Last week, the Department of Trade and Industry (DTI) issued Administrative Order (AO) 21-04 dismissing the petition for general safeguard measures on the importation of motor vehicles. The AO was based on the recommendation of the Tariff Commission (TC) following their investigation of the petition.
In the main, the claim of the petitioners was that a surge in motor vehicle imports during the period of 2014-2020 caused serious injury or threat to the local manufacturing of autos. The TC found that no such surge in imports occurred thus rendering any claim of “serious injury or threat thereof, causation and unforeseen developments” moot and academic. The timely resolution of the issue by both the TC and DTI – notwithstanding the challenges of the pandemic –was commendable.
This is welcome news for the tens of thousands of customers who paid deposits on their purchase of vehicles covered by the provisional safeguard duties. It will be remembered that some automakers decided to implement the deposit scheme while others opted to increase prices outright. With the issuance of the DTI-AO 21-04, those auto dealers that were collecting deposits can now stop doing so and start the process of refunding those they collected since March. Likewise, it removes a retardant to demand for vehicles at a time when the industry continues to grapple with the setback brought by the COVID-19 pandemic.
The dismissal of the petition is a significant development. I think, though, that it is not so much because of the finding that there was no inordinate increase in the importation of completely-built-up (CBU) vehicles. Rather, it is more because it removes a layer of uncertainty that can cause auto makers to take a much longer look than necessary at any of their investment plans for the Philippines.
What most attracts automakers to a market is the size of the total vehicle market – regardless of whether it is CBU or locally produced. The auto business is, after all, highly dependent on volume to achieve economies of scale and reduce costs of production. Research and development costs are among the highest in any sector and, thus, require a significant volume-base to amortize costs. Tooling costs are also another heavy burden. And these are multiplied several times over throughout the many-tiered ecosystem of component makers.Any action that inhibits volume growth, therefore, reduces the attractiveness of that market.
This was evident in the case of the Philippines. When the market was growing at double digits from 2012 to 2017, every car maker was closely looking at our market. In fact, there was a significant number of auto brands that started, rejoined or ramped up their operations in the country during that period. The market growth simply could not be ignored. Add to that the prospect of motorization, the sustained economic growth of the country and the demographic bonus that a young population offers andentry into the Philippineswas viewed as a very enticing proposition.
As the total market grows, sales of certain models grow much faster and in much greater quantities than others. If the volume of a particular model is big enough and the costs for local production are low enough, consideration of producing a vehicle locally comes into play. More so if the government provides adequate incentives to realize cost competitiveness. This is what happened when the government announced the Comprehensive Automotive Resurgence Strategy (CARS) program. Toyota and Mitsubishi enrolled in the program and augmented its local production capabilities.
The growth in imports of CBU’s was not in place of locally produced vehicles; it was in parallel with completely-knocked-down (CKD) models. After all, not all models are produced locally – due to varying market volumes. What cannot be viably produced locally, therefore, must be imported in order to serve the diverse mobility needs of the country. In time, as other market segments grow to the point of economic scale and cost competitiveness, the possibility of adding to the number of locally produced vehiclesincreases.
It might sound overly simplistic but I would argue that the most effective way to safeguard the local auto industry is to allow demand for motor vehicles to rise to its natural potential. This will surely cause auto manufacturers to take a serious look at the country as a potential production base. However, we have to remember that the global supply chain is an intricate web that necessitates a clear competitive advantage – particularly in terms of cost – before local production can be realized.
What also seems clear is that the government is eager to nurture and develop the auto industry. Car makers are likely looking forward to a clear policy framework that can make it happen. Perhaps, long time auto manufacturers in the country can be incentivized to level up their operations as much as – or even more than — new entrants.
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