Challenges to the Philippines’ Automotive Industry

Automotive components

Foreign exchange and LCR policies forced automotive assemblers to establish exports of certain auto components, which continued after these policies were abandoned in 2001 and 2003, respectively, under the WTO. These activities consolidated the components industry into regional production networks under regional free trade agreements (FTAs) such as the Brand-to-Brand Scheme (BBC) in 1988, the ASEAN Industrial Cooperation (AICO) scheme in 1996, AFTA, and since 2015, AEC. Such networks involve a regional division of labour, with specialisation on particular components using economies of scale in each country.

During the 1970s, when participants in PCMP were required to manufacture components not only for the domestic market but also for export to acquire foreign currencies, the Philippines provided labour competitiveness in terms of a combination of labour cost, manual dexterity, and technical skills. A feature has been the production of transmissions. After Mitsubishi established Asian Transmission in 1973, other firms such as Toyota, Honda, and Isuzu followed to produce and export transmissions in the Philippines, particularly under the AICO, aiming to create regional parts complementarity in the 1990s. Japanese manufacturers believed that workers in the Philippines were suitable in terms of manual dexterity and technical skills to assemble the numerous tiny gear parts (such as seals, springs, shafts, interlock assemblies) that make up a gear box (Of-reneo 2016). These assemblers established parts manufacturing for export to other ASEAN countries, as well as to Japan and elsewhere, separately from assembly operation (see Table 8.1).

The Philippines has been growing as a production base for wiring harnesses, although most exports are to outside of Southeast Asia, with Japan and North America taking the bulk of them.¹² There are at least 15 firms that produce wiring harness, including the major exporters Yazaki-Torres and International Electric Wiring Systems. Six of the 15 are ranked among the largest 10 exporters of automotive parts in the country (Sturgeon et al. 2016). Wiring harness is characterised by labour-intensive and skill-intensive production, requiring dexterity and technical skills, with workers who are mostly high school graduates with postsecondary technical skills training (Ofreneo 2016).

Now in the Philippines, 11 assemblers and 265 parts suppliers manufacture approximately 330 components. At least 123 firms are located in the Philippine Economic Zone Authority, exporting at least 70% of their products. Of these, the largest 15 exporting firms account for 80% of total automotive export revenue in the Philippines (Sturgeon et al. 2016: 29). However, the components industry overall in the Philippines generally still remains underdeveloped and has failed to diversify. The Philippines’ industrial structure has remained hollow or missing in the middle, characterised by weak linkages between SMEs and large firms (Aldaba 2013). Despite the success of foreign exchange requirement

Table 8.1 Assemblers’ Parts Production Firms in the Philippines

Source: Fourin (2015: 147).

Note: MT (manual transmission), CVJ (constant velocity joint), n.a (not available).

policies in developing production and export of key components, vehicle import penetration and export performance represent failures to develop the industry, particularly compared to Thailand and Indonesia (see Figure 8.3).

Local content and vehicle costs

Government policy since the early days of automotive development up to the early 2000s had attempted to increase LC by the use of LCRs. Yet although the Philippines has expanded its export capacity of some automotive parts, the LC ratios in locally produced vehicles are still very low. For instance, the LC ratio of Toyota’s Vios (which was the largest production model in the Philippines in 2014) is estimated at an average of 23% (Fourin 2015: 138). Aldaba (2008) analyses the comparative cost structure of vehicle production between Thailand and the Philippines, asserting that the total vehicle production cost with a 23% of LC ratio in the Philippines is 1.4 times higher than that of Thailand with a 67% LC ratio, with the implication that a higher LC ratio reduces costs. In terms of assembly cost, it was 1.75 times higher in the Philippines than in Thailand in the early to mid-2000s (Aldaba 2008: 22). According to CAMPI, it is estimated that locally produced vehicles in the Philippines are approximately US$1,800-2,000 more expensive than imported vehicles from Thailand of the same model.¹³ The CARS programme may enhance local parts production of bulky components and large plastic parts. Nonetheless, it is still uncertain to what extent the locally made parts will be used in the local assembly of vehicles. An executive interviewed in the industry thinks that some bulky parts, along with wiring harness and transmissions production, will survive in the Philippines, but the rest of components production might be eliminated in competition with other ASEAN countries under AEC.¹⁴

Importation of second-hand vehicles

A significant challenge - and policy implementation failure - for the Philippines’ automotive industry is the importation of second-hand vehicles from Japan and Korea. In general, used car imports have been banned in the Philippines. However, this did not apply to free ports, which were allowed to operate as separate custom territories ensuring free flow of goods and capital. In the case of the Subic Bay Freeport (one of the largest in the Philippines), approximately 70 firms were channelling second-hand cars into the country (Aldaba 2008: 4-5).

In 2002, the importation of all types of used cars and components was prohibited, except some which were allowed to be imported under certain special conditions (Llanto and Ortiz 2015). However, this could not be enforced due to a temporary restraining order in March 2003, as second-hand vehicle importers were able to obtain court injunctions because of their powerful political patrons (Ofreneo 2016). Finally, the Supreme Court ruled to prohibit the import of second-hand vehicles except for the Subic Bay Freeport (but on condition that vehicles could not be taken into other areas in the country) (Aldaba

2008, Nomura 2007). Though second-hand imported vehicles are banned in most regions, the ban is not fully implemented. A high-ranking official in the Department of Trade and Industry estimated 20% of registered vehicles (about 3.5 million vehicles in 2014) in the Philippines had been illegally imported.¹⁵

Free trade agreements

Another challenge for the Philippines is in relation with FTAs, since it is less competitive than its main rivals, Thailand and Indonesia. In the ASEAN-4 countries, Japanese-brand vehicles accounted for over 80% of the market in 2016 (87% including Malaysia’s Perodua).¹⁶ Most of the major Japanese assemblers in Southeast Asia produce their vehicles to sell within the region (and also export to the rest of the world in the case of Thailand),¹⁷ and a regional division of labour to achieve economies of scale in vehicle production has been established within the ASEAN region. The location of CBU production in each country is planned within the region according to the local market demand (such as Thailand’s for one-ton pickup trucks) and local conditions including government policies. As we examined in Chapter 4 (see Table 4.10), Toyota specialises in particular models to produce in each country and exchanges their products between countries as intra-firm trade. For example, Toyota in association with Daihatsu started exporting their Indonesian LCGCs to the Philippines in 2014.¹⁸

In addition to Japanese producers, a large volume of investment has been planned by non-Japanese assemblers, namely, GM, Ford, and VW in Thailand and Indonesia in recent years.¹⁹ In Thailand, Ford and GM were planning to produce Eco-cars by 2019; VW is also planning to establish a new factory. In Indonesia, GM was planning to produce 150,000 compact cars a year in 2017. Similarly, VW was also planning to manufacture 100,000 vehicles from 2017. These firms do not own production bases in the Philippines and may export to the Philippines under AEC to compete with local vehicles. In this sense, the strong influence of multinational assemblers has not been channelled sufficiently towards the Philippines by the country’s automotive policies.

The ASEAN-Korea Free Trade Area (AKFTA) poses another challenge. Under AKFTA, tariffs on vehicles from Korea set at 20% in 2015 were reduced to 5% in 2016.²⁰ Korean producers have only small assembly operations in Southeast Asia, depending instead on vehicle exports from Korea.²¹ As mentioned earlier, the Philippines is the only country in which Hyundai has a significant market share in the ASEAN-4. Imported vehicles under AKFTA will thus be a threat unless the CARS policy can attract Korean automotive investment into the Philippines.