Integrating our auto industry in the Asean economic community

FROM LEFT, lawyer Alberto M. Arcilla (vice president, Avid); Fe Perez-Agudo (president, Avid) ; Federico M. Macaranas, PhD (Core Faculty, Asian Institute of Management) and Cielito F. Habito, PhD (Chief of Party, USAID Trade-Related Assistance for Development Project)

2015 is just around the corner and with it, the integration of the economies of ten Southeast Asian nations including the Philippines into the Asean (Association of Southeast Asian Nations) Economic Community (AEC). For each of the ten Asean members, AEC means the opening up of a new market of 600 million consumers. The Asean region accounts for 10 percent of the world population and 3.5 percent of the global economy which is expected to rise to 4.5 percent by 2017 as it continues on its growth path.

For the Philippine automotive industry, which lags behind Asean neighbors in vehicle production, the AEC presents a whole new ballgame with diverse challenges, opportunities and risks.  At the 4th Thought Leadership Forum on “ComeUnity: One Industry, One Voice” held last month by the Association of Vehicle Importers and Distributors (Avid), building the right niche for the Philippine auto industry in the AEC was discussed.  The panel of speakers was led by former National Economic and Development Authority (Neda) head Cielito Habito, PhD, now chief of party, USAID-TRADE/Trade-Related Assistance for Development and Rafaelita M. Aldaba, PhD, Assistant Secretary, Department of Trade and Industry.

The following questions were tackled: 1) What is the comparative advantage of the Philippine auto industry as a regional and a global player? 2) How can the AEC help improve the level of competitiveness of the local auto industry? 3) How should the local auto industry leverage the AEC to move up the value chain? 4) What policy and legislative reforms are needed for the automotive parts industry to optimize the benefits of the AEC? 5) What kind of legislative mindset is conducive to growth in the auto industry? 6) What policy and legislative actions are needed to promote the growth of the auto parts industry and support their transition to become global players?

COMPARATIVE ADVANTAGE. The fourth and sixth questions above divulge the answer to the first question: The comparative advantage of the Philippine auto industry is in the manufacture and export of auto parts although a weak supply chain is one reason why we lag behind in vehicle production, together with lack of economies of scale and high production costs (Read: the highest electric power rates in Asia.) As pointed out by Avid president Fe Perez-Agudo, auto parts and components make up over 90 percent of Philippine exports in automotive products and according to the World Investment Report of 2013, the Philippines is the eighth biggest contributor to the global value chain.

ARCILLA and Agudo

“So why not harness our comparative advantage?” Agudo asked during her talk. “Why not optimize our free trade agreements to channel investments to this sector and turn it into a significant link in the global chain with focus on 1) human resource and skills training; 2) improving technology to process raw materials; 3) access to credit in order to build research and development facilities, processing centers, quality testing centers and skills training venue.  Can we not empower this sector to be the best-in-class suppliers of items integral to what’s ‘hot’ in the market today? The hybrids, the electric vehicles, the next level in green technology!”

Regarding the fifth question above, another forum speaker, Assistant Trade  Secretary Aldaba noted: “A car has over 30,000 parts and components… The goal of the New Auto Program is to attract foreign direct investments (FDI) in assembly and component manufacturing to enable the Philippines to deepen its participation in the global value chains of multinational companies.  Global value chains are a new form of industrial organization where different stages in the construction of a finished good are located in different geographical areas in order to minimize production costs.  Suppliers of components usually follow where assemblers locate their operations.  This has been the experience of several emerging economies including China, Brazil and Thailand, where massive inflows of FDI into assembly attracted many new component companies that followed their major customers.

NEW AUTO POLICY. “To ensure the Philippines can achieve similar results, a comprehensive mix of policies will be crafted to stimulate demand and effectively regulate the industry.  If it inspires new investments in the automotive industry, the New Auto Policy could not only catalyze growth within the industry but also drive broad-based manufacturing growth and economic transformation across the Philippines,”

DEPARTMENT of Trade and Industry assistant secretary Rafaelita M. Aldaba, PhD

As for the fourth question, University of the Philippines School of Economics Dean Ramon L. Clarete, PhD, may have been referring to it in an interview clip when he said: “The AEC compels the Philippine auto industry to reexamine its long-term direction… We must invest in technology, the driver of growth, to move up the regional value chain.” Deploring the absence of technology transfer in the Philippines, Clarete said that local parts manufacturers cannot meet the standards of the contractor-assembler in the short term as to timeliness of delivery, price and quality.  Our country lacks engineers, scientists and mathematicians to upgrade the parts industry, he said.  Clarete recommended establishing and strengthening research and development institutions, directly linking R&D with industries, reinforcing intellectual property rights to allay concerns that mother companies’ technologies would be stolen or copied, and improving infrastructure and other components of logistics.

Meanwhile, Agudo emphasized that in order to get a strong foothold on the automotive value chain, the industry must change by “rewiring mindsets and behavior, dropping old habits, repositioning ourselves” to improve our competitiveness, which is not the domain of business or of the government alone, but a shared responsibility, a synergy of both sectors to create avenues for mutual gain.

RETHINK. “…Let’s face it, locally and regionally, we tend to view government as our only lifeline for business sustainability,” she averred. “This mindset may not make us win markets in the AEC.  It is time to rethink our industry roadmaps and synchronize them with the AEC.  Yes, we will always need government support, especially in providing the adequate infrastructure and in regulating the business environment, but government cannot be a substitute for our ability to get ahead in this new game.

“…The experts have spoken: the Philippine auto industry needs an overhaul! But we cannot expect a different outcome if we keep on resorting to the same systems of protectionism, traditional incentives and other tactics that do not favor competition. The highly liberalized environment of the AEC challenges us to discard the outdated in order to embrace the new normal.”

Concluding, Agudo ticked off what must be done to drive up our competitiveness in the region: First, fast-track infrastructure development especially in priority areas because the quality and reach of a nation’s infrastructure dictate business efficiency and productivity. Second, work harder and faster on market-enhancing policies like a comprehensive competition policy that would ensure more efficient markets, a level playing field for all and safeguard consumer welfare. “The AEC is here,” Agudo said, “challenging Filipinos to collaborate and to be committed to transform the industry, to reframe, to contribute, to adjust, to make sacrifices, to embrace the new normal, and to think global! Because going global is the currency of our future in the AEC. Come—unity can be our road to a globally competitive Philippine automotive industry… our way to make the Philippines the investment destination of choice in the Asean.”