Ford Ceasing Production Due To Poor Incentives


BMI View : Ford's decision to cease auto production in the Philippines plays out BMI 's bearish view on the auto production industry. We believe the government needs to adopt a more pro-active approach if it is to see the auto production and component industry thrive. Ford's move could also have been motivated by the opportunity provided by the AEC to concentrate production in a few countries, something we have seen other automakers doing. BMI is bullish on Philippines vehicle sales and believes that companies will increasingly use dealerships and import vehicles in this growing market.

US automaker, Ford Motor, is preparing to close its vehicle assembly plant in the Philippines in December and consolidate its ASEAN production in Thailand and Malaysia. The plant, which opened in the mid-1990s, is the country's only exporter of new vehicles, exporting a total of 80,000 units to other ASEAN markets between 2002 and 2010. Ford cited low economies of scale due to the size of the domestic market, and the weak local component industry, as having a major bearing on its decision.

Ford's move plays out BMI's bearish view on Philippines auto production sector. With Ford, the sole surviving auto exporter in the country, now ceasing production, we are suspending our vehicle export forecasts from 2013 onwards.

BMI has long maintained that a robust auto policy, such as the Philippines Motor Vehicle Development Programme (MVDP) is needed to be in place as soon as possible to encourage local production (see our online service, November 22, 'Production Weighs On Sector Growth'). Although the lack of component part makers brings about a chicken and egg problem for the sector, we believe a comprehensive auto policy from the government as well as production and tax incentives, will encourage foreign direct investment in the sector, which will then help to break this cycle.

. We believe there is another motivation for Ford to concentrate production in certain ASEAN key countries with strong production and export potential. With the fully implemented ASEAN Economic Community (AEC) in 2015, inter-country tariffs will be removed. Automakers will want to produce in countries, which allow them to reap economies of scale so as to take full advantage of the AEC. It is BMI's view that Thailand and Indonesia (see our online service, November 12, 'Toyota Leverages Indonesian Strength To Increase Output') will be among the key beneficiaries of these production shifts by automakers, due to their competitive advantage of strong infrastructure and low wages respectively.

While Ford has pulled out of auto production in the Philippines, BMI is generally bullish on new vehicle sales in the country. We believe auto companies will increasingly use dealerships in the near future to tap into this growing market. This mode of market entry is less risky and more sensible vis-a-vis producing directly in the country due to the aforementioned reasons.

Strong Consumer Story
Philippines- Domestic Vehicle Sales, Units

Our country risk team is forecasting GDP and private consumption to grow at an average of 4.5% over the 2012-2017 period. We believe as the Filipino consumer story plays out over the coming years, auto sales will enjoy strong growth. BMI forecasts vehicle sales to grow at an average of 7.0% over the 2012-2016 period, to hit 198,000 units by 2016. Therefore, this market still holds plenty of potential for global automakers.

This article is tagged to:
Sector: Autos
Geography: Philippines, Indonesia, Malaysia, Thailand