Should we let car manufacturing die?

We have to make up our minds sooner than we want to. Our car manufacturing industry, or what little of it that we have, is on the verge of dying. Our car market is growing, but the share of locally manufactured (assembled) cars is going down. In 1993 when the total number of vehicles sold (locally manufactured and CBU imports) was at 84,000 units, the share of those locally manufactured was 98 percent or 83,000 units. Now that the market is at the 170,000 level, the share of locally manufactured units is only at 44 percent or just 75,000 units.

We could let the car manufacturing industry go the way of our manufacturing sector. There are threats and opportunities in the business environment that we need to address right away. For instance, the ASEAN Free Trade Zone offers such opportunities and risks. We can expand the production of local cars and car components to take advantage of an expanded market. Or we can just sit back and let Thailand manufacture the cars we will buy. Thailand has a great advantage over us right now. Major car manufacturers have established large car manufacturing bases in Thailand and we are in fact, importing a lot of those Toyotas, Hondas and Fords from Thailand. I understand a Deloitte study puts us at a production cost disadvantage of $1,500/unit vs. Thailand.

But last year’s floods in Thailand have also given manufacturers reason to rethink their strategy of putting all their eggs in the Thai basket. As a result of the flooding, car and parts manufacturers in the region, including Japan, have been forced to slow down or entirely suspend production.  It shouldn’t be that difficult to convince Toyota, Ford and Honda, who must now be thinking of a Plan B to Thailand, to expand their facilities here if we give them the right reasons to do so. There is this huge opportunity to grow the domestic vehicle and parts markets and create jobs, but we need to act quickly. We have what it takes in terms of available manpower and a growing market to do just that.

I sat in a panel of judges for last year’s Employer of the Year award which Toyota Philippines won. When we visited their Sta Rosa plant, the Japanese managers were full of praises for the quality of work of their Filipino workers. Our workers have adapted well to their Kaizen work ethic. We were told that the Sta Rosa plant, which assembles the Vios and the Innova, is one of their most productive plants in the Toyota worldwide network.

But they are just about to hit the plant’s capacity. Any decision to expand depends on whether it makes economic sense for Toyota. For the meantime, all they can do is continually improve the manufacturing efficiency of the Sta Rosa assembly plant from its rated 25,000 units a year when it was built some 15 years ago to its current 30,480 units that was achieved with the addition of only 16 people to the production team. They now have a plant efficiency of 95 percent and quality comparable with the best in Toyota plants worldwide.

I imagine Honda, Ford and Mitsubishi, the other local assemblers of vehicles have a similar positive experience. The labor situation had been stable lately and Filipino workers have proven themselves among the best. So the problem, it seems, is the lack of a proper philosophy and framework on the part of government on what exactly our local car manufacturing industry should be. Other than Toyota, the local car makers are now operating at 30 – 40 percent of installed capacity.

The past few years have been marked by conflicting government policies on the matter of this industry’s survival. I got the impression from the Toyota executives that they are waiting for more definite signals from government before they make a decision to expand. They have more than enough space to expand in their Sta Rosa property. And there is no dearth of trained Filipino labor. But they want to know what we have in mind for the future for this industry. Otherwise, they are perfectly happy to just import CBUs like the Hi-Lux, Camry, Corolla, and Yaris from Thailand, the  Lexus, Rav4, Prius, Previa, Prado, LC200 and Hi-Ace from Japan and from elsewhere in Asean, Fortuner, Altis and Avanza.

We were told by the Toyota executives that the problem of the Philippines is the rather small market. Automotive manufacturing is very much dependent on economies of scale. Because of the small market, even the suppliers of parts can’t be competitive. The exception is wiring harness which is exported in addition to supplying the needs of the local assemblers. Our automotive parts and components manufacturers are exporting to the level of $3.2 billion in 2010 and are in a good position to do more.

According to a study by the University of Asia and the Pacific (UAP), we will have a 300,000 vehicle domestic demand by 2015. If the local manufacturers could produce 60 to 70 percent of this demand (180,000 to 210,000 units per year) it will greatly improve our competitiveness. That volume will help both vehicle and parts manufacturers reach economies of scale.

Even now, Toyota Autoparts Philippines (TAP) assembles two manual transmissions models here that are exported to other Toyota manufacturing facilities. Honda is also manufacturing manual transmission assemblies for use here and abroad. With the right government policies, other regular parts suppliers of Toyota and Honda will follow them here and create jobs and transfer technology.

The UAP study also cited our growing population, 101.8 million as of July 2011, as a great potential for vehicle sales growth considering that as of 2010, we only have a vehicle ownership ratio of 3.4 vehicles per 100 people. They see our per capita income of $2,299 growing faster if we can make the Philippines more of a producer than an importer of manufactured products.

There is sense in the call of the local car manufacturing industry for government to work with them in creating a strategic expansion of the domestic market to achieve economies of scale and capture a significant share in the ASEAN single market starting 2015. “Auto and parts manufacturing in the Philippines is both viable and sustainable. An ambitious but realistic strategy can take it to the next level,” Feliciano Torres, chairman of the Philippine Automotive Competitiveness Council Inc. (PACCI), said. Torres is head of the Yazaki-Torres Group manufacturing world class automotive wire harness that had been exported for decades now.

Torres called for reforms and public policies that support industry development and encourage investment. Besides generating new jobs and providing substantial export revenues to support public spending, these policies, according to Torres, can eliminate uncertainty associated with regional supply chain disruptions.

Other than the need to save what little we have left of our manufacturing sector, that UAP study also show that a “P1 increase in consumption or investment spending for motor vehicles will result in P3.67 worth of additional output in the economy.” In addition, a P100 billion worth of investments in the domestic automotive manufacturing industry is estimated to generate at least 169,061 new jobs.

The study also revealed that the output multiplier of the Philippine automotive manufacturing industry is greater than that of all the investment priority industries of the Department of Trade and Industry (DTI) – tourism, business process outsourcing and information technology services, electronics, mining, housing, and agribusiness. And while the barriers to investment and industry development are high, they can be effectively addressed.

It is about time that government through DTI clarifies what exactly it has in mind for our car manufacturing industry. DTI has practically abandoned this sector and allowed confusing government policies to cloud the continued viability of this industry. If we want Toyota, Honda, Ford and Mitsubishi as well as the parts manufacturers to expand their facilities and create jobs, DTI Sec. Greg Domingo must show some leadership his predecessors sadly lacked. We may end up killing our automotive manufacturing industry by simply doing nothing.

Didn’t wait for Mr. right

Lito Balquiedra sent this one.

At the cocktail party, one woman said to another, “Aren’t you wearing your wedding ring on the wrong finger?

The other replied, “Yes I am, I married the wrong man.”

Boo Chanco’s e-mail address is [email protected]. He is also on Twitter @boochanco