Looking back: 32 years of the auto industry


When the Philippine Daily Inquirer (PDI) was founded in 1985, the Progressive Car Manufacturing Program (PCMP), hatched in 1973 and flaunted as a model car program in Southeast Asia, was collapsing.

Total vehicle sales plunged from around 30,000 units in 1980 to about 6,000 units in 1985.

At the end of the third quarter this year, as PDI’s 32nd anniversary approaches, the Chamber of Automotive Manufacturers of the Philippines, Inc. (Campi) reported January-October 2017 year-to-date sales of 339,380 units, a 14 percent increase over the YTD sales of 292,502 units in 2016.

And that’s not even counting the total YTD sales of the Association of Vehicle Importers and Distributors (Avid), which has 16 member companies representing 23 global brands.

How Philippine automotive industry sales rose from 6,000 in 1985 to a record-setting 417,356 units in 2016 is a success story as well as a cautionary tale worth telling.

But to understand how the auto industry nearly died in 1985, we have to look back even further.

Pioneer in SE Asia

In an excellent paper published in February 2015 “Auto and Car Parts Production: Can the Philippines Catch Up with Asia?,” Rene E. Ofreneo of the University of the Philippines School of Labor and Industrial Relations writes that the Philippines was a pioneer in Southeast Asia in the auto assembly industry.

The industry took roots in the early 1950s after the government adopted an import-substituting industrial policy by banning the importation of finished industrial products, including completely built-up (CBU) cars.

Protected initially by a regime of outright import controls, and later by a system of high tariff walls, the car assembly industry grew continuously throughout the 1950s and 1960s, Ofreneo avers.

But from the 1970s to 2000s, a string of programs instituted by different Philippine government administrations all failed to meet the target goal of developing Philippine capacity to assemble auto vehicles with a local content of at least 30 percent and as high as 80 percent.

“The Philippine auto industry, Number One in Southeast Asia in the 1960s, was down to Number Four by the turn of the millennium, eclipsed by Thailand, Malaysia, Indonesia, and since 2007, by a surging Vietnam,” Ofreneo wrote.

BOI summary

The Board of Investments (BOI) of the Department of Trade and Industry succinctly summarizes the roller coaster ride of the Philippine auto industry history that justifies Executive Order 182, aka the Comprehensive Automotive Resurgence Strategy (CARS) Program which was signed by then President Benigno S. Aquino III in March 2015.

This is how the BOI sums it up:

“Back in the 1970s, the country’s automotive industry was ahead of other Asean countries. The Progressive Car Manufacturing Program (PCMP) was a government initiative which encouraged the assembly of vehicles with the use of imported completely knocked down (CKD) kits.

“The PCMP was implemented during the prevailing high import tariff market environment. In exchange for the privilege of access to the protected local market, the program imposed mandatory local content rules and assigned carmakers to produce key auto components such as engine, transmission and body stamping.

“Also at this time, the Philippines introduced the development of the Asian Utility Vehicle, or what we call the AUVs. By the year 1978, the country was ahead of Thailand (the present-day Detroit of Asean) with local vehicle production of 77,000.

President Rodrigo Duterte takes the driver’s seat of the the first locally-assembled Mitsubishi Mirage.

“When the political turmoil in the mid-1980s came, a foreign exchange crisis ensued, resulting in the tightening of CKD kit importation. Consequently, by the year 1986, vehicle production dropped to 5,000 units, with only one of five members remaining in operation.

“With the recovery of the Philippine economy from the 1980s until the mid-1990s, the automotive industry also recovered with local vehicle manufacture hitting 138,000 units in 1996. This figure is 85 percent of the domestic vehicle sales of the period.

Knocked down again

“Affected by the 1997 to 1998 Asian financial crisis, the industry was once again knocked down with production dropping back to 68,000. With the Philippine peso depreciating, vehicle prices went up, and paved the way for used vehicle imports.

“The uncontrollable arrival of used vehicle imports like the ‘chop-chops’, smuggled completely built units (CBUs), and converted right-hand drive vehicles reached 125,000 units in 2004, 60 percent of the total vehicle sales during that period.

“Meanwhile, the Philippines was then well ahead in the implementation of the tariff reduction scheme within the Asean, dropping from 40 percent in 1996, to 20 percent in 1999, and further to 5 percent in 2002.

“Consequently, the stiff competition from used vehicle imports and CBUs coming in with reduced tariffs greatly affected the local vehicle production. And by the year 2006, the total vehicle sales of 155,000 comprised of only 54,000 locally manufactured units, 56,000 used vehicles and 45,000 CBUs.

70% imported CBUs

“Since 2015, importation of used vehicles has been effectively controlled, but CBU imports started dominating at 70 percent of the local market.

“With the country in the midst of motorization, the inevitable increase in vehicle sales and the history of a promising local automotive and automotive parts production capability must then be an opportunity for the local automotive industry.

“Thus the CARS program.”

Then President Benigno S. Aquino III views the locally-assembled cars displayed at the Mitsubishi Galleray during theMitsubishi Motors Philippines Corporation (MMPC) Sta. Rosa Plant Inauguration at Greenfield Automotive Park, Special Economic Zone in Sta. Rosa City, Laguna.

Ofreneo seems to agree with the BOI as he traces the decline of the Philippine auto industry to policy incoherence, unchecked massive inflows of smuggled cars protected by powerful politicians, and the reduction of tariffs for CBUs.

The most memorable of the government’s auto industry “policy incoherence” was the Progressive Car Manufacturing Program (PCMP) signed in 1973 by President Ferdinand Marcos.

In his book, “The Philippines: People, Poverty and Politics,” Leonard Davis writes that in March 1985, Prime Minister Cesar Virata himself announced that the PCMP was a failure. Virata admitted that since 1975, not one of the five companies in the PCMP had produced a car that could be stamped “Made in the Philippines.”

In March 1985, the remaining car manufacturers in the PCMP—General Motors Pilipinas, Nissan Motors Philippines and Canlubang Automotive Resource/PamCor (a joint venture of Mitsubishi and Chrysler)—were producing only four or five units a day, in assembly plants designed for an output of 280 units each week, Davis writes.

The other PCMP participants were Delta Motors/Toyota, Ford, and DMG/Volkswagen.

Box-type cars

By 1985, due to the prolonged Philippine economic crisis, only Mitsubishi and Nissan were left standing. The box-type Mitsubishi Lancer and Nissan Stanza were just about the only choices available for new car buyers although remnants of the Isuzu Gemini, Toyota Corolla, Toyota Starlet, Ford Escort, Ford Laser and Volkswagen Beetle were still seen on the road.

After the Edsa 1 People Power Revolution in 1986 catapulted her into Malacanang, President Corazon C. Aquino tried to revive the local content program by replacing the PCMP with the Car Development Program (CDP), Ofreneo writes.

Japanese carmakers were among the original CDP participants: Mitsubishi, Nissan and Toyota, the latter resuming business operations in the Philippines in 1988.

Then President Gloria Macapagal Arroyo listens while Nobuharu Tabata briefs her regarding the hi-tech facility and new model of Toyota Prius as Fujio Cho (Toyota Japan president) and George Ty (chairman, Toyota Phils.) look on during her visit to the plant of Toyota Sta. Rosa industrial complex, Sta. Rosa, Laguna.

The addition of the “People’s Car Program” to the CDP in 1990 paved the way for the entry of new CDP players such as Honda, Kia (Columbian Autocar), Fiat (Italcar Pilipinas), Norkis (Transfarm), according to Ofreneo. Fiat and Norkis have long since dropped out.

In 1992, another CDP amendment, the “Luxury Car Program,” saw the entry of Volvo and Mercedes-Benz.

In 1994, still another amendment by President Fidel V. Ramos based on the Asean Industrial Joint Venture Program allowed Proton of Malaysia to join the CDP, but Proton did not last long in the Philippine market.

Thus, by 1994, Ofreneo writes, there were 13 accredited CDP participants, all licensed to produce cars with high local content requirement for a Philippine market that could absorb only around 100,000 locally assembled units a year.

Five left standing

When the 1997-98 Asian economic crisis struck, only five Japanese assemblers were left standing: Toyota, Mitsubishi, Nissan, Honda and Isuzu.

Total industry sales plummeted anew to five digits annually from 1998 to 2006.

Only in 2007 onward did industry sales begin to climb to pre-crisis levels. This year, total industry sales reached 144,435 units.

The consuming public was eager for new cars after the crises of the 1980s, and the local assembly industry supplied most of the new cars sold.

Despite the booming car sales, Ofreneo points out that it was not accompanied by an expansion in domestic car assembly.

Philippine CKD production remained stagnant after the 1997-1998 Asian crisis, and since 2008, CBU imports outnumbered the locally assembled cars.

Gloria Macapagal Arroyo, who was Philippine president from 2001 to 2010, issued EO 156 as the “new” Car Development Program.

To encourage domestic car assembly, EO 156 provided participants additional fiscal incentives, CKD import privileges, and assurance versus used-car importation.

Mitsubishi box-type Lancer

But unlike the PCMP and Cory Aquino’s CDP, EO 156 did not require assemblers to progressively increase local content and to earn foreign exchange by exporting CBU units or automotive parts.

Excise tax system

EO 156 mandated a value-based excise tax system prescribed by the International Monetary Fund, so that the higher the car’s value and the bigger its engine, the higher the excise tax.

The new excise tax, implemented in 2003, favored consumers who acquired small cars priced at P500,000 or below since the tax rate was only 2 percent.

On the other hand, EO 156 imposed double-digit tax rates on AUV producers.

With the failure of the PCMP and the CDP, the auto parts industry supplying the domestic assembly plants likewise failed to grow.

Nonetheless, Ofreneo contends that with a large population of around 100 million, a low car density compared to the big three Asean producers, and as one of the “emerging economies” in the Asia-Pacific, the Philippines clearly has the potential to become a big domestic car market like Thailand and Malaysia, both of which have smaller populations than the Philippines.

CAMPI is equally bullish. At the 6th Philippine International Motor Show (PIMS) in September 2016, CAMPI president Rommel Gutierrez, who is the 1st vice president of Toyota Motor Philippines (TMP), said that CAMPI is confident about achieving Vision 2020, its goal to sell 500,000 units in the next four years.

CAMPI has eight regular members and nine associate members. Gutierrez projected that the auto industry will increase employment in the manufacturing industry from 9 percent to 15 percent by raising the manufacturing sector’s contribution to total GDP from 23 percent to 30 percent.

CARS and Vision 2020

CAMPI is working towards Vision 2020 through the government’s CARS program, which aims to strengthen the competitiveness of the local production of motor vehicles.

The BOI asserts that CARS will attract more than P27 billion in new parts manufacturing investments, produce at least 600,000 vehicles, generate around 200,000 new jobs, and propel economic activity estimated at P300 billion while transforming the Philippines into a regional automotive manufacturing hub.

Only two CAMPI members—Toyota Motor Philippines and Mitsubishi Motors Philippines Corporation—are accredited participants in CARS since they are the only ones deemed capable of meeting the requirements of the government program.

According to a business news report in another broadsheet, the BOI cancelled the authority it granted Hyundai Asia Resources, Inc. (HARI), the authorized Philippine importer and distributor of Hyundai cars and trucks, to participate in the CARS program less than six months after the Hyundai Assembly Center in Laguna began CKD production of the Eon mini subcompact car and the H350 commercial vehicle.

The president and CEO of HARI is Ma. Fe Perez-Agudo, who led the breakaway of member companies from CAMPI in July 2010 to form the 16-member Avid.

A bombshell

A month after 6th PIMS in September 2016, the Department of Finance dropped a bombshell: a tax reform package that would reduce the number of new cars on the road (and thus lessen traffic congestion?) by jacking up their retail prices via increased excise tax rates.

Leaders of Campi and Avid immediately voiced their concern that the automotive excise tax hike would derail the CARS program.

“With the proposed measure discouraging people from buying new cars, the implementation of CARS could be derailed,” Gutierrez told PDI Motoring.

“Investments required under the program may have to be restudied and potential employment will not be realized. It is tantamount to changing the rules in mid-stream and sends the wrong signal to existing and future investors.”

Agudo, Avid president, said in an online message: “Offhand, any tax increase will have short-term negative repercussions as a result of the unfavorable pass-through effects on consumer purchasing power. Over the long run, this may ultimately translate to lower investments in the auto industry which run counter to the intent of government to revitalize and further advance the growth of the industry.”

Meanwhile, as the Christmas season approaches, consumers are finding to their consternation that there is a shortage of new cars available for purchase.

Rumors are rife that car dealers are hoarding their inventories, waiting for prices to shoot up when the new excise tax takes effect early next year.

Some smart private investors are said to be stocking up on best-selling car and truck models to be sold at a neat profit when the tax reform program is implemented in 2018.

That, in a nutshell, is the background and current status of the Philippine automotive industry as the PDI prepares to celebrate its 32nd anniversary.

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