Philippine Batteries, Inc. (PBI), the country’s largest automotive battery manufacturer under the brands Oriental and Motolite, mulls expanding in Indonesia drawn by the country’s robust automotive industry and to insulate them from further foreign exchange losses.
Don Albert G. Cuesta, president of the company’s marketing arm Oriental & Motolite Marketing Corp., said in a presentation before the “Competitive Currency Forum” hosted by the Philippine Exporters Confederation (PhilExport) they are studying if it would make sense for them to put up a new manufacturing facility in Indonesia or increase its manufacturing facility in the Philippines for incremental export to Indonesia.
Foremost in its consideration is the appreciation of the peso against the dollar considering that 55 percent of its local production is exported while 54 percent of its input is locally-sourced.
“Ironically, it is because of this revenue and cost mix, that a sudden appreciation of the peso against the US dollar is a net burden to our business,” Cuesta said.
He explained that all other things being equal, a P2 appreciation to the dollar threatens to erode 5 percent of our export revenue translating to a 33 percent reduction of our export earnings.
“We would then be earning P33 less for every P100 that we used to make,” Cuesta said. The peso has been appreciation to P41 level versus to the dollar.
The company exports automotive batteries to the over 40 countries around the world including US, Australia, New Zealand, Malaysia and Indonesia.
It exports 20,000 units a month to Indonesia although its biggest market is Australia.
Cuesta noted that even if the Philippine automotive market is also growing, the Indonesian automotive market is very attractive to companies like them because it has a market that is 10 times bigger than the Philippines.
In addition, imports from countries with highly depreciated currencies are coming in cheap. Imports now account for 30 percent of the domestic automotive battery market.
“Countries like India, Thailand, Indonesia and South Korea are benefited by currency that have actually depreciated versus the US Dollar over the same period,” he said.
Without additional investment or efficiency, battery manufacturers in countries like Korea can and have reduced prices by at least 5 percent due to their currency advantage.
“We are therefore forced to meet this challenge head on or lose ground in our export markets and may even have to do the same just to defend our home territory,” he said.
According to Cuesta, if they are going to factor the peso appreciation and the Korean won depreciation versus the US dollar, they are going to lose 6.12 percent in revenue translating to a 58 percent loss in earnings.
“All these losses come not from our inefficiency or uncompetitiveness, but only because we have ironically been unfortunate to have a strengthening currency,” he said.
Based on its computation, if they are looking to invest in a new, state fo the art battery assembly line that would have given a 20 percent IRR when the exchange was at P43 to the dollar, the same IRR would crash down to only 1 percent given today’s exchange rate and radical reduction in expected project earnings.
“The payback of this project would stretch to more than 9 years instead of the original 4 years,” he said.
As he appealed to the government to consider allowing the peso to settle at a more competitive level for exporters, Cuesta said the government should learn from the more progressive and industrialised countries like Japan, Korea, and China as well as rising Asean stars like Thailand and Indonesia, who have seemed to manage and benchmark their own currencies successfully over the course of their economic ascent.