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Slicing the pie
Sadly, the Philippine car market still can't accelerate
By Jason K. Ang
By the time this issue hits the stands, retailers will have rubbed their hands after blistering holiday sales. A good sale season, of course, is relative. Yearend sales will surely be good when compared to the previous months of the year, but whether they will surpass last year's Christmas season—which is the more crucial measure—remains to be seen.
Car dealers and manufacturers will be no different in hoping for healthy December sales. You might guess otherwise based on the number of new cars that we see on the roads, but the automotive industry has been stuck in low gear. The Chamber of Automotive Manufacturers of the Philippines Inc., which represents most of the manufacturers and distributors in the country, had a modest target of 100,000 unit sales for 2006. The goal is modest by local standards as well as regional ones. Peak sales had already hit 160,000 units in 1996. When the Asian financial crisis affected our currency, industries and business confidence, sales plummeted to half of that level the following year, and the industry has yet to recover.
Other countries in the region are in a similar plight this year. Malaysia, 6.4-percent decline to 382,403; Indonesia, 46.9-percent decline to about 233,000 vehicles; Thailand, 3.2-percent drop to 488,450 units. Higher interest rates and fuel prices are cited as factors. Still, those countries are experiencing turbulence after their car industries have taken off. Ours has yet to leave the ground.
Carmakers have certainly been doing their part to spur demand. Most companies have not relaxed in their drive to introduce fresh products. New models, spanning the price range from secondhand-car affordable to condominium-level expensive, have been arriving on our shores with unabated frequency. In the case of luxury models, we have seen some of them launch here even earlier than in the US, the world's biggest market. For 2006, we count at least 35 new or updated models. In the past two years, we've even seen the return of brands like Chrysler, Mazda and Subaru. Several models—like the Honda Civic, the Toyota Camry and the Subaru Forester—are feature-packed and attractively priced, aimed squarely at the center of their respective markets. The new model presentations are set to continue till the end of the year, with Ford, Mitsubishi and Toyota releasing several significant new models. Not only are carmakers introducing new vehicles, they're also opening new dealerships, making new car ownership more convenient. Even companies with very tired lineups are offering special packages. This means that carmakers and their dealers are slicing the pie thinner and thinner with each new model, but the overall market has not increased in size.
The taxman has done his part, listening to the logic of Ford Group Philippines, which lobbied hard for a change to value-based taxation in place of the old engine-displacement criterion. This has paved the way for a wider array of passenger-car models. Prices of pickups, large SUVs and the now-obsolete AUV class may have increased, but the tax base has widened as a result. Based on recent reports, the entry of used secondhand vehicles has abated, too.
So the car sellers and the government have mostly done their parts to stimulate demand. That leaves the banks and financial institutions. On the financing side, we have lagged behind other countries in the region. Interest rates being offered here are nowhere near as low as those in Thailand or Malaysia but given the relative size of our market, they are far from being exorbitant.
So why do our cars refuse to roll out of the dealer lots? We see four main factors.
Diminished purchasing power
A fundamental problem is that in peso terms, car prices have soared since the 1996 Asian crisis. A price tag of P350,000 was considered expensive for a Corolla then. Now, the base model goes for P723,000. In dollar terms, our car prices are competitive compared to countries with markets a hundred times the size of ours, thanks to competition. But in peso terms, they have become less and less affordable.
Incomes, for both employers and employees, have not risen as quickly as car prices. Our GDP in 1996 was $82.847 billion, while in 2006 it stood at $98.540 billion. GDP has thus increased by 18.9 percent but the value of the peso has been halved. Other assets like real property in Metro Manila have also not increased significantly since 1996.
The result is that many customers who used to shop in the Camry class now go for a Corolla; those previously budgeting for a Corolla now buy a Vios; and those who would have gone for a Vios now buy secondhand.
High fuel prices
With fuel prices more than quadruple their 1990 levels, you wouldn't want to be paying for monthly installments while being hit at the pump, too. Many people can barely afford the fuel.
If you think that some people might buy smaller vehicles to improve their gas mileage, this only pays off if you're trading in an Expedition for a Getz diesel. With any less-extreme exchange, it'll take you tens of thousands of kilometers to recoup your investment cost.
Continuing migration
Our country should be proud of our overseas workers, but not of the circumstances that create their situation. Limited opportunities for advancement and wealth creation here have meant that not only domestic helpers and seamen have been moving abroad. Managers, professionals and entrepreneurs have also been seeking greener pastures in other countries, leaving fewer potential car buyers.
Lack of confidence in the economy
There are some sectors, such as industrial exports, that have been enjoying double-digit growth. But these and other businesses are also dealing with the pressures of global competition. Companies and individuals are wary of spending on a depreciating asset such as a motor vehicle, unless it's a necessity. Individuals who have a serviceable car now are not really thinking of purchasing a new one with their own money.
In marketing terms, the current problem of weak car sales is not a weakness with any specific company or market segment but a general threat to the auto industry itself. Weak demand is difficult to remedy, and will require external conditions to improve before we see any steady increase. Before those conditions come about, our car companies will continue to operate at a fraction of their capacity, with thousands of potential jobs unfilled.
Proposals being announced such as the new "people's car program" deserve closer scrutiny, but past forays into cheap cars are not encouraging. On the other hand, making cheaper cars available by importing them from other countries may spur demand, but at the long-term expense of manufacturing jobs and investment.
Exporting our way out of this predicament is a worthwhile alternative. Our neighbors have a huge lead already in terms of volume and capacity, but it's always possible to develop a profitable niche. Only Ford Philipppines has had the foresight to include the exportation of completely-built-up vehicles in its long-term plans. Its exports are compensating for difficult local sales. But even that strategy can't continue indefinitely. It doesn't make much sense to produce a lot of cars in a country with a weak demand.
We're keeping our fingers crossed for the small victory of breaking past 100,000 unit sales by the end of 2006. That will signal at least a move in the right direction. When the holiday season is over, there will be either subdued applause at finally surpassing that milestone, or much worrying over what next year will bring about.
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Top Gear Philippines - January-February 2007
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