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Automobiles

Toyota and Mitsubishi risk missing out on Philippine auto perk

$180m tax breaks in jeopardy as pandemic disrupts output targets

The coronavirus lockdown in the Philippines has cast a shadow over Toyota's efforts to produce enough vehicles to qualify for $180 million in tax savings. (Photo courtesy of Toyota)

MANILA -- The coronavirus pandemic has left two Japanese automakers in danger of not qualifying for a Philippine government program that rewards manufacturers for meeting production minimums.

The CARS program offers up to 9 billion pesos ($181 million) in tax incentives per vehicle model as long as 200,000 units are assembled in six years. CARS was launched in 2016 as a way to develop the domestic auto industry.

Two subcompacts -- Toyota Motor's Vios and Mitsubishi Motors' Mirage -- qualified for the program. But the economic shutdown imposed in March has put production targets in jeopardy.

The lockdown measures shuttered dealerships and halted factories. In April, only 133 vehicles were sold throughout the country, a far cry from normal monthly demand of 30,000-plus units.

Toyota and Mitsubishi mostly normalized operations in June. But customer demand has yet to recover, which will result in production cuts.

Of the two, Mitsubishi faces a tougher schedule. The company has a February 2023 deadline to attain the 200,000-vehicle target. So far, Mitsubishi has only produced 50,000 Mirages.

Sales were already suffering for a year and a half due to a tax hike in 2018. The coronavirus pandemic worsened the situation for Mitsubishi.

Toyota is in a better position since the Vios enjoyed healthy sales and the deadline is further out, in 2024. But total output still falls far short of 200,000 cars, making for a steep hill to attaining that goal.

The automakers would still reap a portion of the tax incentives if they managed to manufacture over 100,000 vehicles apiece. But the companies signed on to the program under the assumption they would qualify for all the benefits. Production costs in the Philippines are high enough to significantly undercut earnings without the tax breaks.

The two automakers plan to lobby the government to ease requirements. Ceferino Rodolfo, undersecretary at the Department of Trade and Industry, said last month that he is not optimistic that either automaker will reach the required level.

"If [anything] at all, they will just be given [a] longer time to comply with the target," said Rodolfo, indicating a willingness to discuss the matter.

The government will likely resist deeper concessions. Diminished tax incentives would be a boon to national coffers, which have been depleted by the coronavirus response.

Because the current administration under President Rodrigo Duterte will end in 2022, the issues with the CARS program could remain unresolved ahead of the deadlines. In that scenario, the program may face a backlash over its failures to revive the auto industry, chilling the appetite to invest in carmakers and suppliers.

"How far they are willing to go to meet halfway will show how serious the government is about developing industry," said a source at a Japanese manufacturer.

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