Car program hopes to spur local spare parts sector

By Roy Stephen C. Canivel

The Philippines’ car industry remains in a sweet spot.

Apart from sales rising yearly, the sector also recently received government support — a multibillion dollar financial incentive to help transform the country into a regional auto manufacturing hub.

Understandably, the challenge is daunting, ambitious even.

After all, other countries such as Thailand seem to be a better choice than the Philippines as far as car manufacturing is concerned.

This much is admitted by Rommel R. Gutierrez, first vice-president for Government Affairs at Toyota Motor Philippines.

Take Toyota’s Vios and Innova models, Mr. Gutierrez said.

While both vehicles are made locally and in Thailand, “it’s cheaper to import vehicles than to produce locally,” he said.

This is because Toyota’s local unit has no choice but buy more components from abroad, unlike Toyota’s Thai assembler which sources car parts locally.

“Thailand’s localization is very high, more than 80% while ours are only at 40%,” the Toyota executive said, adding that the industry will become more competitive if it sources its parts locally.

Program seeks to make cars have more local content

Starting 2010, the Philippines found it more difficult to compete when import barriers were pulled down in member countries of the ASEAN Free Trade Area (AFTA).

Under the AFTA’s Common Effective Preferential Tariff (CEPT), taxes on imports — including those previously imposed on vehicles and components — were virtually removed.

As a result, several auto parts suppliers and some car manufacturers left the country since it was no longer competitive, Mr. Gutierrez explained.

After all, it was cheaper to import cars assembled abroad than it was to build them here.

But now, the government — through its Comprehensive Automotive Resurgence Strategy (CARS) program — plans to turn the situation around by increasing localized content to 60% from 40% by 2022.

With locally-built cars containing more parts sourced domestically, companies such as Toyota Philippines “can benefit,” Mr. Gutierrez said.

The CARS program, established by Executive Order 182 that was signed by President Benigno S. C. Aquino III on May 29 last year, provides incentives to three car makers to locally produce three car models with a production volume of at least 200,000 units respectively for up to six years, or an average of 33,333 vehicles per year.

The program also provides auto manufacturers and parts makers operating in the Philippines P4.5 billion in annual support for six years, or P27 billion in total, as well as other non-fiscal measures.

For its part, Toyota Motor Corp. plans to invest P3.22 billion ($70 million) in its Philippine division to increase local output and qualify for a new tax incentive. The Japanese automaker will build 230,000 Vios subcompact sedans.

This would help “close the cost gap” between importing and local production, he said, adding that the domestic sector needs to achieve economies of scale, bringing down cost of localization and resulting in more competitive production.

“You need to produce a lot because you need to spread the cost,” he said. “It’s not easy, but we are more than willing to take the challenge kasi (because) that’s the requirement.”

The Toyota executive, who is also president of Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI), said that it has been a year since the “start of motorization,” which he said signaled a spike in total industry car sales reflecting the stronger purchasing power of the local market.

Toyota, Mitsubishi qualify for car program

Toyota has consistently reported the biggest sales in the Philippines, taking 45.12% of market share as of June this year alone, according to a monthly report issued by CAMPI together with the Truck Manufacturers Association.

By 2020, total market sales is expected to reach 500,000 units. However, this may be reached earlier than anticipated since 320,000 units were delivered last year, meeting the 2018 target of 300,000 way ahead of schedule.

As of this writing, only two companies qualified for the program: Toyota and Mitsubishi Motors Philippines. They received their certificates of recognition last June.

The fate of the third player that would help reach the program’s goal of producing 600,000 units is still unknown.

“We still don’t know if we’re going to open it up,” Trade Undersecretary Ceferino S. Rodolfo told reporters last June while at the sidelines of Mitsubishi’s groundbreaking ceremony of its Laguna stamping facility.

Manufacturers need to meet “the production volume that is needed for the Philippines to surmount the economies of scale and be regionally competitive,” he said.

“If they are accepted into the program, that does not mean that they will be already receiving the incentives. It depends on their performance,” he told reporters. Incentives would only be enjoyed by the manufacturers after they produce their first 100,000 units.

Meanwhile, as the country’s consistent top-selling car maker, Mr. Gutierrez says that the growing traffic does not necessarily post a harm on Toyota’s performance, citing increasing industry growth on the back of solid consumer demand.

“Traffic doesn’t seem to have an effect on our sales,” he said. “In fact, people would rather buy a car than suffer through our public transportation. That’s the irony of it.”

He also pointed out that car sales in the provinces — where roads are not as congested — remain substantial.

A lot of dealerships are now being put in the provinces and, as a result, sales are being dispersed across the region, he said. Sixty percent of its sales are in Metro Manila while the rest are divided among the rest of the areas.

Roy Stephen C. Canivel (@roycanivel on Twitter) covers telecommunications and trade for BusinessWorld. He likes reading a good book and occasionally checks their summaries on several Web sites.