2007 6 16

The Collision of Philippine New and Used Car Industry

Candy Lim Chiu and Hiromi Shioji

The entrance of used cars in the Philippine market has shaken the domestic automakers in the country. Most people thought that if you were the biggest company in the country or in the world, you couldnt go out of business. The domestic automakers came fearfully close to proving that the ideology is wrong with automobile sales that severely plunged, idled plants and projects that threatened to nearly cripple the industry. The automakers pinpoint the cause of trouble is the importation of used cars, they are considered illegitimate sector and making the country a junkyard hub. This study will illustrate the collision of new and used car market in the Philippines by analyzing the scenarios, factors, issues, problems, and government policies. The objectives of the study is to design measures for sustainable automobile industry with the presence of new and used car sectors that would standardize the mix policies of government bodies for the development of automobile industry in the country.

Field of Research: Business, Economics and Political Issues

1. Introduction
The general issues between new and used cars as perfect substitute (Saito, 2002) continue to trigger the whole automobile industry, when everything started as few, now, at times, the used cars outnumber the new ones.
Candy Lim Chiu, MBA, Graduate School of Economics, Kyoto University email: candyonthecover@yahoo.com Prof. Hiromi Shioji D. Econ., Graduate School of Economics, Kyoto University email: shioji@econ.kyoto-u.ac.jp

As Purohit (1992, 154) stated durable products are long-lived, there exists the possibility of secondary markets for used products as well as the potential for product obsolescence. This is an important issue in markets where technology changes rapidly, because the introduction of new versions of a product can make earlier versions obsolete. Firms frequently introduce new generations of products but also older generations continue to be traded in secondary markets. Moreover, as long as both generations satisfy the same general needs. From February 1938, an article entitled Plan Would Junk Worn-Out Used Cars Systematically and Industry Junking Plan a Necessity Fully Laid Out a Permanent Used Car Junking Plan. appeared in National Automobile Dealers Association (NADA) Bulletin (Genat, 1999). The article stated the bad effects of used cars on new car sales. Until today, used car epidemic thrown new car makers and dealers into chaos and panic. Philippines automobile industry rivalry like no other is characterized by warlike. Since the entranced of used car from Japan in mid-1998, the new car makers, dealers, and association are taking the used car markets very seriously and fighting tooth and nail to protect their market shares which have been Liliputian compare to its ASEAN neighboring countries (see Table 1). There is explicit desire on the part of the automakers who are most active in these initiatives to win back the important part of the total expenditures on automobiles that they had lost in years. Times are not easy for the Philippines auto industry. It was put through the test of maintaining its profitability and character. Competition is already aggressive within its border and currently far beyond what is expected to increase until the Philippine economy is in floating condition. Two auto sectors have to fight for market share, sales position, price pressure and customer preference. No doubt, under any circumstances, changeable times demand a great deal more. Based on the study of Chen (2004), the used car market has go along for many years but it is still immature. There is still a certain difference in scale, price, market standard, and market operation from developed countries. These countries have realized this and are trying to improve. They are endeavoring to regulate the law and the policy and also coordinating with new and used car market. They are trying to regulate the price and balance the supply and demand. These made the two sectors co-exist and well-developed. In developing countries like the Philippines, used car started late in 1998 but develops faster. However, trading pattern and the legal rules are still clueless and dispute between new and used car sectors happen quite often. The main objective of the study is to propose definite action plan on the well-being of both new and used car sectors in the automobile industry by illustrating the issues

among stakeholders in the industry that continue to shaken and hamper the path to recovery of the industry. It will provide a birds eye view of the present issues and controversies of the Philippine automobile industry.

2. Literature Review and Discussion A. New Car Maker Outlook

New car makers are known leader in providing good wages, benefits and local taxes, technological advancement, human capability enhancement, employee generator, linkages to all sectors, training programs, and big investments. With the rise of used car importation, new car makers have announced restructuring plans to address changing business conditions, consumer demands and ensure long-term financial health. Used car sector are considered as illegitimate sectors of the industry which has been highlighted by Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI) that the importation of used vehicles hampers the growth of the Philippine automotive industry, deprives the government of substantial tax revenues, threatens employment of tens of thousands of Filipino skilled workers, and exposes the public to safety and environmental hazards (RA8752 Anti Dumping Act of 19991). It remain unresolved bringing to fore serious allegations of corruption and political influence, questions on policy consistency, and lack of political will, while overall eroding investor confidence (CAMPI, 2006). Philippine auto industry is a one time success story in 1996 with total vehicle sales of 162,095 units, Philippines is said to be one of the ASEAN Big four automotive industrialized countries, however, is less developed than many of its neighbors. Since the Asian financial crisis, a drop of 11% to more than 40% for number of consecutive year has occurred. It has struggled to regain steady market growth, and has only experienced mediocre recovery. Automakers openly blame the importation of used cars for the sluggishness of car sales (RA8800 Safeguard Measure Act2) despite low interest rates which enabled them to offer very attractive financing schemes (Ang, 2005a).

Table 1: Top 4 Southeast Asian Japan Motor Vehicle Production

Countries PC Indonesia Malaysia Philippines Thailand

29,108 280,283 15,540 97,129

2000 CV
257,058 2,547 26,300 308,673

2001 Total
286,166 282,830 41,840 405,802

2002 Total
270,197 358,785 42,027 454,293

2003 Total
291,969 395,000 53,663 590,349

2004 Total
263,835 344,284 53,777 727,807

PC
32,237 344,686 29,347 156,066

CV
237,960 14,099 12,680 298,227

PC
24,006 380,000 40,324 170,000

CV
267,963 15,000 13,339 420,349

PC
203,196 324,911 38,661 251,691

CV
60,639 19,373 15,116 476,116

PC
262,752 364,852 61,070 299,439

CV
73659 8064 9658 612150

Total
336411 372916 70728 911589

Source: Japan Automobile Manufactures Association, Inc. (2004 to 2006).

Figure 1: Top 4 Southeast Asian Japan Motor Vehicle Product

1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 2000 2001 2002 2003 2004 Indonesia Malaysia Philippines Thailand

Industry stakeholders are crying foul against what they perceive as lax government policy on used cars. They accuse the Freeport traders of circumventing the law on used car importation that are not liberalized and regulated at the Freeport violating EO1564. Importers at Subic Bay Freeport Zone (SBFZ) (RA72275) are bringing in used right-hand drive vehicles, despite RA8506s outright ban on the importation, registration and use of RHD vehicles. Taking advantage of SBFZs status, traders convert RHD vehicles to LHD (RA41366) and then sell the vehicles for eventual use outside of the Freeport. The issue of adequate reengineering and proper quality control (Ilagan, 2004a). It cannot be assured that these cars, even if converted to LHD, are up to par with PNS1259:19957 standards when one takes into consideration the manner of conversion, wrong wiper orientation which hinders drivers field of vision, wrong headlamp beam pattern which prevents drivers from seeing pedestrians, wrong door position on the left side which endangers pedestrians getting off vehicles on that side, and wrong rear/side-view mirror placements.

The industry culled statistics showed importers of used cars make a profit of as much as US$5 million to a low of US$2,400 for each vehicle they import. Traders use the invoice issued by suppliers of these vehicles, which is taken as the transaction value for tax and duty purposes. Since the invoice usually reflects a lower price, the taxes due from the transaction are much, much lower than what would normally be paid for a new car (Rosales, 2005). For example, a most commonly imported used vehicle, the Mitsubishi Pajero has a local selling price of US$7,600 for a 1998 model. However, acquisition cost is just US$450.00 which when added to the taxes, freight charges and conversion would translate to a total cost of US$1,613.18. Importers exploited the price gap that existed from new car makers, which was the way it was because of excessive import duty and sales tax on new cars (Ang, 2005b; Salvosa, 2005). Cars smuggling defrauded the government of at least P1 billion a year in foregone revenue, due to poor intelligence gathering a volume of used cars importations have been spirited out from freeport without paying correct taxes and duties such as through undervaluation, misclassification and mis-declaration (Ng, 2005; Silva, 2006). According to the Tariff and Customs Code of the Philippines (TCCP), any individual has an authority to import from the country origin even without the accreditation to import provided that their

supposed shipments would be their first and last importation. Through this scheme, hundreds of RHD sports utility vehicles (SUVs), luxury cars and other motor vehicles are being released depriving by a paper product importer who allegedly brings in late model Mercedez Benzes, and dispose his smuggled units discreetly to close friends who are mostly politicians, showbiz personalities and businessmen (Antiporda, 2006). The usual culprit has been inconsistent government policy and damaging political wrangling which prevents automakers from establishing long-term plans that are essential to their success (Ang, 2005a). Automakers demanded the end to used car imports and urged the government to fully implement EO4188 and 156. EO156 bans the entry of used cars in the country while EO418 was issued to impose additional specific duty equivalent to US$10,000 on every used car import. However, business groups observed that the policies allowing the importation and entry of used vehicles within the economic zones has made the two EOs counterproductive (Salvosa, 2004; Barcelo, 2005). The question of new car makers, how compliant are these vehicles with the Clean Air Act (RA8749)9? The law provides that only vehicles meeting substantial requirements in compliance with emission standards in their countries of origin shall be imported into the country. Are these second-hand vehicles compliant with emission standards? Does the government have the capability to ensure that such vehicles are indeed compliant with emission standards (Rosales, 2005)? The used vehicle importers dont benefit the public in any way, as their vehicles, most of which are already considered junk from other countries, are not certified as safe to run on the roads (Remo, 2006). The local automakers informed the government that it would disturb the plan of further investment of the auto industry, if the government continued to change policy regarding import of used vehicles every year. For the automakers, there is no future for us here if we cannot stop used car imports.

B. Used Car Trader Ooutlook10

Used car traders have the responsibility towards the public to vehicles that are safe, in good running condition, and convenient to use. obliged under the law to assure the public on their products safety and (PNS1259:1995; PNS1951:200012; PNS1892:200013), compliance provide motor They are also roadworthiness to established

emission standard (RA8749), and compliance with product standard (RA4136; RA734914). Traders consider used car importation a necessary but volatile business that is subject to the unstable and quick changing policies and programs of the National Government and its local implementing bodies such as the Department of Transportation and Communication (DOTC), Land Transportation Office (LTO), Bureau of Customs (BOC), and Subic Bay Metropolitan Authority (SBMA). The volatility of the business is reflected in the short-term SBMA rental policy for the locators engaged in used car importation, EO156, EO418 and customs and tax implementations that are not friendly to the business. The developing sectors of the Philippine economy, particularly the hauling, distribution, transportation, and other small to medium scale industry sectors, need economically priced and reliable used cars. Export of rebuilt (rehabilitated, refurbished, and restored) used cars has huge potential in the foreign markets. Currently, Southeast Asian, South Africa and Middle East countries are identified as potential markets. SBFZ importers of used cars, who have the capability to rehabilitate, refurbish, restore imported vehicles to its original manufacturers service specifications, and strengthening compliance to the requirements of safety, roadworthiness and emission standard. SBMA in terms of facility and land rentals, spurring other relate businesses that will ride along the growth of automotive service industry inside SBFZ. Automotive services will ad another positive note to the image of Subic as a development hub for the W Corridor11 promulgated by the Department of Trade and Industry (DTI) for Region III. Used car importer and rebuilders provide variety of choices to the consumers, at affordable price that cannot be provided by the new car makers. The importation and rebuilding activity in SBFZ generates a lot of economic activity, create jobs, spur up development of peripheral and support businesses, enliven the business establishments such as suppliers of spare parts, accessories, upholstery, tools, chemical and lubricants, consumables, tires and batteries, hotels and restaurants, and contributes to government revenue collections. Used car importers and rebuilders view the government regulatory agencies such as DTI, BOC, Bureau of Internal Revenue (BIR), and DOTC as predatory. Keeping the used car industry underground, unrecognized, illegitimate,

backyard, and volatile to the advantage of some corrupt officials. A disorganized and backyard industry can always be an easy target for extortion or treated as milking cow. It is questionable whether used cars should be treated differently to new ones for trade purposes. And even where safety is an issue, used cars could be subject to the same rigorous testing standards that new cars are required to meet. The recycling and re-use of cars helps save scarce natural resources and, as long as the cars are not dangerous, stretching the lifespan of old products is on balance good environmental policy (Czaga and Fliess, 2005).

C. Customer Outlook
Who doesnt want a new car? Shiny paint, up to the minute styling and cutting-edge technology, the promise of smooth, quiet, newest safety features, trouble-free operation, that new car smell all these things when the appetite for something new in the driveway. The used car market allows access to buyers who might not be able to afford a new product and provide current owners an outlet to dispose of products that still have market value. According to Levinthal and Purohit (1989), if consumers expect a forthcoming product innovation to lower the future market value of the existing version, then this lowers their willingness to pay for the current product. According to NADA (2002), if newer and older cars are partial substitute, then an increase in the price of new cars increases the demand for used cars. Consumer perceives to buy the same vehicle for less, or buys better vehicle for the same price as a new, less expensive vehicle. Wide range of vehicles to suit every taste and pocket. SBFZ auction of used car has powerful grip on consumers because of its low selling price and variety of choices. The sports utility vehicle (SUV) and European branded cars (Porsche, BMW, Benz) rampantly available inside the Freeport are major attraction (Tan, 2006). Automakers spend millions of dollars designing these vehicles to be supplied into different markets in both left and right hand drive configurations. For the cars that are converted from RHD to LHD, it is the LTO who is best equipped and mandated to ensure the conversion is done correctly prior to registration People, who buy new cars, would not be interested in purchasing a 5 to 10 year old used car regardless of the price. The paranoia of local automakers that they are loosing their protection should not be to the detriment of the Filipino people who deserve to have affordable, safe transport options.

Many Filipino families have finally been able to create small business opportunities through the availability of affordable used cars. This has resulted in a surge of economic growth in the Small and Medium Enterprise (SME) sector as Filipinos are empowered to contribute to the economic growth of the country by getting involved in businesses that were previously out of reach due to the cost of capital equipment such as vans and trucks. Consumers of used car are not well aware of the Clean Air Act 1999 requirements. However, consumers will be concerned about quality issues if CAA 1999 emission standard compliance is clearly shown in terms of vehicle engine performance and fuel consumption efficiency. Consumers are generally happy with the non-appearance or no-show arrangement of private emission testing center that spare them of the inconvenience of having their vehicles tested in the center. They are generally willing to pay a higher fee for this convenience and disregarding the issue of environmental pollution (Tan, 2006). Used car is commonly sold on an as-is, where is basis, with the sellers putting the responsibility of safety and roadworthiness at the hands of the buyers. The strategy is to buy cheap and the buyer rehabilitate the vehicle afterwards. Consumers, majority of them are not inclined to technically assess the used car, will go for cheap price and assume the quality enhancement later (Tan, 2006; Sytin, 2006).

Used car market niche is divergently different from new car market. Used car buyers are balik-bayans (returning residents), Overseas Filipino Workers (OFW), and start-up businessmen or proprietors of small to medium scale companies, who are investing in their first vehicles, or who has limited budget to undertake a business venture. This is fairly clear indication that the populations buying a used car and a new car are different. New cars still remain too expensive for poorer quintiles and used cars are then the only way to become motorized. For Filipino motorist and households, a used car purchase is the substitute when a new car purchase is beyond their means. Used cars as a cheap alternative to personal transportation for developing countries, it indeed a very important auto sector to reckon with.

D. Laborer Outlook

Automakers laborers are asking the government bodies to strengthen the auto policy environment, rationalization of government policies and programs, consistency of implementation, flexibility and readiness to change. Target policies that would encourage healthy competition. There are thousands of workers about 100,000 people, the overwhelming majority of them in making cars parts and components (40,000) and another significant portion in assembly and distribution (16,000), who are in constant threat of retrenchment because of the losses, which the automakers is incurring from the massive importation of used cars (Rosales 2005). Auto plants had to cut down local production, retrenching hundreds or when this matter become worst thousand of workers will bear the brunt of such economic downturn. Factories are slowing down. Local car parts manufacturers, small and medium size businesses employing thousand of Filipinos and catering exclusively to the Philippine auto industry are losing business as well. If the automakers dies, these businesses die together with it, it is a domino effect that everybody are dependent on the industry for employment, livelihood and living. If the importation is not stopped, the auto industry will go the way of other Philippine industries that have already died due to unfair foreign competition, and the lack of support for local industry. Raising the quality of life for all must be the goals of the national economy (Tubeza, 2005).

The employees relying on used car business would be those moving from the right to the left things such as the steering assembly, gas brake and clutch pedals, and dashboard instruments. That under-utilization deprives thousands of good jobs, both in assembly plants and car parts factories. It remains to be seen in this study how used car market and their market shares will evolve and whether all local automakers will definitely give up on this significant part of spending in the automobile market.

3. Methodology
The authors had consciously adopted the descriptive method of research. It is a purposive process of gathering, analyzing, classifying, and tabulating data about prevailing conditions, practices, beliefs, processes, trends and cause-effect relationship and then making adequate and accurate interpretation of such data with or without the aid of statistical methods. Because of limited literature and data on the topic to be

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analyzed, heavy reliance had to be placed on direct interviews with and information provided by respondents. Data gathering used in this study are conducted as follows: Primary data sources: (1). Field work and interviews was carried with automakers, used car dealers, government bodies, users, and auto associations. Secondary data sources: (1). Publications such books, articles, journals, and news clippings, and (2). Information available through actual observation and via internet.

4. Conclusion
The bewildering menu of facts is offered by the hustle and bustle of the marketplace and the institutions embedded in it. Economic uncertainties, political instability, and mix policies dictate the instability of automobile industry. The question is not which car sector should be promoted but how can new and used car work together to promote the Philippine automobile industry? It should be a win-win situation for both parties. Planning objectives are therefore as follows: New and used car are not fully differentiated so two major car sectors are competing for the same customers and resources. It intensifies having the same market share, leading to a struggle for market leadership and brand identifications are similar, only the wear and tear makes the difference. The auto industry is heavy relying on domestic market. The fundamental obstacle to production efficiency is the diseconomy of scale associated with its production oriented towards internal markets of limited size. The market is small compared to the minimum scales of production required so even a small scale used car dealer has the cost advantage to enter the market. The reality of having a skyrocket sales and maximizing production capacity is to engage in exporting. Governments can fix the automobile industry, but inconsistent national economic and regulatory policies inhibit investment and sales as well as generate potentially large fluctuations in economic performance. They are unlikely to succeed unless they appreciate exactly what the problem is in the first place. Commitment by the government to auto sector both new and used car. Automobile investment requires large amount of capital, which must be committed for a long period. Investors want to minimize the associate risks, so they want clear evidence that the government is committed to the auto industry. Investors are likely to go elsewhere if they believe that a country

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does not seriously want auto investment. The used cars with potential to replace new car purchases, the competition they represent is becoming more direct, to a large degree due to two main product policies undertaken by the automakers themselves. One is the credibility now afforded to used cars due to their increased quality and enhanced reliability. In addition to the confidence this affords the buyer, this development also makes it feasible for sellers to offer guarantees for their used cars sales, offering almost as much security to the buyer of a used car that they do to the buyer of a new car. No business would thrive and no product would sell if there is no market for that business and if there is no demand for that product. Competition from cheaper or better foreign products cannot put all our domestic industries out of business, because otherwise people couldnt afford to buy the foreign products. But it can alter the balance of economy. Trade or no trade of used cars, a healthy economy lose jobs all the time, and creates them as well. The Philippine automobile industry came fearfully close to proving that the ideology is wrong. The certain risks of new and used car collision will left everyone empty handed. Automobile industry must come to see the difference between the business as-it-is and the business as-it-could-be. Two markets will always co-exist.

Endnotes
1. Anti Dumping Act of 1999 (RA8752) whenever any product, commodity or article of commerce imported into the Philippines at an export price less than its normal value in the ordinary course of trade for the like product, commodity or article destined for consumption in the exporting country is causing or is threatening to cause material injury to a domestic industry, or materially retarding the establishment of a domestic industry producing the like product. Safeguards Measure Act (RA8800) provides measures to protect domestic industries and producers from increased imports which cause or threaten to cause serious injury to those domestic industries and producers. It authorizes to impose a general safeguard measure upon a positive final determination that a product is being imported into the country in increased quantities, whether absolute or relative to the domestic production, as to be a substantial cause of serious injury or threat thereof to the domestic industry. Countervailing Act of 1999 (RA8751) whenever any product, commodity or article of commerce is granted directly or indirectly by the government in the country or

2.

3.

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4.

5.

6.

7.

8.

origin or exportation, any kind or form of specific subsidy upon the production, manufacture or exportation of such product, commodity or article, and the importation of such subsidized product, commodity or article has caused or threatens to cause material injury to a domestic industry or has materially retarded the growth or prevents the establishment of a domestic industry. Restructuring of the Motor Vehicle Development Program (EO156) bans the importation of all types of used motor vehicles and parts and components, except those that may be allowed under certain conditions. It rationalizes the importation of used motor vehicles taking into consideration the needs of local government units, small and medium enterprises and the public transport sector. This also restructures the Most Favored Nation (MFN) tariff rates for motor vehicles and their raw materials and parts and components at such rates that will encourage the development of the Philippine motor vehicle industry. The Bases Conversion and Development Act of 1992 (RA7227) Subic Special Economic Zone shall be developed into a self-sustaining industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract and promote productive foreign investments. SBFZ shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the SBFZ, as well as provide incentives such as tax and duty-free importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the SBFZ to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines. Land Transportation and Traffic Code (RA4136) was enacted abolishing the Motor Vehicle Office and creating the Land Transportation Commission. The Code provided that the Land Transportation Commission shall control as far as they apply, the registration and operation of motor vehicles and the licensing of owners, dealers, conductors, drivers and similar matters. Requirements for Repositioning Right-Hand Drive to Left-Hand Drive (PNS1259:1995). This standard was formulated to draw up the safety aspects of a vehicle particularly on the parts being repositioned as the main criteria. All right-hand drive (RHD) vehicles and components in the country prior to registration shall undergo repositioning to left-hand drive (LHD) orientation. Modifying the Tariff Nomenclature and Rates of Import Duty on Used Motor Vehicles under Section 104 of the Tariff and Customs Code of 1978 (EO418) stated

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9.

10.

11.

12.

13.

14.

15.

that all motor vehicles that have been sold, registered and operated in the roads/highways of any foreign state or country or all imported motor vehicles that has a mileage of more than 200 kilometers regardless of year model shall be imposed with heavy excise custom duties of US$10,000 excise duties per unit of imported used vehicle. Philippine Clean Air Act of 1999 (RA8749) stated the regulation of all motor vehicles and engines that any imported used motor vehicle or rebuilt motor vehicle using new or used engines, major parts or components shall not be registered unless it complies with the emission standards. And for second-hand motor vehicle engines that any imported second-hand motor vehicle engine shall not be introduced into commerce, sold or used unless it complies with emission standards. A draft proposal to develop Subic Bay Freeport Zone as a center for automotive service and related peripheral industry was wriiten as an advocacy of Vehicle Inspection and Testing Corp. (ViTEC) to transform SBFZ into a center for automotive repairs, in order to legitimize SBFZs used vehicle importation businesses. This is also an answer to the on-going Congressional inquiry on the alleged unabated importation activities that has turned SBFZ into a dumping ground for used automotive vehicles. W Corridor is an economic development program for small and medium scale industries promoted by the Government for Central Luzon, covering its seven provinces, through infrastructure building such as highways and bridges and the development of industrial parks. The road development is shaped like the letter W earning its nickname W Corridor. Road Vehicles Requirements for Rebuilding (PNS1951:2000). This standard was developed to address rebuilding of road vehicles and restoring them to their design capacity and efficiency with the prime consideration of safety. Road Vehicles Safety Belts and Restraint System Specifications (PNS1892:2000). This standard applies to safety-belts and restraint systems for installation in power-driven vehicles with four or more wheels and are intended for separate use i.e. as individual equipment, by persons of adult build occupying seats facing forward. Consumer Protection Act (RA7349) prohibits the importation, manufacturing, selling, and distribution of products that will compromise public health and safety. It provides redress of grievance through consumer protection by developing product standards. Acknowledgement This study was made possible because of the proper guidance

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and active support of the respondents (new car makers, used car traders, government agencies, users, and associations). And special thanks given to Mr. Henry L. Tan for his advises and knowledge had been a great help for the completion of this study.

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