Cars proudly assembled in the Philippines

It seems that government has finally breached the impasse that has – since the late 80s – paralyzed the country’s dream to become a major export hub for automotive assemblers.

Finally, the Department of Trade and Industry (DTI) and the Department of Finance (DoF) have agreed on a relatively acceptable compromise that will entice car manufacturers to assemble vehicles in the Philippines and export them by the hundreds of thousands to the ASEAN market and to the rest of the world.

Over a month ago, the Arroyo government signed Executive Order 244 that provides preferential tariff rates to assemblers exporting completely built-up (CBU) units starting Jan. 1, 2004 to Dec. 31, 2008.

While the incentive could mean some revenue losses for the government (which the DoF was not entirely too pleased), the potential for encouraging more direct investments not only in the CBU sector but also in the manufacture of car parts was a mitigating reason for the EO’s passage.

The EO gives export credits of $400 for every vehicle exported. The export credit will be in the form of tariff subsidy to the car exporters‚ imports of CBUs during the five-year period.

The credits will be available to manufacturers shipping more than 10,000 units a year at a minimum freight onboard value or FOB of $5,000 each.

To sweeten the pot, the Palace also reduced the tariff on CBUs coming from ASEAN countries to one percent and those from non-ASEAN to 10 percent.

Mixed Reactions From The Industry

Prior to the signing of the EO, the local automotive industry had made a last ditch effort to lobby for the elimination of the minimum volume requirement, purportedly to encourage wider participation in the auto export program.

There were barbs from other carmakers, particularly the Japanese assemblers, that the government’s incentive scheme was tailor-fitted to Ford’s requirements. They alleged that instead of encouraging assemblers to export, the EO would only lead to CBUs flooding the local market.

With the EO approved, the government is now being strongly criticized for giving incentives to the American company Ford when, during the height of the country’s debt crisis in 1983, it had packed its bags and left.

Critics also cited that seven years ago when Ford poured billions of dollars investment into the region, it chose Thailand instead of the Philippines. In the meantime, Japanese carmakers stayed and nurtured the domestic market.

A Change Of Heart

In 1999, however, Ford decided that the Philippines, while still a relatively small market, is one that is hard to ignore. In the beginning, the car maker was content to bring in mostly CBUs. Eventually, it put up a P4-billion assembly plant in Laguna that aimed to export 14,000 units of different Ford models this year, mostly to Indonesia and Thailand.

With the passage of the EO, however, Ford Philippines is looking at exporting more than 100,000 units in the next five years. The US carmaker now holds the distinction of being the first exporter of CBUs from the Philippines.

Despite criticisms, Ford says that the tax break will help make the Philippines more competitive in the global market and should compensate for the country’s high cost of power and logistics, weak supply base, and low volume market.

Tax Subsidy Entices

It looks like the lure of subsidy in the form of five-year tax breaks is irresistible, if we are to judge succeeding reactions of the rest of the industry. Toyota, for one, has announced that it remains committed to the Philippine auto industry and is expanding its capacity to export car parts.

When Ford proposed the export subsidy scheme to the government, it committed to increase its investments in the Philippines by another $1.2 billion over a set period of time, confident that exports would flourish under a nurturing environment.

The American company likewise argued that any increase in local employment would yield higher income taxes for the government. Ford is looking at an employment growth of almost 120 percent in its first year, and from five to 13 percent during the remaining four-year period.

The firm also added that the tax credits, for instance, would enable Ford to bring in its Expedition, Explorer Sport Trac, Club Wagon, Ranger and F-150 at a lower cost, thus making it more affordable to local buyers.

But Subsidies May Not Be Enough

For now, Ford deserves a pat on the back because in spite of the current political uncertainties and the multitude of problems hostile to investors, the company has opted to work things out so that it may be able to grow its business in the country. And of course, the export subsidy it got helps.

But, believe you, me, Ford Phils. - and any other multinational company for that matter - will pull out without hesitation if overall business conditions continue to deteriorate and with no concrete remedial government action in sight. Ford Phils. did it in the past and can easily do it again.

GSIS Issues Back On TV

"Isyung Kalakalan at Iba Pa" on IBC News (4:30 p.m. and 10:30 p.m., Monday to Friday) starts today a look at the various issues that have placed the Government Service Insurance System (GSIS) in the limelight lately. There are even rumors circulating that the GSIS situation, specifically that related to the continuing stay of its President, Winston Garcia, is one of the straw that broke the camel’s back and ended Sec. Camacho’s short stint in the government. Watch it.

"Breaking Barriers" With Road Board

"Breaking Barriers" on IBC (11 p.m. every Wednesday) will feature on 3rd December 2003, former Congressman Danilo Suarez, vice-chairman of the Road Board. Despite protests, Republic Act 8794, popularly known as The Road Users Tax, was enacted into law. After collecting more than six billion pesos since 2001 and after waiting for more than three years, the law is now fully operational with the Road Board in place and the Implementing Rules and Regulations (IRR) finalized.

The Road Board recently launched "Kalye Natin, Aalagaan Natin" to kick off the road maintenance program as part of the promised benefits. The timing of the program that will create thousands of jobs at barangay level to do road maintenance work looks suspect. Is this another political gimmickry using public funds? Or is this a sustainable program that road users have been waiting for? With elections just around the corner what are the assurances in place to prevent electioneering and corruption to plague the program?

Join us break barriers and gain more insights into how this additional tax burden is being used or misused. Watch it.

Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at reygamboa@linkedge.biz. If you wish to view the previous columns, you may visit my website at http://bizlinks.linkedge.biz.