While the automotive segment has been boosted by a solid rise in sales, driven by increased economic growth and consumer spending power, there is rising uncertainty over the long-term viability of domestic production, as regional rivals and a still-narrow market eat away at cost efficiency.

On August 9, the Chamber of Automotive Manufacturers of the Philippines (CAMPI) issued its latest update on car sales, which shows a 7% increase in the number of vehicles sold during the first seven months of 2012. Sales totalled just under 87,500 units, prompting CAMPI to lift its year-end estimate from 180,000 cars sold to 185,000. The improved performance was due to strong economic indicators, the launch of new models and the local industry?s recovery from automotive parts shortages caused by flooding in Thailand at the end of 2011.

While sales may be increasing, the broader picture for the industry is less rosy, with concerns that the domestic production base may be eroding. Rising production costs, more competitive overseas rivals and the relatively small size of the Philippines? own market could prompt some vehicle manufacturers to close their factories.

Speculation over a scaling back of local production spiked after US car manufacturer Ford announced in late June that it would be shutting down operations at its Santa Rosa plant at the end of 2012. Ford had already been reducing production in recent years, with its 750-strong workforce of a few years ago now drawn down to 250 and production in 2011 less than half the factory?s capacity of 36,000 units.

In announcing the closure, Peter Fleet, the president of Ford ASEAN, said the move was linked to a lack of local auto-parts suppliers and weak economies of scale.

The Philippine automotive industry has also had to struggle the lowering of tariff barriers, which since 2009 have lifted completely for vehicles produced within the ASEAN region. The more open trade regime has seen the sales of locally manufactured vehicles fall from 94% of the total in 2000 to just 34% in 2010, according to data from the Philippine Automotive Federation.

Rommel Gutierrez, the president of CAMPI and vice-president of Toyota Philippines, acknowledged that issues raised by the closure of the Ford plant, such as the supplier base and the lack of economies of scale cited by Fleet, were a problem for the industry but that an answer could be found.

?We are trying to address them. We are collaborating with the government to come up with the road map precisely to address those issues,? he told The Business Inquirer in early August.

Among the proposals mooted are a reintroduction of import tariffs to protect the industry and an increase in incentives, such as tax holidays and preferential duties on imported capital equipment. Export credits have also been discussed as a way to encourage local production for the overseas market.

It is not just the automotive sector that is underperforming, however. Data released by the National Statistics Office shows that the industrial sector contributed just 1.6% of the 6.4% GDP growth for the first quarter of 2012. Meanwhile, the sector provided jobs for 15.6% of the workforce, less than half that of agriculture, and well under the 51.4% of the services sector.

The National Economic and Development Authority (NEDA) has called on the government to take steps to boost the industrial sector to create employment opportunities for unskilled and semi-skilled Filipinos. According to Arsenio Balisacan, the director-general of NEDA, the Philippines has fallen behind its neighbours, with industrial growth flat at best, and limited progress in job creation.

?If you look at our neighbour countries, their industry sector is growing. And that is what we want to see in our economy, a reintegration of our industrial sector,? Balisacan told Malaya Business Insight in mid-June, adding that this regeneration would drain the pool of untrained workers that currently exists.

While some industry associations are confident the sector will continue to expand and further develop its export potential, there have also been concerns in the media that other producers may withdraw from the market. Additionally, the Philippines? automotive industry will face increasingly stiff competition from regional rivals, such as Thailand, Japan and China, when the next round of tariff reductions is enacted in the coming years.

 

Source: oxfordbusinessgroup

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