A level playing field in the auto industry

Whether a level playing field of competition exists in the Philippine automotive industry has long been a hot button issue. In July 2010, the industry was jolted when non-voting associate members of Campi [Chamber of Automotive Manufacturers of the Philippines Inc.] bolted and, together with new entrants, formed Avid, the 10-member Association of Vehicle Importers and Distributors. Avid members led by its president, Hyundai Asia Resources Inc. CEO Ma. Fe Perez-Agudo, were apprehensive that the tariffs on CBUs [completely built units] would be raised to restrictive levels and tilt the playing field in favor of the regular voting members of Campi, all of whom are car assemblers.

Avid was excluded from the Motor Vehicle Industry Council (MVIC) that is discussing the IRR [implementing rules and regulations] of Executive Order 877A, aka the Motor Vehicle Development Program (MVDP) of the Department of Trade and Industry’s Board of Investments. In contrast, a new group called Pacci [Philippine Automotive Competitiveness Council Inc.] composed of auto parts manufacturers and four voting Campi members (Toyota, Mitsubishi, Honda and Isuzu) plus the independent Ford Group was represented in the MVIC and supported EO 877A as the only way to speed up the competitiveness and expansion of the PH auto industry in the region.

Perhaps partly because of the infighting among the industry’s three factions (although Pacci is perceived as a Campi ally), the BoI announced in December 2010 that the final IRR of EO 877A would not be released until February 2011. That was 10 months ago but the BoI has not produced the final IRR. Meanwhile, the PH auto industry lags behind its Asean neighbors with Ford Motor Co. transferring the assembly of its hot new global compact car, the 2012 Focus, from the PH to Thailand, General Motors choosing Thailand for Southeast Asia’s first diesel engine plant, investing $200 million to build it and choosing Indonesia for another new plant with a $150 capital investment.

In postponing the completion of the MVDP’s IRR, the BoI said it was having difficulty creating a new business model for the industry that will encourage assemblers to venture into export, forego protectionist policies and adapt to the exigencies of Afta [Asean Free Trade Agreement], Jpepa [Japan-Philippines Economic Partnership Agreement] and other free trade agreements—the very reasons why the PH auto industry continues to stagnate.

REVIVED. The BoI’s failure to meet its self-imposed February 2011 deadline cooled down media coverage of EO 877A. But last week, Avid revived interest in the level playing field issue when it held a half-day forum on the importance of a comprehensive competition policy. This was Avid’s 2nd Thought Leadership Forum, the first in 2010 having discussed competitiveness vis-à-vis government initiatives aimed at open trade and liberalization.

This time around, the speakers were Representative Tomas Apacible, vice chairman of the House Committee on Trade and Industry, Trade and Industry Undersecretary Zenaida Maglaya, Philippine Institute for Development Studies Senior Research Fellow Dr. Rafaelita Aldaba, International Telecommunication Union (ITU) Working Group Vice Chairman for the Amendment of the ITU Constitution and Convention Atty. Rodolfo Salalima and Asian Institute of Management Policy Center Associate Director Atty. Lai-Lynn Barcenas.

The theme throughout the forum was creating a level playing field in the auto sector and other industries via the passage and implementation of a comprehensive competition law. For motorists, the most interesting sidelight was Aldaba’s talk on the impact of liberalization on competition in the auto industry. Reviewing the MVDP’s policies, she pointed out that in the 1970s-’80s, there was heavy government protection and regulation, an import ban, 100 percent tariffs and the government limited the number of assemblers to five aside from limiting  the number of car models.

In the 1990s, Aldaba said, tariffs were reduced, the import ban was removed, entry was deregulated and new models were allowed. In the 2000s, Afta eliminated tariffs for cars produced in Asean countries and our MFN [Most Favored Nation] status cut other tariffs down to 30 percent. Aldaba also noted that during the 2000s, new, globally competitive firms entered the industry, such as Hyundai Motor, which increased its PH market share from 3 percent in 2004 to 11 percent in 2010 through marketing innovation.

SHOOK UP. Aldaba noted that the entry of imports shook up the industry.  The market share of CBU imports rose sharply from 2 percent in the early 1990s to 40 percent in 2006, 51 percent in 2009 and 56 percent in 2010. This has led to intense competition in the industry, resulting in a wider range of models and promotional freebies offered to consumers by dealers.

A pie chart shown by Aldaba confirms that Toyota still reigns with 34 percent market share, Mitsubishi is runner-up with 19 percent and Hyundai is third with 11 percent. Not far behind Hyundai is Honda with 10 percent, while Ford/Mazda and Isuzu share fifth place with 6 percent each. Nissan is sixth with 5 percent, Columbian Autocar (Kia) ranks seventh with 3 percent and The Covenant Car Company Inc., the distributor of Chevrolet organized only two years ago, is last with one percent. All the other remaining brands together have 5 percent market share.

The good news, brought by Rep. Tom Apacible, is that House Bill No. 4835, which consolidates 12 measures covering competition, monopolies and cartels, has been certified by President Benigno Aquino III and awaits deliberation for second reading at the Plenary. HB 4835 contains seven chapters and 49 sections adapted from the Asean Handbook on Competition and other international best practices. It will create the Philippine Fair Competition Commission (PFCC) to maintain a level playing field and encourage the spirit of enterprise

ABUSE OF DOMINANCE. HB 4865 is not against dominance, Apacible emphasized, but against abuse of dominance. He said that a level playing field will attract new entrants to different industries, thus enhancing the business landscape and benefiting consumers in terms of more choices, lower prices and better quality.

The bad news is that President Aquino did not include HB 4865 in the Priority List of Bills, so it has long been pending. Opposition to its enactment exists since many legislators come from families with vested interests or have friends’ and clients’ businesses to protect. Last June, Malacañang issued Executive Order 45 authorizing the Department of Justice (DoJ) to create the Competition Office to investigate all cases violating competition laws and prosecute violators. But Apacible objects to the DoJ taking control of the agency since it wouldn’t be independent. He prefers the Competition Office to be under the Office of the President.

Taking a proactive stance, Avid president Agudo said, “We believe in creating an environment of innovation as a platform for the sustainability of the automotive industry. As we move towards a globalized world economy, barriers to competition must be taken down and not reinforced. The potential to grow in an open and competitive market environment should be encouraged. We cannot rely on the government alone.  We must do our part to ensure that the automotive industry is constantly moving forward.”