The Philippines works to establish a stronger base for vehicle and components manufacturing

In 2013, the Department of Trade and Industry (DTI) was allocated P2.3bn ($51.8m) from the Department of Budget and Management towards its manufacturing resurgence programme. The programme will support the implementation of a number of industry road maps that have been formulated by the Board of Investments (BOI) with input from technical working groups including industry representatives. In all, 22 manufacturing road maps have been submitted to the DTI-BOI so far. One stand-out programme is the Comprehensive Automotive Resurgence Strategy (CARS), which is receiving attention in light of the multiplier effect a strong domestic vehicle and components manufacturing base provides, and the market access and supplier integration opportunities set to come about via ASEAN Economic Community (AEC) integration.

DEVISING A PLAN: Establishing an automotive manufacturing base is not without its challenges, and the country has some catching up to do with the region’s more established vehicle producers. According to ASEAN Automotive Federation data, the Philippines assembled 79,169 vehicles in 2013 compared to 2.46m in Thailand, 1.21m in Indonesia and 601,407 in Malaysia.

Thailand is the region’s leader, a position that observers attribute to the implementation of dynamic and focused industrial policy. Considering the extent to which the automotive industry relies on global supply chains, as component companies cluster around their original equipment manufacturer (OEM) customers, the Philippines is looking to emulate the Thai example, as well as those of countries such as South Africa and Brazil that have emerged as regional production success stories by integrating into the networks of leading multinational automotive makers.

SEEKING DIRECTION: As part of the CARS programme, the establishment of an industry support fund potentially totalling $600m is being considered. The final version of the industry road map has not yet been released, but indications are that it will entail a combination of income tax holidays and tax credits. Wooing OEM brands to relocate to the country, however, is not as simple as offering preferential terms and financial incentives. The DTI has stated that reward packages will likely be offered to companies producing a minimum of 200,000 units of a particular vehicle model over a five-year period. Yet high-volume production depends on a strong local supply base, which at the moment the country does not possess across the board. A car, on average, has around 30,000 component parts, and production of these relies on viable chemical, plastic, textile, rubber, glass, steel, electrical and other manufacturing subsectors or supply chain linkages.

The Philippines does have a local petrochemicals sector that produces the ethylene and polyethylene that go into manufacturing rubber and some engineering plastics. This could change, however, when a $800m cracking facility being built by JG Summit Holdings, which is expected to produce 320,000 tonnes per year of ethylene, comes on-line.

Due to proportionally higher energy and other input costs, studies reveal production costs in the Philippines for an average passenger vehicle are around $1000 more than in other ASEAN producer country, a margin that incentives would be difficult to offset.

LOCAL MARKET: Perhaps the country’s biggest draw for multinational OEMs is the growth potential of the domestic market as at some point economies of scale could tip the balance in favour of local assembly over imports. Despite a population of close to 100m, income levels have lagged other countries in the region and motor vehicle ownership is comparatively low. Thailand, for example, with 67m people, has 40% more car sales than the Philippines. Low saturation, however, makes the Philippines one of the more promising car markets when evaluating scope for expansion, as the country is viewed to be on the cusp of motorisation – a term referring to when car ownership spreads beyond urban centres and becomes more commonplace. According to figures from the World Bank, gross national income per capita totalled $3270 in 2013, which is up substantially from $2480 in 2009 and almost treble the amount recorded in 2003.

“More earnings, consumer confidence, low interest rates and the increased ease of getting loans are generating new demand,” Renato Pizarro, the senior vice-president at Hyundai Philippines, told OBG.

According to the Chamber of Automotive Manufacturers of the Philippines, sales of passenger and commercial vehicles from January through September 2014 increased almost 30% year-on-year. In 2014 sales increased by 29.5% to 234,747 units, while 272,000 units are expected for 2015, a growth rate of 16%.

IMPACT POTENTIAL: A situational study included in the road map proposal concludes that industry savings of P759bn ($17.1bn) could be achieved by 2022 if 400,000 completely built units are made locally instead of being imported. At the same time, an estimated 300,000 jobs could be created domestically and the industry’s contribution to overall GDP increased to 2.2%. A separate study released by the University of Asia Pacific and referenced by the BOI reveals that every P100bn ($2.3bn) in investment in the industry creates an estimated 170,000 additional direct jobs.

In 2013, employment in the industry was broken down into 8000 workers directly employed in auto manufacturing, 68,000 in the auto parts sector and 340,000 indirectly employed in supporting industries.

AEC: Any OEM brand evaluating between competing investment markets within ASEAN will likely be assessing the regional market as a collective, as once the AEC is formalised in 2015, intra-regional imports will be subject to zero tariffs. “Manufacturers will have to rethink their regional set-up,” said Pizarro. “Competing Japanese brands that manufacture and import to the Philippines from Thailand will suddenly become a lot cheaper than European or Korean vehicles imported from their home or a non-ASEAN country.”

ASEAN pooled population of 600m people presents attractive prospects for whichever members emerge as net exporters. Deutsche Bank forecasts ASEAN car ownership to grow 10% year-on-year to reach 40m units in 2015 and 44m by 2050. Consultancy Frost & Sullivan anticipates ASEAN will emerge as the sixth-biggest automotive market globally by 2018.

ELECTRIFYING NICHE: Considering the barriers that need to be overcome to catch up with the likes of Thailand as a major automobile producer, perhaps the more viable course of action for the Philippines is to hone in on one or two vehicle types where it can achieve a competitive edge through specialisation.

Looking back at Thailand’s journey into becoming a global competitor, it first forayed into vehicle manufacturing by focusing on cost-effective pick-up trucks used for its own agriculture sector. In a similar vein, a logical starting point for the Philippines could be in producing and eventually exporting electronic versions of the jeepneys and motorised tricycles that dominate the country’s public transportation landscape. The origin of the colloquial term “jeepney” is rooted in their first conceived versions having been re-assembled from US military jeeps left after the Second World War. These iconic and colourful bus-van hybrids are uniquely Filipino, and deemed a practical, efficient and affordable means of moving people in urban and rural settings where commercial bus fleets have not hit critical mass.

There are an estimated 370,000 jeepneys on the nation’s roads. Many are approaching the end of their shelf life, and are noisy and highly polluting. According to estimates from the Department of Environment and Natural Resources, the 55,000 jeepneys serving Manila account for around 80% of the capital’s carbon emissions. In order for jeepneys to retain their prominence within the transportation network, modernisation is needed, and the Electric Vehicle Association of the Philippines believes that electric versions offer a sustainable solution. The association is targeting to have 1m electric vehicles in the Philippines by 2020. Prototypes have been developed, and while costing about P300,000 ($6750) more than a traditional jeepney, the initial outlay will be recouped in lower petrol and maintenance costs over the vehicle’s life span.

The Philippines is home to 3.5m motorised tricycles (trikes), and they function similarly to Thailand’s tuk tuks and India’s rickshaws, with the main physical difference being that the passenger carriage is attached to the side of rather than behind the driver. The Asian Development Bank is providing $300m towards a $500m plan to introduce an initial tranche of 100,000 e-trikes by 2017. There are currently three Japanese e-trike manufactures that have invested in the Philippines, and expectations are that they will be looking to eventually export models to other regional markets.

While analysts applaud the efforts to further promote e-vehicles for local use, some are reserving enthusiasm until there are more clear signs that the support infrastructure, such as plugin stations, can be put in place nationwide. Although manufacturers can tap into certain supply-side incentives from the BOI as it is eager to encourage environmentally friendly investments, some argue that demand-side incentives are required to encourage potential owners to incur the expense.