Econ 101 and the Honda plant closure

Social media is yet again on overdrive with the announcement of Honda Cars Philippines’ closure of their Sta. Rosa plant. Not surprisingly, people are speculating about the reasons. Here are some of the reasons I’ve seen on the posts and on the comments sections: 

1. Honda closed the factory because of too much traffic.

2. They’ve been selling cars at a premium, unlike Toyota and other Asian brands.

3. Honda spare parts are high.

4. Honda failed to jump on the pickup/pickup-based SUV bandwagon.

5. Decline in sales

6. TRAIN Law effect

7. Honda disallowed the use of their cars for the taxi and TNVS industries.

8. High electricity rates, minimum wages, and labor unions

9. Philippines is becoming hostile to businesses.

These are just nine of what seems like more than a hundred speculations offered by netizens as to why Honda shut down its factory. Here are my comments on those online reactions, number by number (mind you, these opinions are mine and not HCPI’s):

1. This line of reasoning borders on the ridiculous. Car companies would be more than happy to clog our roads with traffic by selling (and not necessarily making) new cars. Traffic has nothing to do with Honda closing its local car manufacturing.

2. This is a valid line of reasoning but it being the actual reason for the closure is still far off. One must realize that the only cars that Honda is manufacturing in Sta. Rosa are the City and BR-Z. They may not be the cheapest cars on the market, but they are competitively priced with their segment rivals, and have very simular low-down payment/low monthly rates as the competition, which is how they’re most often paid for.

3. People who say this probably haven’t owned a Honda and have been using it as an excuse not to buy one. They also probably haven’t owned a late-model example of other Japanese brands. Parts costs and availability (whether inside or outside a casa) for these models are pretty much the same. I’ve been using my 2007-model Civic service car for the last eight years and have always had it maintained by a Honda casa and the prices have never been far from what I experienced with other mass-market brands I’ve owned. The car has also proven to be impressively reliable and trouble-free, despite being 13 years old and with close to 100,000 kms. on the odometer.    

4. Not having a model to compete directly with the Toyota Fortuner/Hilux, Mitsubishi Montero Sport/Strada, Nissan Terra/Navara, and Ford Everest/Ranger SUV/pickup genre certainly hurt Honda. But that is far from the reason why the Honda Cars plant closed. All the SUV and pickup models I mentioned here are made in Thailand, not in the Philippines. In fact, out of 20 Toyota models sold locally, Toyota manufactures locally only two: the Vios and the Innova. The 18 other Toyota models are imported from Japan, Thailand, and Indonesia. Ditto with Mitsubishi, which only makes the Mirage here and imports everything else from the three aforementioned Asian countries. 

5. This pretty much nails the reason for the closure. In the 90s, Honda was a strong No. 3 in the industry (behind only Toyota and Mitsubishi). Today, it’s a tight race for the No. 4, 5, 6, and 7 positions, with Honda locked in a brutal battle with Hyundai, Ford, and Suzuki. Despite the market growing month to month, year to year, and even decade to decade (with the exception of 2018 onwards), the industry has been about decreasing market share (due to the entry of many strong new players, mostly from China) and razor-thin margins. Definitely not good for long-term manufacturing prospects.

6. The TRAIN Law pretty much derailed everything for the car companies. It singlehandedly flat-lined double-digit growth that the industry had been enjoying for the past several years. TRAIN Law may have had more adverse effects on some car companies more than others for a variety of reasons, but it’s still not the sole cause of Honda’s plant closure.  

7. I only saw this taxi/TNVS comment online once, but it somehow strikes a nerve. Uber and Grab (and now, just Grab) jumpstarted the subcompact sedan segment a few years ago with drivers rushing out to buy a Vios, Mirage, Ciaz, or Accent to join the TNVS business. Conspicuously absent was the City. Imagine the volumes it could have enjoyed if it was allowed to be used as a Grab car at a time when Toyota was running out of Vios models to sell to TNVS drivers and operators. And that’s not even counting the taxicab operators, most of whom go for a Vios or Mirage. Having said that, the TNVS bubble has already burst, and both Toyota and Mitsubishi have a lot of Vios and Mirage models in their stockyards.

8. This is certainly a major factor, not just for Honda and not just for the local car industry, but for the whole manufacturing industry in the Philippines as well. High overhead costs and high wages are always a burden on the bottom line. Complicating this, of course, are militant labor unions that almost always try to further raise wages and benefits — oftentimes to the financial detriment of the whole company.                     

9. That’s not necessarily true, unless you’re a media organization criticizing an administration or a wealthy taipan that’s gotten on the wrong side of a government. Politics aside, the Philippines has historically been tough on businesses, particularly multinationals, with its inconsistent on-again/off-again business regulations and in terms of ease of doing business. A prime example is the CARS Program of the previous administration, which gave tariff-free privileges for models made locally provided they made 200,000 units over six years. It was a tough sell, and only Toyota and Mitsubishi bit the proverbial bullet with the Vios and Mirage. Then, with the program not even halfway, the succeeding government introduced the TRAIN Law, which raised prices of cars and reversed the momentum of many years of successive sales growth.

Then there’s the government issuing limits on the number of cars for the TNVS companies, which slammed the brakes on subcompact car sales growth. Toyota and Mitsubishi ended up with so many Vios and Mirage units in their stockyards — spooking other car companies from whatever local manufacturing they may have had in mind, perhaps forever.

Many factors figured in Honda’s decision to close its manufacturing operations. But it’s ultimately down to economies of scale (on a global or at least regional level) and the bottom line. Car companies will always try to sell the maximum number of cars they could. And obviously the lower the price of any model, the more units of it they can sell. So if Thailand can manufacture a Honda City and land it in the Philippines at a theoretical total cost of P500,000, while the Sta. Rosa plant can make one at P550,000, guess which factory will get the green light? That’s Economics 101 for you.

And speaking of Econ 101, here are the ASEAN numbers in terms of vehicle production (not sales) by country: Thailand leads with 2,013,710 units manufactured there last year (roughly half of which were exported). Indonesia follows with 1,286,850 units while Malaysia is third with 571,630 units made in that country.

Vietnam, having overtaken the Philippines, is now the fourth biggest ASEAN vehicle manufacturer with 176,200 units. The Philippines is now in fifth with 95,090 vehicles locally made. Myanmar is the only other ASEAN country that makes cars and it produced 15,500 units there last year. Those numbers certainly put Philippine automobile production in perspective.

While the closure is tragic in light of the some 300 people who will lose their jobs, it’s really nothing new when viewed with the earlier plant closures done by Ford and other brands over the years.

In the end, Honda’s decision to close its Sta. Rosa factory is a sad but ultimately sound and practically predictable one. At this point, the most that the government can do is to help ensure that Toyota’s and Mitsubishi’s local plants not just remain fiscally feasible, but actually have the potential to turn a decent long-term profit. Keeping them alive is a matter of national urgency — because the alternative is almost unthinkable.

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