THE COSTS OF PRODUCTION AND THE EXIT OF HONDA PH

IN THE PHILIPPINE CAR INDUSTRY

ABSTRACT

In our current industrial age, companies left and right will face
certain decisions to keep them afloat in the sea of commerce, but
these decisions also have a certain effect on the society and the
products or services these companies produce. With that being said,
companies will be forced to increase their costs in producing the good,
which will consequently increase the price the consumers are willing to
purchase it for. Utilizing the concepts in determining the costs of
production will be essential for the creation of the term paper. This
paper is aimed to determine the “market forces” that affected the
manufacturing company and is there any significant relationship on the
costs of production and the low production volume of Honda cars in the
Philippines. As researchers in this topic, we will identify factors, using
the formulae given to us by our report on the costs of production, the
paper will determine the wage rate per worker, the cost to produce one
unit, how much are they earning, the accounting and economic profit,
are there any explicit and implicit costs affecting their company and
how the company will look in the long and short run average total
costs.

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Honda’s History
The first thing that could come up in your head when you hear
about Honda is the Civic. Or, on the other hand, it could be one of its
famous motorcycle, or the humanoid robot Asimo, or even Formula
One. Whatever you think about hearing the word “Honda”, one thing is
for sure --- this Japanese maker has rich legacy driven by the force of
dreams. Here is Honda’s past:
The Honda Motor Company was founded in October 1946 by
Soichiro Honda. From a young age he was very interested in vehicles,
and he used to mod cars and put them into races using his friend’s
garage. When he grew up he wanted to be in the car industry.
Eventually his efforts paid off, and he got a contract to supply big car
manufacturer Toyota with piston rings. But unfortunately he lost the
deal because his goods didn’t meet the price expected. So he went to
numerous Japanese factories searching for ways to boost the engine
efficiency by creating powerful piston rings. Soon he was able to
discover a fully efficient method that could manufacture high quality
piston rings using unskilled labor. Toyota was impressed by his product
ad soon bought 40% of the company and this Soichiro and the officials
at Toyota could built a lasting business relation but due to unforeseen
events his company got damaged forcing him to fully sell his company
to Toyota.
He founded Honda Technical Research Institute in 1946 to sell
modified bicycles with motors attached to them. He only had 12
employees employed in a 170 sq ft. area. In 1949, Honda and his team
were able to unleash the Model D after years of effort and became the
first complete motorcycle they ever produced from their own
components. Soon demand for his low-priced motorcycle increased and
by the 1964 the Honda Company became the largest motorcycle
maker. They didn’t stop there but sought out different possibilities in
that span of time. They managed to introduce their first ever four-
wheel vehicle in the form of the T360 mini pick-up truck in 1963.

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 Honda has a reputation as the biggest internal combustion
engine maker to hit an unprecedented figure of 15 million in 2012. It is
now the world’s eighth-largest car maker; an industry it has a very late
entrance into. In 2012, Honda had sales in excess of $99 billion out of
which $3 was the annual income. It has over 175,000 employess
working in various parts of the world. As of 2013, more than thirty car
models have been launched to boost their performance year after
year. (“Success Story”,n.d)
Through manufacturing loud scooters to building the world’s
finest vehicles, Honda has come a long way to grow as a business.
In the Philippines, Honda is in strong partnership with the Ayala
Automotive Holdings Corporation and the Rizal Commercial Banking
Corporation. According to their website, it was established on October
1990 and commenced its manufacturing operations on February 1992.
Honda has always been inspired by its visons from its inception to
deliver goods of the finest quality at a fair price. HCPI was given an ISO
9002 certification in November 1997 for its robust quality checking ---
an indication of the excellent standard of Honda vehicles. With its
world class infrastructure and indigenous manpower skills in its
production activities, the Honda City is confidently manufactured
locally at the manufacturing plant at HCPI in Sta. Rosa, Laguna. With
the varied needs of customers in mind, HCPI markets eight models in
the Philippines --- City, Jazz, CR-Z, Civic, Accord, CR-V, Pilot and
Odyssey --- suitable for various lifestyles. Honda’s vehicle is
engineered to offer pleasurable driving efficiency, excellent fuel
economy and optimal safety for riders. Honda has recently launched
cutting-edge technology that not only make mobility enjoyable, but
also environmentally sustainable. (“Chamber of Automotive
Manufacturer Philippines, Inc., 2014”)

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Honda’s Market Forces in the Philippines
The Philippine automobile industry today was shocked by the
surprising news on March 25, 2020. Honda Cars Philippines is shutting
its assembly plant in Santa Rosa, Laguna. Company spokesperson
Attorney Louie Soriano sent out the announcement. This means the
Japanese automaker’s stoppage of production activities in the region. It
was on brink of selling out but it came back firmly to cement itself as
one of the major names on the foreign car market. It has kept its
status as the world’s largest maker of motorcycles since it assumed
the position in 1964. At that facility Honda is currently manufacturing
two models of vehicle: the BR-V and the City. It should be noted that
motorcycle manufacturing is not affected by this growth, as a
separated company (Honda Philippines) manages the two-wheeled
products from Honda.
In a phone interview with VISOR, Soriano said that “market
forces” had contributed to the company’s decision. He cited the
“global market slowdown” and the “shift in automotive technologies”
as the key reasons for the switch.
A total of 387 people will lose their jobs in the process, according to
Soriano, but said the staff will be fairly paid. “We will provide them with
packages that go above and beyond what is stipulated in our collective
bargaining agreement.” Of course, the staff are not the only ones
affected by the closure. HCPI reports on its website that they have
“about 60 parts and materials supplier”
In February 1992, Honda’s Santa Rosa factory commenced
manufacturing operations. Honda is expected to supply both the BR-V
and the City from either Thailand or Indonesia in the future.

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Distribution of Salaries
According to salary explorer, a person employed in the Philippine
Factory and Manufacturing usually earns about 39,600 pesos per
month. Salaries vary from 18,700 pesos (lowest average) to 74,600
pesos (highest average, higher total gross salary).
That is the average monthly wage for housing, travel and other
benefits. Wages vary significantly between various occupations in
Factory and Manufacturing

Figure 1. Factory and Manufacturing Job Salary

Distribution in the Philippines

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Salary Range
A salary range for an individual includes the dimensions of the
benefits that the person wants to receive. It’s the rate the organization
has at its fingertips for a corporation to pay a potential hire, and what
existing workers would expect to receive in a similar job. In the
Philippines, Factory and Manufacturing wages vary from 18,700 pesos
per month (minimum average wage) to 74,600 pesos per month.

Median Salary
The term “median” simply means middle and when it applies to
salaries, it is the one that falls into the middle of the table if you
mention in numerical order all the salaries of each worker working in
that profession. Half of those on the list earn less than the mean and
half earn higher. Here in the Philippines, the median wage is 42, 800
pesos a month, meaning that half (50%) of Factory and Manufacturing
employees earn less than 42,800 pesos and the other half earn more
than 42,800 pesos.

Percentile Salary
It tells how much a certain percentage of an overall population in
a geographic area of within a given industry or field makes. The most
commonly used percentile salaries are the 10th, 25th, 50th, 75th and the
90th percentile. The salary allocation diagram reveals that 25 percent
of people employed in the factory and industrial industry earn less
than 27,600 pesos while 75 percent earn more than 27,600 pesos. The
figure further reveals that 75 percent of people employed in Factory
and Manufacturing earn less than 63, 400 pesos while 25 percent earn
more than 63,400 pesos.

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RESULTS

A brand-new Honda Civic 1.5 RS Turbo CVT is valued at 1,608,00 PHP

Cost of Research and Development is 16% of the price
Cost of Labor of an Assembly Line Worker is 17,700 PHP

Marginal product of labor (MPL) = ∆Q

∆L
1
MPL1 = =0. 1
10
2
MPL2 = =0 . 2
10
3
MPL3 = =0 . 3
10
4
MPL4 = =0 . 4
10
L Q MPL
0 0 0
10 1 0.1
20 3 0.2
30 6 0.3
40 10 0.4

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Slope of Production Function

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 Cost of
Research
Cost of
L Q and Total Cost
Labor
Developme
nt
0 0 257,280 0 257,280
10 1 257,280 177,000 434,280
20 3 257,280 354,000 611,280
30 6 257,280 531,000 788,280
40 10 257,280 708,000 965,280

Total Cost Curve

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 ΔTC
Marginal Cost (MC) = ΔQ

Q Total Cost
0 257,280
1 424,280
3 611,280
6 788,280
10 965,280

Marginal Cost Curve

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Costs

Q FC VC TC
0 257,280 0 257,280
1 257,280 177,000 434,280
3 257,280 354,000 611,280
6 257,280 531,000 788,280
10 257,280 708,000 965,280

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Marginal Cost Average Fixed
Cost

Q TC MC Q FC AFC

0 257,280 N/A

0 257,280
167,000 1 257,280 257,280

1 434,280
93,500 3 257,280 85,760

3 611,280
6 257,280 42,880
59,000
6 788,280
10 257,280 25,728
44,250
10 965,280

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Average Variable Cost

Q VC AVC

0 0 N/A

1 177,000 177,000

3 354,000 118,000

6 531,000 88,500

10 708,000 70,800

Average Total Cost

AFC AVC
Q TC ATC

N/A N/A N/A

0 257,280

434,280 257,280 177,000

1 434,280

203,760 257,280 354,000

3 611,280

131,380 257,280 531,000

6 788,280

96,528 257,280 708,000

10 965,280

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RECOMMENDATION

With the provided data given by the results of the paper, the
researchers recommend the following:
1. The production of motor vehicles must be more focused on which
has the most sales that will have a significant difference in total profit
of the company.
2. The marketing team are encouraged to engage in touring other
industries that are successful in the business and use what they have
learned to improve theirs.
3. The company must be aware of their average total cost curve (ATC)
in the long and short run so that they can understand on which
quadrant must they focus their production on.
4. The company is also encouraged to conduct monthly surveying on
their competency with other vehicle manufacturers in order to keep up
with the trends and keep producing vehicles that will give competitors
a run for their money.
5. Future researchers are encouraged to conduct similar topics
about what factors do consumers highly prioritize when purchasing a
vehicle and how will it affect the consumers’ comfort and daily living
after purchasing the vehicle.

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