THE local automotive industry has protested the ending of funding for two incentive programs, saying that these are critical for the growth of the sector and further development of electric mobility. We disagree. While it is certainly true that incentives for the growth of the Philippines’ industrial sector are certainly a good investment on the part of the government, when President Ferdinand Marcos Jr. vetoed the funds in question last week, he was not rejecting a potentially productive step in the right direction, but rather putting a prudent end to a failed experiment.
The funds were part of the P92.5 billion in unprogrammed appropriations that the president’s veto removed from next year’s budget, and included P4.32 billion for the Comprehensive Automotive Resurgence Strategy (CARS) program, and P250 million for the Revitalizing the Automotive Industry for Competitiveness Enhancement (RACE) program.
The CARS program was launched in 2015 under the administration of the late president Benigno Aquino III, driven by the high-profile departure of a couple of auto manufacturers, mainly Ford and Honda, and the scaling back of operations in the country by other builders. Under CARS, the government offered fiscal and non-fiscal incentives to automakers that produced at least 200,000 units of a registered model over six years. The program should have ended in 2022, but some leeway was offered due to the interruptions of the Covid-19 pandemic, and then in 2023, Marcos extended the program for another five years. The RACE program, on the other hand, was intended to be a scaled-back replacement for CARS once the latter expired, offering incentives to automakers producing at least 100,000 units of a registered model.
The principle behind the two programs seemed reasonable. By incentivizing the assembly of a few marketable auto models, the local value chain of parts and supplies would build up as well, creating an infrastructure that would attract other manufacturers. Over time, the industry could graduate from automotive assembly to actual manufacturing of high-value components such as engines, transmissions and body components, which would open up opportunities for export business.
It was a good plan on paper, but after 10 years it is clear it was not working. The CARS program sought to have three manufacturers, but only two, Toyota and Mitsubishi, enrolled in the scheme, Toyota with the popular Vios model, and Mitsubishi with the Mirage G4. Both of those have been able to meet the criteria for receiving incentives, largely because the volume of vehicles they assembled just matched the local demand. The participation of another competitor would have likely put pressure on all three to meet their production and sales targets.
The biggest reason the incentive scheme did not catalyze the growth everyone was hoping for was the existence of the scheme in the first place. Any manufacturer beyond the initial three that could be accepted could not avail of the same incentives, which would put them at a competitive disadvantage. The RACE program sought to correct that to some degree, but its incentives were lower than the original CARS program, so it was not attractive enough to “revitalize” the industry as advertised.
Put all that together with the other competitive disadvantages of the Philippines that have not yet been adequately addressed, such as high energy costs, problematic infrastructure, and inefficient bureaucracy, and the results are not surprising. Countries such as Indonesia, Thailand, and Vietnam are all working very hard to turn themselves into greener pastures for investors, and it’s working. The CARS and RACE programs, unfortunately, were not, and it was sensible for the president to recognize this and stop the government from throwing good money after bad.
The protest of the local automotive industry that the programs must be restored is unimaginative. It is based on the assertions used to justify these programs in the first place, and which have already been refuted by unimpressive results. That is not to say that ambitions for industrial development through the vehicle industry should be dismissed entirely, as the rapid growth of electric vehicles suggests new opportunities. Nevertheless, vehicle manufacturing is just one path among many possible paths to industrial growth, and it can be argued that there are others for which the Philippines is much better suited to pursue. The best, long-term opportunities, whether in auto manufacturing or something else, must be studied carefully, and rational plans that prioritize building up the foundations for industry rather than merely offering incentives need to be developed.
