Shutdown of auto industry bad for economy - UA&P study

MANILA, Philippines - The shutdown of the automotive local industry will lower the gross domestic product (GDP) by 2.35 percent and will reduce spending by P6.96 billion, a study made by the University of Asia and the Pacific (UA&P) showed.

The UA&P study, which campaigns for support for the industry, was done as the government reviews the policies and incentives that it is willing to give the automotive industry.

“Thus, automotive manufacturing calls for continued positioning as a strong core industry playing an important role in stimulating the economic development of the country given its large impact on the economy and employment,” the study stated. “It must be supported to avoid a more perilous situation if the automotive manufacturing industry is neglected and left to deteriorate.”

The report likewise cited a previous study which warned that the removal of both automotive manufacturing and the manufacture of vehicle parts and accessories from the inter-industry production structure of the economy will lower the industry’s growth by an estimated 2.48 percent.

Using the input-output analysis, the UA&P study showed that the removal of the automotive industry will lower the GDP by 2.35 percent. “For a country that rarely achieves double-digit growth in GDP, this decline is considerable because it is associated with the simulated loss of only one industry.”

To quantify, for 2010, GDP at current prices amounted to P9.003 trillion. A 2.48 percent reduction would translate to a loss of P223 billion.

The study stated that data from three automotive manufacturers showed a combined average annual procurement of goods and services of P6.96 billion. Therefore, the study said that an assumed shutdown of a manufacturing operation would result in a reduction in spending of about the same amount.

The study also said that foregone would be the significant spending that automotive manufacturers make on their employees. With an average employment of 661 workers, this amounts to P10.53 million expenditure per employee.

Likewise, the automotive manufacturing is one of the industries with the highest multiplier effects, at fourth with a 3.67-multiplier effect. This means that a P1 change on either consumption or investment generate P3.67 worth of additional output infused in the economy.

This strengthens the position of the study on the importance of incentives in order to make manufacturers more economically competitive.

“Solid incentives support from the government will make it possible for locally registered automotive manufacturers to be economically competitive. With incentives, manufacturers can sustain buying from local parts makers that will enable sharing of their research and development efforts, best practices in applying manufacturing know-how to local parts makers,” the study stated.

The study added that a cost-benefit analysis of the proposed fiscal incentives show that for every peso of fiscal incentives granted to the industry, there is a positive return to the government. For instance, for CBU exports, assuming that the export credit per unit is $700, the benefit-to-cost ratio is 1.82.

The Department of Trade and Industry (DTI) has been waiting for the UA&P study in order to decide whether they will implement the Motor Vehicle Development Plan (MVDP) or Executive Order 877-A, or scrap the MVDP.