philippine Metalworkers Association, and that is accurate. The PMA is a group of local unions involved in parts manufacturing (steel, electronics, etc.) and they asked the DTI to take action regarding the state of local auto manufacturing, and that started this whole process.

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We actually tried to reach out to the Philippine Metalworkers Association through some back channels in the unions but we couldn't get through. Apparently, even our contacts that are involved in the local auto unions don't know exactly who the spokesperson for the PMA is. There is an interesting thing to note here though: the petition coincided with the timing of another major and relevant industry event, and that was the closure of the Honda automobile factory.

The announcement of Honda's decision to close their Sta. Rosa, Laguna factory by March 2020 sent a shockwave through the industry, especially if you were in the parts business. That meant the City and the BR-V won't be built in the Philippines anymore, signaling that the company will transition from manufacturer/importer to just importer.

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We actually thought that the petition itself was triggered by the Honda closure, but after a bit of consideration, we don't think that's accurate. Here's why: the PMA petition actually pre-dates Honda's announcement.

Based on the DTI's report, the Secretary accepted the petition application of the PMA on January 15, 2020, and there were reports of the petition being lodged in 2019. Honda only announced the factory closure on February 22, 2020. From what we can tell, no one knew of the closure before February 22 outside of a very small (and very senior) circle within Honda. Unless there was a leak, the cessation of Honda's manufacturing operations here likely did not prompt the petition, but it may have pushed the response in favor of safeguards.

The DTI sent a questionnaire to the many automobile companies operating in the Philippines on the main matter: is Philippine auto manufacturing being caused serious injury because of CBU imports? The two major automobile industry associations - CAMPI and AVID - also responded, and formed the basis of the industry response. Basically, they both condemned the safeguard measures... albeit in politically correct terms. Terms and phrases like deeply concerned, market contraction, progressive manufacturing policy, domestic industrial policy, fiscal incentives among others were used.

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Of the 113 local companies that the DTI had on their list, only 8 local companies responded: Toyota Motor Philippines, AutoHub Group (Mini, Rolls-Royce, Lotus), Mitsubishi Motors Philippines, Honda Cars Philippines, Sojitz Geely Auto Philippines, Nissan Philippines, Ford Philippines, and The Covenant Car Company, Inc. (MG, Chevrolet). There was another company but they just returned the questionnaire without responses. Here's an interesting tidbit though: Honda submitted their answered questionnaire on February 21, 2020, or just one day before the announcement of their own factory closure. That was timed to perfection.

Regardless, the positions of the individual players were rather unanimous: safeguard measures will do more harm than good. Even the two largest automobile manufacturers (Toyota and Mitsubishi Motors) that are actually rolling out new vehicles from their factories in the country aren't jumping for joy over the matter. Together, the number one and number two automobile companies in the Philippines account for about 54% of total industry sales (2018 and 2019), and they also account for the overwhelming bulk of locally produced models.

These two automakers made it clear that they are against it, going so far as to say that safeguard measures will affect the market in a very negative way, and with immediate effect. Moreover, they believe that there is no guarantee that safeguard measures will convince customers to shift their choice to a locally-produced model.

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The Philippines only produces a handful of vehicles from domestic factories, most of which are in Laguna. Toyota builds the Vios and the Innova in Sta. Rosa. Mitsubishi Motors manufactures the L300 and Mirage in Sta. Rosa. Isuzu assembles bigger trucks at their Binan plant. Foton assembles the Toplander SUV at their plant in Clark. The Nissan Almera is also locally built, albeit by UMPI which is also in Sta. Rosa at the old Nissan Motor Philippines facility, but let's put a pin in that one for now.

As you can see, the options for locally produced models are slim. That's also why Toyota, Mitsubishi Motors, and the other automakers that actually have assembly lines manned by Filipinos are also in the import business. They are giving Filipino customers a broader choice through imports.

Despite the opposition to the safeguards from all fronts - including embassies of exporting nations and the mother companies of most of the auto brands in the Philippines - the DTI still pushed through with it. The organizations supporting the DTI in this charge are the local parts suppliers and their respective organizations, like the Philippine Metalworker Association and the Philippine Parts Maker Association.

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I've read through the long 99-page report (or at least most of it) published by the DTI on the matter. I can understand the point that the DTI is driving at, but after going through it I do have three questions that need answering:

1) Is it really about protecting what's left of the local manufacturing industry?

2) Is this safeguard measure really a matter of building a favorable environment for local manufacturing?

3) Are imports directly hurting locally-made models and in turn the industries and jobs that rely on them?

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On the first question, my opinion is this: I'm not sure.

Yes, there is a great advantage wielded by foreign automakers exporting CBUs to the Philippines given the many free trade agreements we are involved in via ASEAN. Things like higher economies of scale, better infrastructure, lower manufacturing costs, lower parts costs, lower overheads, and many, many more; this is just the tip of the proverbial iceberg.

Thailand and Indonesia constitute the bulk of imported automobiles in the Philippines. China is catching up, while Korea and Japan have a strong presence too. We also have vehicles imported from North America, from Europe, and even from India. Actually, the last time we checked, there may be some exceptions with the safeguards for Indian-made vehicles.

The thing worth noting is that we knew all of that a long time ago. So why are they implementing such measures now when the automotive industry as a whole is suffering? And by that, we mean languishing after 2020 that saw numbers drop by 40% compared to 2019. Some car companies in the Philippines believe that the industry will bounce back a little bit in 2021, but they may have to reconsider those predictions given the new safeguards.

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Something may have changed for the government to push this in 2021, and on the first working day of the year, no less. There's actually a prevalent theory in the industry: the DTI was supposedly pushed into doing this to try and make up for the shortfall of 2020.

Let's see if that theory has merit. As we all know, 2020 was a terrible year, fiscally-speaking. Remember the 40% fewer cars sold? That means a huge chunk of revenue for a government that had to spend a lot to keep the country going during the heaviest of the lockdowns. Toss in the cash ayuda, basic goods handouts, infrastructure projects that are ongoing, the need for vaccines to be distributed, so on and so forth, it can be reasoned that the government has to make it all up somehow.

This isn't a matter of the house always wins in casino speak; this is a matter of the house cannot and must not lose. The simple fact is that a government cannot be in the red. That is very much understandable if that is indeed the motivation (even just in part) behind this. The only problem is that everyone else is in the red. 

We just completed our 2020 annual sales report and an overwhelming majority of the Philippine automobile industry showed a lot of red. All the sales numbers of the top 10 performing auto brands took a nosedive. Isuzu was able to limit the damage and took a 19% hit. Hyundai has the highest drop of the top 10 brands at 50%. Even the sales of the perennial market leader and stalwart Toyota plummeted by 38%. In 2019, they sold over 161,395 vehicles, but in 2020 they dropped to 5 digits at 99,545 units. 

The timing of the safeguards couldn't be worse.

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Regarding the second question about whether I think the safeguard measure will grow local manufacturing, my opinion is this: not really.

Slapping a huge bond on imported cars will make those more expensive in the short term, but I can't see how it will drive customers to buy local in the long term. Yes, the prices of competing imported models will go up versus local counterparts for just over half a year, but what's next? That doesn't exactly enhance the value-for-money proposition of locally-made vehicles on merit. There are also countermeasures available to automakers. Remember those economies of scale abroad? If there's enough demand here, importers can renegotiate their FOB/CIF prices with the exporter/manufacturer to compensate. They can even remove expensive features to be able to still be competitive.

Unless I missed it in those 99 pages, I'm not seeing any plan - or even just a mention - to try and expand manufacturing here in the DTI report. The declared reason for the safeguards is protecting the status quo which already isn't much to begin with.

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As AVID mentioned in their statement, they feel like the rug is being pulled from under them after an already terrible 2020. But it might go down easier - or even just be bearable - if they were taking a hit for something better. The key is what CAMPI said in their statement, that the most suitable recourse is a progressive and sustainable manufacturing policy for the Philippines.

Some would point out that we have two policies intended to boost local manufacturing. We have the Motor Vehicle Development Program or MVDP for assembling vehicles from knock-down kits and the Comprehensive Automotive Resurgence Strategy or CARS (yes, they really wanted that acronym) for full vehicle manufacturing including producing body shells and stamping.

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Both policies are intended to attract car companies to set up assembly lines in the Philippines with MVDP offering tax incentives (read: tax breaks) while CARS offers fiscal incentives (read: cash incentive) meant to soften the hit from the cost handicap of manufacturing here.

With CARS, however, there is a big catch: an automaker has to achieve 200,000 models produced over 6 years for every car nameplate in the program. That means 33,333.33 units of every single CARS-enrolled nameplate per year. That is a tall order for our relatively small auto market; the Vios did come close in 2019 when unit sales hit 33,181, but that was it. Vios sales in 2020 are far less than 2019. The other model enrolled in the program is the Mirage from Mitsubishi, but the sales of that model aren't close to the Vios; about half.

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And that brings us to the third and final question: is local auto manufacturing (and the industries and jobs it supports) being harmed by imports? 

My opinion is two-fold. There is a soft yes and there is also a firm no

If we are just looking at overall sales, the answer will be a soft yes. Imports consist of the overwhelming majority of sales here versus Philippine-made or assembled models. For every 5 cars sold, 4 are imports while only 1 is made here. 

The sales numbers, however, do not show the whole picture. It's just the tip of the iceberg that's poking up from the surface. There is a much larger part that's hiding under the waterline. That's why my answer is also a firm no: imports are not directly hurting local auto manufacturing. The real harm is the environment that the auto industry has to operate and do business in.

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Automobile manufacturing in the Philippines isn't advantageous for many reasons. Many of the raw materials and parts are imported from foreign suppliers. Such supplies also have to come in via ships and through ports; these materials and parts can't be driven across a border on semi-trailers more economically because, well, we're islands. Infrastructure, while improving, isn't enough yet. We have higher energy costs relative to most of the region. Heck, we have higher fuel and food costs compared to the region. Well, maybe except for Singapore.

All these things are stumbling blocks for large-scale manufacturing industries (i.e. automotive) to thrive. We also get hit with all kinds of natural disasters like typhoons, volcanoes, and earthquakes. When Taal erupted, nearly all auto manufacturing here stopped as most of the car factories are relatively close to the volcano.

There isn't much we can do about our geographical location being on the firing line of every Western Pacific storm, but perhaps one of the biggest problems is that we have new policies that come into effect with every administration that affects the auto industry. MVDP came out in 2002 under President Macapagal-Arroyo. CARS emerged under the administration of President Aquino. TRAIN Law came about under President Duterte. These three differing policies from three consecutive presidencies each had a marked effect on how the industry does business.

What this demonstrates is an apparent inconsistency from one administration to the next when it comes to automotive industry policies. In my opinion, that could be a red flag for automobile manufacturers that we are trying to attract. The industry just got used to the TRAIN law, but now there's a new matter to deal with: safeguards. In about 200 days, there may even be another new policy after the Tariff Commission investigation.

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Beyond the inherent disadvantages, what the major players in the auto industry need are consistent, realistic, and progressive policies that won't do a U-turn when power transfers from one administration to the next. Actually, given the advantage and head start that our ASEAN auto manufacturing neighbors already possess, we have to go beyond being attractive for manufacturing; we have to make offers that automakers simply cannot refuse.

For auto manufacturing to survive and thrive here, automakers have to be given irresistible propositions to invest in making cars in the Philippines. They look for things like lower operating costs, lower energy costs, lower taxes, and many more. Those are just some of the non-negotiables to reform the business and manufacturing landscape to be advantageous on merit and not handicapped from the start.

Is it doable? Possibly, but we need to focus on export. I'll say this flat out: the total sales volume of our auto industry is not enough to support sustainable automobile manufacturing. We need to be able to export vehicles, and that means building cars that are left-hand-drive and right-hand-drive.

We are strategically located in terms of geography to export but we're not exporting. The Philippines did export CBUs in the form of the older generation Ford Escape and Mazda Tribute, but that ceased when Ford shut down the factory. Mitsubishi took over the plant and has plans to export the L300 Euro4, but there has been no announcement yet if they have started.

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There are still opportunities for exporting cars made in the Philippines, but right now the opportunity to export and be a player in the automotive value chain lies with the parts industry. If I remember correctly, there are many parts companies in the Philippines that play a big role in the global supply chain like Yazaki-Torres (for in-car instrument clusters, etc.). We also have many homegrown companies that are actively participating in the supply chain, one of which is alloy wheel company PAWI (Philippine Aluminum Wheels Inc.). You'll know them by their brand name of Rota. These companies and many more all need government support.

Only time will tell how the safeguards will work, and what final policy will emerge after the Tariff Commission's investigation. It is likely that the industry will take a big hit in 2021 because prices will jump. Maybe not all the brands will survive, and some struggling dealerships may even close. Jobs will be lost if that happens. And it also doesn't help the case of those opposed to safeguards that another important piece of news broke out this week: Nissan.

Remember the Almera sedan? Well, Nissan just officially confirmed an open secret: they will not be renewing the contract they have with UMPI to produce the Almera at their Sta. Rosa factory. This will mean that Nissan won't have any locally-built models anymore until the plans to utilize the Mitsubishi Motors Philippines plant (Nissan does own the biggest stake in Mitsubishi) to produce models in the future come to fruition. The cessation of Almera's production in the Philippines gives the DTI another ace to support safeguard measures, and it means that the next generation Almera will come from Thailand and that in itself brings up another issue.

The Philippines has been in a trade conflict with Thailand over tobacco products. We are one of the largest exporters of tobacco products to Thailand, but there is a long-standing dispute between our two nations because Thailand is taxing our tobacco in violation of the 1994 GATT and affirmed by multiple decisions from the World Trade Organization (WTO). Now the Philippines is looking to retaliate economically against imports from Thailand via tariffs. And guess what: the Land of Smiles is the single largest exporter of cars to the Pearl of the Orient. The auto industry is collateral damage. 

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The real losers in this are probably not the players in the industry though. It will be us: average consumers. If you're in the market for a vehicle costing around or below PHP 1 million, those could become more expensive soon. It's no problem if you were looking at getting a Mirage, Toplander, Innova, L300, or Vios, but alternatives may have been put out of reach.

There are many ways to make Philippine-made vehicles more attractive to consumers in a market-driven economy. Give those who buy a brand new Philippine-made Mirage from Mitsubishi free or discounted registration for the first owner. Give those who buy a brand new Toyota Vios a 50% discount on all toll fees and parking fees. Give first owners of L300 Euro4 an exemption from taxes related to fuel purchases. There are many creative ways to make Philippine-made vehicles attractive or even compelling for customers, ways to make them proud and happy to own a car made here.

There are those that belittle the capabilities of Filipinos to build cars. Hanggang jeepney lang tayo, some say. But honestly, the vehicles built here can and do compete against volume foreign imports on quality. Yes, even the reproductions of military-style World War II jeeps by MD Juan are sought after abroad.

Remember when Honda closed the factory? I was able to do a long term test of a Philippine-made City for several months prior to that. I experienced no issues, even if the vehicle itself was already well and truly beaten up as a test car for the press. A month ago I was sent a fresh, all-new Thai-made Honda City. Whenever I went over a speed bump (AKA: hump) the engine would lose electrical power and stall. There was an electrical gremlin somewhere probably a loose connector. They're figuring out the issue, and it seems it's an isolated case. All other City units released to customers experienced no such problems. 

Yes, Philippine-made can be better. I believe in Philippine-made. We just need those vehicles to be made more affordable and better value on merit. And no, making competing models more expensive doesn't count.

Until the real issues that are causing serious injury to Philippine auto manufacturing are recognized, addressed, and countered, any safeguard may just end up delaying the inevitable.