ECONOMIC RESEARCH CENTERDISCUSSION PAPER

No.152A Tale of Two (Philippine) Industries
byPeter Lee U

January 2005

ECONOMIC RESEARCH CENTERSCHOOL OF ECONOMICSNAGOYA UNIVERSITY

A Tale of Two (Philippine) Industries∗
Peter Lee U†

Abstract
This paper reviews the histories of the Philippine automotive andelectronics industries. The two industries present a very interesting
contrast. The automotive industry has been around longer than theelectronics sector in the Philippines. Moreover, it was the target ofmuch government industrial policy in the form of various motor vehicle
programs. In contrast, the electronics sector does not seem to have”enjoyed” the same level of government attention at the start. Yet
the electronics industry is today the country’s main exporter and alarger employer than the automotive industry. Their histories provide
an example of the pitfalls of Philippine industrial policy.

∗

I wish to thank the Economic Research Center for the hospitality and access to theirresearch facilities. I am grateful also to the participants of the ERC workshop for theirhelpful comments and questions.
†
Visiting Research Fellow, Economic Research Center, School of Economics, Nagoya
University and Program Director, Industrial Economics Program, and Assistant Professor,
School of Economics, University of Asia and the Pacific, Manila.

Introduction
This paper strives to recount and compare the histories of two industries in thePhilippines: the automotive and electronics industries. The two industries present a very
interesting contrast. On the one hand, the automotive industry has been around longer
than the electronics sector in the Philippines. Moreover, it seems to have been the focus
of much government targeted industrial policy in the form of the various motor vehicle
programs that will be described later. In comparison, the electronics sector does not seemto have ‘enjoyed’ the same level of government attention at the start.
Yet today, the electronics industry is the more important industry as far as
employment and exports are concerned. Electronics exports are by far the country’s mostimportant export, accounting for more than half of the country’s manufactured exports.
The electronics industry association SEIPI estimates that the industry employed 335,000
in 2002. The DTI estimates the motor vehicle assembly and parts industry employedaround 40,000 in 2004. To students of industrial policy, it might be tempting to see inthis contrast, support for the “Chicago school’s” philosophy of minimal government
intervention and point to the greater degree of government intervention in the automotive
sector as the culprit for its relatively lackluster performance.
Thus the story of the two brings us back to a very important debate in economics:
the role or place of industrial policy. The World Bank (1992), in The East Asian Miracle,
defines industrial policy as “government efforts to alter industrial structure to promote
productivity based growth”. This actually brings us to another larger question: What is
the role of government in an economy? To this bigger question, neoclassical economics’prescription is normally for the government to step in only in instances of market failure.
As with any argument, there are two sides: those who say there is a place forindustrial policy and those who would claim there is no need for one. The former schoolof thought is of course quite willing to assign government greater economic role, and forthis reason we will call it the ‘activist’ school. Activist proponents often cite Japan, Korea,
and Taiwan as examples of countries that were able to develop by pursuing policies
designed to nurture selected ‘winner’ industries.
The latter might be called the Chicago school type of philosophy. Although it is
not exclusive to the University of Chicago, this school of thought prefers that government
takes a hands-off stance towards markets, a stance popularly associated with past andpresent stalwarts of Chicago; e.g. Stigler, Friedman. They point out that market
intervention distorts price signals and usually brings with it unforeseen consequences andcosts. They also question whether government bureaucrats can pick “winners” more
successfully than profit motivated private businessmen.
We will not attempt to settle this debate here and we hope that this paper can beobjective and not take either side. But it is tempting to attribute the relatively poorer
performance of the Philippine automotive sector to the more extensive government
intervention it has received. This paper hopes that by analyzing the facts and1circumstances surrounding the development of both industries, we can better assess therole that industrial policy played, if any, in either industry’s development.
Brief History of Philippine Economy and Industrial Policy
In this section we briefly review Philippine economy and industrial policy. Policy
impacting Philippine industry may be considered at two levels. At a macro level areeconomy wide trade and foreign exchange policies that impact all sectors of the economy
and not just the automotive and electronics industries. The next level would be theindustry specific policies, e.g. the motor vehicle program, that target a particular industry.
The latter will be tackled in more detail later in the sections for the respective industries.
A general background of the Philippine economic history is also helpful for
appreciating developments in the two industries. In particular, the great depression of
1983 had important consequences for industries focused on the domestic market like theautomotive industry. Needless to say, the political crisis and attendant instability also had
a great impact on investments.
Philippine trade policy may be characterized as one initially of import substitution,much like many of its southeast Asian neighbors. This lasted roughly from the decade of
the 50s up to the late 70s. This strategy was characterized by a regime of import controls,
including high tariffs and quantitative restrictions accompanied by exchange controls.
The country’s bias towards import substitution in consumer goods arguably hurt
employment generation. Most production activities were in assembly and packing
operations heavily dependent on imported materials and capital equipment. Ironically,
this bias against backward integration and exports prevented the Philippines from
capitalizing on what should have been its comparative advantage - its labor surplus. As aresult, the share of labor-intensive manufactured goods to total exports remained small
throughout the decades of the 50s and 60s.
While import substitution initially had some benefits, it was eventuallyconstrained by the relatively small domestic market. Medalla (1996) summarized
negative consequences of this protectionist trade policy. She pointed out that the low
tariffs on imported inputs made them artificially cheap, discouraging backward domestic
linkages. The high tariff on imported finished consumer products, on the other hand,promoted finishing stage or assembly type of industries. Thus industries, which wereheavily dependent on imported inputs, grew until they were constrained by the limited
size of the domestic market.
Exports, on the other hand, were discouraged by the highly protectionist trade
policy. The fixed exchange rate policy of the government kept the peso artificially strong,handicapping exports.
Furthermore, the protection structure artificially cheapened capital, encouraging
greater capital intensity. From the 1950s to 1970s, the investment structure also favored2

large and capital intensive industries. These industries were given tax exemptions, suchas duties on raw materials and imported equipment. These incentives extended to socalled “new and necessary” industries, mainly geared towards production for thedomestic market, were at the expense of small and medium enterprises. So-called
preferred industries included such as basic metals and chemicals, paper and pulp, mining
and cement.
Austria (2002) similarly observed that this pattern of protection adversely affected
the efficient allocation of resources by favoring import-substituting manufacturingindustries over exports and agriculture, and consumer goods over capital and intermediate
goods. Yap (1999) noted that protection directed resources to sectors where thePhilippines did not have comparative advantage. Moreover, he observed that the lack ofcompetition removed the incentive to innovate fostering monopolistic firms that produced
poor quality, high-priced products for the domestic market. Both concluded that the end
result was an imperfectly competitive industry structure characterized by unrealized scaleeconomies and dynamic efficiency losses due to the lack of competition.
Despite early efforts at exchange decontrol and some degree of liberalization in
1960s and 1970s, the general framework remained essentially inward-looking with thesystem of economic controls largely in place.
The extent of government intervention and involvement in the economy probably
peaked with Marcos and the advent of Martial Law in the early 1970s. The government
increasingly took the role of directing industrialization aimed at strategic sectors withlimited or no private sector participation. Under Marcos, several government-owned
enterprises, such as the National Steel Corporation, Philippine National Oil Company,
and the National Power Corporation actively competed in the market, crowding out theprivate sector. Government monopolies were also set up in the coconut, rice and sugar
production. Other industries were also the subject of heavy state regulation such as in theautomotive sector.
The automotive industry “grew up” in this economic environment. This may
explain why the industry was primarily inward looking; i.e. domestic market oriented.
Indeed, this was true of most Philippine industries of the time because of the importsubstitution strategy pursued by the government. And this orientation may have been
reinforced by the fact that neighboring countries were also pursuing a similar strategy,
Thus it made it difficult at the time to export at the time because other countries also hadhigh tariff walls to protect their automotive industries. In contrast, the growth spurt of theelectronics exports occurred in the mid 90s, when tariff walls around the world werefalling.
Economic reform and domestic liberalization
Export industries began to receive some attention during the 1970s. The Export
Incentives Act (RA 6135) was enacted in 1970 to stimulate nontraditional manufactured
exports. It provided for exemption from export taxes on industrial exports and granted tax

3credits on export sales and excise taxes on intermediate inputs. Presidential Decree 92 ofJanuary 1973 allowed the deduction from taxable income of the total cost of direct laborand local raw materials used in export production. This was intended to promote
backward integration and labor employment.
However, foreign exchange controls still handicapped export producers. The
government's efforts to maintain a relatively strong peso worked against exporters. The
government “floated” the peso in February 1970 in response to a balance of payments
crisis. But, while the peso depreciated, the Central Bank very much still fixed theexchange rates.
The political and economic crises of the late 1970s and early 1980s forced afundamental shift in economic strategy from inward looking to a more outward oriented
strategy. There were major changes in the trade policy regime, which moved away from a
trade-restrictive and protectionist policy framework to a progressive reduction of tariffs
and elimination of quotas. The balance of payments crisis following the Aquinoassassination in 1983 forced a massive depreciation of the peso that finally started theremoval of the exporters’ perennial handicap of an overvalued peso.
In 1981, the government began implementing a progressive reduction in tariffs
through the Tariff Reform Program (TRP) to reduce the overall level of protection andthe dispersion of tariff protection within and across sectors and industries. The basic aimof the program was to create a simpler and more uniform tariff structure. By adopting a
low and uniform tariff structure, the government sought to improve access to crucial raw
material and technology to encourage more globally competitive domestic industries. The
tariff reform proceeded in three phases, progressively narrowing the range of tariffs aswell as lowering the average nominal tariffs. By 2004, the program aimed at a uniform
tariff rate of 5 percent and an average nominal tariff rate of 4 percent. (Austria, 2002).
The shift from import-substitution to export-orientation and import liberalization
has had a profound change on the Philippine economy. Not surprisingly, the Philippine
economy became a more open one, as evidenced by the increasing share of foreign tradein the Philippine economy. The export-to-GDP ratio rose from 13.6 percent in the 196772 period to 45.8 percent in 1998-2000 while the import-to-GDP ratio increased from
17.4 percent to 43.2 percent over the same period. (Cororaton, 2002) There has been aclear shift from primary sector exports to exports of higher value manufactured products,
with the latter’s share rising from about one-third in 1970 to over four-fifths of totalexports by 2000 (Bautista and Tecson, 2003). Merchandise exports jumped from US$8.2
billion in 1990 to US$17.4 billion in 1995, and grew consistently by almost 17% per year
until it reached US$38.1 billion in 2000.
Changes were also introduced to improve the investment incentive system. The
government previously adopted an implicit positive list for foreign investments, heavily
restricting the entry of foreign capital into the Philippines. The liberalization of foreign
investment followed the passage of the 1991 Foreign Investment Act. The law allowed
foreign entry up to 100 percent equity ownership in all sectors of the economy except

4those contained in its negative list and those expressly limited by the country’s
constitution.1
The Philippines is usually characterized as capital scarce and thus in need offoreign capital and investments. But foreign investments are also sought in order to pickup technology. The entry of multinational firms is hoped to provide domestic firms
access to leading edge technologies they may not otherwise have. Second, FDI also bringaccess to export markets. Not to be ignored are also the demonstration effects that can
spillover to other sectors of the economy. Multinational companies’ methods ofoperations may be emulated by domestic companies. Multinationals may also demandhigher standards of service from domestic companies.
Though still relatively low by ASEAN standards, FDI inflow to the Philippines
increased since liberalization. Foreign investment largely went to manufacturing but there
has been a shift to services particularly after the Ramos administration opened up andderegulated key sectors such as telecommunications, power, retail trade, air and maritime
transport, and banking. Policies were introduced to allow 100 percent foreign ownershipin selected industries, such as in insurance and tourism. The government also lifted
exchange controls to allow the freer flow of capital.
The government also sought for the regional dispersal of industries and promotionof regional investment outside the capital region. The first export processing zones wasestablished in 1976, helping boost the country’s exports. As Balisacan and Hill noted,
these export zones provided a location for investors that offered better infrastructure thanprevailing in the rest of the country. After 1986, the Philippine government accelerated
the promotion of export processing zones and other industrial estates to encourage
industrial dispersal and development across the country.
Unfortunately, the country is unattractive to investments at present. Perceived
political instability seems to be a real deterrent to foreign investors, though this is mostly
outside the realm of pure economics. But other common complaints of investors havebeen about poor infrastructure also. There seems to be a vicious cycle at work here, achicken and egg problem – building some of this needed infrastructure would require
foreign investments in the first place.
Automotive Sector
Many developing countries (DC) look at the automotive industry as a strategic if
not a ‘showcase’ industry. In many countries, the automotive industry has extensive
1

The negative lists are of two types: (a) List A - consists of areas of activities reserved to Philippine
nationals where foreign equity participation in any domestic or export enterprise engaged in any activity
listed therein shall be limited to a maximum of forty percent (40%) as prescribed by the Constitution andother specific laws; and (b) List B - consists of areas of activities where foreign ownership is limited topursuant to law such as defense or law enforcement-related activities, which have negative implications on
public health and morals, and small and medium-scale enterprises.

5

linkages with other sectors in the economy; e.g. steel, glass, rubber, plastics etc. To
manufacture a motor vehicle, products from a wide array of sectors in the economy areassembled: tires (rubber), windshield (glass), metal body parts (iron and steel),
upholstered seats (garments/leather), instrumentation panel (electronics and plastics),
wiring harness (metal products), and others. In fact, among the multitude of goods andservices produced in any economy, the automotive industry is potentially one of the mostsignificant because it can have extensive upstream and downstream linkages to othereconomic sectors.2
Thus, for many developing counties, the automotive industry is regarded as a kindof ‘badge’, signifying the country has ‘arrived’ in an industrial sense. Consequently many
developing countries have specifically targeted the sector in their industrial policy.
Except for Singapore, all the other major ASEAN countries have all targeted theautomotive sector in their industrial policy. Malaysia and Indonesia have attempted to
institute their respective national car programs. Malaysia started earlier and its Proton
and Perodua now account for a lion’s share of automobile sales in its domestic market. Of
course, both companies enjoy very high tariff protection and Malaysia has asked for theindustry’s exclusion from the scheduled tariff reductions under AFTA. Indonesia tried to
put up its own car company as well but was derailed by its economic crisis and Suharto’s
departure.
Thailand and the Philippines, on the other hand, are following a different strategy.
Both are trying to attract instead the multinational automotive companies to invest and set
up production facilities in their respective countries. Because of a better performing
economy and more attractive investment climate, Thailand has been more successful andis now referred to as the Detroit of Asia.
The Philippine automotive sector on the other hand, suffers in comparison with its
major ASEAN neighbor countries. Indonesia has a natural edge in the size of its
population, which gives it the bigger market size. Malaysia and Thailand, on the other
hand, boast higher per capita incomes, which makes possible the greater market demand
for automobiles in those countries. And while all the ASEAN countries' automobile
markets suffered in the wake of the Asian crisis, the other countries have rebounded more
quickly than the Philippines. This is unfortunate because an EIU report even considered
the Philippines as once having had the strongest auto industry in ASEAN.3 In 1969, thePhilippines was second only to Malaysia in ASEAN car production. Thailand was a
distant third and Indonesia at the bottom of the heap. (see table 1)
Moreover, several manufacturers have recently announced that they will no longer
produce or assemble certain models in the Philippines. Honda has decided to import its
Accord from Thailand. Mitsubishi is reportedly planning to do the same with its Lancer.
On a positive note, Ford Philippines has started exporting the Lynx and Escape models to
2

Yannis Karmokolias, Automotive Industry Trends and Prospects for Investment in Developing Countries,
Discussion Paper 7, International Finance Corporation, August 1990.
3
EIU p. 44

6

Thailand. No doubt this is partly due to a global trend in the industry to rationalize
operations. However, the automotive industry is characterized by economies of scale, andgiven the relatively small Philippine market, it is unavoidable that some operations may
be relocated from the Philippines to other countries.
What ails the Philippine automotive sector? Why is it the laggard among theautomotive industries of the region? What policies, if any, might be appropriate to pursue
in order to support the industry? In this section we survey the state of the Philippine
automotive sector with the objective of, if not answering these questions definitively, atleast offering an understanding of the main industry issues.
Brief History of Philippine Automotive Industry
From 1916 up to 1951 the Philippines had been importing completely built up
automobiles. Tolentino and Ybanez (1983) reported that as early as 1916, a certain E.C.
McCullough and Company had been importing cars under franchise from Ford Motor
Company in the USA.4 But a foreign exchange crisis led to the passage of the Import
Control Law in 1950, which banned the commercial importation of CBUs, among otherexchange and import controls, in an effort to conserve foreign exchange reserves. Thus,in 1951, Fabar Inc. was the first Filipino firm to start importing and assembling vehicles
in completely knocked down form.
Like most automotive industries in developing countries, the small domestic
market meant poor economies of scale. By May 1968, the industry had grown to a total of
19 firms assembling over 60 different passenger vehicle models with a market size of
10,000 units (annual).5 In the 1970s, there were around twelve companies offering a
total of 130 different models for a total market size of 17,000 units a year.6
The decade of the 70s in the Philippines saw the dictator Marcos impose Martial
Law. Economically, the country went through a phase where the government took an
increasingly interventionist role. This was manifested in the automotive industry by the
introduction of the Progressive Motor Vehicle Program in 1972. It featured a host of
regulations on domestic content, foreign exchange earnings, and number of firms, among
others. We will describe this program and its many variants in more detail later on.
As mentioned earlier, the assassination of the former senator Benigno Aquino Jr.
in 1983 sparked a political crisis and triggered massive capital flight. The ensuingeconomic depression cut incomes severely. Sales of automobiles, being a luxury good,
obviously suffered. The market prospects were so poor that one by one, the participantsof the motor vehicle program left the country.
Fortunately, a peaceful transition back to democracy was managed in 1986 with
Cory Aquino, the wife of the slain senator, becoming president. A measure of political
4

Tolentino and Ybanez (1983) p. 230.
Lim (1980) p. 22 and Tolentino and Ybanez (1983) p. 231.
6
EIU p. 36.
5

7

stability was achieved so that investments, and the automotive firms, started to return.
However, the Aquino presidency would be hostage to a number of failed military coupsthat would sufficiently deter any significant inflow of foreign capital. Unfortunately, thisis roughly the period of the first ‘endaka’7 and as will be mentioned later, many analysts
believe the Philippines missed out on the first wave of Japanese investments in southeast
Asia as a result.
Normally, sustained economic growth brings with it the rise of per capita income,which in turn increases demand for the automobile, especially since the demand forconvenience also increases with higher income. Figure 1 suggests that there is a direct
relationship between income (real GNP) and vehicle demand in the Philippines. One canclearly see also the impact of the great depression of 1983 to 1985 on motor vehicle sales.
After the Ramos administration solved the power crisis of the early 1990s, the Philippine
economy looked set for a recovery. Thus one might have thought that the outlook for thePhilippine automotive sector looked bright.
As the Philippine economy boomed in the 1990s, so did the automotive industry,
peaking in the years 1995 and 1996 with about 160,000 total annual new vehicle sales.
However, like most other Asian countries, the Philippines suffered from the Asianfinancial crisis of 1997. Its economy, growing steadily since 1992, lost steam andplummeted to a –0.6% decline in 1998. The industry has not yet recovered to its 1996
peak.
The automotive industry mirrored the decline in the economy as total new
registrations (cars and utility vehicles, excluding motorcycles, trucks, buses and specialpurpose utility vehicles) plummeted from 204,991 units in 1996 to just 134,761 in 1999.
However, while total new registrations showed some recovery after 1997 crisis,
this did not translate to more new vehicle sales. Data from the Chamber of Automotive
Manufacturers and Producers, Inc. (CAMPI) shows that, for example, the 76 thousand(plus) total vehicle sales in 2001 is less than half of the 162 thousand units sold in 1996,prior to the Asian financial crisis. (see figure 2)
The situation is worse if only passenger cars were considered. Total passenger car
sales in 2001 was only about ¼ of total sales in 1996; or about the same level as in 1974.
Although in this case, it should be noted that the decline is partly due to the switch inconsumer preference from sedans to Asian Utility Vehicles and Sport Utility Vehicles.
In fact, compared with other countries, the demand for new automobiles in thePhilippines seems to be the slowest to recover (see Table 2). The same table also showsthat the Philippine industry probably has the least economies of scale compared with its
neighbors, since its capacity utilization, even at pre-crisis levels, was the lowest.
As of October 2001, there were 14 firms in the Car Development Program while
there were 20 firms in the Commercial Vehicle Development Program. Some firms are in7

Appreciation of the Yen.

8both programs. In all there are about 26 distinct firms between the two programs.
Passenger car assembly/production in 2002 is estimated at 25,000 units only while total
commercial vehicle output in 2002 is estimated at 56,000 units.8 This implies a very low
capacity utilization of 11.3% for passenger cars and 38.4% for commercial vehicles. If
the market continues to remain depressed, then we should not be surprised if some firms
will close shop. (see table 3)
While CAMPI data already includes CBU imports of CAMPI-member companies,
CAMPI sales figures do not capture everything. A portion of new vehicle demand also
goes to "backyard" or small players who assemble utility vehicles like "owner-type" jeeps,
passenger jeepneys, and some less popular brands of AUVs (AUV “clones” e.g. Carter,
Masa etc.) and the second-hand imports thru Subic. Figure 3 suggests that these could
account for a sizable share of the market. In year 2000, for example, new vehicle sales
accounted for only 54% of total registrations. The residual presumably went to this"backyard" or "small player" sector and the second hand imports. The “backyard” include
the jeep/jeepney assemblers.9
In recent years, imports of second-hand vehicles through the freeports havebecome an important issue. The products of the backyard assemblers (jeepneys, AUV
clones) are not likely to compete directly with the product lines of CAMPI members.
Moreover, in recent years, some traditional jeepney assemblers like Sarao and Francisco
Motors have closed shop already.
This suggests even more that perhaps the used vehicle imports are taking awaysignificant market share from the domestic manufacturers. The growing numbers of thesevehicles on the road cannot escape the eye of even the casual observer. These vehicles
often sport relatively new registration plates yet either are models that were notcommercially available in the Philippines or are clearly from older model years.
Most of these used imports are vans or sport-utility vehicles and are probably sourced
from Japan. This implies that they would have had to be converted first from right handdrive to left hand drive, since Philippine laws ban the use of right hand drive vehicles.
This raises also the possible issue of customer safety. The average buyer is not
likely to be able to discern the quality of the conversion work done. Since these second
hand imports fetch prices that are a fraction of the comparable brand new version, they
may not displace new vehicle sales one-for-one (just as second hand domestic vehicles donot). Nevertheless, they are probably taking away some market that would otherwise
have allowed the assemblers to reach better capacity utilization.

8 Source for production estimates: Global Insight Asian Automotive Industry Forecast Report, April 2003.
9 The jeepney is a popular mode of transport in the Philippines. It is a locally developed vehicle, modified fromthe General Purpose vehicles left by the US Army after World War II. It uses imported surplus (second-hand)critical components, such as the engine.

9

Among the local assemblers, the major Japanese firms’ subsidiaries dominate themarket. For the year 2002, Toyota led the industry with a market share of 29%. In recent
years, Ford and Kia have gained a foothold in the market. (see table 4)
Government Automotive Industry Policy
Believing in the potential catalytic role of the automotive sector to the economy,
the government had instituted several successive programs to develop the industry. The
programs were initially directed at the auto assembly sector, but were later on revised tofocus on auto parts and components as well. This section provides a summary of these
relevant government initiatives.
Through the various car manufacturing programs, which featured a host of importprotection measures, local content requirements, barriers to entry and other policy
measures, the government hoped to promote a local automotive sector. Few will argue
that the result has been as intended. Consumers suffered from high vehicle prices andcountries like Thailand have clearly overtaken us with their larger automotive sectors.
Starting with the Aquino administration, the process of liberalizing the industry
commenced and since then the number of car firms have increased.
The First Motor Vehicle Development Program (1972). The main policy instrument for
the automotive industry in the 70s was the Progressive Motor Vehicle Program or PMVP
created in 1972. The Philippine automotive parts and components industry was conceived
basically through the implementation of this program, which had three components:•••

The Progressive Car Manufacturing Program (PCMP);The Progressive Truck Manufacturing Program (PTMP); and,The Progressive Motorcycle Manufacturing Program (PMMP).

These programs had three main features: the local content rule, the limitation on
the number of assemblers, and the prohibition of vehicle importation. The auto partsindustry directly benefited from the first feature; and indirectly gained from the last, since
it expanded the demand for locally-assembled vehicles.
To achieve economies of scale given the small domestic market, the program
limited the number of car assemblers to five (5) and prohibited CBU (completely builtup) vehicle importations. The five assemblers were: General Motors Phils. (GMPI) –Isuzu; Ford Motors Co. – Mazda; Delta Motors – Toyota; Canlubang Automotive
Resources Corp. (CARCO) – Mitsubishi; and D.M.G. Inc. – Volkswagen.
The local content requirement was initially pegged at 15% in the first year of the
program, increasing to 25% and 35% in the second and third years respectively. It was
hoped that this would force assemblers to pinpoint local suppliers capable ofmanufacturing automotive parts and worthy of financial or technical assistance.
The growth of the motor vehicle industry and the localization requirements of the10

program seemed to have initially stimulated the growth of the parts manufacturing sector.
By the end of 1978, there were more than 220 manufacturers supplying the assemblers,
an impressive improvement from the 32 parts makers at the program’s inception in 1972.
This was probably achieved though, at the expense of car buyers, who had to pay higher
car prices.10
An additional condition of the program required the assemblers to invest in larger,
more capital-intensive ventures in automotive parts, the products of which were exported
to other countries. CARCO established its Asian Transmission Corporation to
manufacture transmissions. Ford invested in a stamping plant. Delta produced gasoline
engines. Lastly, DMG produced vehicle body parts. (see table 5)
In 1983, as a result of the shortage of dollars, the assemblers were required by thegovernment to earn their own foreign exchange. Moreover, the political and economiccrisis that hit the country brought the industry to the verge of collapse. By 1984, only twoparticipants (PAMCOR-Mitsubishi Motors and Nissan Motors) remained in the program.
Ford and General Motors pulled out of the country and Toyota’s assembler-distributor,
Delta Motors Corp., closed shop. Consequently, the number of parts manufacturers
dropped to 40 companies.
The Rationalized Motor Vehicle Development Program (1987). Soon after President
Corazon Aquino assumed power and the Philippine economy stabilized, the motor
vehicle program was revised through the Motor Vehicle Development Program, which
consisted of:•••

Car Development Program (CDP), which replaced the PCMP;
Commercial Vehicle Development Program, which replaced the PTMP; and,Motorcycle Development Program, which took the place of the PMMP.

These programs' features are summarized in Table 6. Note that the “developmentof a viable automotive parts manufacturing industry” had become an explicit primary
goal of the program. However, the manufacturing and export of auto parts did not
perform as well as expected. Exports of auto parts increased, but only on the back of afew components such as wiring harness, transmissions, radiators, aluminum wheels,
plastic grills, and rubber hoses. These were mostly the same parts exported during the oldmotor vehicle program. Wiring harness exports accounted for more than 70% of all
automotive parts exports. The other items were mostly replacement parts and accessories.
On the other hand, the growth of vehicle sales and the local parts requirement of
the program provided the parts makers with an expanding market, at least insofar as local

10

Tolentino and Ybanez (1983) p. 248. They cite an instance where an assembler estimated in 1975 that netof taxes, the ex-factory cost of a locally manufactured car was about 39% higher than the cif cost of asimilar imported car.

11

sales were concerned. The number of auto parts manufacturing companies grew from 40
to 60 in the first year of implementation, then rose to as many as 164 in 1992.
Amendments to the Motor Vehicle Programs
There were several amendments introduced into the program, including the following;
The People’s Car Program. In 1990, the government opened the CDP to new participants
willing to assemble cars with engine displacement of 1200 cc and below known as thePeople’s Car. Interested assemblers were required to have the capability to:•••

Manufacture or assemble cars with a selling price of about Php 175,000i;
Manufacture or assemble passenger cars from CKD (completely knocked-down)
packs and the ability of the foreign partner/supplier/licensor, if any, to supply
CKD packs;
Earn at least 50% of their foreign exchange requirements, by exporting
automotive and non-automotive products in accordance with the following
schedule:
Year
1990
1991
1992
1993

•
•

Percent of Exports due toAutomotive
Non-Automotive
20
80
30
70
60
40
100
0

Invest/bring in investments worth at least Php 200M in the manufacture andassembly of cars; andCommitment to manufacture major components.

In addition, a schedule of minimum vehicle local content requirements were imposed:
35% in 1991, 40% in 1992, and 51% in 1993. There were five (5) players who entered
the market via the people’s car category: Honda, Daewoo, Daihatsu, Fiat and Kia.
Participants in this category later “graduated” to the main car category under which somecompanies chose different models than those fielded in the People’s Car Category. Thus,
Hyundai and Mazda entered the Philippine car market.
CDP’s Category III. In December 1992, the government again supplemented the CDP by
creating a third category for passenger cars with engine displacement of 2190 cc andabove.
The new category was opened to existing participants who were able to comply with theforeign exchange self-sufficiency rules in their respective present categories. New
participants (i.e., companies that are neither a participant of Categories I and II) were also
accepted in the new category if they have the capability to:12•Invest and/or bring in investments equivalent to US$8M in the manufacture of
motor vehicle parts and components for export and domestic markets and promote
their trading under the ASEAN Brand-to-Brand Complementation scheme.

•

Establish a new assembly facility, or utilize an existing assembly facility which iseither idle or in operation. The assembly facility should be prepared in such a way
where it can be utilized as contract-assembly so that the country can be a possible
assembly base for small-volume car model of any brand, 100% of which shall be
for the world market.

Mercedes-Benz, BMW, and Volvo took advantage of the third category to enter the CDP.
Several other modifications in the program were made between 1993 and 1996. These
included:•

Changes in the engine displacements of vehicles qualified for Categories I, II andIII.
Category I: With engine displacement of 1200 cc or below for gasoline
engine, or with a diesel engine with corresponding displacement; or with alarger engine displacement provided that its selling price shall be inaccordance with the price ceiling established for this category.
Category II: With engine displacement greater than 1200 cc up to 2000 cc
for gasoline engine or equivalent displacement for diesel engine.
Category III: With engine displacement over 2190 cc for gasoline engine
or equivalent displacement for diesel engine.

•

The number of basic models that participants may register was increased fromthree to four.

•

Relaxation of rules for the importation of CBU passenger vehicles, provided
that these are new passenger vehicles with engine displacement of 2800 cc or
greater for gasoline fed engines or 3100 cc or greater for diesel engines.
Subsequently, only passenger vehicles with a book value of at least US$20,000
were allowed to be imported.

Car Assembly Under the AIJV. Another important revision in the MVDP was theprovision allowing for the implementation of the ASEAN Industrial Joint Venture (AIJV)
mechanism. The main features of the AIJV are as follows:•

Foreign Exchange Requirement. While waiting for their respective
automotive parts manufacturing projects to be set up, participants underthe AIJV scheme are allowed to earn 50% of their foreign exchange13requirements during the first six months of SKD/CKD operations; the 50%
balance shall be paid during the succeeding six-month period. Definitively,
however, the participants under the AIJV scheme are required to earn
100% of their foreign exchange requirements for CKD importations
through the generation of export earnings.
•

Parts Manufacturing Facility. The participants are required to start the
project implementation of their major automotive parts manufacturing
facilities at the same time as their SKD assembly operations. The facility
is expected to be operational within 24 months.

•

Investments. Fifty percent of the investments allocated for the car
assembly plant, excluding the cost of land, shall be in place during theyear that SKD operations are started, and the proportionate amount ofinvestments in the major automotive parts manufacturing facility, theschedule of which shall be approved by the BOI, shall likewise be in place.

Proton of Malaysia came in under this amendment.
Modification of the Rates of Import Duty. In 1995, the rates of import duties on motor
vehicles and auto parts were also revised. Under EO 264, the tariff rate for CBU’s was set
at 40% while the rate for CKD’s was lowered to 3%. The tariff differential was meant toencourage the development of the local automotive assembly sector and of auto parts
manufacturing.
The New Motor Vehicle Development Program (1996)
In 1996, the government re-stated the policy objectives of the MVDP as:First, the need to increase exports of automotive parts and components
to develop a viable automotive parts manufacturing industry, which is thecommon and primordial objective of the CDP, CVDP, and MDP;
Second, the need to support accelerated rural development by providing
suitable means for the transport of passengers and goods; and,Third, the need to encourage and assist the development of the nonformal automotive industry in areas of safety, roadworthiness, andcompliance with emission standards.
Entry into the program was also liberalized. The previously closed categories(People’s Car, Passenger Cars (Main) and Light Commercial Vehicles) were opened to
new participants, subject to minimum investment requirement for parts and components
manufacturing, and to compliance with the local content and foreign exchange
requirements. The salient points of the new program are shown in Table 7.

14

The MVDP, both the 1987 as amended and the 1996 versions, placed emphasis on
the development of the auto parts industry. The main policy tools used to promote its
development were:
•
•
•
•
•

Local content requirements
Foreign exchange requirement (earned by directly or indirectly exporting motor
vehicles, auto parts, and even non-auto products—this was however eventuallyphased-out)
Minimum investment requirements on auto parts manufacturing
Promotion of ASEAN Brand-to-Brand Complementation (BBC) scheme
Tariff differential between CKDs and CBUs

However, these measures are not without their costs as well. Takacs (1994)
estimates that car assemblers enjoyed a net positive protection from the policies. They
were hurt by the domestic content requirements but benefited from the import tariffs onimported vehicles. Of course, the car buyers were also hurt by these measures.
Components manufacturers were the unambiguous beneficiaries of these policy measures.
That the components manufactures still haven’t developed casts some doubt on theefficacy of the domestic content requirement in the Philippines.
Tax and Trade Policy
The other main government policies impacting the industry were tax and tariffs ortrade policies. Before changes were made on the Motor Vehicle Development Program,excise taxes levied on vehicles in the Philippine depended on the number of seats. The
government had attempted to promote the Asian Utility Vehicle (AUV) segment by
exempting vehicles with ten seats or more from excise taxes. This has caused a major
shift in car buying towards AUVs. However, this also became an incentive for some car
firms to re-label their models as an AUV to avail of the tax exemption. The result has
instead been a significant amount of foregone tax revenue. While buyers of AUVs
benefited, the vague definition and the loopholes in the program led to a number of highend sport utility vehicles (SUVs) getting exempted from excise taxes by having 'jumper'
seats installed in the back. In 2000, the government attempted to plug these loopholes by
eliminating these exemptions on four-wheel drive vehicles having 10 and more seats.
However, many vehicle manufacturers exploited another loophole in this program byintroducing 10-seater or more, 4X2 versions of popular SUV models.
The Department of Finance, together with the Board of Investments, proposed in
the latter half of 2002, and finally approved in the middle of 2003, a new excise tax
structure based on the selling price rather than engine displacement. Taxation based on
the number of seats was scrapped. However, tax exemptions for special vehicles likeambulances, fire trucks, buses and motorcycles remain unchanged.
Meanwhile, the Philippine automotive sector had also been heavily protected, as
might be expected from an import substitution strategy. Nominal tariffs were certainly
high (see table 8), but even when measured using Effective Protection Rates or Domestic
15

Resource Costs, the sector received more protection than the overall manufacturing sector
did. Aldaba (2000) (see table 9). The effective protection rate measures the net
protection on the value added of a sector while the domestic resource cost is the estimatedratio of total domestic cost evaluated at social opportunity cost, to the net foreignexchange earned. Thus it represents the “social cost of promoting exports or of protecting
import substituting industries.” 11
Since 1994 though, the Philippines has brought tariffs on motor vehicles down. It
also slashed tariffs on completely built units (CBU) imported from ASEAN Free Trade
Area (AFTA) member countries to below 5% starting January 2003 as part of its
commitments to the trade body. The Philippines has also made commitments to theWorld Trade Organization (WTO) to scrap the local content requirements of vehicle
manufacturers starting 2004.
With the elimination of these trade barriers and very little government assistance,
the local auto industry is more open to competition from vehicle manufacturers in AFTA
especially, Thailand, Malaysia and Indonesia. But the Philippine government has noticed
the protection extended to the auto industry by governments of other Asean member
countries. For instance, Malaysia imposes duties as high as 300% on CBUs to protect its
national car program. Thailand, meanwhile, imposes an 80% import duty on all CBUs.
In this regard, the Philippine government is currently contemplating to increase its importlevies to 30%-50% on CBUs, and to 10-30% for completely knockdown (CKD) units.

Political Considerations
Before one dismisses outright the motor vehicle as fundamentally flawed, in
fairness we should also recognize that it was very poorly implemented. Very often,
political connections enabled certain firms to circumvent the regulations. Doner (1991)
provides a very good account of the political maneuverings surrounding automotive
policy formulation and implementation in the Philippines. He provides many anecdotes
for example, of how one firm's Filipino owner used his close connections to Marcos to
get away with local content requirement noncompliance.12 This is on top of loopholesthat existed in local content requirement rules. For example, firms were allowed to use
exports to offset required local component procurement.
As we have seen, one feature of the Philippine motor vehicle programs had been alimit on the number of firms. This of course raises the question of how many firms isright for a market. It also opens the door to lobbying activities by those outside wanting
to enter. It also raises the question of how credible a threat is the government’s statedpolicy to limit players to a particular number. During his term as BOI head, Vicente
Paterno, was of the opinion that two firms were enough. But the PCMP apparently started

11
12

See Aldaba (2000) p. 24 for a discussion of the methodology.
Doner p. 177. Most of the incidents related in this section are drawn from his book.

16

with five assemblers. The three “excess“ firms were supposed to be phased out, but theyin fact continued operations for several years.
A decision like this is not likely to be devoid of politics. Doner provides a very
detailed account of the maneuverings by the interested parties to be included and thereader is referred to his account for more details. Even though Paterno thought two was
the right number, apparently he was worried about the consequences of excluding either aJapanese, European, or American firm 13 and thus increased the number to three. The
National Economic Council, the government planning agency at the time, increased thatfurther to four, partly on the basis of more optimistic market demand projections, but
Doner hints at possible lobbying also by parties eager to participate in the program.
But this was not the end of it. Ford apparently felt its bid to enter the program wasweak and it faced the risk of being left out of the program. Doner claims that Ford
headquarters thus dispatched Henry Ford’s wife Christina to meet with Mrs. Marcos, who
was a personal friend. Not long after, the BOI announced that there would be five firms
instead of four, and Ford was the last firm.
Both sides of the industrial policy debate could use these anecdotes to argue theirrespective sides. One side could argue that the programs failed partly because it wasn’t
implemented correctly. On the other hand, the other side could also use the experience tounderscore the difficulty of deciding on the number of firms in a market by fiat, rather
than leaving it as a natural outcome of market forces.

Electronics industry
Brief History of the Electronics Industry
Literature on the history of the electronics industry is not that abundant. However,there have been studies dealing with the home appliance industry.14 (for example Tan
1987). The Philippines has been producing electric fans even before the Second World
War. The first air conditioner company Aircon, Inc. was apparently established in 1943
by J. Concepcion Sr.. The Ysmael Steel Company may have been the first refrigerator
manufacturer in the country with brand names like Felda and Admiral. Another local
entrepreneur in the appliance business was the same D.M. Guevara that assembled
Volkswagen automobiles later on. His Radiowealth company produced radios, televisions,electric ranges and other home appliances.
Initially, tariff rates on appliances were based on the 1909 tariff code. Sometypical tariff rates are for example, 25% for refrigerator and stove/range; 15% for electric
fan and sewing machine. There were no tariffs on some appliances like TV sets andairconditioners since they obviously had not existed in 1909 and therefore were not
13

Doner p. 166
See for example Tan, 1987 pp. 3-10. Much of the historical information here is from Tan. Appendix 1 ofher study provides a very useful summary of government policy towards the appliance industry.
14

17

provided for in the 1909 code. Then consistent with the import substitution strategy of thetime, tariff rates were raised in 1957. Tariffs on refrigerators became 120%, electric stove
and fan were 25%, airconditioners were 70%, and for sewing machines 50%.
The balance of payments crisis of 1970s brought with it import restrictions on
many goods, including many home appliances, as the government sought to conserve
foreign exchange reserves. The government also tried to use the tax system to promotelocal content. As early as 1964, through RA 4122 and the National Internal Revenue
Code, the government levied a reduced sales tax of 7% for locally manufactured
phonographs, radio sets, and TV sets. Imported counterparts were assessed a much higher
40% sales tax.15
The only set of government policies comparable to the motor vehicle programsfor the electronics industry that we could find is the Electronics Local Content Program(ELCP) of 1975. The ELCP apparently took off from RA 4122 described above anddefined a list of 13 parts/components (in the first program year) that could benefit fromlower sales taxes if they were locally manufactured. This list would expand to 18 and 24
components and parts in the second and third years respectively. In addition, the importduties on raw materials or semi-processed materials needed to manufacture the listed
items were reduced to 20% or less.
The ELCP apparently covered only end products in the “brown lines” ofappliances. “Brown lines” included TV sets, stereo and radio phonographs, and taperecorders among others. Importation of items prescribed as local content was restricted.
The ELCP was apparently renamed the Progressive Export Program forConsumer Electronic Products or PEPCEP later in 1983.16 In general, PEPCEP initiallyallowed the importation of certain raw materials, parts, and components but gradually
reduced the amount that could be imported over succeeding years. Non PEPCEP
participants apparently faced even more restrictions or higher tariffs in their importation.
Tan (1987) in her appendix 1 provides a very short description of PEPCEP as well as achronological list of other government rulings issued to support it. Otherwise,
information on ELCP/PEPCEP was hard to obtain. In fact, BOI/DTI staff that we
contacted had difficulty locating information on the ELCP/PEPCEP.
Clearly, the success story in recent years for Philippine exports has been its
electronics exports (although not of consumer electronics or appliances), accounting for
more than half of total exports in recent years (see Tables 10 and 11). Not surprisingly,
the US is our largest market, accounting for about 26%. However, the market for ourelectronics exports appears relatively well balanced: Europe 22%, Japan 11%, ASEAN
17%, other Asian countries 21%, and other countries, 3%.

15

According to Tan (1987) Appendix 1, an article was considered locally manufactured if it met “local
content requirements which consists of five types of components, namely, printed circuit board, coils,
transformers, chassis and cabinets.” She did not elaborate on how this was actually measured in practice.
16
Tan (1987) p. 26.

18

It is almost certain that the success of electronics exports can be explained in part,
if not wholly, by the tremendous amounts of investment, especially foreign, into thesector. The Philippine Economic Zone Authority estimates that electronics accounted for
51% of total PEZA investments in 1995-99. In the same period, exports from these zones
increased from 22% to 50% of total Philippine exports. Multinational corporations
accounted for 85% of these exports, with Japanese firms alone accounting for 46%.17
The Semiconductor and Electronics Industry of the Philippines Inc. (SEIPI) classifies theelectronics industry into the following sub sectors, together with a short list of someproducts:
1. Semiconductor Components and Devices – Pentium III, DSPs, Integrated Circuits,
Transistors, Diodes, Resistors, Coils, Capacitors, Transformers, Lead Frames,
PCB
2. Consumer Electronics - TV Sets, Electronic Games, Radio Cassette Players,
Karaoke Machines, Radio Cassette, Recorder
3. Office Equipment -Photocopy Machines and Parts, Electronic Calculators
4. Control and Instrumentation - PCB Assembly for Instrumentation Equipment
5. Automotive Electronics - Anti Skid Brake Systems (ABS), RC Systems, Car
Radios, Wiring Harness
6. Electronic Data Processing - Personal Computers, Hard Disk Drives, Floppy &Zip Drives, CD ROM, Motherboards, Software Development, Data Encoding andConversion, Systems Integration Customization
7. Telecommunications - Telephones, Pagers, VHF, UHF Radios, Cellular Phones,
Scanners, Satellite Receivers
8. Communications and Radar - Pagers, CCTV, Radar Detectors, Marine and Land
Mobile Radios, CB Transceivers
9. Medical and Industrial - Spiro Analyzers, Smoke Detectors
The consumer electronics category produces primarily for the domestic market,
while the electronics components categories are mainly for export. Since semiconductors
account for about 70% of the total output, Philippine electronics is mainly export oriented.
Not surprisingly, most of these companies have located in export zones. The following
Table 12 provides a perspective on the relative sizes and export performance of thevarious subsectors.
Ironically, in the Export Development Strategy for Seven (7) Priority Products18 of 1982
by the then Ministry of Trade and Industry (MTI), on page two of the export promotion
strategy for electronics we read:“Although further promotion of the component industry should be encouraged, it
becomes evident that to promote export of electronics prime importance should
now be given to the stimulation of the first category.“17

See Hill and Balisacan (2003) p. 231.
The seven products were garments, furniture, electronics, gifts and housewares, construction services,
fresh and processed foods, footwear and leather goods)
18

19

By first category, the MTI referred to finished consumer and industrial electronic
products. We cite this passage as another instance of how government can misread which
sectors, or industries even, have the potential to be winners.
By December 2001, there were already 715 firms in the industry. The overwhelming
majority of these firms are foreign (72%). Domestic firms account only for 28%.
Japanese firms are by far the most significant, 30% of the total number of firms are
Japanese.
Internal Drivers and Obstacles
Skilled labor appears to be the comparative advantage of the Philippines.19 While
Philippine labor is not the cheapest, it is cost competitive. The country boasts a labor
force of 32 million, English speaking workers with over 100,000 engineering, IT andtechnical graduates every year. Indeed, the industry is increasingly an important employer
in the economy, increasing tenfold from 38,000 workers in 1985 to 307,000 by 2001. In
fact the World Competitiveness Yearbook ranks the Philippines first out of 49 countries
in the availability of skilled labor and third in availability of competent senior managers.
Interviews with some Japanese firms support the SEIPI claim that electronics employers
find Philippine labor trainable and of high quality.
However, there are complaints of rising wages, which if it continues withoutaccompanying productivity improvements, may ultimately erode our comparativeadvantage in labor. Some of our competitors in electronics like Malaysia and Singapore
do not even have minimum wage laws. Thus, increasing labor productivity could becritical to the country’s maintaining its comparative advantage in labor for the electronics
sector.
Another potential threat on the horizon as far as labor is concerned is also ourperceived declining quality of education. In many international comparisons, our students
tend to score near the bottom of the ladder, particularly in mathematics and sciences. This
trend too, if it continues, will erode our labor advantage. As teachers, we note also thedeteriorating English abilities of our students.
Infrastructure problems usually rank high also on the list of investor complaints.
In the electronics industry, the high power costs, poor quality of power and water, andpoor roads pose a challenge to firms. Intel has reportedly decided not to establish a wafer
fabrication plant in the country for these reasons. Besides being expensive, powerfluctuation is also excessive, which is a problem for the semiconductor companies.
Deloitte (2002) cites that power voltage could fluctuate in the Philippines by more than+/- 10% while in Malaysia by comparison it fluctuates between +3%/-0.05%. This isunfortunate, because wafer fabrication would greatly add to the local value-added of the
19This seems to be a common assessment of the literature. See for example Morisawa (2000) p. 9 andTecson (1999).

20

industry. In fact, it seems that the Philippines is really engaged mostly in assembly andtesting. (see figure 4)
Government Policy
In an interview with Mr. Ernesto Santiago of SEIPI, he expressed the opinion that,at least in recent years, the government had not intervened heavily in the industry. A BOI
official shares this opinion and added that this was due in part to the fact that it was theway industry wanted it. This is not to say the government neglects the sector because the
DTI and BOI have a task force assigned to meet regularly with the electronics sector.
They have assisted the industry in very specific and micro-level interventions like
improving traffic flow by removing an electric utility’s posts obstructing traffic on key
access roads to the firms. Another concrete area industry and government is working on
together is solving the ‘truck hijacking’ problem on the South Luzon Expressway.
We have been unable to find any industrial policy at present specifically targetingthe electronics in the same way as we have the Motor Vehicle Development Program in
the case of the automotive sector. Mr. Santiago of SEIPI mentioned that a wafer
fabrication bill had been filed in the legislature, presumably seeking to attract wafer
fabrication to the country. However, it apparently has not prospered.
The government did have in place at one time, the Electronics Local Content
Program (ELCP), whose objective was to promote the increase of local value added inelectronics by developing ancillary industries. However, this program was discontinued
in 1986,20 before the spectacular growth of the industry in the 90s. Moreover, it dealt
primarily with the consumer electronics sector and not the semiconductor andcomponents, which accounts for the bulk of our current electronics exports.
The electronic parts and component manufacturers had pushed for the ELCP. It
required assemblers to source from local suppliers, parts and components included in alist drawn up by government. Tecson (1999) believes the program was a failure because it
tended to be more regulatory or coercive than promotional; i.e. it required local
procurement instead of providing incentives so that such a network of local suppliers
could first exist. Because the local suppliers were not cost competitive and could not meetthe required quality, the assemblers were thus forced to use high-priced low quality parts,
which in turn limited exports. This of course reduced their demand for parts andcomponents, worsening the problem. In the end, the government had to allow in-houseproduction of parts and components to count towards satisfying the local content
requirements. This effectively gave the go signal to assemblers to resort to in-houseproduction, ironically reducing the development of inter-firm linkages and specialization.
The error of the ELCP lay in assuming that simply forcing local procurement
would automatically lead to a network of competitive local suppliers to sprout up.
Perhaps having learnt this lesson, the BOI implemented a Backward Linkage Program in
20

Tecson (1999) p. 33.

21

1995 that involves the extension of technical assistance to supplier firms. It consists ofthree sub-projects: the Assembler-Supplier Matching Program, the Center-Satellite Pilot
Project and the BOI-JETRO Support Industry Promotion Project. The third has theobjective of upgrading local supplier capabilities in the metal press and plastic injection
sectors so as to meet Japanese assemblers’ standards.
Backward Linkages
The lack of backward linkages is a problem common to both the electronics andautomotive industries. The Japanese External Trade Organization (JETRO) (2003) 21
conducted a questionnaire survey of Japanese affiliated manufacturers based in eleven
Asian countries and regions.22 The questions ranged over a wide range of topics andissues: future plans, subcontracting and cost structure, problems and even views on a free
trade agreement between the Philippines and Japan.
Of particular relevance to this issue of backward linkage perhaps are some
responses on the procurement patterns of Japanese firms in the Philippines comparedwith similar firms in neighboring countries. Japanese manufacturers in the Philippines
tend to have the lowest rate of locally procured materials and parts. (see Table 13) The
JETRO survey reports that 60.5% of Japanese firms in the Philippines indicated“difficulty in procurement of local parts and raw materials“ as one of their production
problems. This is significantly higher than the average of 44% for ASEAN. In the survey,
only Vietnam had a higher proportion of firms (61.8%) expressing this problem.
Some of the companies we interviewed also confirmed this when they remarked
that they had difficulty finding local subcontractors to outsource parts of their production
activities. This is consistent with observations that Philippine industry suffers from poor
backward linkages. The semiconductor industry for instance, has often been cited as an
example of an export with low domestic value-added.
To put things in perspective, we note that such complaints are not unique to thePhilippines. Warr (1987, 1989) also reports the same criticism of poor backward linkage
with domestic firms made about foreign firms in free trade and export zones in othercountries like Malaysia and Indonesia. Belderbos etal (2000) estimated the distribution of
procurement by Japanese manufacturing subsidiaries in select Asian countries. They
found that Thailand and China also had relatively low rates. Admittedly, the Philippines
had the lowest rate though. (see table 14)
The Philippines does not invest enough in research and development and has
traditionally been dependent on imported technology. Radelet (1999) presents evidence
that manufactured exports growth can enhance economic growth and technological
21

Overseas Research Department, Japan External Trade Organization (JETRO), “Japanese Affiliated
Manufacturers in Asia: Survey 2002”, March 2003.
22
The countries or regions included: Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam,
China, Hong Kong, India, South Korea, and Taiwan. Respondent companies covered a wide spectrum of
industries, not just automotive and electronics.

22

progress by fostering ties between domestic firms and multinational firms who haveleading-edge technologies. This is a motivating factor also in the government’s
investment incentives program.
Some studies like the World Bank (2000) 23 have characterized the Philippine
export structure as the most high-tech in the region, and perhaps the world. Hill (2003)24
cautions however against such a label for Philippine exports, noting that electronics
products can span from relatively low to high tech and the country’s exports actuallyspecialize in low tech electronics activities. The findings of low local procurement andfrequent description in the literature of the industry as having low value added suggestthat Hill’s assessment is probably more accurate.
This finding of poor linkage with domestic suppliers is consistent with thefindings of Radelet (1999). There he noted that many countries pursued the strategy ofestablishing an “export platform” or enclave where exporters could operate in anenvironment free from problems of poor trade policies, weak infrastructure, bureaucracy
and inconsistent rule of law prevalent in the general environment. In many of thesecountries, he found similar poor backward linkages with domestic suppliers. It is possiblethat in an export processing zone, the incentive of relatively free importation of raw
materials and capital equipment (duty free in the Philippine case) may precisely reducethe incentive for locators to go outside the zone for suppliers. Domestic suppliers outside
export processing zones also generally do not enjoy duty exemptions for their own inputs,
which may render them uncompetitive.
Another possible explanation may lie in the workings of the Japanese keiretsu.
There is much literature that suggests Japanese firms tend to rely more on long term
supplier relationships. Such networks of suppliers are called keiretsu and very often,these firms follow a parent company to a foreign location. Some studies find thatJapanese firms are less eager to switch to local suppliers because of such networks.25
This would thus seem to be an obvious strategy to increase Philippine
manufactured exports: to improve the backward linkage of Philippine manufacturing byraising the capability of local firms to supply to multinationals’ affiliates here. We recall
that when General Motors decided to locate in Thailand over the Philippines a few years
back, GM had cited the well developed supplier network that was available there as aplus for Thailand. Further study is needed to establish the reason for the poor domestic
supply capability.
It is the opinion of many that a key factor explaining the rapid growth of thesector in the 1990s was the tremendous influx of investments into the sector. In the firstpart of the presidency of Fidel Ramos, the country had to grapple with a crippling powercrisis. Probably as investors saw that the administration was serious, and more
23
24

25

World Bank (2000), “Philippines Growth with Equity: the Remaining Agenda”, p. 19.
In Balisacan and Hill (2003) p. 225.

See Belderbos et al (2000) for example, for a summary of this literature.

23

importantly, successful in solving the power crisis, those investments started coming in.
In fact, Tecson (1999) is of the opinion that the country had already missed out on thefirst wave of investments by multinational electronics companies in the region in the late1980s due to the political instability, e.g. the numerous coups launched in theadministration of Pres. Aquino. Table 15 below shows the spurt in investments,
particularly in 1993-94.
In this light, if one could consider any government policy as having been
instrumental for the success of the industry, it could be the investment incentives program,notwithstanding the criticisms mentioned earlier about poor backward linkages. This
would include not just legislation such as the Investment Incentives Act (1967), Export
Incentives Act (1970), Omnibus Investments Code (1987) and the Foreign Investment
Act (1991), to name the primary ones. The Omnibus Investments Code of 1987 granted
income tax holidays while the Foreign Investments Act of 1991 allowed foreign equity
participation up to 100% in areas not included in the Foreign Investment Negative List if
the form exported at least 60% of its output.
Nevertheless, it appears the Philippines may not have been as quick and decisivein attracting foreign investments, at least from Japanese firms. As Kunio (1994) notes,
Japanese investments started flowing into Thailand as early as the 1950s and were themain investors in the 1960s. In contrast, it was not until 1967 that the Philippines allowed
Japanese investments and on a minority basis at that. (see table 16)
Export Zones, Foreign Direct Investments and Japanese Multinational Companies
In both industries, technology plays an important role. As we noted, thePhilippines has relatively low ability to generate its own technology and must depend on
foreign capital for this. Thus foreign direct investments are critical in both industries. The
importance of attracting foreign investments was recognized and export zones were a key
part of government strategy.
Perhaps it is the establishment of export zones and the incentives given to locators
there that have been most instrumental in attracting these investments. A World Bank
Study, Managing Global Integration (1997) judged the incentives given by the country in
its export zones as “the most generous and flexible set of incentives available anywhere.”
Export zones are enclaves created by the government with incentives to firms thatlocate there. Typically firms locating in an export zone receive the following privileges
1. duty-free import of raw materials, intermediate inputs capital goods privileges forexport production
2. reduced government bureaucracy. Usually firms deal with just one government agency
3. tax concessions like tax holidays
4. better infrastructure than available in other parts of the country24Thru these zones, governments usually hope to attract more investment, thereby
generating employment and income. It is also hoped that foreign investors would bebringing with them technology transfer.
The literature is not unanimous on the benefits of export zones though. Warr
(1987, 1989) is one such opinion. Warr (1987) in fact focused on the Bataan export zone,
the first export zone to be set up in the Philippines. Warr (1989) compares estimates of
the costs and benefits associated with some of these zones for the Philippines, Indonesia,
Malaysia, and Korea. He finds that while the Bataan zone earned a negative real internalrate of return (-3%), the sample zones for Indonesia, Korea, and Malaysia returned 26%,
15%, and 28% respectively.
Despite the positive rates of return for Indonesia, Korea, and Malaysia, Warrnevertheless is pessimistic about the benefits of export zones and judges them as‘definitely not “engines of development”’ The main reasons for his negative judgment
seems to be his belief that many of the features of the export zone (e.g. reduction of
government red tape, better infrastructure) could be extended to the rest of the domestic
economy without incurring the cost of establishing a special enclave.
While we agree that some measures like reducing red tape for all firms, not justthose in export zones, is definitely a first best option, developing economies may beconstrained in pursuing others. For example, poor infrastructure is a frequent complaintof business in the Philippines. But lack of resources would prevent the government fromradically improving the infrastructure over the whole country in a short time. Improving
the infrastructure in select special zones may be a more pragmatic way to enable firms
located within to compete.
Warr also referred to firms in these zones as ‘footloose’ in the sense that they
could easily pack up and move from one zone in one country to a zone in another country.
While he did not specifically refer to it in his 1987 or 1989 articles, we do see a potential
for host countries to engage in “bidding wars” of export zones. In other words, in aneffort to attract investors, countries may try to outdo each other in offering more andmore generous incentives, akin to a Bertrand price war, that leaves each country withminimal benefit from the zones. Multinational firms, aware of this, may also play off one
country against each other to get the best “deal” in return for investing in the country.
Manasan(1988) calculated the internal rate of return of hypothetical investmentsin the ASEAN countries before and after incentives. She found that the rate of return onthese hypothetical investments after the incentives were roughly similar across all thecountries. This suggests that the countries’ incentives probably roughly cancelled eachother out, implying foregone government revenue.
Were there other reasons these investments come here? Tecson (1999) noted thatthe ‘endaka’ or yen appreciation that followed the Plaza Accord of 1985 saw the yen
appreciate from 250Yen/$ in 1985 to 125 Yen/$ by 1989. This sent many Japanese firms
abroad to lower cost production locations in order to stay competitive with the strong yen.

25

This was the first wave of investments mentioned. It is said that we missed the first waveof Japanese investments due to the political turmoil in the Philippines at that time whichscared away most but the bravest of foreign investors.
The power crisis of the early 1990s likely also deterred investors. But its
resolution in the middle of the decade combined with the relatively stable politicalenvironment of the Ramos presidency put the Philippines back on the radar screens ofinvestors. By the time the second wave of Japanese investments started (in the mid 1990s,
following another yen appreciation), the Philippines was poised to capitalize on it. Indeed,a casual inspection of the investment figures for the electronics industry in the Philippines
shows a surge of investments between 1993 to 1995 which preceded a similar surge inelectronics exports from 1995 to 1998.
Finally, in the case of the hard disk drive industry, Tecson (1999) suggests thatsomething similar to a herd instinct or bandwagon/demonstration effect may have also
been at work. Tecson cites the case of relocation of four Japanese HDD (Hitachi, Fujitsu,
Toshiba, NEC) majors, all between 1994 and 1996. These firms brought with them also
their affliliated suppliers. Moreover, Tecson reported that at the time, with the exceptionof Fujitsu, the Philippines was the only Asian assembly facility outside Japan for thesecompanies.
However, Tecson conducted interviews and there does not seem to be evidence
that the major HDD comp discussed their location decision among themselves. However,her interviews suggest that their respective supplier companies definitely came to thePhilippines to be close to their major buyer firms.

So What Have We Learned? (A Tentative Synthesis)
Like many of its neighbors, the Philippines had pursued an import substitution
policy initially. There was a fair amount of state intervention in the form of trade andmonetary policy, and even direct participation in the market through state owned
enterprises. It was only later that it started opening the economy and orienting activity
towards exports. In retrospect, the import substitution policy biased resources towards the
final consumer goods sectors and hindered development of backward linkages. Early
push for industrialization through high protection resulted in a large but generally
inefficient manufacturing sector. The sector has been unable to adjust to a less protectedenvironment resulting in the curious phenomena of “deindustrialization’ at a low level of
economic development (Balisacan and Hill, 2003).
The automotive industry was 'born and grew up' in this environment. The
electronics industry's formative years on the other hand, came mostly after the move tomore liberalized markets. Balisacan and Hill's characterization of the Philippine
manufacturing sector above might well be applied to the automotive industry in particular
to explain its relative uncompetitiveness today.

26

As far as industrial policy is concerned, both the automotive and electronics
industries were the recipient of government intervention, although it seems to different
degrees. Arguably, the automotive industry has been the recipient of the heavier hand ofgovernment intervention. Through various incarnations of the motor vehicle development
program, a host of policies comprising import protection, foreign exchange earning anddomestic content requirements among others were implemented. Yet today, thePhilippine automotive sector remains the smallest compared to its major ASEAN
neighbors.
The electronics sector, on the other hand, seems to have escaped this kind of close
scrutiny by the government, even though policy makers seem to have recognized thegrowing importance of the sector. The one industrial policy specific to it, the Electronics
Local Content Program seemed to have been a failure and was scrapped in 1986. The
recent surge of electronics exports seems to have been the result of large investments byforeign MNCs in the 1990s. Despite the sector's success, it is not without its critics. Many
point out that precisely, the sector has poor linkages with the rest of the economy andlocal value added is low. In fairness, this seems to also be a criticism made of theautomotive sector.
It is always very difficult to compare two different industries, each with their own
unique circumstances. In this case it is tempting to point a finger at the heavier
government intervention as the culprit for the relatively poorer performance of theautomotive industry.
However, one should also consider precisely some of these different
circumstances. First, the electronics industry was and remains an export-oriented industry,
which gives it a much bigger potential market, and the ability to exploit economies ofscale. On the other hand, the automotive industry grew up at a time when tariff walls
were high internationally and industries tended to concentrate more on the domestic
market. Since the Philippine market for automobiles is small, this meant the industry did
not enjoy the economies of scale that is so important to automobile production.
The timing of the electronics industry’s birth in the Philippines was also fortuitousin another way. It escaped the great depression of the Philippine economy from 1983 to
1985. That depression dealt a severe blow to all of Philippine industry but arguably, theautomotive industry was among those most hurt. And since its market was mainly
domestic, it meant the Philippine market would not be attractive for many more years. In
contrast, the export oriented electronics industry continued to grow even through the
Asian crisis, when the Asian economies went through an economic slump.
Then also the electronics industry is what one might call a ‘sunrise’ product. We
are only beginning to exploit the full potential of electronics and everyday we are witness
to an explosion of more and more new products and applications of electronics. The
automobile on the other hand, is a mature product. Also, because it is a “big ticket” item,the typical buyer may not consume that many units over his/her lifetime. This implies
naturally a much bigger market volume-wise for electronics products.

27

The protection accorded the automotive industry probably contributed to its lackof competitiveness. The various local content schemes that were imposed on the industry
did the same and imposed costs on consumers as Takacs’ analysis shows.
The development of the Philippine automotive industry certainly did give rise to
the creation of rents and rent seeking activities, a common criticism of government
intervention. Doner’s accounts suggests that this may have been due in no small part to alack of government bureaucratic expertise to manage industrial policy. The many
revisions to the motor vehicle programs suggests that the Philippine government agencies
concerned may have been too flexible in implementing the program. Then also, very
often these bureaucrats’ hands were tied because of the political influence that someparticipants were able to wield as a result of their connections.
The electronics industry on the other hand, can trace its strong growth to robust
global demand and the influx of foreign capital that preceded the growth spurt in 1995 to
1997. The main government industrial policy for electronics, the ELCP/PEPCEP, hadapparently been dismantled in the late 1980s. In any case, the program had targeted
mainly the consumer electronics sector. Coincidentally or not, that sector accounts for
only 1.5% of total electronics exports (based on 1998 export figures).
This cursory review suggests that the various motor vehicle programs have notbeen successful in promoting the automotive industry. On the other hand, what may havebeen more critical for the electronics industry may have been the investment incentive
programs that played a role in attracting the foreign capital in electronics to thePhilippines. These investment incentives though, were in general available to many otherindustries' firms as well. Thus on the balance, it seems that Philippine industry specificpolicy did not work as intended. Admittedly, the Philippine automotive programs were
badly implemented. But even if it had been implemented properly, would they haveworked?

References
Aldaba, Rafaelita A.M. (2000) “Increasing Globalization and AFTA in 2003: What are
the Prospects for the Philippine Automotive Industry?”. Philippine Institute forDevelopment Studies Discussion Paper Series No. 2000-42. Makati. (November).
Austria, Myrna. (2002) “Liberalization and Regional Integration; The Philippines’
Strategy to Global Competitiveness” PIDS Discussion Paper Series No.2002-15.
Philippine Institute for Development Studies, Makati City, Philippines.
Bautista, Romeo and Gwendolyn Tecson. (2003). “International Dimensions” in Baliscan,
Arsenio and Hal Hill (eds). The Philippine Economy: Development, Policies andChallenges. Ateneo de Manila University Press.

28

Belderbos, Rene. Giovanni Capannelli and Kyoji Fukao. (2000) The Local Content ofJapanese Electronics Manufacturing Operations in Asia in: Taketoshi Ito and Anne
Krueger, eds., The Role of Foreign Direct Investment in Economic Development, Chicago
University Press for the NBER, Chicago, 9-47.
Cororaton, Cesar (2002) “Research and Development and Technology in the Philippines”
PIDS Discussion Paper Series No. 2002-23. Philippine Institute for Development Studies,
Makati City, Philippines.
Deloitte Consulting. (2002) Competitive Landscape for Philippines Semiconductor &Electronics Industries. Report submitted to the Semiconductors Industries of thePhilippines Incorporated. (October)
Doner, Richard F. (1991) Driving a Bargain: Automobile Industrialization and JapaneseFirms in Southeast Asia. University of California Press, Berkeley.
Economist Intelligence Unit (1985) The ASEAN Motor Industry: Problems and Prospects.
EIU Special Report No. 205. The Economist Publications. UK.
Manasan, Rosario G. (1988) “A Review of Investment Incentives in ASEAN Countries”
Philippine Institute for Development Studies Working Paper No. 88-27
Japan External Trade Organization. (2003). Japanese-Affiliated Manufacturers in Asia:
Survey 2002. JETRO. Tokyo. (March)
Kunio, Yoshihara (1994) The Nation and Economic Growth: The Philippines andThailand. Oxford University Press. New York.
Lim, Chee Peng. (1980) “The problems facing an ASEAN automotive industry”. ASEAN
Business Quarterly, Asia Research Pte, Singapore.
Medalla, Erlinda; Gwendolyn Tecson, Romeo Bautista, John Power and Associates.
(1996) Catching Up with Asia’s Tigers. Philippine Institute for Development Studies,
Makati City, Philippines.
Ministry of Trade and Industry. (1982) Export Development Strategy for Seven (7)Priority Products. mimeographed.
Morisawa, Keiko. (2000) “The Philippine Electronics Industry and Local Suppliers:
Developing Supporting Industries through Foreign Capital-led Industrialization.”
University of the Philippines School of Economics Discussion Paper No. 0011. (October)Radelet, Steven (1999) “Manufactured Exports, Export Platforms, and Economic
Growth“ CAER Discussion Paper No. 43. Harvard Institute for International
Development. (November).

29

Sturgeon Timothy J. and Richard K. Lester. (2002) “Upgrading East Asian Industries:
New Challenges for Local Suppliers”. MIT Industrial Performance Center. Cambridge.
Tan, Elizabeth S. (1987) “A Study on the Comparative Advantage of the Home ApplianceIndustry”. Tariff Commission-PIDS Joint Research Project Staff Paper Series No. 86-12.
Tecson, Gwendolyn R. (1999) “The Hard Disk Drive Industry in the Philippines”
University of California San Diego Information Storage Industry Center Report 99-01
Tolentino, Arturo and Roy Ybanez (1983) “Ancillary Firm Development in thePhilippine Automobile Industry” in The Motor Vehicle Industry in Asia: A Study ofAncillary Firm Development. Konosuke Odake ed. Council for Asian Manpower Studies.
Singapore University Press.
Warr, Peter. (1987) “Export Promotion via Industrial Enclaves: The Philippines’ Bataan
Export Processing Zone”. Journal of Development Studies. 23:220-41.
Warr, Peter. (1989) “Export Processing Zones: The Economics of Enclave
Manufacturing”. World Bank Research Observer.v 4, no. 1 (January) pp. 65-88.
World Bank (1997) “Managing Global Integration” vol. 2 . The World Bank. Washington
DC.
Yap, Josef ed. (2002) “The Philippines Beyond 2000: An Economic Assessment”
Philippine Institute for Development Studies, Makati City.

30

Table 1 Automotive Production (‘000 units)
1969% share1976% share1982 % share

Malaysia

25.0

36

51.6

22 100.9

24

Thailand

11.7

17

48.7

21

70.0

17

Philippines

20.1

29

50.6

22

54.0

13

Indonesia

1.4

2

75.6

33 189.0

46

Singapore

11.9

17

4.3

2

a

0

ASEAN (Total)

70.1

100

230.8

100 413.9

100

a. Local production ceased as of 1980

Source: EIU (1985)

Figure 1. New Vehicle Registrations vs. GDP Growth (1981 to 1999; GDP Growth
based on constant prices)
New Reg'n. vs. Real GNP Growth
250,000

10%

Reg'n.
GNP

8%

200,000

6%

4%

150,000

2%0%

100,000-2%-4%

50,000

-6%

-8%

-10%
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

31

Figure 2.
180,000
162t

Total Vehicle Sales(in units)

160,000

140,000

120,000

100,000
76t
80,00060,00040,00020,00001971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Source: CAMPI

Table 2
(1)

(2)

(3)

(4)

New Demand

Capacity

Pre-Crisis

Pre-Crisis

Production

Sales

in %

in %

(2002)(1)/(3) (4)/(2)Indonesia

318,400

700,000+

386,000 (1997)

386,500 (1997)

82

55

Philippines

85,600367,100

131,200 (1996)

162,000 (1996)

53

44

Thailand409,300

996,800

559,400 (1996)

589,700 (1996)

69

59

Malaysia

440,800

570,000

462,400 (1997)

404,900 (1997)

109

71

Source: UNESCAP (2002); Global Insight Asian Automotive Industry Forecast Report, April 2003

Table 3
No.of Participants

Annual total
capacity (units)

Passenger Car Assembly

14

221,450

Commercial Vehicle Assembly20

145,650

Source: UNESCAP (2002)

32

Figure 3

Brand New Vehicle Sales vs. New Registration
100%

Residual: New Registration less CAMPI Sales

80%

60%

54%

40%

20%

CAMPI Sales
0%
1982

1983 1984

1985

1986

1987

1988 1989

1990

1991

1992 1993

1994

1995

1996

1997 1998

Table 4: Sales by Company (‘000 vehicles)
Company

1999

%

2000

%

Share

2001

Share

%

2002

Share

Toyota

21.6

29.1

24.0

28.5

19.9

25.9

24.8

Mitsubishi

15.8

21.3

16.1

19.1

16.9

22.0

16.3

Honda

13.0

17.5

12.5

14.8

9.4

12.3

13.6

Isuzu

5.8

7.8

8.3

9.8

10.4

13.6

12.0

Nissan

7.3

9.9

9.7

11.5

8.3

10.8

7.6

Ford

2.0

2.7

6.0

7.1

5.3

6.9

4.2

Kia

2.8

3.8

3.0

3.6

2.7

3.5

2.8

Chevrolet

0.1

0.1

0.3

0.4

0.6

0.8

1.0

Others

5.7

7.7

4.4

5.2

3.2

4.2

3.3

Total

74.1

100.0

84.3

100.0

76.7

100.0

85.6

33

1999

2000

Table 5: Investments of Assemblers on Major Autoparts(under the first development program)
Assembler

Investment

Main Market

GM

Transmission plant for cars and lightcommercial vehicles (LCV)

Ford

Body stamping plant for production ofdoors, trunks and other body panels

Delta Motors

Engine plant (for Toyota 12R engine)with foundry and machining capability
Transmission plant
Stamping plant for locally-designed
LCV

Locally-assembled GM cars and
LCVs
Exported to Opel (Germany) andIsuzu (Japan)
Locally-assembled Ford cars.
Exported to UK and Germany foruse in Escorts and Cortinas
n.a.

CARCO – Mitsubishi
D.M.G.

Exported to Japan and Thailand
No exports

Source: Gimenez, Antonio. An Assessment of the Automotive Parts Manufacturing Industry in thePhilippines. Manila, 1994.

34

Table 6: Salient Features of the Rationalized Motor Vehicle Programs
ITEMS

Objective

CAR DEVELOPMENT
PROGRAM••••

Coverage

Local
content (%)•

development of a viable
automotiveparts
manufacturing industry
technology transfer anddevelopment
employment generation
reasonable consumer
prices of motor vehicles;
and foreign exchangesavings and earnings.
passenger cars up to
2,800 cc engine
displacement

1988
1989
1990

32.26
36.58
40.00

COMMERCIAL VEHICLE
DEVELOPMENT PROGRAM

MOTORCYCLEDEVELOPMENT
PROGRAM- same as CDP -- same as CDP-••

Category I
Asian
Utility
Vehicles(AUV) up to 3,000 kgs
GVW•
Category II•
Light Commercial Vehicles(LCV) up to 3,000 kgs
GVW•
Category III•
Vehicles 3,001 -6,000 kgs
GVW•
Category IV•
Vehicles 6,001-18,000 kgs
GVW
Yr 1 Yr 2 Yr 3
1988 1989 1990
Cat I
43.10 51.21 54.86
Cat II
35.62 41.69 44.42
Cat III 16.83 20.33 21.90
CatIV-A: 16.50 19.91 21.44
IV-B: 17.08 20.64 22.24
IV-C: 10.69 12.65 13.53
IV-D:
10.87
12.87

Foreignexchangerequirement
(%)

•

•

•

Participants shall earn
50% of their foreignexchange requirements
for CKD importations
through generation ofexport earnings
Exports of automotive
units and components
will be given higher
foreign exchange credits
thanexports
ofnon-traditional
and/ornon-automotive products
if still allowed
Foreign exchange credits
forexportsofnon-automotive products
will progressively bephased out during thefirst five program years.

-

35

•
•

Category A
Twowheeled
motorcycles with nolimit
toenginedisplacement
Category B
Threewheeledvehicles with unitize
chassis and no limit toengine displacement

Cat A
Cat B

Yr 1 Yr 2 Yr 3
1988 1989 1990
44.02 51.2854.86
38.20
44.02
46.64

13.77

Participants shall earn
25% of their foreignexchangerequirements
through generation ofexport earnings.

- same as CDP -••- same as CVDP -•

Foreign exchange credits
shall account in theforeignexchangerequirements as follows:
Auto
Non Auto
1988 encouraged 100
1989
20
80
1990
40
60
1991
60
40
1992
80
20
1993
100
0

36

Table 7. Salient Feature of the New Motor Vehicle Development Programs
ITEMS
OBJECTIVES

CDP
-

-

Development of theparts
manufacturingindustry
Technology
transferand development
Employment
generation
Foreignexchangesavings and earnings

CVDP---same as CDP-Encourage and assist
the development of thenon-formal automotive
industry in terms ofsafety, road worthinessand compliance withemission standards

MVDP---same as CDP-Support
accelerated
rural development by
providingcheaperalternativetransportation units forgoods,
services,
passengers in rural
areas

COVERAGE-

Category I− withenginedisplacement of 1,200cc and below and witha reasonable priceceiling− largerenginedisplacement may beallowed provided its
selling price shall be inaccordance with theprice ceiling
Category II− above 1200
but
below 2,190 cc
Category III− above 2,190 cc-

Category I
AUVs up to 3,000 kgs
GVW
Category II
LCVs up to 3,000 kgs
GVW
Category III
Vehicles 3,001 -6,000 kgs
GVW
Category IV
Vehicles 6,001-18,000 kgs
GVW− IV-A:
6,001-9,000− IV-B:
9,001-12,000− IV-C:12,001-15,000− IV-D:
15,001-18,000
Category V− Trucks above 18,000 kgs.
GVW and SPVs

Category A
Two- wheeled motorcycles
with no limit to engine
displacement
Category B
Three- wheeled vehicles with
unitize chassis and no limit
to engine displacement

LOCAL
CONTENT

Categories I & II
− 40% minimum− 50% forex award if LC
weighted average is atleast 50%

Categories I and II− 45% minimum− 50% forex award if LC
weighted average is atleast 55%
Category III: 21.90%
Category IV-A: 21.44%
IV-B: 22.24%
IV-C: 13.53%
IV-D: 13.77%
Category V: 13.77%
The
local
content
requirement
shallbeterminated by 2000 based on
the agreement on TRIMS
under GATT

Category A - None
Category B - 35%

Category III: None

The
local
content
requirement
shallbeterminated by 2000 basedon the agreement on
TRIMS under GATT

37

− 50% forex award if LC
weighted average is atleast 55%

The
local
content
requirement
shallbeterminated by 2000 based on
the agreement on TRIMS
under GATTFOREIGNEXCHANGE
REQ’RMNT. (%)

Categories
I
II
III
1996
5.0
45
75
1997
7.5
45
75
1998
7.5
50
75
1999 15.050752000 15.0
55
75
The foreign exchange
requirement
shallbeterminated by 2000 basedon the agreement on
TRIMS under GATT

Categories
I&II
III&IV
1996
5.0
5.0
1997
7.5
5.0
1998
7.5
5.0
1999
15.0
5.0
2000
15.0
2.0
The
foreignexchangerequirement
shallbeterminated by 2000 based on
the agreement on TRIMS
under GATT1996 5.0
1997 7.5
1998 7.5
1999 15.0
2000 15.0
The
foreignexchangerequirement
shallbeterminated by 2000 based on
the agreement on TRIMS
under GATTINVESTMENT
REQ’RMNT.
FOR NEWPARTICPNTS.

US$ 10 million worth ofinvestment in parts andcomponents
manufacturing facility

US$ 8 million worth ofinvestment in parts andcomponents
manufacturing facility

US$ 8 million worth ofinvestment in parts andcomponents
manufacturing facility

Table 8 Philippine Automotive Tariffs (%)
1988

1993

2000

2003

Cars*

50

40

20

5

Trucks/Buses

30

35-65

15-20

5

*From as high as 100% from 1973-80.
Source: Aldaba (2000), Tariff and Customs Code

Table 9 EPRs and DRCs of Transport Equipment and Total Manufacturing
1983

1988

1994

Transport

All

Transport

All

Transport

All

Eqpt

Mfg

Eqpt

Mfg

Eqpt

Mfg

EPR1

50.6

42.8

48.8

28.3

57.3

19.2

DRC/SER2

2.4

1.7

1.4

1.5

1.9

1.2

1Effective Protection Rate
2Ratio of Domestic Resource Cost to Shadow Exchange Rate

Source: Aldaba (2000) p. 24

Table 10 Philippine Exports
1985

1990

1995

Total Exports (M$)

4629

7821 17447 20543 25228 29496 35037 38079

Manufactures (%)

59.7

76.6

Manufactured Exports (M$)

2765

5995 14224 17409 21712 26090 31562 34242

81.5

of which

38

1996

84.7

1997

86.1

1998

88.4

1999

90.1

2000

89.9

Electronics (%)

38.2

32.8

52.1

57.3

60

65.8

57.1

64.8

Machinery (%)

1.1

2.5

5.2

7.4

12.4

12.7

15.7

17.3

Garments (%)

22.5

26.3

18.1

13.9

10.8

9

7.2

7.5

Textiles (%)

1.4

1.5

1.5

1.4

1.4

0.9

0.7

0.7

Source: Balisacan and Hill (2003) p. 232

Table 11 Electronics and Motor Vehicles Exports, 1995-1999 ($ billions)
ELECTRONICSa

MOTOR VEHICLESb
% of

World
Value of % of World

ExportValue of

World

World

Exports

Exports

Rank

Exports

Exports Export Rank

Indonesia

18.4

0.6

22

0.6

0.0

44

Malaysia

211.9

6.4

5

1.3

0.1

37

s

72.8

2.2

14

0.7

0.0

42

Thailand

81.5

2.4

12

3.4

0.2

25

ASEAN 4

384.6

11.6

6.0

0.3

PhilippineaElectronics includes office equipment, electronic components, consumer electronics,
computers, and telecom equipmentbMotor vehicles includes finished vehicles and parts.
Source: Sturgeon and Lester (2002) page 4
Table 12: Value of Exports of Electronics Sector and Consumer Electronics
Products: 1993-1998 (Value in FOB US$)SUB-SECTOR

1993

1994

1995

1996

1997

1998 CAGR(%)

Total Electronics

3,515

4,886

7,556

10,61014,962

19,873

33.5

Semiconductor devices

2,674

3,767

6,060

8,468

11,495

15,665

34.3

98

171

214

206

281

510

31.6

Telecom/sound & video apparatus

369

462

550

747

832

692

11

Electronic office and automatic data

215

233

441

878

2,101

2,173

47

Electricalmachinery/apparatus&

appliances

processing machines

39Consumer electronics:

160

252

291

310

253

293

10.6

Audio video products (brown lines)

136

219

258

271

215

260

11.4

Household appliances (white lines)

19

28

27

32

34

32

9.1

Other consumer electronic products

4

52

6

8

4

2

-10.9

Source: BOI, TESDA Study on Electronics

Figure 4 The Electronics Value Chain
Market, Sell, Service

Procure/Make/
Distribute

Create, Design,
DevelopHigh
Test &

Assembly

Package&

Distribution

Test

Hub

Value
Development

Wafer FabRegional
Call Center
Opportunity

We are here

Low

Table 13: Percent of Respondents Procuring Locally by Share of Materials andParts% OF MATERIALS AND PARTS LOCALLY PROCURED IN YOUR LOCATION
91 to

Unkno

0

1 to 20 21 to 30 31 to 40 41 to 50 51 to 60 61 to 70 71 to 80 81 to 90

100

wn

5.1

27.7

11.7

7.1

6.9

6.5

8.3

7.9

9

9.8

3

Subtotal

5.7

31.9

11.5

7.2

6.9

7.2

7.3

6.5

7.9

7.9

2.1

Thailand

3.5

25.2

9.7

8.8

9.7

8.4

8.4

8.4

8.4

9.3

3

Malaysia

2.9

28.2

13.2

7.5

3.4

9.2

9.2

6.9

9.2

10.3

0.6

Singapore

8.8

20.2

11.4

7.9

6.1

7

7

11.4

12.3

7.9

4.2

Indonesia

2.5

31

8.9

8.2

10.8

8.9

8.2

4.4

8.2

8.9

1.3

s

10.1

45.6

17.4

4.7

4.7

3.4

5.4

2

4.7

2

0.7

Vietnam

13.4

55.2

6

3

3

3

1.5

6

1.5

7.5

4.3

Total
ASEAN

Philippine

40

ROK

13.3

20

3.3

6.7

-----

3.3

16.7

6.7

10

10

9.1

Taiwan

5.7

17.1

0.5

8.6

7.6

1

13.3

15.2

9.5

11.4

2.8

(excl HK)

3.3

24

12

6.6

7.1

6.8

6.8

8.5

10.7

14.2

4.7

Hongkong

2.9

29.4

7.6

5.9

8.8

5.9

5.9

5.9

8.8

8.8

-----

India

2

5.9

9.8

7.8

7.8

5.9

23.5

13.7

13.7

9.8

3.8

China

Source: JETRO

Table 14 Distribution of Procurement by Asian Manufacturing Subsidiaries ofJapanese Electronics Firms in 1992 over regions of origin
Local (%)

Japan (%)

Asia (%)

Other (%)

Subsidiaries (#)

Hong Kong

48

34

18

0

8

S. Korea

46

50

4

0

25

Singapore

40

43

15

2

27

Taiwan

50

43

6

1

38

NIEs

46

44

9

1

98

Indonesia

63

17

20

0

5

Malaysia

34

44

16

6

40

Philippines

16

42

42

0

4

Thailand

28

55

15

2

34

ASEAN-4

62

47

17

4

83

China

23

72

0

5

7

Asia-9

39

46

12

3

188

Source: Belderbos etal (2000) Based on their calculations using MITI data

Table 15: Investments in the Electronics Industry
YEAR

VALUE (BILLION% GROWTH

US$)
1992

0.04

1993

0.22

450.0

41

1994

1.29

486.4

1995

2.16

67.4

1996

1.08

-50.0

1997

1.47

36.1

1998

0.67

-54.4

1999

0.79

17.9

2000

1.24

57.0

2001

0.72

-41.9

Sources:

Philippine Board of Investments (BOI) & Philippine Economic Zone Authority (PEZA)

Table 16 Japan FDI in Thailand and Philippines
Year

Japanese Investment

Total Foreign Investment

Philippines

ThailandPhilippines

Thailand

1987

29

966

167

1,948

1988

96

3,034

473

6,239

1989

158

3,526

805

7,996

1990

306

2,704

962

14,119

1991

208

1,754

787

4,972

Total

797

11,984

3,194

35,271

Source: Table 4.1 of Kunio p. 49
Note: The investment figures in national currencies were converted by the exchange rates ofrespective years.

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