AMBASSADOR VISIT TO FORD AND PG PLANTS AND BRENT

UNCLAS SECTION 01 OF 03 MANILA 001853

SIPDIS

SIPDIS

STATE FOR EAP/MTS and EAP/EP
USDOC FOR 4430 ITA/MAC/ASIA

TAGS: EINV BEXP ETRD RP
SUBJECT: AMBASSADOR VISIT TO FORD AND PG PLANTS AND BRENT
SCHOOL

REF: 05 MANILA 5922

--------------
Summary
--------------


1. Ambassador and Emboffs visited the Ford Motor Company
manufacturing plant, the Procter and Gamble factory, and
Brent International School during a trip south of Manila on
April 21. Ford Philippines' vehicle exports to Southeast
Asia have earned $571 million since 2002, making it the only
automobile company here with a positive trade balance. In
October 2006, Ford's plant will commence production of a
flexible fuel engine that uses up to 20% ethanol. Procter &
Gamble expressed optimism about the continued growth of its
consumer product sales, a result of successfully tailoring
products and marketing to the Philippine consumer. The
Brent School is an important community service supporting
foreign investors and U.S. Embassy families. End Summary.

--------------
Ford Plant Boosts Philippine Exports
--------------


2. On April 21, the President of Ford Group Philippines,
Henry Co, escorted the Ambassador, FCS Counselor, and
Econoffs on a tour of Ford's 30,000 square meter facility on
its 42-acre site in Santa Rosa, about 30 miles south of
Manila. The Ford plant, built in 1998-99 with an initial
investment of $200 million, is the company's fourth largest
in Asia, producing up to 36,000 vehicles a year. Co noted
that Ford makes its completely built-up units (CBUs) from
start to finish in just 12 hours. The plant produces four
models - the Focus, the Escape, and two Mazda-brand cars.
Co said Ford's market share has risen from 4% in 1999 to 9%
in 2005, but still lags behind Toyota (37%),Mitsubishi
(13%),and Isuzu and Honda (10% each).


3. Since the plant began exporting in 2002, Ford has sold
43,000 vehicles to Thailand, Indonesia, Malaysia, and
Singapore for total export sales of $571 million. It is the
only volume exporter of vehicles in the Philippines. (Note:
Toyota is the only other local manufacturer of CBUs.) The
company's $420 million in total exports of CBUs and parts in
2005 far exceeded its $191 million in imports, making it the
only automotive company with a positive trade balance in the
country. Co said Ford is also one of the largest buyers of
Philippine-sourced components among exporters, buying
several million dollars worth of parts each year to support
local businesses.

--------------
New Flex Fuel Engines for Asia
--------------


4. Much of our discussion with Ford centered on the recent
launch of its Flexible Fuel Engine Project. With an
investment of $20 million, the Ford plant will commence
commercial production in October of the first engines in
ASEAN and the second in Asia (after Japan) that will run on
gasoline blended with up to 20% ethanol. Ford managers
anticipate that, at current gas prices, consumers will save
up to $1 per gallon by using the ethanol blend in comparably
priced cars. Besides appealing to economy-minded and eco-
friendly clientele, Co remarked that the program supports
U.S. as well as GRP efforts to encourage alternative fuels.
Ford received a number of financial incentives for building
its flex-fuel engines in the Philippines, including a zero
duty on imports of components, a $400 per vehicle export
credit that Ford will use to "buy down" import duties on its
Expedition, and lower excise taxes. Co said the Philippines
is progressive compared to other Southeast Asian countries
because it bases its excise tax on auto value rather than
specifications, making tax avoidance difficult.


5. The Santa Rosa plant employs 1080 non-unionized workers
it calls "partners." Ford practices complete disclosure and
provides financial training so its employees can help
evaluate company performance and establish production
targets. Morale and efficiency at the plant are very high
because workers see themselves as directly involved in the
company's success. At the end of the visit, Ambassador
spoke to about 400 enthusiastic employees, recognizing
Ford's dynamic workforce for its manufacturing excellence
and economic contributions. She also noted the generosity
and civic-mindedness of employees, who organize and

MANILA 00001853 002 OF 003


participate in community volunteer projects in health and
the environment.

--------------
Ford's Business Challenges
--------------


6. Ford executives identified a number of business
challenges they face in the Philippines, and the areas of
potential cooperation with the U.S. Embassy:

-- The Philippines remains one of the smallest car markets
in ASEAN, with the lowest tariff protection. Ford execs
attributed stagnant domestic car sales to these conditions.

-- The Philippines' parts-support industry remains
underdeveloped.

-- Continued need to affirm and implement the Supreme Court
decision authorizing the Subic Customs Agency to enforce
anti-smuggling laws. (Note: Imported used cars ostensibly
brought into the Subic export processing zone to be re-
worked and re-exported had been easily smuggled into the
Philippine market because Subic Customs officials
technically lacked jurisdiction. End note.)

-- The Philippine and Japanese Governments are completing
negotiations on a Japan-Philippine Economic Partnership
Agreement (JPEPA) that would eliminate tariffs on vehicle
and auto part imports from Japan, placing GM, Ford, and
European car companies at a disadvantage. Ford successfully
lobbied to push back the tariff reduction until 2013, giving
the automobile industry time to adjust. (Note: This
represents an additional three years beyond the 2010 date in
the draft agreement under discussion several months ago
(reftel),to Ford's significant advantage. End note.) Ford
still seeks assurances of responsible implementation of the
agreement to ensure protection of its business interests.

-- A proposed alternative fuels bill may mandate a 5%
ethanol mixture in gasoline, but the Philippines has no
ethanol refineries or gas stations. Co hopes that the
market will overcome this "chicken and egg" problem by the
time Ford's flexible fuel cars hit the streets.

--------------
Procter and Gamble - Major Asian Hub
--------------


7. Procter and Gamble (P&G) Finance Manager Jesse Teo
briefed the Ambassador on the company's history and
operations at its nearby plant in Cabuyao. P&G traces its
manufacturing roots in the Philippines back to 1935 when its
Manila purchase became the first P&G plant in Asia. In
2005, P&G pledged to invest another $30 million in its
current facility making it a manufacturing and service hub
for Asia. The integrated plant manufactures detergent,
soaps, diapers, dishwashing liquid, and paper products. It
is a local market leader in these consumer categories.


8. P&G has reaped the benefits of a carefully tailored
marketing strategy for the Philippines by targeting low
income households and offering single-use ("sachet") packets
of product. The small quantity makes the product affordable
for consumers on a tight budget who do not have the
disposable income to buy in bulk. The product line also
makes adjustments for local culture and infrastructure. For
example, P&G manufactures a bar soap to rub on clothing in
support of this traditional method of pre-treating laundry.
In addition, Tide detergent is tweaked for efficiency in the
country's hard water conditions. P&G directly employs 1000
workers and sub-contracts an additional 2000 workers. The
company sponsors a program to build housing for impoverished
Filipino families in the area, with employees assisting in
the construction. In 2005, the company built 70 homes to
mark its 70-year anniversary in the Philippines.


9. Although P&G's paper and cleaning products are doing
well in the local economy, some items such as Pringles chips
are too expensive for Filipino consumers. The company
executives acknowledge that snack foods are not a core
product in the Philippines or in P&G's global market. In
October 2005, P&G completed a merger with the Gillette
Company and will begin incorporating razors and batteries
into its diverse product line.


MANILA 00001853 003 OF 003


-------------- --
Brent International -- an Embassy School Option
-------------- --


10. Ambassador toured Brent International School Manila
with administrators and the School Board Chairman. Most
U.S. Mission employees send their children to the
International School of Manila with its close proximity to
the housing pool, but 29 U.S. Embassy dependents attend the
five-year old Brent campus. Koreans are the largest
nationality at the school, followed by Filipino, American
and Japanese students. The administrators attributed the
growing population of Korean students to high quality
instruction in English and strong cohesion and values in the
community. Brent's student population has increased
recently to near capacity because of the growing number of
expatriates and Philippine families returning from overseas
living in the south Manila exurbs. Despite the growing
number of students, the administration remains dedicated to
individual attention; small classes remain the standard.
The School Board, which includes an Embassy representative,
prides itself on running "like a business" and moves quickly
to deliberate and act on issues that could affect
admissions. The American Chamber of Commerce of the
Philippines notes that the availability of international
schooling options, such as Brent, is an important factor for
foreign investors relocating to the Philippines.

KENNEY