Safeguard duties in perspective

The sudden shutdown of Honda’s assembly plant last month has added urgency to calls for the government to protect local assembly plant workers and auto parts suppliers from the loss of jobs.

Even before Honda Cars Philippines, Inc. (HCPI) announced the closure of its assembly plant, a labor group, the Philippine Metalworkers Alliance, had already filed a petition with the Department of Trade and Industry (DTI) for safeguard duties on vehicle imports.

After the HCPI plant shutdown, the Philippine Parts Makers Association (PPMA) headed by Ferdinand Raquelsantos, also urged the DTI to speed up the implementation of “safeguard measures to …sustain whatever local assembly we have, and even entice new entrants to promote additional employment.” (Quoted by Tessa Salazar in PDI Motoring, Feb.26, 2020)

HCPI’s assembly plant closure was preceded in July 2019 by the decision of Isuzu Philippines, Inc. to move the production of the D-Max pickup truck to Thailand. In June 2012, Ford Motor Co. announced that it would stop manufacturing vehicles in the Philippines at year’s end, citing as rationale the country’s small market demand, lack of economies of scale, and inadequate parts supply base compared to other ASEAN countries.

Thanks to the ASEAN Free Trade Agreement which liberalized trade in the region through the elimination of tariffs and non-tariff barriers among the ASEAN members, global automotive brands that had built their major export manufacturing plants in Thailand, Indonesia and Malaysia found it more cost-effective and more profitable to export vehicles from those countries to the Philippines, rather than assemble them here.

PUNY PRODUCTION. The truth is that compared to other Southeast Asian countries, the Philippines’ motor vehicle production is puny. The ASEAN Automotive Federation recently reported that in 2019, the Philippines produced 95,094 units while Thailand produced 2,167,693, Indonesia’s output was 1,268,848, Malaysia manufactured 571,632 units. Even Vietnam outproduced the Philippines with 176,203 vehicles.

We produced 95,094 vehicles in 2019, yet registered new car sales totaling 412,106 units. This can only mean that more than 90 percent of motor vehicles sold last year were imported models called CBUs (completely built units).

Of the brands that made the top 10 best sellers’ list for 2019, only four—Toyota, Mitsubishi, Nissan and Honda—assemble passenger vehicles locally, and they assemble only one or two models each. No wonder a DTI official has been quoted as saying that vehicle imports rose to a total of 1 million units from 2014 to 2018. Consequently, according to the Philippine Statistics Authority, the number of auto production workers, including indirect contractors and suppliers, shrunk from 86,428 in 2015, to 57,982, representing a 32 percent loss of jobs within a period of three years.

With HCPI ceasing production this month and another brand rumored to be considering the same move soon, we may be left with only two car manufacturers: Toyota Motor Philippines Corp. (TMP) and Mitsubishi Motors Philippines Corp. (MMPC).

As the only participants in the government’s multi-billion Comprehensive Automotive Resurgence Strategy (CARS) program, TMP and MMPC are committed to locally produce a total of 200,000 units each of the Toyota Vios and Mitsubishi Mirage by 2023. The CARS program, which began its first full year of implementation in 2019, is credited with the 19.2 percent jump in domestic car production, over the 79,763 units in 2018.

GADZILLIONS INVESTED. Undisputed market leader Toyota, in particular, has invested ‘gadzillions’ in the Philippines. At the ceremonial turnover of the TMP presidency last Feb. 17 where DTI Secretary Ramon Lopez was the guest of honor, TMP chairman Alfred Ty in his speech revealed that over a period of 30 years, the company has made a cumulative investment of P64 billion, including P5.42 billion in the CARS program, to promote the country’s competitiveness as an automotive production base in the region.

Moreover, since TMP started operations in the Philippines, they have paid P384 billion in various taxes and duties towards national development, including P46.8 billion in 2019.

TMP has exported close to US$1 billion (about P51 billion) of auto parts annually, Ty added, probably referring to manual transmissions exported to other Toyota plants worldwide.

DTI Secretary Lopez, for his part, congratulated TMP for its participation in the CARS program, for increasing local content from below 20 percent, to 42 percent, for directly employing 2,000 and creating indirect labor at 55,000, for providing business to 95 local parts suppliers—in sum, for expanding linkages to the domestic economy, and to a growing auto parts sector as a major source of exports.

Meanwhile, the Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI), which is headed by TMP 1st VP Rommel Gutierrez, issued a statement that after the HCPI plant shutdown, the remaining local vehicle manufacturers and assemblers need incentives and strong government support and assistance, to maintain the viability of their local production and stay competitive in the region.

CAMPI said that at this critical stage, the government must seriously study any initiative that would dis-incentivize domestic auto assembly operations as this would further endanger employment and existing investments, among others.

GTI CAPITAL PERSPECTIVE. How could a government initiative discourage domestic auto production? To find out, PDI Motoring e-mailed a questionnaire to Vince Socco, former GM of Toyota Motor Corp. Asia Pacific (Japan) and now GT Capital EVP and chairman of GT Capital Auto Dealership Holdings (GT Capital has a 51 percent direct ownership in Toyota Motor Philippines. The answers he gave are in his capacity as a GT Capital officer, not as a TMP officer.)

Saying that he understands that the DTI has initiated its probe into the call of the PPMA for safeguard duties, and that the probe includes consultations with stakeholders including CAMPI, GTI Capital would like to refrain from any comments that will preempt the results of the DTI study.

After expressing respect for the government’s prerogative to take measures that are provided by law and that aim to address various social or economic issues affecting the interest of the nation or its people, and after expressing support for free trade among nations, Socco said:

“We trust that the government will pursue the most reasonable and balanced response available to it, mindful of their commitments as a member of the international community.

ROAD MAP. “In this instance, we hope that a thorough and comprehensive road map for industrial and manufacturing development be defined, including the role of the automotive industry in it.

“This long-term policy direction is more ideal than reactionary short-term measures and is consistent with the nature of investments in auto manufacturing that usually has gestation periods covering five to 10 years. We are keen to work with government in finding the most progressive way forward.”

As for the proposed imposition of safeguard duties on vehicles imported from Thailand, Socco replied: “The safeguard duties—if imposed—should only be for a limited period to allow the local industry to strengthen itself and improve its competitiveness.

“Therefore, it is necessary for any safeguard duties to be accompanied by a policy package that will, in fact, give potential local manufacturers a clear economic reason to start or expand local production in the country.

“Safeguard duties alone may only result in increased prices of vehicles and not necessarily cause OEMs (original equipment manufacturers) to locate production facilities in the Philippines.”

INCLUDE CHINA? Socco added, possibly referring to China: “In our understanding, any potential safeguard duties imposed on CBUs should not be limited to any one country, for example Thailand. It should cover all CBUs from all countries.”

He clarified that the safeguard duties are different from the retaliatory taxes that the DTI is considering to impose on Thai-sourced CBUs. The retaliatory taxes are a recourse of the government to address an ongoing trade dispute with Thailand involving tobacco exports from the Philippines.

Asked whether the imposition of tariffs on CBUs from Thailand would affect TMP’s production and the retail pricing of Toyota vehicles, Socco replied that it is not expected to impact local assembly operations.

Ultimately, he said, the impact of any increase in taxes will have to be borne by the consuming public. Potentially, this could dampen demand as was evident when excise taxes on affected vehicles were increased under the Tax Reform Acceleration and Inclusion (TRAIN) law.

Going back to the ceremonial turnover event of TMP last month, Ty included in his speech a countdown of the company’s achievements: Since 1989, the delivery of a total of 1.7 million Toyota vehicles to homes and businesses; selling an average of 114,000 units a year, surpassed in 2019 by the delivery of 162,011 Toyota cars, SUVs, passenger vans and commercial vehicles to Philippine homes.

The question is: How many of these 1.7 million since 1989, or how many of the 162,011 delivered last year were made in the Philippines? Or, phrased another way, how many were imported CBUs?