Philippine auto assembly still far from its true potential

Toyota Innova assembly at Santa Rosa factory. Photo by Tessa Salazar

While President Aquino is giving his midterm report via his State of the Nation Address, we take a look at how the carmakers and car sellers have been faring for the past three years.

For 2010, the first year of President Aquino’s term, official Philippine unit sales were pegged at 168,490 vehicles. The figure has been growing steadily since then, with the market hitting 183,000 units in 2012. For 2013, the target is to hit 200,000 to 210,000 units, which would be a record figure.

The proportion of locally produced units, however, has declined, from nearly 46 percent of the 2011 sales figures to around 40 percent in 2012. The establishment of trade agreements within the Asean region and even Japan, where car production already has the efficiency of scale, does not bode well for local production.

Local production has risen from 64,000 units in 2011 to more than 75,000 units in 2012. Yet even that figure pales with that of our Asean neighbors, which as recently as 1996, had production numbers not far from ours. Indonesia produced more than one million units in 2012; Malaysia, 500,000; and regional auto behemoth Thailand is already at 2.4 million. The installed production capacity in the Philippines is around 350,000 units, but local firms are using barely 20 percent of that.

The practice of producing where the demand is greatest is hobbling the automotive industry, as our neighbors have much higher sales. Our auto sales can be tacked onto theirs in the production schedule. This was borne out by the closure last year of Ford Philippines’ assembly plant in Santa Rosa.  Ford Philippines was the only one to produce completely builtup units for export. Its closure costed more than 100 well-paid jobs, and also business for its local suppliers.

Yet some bright spots remain. Toyota Motor Philippines (TMP), the market leader and also the biggest assembler in the country, has previously disclosed to Inquirer Business that it is gearing up for a possible jump in demand when Philippine per capita gross domestic product (GDP) hits $3,000, noting that demand for cars can significantly increase in such a situation. 2012 per capita GDP was $2,613.

Competing with our well-entrenched neighbors will be a tough task, particularly with our comparative disadvantages in terms of infrastructure, local supplier base and power cost. Yet with some innovative thinking, there are some concrete steps that can be taken to boost our auto manufacturing:

Increase local content

Begin with the cars that are already being assembled here, and find ways to increase local content. It’s heartening to note that TMP has announced that the best-selling passenger car, the new Vios, will not only continue to be assembled in Santa Rosa, but will also feature increased local content. TMP aims to double the Vios’ local content from 20 to 40 percent of the vehicle. Nissan Motor Philippines assembles the Almera also in Santa Rosa, but the local content is currently limited to the wiring harness and the alloy wheels. If more parts are produced locally, and the Philippines has a multitude of world-class parts manufacturers that can step up, the supplier base is widened and prepared for more models to be assembled locally.

Look at nontraditional

Steel and the internal combustion engine are the current standards, but the future direction lies in composite materials and electric motors. If the Philippines can lure innovative manufacturers such as Tesla Motors or Gordon Murray Design to produce here, we may leapfrog other countries in technology. The automobile of the future will have more in common with a computer than a horseless carriage. We have been successful in establishing a production base for electronics; we should build on this to manufacture the car of the future.

Increase demand

As it makes sense to produce where the demand is greatest, economic growth is the best possible incentive. As Toyota notes, hitting that $3,000 GDP figure can stimulate demand for autos. We should also have in place better roads so that car ownership and operation will not be an exercise in frustration. Even if this pains a lot of enthusiasts, older models should also be phased out by being heavily taxed and eventually denied registration, to encourage purchase of newer, more efficient models.

Have a direction

Clear, consistent policies encourage automotive investment. Thailand first established itself as a production base for light trucks, particularly pickups, by putting in place incentives for development and production of such vehicles. Now it is expanding into eco-friendly vehicles. The Philippine auto industry desperately needs that long-awaited “road map” for development.