New Strategy For Resurgence of the Philippine Auto Industry

Rafaelita M. Aldaba PH Department of Trade and Industry

Board of Investments 4 February 2016, WTC Conference Center, Tokyo

Presentation Outline

Roadmaps for upgrading industries to foster sustainable

& inclusive development, transformation, & growth

MACRO

PERFORMANCE

NEW

INDUSTRIAL POLICY

CARS

PROGRAM

PH MACROECONOMIC PERFORMANCE

PH REMARKABLE GROWTH PERFORMANCE

PH-Japan Trade Relations • Free trade agreements: PH-Japan Economic

Partnership Agreement, ASEAN-Japan • Japan: top trading partner in 2014

– Total trade: $19.154 billion (15% of total trade) 2014 Exports to Japan • US$13.9 B (22.4% of

total) • Electronic products,

woodcrafts & furniture, machinery & transport equipment, ignition wiring sets, chemicals

2014 Imports from Japan • US$5.3 B (8.03% of

total) • Electronic products,

transport equipment, industrial machinery & equipment, iron & steel, telecommunication equipment, electrical machinery

Japan FDI Inflows

60.64 54.60

824.37

59.39

626.09

246.53

367.26

146.11

437.51

117.50

378.30

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 p 2015 p

Source: Bangko Sentral ng Pilipinas

• Japan one of the major investors in PH • Largest share of approved projects in 2014

Macro Performance

• Robust growth due to strong macro fundamentals supporting domestic demand & shielding us from global weaknesses

• Rising trend in manufacturing after sluggish growth in 80s-90s

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Quarterly Growth 2009-2015

AGRI., HUNTING, FORESTRY AND FISHING MANUFACTURING

SERVICE SECTOR GROSS DOMESTIC PRODUCT

PH a new growth area

• PH Industry growth: 7.3% (‘12); 9.3% (’13, highest), 7.5% (‘14 highest)

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

in %

Year

Industry Growth: PH vs Selected East & Southeast

Asian Countries

PH

TH

INO

VN

PRC

MAL

7

WHAT MAKES PH DIFFERENT

Market

• Growing market, middle class • Demographic sweet spot

Labor

• Young, English speaking, highly trainable • Moderate wage increases

Operating environment

• Strong macro fundamentals • Political stability, strong business/consumer confidence

Policy focus

• New Industrial Policy • Investment Promotion Agencies

Competitivenness

• Improved competitiveness ranking (World Economic Forum #47 from #52)

Comparison of Wage Rates

53

74

133

205.5

259.5

344

345

352.375

1143

1230

1619

1734

0 500 1000 1500 2000

Myanmar

Cambodia

Vietnam

Indonesia

Philippines

Malaysia

Thailand

China

Singapore

Taiwan

Hong Kong

Korea

Workers

source: Japan External Trade Organization (JETRO)

138

285.75

298

373

387.5

635.75

698

944

1456

2255

2263

2325

0 500 1000 1500 2000 2500

Myanmar

Vietnam

Cambodia

Indonesia

Philippines

China

Thailand

Malaysia

Singapore

Korea

Hong Kong

Taiwan

Engineers (mid-level)

• Wages for workers & engineers are relatively lower than China, Malaysia, & Thailand (monthly rates in US$)

THE NEW INDUSTRIAL POLICY FOR STRUCTURAL TRANSFORMATION

MANUFACTURING, AGRIBUSINESS, & SERVICES ROADMAPS

New Industrial Policy

Inclusive growth

Regional economic

integration, FTAs*

Jobs, Competitive-

ness

• Competitiveness crucial in upgrading, rising regional integration & global value chains

* Free Trade Areas

• Industrial policy best way to create jobs, reduce poverty, & achieve inclusive growth

• Upgrade industries • Remove growth obstacles

GOAL: Improve Competitiveness

• Create proper environment for private sector development

• Private sector: proximate source of growth

Government as Facilitator

• How to plug in regional production networks • Move up the value chain • Build strong regional economies

GVC-focused, Cluster-based

Strategic Industrial Policy

MANUFACTURING ROADMAP

-automotive, aerospace parts electronics, garments, food, resource-based industries, chemicals, furniture, tool & die, shipbuilding

-move to high tech transport equipment, chemicals, electrical machinery -manufacturing hubs in regional & global production networks for auto, electronics, machinery, garments, food

-high value added activities upstream industries: chemicals, iron & steel, med-tech basic & fabricated metal

Phase I 2014-2017

Phase II 2018-2021

Phase III 2022-2025

VISION: globally competitive & strongly linked with other sectors, a main growth driver

Major Strategies

Manufacturing--15% to GDP

Horizontal measures

Coordination mechanism

Vertical measures

• Close supply chain gaps • Expand domestic market

& exports • HRD & skills trainings • SME development • Innovation • Green growth

• Promotion • Power, smuggling,

logistics, infrastructure

• Improve regulation, reduce cost of doing business

• Competitive exchange rate

open trade regime, sustainable macro policies, sound tax policies & administration, efficient bureaucracy, secure property rights, institutions

Strategic Actions: Manufacturing

15

STRATEGIC ACTIONS

Close Supply/Value Chain Gaps : Copper, Furniture, Tool & die, Paper, Iron & steel, Petrochemical, Plastic

Domestic Market Base & Exports: Automotive, Shipbuilding HRD & Skills/Trainings: engineers, design, tool-making,

prototyping, molding, die casting, technical-vocational SME Development & Innovation: Finance access, compliance

with product standards, Incubation, Quality testing, R&D, Industry-academe linkages, Fablabs, SME Business Centers

Aggressive marketing & promotion to attract investments Horizontal issues: high cost of power & domestic shipping,

smuggling & streamline & automate government procedures

AGRIBUSINESS ROADMAP DRIVE REGIONAL ECONOMIC TRANSFORMATION

Transform & upgrade agriculture from traditional farming to a globally competitive agribusiness sector

-rubber, coconut, mangoes, coffee, cacao, banana, palm oil & other high value crops -supply chain gaps

-deepen participation in GVC -PH as agribusiness regional hub

-strengthen agro-processing & its linkages to production: R&D; strengthen supply chains, upgrade commodity clusters; access to technologies, finance; regulatory & certification system

Phase I 2014-2017

Phase II 2018-2021

Phase III 2022-2025

SERVICES ROADMAP Glue That Binds All Sectors Together

-Labor-intensive sectors: tourism, construction, ship repair, MRO -accelerate infrastructure investments -move up IT-BPM GVC

- PH as regional hub: training - upgrade services, manufacturing related services to sustain growth & job creation

- Education, design, R&D, finance, infrastructure - Services embedded in manufacturing - HRD & skills training - Innovation ecosystem linked with manufacturing

Phase I 2014-2017

Phase II 2018-2021

Phase III 2022-2025

Globally competitive services, create quality jobs, move up the value chain, enable structural transformation

Comprehensive National Industrial Strategy (CNIS)

• THREE IMPORTANT CHANNELS AFFECTING INDUSTRY GROWTH: COMPETITION, INNOVATION, PRODUCTIVITY

18

MANUFACTURING SERVICES

AGRICULTURE FISHING,

FORESTRY MINING

INTERNAL FACTORS: GOVERNMENT POLICIES &PROGRAMS, INSTITUTIONS, INFRASTRUCTURE, MACRO STABILITY, RULE OF LAW,

PEACE & ORDER, POLITICAL CLIMATE

EXTERNAL FACTORS: GLOBALIZATION, REGIONAL/BILATERAL/MULTILATERAL TRADING ARRANGEMENTS, GLOBAL & REGIONAL PRODUCTION NETWORKS

Industry Development Council (IDC) IDC Secretariat

IDC Technical Committee DTI - Chairman

• DTI, NEDA, DA, DOF, OP; Private sectors representatives

IDC Executive Committee DTI – Chairman

• 11 representatives from government • 7 representatives from private sector • 1 representative of academe • 1 representative of research institute/think tank • 1 representative of labor • 1 CSO representative

Chemicals,

plastics, petrochem

ical

Eminent Persons Group (EPG)

5 industry leaders

Philippine Industry Development Council

Electronics

Mass housing

IT-BPM

Furniture

Ceramic tiles

Biodiesel

Aerospace

Automotive

Copper

Metal casting,

Rubber

Iron & steel

Motorcycle

Natural health

Retirement

Tool & die

Paper

COMPREHENSIVE AUTO

RESURGENCE PROGRAM

Auto roadmap visions, goals, strategies, timeline

Current State and Strengths

Industry Characteristics

Rated capacity: 200K units/year 4 carmakers Parts & components: 272 Direct Employment: 68K Net exporter of parts: Exports US$4.3B (7% of total) Strong current comparative

advantage: ignition sets, radio receivers, external power, lead-acid electric accumulators, brake system, transmissions, air filters for engines, tires, etc

Highly skilled labor & technical manpower

Metro Manila

Pampanga

Laguna

Cavite

Batangas

Vehicle Parts

7 plants electro-deposition painting systems

3 stamping, 5 transmission, 6 wiring harness, 2 large injection, 3 suspension system, 2 tool & die, 50+ others

PH Auto Industry Sales & Growth

269164

321532

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

50000

100000

150000

200000

250000

300000

350000

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Total Industry Growth

• PH: high population with low vehicle ownership o Motorization rate: PH: 35; VN:20; INDO:73; THA:200;

MAL: 395 • Significant market potential as the share of households

who can afford to buy vehicles increased from 26% to

Vehicle Sales of Selected ASEAN Countries (Jan.-Jun. 2015)

-12%

-18%

-3%

21%

72%

-16%

67%

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000

Brunei

Indonesia

Malaysia

Philippines

Singapore

Thailand

Vietnam

Jan-Jun 2015

Jan-Jun 2014

source: ASEAN Automotive Federation

Vehicle Production of Selected ASEAN Countries (Jan.-Jun. 2015)

-14%

3%

9%

-2%

45%

0 200,000 400,000 600,000 800,000 1,000,000

Indonesia

Malaysia

Philippines

Thailand

Vietnam

Jan-Jun 2015

Jan-Jun 2014

source: ASEAN Automotive Federation

Market Opportunities

• Motorization starts at GDP/capita level US$2,500 • Mitsubishi to stop US operations, expand Asia

1.7 MILLION VEHICLES

2.5 MILLION VEHICLES

3 -6 MILLION VEHICLES

ASEAN Market Size

Production : 764K units

Thailand’s Snapshot

GDP per capita : US$2,603 Population : 62 Million

Domestic Sales : 626K units Production : 923K units

ASEAN Market Share 37%

Indonesia’s Snapshot

GDP per capita : US$2,980 Population : 238 Million

Domestic Sales : 764K units

ASEAN Market Share 31% Production : 702K units

2004 2010 2015-2022

Indicator 2010 2011 2012 2013 2014 2015 2016 2020

GDP/capita (US$) 2155 2378 2611 2790 2934 3279 3601 4757

Population (M) 92 94 96 98 99 101 103 109

Source: Sugata, M. (2014). TMPC

PH Auto Industry Roadmap

Auto Program Formulation and Approval

Local Market Expansion

Integration of PH Auto Industry into ASEAN Production/ Sales Network

STAGE 1 (2013-2015) Government support critical

STAGE 2 (2016-2020) Investment & capacity building

STAGE 3 (2021-2025) Full integration to take advantage of AEC

The CARS Program Goals o Revive auto manufacturing, generate employment, attract

investments, build domestic scale, develop PH into a regional auto manufacturing hub

Coverage o Vehicle Production o Parts Manufacturing: body shell assembly, large plastic

assemblies, common parts, strategic parts not currently produced in PH, shared testing facilities

Fiscal Incentives o Time-bound; Output/performance-based o Fiscal support not exceeding PhP27B spread over 6 years o 3 models; 200,000 units per model o Fixed Investment Support (40%): Invest in parts &/or shared

testing facility o Production Volume Incentive (60%): Exceed 100,000 units in

production volume per model

Fiscal support: Allocation

Production Volume Incentive (PVI)

60% of MLB

Fixed Investment Support (FIS)

40% of MLB

Model Life Budget (MLB) PHP9B

Body shell assembly Common parts & shared facility

Strategic parts

Standard Production Support Actual Annual Production Logistics Efficiency Index

Common & Strategic Parts 1.Auto grade fabric 2.Engines, engine parts & assembly 3.Engine mounts 4.Transmissions/transaxle parts & assembly 5.Constant velocity joints 6.Axles 7.Grill 8.Lamps 9.Shock absorber, struts 10.Suspension members 11.Wiper motor mechanism, blade 12.Steering wheel

13.Electric power steering system 14.Window regulators 15.Combination meter/Instrument cluster 16.Chassis & sub-frame 17.Interior finishing 18.Electric Relays, switches 19.Alternator, starter motors 20.Seat mechanism/Seat recliner & sliders 21.Retractable seat belts 22.Aluminum radiators, evaporators, condensers & oil coolers

23.Plastic fuel tanks 24.Fuel pumps 25.Brake system & components 26.Aircon compressor & parts 27.Air bag systems 28.Auto glass 29.Door & rear view mirrors 30.Tie rods 31.Clutch disk 32.Clutch cover 33.Locks 34.Motors

Who are eligible to enroll in the program

Participants Qualifications Car Maker • Internationally-recognized carmaker

• Proven track record • Multinational operations including R&D,

manufacturing, marketing & after sales services in Asia, Europe, N.America

Parts Maker • Endorsed by the PCM to manufacture parts of its enrolled model

• OEM auto parts maker • proven track record • member of good standing of the PH Parts Makers

Association Shared Testing Facility Provider

• Collectively endorsed by the PCMs • proven track record

Criteria for evaluating applications

• Track record & model competitiveness including global & domestic sales

• New investments in body shell assembly & large plastic parts assemblies

• Planned volume no lower than 200K units over model life up to maximum of 6 years

• Economic impact of the investment plan: parts manufacturing, linkages, strategic & common parts, employment, consumer welfare

• Impact on overall competitive environment & long term industry development

• Safety, fuel efficiency, emission level standards (no lower than standards under the Clean Air Act)

o Adoption of national standards for auto parts & certification of international quality systems (TS 16949) & environmental management system (ISO 14001)

o Alignment of PH standards with other countries: labor incentives, customs procedures & systems, technical, environment & safety standards

o Strict implementation of vehicle registration regulations– Motor Vehicle Inspection System

o Full implementation of the automated import & export documentation system

o Streamline regulatory procedures to reduce cost o Allocation of road user’s tax to improve

infrastructure o Demand stimulating measures: easy consumer

Non- Fiscal Measures

Envisioning the Future

0

50

100

150

200

250

300

350

CARS Program to sustain the growth & development of the industry from 2016 and beyond

Actual Imports Actual Production Projected Imports Projected Production

Arigatou Gozaimasu!

Guided by the industry roadmap’s clear vision to transform the economy & a more pro-active government focused on establishing an environment conducive to private sector growth, the Philippines is now an excellent place to invest & one of Asia’s brightest spots.

For more information, visit our website at industry.gov.ph