Auto sector perks tied to manufacture of parts

Car assemblers will have to invest in part manufacturing to continue receiving tax perks under a proposed revision of the Motor Vehicle Development Program, a draft executive order (EO) released on Friday showed. This move to lengthen the domestic automotive supply chain, however, is the sole provision involving an increase in local content use. Earlier proposals to award more generous incentives to assemblers that rely on Philippine-made parts were excluded. Industry groups had mixed reactions to the draft order, which also tightens the ban on imported used vehicles and creates an automotive council. One official said the draft did not provide enough substantial changes to lure investors, while another said the proposed order was satisfactory. The revision of the incentive scheme provided by Executive Order 156 comes as both the public and private sector brace for increased import competition this year. Tariffs on cars and parts traded among Association of Southeast Asian Nations (ASEAN) members — including regional assembly hub Thailand — dropped to zero in January, while duties under the Japan-Philippines Economic Partnership Agreement will be removed by 2013. Firms, industry groups and even the Board of Investments (BoI) earlier proposed the new program to encourage higher use of locally made parts and specialization, among other things. "We removed it because there was opposition to earlier proposals. But with the provision seeking the review of excise taxes, the policy will eventually be directed towards [encouraging development of a niche vehicle or using more locally made parts]," Efren V. Leaño, BoI executive director for management services, said on the sidelines of the public hearing on Friday where the draft Palace order was presented. "Maybe it will come in the implementing rules and regulations," he added. The draft order encourages the use of locally made parts by calling on participants to set up a new manufacturing or assembly facility or use an existing facility, provided there is an investment in the making of car components. The investment may include in-house manufacturing, equity investment in companies that manufacture car parts, or cost-sharing schemes with these firms for modernization programs. The order was vague on how tariff rates and excise taxes will be changed to favor local assemblers, only stating that these "shall be restructured." "The reason we put these in general terms is so it will not pass through the legislative body," Leaño said. Another change imposed by the draft order is a stricter ban on imported used vehicles. While exemptions to the import ban have been retained, a new provision bans the import of parts for these used vehicles to dissuade buyers. The draft order also seeks to create an Automotive Industry Development Council composed of officials from the Trade, Energy and Environment departments, among others. "We would like them to be present so problems can be readily addressed without your going from one office to another," Leaño said. The draft, which may still be revised after firms’ position papers are in by Feb. 19, was met with varied reactions. Elizabeth H. Lee, president of the Chamber of Automotive Manufacturers of the Philippines, Inc., told the hearing that all the order does is put up a council instead of coming up with a new motor vehicle development plan "On its face, there is nothing there that will make investors [want to come in]. It should have a more compelling reason for the next generation or new model to be assembled in the Philippines," said. "My brand is seriously looking at the Philippines," added Lee, who is also executive-vice president of Universal Motors Corp., which assembles and distributes Nissan light commercial vehicles. But unlike Thailand and Malaysia where government incentives are directed towards a certain vehicle type, the draft order does not carve out a niche for the Philippines, she pointed out. Leaño countered, saying: "It will be difficult for us to [favor a certain vehicle]. For us to be the one to say what you should come out with is not our mandate." The Philippine Automotive Competitiveness Council, Inc. (PACCI), which groups car assemblers and parts makers, supported the draft. "What we were shown today is just a framework. There is still a comment period and the implementing rules and regulations. I feel [the draft] is a step in the right direction," PACCI Executive Director Benjamin C. Sevilla told BusinessWorld on the sidelines of the hearing. PACCI groups the Motor Vehicle and Parts Manufacturing Association of the Philippines and car makers Ford Motor Co. Philippines, Honda Cars Philippines, Inc., Isuzu Philippines Corp., Mitsubishi Motors Philippines Corp., and Toyota Motor Philippines Corp.