Are car prices going up or down?

Published March 26, 2021, 5:55 PM

by Inigo Roces

For those in the market to buy a vehicle, committing to a purchase can be frightening with the way prices have been fluctuating. It begs the question, ‘Are car prices going up or down?’

Annual sales reports from 2020 and the first couple of months of 2021 paint a bleak picture of the automotive industry. Sales are down, the Department of Trade and Industry’s (DTI) new safeguard duty threatens to shoot up car prices at the worst possible time, and there’s buzz of a chip shortage that may affect some models. These bleak predictions don’t even include the current blockage of the Suez Canal that will likely affect vehicle supply chains and fuel deliveries in some way. All signs seem to point to prices going up, yet why are some car companies offering their cars for less?

The answer is not quite as simple. It depends on a number of factors like how well a brand has prepared for the pandemic slump, where it sources its vehicles, and the strategies it is employing to continue to sell.

Pandemic slump

First let’s address the pandemic slump. There’s no doubt the situation has affected vehicle sales. With the country shut down for two months last year, many brands were forced to stop sales completely or at least delay deliveries until after the lockdown. The situation affected logistics as well, with new models, new stocks, and some parts from abroad delayed by lockdowns around the world.

As restrictions eased up, sales began to catch up as public transport offered few solutions. Key movers were the small affordable sedans, hatchbacks and MPVs, with specialist small car brand, Suzuki, benefiting the most, followed closely by new player, Geely. Naturally, cars sourced from factories around Southeast Asia were easily replenished. Those from farther abroad faced a few more snags.

Even with sales nearly returning to pre-pandemic levels by the end of the year, it still wasn’t enough to make up for the lost two months. By the end of the year, the industry was down by a hefty 40%.

DTI safeguard duty

With a new year and lots of time to recover and reconfigure, many brands were looking forward to a more positive 2021. Many have overhauled their websites, showrooms, and sales procedures to accommodate new health and safety standards.

However, in the early months of 2021, the DTI had announced a safeguard duty to be imposed on imported vehicles. Unfortunately for us, a large majority of our cars are imported from Association of SouthEast Asian Nations (ASEAN) member countries, Korea, and China.

This is because, over the years, and thanks to several free trade agreements with members of ASEAN, Korea, and China, the Philippines has become reliant on vehicle imports. While it’s entirely possible to make a number of models here, the sheer economics of scale of car-producing nations like Thailand and China make it cheaper to import a vehicle than assemble it in small numbers locally. After all, 10,000 units of one model is a drop in the bucket for a Thai factory’s 200,000 unit annual capacity, much less a Chinese factory’s 500,000 unit annual capacity. By contrast, it costs more to produce 10,000 units in a Philippine factory designed to build 30,000 annually.

It’s why local production of cars like the Isuzu D-Max, Honda BR-V and City, and Nissan Almera were eventually halted. When the numbers are crunched, producing locally offers very few financial incentives over importing them relatively tax free thanks to these agreements. The end of local assembly of key models is what prompted the DTI to issue a safeguard bond on imported vehicles. With a higher price, it’s hoped that buyers will be directed to the ‘cheaper’ Philippine made vehicles.

Yet many in the industry believe this safeguard duty won’t encourage local production as hoped. It’s not simply a matter of raising prices. Part of the decision stop production typically cites issues like high electricity costs (from non-renewable resources), transport and logistics issues, and worst of all, shifting government policies that favor the auto industry one year, and seemingly punish it the next.

Stockpiles

DTI’s safeguard duty is already in effect but only a few of the brands have announced price increases. This is because, owing to the lower than expected sales, many brands still have a lot of stock. The bond, after all, is slapped on any imported vehicle within a specified 200-day period. Rather than pass on the bond to the consumer and risk scaring the few buyers away, some brands have simply opted to stop importing and finish up their stock. Once the inventories are empty (hopefully after the 200-day period), they will order new cars again.

Perhaps the rare few forced to impose price increases are companies like Toyota and Mitsubishi that continue to be in demand even during the pandemic.

Loopholes

Another side of the DTI safeguard duty conundrum is the rules surrounding the free trade agreements. In many cases, these free trade agreements we currently enjoy come with stipulations against the implementation of protectionist policies like the safeguard duty. In response to new duties on their cars, Thailand or China could easily slap safeguard duties on Philippine export products arriving in their countries.

The safeguard duty may seem like a blanket measure for all vehicle imports, but upon closer inspection, it has a few loopholes. The bulk of the duties seem to be targeting vehicles made in countries like Thailand and Indonesia which is where we get a large bulk of our vehicles (pickups, SUVs, and MPVs).

However, there are exemptions for specific kinds of vehicles from specific countries.  For example, commercial vehicles from China are exempt from this rule. As such, the Maxus T60, a pickup made in China has no safeguard duty at all. The same goes for some Mazda and Peugeot models which are made in Malaysia. Small cars like the Suzuki Dzire and Swift, made in India, are also exempt. These cars from countries not typically known for producing cars will likely gain more attention thanks to the safeguard duty, not the locally produced cars.

Continued promos

The last factor adding to the confusion is the continuous stream of promotions offered by many brands. Car sales and promotions are typically at their peak nearing the holidays. Many brands extend it into the early months of the year with buy now, pay later plans. Yet with the added pressure to make up for the massive dip last year, more and more car companies are getting creative with promotions, offering low downpayment, discounts and trade-ins, and buy-one-take-one plans to move cars off the showroom floor. Honda has even offered to partially absorb the safeguard duty, taking on the financial burden and only passing on half the amount to the consumer.

In many ways, the trajectory of a vehicle’s price serves as an indicator of its popularity. If the price has gone up, it’s a popular and in-demand model. Whether you like it or not, you’ll have to pay the price if you want one. Find a car you like with a tempting discount? It’s likely a model that’s a tougher sell. Still, there’s no better time to grab that dream than now.

Yet whether locally made or imported, on sale or on waiting list, our car brands aren’t the greedy monolithic corporations many make them out to be. The sheer number of brands we have today make competition incredibly tight, with price often determining one model’s success over another. None can afford to raise prices at this time, particularly after a devastating 2020 and only a quarter of 2021 over.

The price tags you see now have taxes and margins shrunk to as little as possible. We’re getting the best deal they can offer. Yet in these troubling times, with the cost of doing business higher and a frightening trend of rising viral infections, the best deal may not be enough.

 
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