When a major investor leaves: Ford will close Philippine assembly plant

Ford Motor Co. recently announced that it will close its manufacturing plant in Sta. Rosa, Laguna at the end of the year. This comes at a time when signs are looking up for the Philippine economy’s near term future.

It is a business decision, the announcement says. It is part of a restructuring decision of the whole Ford Motor Co. international operations.

“Footloose, marginal and internal to Ford.” Ford is a name brand and a good investor to have in manufacturing. But the reality is that Ford’s factory in the country is a small presence from that company’s standpoint.

The investment in Sta. Rosa Laguna was a second earnest effort to establish a future long term presence in the country. The first was a car body stamping plant in the country’s first processing zone which closed in 1983.

Market prospects did not produce the original expectations twice around. It has been hampered by limited local demand and a small export market to other parts of ASEAN.

Ford’s presence in Southeast Asia, like those of other American companies, has been a weak one. Competition with the Japanese car industry, and now with South Korea’s, has contributed to that weakening. Ford, along with the other American car makers, is still re-engineering its cars to compete effectively in terms of cost and performance.

Ford’s Philippine presence is even smaller and marginal. From the viewpoint of the entire Ford Motor Co., it is essentially a footloose operation that headquarters could cut off easily The plant has an employment of only 450 workers.

The Philippine Ford group explained that this move is part of a larger restructuring of Ford’s regional manufacturing operations to improve efficiencies and better leverage of economies of scale. Explaining even further, it refers to a lack of a broad supply base in the Philippines.”

“Investment departures send a policy message.” Any investment closure by a name brand which has salutary advertising impact for the country invites questions about the investment climate. Even in a time of improving expectations, it is an event not to be ignored.

In the last decade or so, there was the case of Colgate Palmolive, Procter and Gamble and other drug and consumer manufacturing plants which moved to our ASEAN neighbors. They were restructuring their operations in part to take advantage of the new ASEAN free trade region.

Among the electronic companies, Intel closed its large semiconductor assembly plant. Toshiba also closed its laptop assembly and Acer, a large computer assembly, sold its plant in Subic that led to closure. But every case of investment departure sends a signal about an aspect (or aspects) of the host country’s economic policies or situation.

“Inadequate reform response.” The Aquino administration has kept focus on anti-corruption measures as its main reform issue. Further, it keeps harping on the need to improve infrastructure as a main bottleneck. True, these are important factors.

But far more structural issues in policy reforms have to be attended to. It has a weak long term vision. At the very least, the President does not seem to have it.

I can cite three major gaps in economic policies that the administration needs to be pro-active in, but which, by its words and action, still appear to be either one of neglect, inadequate effort, or flat denial.

First, on the issue of the reform of the restrictive provisions of the constitutional provisions, President Aquino has given negative signals.

Second, there is no leadership in pointing out what’s wrong with the country’s labor market policies. The country surely shows a mismatch between high labor standards with the incidence of high unemployment of the poor. They are left out of economic progress. Using today’s current buzzwords, there is exclusive, not inclusive, growth being experienced.

Third, even though electricity price penalizes production costs in the country, there is no effective plan in place to bring down the cost of electricity aligned with those of our neighbors so we could be competitive.

“Lessons from Thailand.” Philippine policy-makers who want to strengthen the inflow of investments in manufacturing and industry should heed lessons that our neighbors offer to us. The problem has been structural for the Philippines for decades. To them, their experience has been a breeze in getting foreign FDI to come in. We have to make headway in reforming the policy problems.

When it began to industrialize, Thailand had very liberal encouragement for foreign direct investments. We were actually ahead of Thailand, nay, ahead of any major country in ASEAN in the promotion of industrialization. We were confident but we stuck to our policies of qualified entry of foreign investments because of the constitutional restrictions.

In the meantime, all our ASEAN partners learned from us by mimicking many of our policies. Except that they discerned. They kept those policies that they liked and they discarded those restrictive that we were keeping as part of our policies.

Where they found our investment policies cumbersome and full of complicated rules and definitions, they simplified theirs. Where we had rules that separated various markets – like differentiating the incentives for local domestic production and those for general promotion – they unified their rules, made them more inclusive and of general application to level the playing field.

In short, their policies were more liberal, more open and more conducive. Ours were full of grand policy statements that had mazes of definitions and qualifications. We had many good lawyers. They only had businessmen.

Hence, their FDI policies were more attractive to business and ours were restrictive that required unraveling with the help of lawyers. But Thai lawyers today are probably more prosperous than Filipino lawyers.

Another way of saying this is that they devised national policies that were simpler, leveling the playing field for all investors so that foreign investors were almost on the same footing as those for their own nationals. Foreign investors found it easier to set up businesses.

The result was continuous influx of FDIs. That cumulation of FDIs over time created a large base of manufacturing operations in industry over a wide area of the economy. When big industrial investors came into the country, supplier companies of those large foreign companies followed suit.

As the manufacturing industries deepened, the domestic supply chain in industry became more diversified. This is one reason why the export industries from industry have been able to have a larger impact on domestic economic procession.

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