The Philippines is a member of the Association of South East Asian Nations (ASEAN), a regional trading block with combined annual vehicle sales of 1.5 million units (1996, pre financial crises.) Before the beginning of the current economic crisis, Thailand was the largest automotive market within the ten-nation ASEAN, with Indonesia ranking second in the group, followed by Malaysia, and then the Philippines. In 1998, Malaysia was the largest, followed by Thailand, then the Philippines and Indonesia (vehicle sales for the entire ASEAN market were down 73 percent compared to the pre crisis levels of 1996.) The other ASEAN nations include Brunei Darussalam, Burma (Myanmar), Cambodia, Laos, Singapore and Vietnam.
The Philippines' 1995 unit vehicle sales reached just over 128,000 units (approx. 71,000 passenger vehicles and 57,000 commercial vehicles.) Sales in 1996 were 162,000. The Philippines has been hard hit by the economic crises in South East Asia. In 1997 motor vehicle sales in the Philippines were 144,435 units, down 11 percent from 1996. For 1998, vehicle sales were down 44.5 percent, to 80,231 compared to 1997. Sales are not forecast to recover to 1997 levels until 2001.
The Philippines' vehicle market is approximately 55 percent passenger vehicles and 45 percent commercial vehicles. Japanese manufacturers dominate this market with over 80 percent market share, while Korean manufacturers hold 15 percent. All other manufacturers hold the remainder.
According to International Trade Commission (ITC) data, for the full year 1998, U.S. vehicle exports to the Philippines were down 55 percent, from $50 million to $23 million, compared to 1997.
U.S. Motor Vehicle Investment in the Philippines
Ford:
Ford has broken ground at their Greenfield Automotive Technology Park. The plant will be capable of producing a variety of models. Several of Ford=s traditional suppliers are also setting up facilities near the new Ford plant. Operations are currently scheduled to begin in late 1999.
GM:
In 1995, General Motors explored the possibility of setting up new manufacturing facilities in the Philippines. However, during 1996 GM elected to set up its regional hub operations in Thailand. Nevertheless, it has been reported that GM may now be considering a major components facility in the Philippines to complement its Thai operations.
DaimlerChrysler:
DaimlerChrysler currently has a joint venture in the Philippines with Transfarm and Co., Inc. which produces a limited number of Chrysler badged vehicles.
Trade Barriers
In order to produce vehicles in the Philippines, manufacturers must be recognized as part of one of the Motor Vehicle Development Programs (MVDP), to produce either passenger vehicles or commercial vehicles. To participate in either of these programs, certain requirements must be met, including having a minimum of 40 percent local parts content as well as meeting foreign exchange requirements in order to import components.
The MVDP was first initiated in 1987 with the Car Development Program, which was designed to help foster the development of a local components industry. At that time the number of manufacturers was limited to three (all Japanese manufacturers). Since 1995 the trend in the Philippines' automotive sector has been towards liberalization, with President Ramos' initiative to remove quotas on vehicle imports. In 1996 steps were taken to open up the MVDP to all manufacturers.
Tariffs:
Motor Vehicles:
The importation of CBU passenger vehicles is fully liberalized (no restrictions or quotas). All passenger cars and light trucks (less than 3 ton GVW) are assessed an import duty of 40 percent. Commercial vehicles with a GVW greater than 3 ton GVW are assessed a tariff of 30 percent.
Participation of CBU vehicles in the AFTA trade agreement (0-5 percent with 40 percent ASEAN Content Requirements) is not expected to be implemented until after 2003 due to the sensitive nature of CBU trade until.
Buses (6-18 tons) are assessed an import duty of 20 percent in 1998 and 1999.
Buses (more than 18 tons) are assessed an import duty of 30 percent in 1998 and 1999.
Trucks for refrigerated goods are assessed an import duty of 3 percent.
Automotive Parts and Components:
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CKD kit imports for categories I, II and III (see Local Content Requirements below) are assessed an import tariff of 7 percent, up from 3 percent in 1997. In 1999, this rate is expected to be increased again to 10 percent.
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CKD kit imports for under the Commercial Vehicle Development Program will be maintained at a 3 percent tariff rate.
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Component subassemblies and raw materials that are imported outside of a designated CKD pack attract tariffs from 5-40 percent. Generally, original equipment manufacturers (OEM) assemblers import components for Philippine suppliers and consign the materials to them for assembly and finish work to avoid excessive duty penalties.
- ASEAN component trade under ASEAN Free Trade Area ( AFTA -preferential 0-5 percent tariffs with 40 percent ASEAN content) is accelerating opportunities for competitive development in the components sector. Maximum component tariffs are expected to be 20 percent for AFTA trade in 2000 and will decline to a maximum of 5 percent by 2003.
- Many programs are being considered to encourage additional AFTA- related trade. The most promising, and one that the Philippines has approved for various manufacturers in the auto sector, is AICO (ASEAN Industrial Co-operation). Parts approved under an AICO arrangement have immediate access to the preferential tariff rates (0-5%.) Approval between both the AFTA countries in the trading arrangement is required before the preferential rate is applied.
Taxes:
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All cars and commercial vehicles designed to carry passengers, with seating capacity under 10 people are subject to excise taxes based on engine displacement size. Regulations defining the A10 seat rule@ are open to interpretation and subject to conflicting declarations by implementing officials.
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The excise tax schedule is currently:
Gasoline engines:
Below 1600 cc 15 percent
1600 to 2000 cc 35 percent
2001 to 2700 cc 50 percent
2701 and greater 100 percent
Diesel engines:
Below 1800 cc 15 percent
1800 to 2300 cc 35 percent
2301 to 3000 cc 50 percent
3001 and greater 100 percent
- The basing of the excise tax on engine displacement creates market distortions in the types of vehicle and engines offered in the Philippines. U.S. vehicle manufacturers, whose engine architecture generally favors larger displacements are effectively discriminated against based on the punitive level of excise taxes applied over 2000cc. The higher tax rates, meant to penalize "gas guzzlers", are no longer consistent with advances in fuel economy. In city driving, for example, U.S. Department of Transportation fuel economy data shows an average difference of 20 percent between a 1600 cc and a 3000 cc engine, compared to the tax differential of over 600 percent.
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A 10 percent VAT tax is assessed on all vehicles and automotive components sold in the domestic market.
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Commercial vehicles, except for vans and Sport Utility Vehicles (SUVs), are not subject to the excise tax.
Other Measures:
- Importation of the following automotive parts is regulated by the Bureau of Import Services (an agency under the Department of Trade and Industry), which requires clearances/permits prior to importation:
Dashboards, Doors ,Fenders Ext. luggage racks
Grilles ,Hoods ,Luggage compartments ,Running boards
Plate brackets, Visors, Radiator cowlings,
Trunks/trunk lids, Mudguards, Floor Boards
Floor mats (other than of textile material/rubber)
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The importation of bodies (including cabs and body shell) and chassis fitted with engines for vehicles weighing below 6 tons is not allowed.
- The lack of development in the automotive component segment is exacerbated by the higher tariffs that components and raw materials attract. Independent manufacturers without strong links to assemblers for consigned components are not able to compete effectively in the domestic market.
Local Content Requirements:
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The Philippine Car Development Program (CDP) introduced in 1987 was developed to increase the exports of automotive parts to enable the Philippine economy to support a viable local components industry. In the early 1990s a Apeople=s car@ program was added. As a result, the following three passenger vehicle categories were developed for local content requirements.
- Category I (engine capacity below 1200cc, low priced): 40 percent
- Category II (between 1201-2190cc, medium priced): 40 percent
- Category III (above 2190cc and above US$25,000): no local content requirement. New participants in the above categories must invest USD 10 million in parts and components manufacturing.
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Under Memorandum Order 473, of April 1998 (MO 473), manufacturers exporting $200+ million a year can offset local content requirement. The BOI may grant local content offsetting scheme in which foreign exchange can replace up to 50 percent of local content, provided that the foreign exchange is twice the value of local content replaced. There will always be a minimum local content level required under any scheme.
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Under the April 1998 regulation, the BOI gained the authority to form a mandatory parts list as part of local content requirement for manufacturers.
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As in the car sector, the government developed the Philippine Commercial Vehicle Development Program (CVDP). This scheme also attempts to encourage the development of the local components industry. This program has five categories, there are no limits on the number of participants, and on the imports of brand-new CBUs. The CVDP also sets out detailed regulations on local content levels.
- Category I Asian utility vehicle (AUV), low cost commercial vehicles originally designed locally, with a gross vehicle weight (GVW) up to 3,000 kg: local content of 54.9 percent
- Category II Light commercial vehicles other than AUVs, such as pickups, delivery vans and 4WD vehicles, with a GVW up to 3,000 kg: local content of 44.2 percent
- Category III Medium-sized trucks and buses with a GVW between 3,001 and 6,000 kg: local content of 21.9 percent
- Category IV Heavy trucks and buses with a GVW above 6,001 kg., but below 18,000 kg: local content between 21.4 - 13.8, based on GVW
- Category V Heavy Trucks and buses with a GVW above 18,000 kg: local content between 21.4 - 13.8.
- Local content requirements are based on a Ashopping list@ of components with points assigned. In theory, a point is equal to 1 percent of a vehicle=s value, however, many accommodations have been made between industry and government reporting bodies and compliance is sporadic.
- The local content requirements established by the BOI are scheduled to be eliminated in January 2000, consistent with the Philippines commitment in the World Trade Organization (WTO).
Import Quotas/Bans:
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All import quotas on CBU and CKD vehicles have been eliminated.
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SKD vehicles can no long be imported at CKD tariff rates.
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Used cars cannot be imported, except for imports of returning residents and members of the diplomatic corps. Used trucks, buses and special-purpose vehicles are allowed but are subject to Bureau of Import Services (BIS) approval.
Investment Requirements:
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The CVDP (Categories I to V) is open to new participants.
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CDP Category I and II participants must earn 50 percent of their foreign exchange requirements for CKD imports through the generation of parts exports earnings.
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CDP Category III must earn 100 percent of foreign exchange requirements in this manner.
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Terms and Conditions: The Philippine Board of Investments (BOI) may cancel the registration of a participant if the company fails to meet at least 20 percent of its production commitment in a one year period.
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The foreign exchange requirements for CKD kits are 50 percent for passenger cars and 7.5 percent for commercial vehicles.
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Prior to the issuance of a Certificate of Registration, the BOI requires applicants/participants to establish a new plant (the suppliers can be asked to do this) which can be 100 percent foreign owned.
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The Car Development Program requires an investment of $10 million in parts and components manufacturing for export and domestic markets as a mandatory step to establish a vehicle assembly facility ($8 million for trucks/commercial vehicles).
- Foreign exchange self sufficiency regulations require assemblers to earn 5-100 percent of their foreign exchange needed for the importation of CKD kits through the promotion of CBU exports.
