Pascual’s objection to HEV exemption is flawed

TRADE Secretary Alfredo Pascual has objected to the inclusion of hybrid electric vehicles (HEVs) in the tariff reductions set out in Executive Order (EO) 12, aimed at expanding the market for electric vehicles (EVs) in the Philippines, and ultimately build up a domestic electric vehicle industry. The reasoning behind Pascual’s objection is deeply flawed and indicates a preference for the approach that is least likely to accomplish the broader goals.

EO 12 was enacted in February 2023 to bolster the so-far disappointing results of the Electric Vehicle Industry Development Act (Evida), which sought to encourage the development of a domestic EV industry, including local battery and vehicle manufacture and an infrastructure of nearly 100,000 EV charging stations. EO 12 spelled out temporary tariff duty exemptions for certain EVs and their parts and components for a period of five years, with the EO to be reviewed after one year, which is now.

Like the original Evida law, EO 12 did not extend the incentives to the most popular EV segment — two- and three-wheeled vehicles — or to HEVs. Those omissions are widely acknowledged to be errors causing the Evida law to fall far short of its otherwise good objectives, and a bill that would correct the mistake is currently pending in Congress. Likewise, with EO 12’s mandated review underway, it has been proposed that the same oversight be fixed there.

Pascual does not agree. Adding HEVs to the tariff exemptions, he said, would work against the objective of setting up a large-scale charging infrastructure because HEVs do not necessarily require public charging stations or, in most cases, any sort of charging facility at all. Without charging stations being seen as a feasible business here, we will not attract the investment needed to create a charging network, and ultimately, the domestic EV industry will not develop.

Quite simply, the thinking at the DTI is that tariff exemptions on EVs, in combination with enhancing the convenience of EV ownership by providing a large-scale charging infrastructure, will increase market demand for EVs. That increased demand, in turn, will be the incentive for EV and EV component manufacturers to set up shop in the country. It sounds reasonable until one begins to look into the experience of countries with more developed EV markets, like the US, China and Australia, where it is apparent that public charging networks have little to do with boosting the overall EV industry and are fraught with problems which make charging networks an extremely risky business, more likely than not to fail, and not particularly attractive to investors.

In China, one of the developments identified as a boost to its impressively successful EV market is the widespread adoption of home-based “slow” charging systems — for example, condominium parking spaces equipped with plug-ins that deliver regular house current and require little in the way of special equipment — rather than commercial “fast” chargers. Fast charging stations require expensive electrical equipment and connections to distribution grids, which give them very high up-front costs and then have proven to be an operational nightmare due to heavy maintenance requirements. In a recent study, an estimated 1 in 5 charging stations in the US was inoperative due to maintenance failures; in California, it was 1 in 4. Due to high costs and low revenues, one of the biggest charging network companies, the US-based ChargePoint, pulled the plug on its network in Australia on February 1 after announcing it would lay off about 12 percent of its global workforce.

Public charging infrastructure is, if anything, the weak link in the EV value chain, and as China and others are increasingly demonstrating, it is not strictly necessary to build EV market demand. We believe that in order to move toward the ultimate goal, which is the development of a domestic EV industry, the government’s focus should be more direct and should ignore charging infrastructure or at least reduce its priority.

Building market demand, which in turn incentivizes the development of the local industry, is best accomplished by giving consumers the widest possible choice of affordable vehicles. Thus, both HEVs and so-called e-bikes and e-motorcycles should be included in the tariff-exempt incentive. What should be changed, however, is the application of those exemptions from completely built-up (CBU) vehicles to completely knocked down (CKD) vehicles that will need to be assembled here. To further incentivize rapid development, these exemptions should have a sunset clause, although depending on circumstances, the period of effectivity for exemptions on components may be a little longer.