Auto industry, gov’t should get their act together
When Randy Krieger arrived in Manila in May 2010 to assume the presidency of Ford Group Philippines (FGP), no one could have known that, two years later, he would suddenly announce the shutdown of the Ford assembly plant in Sta. Rosa, Laguna, by the end of the year.
At the time of his arrival, FGP was still exporting the Ford Focus, Ford Escape and Mazda3 to Asean markets. By the time Krieger announced the plant closure last month, the company had exported 80,000 vehicles with an export value of more than $1 billion. In its press releases and promo materials, Ford often mentioned—if not bragged—that it was the first and only volume exporter of CBUs [completely built units] from the Philippines.
FGP is proud of it because from Day One, Ford’s business strategy in the Philippines was export-oriented. I remember Krieger stressing, during a one-on-one interview last year, that producing vehicles for export should be given priority to accelerate the growth of a country’s auto manufacturing industry. He cited the United States and Japan as examples of the export-first policy’s success.
Export business model. Ford’s export priority was noted by Trade Undersecretary for Industry Development and Trade Policy Adrian Cristobal Jr. In a telephone interview, Cristobal said that Ford “has a different business model, described as clearly starting with export. Ford came in with an export business model.” He added that the others—Toyota, Honda, etc.—have a business model catering to the domestic market with the aim of building export capacity.
Cristobal said that Ford’s decision to close its Philippine plant due to the lack of economies of scale and a broad supplier base “was not a total surprise to us. Ford has been scaling down its operations here in the last two years. The Laguna plant used to have 750 workers, now it’s down to 250.” He revealed that Ford had originally planned to stop the local assembly of the Escape in June 2012 together with the Focus (after ending local assembly of the Mazda3 in January this year) but agreed to extend it to December 2012 “when we tried to keep them in.”
Indeed, of the eight Ford and eight Mazda models sold in the Philippines, only three (the Focus, Escape and Mazda3) were assembled here, the rest were and are imported CBU from Thailand or the United States. The $270 million-worth Ford assembly plant in Laguna produced only 15,000 units in 2010 although its usual output is 36,000, which is just 10 percent of its desired capacity to attain economies of scale. That’s less than the 25 percent of plant capacity at which the other assemblers operate. Significantly enough, most of the vehicles made locally are entry-level models and Asian utility vehicles (AUVs), which suggests that the auto plants here lag behind other Asean countries in technology as well as productivity.
Decline. At the Third Automotive Manufacturing Summit in Manila last January, Philippine Automotive Federation president Vicente Mills Jr. lamented that the share of locally manufactured vehicles (LMVs) in total sales in the domestic market declined from 96 percent in 2000 to 34 percent, or 75,000 units in 2010—a third of the industry’s total production capacity of 250,000 units. Aside from Ford, the other assemblers sell more imported CBUs than LMVs—only one out of five models sold by Honda is an LMV, three LMVs out of 10 Mitsubishi models, four out of 10 Nissan offerings and only two out of 15 Toyota nameplates. Zero or reduced tariffs have made importing and selling CBUs more attractive for car companies than assembling them locally.
So is the decommissioning of the Ford plant a bad omen for the Philippine auto industry? Hyundai Asia Resources Inc. CEO Ma. Fe Perez-Agudo, who led nonvoting associate members of the Chamber of Automotive Manufacturers of the Philippines Inc. (Campi) to break away and form the Association of Vehicle Importers and Distributors (AVID), said that the closure “looks every inch a purely business decision. We are certain that the move proceeded from a careful evaluation of the industry and business environment shaped by both international and local events. This perhaps includes an assessment of the continuing viability of its local car manufacturing venture in the country given the tough challenges the industry has been facing and continues to be saddled with, as well as the need to restrategize in the face of globalization, regional market integration, and the like.
“It is tempting to say,” the AVID president continued, “that the closure of assembly operations by a pioneering participant in the car manufacturing development program could be seen as a tell-tale sign of something seriously afflicting the car manufacturing industry in the Philippines. On a positive note, this development, unfortunate as it may seem, could, as it should, provide strong impetus for the government and auto industry to more closely and seriously revisit current policy tack, strategies and direction to ensure that the correct industry program road map is laid down and traversed by all stakeholders. We are happy to note that Ford Philippines will continue to do business in the country though no longer as an assembler.”
Road map. Meanwhile, after Ford’s move, the heads of Campi, the Philippines Automotive Competitiveness Council Inc. (Pacci) and Motor Vehicle Parts Manufacturing Association of the Philippines (Mvpmap) called for strong collaboration between the industry and the government to sustain the viability of local car assembly and enhance its competitiveness (See “On the Road,” Inquirer, 07/04/12.) Which brings up the long-overdue Road Map for the Four-Wheel Auto Industry, aka the Motor Vehicle Development Program and/or Executive Order 877-A, to which Campi, Pacci and Mvpmap are still committed, according to Undersecretary Cristobal.
The initial version of the road map came out recently, Cristobal said, but no one knows when it will be finalized. “The government is waiting for the final road map to see if policy intervention or investment incentives are needed,” he averred. “The DTI supports the auto industry but we need a clear plan or strategy that will grow the industry into a regional player. We have to design incentives rationally, depending on the final road map.”
Optimistic. Cristobal noted that the road map optimistically projects a domestic market of 300,000 LMVs by 2015 although it also points out that 60 to 70 percent of motor vehicles on Philippine roads are 15 years old or older. “One possible approach,” he suggested, “is a re-fleeting program for taxicabs, government vehicles, company cars, to increase the demand for LMVs.” Other suggestions: identify which core components or critical parts of a car that the Philippines can produce and set up world-class test labs so that auto parts manufactured locally can be tested here instead of abroad.
When asked about the technical and outright smuggling of cars and the continued importation of used cars—illegal activities that undermine the assemblers—Cristobal said the question should be addressed not to the Department of Trade and Industry, but to the Bureau of Customs, which is under the Department of Finance.
Earlier this year, Pacci claimed that the Philippines has all the ingredients—skilled manpower, a population of over 100 million, rising per capita income and current total production capacity of 250,000 units—to become an alternative regional manufacturing hub for vehicles: Assuming that’s all true, Ford’s exit as an assembler is a wake-up call for the industry’s stakeholders to review and fast-track the road map and for the government to finally get its act together with them.
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