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FTA with Korea, Taiwan urged to boost auto sector

Business Mirror, Manila

FTA with Korea, Taiwan urged to boost auto sector

15 July 2011

By Cai U. Ordinario and Max de Leon / Reporters

Free-Trade agreements with South Korea and Taiwan.

This is what the State-owned think tank Philippine Institute for Development Studies (PIDS) is urging the government to forge in order to help boost the local automotive industry.

Besides addressing smuggling, it is crucial for the Philippines to create policies that encourage and promote investments to revive the local auto industry, the PIDS Policy Note, authored by Rafaelita Aldaba, PIDS senior research fellow, said.

Given the competitiveness of South Korea and Taiwan in the auto industry, entering into FTAs with them would pave the way not only to the entry of investments but also of increased technical cooperation in the industry.

“Another crucial policy is the need to encourage and promote investments in the industry through joint ventures and technology agreements with foreign companies. FTAs with other East Asian neighbors like Korea and Taiwan could play a crucial role in facilitating investments and technical cooperation in the industry,” the PIDS said.

“Both Korea and Taiwan have strong motor vehicle and parts industries and have their own production networks in these products. This could serve as one of the possible areas for cooperation with Korea and Taiwan,” it concluded.

This developed as vehicle-parts makers of the Toyota Group have asked the government support the local auto-parts industry as they fear losing their business to more competitive manufacturers in Thailand, Indonesia, China and South Korea with the continuing tariff liberalization.

The Toyota Group consists of the Toyota Motor Philippines Corp. (TMP) and locators of the Toyota Special Economic Zone in Santa Rosa, Laguna.

Michinobu Sugata, TMP president, said local producers would face additional threats from imported vehicles, especially with tariff concessions under the Association of Southeast Asian Nations-Korea and Asean-China FTAs beginning 2012.

Also, Sugata said the increasing cost competition between parts suppliers in the region threatens the position of the Philippines as an automotive parts production base.

“At present, the risk of losing business to strong production bases like Thailand and Indonesia, is very high,” Sugata said in a recent meeting with Philippine Economic Zone Authority officials.

The tariff liberalization brought about by the numerous FTAs that the Philippines has entered into, Sugata said, is threatening the promising outlook for the Philippine auto industry in the medium term.

“The Philippines can potentially lose a significant portion of automotive export sales if parts manufacturing will not be supported. With parts and components export accounting for 95 percent of total auto export sales, supply base reduction will definitely affect the auto export base,” he said.

The Toyota Group asked the government to design a special program for parts exports, similar to what has been done for exports of completely built-up units (CBU).

Sugata said the auto industry needed government support to respond to the projected high-potential growth in industry sales beginning 2013.

“The industry will only be able to take advantage of this opportunity with a competitive production base,” he said.

The Toyota Group exported $860 million in parts and components to different markets, equivalent to 86,000 units of CBU vehicle export. This parts-complementation scheme provides market opportunities for local parts manufacturers who may otherwise find it hard to penetrate the export market individually.

PIDS said the partnership with the two Taiwan and South Korea would help the Philippines address issues that are preventing the domestic auto industry from taking off. These include the absence of economies of scale, limited supply base and high cost of production.

Because of these challenges, PIDS said only 10 percent to 15 percent of the total number of parts and components needed by local motor-vehicle assemblers are manufactured by the domestic auto parts sector.

The total value-added contribution of the assembly industry declined substantially to P19 billion in 2008, from about P72 billion in 2006. This represented a huge drop in its share from 8 percent of the total manufacturing value added in 2006 to 2 percent in 2008.

With the low volume and limited supply base, the PIDS said the production cost in the Philippines is 1.4 times higher than in Thailand. A study of the auto industry by Deloitte Consulting showed that the estimated gap between the Philippines and Thailand is around $1,000 to $2,000 per vehicle.

“Globalization and liberalization have become an irreversible trend. With intense competition, market participants must always be on their toes. Given the country’s limited domestic market, individual brands and models cannot be produced in large quantities. Firms should, therefore, specialize in certain niche products and markets in which they can best compete,” the PIDS said.