Bernardo M. Villegas
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Can Automotive Manufacturing Sector Survive?

     I am glad that there are no dogmas in economics.  Whereas privatization, liberalization and deregulation were mantras in the 1990s when the Philippine economy was recovering from decades of asphyxiating government ownership of enterprise, regulations and controls, today there are enlightened calls for a closer regulation of oligopolies or monopolies, as in the telecommunications and electricity distribution sectors.   In the U.S., financial deregulation, especially during the long reign of Alan Greenspan at the helm of the U.S. Federal Reserve System, has been blamed for the excesses of financial institutions that led to the Great Recession.  Privatization of the electricity sector in California has been judged a failure.  There is no doubt, however, that the deregulation of many strategic sectors in India and China has resulted in the ongoing dynamism of these two giant economies that are leading the world in economic growth.  I have been a practising economist long enough to realize that unfettered market forces do not always promote the common good.  There are situations that could warrant a temporary or even permanent intervention of the State in the workings of an imperfect market.

          Take the Philippine automotive manufacturing sector.  There are those, who in the name of global competitiveness, would like to see the automotive parts manufacturing sector disappear and to be replaced by a, say, car industry that imports only completely built units (CBUs).  They (including myself) often cite the failure of our three decades of  import substitution, inward-looking and protectionist industrialization that was a major reason for our having been left behind by our East Asian neighbors that early on adopted an outward-looking, export-oriented industrialization strategy.  The failure of Philippine industrial policy based on import substitution has prejudiced most of us economists against any effort of the Government to choose so-called winners and shower them with fiscal incentives and tariff protection.  Obviously, it is too late for us to resuscitate the local textile industry (as distinguished from garments) or the integrated steel industry (as distinguished from metals fabrication).  But should automotive parts manufacturing go the same way as textile and steel?

          The Philippine automotive manufacturing sector in 2011 is made up of 14 car assembly enterprises and 256 automotive parts and components manufacturers.  These firms directly employ 70,025 workers and create employment opportunities for some 340,000 others who work for allied industries.  The entire industry has local sales amounting to some 22.74 billion pesos and exports $105 million in CBUs and $2.6 billion in parts and components.  Export markets include 4 ASEAN countries and 6 non-ASEAN territories.  The major products are passenger cars, commercial vehicles (AUVs, trucks and buses), wiring harness, transmission engines, steel-based tires, airbag assembly, electronic sensor cluster for chassis,  anti-lock brake system, batteries, etc.  They make significant contributions to technical manpower training through such institutions as the Isuzu Training Center for engine mechanics, PAFE-managed TESDA certified training center for automotive manufacturing and servicing skills, assembler-specific service training centers for dealers' technicians, PAFI/CENTRO manufacturing training center for welding and painting, and Dualtech training center on assembly and machining.

          The automotive parts and components industry in the Philippines has great potentials for growth within the ASEAN Free Trade Area (AFTA).   It is no longer limited to the domestic market of the Philippines itself.  A recent research of economists at the Center for Research and Communication has concluded that a regional Free Trade Area (FTA) is where national economic policy and corporate business strategies can converge in pursuit of industrial growth.  Automotive parts and components manufacturing in the Philippines can survive global competition and need not go the way of textile and steel.  The Philippines can have its proper place in the integrated automotive industry within the AFTA.  Original Equipment Manufacturers (OEMs) of automotive products are global players and have regional presence.  There is no question that parts/components makers in the Philippines can and must have regional growth ambitions.  They can reach the required economies of scale if they develop a regional mindset about the future.

          The Investment Priorities Plan (IPP) of the national government through the Board of Investments is a manifestation of new and developmentally-responsive areas for desirable investments as mandated under the Medium-Term Philippine Development Plan.  There is still room for modern industrial policy (despite its disrepute in the past) that calls for generous use of fiscal incentives especially in encouraging new areas of manufacturing activities within the context of the AFTA.   Alignment of national policy interests with global business objectives makes practical sense at the regional context.  This collaboration and partnership underpins the needed industrial growth that will assure the continued dynamism of the local manufacturing sector.  The ASEAN regional market is the platform for crafting a doable blueprint for growth of the Philippine automotive manufacturing sector.

          The CRC economists' blueprint for the long-term growth of the Philippine automotive sector is premised on the following:

·      Existing automotive manufacturers understand doing business in the Philippines and are eager for growth with government assistance.

·      Automotive manufacturing, based on recent years of market growth, can significantly expand if growth is vigorously pursued focusing on the larger regional Free Trade areas and other freely accessible foreign markets.

 

·      Fiscal and non-fiscal incentives can be fully employed to lead the country's industrial policy towards manufacturing growth in open regional markets. 

 

·    Judicious use of fiscal and non-fiscal incentives will support the parts and component

manufacturers in their pursuit of regional market.  This is consistent with the Aquino Administration's significant policy goals on industry, trade, technology, human resource development and employment, energy, and environmental protection, among others.

          Under a regional market growth-seeking blueprint, several new activities can be considered as eligible for fiscal and non-fiscal incentives:

·    Activities related to establishment of local operations destined as a regional manufacturing

base for an existing or new automotive model.  For example, a Korean company is already considering the Philippines as a regional manufacturing base for the ASEAN.

·    Activities related to establishment of local operations to enable the manufacture and

    assembly of completely-built-up alternative energy-using or hybrid vehicle models.

·    Activities related to establishment of local operations leading to the manufacture and/or

    assembly of newly designed vehicles for (public) passenger use.

·    Activities related to the manufacture and assembly of parts and components for any one of

    the above-mentioned activities.

            A very close dialogue and partnership between the Government and the private sector is indispensable to the crafting of a long-term automotive manufacturing industry in the Philippines.  We should not let the failures of the past, in which a very limited Philippine domestic market was the only base for the automotive complementation program, prevent us from seeing the new opportunities that a regional market of more than 600 million consumers (close to 100 million households) in the ASEAN in the medium term has opened for our automotive manufacturing sector.  For comments, my email address is bvillegas@uap.edu.ph.