Parts or cars?

By the end of this year, after producing and exporting 80,000 vehicles in a ten year span, the high tech campus style Ford plant in Greenfield, Santa Rosa will be shuttered after the last Ford Escape leaves the assembly hall. Though the Ford plant delivered as advertised, it could not promise profitability in the near term as competition has intensified and local government incentives were still no way as favorable as Thailand's. Coincidentally, parts and transmissions that Toyota produced and exported from Santa Rosa over roughly ten years from 2011, cost the USD equivalent of 80,000 CBUs. Just a few blocks away, on the other side of the Industrial Park fence, Isuzu Philippines Corporation will be winding down the Isuzu D-MAX assembly line, leaving the evergreen decade old Crosswind and NKR light duty trucks as proudly made in Santa Rosa. Even if IPC shuts down D-MAX assembly, Isuzu Autoparts is increasing Philippine transmission production from 200,000 units/year to 300,000.

Isuzu's conundrum

It is not certain if IPC will assemble the new D-MAX that is now on sale in Thailand. After all, all the other pick ups - Nissan Navara, Mitsubishi Strada, Toyota Hi-Lux, Ford Ranger, Mazda BT-50 and the D-MAX's platform share, the Chevrolet Colorado - are made in Thailand in both right and left hand drive versions. Moreover, producing the LHD D-MAX in the Philippines incurred a USD2,000.00 cost penalty per unit as some inputs here are more expensive than Thailand. Like it or not, notwithstanding supplier and employment anguish, it just makes good business sense to keep production costs efficient and Isuzu Thailand and Isuzu Philippines cannot be faulted for that.

Harm down the line

The decline in makes and models being assembled in the Philippines has cascading dire effects not only through employment in auto assembly but also employment in auto components suppliers/manufacturers. Decreasing volumes and the continuous cost squeezing that determined car makers demand to keep their prices competitive will lead to thinner margins and even more closures of local plants. The demise of local assembly means also the demise of local parts manufacturing.

We've come a long way

It's been a long road from the days of the PCMP in 1972. It was all for a good cause they said. First, a car for the Filipino, made by Filipinos. Next a Filipino car for the world. The template was that all the Asian Tiger economies wouldn't become powerhouses without a home grown automobile industry. We had to sacrifice our freedom of choice and save precious foreign exchange for we were building the future, an industry that would employ thousands and make millions. We paid through our noses in real income terms for bare bones rust buckets. Accessories and after market parts became big business. Parts reliability, of the locally manufactured kind, fostered the blossoming of independent repair shops and smuggled imports of used, fake or original parts. Premature corrosion fed the burgeoning paint and body repair shops. We pined for used car imports of the brands we liked from the USA and later the Middle East. Or even cast offs from the US bases and the ADB. Every time we went abroad, we drooled with envy with what the other guys were driving, the options they took for granted, the colors they could choose from and the plethora of brands and variants that they were able to own by just signing on the auto financing slip dotted line.


Wait a minute. Doesn't that envy scenario sound familiar? Like, today? Apart from Brunei and Singapore, our country's relatively small car market because is highly competitive, thanks to zero barriers to entry. But as a market, its survival of the fittest out here. Many keenly priced CBUs cars imported under zero tariffs granted by Free Trade treaties fight toe to toe with high quality locally manufactured models, some of which are exported under zero tariffs to other ASEAN markets. In fact the volume sellers like Toyota Vios,Toyota Innova, Honda City, Isuzu Crosswind, Mitsubishi Adventure, Mitsubishi Lancer, Nissan Sentra, Nissan Urvan and Mitsubishi L300 FB are all made here. Just as visible though less in number are the Nissan Livina, Nissan X-trail, Isuzu D-MAX, Ford Escape, Ford Focus and Mazda3.

Why bother with the Philippines?

To the casual observer, it would seem that despite all the cost spiraling faults of the Philippines as an investment domicile in ASEAN, i.e. restive labor, pricey power, creaking infrastructure, flip flopping regulators, uncoordinated laws; locally produced cars are of the quality and price that can hack it with the US, Thai, Korean, Indian and China sourced competition.

Survival of the fittest

In reality, the locally made models that we see today are the fittest that survived the culling process caused by free market reforms, unleashed by the excise tax reform of 2003, when the tax advantage of some AUVs and LCVs was axed. Then the ASEAN zero tariff trade treaty called AFTA kicked in by 2007, making ASEAN imports cheaper. Gone were the advantages of the early adapters in 1997 when the sales battle royale shifted from between the Corolla and the Civic, to the first Isuzu Highlander, Mitsubishi Adventure and Toyota Tamaraw/Revo.

Once upon a time

But to look at the glass half empty, there used to be more car categories assembled in the Philippines. Mitsubishi Galant. Honda Accord. Nissan Cefiro. Toyota Crown. Honda Civic. Toyota Corolla. Honda CR-V. Nissan Patrol. Kia Pride. Volvo S70. Isuzu Trooper. Mitsubishi Pajero. Toyota Lite-Ace. Nissan Vanette. Nissan Frontier. Isuzu TFR. Other models began as partial CBU, i.e. the cars arrived without batteries and tires as such were installed once the cars were rolled of the ship but it was a start. Being a left hand drive market, the mostly Japanese transplant factories preferred to assemble only for our local market while volume produced parts made by its local manufacturing partners, was to meet their export commitment.

Export and live

The introduction of a new set of incentives in the early part of the 21st century, enticed Ford and its partner-suppliers to establish in Greenfield, Santa Rosa, parts making facilities to feed an assembly operation that would produce the Ford Lynx, Ford Focus, Mazda 323, Mazda3, Mazda Tribute and Ford Escape for export to other ASEAN markets. Ford's flexible production line allowed it to produce both left and right hand drive versions.

Nostalgia has its costs

What to do? Much as the nationalists, local parts makers and assemblers would want, we can't bring back the days when high tariff walls shielded the local market. To do so would mean violating several free trade treaties that have allowed some Philippine exports to gain a competitive footing in other markets. Whatever these exports may be, if such exports prove competitive, then  it would be a more sustainable industry than exports from industries that need high subsidies and tariff walls.

AUV couldn't be global

Originally, in the ASEAN motor vehicle complementation scheme of things, Thailand was supposed to be the world's supplier of pick up, trucks while the Philippines was to supply LHD AUVs while Indonesia supplied RHD AUVs. But unlike the global compact pick up market, the AUV market existed only in ASEAN and bits of South Asia. As the market evolved, the fancy SUV and the more urbane MPV encroached on the AUV segment. Global demand for the AUV was never going to be as big as the staple pick ups made in Thailand.

Hybrid, the wave of the future?

The recent legislation promising promotion and veiled or vague subsidies for hybrids and alternative energy vehicles encouraged local parts manufacturers to shift their planned production to these other form of propulsion but only if the local parts makers are, just like in the 70s, protected by high tariff walls against imported parts and hybrid CBU imports.

Government to buy local only

Reintroducing the directive for government offices to purchase only locally made motor vehicles hampers government from seeking value for money on behalf of the taxpayer. Besides, this is essentially a ban on imported motor vehicles which is a restraint on trade under WTO agreements and invites retaliatory action from the producer countries that will be disadvantaged. For instance, if Indonesia had such a government purchase ban, then it would not have imported Philippine made RHD Ford Focus Police Cars in 2010.

If you can't succeed, why invest?

It would seem that the way the rules and regulations are in this country, the moral of the story here is that for so long as you cannot sell the volumes that the Toyota Vios, Toyota Innova, Honda City, Isuzu Crosswind and Mitsubishi Adventure do, don't bother investing in the motor vehicle manufacturing and parts manufacturing in the Philippines. But that would be mistaking the effect for the cause. And who can really forecast the success of a model from Day 01, ten or even five years ago?

Changing tides

On the side, look at what happened to the truck industry. There was a Progressive Truck Manufacturing Program, with similar incentives to the PCMP. But then the government allowed the importation of used and reconditioned trucks and truck parts, which resulted in the dominance of reconditioned trucks on the road, effectively stunting the growth of the PTMP. Though we all know the safety and pollution issues of haphazard reconditioning of used trucks, truckers are businessmen and being businessmen, the tendency to buy based solely on price is irresistible.

Is a Filipino car a must?

Does this mean that the rules and regulations have to change to favor local parts manufacturing and local assembly? Again? We've seen in the past that favoring local car manufacturing does not mean lower prices. It would only artificially jack up the price of imported CBUs. Would the Filipino consumer, who has been spoiled for choice for close to 9 years, prefer being shackled again, just to favor the car industry labor and manufacturing sector? Is a Filipino car, like a Filipino iPhone, all that important that the rest of the country should fork out a subsidy and risk exclusion from other markets for unfair trade practices?

Look elsewhere

Besides we may be better making other things. We may not be known as the world supplier of rocket scientists, but we export damned good nurses, caregivers, seamen and chefs. From ASEAN to the Middle East, the better hotels proudly announce that that their nighttime club entertainment is by Filipino band. We can make good music. We do make good cars, but profitability, against a back drop of the global car industry with 35% overcapacity and parts suppliers squeezed at the margins, is another story. Perhaps, producing transmissions, which is not subject to frequent model changes is more profitable for the Philippines?

Car assembly; yes or no?

Car assembly in the Philippines? Leave it to laissez faire; wherever the car is made doesn't matter as long as it sells and it makes money. Toyota's hot selling Vios and Innova are made in the Philippines. But then the top selling Fortuner, Altis, Camry and Hi-lux are Thailand sourced while the best seller Hi-Ace Grandia is sourced from Japan. Honda sources its luxury Pilot and Odyssey from the US, the Accord, CR-V, Jazz and Civic from Thailand but its best seller City is made in Santa Rosa. Mitsubishi's top selling Montero Sport comes from Thailand and the Pajero from Japan but it has restarted assembly of the Lancer locally, adding to the L300 and Adventure assembly lines in Cainta. Isuzu assembles the NK-R light duty truck alongside the current D-MAX and Crosswind with only the Altera as its sole Thai import. NMPI produces the Sentra Classic, Livina and X-trail while the Sentra 200 comes from Mexico and the Teana from Thailand. Universal Motors puts together the UrVan but imports the Navara from Thailand, the Murano from the USA and the Patrol from Japan. Other CAMPI members - CAC-Kia, ACC-BMW- used to have assembly halls but when the volumes, regulations and prices didn't justify it, the assemblers just mothballed or dismantled the assembly lines. To assemble or not assemble is a business decision better left to businessmen.

Not that unattractive

But local assembly has its fans. When Chery of China was dealing with home grown quality issues, they considered local assembly operations here. Other Chinese makers are considering the local assembly option too. Though AVID is an association of brands that sell all imported CBUs, Volvo once had an assembly operation and Hyundai did consider remaking the old Starex into an LCV locally. Local assembly has its merits but as in the case of Toyota, what works for the locally assembled Vios may not work for the Altis, which used to be locally assembled. It is still an impressive achievement that although there are not that many models that are locally made, those that are, hold their own in sales, giving its CBU competition a fair run for the money.

Local assembly?

Local assembly? Let the businessmen decide and encourage government to keep or lay down a level playing field. Whether import or local assembly, businessmen will go by what makes money, i.e. like making transmissions. True, yesterday's high tariff walls grew employment but, as time has shown, assembly of some models and brands are not as competitive as the others. Other car assembling countries, kept improving their incentives. Protectionist programs like our PCMP was ahead of Thailand's but they did something right that we failed to consider. It's too late to revive that protectionist past now that the world has opened up to more free trade. Unless we want to ape North Korea.