Saving car companies from the gray market

Who needs saving, you say?

There’s no doubt that the Philippine automotive industry continues to grow—as evidenced not just by robust sales numbers, but the increasing number of brands being distributed here as well. European brands—some of them ultra-premium ones—have found a surprising, enduring support from local buyers.

But even as ostensibly healthy market surges forward, rust is figuratively gnawing at its A-to-C pillars.

An industry source tells the STAR that the gray—or parallel—market in the automotive industry has long been making hay at the expense of the legitimate distributors. “It’s frustrating,” he laments, and continues that it’s the premium European brands that suffer the most. Consider, for instance, that a particular model of an exotic brand goes for P24 million from a legitimate dealer but only P14 million on the gray market. Another European SUV, usually tagged at P8 million, is sold for P4.5 million—almost half the legitimate model’s amount. These dealers, reveals our source, are in plain sight in places like Quezon City, Makati, and Pasig. Not surprisingly, they sometimes sell up to four times the quantity of legitimate retailers.

How does this happen?

“They (gray-market dealers) don’t have an invoice, and don’t pay the correct taxes. These dealers just give out a deed of sale,” explains our source. He reveals that supplies come from Hong Kong, Dubai, and the US. “The buyers just walk into the showroom, and pay for, say, five units to get a fleet discount. You’d be surprised to know that some of these distributors have 40 to 60 units of premium vehicles—higher than the inventory of official, legitimate distributors.”

On the other hand, local distributors and car buyers are heavily taxed—leading to a bloated retail price. Couple that with low per capita income, and you get a good idea why a lot of people choose to commute, putter about in woeful second-hand rides, or go for the cheapest subcompact money can buy.

Meanwhile, STAR columnist and fellow Motoring scribe Cito Beltran says, via email, that “the real problem is oligopoly/monopoly situation where the brand distributors are the same people who own the banks that finance car sales—many of whom own or are partners in insurance companies. The problem happens when the same people become their own competition or enemies. The banks resell unpaid units, insurance companies resell damaged and repaired units. As a consequence, the sister companies or subsidiaries end up competing with dealers of the brand distributors. That, in effect, is actually a conflict of interest.”

Still, the veteran writer adds that gray market dealers remain “competitive because units are often pre-ordered, pre-sold, and guaranteed delivery 95 percent of the time. Cash transaction mean better discounts. I suppose the taxes are also lower based on the declared value. Dealers, on the other hand have to queue, and when units are scarce, buyers have to pay premium or extra to get an allocation.”

In other words, aboveboard dealers and buyers both have to endure a tougher time and for greater damage to the wallet. Put in that context, one could understand choosing the path of least resistance and greater profit (for dealers) and savings (for buyers) by going gray.

“Exorbitant taxes have always been the number-one reason cause for reduced sales,” rues Beltran. “Not only are taxes too much, they are also too many… Imagine, the government makes more money from the cars even before the brands make the sales.”

Our STAR source agrees with Beltran, and says it’s high time government gives the industry a leg up. “We need to promote the industry as a whole,” he declares, and points to how government commitment and fiat has redounded in benefits to car companies and buyers in countries like Thailand, where the annual car sales figure of around 800,000 dwarfs our 200,000—to think that Thailand population is less than 70 million, while Filipinos have breached the 100 million mark in number. “The Thai government gives tax breaks to farmers,” he shares, which helps explain the healthy sales.

In addition, we must note that the Thais rank 93rd in per capita income with US$ 5,678 (according to International Monetary Fund’s 2012 study), while we come in at a woeful 126th with US$2,614.

Whatever yardstick you use, there’s a clear disconnect from the way the Philippine government is implementing its taxation measures that bloat car prices and keep steady pressure on the neck of the automobile industry—the aboveboard companies that invest on manpower, training, facilities.

If you think about it, continues our source, the government counts itself as among the losers as the gray market dealers continue to run unchecked. These operations do not remit commensurate earnings to government coffers, while they legitimate distributors “suffer because of their high overhead,” even as they are bled dry.

The solution is obvious as it is simple: extend tax breaks immediately. This will not only help spur vehicle sales, but put an end to the hemorrhaging caused by the nefarious gray market, too. “It’s like a 15-year zarzuela,” laments our source. “The government cracks down, then these dealers come back.”

Time has come for a decisive solution that will naturally kill these businesses off—just as the Japan–Philippines Economic Partnership Agreement (JPEPA) did to a once-lucrative gray market for Japanese cars.

The causality is clear for Beltran: “Bring down taxes and you will bring up sales,” he concludes simply.

Indeed, unfettered from a stifling system, who knows how much brighter the industry’s future could be?