Punishing the automotive industry

The local automotive sector is one of the country’s best performing industries at the moment.

Except for the dip in 2011 caused by a supply problem due to the flooding calamity in Thailand, which supplies the majority of mass market cars to the Philippines, it’s been a record breaking year in 2010, 2012, 2013, 2014, and 2015.

And 2016 looks to be even greater, with the industry poised to move anywhere from 356,000 to 380,000 cars, according to a variety of key industry people.

Obviously, this does not bode well for the traffic situation. Yet, the traffic problem will get worse regardless if more cars are sold or not, as solving traffic ultimately is a different issue in itself.

But going back to car sales in general, there seems to be a storm brewing.

Due to the government’s crackdown on the mining and gaming industries in particular, the government is poised to lose revenue from these two industries.

According to friends and those in the know in the mining industry in particular, it’s good that DENR is clamping down on mining companies with poor business and safety practices, those abusive mining firms that waste our natural resources and mistreat poor indigenous people who live in the far flung, unmonitored rural locales operated by mining firms with practically no government supervision.

We are being used and abused by mining companies, many of which are foreign owned in part or in whole.

So why should the automotive industry be responsible for shouldering a huge bulk of the financial burden?

Early reports saw President Rodrigo Duterte quoting that we will lose around P40 billion in government revenue due to the closure of these mining companies with poor business and safety practices.

It seems like the automotive industry has been summarily tasked to provide the P40 billion that will be lost from mining.

Let’s do some basic math: P40 billion divided by 350,000 cars (a conservative estimate) means we will have to tack on an additional P114,286 per car.

Additional 20% on SRP

If you add this amount on the selling price of a Toyota Wigo, Mitsubishi Mirage or Suzuki Ciaz, this would represent as much as an additional 20 percent from the current SRP.

That’s a deal-breaker for most of the people looking at buying cars in this segment. They will be forced to save further, or buy a second-hand car, which obviously won’t be as reliable or trouble-free as a brand-new car.

Why should our fellow Filipinos be prevented from buying their own brand-new car?

As I always tell people, buying a car is often the second biggest purchase people will make in their lives, after a home.

On the opposite end, people buying a car well into the millions will probably not notice this amount.
A typical sports car will start at P8 million. An additional P114,286 represents a drop in the bucket, like getting regular leather instead of the combination suede/Alcantara.

So obviously the government can’t tack on a fixed amount on every single car sold.

Gathering information, all I’ve heard is hearsay. A new or revised tax scheme will be introduced by December, and implemented by January of 2017, according to some contacts familiar with what’s going on.

Mass-market cars sold below P2 million to P2.5 million (the delineation isn’t clear yet) will be levied an additional tax of P20,000 to P50,000, depending on their value.

Cars sold above P2 million to P2.5 million will be levied an additional 10 to 30 percent in luxury tax.
You can imagine the ramifications on this: cars in general will be more expensive to buy. This means people will be prevented from buying a new car.

The luxury segment consisting of five percent (roughly 17,000 cars or more out of a conservative estimate of 350,000 cars) will also be greatly affected.

This can mean downgrading from a top-spec diesel SUV to a lower or base model variant.

If you look at the diesel SUV segment, almost all of them are priced at P2 million and up.

Why am I critical about this? Because you get most of the important safety features on top-spec models versus mid-range and base-model vehicles.

Why should Filipinos be deprived of features in a car that ensure their improved safety and security?
There are other questions that need to be addressed. Will the additional tax be based on the vehicle’s SRP? Or will it be based on FOB (freight-on-board) landed cost?

Speaking on anonymity, a top industry executive said most car manufacturers and importers are willing to absorb part of the additional taxes levied on their cars, if only to sustain market growth and volume. But they obviously will not suck up the entire additional taxes if it reaches beyond a certain amount.

Indonesian experience

Indonesia is a country currently in turmoil due to a variety of socio-economic reasons.

A number of manufacturers have already pulled out of Indonesia due to highly restrictive government legislation, particularly vehicle import taxes.

But at least the administration of President Joko Widodo has already started a massive mass-rail transit project in Jakarta so despite even worse traffic (far worse than in Manila), there is light at the end of the tunnel in probably four to five years.

For the Philippines, though, solving traffic by financing a comprehensive mass transport project remains to be a dream.

With higher taxes looming, will we be following Indonesia too? Crucially, this means lesser car sales.
We deprive the hard-working emerging middle-class Filipino segment from buying a new car. And cars are a sign of our freedom because the convenience allows us to travel anywhere, anytime.

It also represents one’s success, something to be proud of.

Secondly, and just as important, this closes the door on employment opportunities for Filipinos. I don’t have any figure on how many people the automotive industry, from the manufacturing, sales, distribution, aftersales and OEM supplier segment, but I can bet you, it is in the hundreds of thousands.

A drop in car sales also means financial institutions and insurance companies will see a huge drop in revenue as less people can afford to buy cars, be it on cash basis or financing.

The alternative is to take public transport. But until government can address the problems about the mass rail transit system, poor roads and the resulting traffic, productivity of the Filipino workforce will continue to suffer.

I do not want this column to seem like a paid editorial opinion by the motoring industry, but I am ferociously loyal to the industry. I have seen the leaps and bounds that this industry has grown since I started writing in 2004.

We are finally at par with many of our Asean neighbors (Thailand and Malaysia) in terms of purchasing power for cars. So why is the government planning on putting a stop to the growth and success of an industry that has brought in billions of dollars in direct foreign investments to our country?

I think the government will easily find the P40 billion that will be lost from the mining industry’s crackdown if they focused on weeding out corruption and removing any and all forms of the pork barrel by our lawmakers who remain short-sighted on how to truly improve the Philippine economy.