SOS for the auto industry

Policy inconsistency has been the bane of our economy for far too long. “Implementation inconsistency” may be the better term in certain cases. Whatever it is, our government has had a notorious track record of saying one thing now, and then doing the exact opposite.

A clear example I have already written about concerns our international shipping ports in Manila, Batangas and Subic. With the professed aim of decongesting Metro Manila, the past administration borrowed billions of pesos about a decade ago from the Japanese government to upgrade the Batangas and Subic ports. The aim was to divert shipping cargo traffic toward these ports so that eventually, we would see less of those monstrous container vans clogging up Metro Manila roads at huge economic cost to everyone else. But in what I’ve termed a colossal contradiction, the same administration later approved substantial capacity expansion at the Manila Port. The international ports at Subic and Batangas remain virtual white elephants used at less than 5 percent of what they can handle. Even manufacturers located at or near Subic and Batangas City still prefer to use the Manila Port—and Metro Manila traffic is as clogged as ever, probably more so.

Motor vehicles, new or used, dominate the cargo shipped in through Batangas and Subic. This leads me to another major government contradiction. Long ago, the Philippine government made a policy decision to pursue the development of a local automotive industry. After witnessing our closest neighbors parlay that industry into being a key industrialization driver for their economies, there seems to be cogent reasons why that policy decision was in fact a good idea.

For one thing, the industry tends to have strong backward linkages (i.e., through the inputs side) with other local industries, hence strong multiplier effects on the rest of the economy. A 2010 input-output study by Dr. Cid Terosa of the University of Asia and the Pacific estimated a multiplier of 3.67 for the industry, among the highest in the economy. This means that P100-worth of production in the auto industry ultimately increases total production and income by P367. As such, like most of manufacturing, it can be an important driver for inclusive growth.

The industry is also cited to be a channel by which modern process and production technologies and new skills are introduced into emerging economies, with beneficial effects spilling over to other sectors of the local economy as well. Moreover, the demand for motor vehicles tends to rise dramatically as average incomes and living standards improve in emerging economies such as ours—and industry analysts believe that we are approaching the threshold income level at which motor vehicle demand takes off. In the absence of a domestic auto industry, the attendant high import requirements would put pressure on the country’s foreign exchange balance. But the ideal of having an export-oriented auto industry that also serves the domestic market would avert this potential long-term constraint on economic growth.

The sad reality, though, is that the Philippine automotive manufacturing industry is on a decline, even as those of Thailand, Malaysia and Indonesia have been on the rise. And we are getting precariously close to a situation where existing auto manufacturers will find it attractive to fold up entirely. Unless government acts strategically and decisively, we may have to bid goodbye to our own auto industry and be the only original Asean member country without one. Meanwhile, newcomer Vietnam is said to be overtaking us already on this.

Where did we go wrong? Our motor vehicle statistics tell the story rather graphically. In 2004, we imported nearly 140,000 used motor vehicles, or 61 percent of total motor vehicle sales in the country that year, despite the fact that Executive Order No. 156 issued in December 2002 had banned importation of used vehicles (except light trucks, buses and special purpose vehicles). We supposedly had a policy that was based on both economic and environmental considerations. Thailand, Malaysia and Indonesia have firmly banned used vehicle imports altogether. Indonesia makes an exception only for trucks 24 tons and over. Vietnam maintains a steep 115-percent tariff on imported vehicles, and only allows 100,000 units a year, subject to bidding. Furthermore, these countries have provided deliberate and strategically designed incentives to their auto industries that further boosted their head start.

The local auto industry argues that tolerating substantial used car imports all through the years severely stunted their development. With questionable used car imports cutting their local markets up to less than half for decades, they were unable to achieve the economies of scale needed to be competitive with other Asean auto makers. Hence, by the time the Asean-agreed reduction of vehicle import tariffs to 5 percent in 2002 and zero in 2010 came about, the industry found it more rational to import completely built-up (CBU) cars from our neighbors instead. As of 2012, the industry imported three CBU vehicles for every two it assembled locally.

Is it too late to save the Philippine auto industry? Analysts don’t think so. With our recent economic growth rates, and with the younger Asean economies also growing briskly, the domestic and Asean markets appear headed for phenomenal growth. But if we are to revive our auto industry to cash in on emerging opportunities and be a key driver for more inclusive industrialization, we need to get it right this time on the package of policies and incentives that will provide it the needed shot in the arm.

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