The 1500cc is the sweet spot for the auto industry

The last few years saw the influx of many vehicles from the People's Republic of China.

The global competitiveness of China's automobiles is being tested in our market by their respective brands, which is why we're seeing so many new brands take part in our market. They are testing the waters, so to speak, and they're doing it with a wide range of passenger cars, vans, trucks, and crossover SUVs. Well, mostly crossover SUVs.

There are many wondering though: why do the many automobiles from China have engines that have only 1.5-liters of displacement or less?

The primary reason is easy: there is a cost advantage when it comes to import duties.

Why do most Chinese cars have sub-1500cc engines for PH? image

Under the current import rules and the free trade agreement between ASEAN and the PRC, a vehicle can be imported from China with only a 5% import duty if the total cylinder displacement of the engine is 1500cc or lower.

To better understand it, we need to look at AHTN or the ASEAN Harmonized Tax Nomenclature codes and how these apply to certain vehicles. Under Executive Orders 71 and 72 (signed in 2012 by the late President Aquino) which came into effect in 2018, the import duty for certain vehicles were dropped from 20% to 5%.

The 5% import duty applies to a lot of vehicles, but for this purpose, we'll just look at two codes: AHTN 8703.21 and 8703.22. If a vehicle has an engine that is 1000cc or smaller, it is classified as AHTN 8703.21. If a vehicle has an engine that is 1001cc to 1500cc in total displacement, then it is classified as AHTN 8703.22. There are some exceptions that would qualify a vehicle under a different AHTN code (e.g. vans) but basically, AHTN 8703.21 and 8703.22 covers most of the vehicles in our market.

These two codes and the corresponding import duties altered the landscape of what carmakers offered in the Philippine market from China starting in 2018.

Why do most Chinese cars have sub-1500cc engines for PH? image

Ford was one of the first takers, and they did it with the facelifted EcoSport. The model started life as a Thailand-made vehicle in 2014, but for the facelift they shifted to the model produced by the Changan Ford joint venture. That model has two engine choices, a non-turbo three-cylinder with 1499cc and the lauded 999cc turbocharged three-cylinder, qualifying it (depending on the variant) for 8703.21 or 8703.22.

Why do most Chinese cars have sub-1500cc engines for PH? image

This move was actually unusual because the EcoSport enjoyed a 0% import duty from Thailand because it's an ASEAN country; so in effect, they ended up paying an additional 5%. We think the economies of scale in the PRC made up the difference, but what became significant was the model that followed last year: the Territory. Instead of Changan-Ford, this Territory is a product of the Jiangling Ford joint venture and occupies the position where the Escape would have been. It comes with a 1492cc turbocharged four-cylinder that has been badged as EcoBoost, qualifying it as 8703.22.

Why do most Chinese cars have sub-1500cc engines for PH? image

Volkswagen Philippines has the same strategy; they made the big switch in 2018 with most of their model line now composed of SAIC-VW models to maximize ACFTA. The Santana, Santana GTS, and T-Cross are all powered by a 1498cc four-cylinder, while the Lamando and Lavida come with a 1395cc turbocharged engine. All of these vehicles would be under 8703.22.

Why do most Chinese cars have sub-1500cc engines for PH? image

Geely has perhaps the most interesting approach with the popular Coolray, the larger Azkarra, and the much larger Okavango all using the same engine: the 1.5TD which is a 1499cc turbocharged three-cylinder that has up to 177 PS in standard trim. In the Azkarra, that engine is actually just right, but for the all-wheel-drive version Geely took advantage of the modularity to give it more power: they fitted a mild-hybrid system to up the rating to 190 PS and an extra 35 Nm in torque.

That's also the approach with the heavier Okavango. Even with the mild-hybrid, only the displacement really matters under AHTN codes, so all Geely models in the Philippines so far qualify as 8703.22. The mild-hybrid systems in the Azkarra Luxury and Okavango also have the added benefit of working on the excise tax; for hybrids (yes, even mild qualifies) excise is only 50%.

Why do most Chinese cars have sub-1500cc engines for PH? image

All the other major automakers are taking this approach with their models. Chevrolet just announced they are introducing the Tracker with a 999cc turbo (8703.21). The entire MG lineup has the same strategy; most of which have the 1498cc non-turbo or the 1490cc turbo (8703.22). Chery and Changan likewise do the same, and they stick to engines that are 1.5L or smaller for their models (8703.22). There are more, but that's generally how it works.

Why do most Chinese cars have sub-1500cc engines for PH? image

The timing of the ACFTA tariff reduction on vehicles with engines displacing 1500cc or smaller was also ideal, as the global auto industry was shifting away from larger normally-aspirated engines to small turbo engines. That's why a lot of the turbo engines at 1.0L or 1.5L are so sought after especially with the issues regarding diesel emissions. And the advent of hybrid technology (mild, conventional, or plug-in) is making an impact too. Whatever the case may be, the path of the small turbo engine (with or without hybrid tech) is what many automakers are driving on right now.

The noteworthy thing here is that we are referring to cc and not rounding up. Import laws are based on cc or cubic centimeters, and such laws are very specific. If a vehicle is just 1cc too high or too low, then it falls under a different AHTN code. So if a vehicle originating from China has an engine that is 1501cc or higher, then it qualifies as 8703.23 or other code; that means it would automatically have to incur a 30% import duty instead of 5%.

Why do most Chinese cars have sub-1500cc engines for PH? image

We asked some of our contacts in the industry what the pricing of their current models would be if it had an engine that was at least 1501cc, and the answers were staggering. If a vehicle with a 1500cc or smaller engine currently has an SRP of about PHP 1.2 to 1.3 million, the price increase if they used a 1.6L or a 2.0L would be about PHP 200,000 to as much as 300,000.

Would you buy a Geely Coolray Sport at PHP 1.5 million or a Ford Territory at PHP 1.61 million?