Auto manufacturing in the Philippines expanding as demand grows

South-east Asia’s automobile manufacturing hubs have long centred on assembly plants located in Thailand and Indonesia, which have in turn supplied much of the imports to other nations within the ASEAN trade network. In the Philippines, the majority of the rapidly growing automotive market is still supplied by foreign imports, leaving domestic manufacturers in a bind. With automotive sales exploding since the beginning of the decade, this represents a significant lost opportunity for domestic manufactures. Rapidly rising incomes, declining fuel prices and a lack of viable mass transit options have spurred double-digit growth in automobile sales in recent years even as urban centres become increasingly prone to traffic.

Driving Demand

A strong sales month at the end of 2016, in which automotive purchases expanded by 24.6% year-on-year in the final month, pushed the total annual sales mark for the country to 359,572 units, up from 288,609 in 2015, according to data supplied by the Chamber of Automotive Manufacturers of the Philippines (CAMPI) and the Truck Manufacturers Association (TMA).

Commercial vehicles accounted for 63% of these sales, with 226,384 units sold during the year. This represented a 31.4% increase over the 172,228 vehicles purchased in the previous year. Sales of passenger cars grew by 14.4%, with 133,188 units sold over the year, compared to 116,381 in 2015.

In addition to organic growth in the passenger vehicle segment, the gains made were also partly attributed to the introduction of new car models along with intensified financing strategies employed by automakers. Sales remain on pace for another consecutive record-setting year in 2017, with a 27.8% increase in vehicles purchased in January compared to the same month in 2016.

Domestic demand is served almost exclusively by Asian automakers, with US carmakers largely showing little interest in the market and European models reserved primarily for the smaller luxury car niche. As of year-end 2016 Japanese automaker Toyota Motor Philippines remained easily atop the sector with a 44.14% market share and sales reaching 229,919 units over the year. Another Japanese producer, Mitsubishi Motor Philippines, came in second with a 17.08% market share, followed by the sole US representative in Ford Motor Company, with a 9.37% share. Isuzu Philippines, another Japanese player, ranked fourth with 7.61% of the market, followed by Honda Cars Philippines at 6.45%.

Local Content

Looking to tap into this strong growth, the Philippine government launched measures intended to bolster the auto sector in the form of Executive Order 182 in June 2015. Implemented in May 2016, the aptly acronymed Comprehensive Automotive Resurgence Strategy (CARS) programme sought to entice automakers into the country by introducing a variety of incentives. In return for a direct government subsidy of $1000 per automobile, carmakers will be required to operate factories producing a minimum of 200,000 units per year of the same model while sourcing their large body parts, instruments and other assorted components from local manufacturers.

According to the country’s Department of Trade and Industry, the CARS initiative is projected to attract P27bn ($571.2m) in fresh investments, boost annual manufacturing by 600,000 vehicles, and add P300bn ($6.4bn) to the domestic economy – equivalent to 1.7% of GDP – over its six-year lifetime. These benefits are also expected to have spill over effects in other support service sectors, benefitting a wide array of businesses, including the chemicals, metalworking, tools, dye, plastics, electronics, rubber, glass and textiles segments.

As of late 2016 two Japanese manufacturers had answered the call: market leader Toyota signed on to produce its Vios model starting in 2018, while Mitsubishi agreed to manufacture its Mirage and Mirage-G4 models beginning in 2017. Mitsubishi announced in 2016 that it would invest approximately P4.3bn ($91m) to set up the new product line, including P2bn ($42.3m) for a new stamping shop facility, which will start with an initial production run of 20,000 units per year, expanding to more than 30,000 units annually thereafter.

Toyota will likewise invest P3.2bn ($67.7m) to produce 230,000 units of its Vios subcompact sedan in Philippine factories over six years starting in 2018. “Under the CARS programme, our projected production volume is 200,000 units within a period of six years,” Yoshiaki Kato, president and CEO of Mitsubishi, told the local press. “In order to meet this target volume, Mitsubishi plans to increase its plant’s capacity by adding another work shift. Along with this, more jobs are likely to be generated nationwide. Automotive industry associations and economists predict total industry sales will reach the 500,000-unit mark by 2020,” he added.

As a result of both Mitsubishi and Toyota committing to producing a combined 430,000 cars over a six-year span, the pendulum is set to swing back in terms of domestic manufacturing. Over the four-year span from 2017 to 2020, passenger vehicle production is forecast to increase by an average of 37.1% annually, up from previous projections of 13.15% average annual growth. This has the potential to bring the industry back to the levels where it was in the 1980s, prior to trade liberalisation.

The CARS programme supplements previously existing legislation governing the automotive sector, including the Comprehensive Motor Vehicle Development Programme of 2010 and the Restructured Motor Vehicle Development Programme of 2002. Furthermore, the administration of President Rodrigo Duterte submitted a new tax reform package to Congress in October 2016, which includes a reconfiguration of excise taxes charged on imported automobiles. Currently, the tax on cars and trucks valued under P600,000 ($12,700) remains at 2%, but a government proposal could increase it to 5%.

To provide similar impetus to domestic production of associated automotive parts, however, further quality controls may be needed. “The Philippines does have a framework for regulating and monitoring inferior products and sub par brands, but the implementation is weak and the parameters are not clear enough,” Ronnie Co, CEO of PPC Asia, told OBG. “The rules and regulations should not only be applied to sellers, but also to users. Unfortunately, we will be far from achieving a decent number of safe tyres on Philippine roads unless laws are strictly enforced.”

Coming Into Its Own

As a result of rapid demand growth and a new focus on domestic production, the sector hopes to establish itself as a regional manufacturing centre to compete with more established producers in Thailand and Indonesia. In 2016 Thailand led ASEAN in vehicle production, with 1.94m commercial and passenger vehicles produced, followed by Indonesia with 1.18m and Malaysia with 545,253, according to data from the ASEAN Automotive Federation (AAF). While these countries have well-entrenched auto sectors producing vehicles for both domestic consumption and exports, vehicle sales continue to decline in their respective home markets. Sales of vehicles in Malaysia contracted by 13% in 2016, while the Thai market declined by 4%. This trend is in stark contrast to the Philippines’ market, which has strong, double-digit annual growth and little domestic capacity to serve it.

A Newcomer

Seeking to tap into this market and compete with the established Japanese automakers in ASEAN markets, South Korean carmaker Hyundai is set to enter the Philippines with its first manufacturing foray into the market. In October 2016 the company and its exclusive local distributor, Hyundai Asia Resources, submitted an application to the Philippine government to build the company’s first assembly plant in the country, which would house an assembly line capable of an initial run of 5000-6000 vehicles per year. The plant, which is to be managed by Hyundai subsidiary Star Motors Manufacturing, could ultimately produce up to 40,000 units per annum. The facility will mainly assemble Hyundai’s smallest vehicle, the Eon, from component kits. The investment will allow Hyundai to access not only the rapidly growing Philippine market, but also to serve as an export hub for other ASEAN member nations also experiencing growing vehicle demand.