A monumental failure in the making
BEN KRITZ
WITH much fanfare, Toyota Philippines last week unveiled its 2019 Vios model, the latest version of its popular entry-level sedan, and the first vehicle model assembled entirely in the Philippines under the Comprehensive Automotive Resurgence Strategy (CARS) program.
Government and the local media have been effusive in their praise for Toyota’s “commitment to the country’s car manufacturing program,” characterizing the rollout of the new Vios as a clear signal of “the seriousness of the Philippines in its desire to become a car-manufacturing hub in Asia through its manufacturing resurgence program.”
If the milestone last week was symbolic of anything, it’s that the meaning of the word “resurgence” is not actually understood by the country’s economic planners. The Philippines has as much chance of becoming a manufacturing hub for flying saucers as it does cars. The business environment a directionless and contradictory economic policy has created is about the same for both.
Under the CARS program, which was conceived and launched by the previous administration, an auto manufacturer can earn up to $200 million in tax and other fiscal incentives for committing to produce at least 200,000 units of a selected model, with at least 50 percent of the vehicle’s content sourced from local suppliers.
The program, which was launched in 2015 and was hoped to begin in earnest in 2016, is supposed to include three manufacturers, each producing one eligible car model. So far, only Toyota and Mitsubishi (which will build the Mirage G4 model) have firmly committed to it, with Toyota being the first to actually produce something.
Unlike most Aquino-era initiatives, the CARS program actually made some sense, and appeared to have a good chance of achieving what it set out to accomplish. At the time it was conceived, the Philippine vehicle market was booming, and it was growing fastest in the entry-level segment the models most suited to the program would serve. From a manufacturer’s point of view, the program was appealing because importing entire vehicles has become increasingly unattractive, and is less cost-effective the cheaper the car model is. Putting up an assembly plant for its best-selling models in a particular market makes good business sense for an automaker, and if the host government is going to offer incentives to do that, so much the better.
The major shortcoming of the CARS program as it was developed by the Aquino administration was that it overlooked the need to address local suppliers’ capacity. It was admirable for its aim to help build local supply chains, but was unrealistic in its assumptions about what those supply chains could handle.
As Toyota has demonstrated, this is a problem that could be largely worked out on a case-to-case basis, but the time required to do that as well as bureaucratic delays on the part of the Aquino administration in getting the program off the ground meant that CARS did not begin in earnest until after the change in government.
Despite the lip service given by the incoming President Duterte to “building up Philippine manufacturing” and the fact that the automotive sector was an obvious low-hanging fruit that would allow his administration to demonstrate some progress along those lines, one of the first significant moves of his economic team was to attempt to destroy the Philippines’ automotive market.
A punitive vehicle excise tax scheme, specifically marketed to the public as a traffic reduction measure, was imposed, and has had the predictable effect. While auto manufacturers and dealers were cautiously optimistic the market’s momentum would moderate the chilling impact of the excise tax to produce at least flat market growth this year, the bottom has gone out of the tub. According to the most recent data, new vehicle sales are down by 12.5 percent for the year, and tumbled 21.7 percent in June alone.
While the government and auto industry players might express optimism that the local auto market is a “moving target” and will eventually resume an attractive growth trajectory, there’s no evidence to support the notion that will happen in the next several years.
Prices of Philippine-assembled vehicles can’t be reduced by a significant amount, because even though many components can be sourced here, the country doesn’t have the manufacturing capacity for the most expensive ones like engines and transmissions.
The weak peso, which will persist for the rest of this year and probably all of next as well, if not beyond, helps to keep the prices of those imported items high. Wage growth will not be sufficient to lift the incomes of potential customers priced out of the vehicle market by obnoxiously high taxes for years to come, and will most likely never catch up. It certainly will not for as long as Duterte and his inflation-causing high government spending economic strategy remain in office. Given the usual one- to two-year cycle of strategic planning in the automotive industry that is very likely more time than manufacturers like Toyota and Mitsubishi will wait to decide that CARS is a
losing proposition, and scale back their operations to reflect market reality.
Even shifting CARS to an export-oriented program, as some have suggested, is a ludicrous proposition with no more chance of success than the domestic market original. Other companies such as Ford have already pulled up the stakes to shift manufacturing closer to overseas markets, and for good reason. Countries such as China, Thailand, and Vietnam are miles ahead of the Philippines in terms of manufacturing capacity, and thoroughly outdo this country in terms of aggressively courting industrial locators. Vietnam, which is launching its own completely domestically produced automobile brand (called Vinfast), is a particularly formidable competitor in this respect.
Something can only undergo a “resurgence” if it existed in the first place. The Philippines has never had a strong manufacturing sector. Setting a goal of developing one is not necessarily a bad idea, but using one hand to do it in a sector that the other hand is actively trying to strangle is going to accomplish nothing.
ben.kritz@manilatimes.net
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