STAFF REPORT

Formal Investigation of Safeguard Measure Case

Against Importation of Ceramic Floor and Wall Tiles
(SG Investigation No. 01-2007)

IN THE MATTER OF PETITION FOR

EXTENSION OF THE IMPOSITION OF
SAFEGUARD MEASURE AGAINST THE
IMPORTATION OF CERAMIC FLOOR AND
WALL TILES
(AHTN Nos. 6907.90.10; 6907.90.90; 6908.90.11;
6908.90.19; 6908.90.21; 6908.90.29; 6908.90.90)

FOR: SAFEGUARD MEASURE

(R.A. 8800)
S.G. INV. NO. 01-2007

PHILIPPINE CERAMIC TILE INDUSTRY,

AS REPRESENTED BY CERAMIC TILES
MANUFACTURERS’ ASSOCIATION, INC.
Petitioner
x --------------------------------------------------- x

15 October 2007
 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

TERMS OF REFERENCE

1. The Definitive Safeguard Measure

On 11 April 2002 the DTI Secretary (hereinafter “Secretary”), after reviewing the
Tariff Commission’s Formal Investigation Report (SG Inv. No. 01-002), issued a
decision imposing a definitive general safeguard duty for a period of three (3) years
on imports of ceramic floor and wall tiles.

On 26 May 2004, the Ceramic Tile Manufacturers’ Association (CTMA)1 applied

for extension of the definitive general safeguard measure. On 15 October 2004,
the Commission submitted its Formal Investigation Report and recommendation to
the Secretary to extend the safeguard action for three (3) years to allow the
domestic industry to fully implement its adjustment plan.

On 21 December 2004, the Secretary issued a Department Order extending the

definitive measure on ceramic tile for another three (3) years beginning
12 January 2005.

Based on the Department Orders and subsequent annual monitoring review

conducted by DTI, the definitive safeguard duties for the two (2) three-year period
are shown in Table A.

Table A. Definitive Safeguard Duty on Ceramic Tiles (P/kg)

Original Imposition Extension
1ST Year* 2nd Year 3rd Year 1st Year 2nd Year 3rd Year
(2002) (2003) (2004) (2005) (2006) (2007)
5.40 4.30 3.50 2.80 2.45 2.15
* The first year implementation took effect on 09 January 2002, the date of issuance of Customs Memorandum
Order 4-2002 imposing provisional safeguard duty

2. Petition for Extension of the Measure

Section 19 (Extension and Re-application of Safeguard Measure) of

RA 8800 (Safeguard Measures Act) provides the requirements and procedures in
applying for extension of the measure.

Section 19 (1) of RA 8800 provides that, subject to the review under Section
16 (Monitoring), an extension of the measure may be requested by the petitioner if
the action continues to be necessary to prevent or remedy the serious injury and
there is evidence that the domestic industry is making positive adjustment to import
competition.

Section 19 (2) of RA 8800 provides that the petitioner may appeal to the
Secretary at least ninety (90) days before the expiration of the measure for an
extension of the period by stating concrete reasons for the need thereof and a
description of the industry’s adjustment performance and future plan.

1
CTMA is a non-stock business organization organized on 27 September 1999, primarily to promote
the advancement of the ceramic industry.

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

On 03 September 2007, DTI referred the letter request, dated

16 August 2007, of CTMA to the Tariff Commission pursuant to Section 19 (2) of
RA 8800.

CTMA requests for a final extension of four (4) years of the definitive
safeguard duty. The domestic industry is asking for additional time to implement its
adjustment plan and make it globally competitive. Petitioner cites the Commission’s
Monitoring Report to attest that the domestic industry has been serious and has
invested time and resources in its adjustment plan.

CTMA cites that an additional element of its adjustment plan is a project to

reduce the cost of energy using alternative resources. And it expects to implement
the same on a commercial basis in the period of the last extension applied for. A
final extension would ensure that it would be able to complete the same.

THE FORMAL INVESTIGATION

1. Period under Review

The period under review is the period when the safeguard measure is in
place, i.e., starting year 2002 up to the present or where latest data is available.

The Commission shall evaluate if the action continues to be necessary to

prevent or remedy the serious injury and there is evidence that the domestic
industry is making positive adjustment to import competition during the period when
the definitive safeguard was extended for another three (3) years.

2. Commencement of Formal Investigation

The formal investigation commenced on 10 September 2007 upon receipt by

the Commission of the endorsement from DTI.

The Notice of Formal Investigation was published on 13 September 2007 in

Manila Standard Today and The Manila Times. The Notice indicated the date of the
Preliminary Conference and the matters for discussion in that conference. The
Commission sent individual notices to the following:

• The Ceramic Tile Manufacturers’ Association (CTMA) representing the domestic

ceramic tile industry;

• The identified importer association, Philippine Ceramic Products Importers

Association, Inc. (PCPIA), oppositor in the original investigation;

• Britanico Sarmiento & Franco Law Offices, which requested the Commission
that they be notified in case a petition for extension of the safeguard measure is
filed;

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

• Embassies in the Philippines of the following exporting countries whose exports

of subject articles are imposed the safeguard duty: Brazil; People’s Republic
China/ Hong Kong; India; Indonesia; Korea; Malaysia; Thailand; UAE; and
Vietnam; Cultural Office of Taiwan, Taipei Economic and Cultural Office
(TECO);

• Embassies in the Philippines of developed countries: USA and Australia;

• Identified importers and exporters of ceramic tiles from above-mentioned

countries/economies;

• Concerned government agencies; and

• Non-governmental organizations/ professional organization/ consumer group

• Philippine Commercial Attaches based in above-mentioned countries.

2.1 Preliminary Conference

On 18 September 2007, the preliminary conference was held at the Tariff

Commission. In attendance were counsel for petitioner, CTMA; representative from
PCPIA; counsels for oppositor, Golden Ocre Trading Corporation. Other parties
who registered their appearances were representatives from Mariwasa-Siam
Ceramics and Lepanto Ceramics Inc..

Government representatives from the DTI - Bureau of Import Services (BIS);

DTI – Construction Industry Authority of the Philippines (CIAP); and Bureau of
Customs (BOC) attended.

Representatives from the Embassy of Australia and Embassy of Indonesia

also attended.

The agreements reached during the preliminary conference were the

following: the timetable of investigation; entry of appearance of interested parties;
names of counsels; sufficient notice; accessibility of documents in the public file;
treatment of documents marked confidential; submission of position papers;
additional data required by the Commission; and verification thereof, including
submission of adjustment plans by the domestic industry; conduct of ocular
inspection; and schedule of public consultations.

Petitioner was also required to submit to the Commission the attachments to

the instant petition as filed with DTI.

These agreements were contained in an Order dated 18 September 2007

and sent to the following parties: counsel for the petitioner – CTMA; counsel for
PCPIA; counsel for Golden Ocre Trading Corporation; importers and exporters
identified by the Commission; non-governmental organizations; concerned
government agencies; and the embassies of above-mentioned countries.

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

2.2 Schedule of Public Consultation

The Notice of Public Consultation was published in the Manila Standard

Today and The Manila Times both on 10 October 2007. As agreed during the
Preliminary Conference, the consultation will be held on 22-26 October 2007 at
9:00 a.m. at the Tariff Commission. Individual notices were likewise sent to the
following parties: counsel for petitioner, CTMA; oppositor, PCPIA; counsels for
other oppositors: Golden Ocre Trading Corp. and Citrinum Corporation; importers
and exporters; non-governmental organizations; concerned government agencies;
and the embassies of above-mentioned countries.

In the Commission Order of 18 September 2007, parties are given an

opportunity to comment on the Commission’s Staff Report on October 19, 2007.

Parties are also required to submit to the Commission not later than
19 October 2007, a list of issues they want to explore other than the issues of
product comparability. A party who does not submit a list of issues is deemed to
have no controversial/contestable matter to raise, hence, will be given less priority
in the order of parties to ask clarificatory questions during the public consultation.
Parties are also required to submit to the Commission the affidavits of their
witnesses three (3) days prior to the public consultation.

Furthermore, all principal parties, counsels, affiants, deponents and other

interested parties are required to appear before the Commission on the first day of
the public consultation.

3. Submissions to the Commission

As agreed during the Preliminary Conference, interested parties were given

until 28 September 2007 to submit their respective preliminary/supplemental
position papers/documentary evidences. Following the granting of a Motion by
counsel of Golden Ocre Trading Corporation to extend their time for filing of
position papers, the deadline for all parties to submit their respective position
papers was extended to 08 October 2007. Counsels were duly notified of the
extension.

3.1 Position Papers

The Petitioner

In its position paper received by the Commission on 03 October 2007, CTMA

cites that:

the safeguard is still necessary as imported ceramic tiles remain a threat to the
domestic industry;

the volume of imports increased as the amount of safeguard duty decreased

from the time the safeguard measure was imposed;

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

the market share of the domestic industry also decreased as the amount of
safeguard measure decreased;

following the trend, the above data indicate that once the measure is
terminated, increased volume of cheaper imported ceramic tiles would enter the
local market;

removing the safeguard measure at this time would jeopardize the industry’s
adjustment plan;

the threat of cheaper imported tiles as there is overcapacity in the global

production of ceramic tiles with reports of more plants being constructed.

Petitioner mentioned that it is serious in its adjustment plans by taking steps

towards a positive adjustment to import competition and that the imposition of
safeguard measure and the adoption of its adjustment plan has resulted in its
financial recovery. Petitioner claims that it was not able to complete its adjustment
plan for reasons beyond its control.

The Oppositors

PCPIA, submitted its position paper on 28 September 2007.

PCPIA, in its paper, states that it has not yet received a copy of the position
paper to make a full comment on the subject as it does not know the grounds for
the subject petition.2 The preliminary statements opposing the petition for
extension are based on the following grounds:

- The safeguard duty in the first three (3) years of imposition was above that
recommended by the Tariff Commission. It was extended for another
three (3) years; the six (6) years of protection is already reasonable for the
local industry to make adjustments to foreign competition. Beyond this
period, it would give the local industry an undue advantage and it would be
against the principle of fair competition;

- Several circumstances have transpired that significantly changed the

situation, foremost is the implementation by BOC of a minimum threshold
value on imported ceramic tiles of US$0.20/kg for sizes less than 60x60 cm
and US$0.30/kg for sizes 60x60 cm and up, regardless of whether their
actual FOB is below US$0.20/kg;

- Starting October 1, 2007, all ceramic tiles are required to obtain product
certification or import commodity clearance (ICC) from the Bureau of Product
Standards (BPS). All imported ceramic tiles must meet quality standard PNS

2
The Commission, in its letter of 02 October 2007 to PCPIA, mentioned that the grounds for petition
are stated in the Briefing Paper. PCPIA and counsel for Golden Ocre Trading were provided with a
copy of petition/(non-confidential) attachment of CTMA petition as filed with DTI Secretary. This
document forms part of the public file. PCPIA was reminded that submission of preliminary position
papers is until 08 October 2007.

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

ISO 13006. Cheap tiles from China which are mostly also poor in quality will
no longer be allowed with the implementation of this new regulation from
BPS. This is another reason why the extension of the safeguard measure is
no longer necessary.

Golden Ocre Trading Corp., through counsel, submitted its position paper on
08 October 2007. This oppositor presented the following grounds for denial of
the petition for extension:

- the petition failed to comply with the requirements of Sec. 19 of R.A. 8800.
The Monitoring Report of the Commission shows the absence of the
condition that the extension of the safeguard measures continues to be
necessary to prevent or remedy the serious injury, as required by Section 19
of the same law;

- petition, by way of letter-request, did not comply with the requisites provided
by Sec. 19 (2) of RA 8800. Concrete reasons for the necessity of an
extension were not stated. Failure to state in the petition the requirements of
the law necessitates the dismissal of the petition;

- it is the task of the Commission to determine whether the petition for

extension of imposition of safeguard measures may be given due course;

- there is no showing that increased quantity of imported ceramic tile is a

substantial cause of serious injury or threat thereof to the domestic industry,
as a requisite for the grant of extension;

- further extension of the imposition of the measure will not be in the public
interest;

- there is failure on the part of the domestic industry to show positive

adjustment to the extension of the measure.

• - Indonesian Ministry of Trade, Directorate General of International Trade

Cooperation

- the Government of Indonesia (GOI) is really concerned about the length of

the safeguard measure and hopes that the Commission will not recommend
an extension of the measure;

- From the Monitoring Report, imported products do not cause injury of

domestic industry. The domestic industry suffer from loss in the period of
safeguard measure being implemented;

- GOI has delivered proposal for trade compensation to DTI but the
Philippines has not yet bring any proposal for GOI to discuss trade
compensation;

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

- The imposition of safeguard measure against importation of ceramic tiles

originating from Indonesia since 2002 is being considered as a conduct of
over protectionism by Philippine authorities.

Taiwan Economic and Cultural Office (TECO)

- the average import share of products from Taiwan for the past five (5)
years was less than 3%.

- Suggests that Taiwan be deleted from the list of exporting countries since
its exports to the Philippines is less than 3% of the total imports.

- if there is a decision to extend the measure, the Philippines must provide

the evidence supporting its decision as prescribed under Article 12.2 of
the WTO Agreement on Safeguards;

- Exporting members should be notified and consulted with or even

compensated according to Articles 8 and 12 of the Agreement.

3.2 Other Submissions

Citrinum Corporation, through counsel, filed on 04 October 2007 a Motion to

enter appearance and additional time of twenty (20) days or until
28 October 2007 to file its position paper.

The Motion for additional time to file its position paper was denied given
the schedule of public consultation is on 22-26 October 2007 and the issuance
of the Staff Report on 15 October 2007.

Taicera Enterprise Company (Vietnam)

It has no opposition to the said petition. It cites that it is a licensed

manufacturing corporation in Vietnam and exports only homogeneous tiles and
has no existing branch in the Philippines.

Embassy of Malaysia

The Trade Commissioner acknowledged receipt of the Order issued by

the Commission and will appreciate if his office is updated from time to time.

Guocera Tiles (Malaysia)

Guocera requests trade data on ceramic tile imports of the Philippines;

customs duties for 2008; and latest report on the safeguard measure on ceramic
tiles.

3.3 Adjustment Plan

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

Rule 4.1 (a) of the IRR to R.A. 8800 defines “Adjustment Plan” as an action
which a domestic industry is required to submit, that describes a set of quantified
goals, specific plans, and timetables that a concerned industry commits to
undertake in order to facilitate positive adjustment of the industry to import
competition.

“The adjustment plan shall provide a clear quantification of its proposed

goals and detail the efforts that the domestic industry and other concerned
parties will make to place the domestic industry in a more competitive position.
The goals shall be presented using objectively verifiable indicators that will
cover the period for which safeguard measures are sought. Measures covering
more than one year shall include specific efforts to be undertaken by the
domestic industry for each year of progressive liberalization of the measure. It
shall likewise include a time frame to enable the Commission to monitor their
attainment over the specified period.”

Submissions 3

A. Mariwasa-Siam Ceramics, Inc. (2008-2011)

CTMA, in its letter dated September 28, 2007, submitted to the Commission
the confidential and non-confidential version of Mariwasa’s adjustment plan for the
period 2008 – 2011. Among the schemes it plans to implement in order for it to be
more competitive are:

1. To continue with the company’s commitment of providing better and new

designs, at least 370 new designs will be launched in 2008 – 2011. The
products being developed and introduced are comparable with their foreign
counterparts in terms of design and quality.

2. Have a more extensive distribution network by appointing additional dealers,

a minimum of 40 new dealers within the 2008-2011 period. This would
ensure that the company would be able to tap potential markets on areas not
currently being served by Mariwasa.

3. Increase product/brand awareness. In order to boost sales, the company has

come up with a more intensified and aggressive marketing program.

4. Optimization of production capacity. With the projected increase in sales,

Mariwasa would be able to optimize its capacity and consequently lower
production cost. In the succeeding years, capacity utilization is expected to
reach more than 75%.

5. Reduce major cost components. The company is putting more effort in

bringing down further the consumption of its major cost components to
cushion the negative impact of increasing cost inputs. Mariwasa would be
focusing on energy and glaze.

3
Submissions marked as non-confidential are available in the public file of the Commission.

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

Quantitative targets:

1. Reduce power consumption by 8% by year 2011.

2. Lower fuel (LPG) consumption by 10% by year 2011.
3. Lower fuel cost by 40% by year 2011.
4. Reduce glaze cost by 3% by year 2011.

In order to attain these targets, Mariwasa needs to increase further its

productivity and efficiency, continue sourcing cheaper alternative sources of fuel
and cheaper raw materials. Production and the Technical Group are working
closely to improve quality of body powder and glazes. Research and
reformulation are being done to replace high cost raw materials with cheaper
raw materials.

6. Improve product quality. Mariwasa has to improve more on the quality of its
product by having higher extraction rates of Grade A tiles. Planned
extraction rates by 2011 are as follows:

Floor tiles (grade A/ grade B) = 90%/ 10%

Wall tiles (grade A/ grade B) = 94%/ 6%

B. Lepanto Ceramics, Inc. (2008-2011)

In its letter dated 09 October 2007, Lepanto Ceramics submitted its

Adjustment Plan (2008-2011) marked as confidential. There was no
non-confidential version of the submitted adjustment plan of Lepanto Ceramics, Inc.

In summary, the programs to be undertaken by Lepanto to enable it to be

competitive with imported ceramic tiles are:

1. Organizational changes
2. Key Result Areas:
a. Capacity maximization
b. Cost reduction and management, and
c. Extraction improvement
3. Sales and Marketing Programs
4. New Designs
5. Improvement in financial position

4. Plant Visit/ Verification of Data

The manufacturing plants of Mariwasa Siam Ceramics, Inc. and Lepanto

Ceramics, Inc. were visited on September 21 and September 26, 2007,
respectively. Aside from ocular inspection of production lines in operation,
documents inspected were the financial records on production levels, cost, sales,
selling price, employment and inventory levels.

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

THE DOMESTIC INDUSTRY AND MARKET

1. The Domestic Product4

The domestic industry produces glazed ceramic floor and wall tiles. Ceramic
tiles are used as outdoor and indoor floor and wall coverings in private dwellings,
commercial and industrial buildings, urban facilities, etc. The more common sizes
in the local market for floor tiles are 20 x 20 cm (8” x 8”), 30 x 30 (12” x 12”) and
40 x 40 (16” x 16”). In the case of wall tiles, 20 x 20 cm (8” x 8”) and 20 x 25 are
common. In the domestic industry, first class tiles are called commercial grade and
those with slight glaze and body defects are labeled B grade. Tiles with very visible
defects are tagged rejects.

The major raw materials used to form the tile body are ball clay and feldspar
which are locally available. Glazing materials are imported from Europe, China and
Taiwan.

The domestic industry utilizes the dry pressing (dust pressing) method,
single or double firing process.

2. Market Participants

2.1 Domestic Producers

Table 1. Domestic Producers
COMPANY LOCATION PRODUCT
Mariwasa Siam Ceramics, Bgy. San Antonio, Sto. Glazed ceramic floor and
Inc. (ISO certified) Tomas, Batangas wall tiles
Km. 545, Makiling, Glazed ceramic floor and
Lepanto Ceramics, Inc.
Calamba, Laguna wall tiles
Eurotiles Industrial Glazed ceramic floor and
Silang, Cavite
Corporation (ISO certified) wall tiles (white body)
Glazed wall tiles 4”x4” and
Filcera Manufacturing, Inc. San Vicente, San Pedro,
8”x8”)
(Ceased operations) Laguna

Italfil Manufacturing, Inc. AIP-SEZ, Calibutbut, Unglazed floor tiles

(Shutdown) Bacolor, Pampanga
Formosa Ceramic Tiles Mfg.
San Simon, Pampanga Glazed floor tiles
Corp. (Grand Caesar)
Pioneer Ceramic, Inc. (Tri- Sotero Laurel St.,
Glazed floor tiles
Little Dragon) Mandaluyong City

2.1.1 Status of Operations

Based on the updates of CTMA, the following domestic tile

manufacturers are currently in operation:
• Lepanto Ceramics, Inc.
• Mariwasa Siam Ceramics, Inc.
4
For details, refer to Report on SG Inv. 2001-02

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

• Eurotiles Industrial Corporation.

• Grand Ceasar Ceramic Tiles Corp. (Tenzen)
• Pioneer Ceramic, Inc. (Tri-Little Dragon)

Filcera Manufacturing, Inc. ceased operations in June 2003. Italfil

Manufacturing ceased productions in July 21, 2004. No information was yet
obtained from Pioneer Ceramics, Inc. regarding the current status of its operations.

2.1.2 Distribution Channels

The finished products are distributed to wholesalers, distributors, architects

and/or contractors. From the wholesalers or through the company’s own retail
network, these are then channeled to hardware and tile retailers where end-users
can source their tiles.

Distribution Network Flow Chart *

Ceramic Tile
Manufacturer

Wholesale Architects /
Dealer/Distributor Contractors

Hardware / Tile Project Owners

Own Retail Residential
Retailers (Commercial)
Network Owners

END-USERS
3.2 Major Importers
(Commercial and Residential Owners)

* p.24, Formal Investigation Report SG. Inv. No. 2001-02.

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

3. Importers

Based on Import Entries on file with the Commission, importers were

identified for the period 2004- 2006. The top importers identified are:

Table 2. Top Importers of Ceramic Tiles

Quantity* Country
Year Importer
(sq.m.) (Port of Origin)
2004
1 Hong Kong, China
The World of Tiles 202,500
2 China, Malaysia
Davao Citihardware 150,806
3 Hong Kong, China
FC South Trading 69,968
4 Thailand, Brazil, Indonesia
Decoarts Marketing 67,783
5 China
Wilcon Builders 30,000
6 Hong Kong
Malogan Ent 27,500
7 Japan
Nakayama Tech Corp 16,577
8 Vietnam
Adventure Import Export 16,346
9 Hong Kong
RS Directo Ent 13,250
10 Hong Kong
Sun-Lor Enterprises 13,250
2005 -
1 The World of Tiles China, Hong Kong
444,798
China, Hong Kong, Indonesia,
2 Felport Int'l
195,529 Singapore
3 Davao Citihardware China, Malaysia
176,604
4 MGO Marketing China, Hong Kong
134,788
5 Decoarts Marketing Brazil, China, Thailand
134,384
6 Wilcon Builders China
129,563
7 Porcellanato China, Hong Kong
101,206
8 Tryzone Enterprises China
86,578
9 Asiahome Trading 84,587 China, Hong Kong
10 FC South Trading Hong Kong
70,860
2006
1 Citrinum Corp. China
1,003,438
2 Wilcon Builders China, Indonesia, EU
620,593
3 Golden Ocre Trading 438,112 China

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4 Dau Tiles Center China

428,180
5 Felport Marketing China, EU
293,086
6 Futek Ent China
258,327
7 Davao Citihardware China, Malaysia
242,516
8 Decoarts Marketing China, Indonesia, Thailand
222,644
9 Olongapo Home Builders China, Hong Kong
125,883
10 Frontier Ceramics Indonesia, EU
88,693

Source: Import Entries (unliquidated) on file with the Commission. Import data do not reflect total
importation of identified importers.
* Based on encoded (partial) available import entries; Import volumes converted to sq.m. using the
methodology adopted in the original investigation (16 kg/sq.m).

4. Users

The major users of ceramic tiles are construction companies engaged in

private and public housing and infrastructure projects as well as direct purchasers
at the retail level, e.g., homeowners. Local contractors also utilize ceramic tiles in
condominiums and shopping malls.

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

DETERMINATION OF LIKE PRODUCT

Section 4(h) of R.A. 8800 states that “like product” shall mean a domestic
product which is identical, i.e., alike in all respects to the imported product under
consideration, or in the absence of such a product, another domestic product
which, although not alike in all respects, has characteristics closely resembling
those of the imported product under consideration.

Rule 9.4.a of the IRR of R.A. 8800 provides that the Commission shall
determine “if the domestic product is a like or directly competitive product to the
imported product under consideration”.

1. Subject to Definitive Safeguard Duty

The application of definitive safeguard duty is directed against imports of

ceramic floor and wall tiles, glazed or unglazed, classified under the ASEAN
Harmonized Tariff Nomenclature (AHTN) Code Nos. 6907.90.10; 6907.90.90;
6908.90.11; 6908.90.19; 6908.90.21; 6908.90.29; 6908.90.90 . The Order of the
Secretary excludes imported ceramic tiles originating from Japan and member
states of the EU from the imposition of definitive safeguard duty.

2. Tariff Classification
Table 3. Tariff Schedule

Regular Duty (% ad. val.) Additional Duty

CEPT
HS Code AHTN Code* MFN ACFTA Safeguard Duty**
AFTA
6907.90 00 6907.90.10 ]
6907.90.90 ]

6908.90 00 6908.90.11 ] 10 5 8 P 2.15/kg

6908.90.19 ]
6908.90.21 ]
6908.90.29 ]
6908.90.90 ]
* Transposition from the Harmonized System (HS) Code to the AHTN Codes following the official
adoption in 2004 by the Philippines of the AHTN.
** Imports from Japan, EU and de minimis imports from developing countries are excluded from the
imposition of the definitive safeguard duty.

3. Conclusion

The locally produced and imported ceramic tiles are made from the same
raw materials; using the same process and technology; conform to recognized
product standards; fall under the same tariff classification and have the same end-
use. 5

5
Formal Investigation Report (SG. Inv. No. 2001-02)

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

DETERMINATION OF VOLUME OF IMPORTS

1. Period under Review

Fig. 1. Ceramic Tile Imports (‘000 SQM)

CERAMIC TILE IMPORTS ('000 SQM)

10,000.00

INITIAL SURGE IMPOSITION OF INITIAL EXTENSION OF SG

9,000.00

TOTAL
8,000.00

7,000.00

6,000.00
CHINA

5,000.00

4,000.00
INDONESIA
3,000.00

2,000.00
HONGKONG
TAIWAN
1,000.00
MALAYSIA THAILAND

-
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

TOTAL PROC Thailand Malaysia Taiwan Indonesia Hongkong

Table 4. Total Volume of Ceramic Tile Imports (‘000 SQM)

Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Volume 3,591 2,531 4,288 7,086 8945 4,160 4,391 4,206 7,642 8,978
Growth
(30) 69 65 26 (53) 6 (4) 82 17
Rate, %
* Data based on NSO Trade Statistics, reported in gross kg converted to sq. m. using methodology used in original
Formal Investigation (SG 2001-02).

The original investigation determined that surge in imports commenced in

year 2000. The Commission concluded in the original investigation that, in
accordance with RA 8800, ceramic tiles are being imported in increased quantities,
both in absolute terms and relative to domestic production.

With the imposition of the definitive safeguard measure beginning in 2002,

total imports of ceramic tiles for the period 2002-2004 were drastically reduced.
However, when the safeguard measure was extended in 2005, the volume of tile
imports significantly increased to levels exceeding that of the surge in 2000 - 2001.

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

3. Country Suppliers

Table 5. Country Suppliers of Ceramic Tiles*

SOURCE IMPORTS IN '000 SQM % SHARE TO TOTAL Growth Rates (%)

COUNTRY 2004- 2005-
2004 2005 2006 2004 2005 2006 Average
2005 2006
TOTAL 4,206 7,642 8,978 100.00 100.00 100.00 81.69 17.47 49.58
China,
(PROC) 1,756 4,285 7,041 41.75 56.06 78.43 143.96 64.34 104.15
Hong Kong 443 1,738 523 10.52 22.75 5.83 292.75 -69.90 111.42
Thailand 181 339 333 4.30 4.44 3.71 87.87 -1.95 42.96
Taiwan 192 98 112 4.56 1.28 1.24 -48.86 13.90 -17.48
Malaysia 212 146 101 5.04 1.92 1.12 -30.99 -31.19 -31.09
Vietnam 130 66 17 3.09 0.86 0.19 -49.19 -74.49 -61.84
Brazil 325 41 9 7.72 0.54 0.10 -87.28 -78.12 -82.70
EU ** 626 624 506 14.89 8.16 5.64 -0.35 -18.85 -9.60
Japan ** 75 23 70 1.77 0.30 0.78 -69.76 211.28 70.76
Others 267 282 266 6.35 3.69 2.96 5.37 -5.65 -0.14
* Data based on NSO Trade Statistics, reported in gross kg converted to sq. m. using methodology used in original
Formal Investigation (SG 2001-02).
** Excluded by DTI from the imposition of safeguard measures.

After the extension of the imposition of safeguard measure, China became

the major source of imported ceramic tiles in the Philippine market. Imports from
China exhibited an accelerating trend at an average annual growth rate of 104%
during the period 2004 - 2006. In 2006, China (together with Hong Kong)
accounted for almost 85% of the total volume of imports. Except for Thailand which
still accounted for 3.71% share of total ceramic tile imports of the Philippines in
2006, imports in the last two (2) years from other countries covered by the
imposition of safeguard duty may be deemed as de minimis.

4. Findings

Based on the data presented above, total volume of ceramic tile imports in
2005 - 2006 reached levels when imports surged in 2000 and peaked in 2001.

China (together with Hong Kong), now the principal source of imported ceramic
tiles, accounts for almost 85% of the total volume of ceramic tile imports of the
Philippines.
___

Page 17 of 24
 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

PRELIMINARY FINDINGS ON SERIOUS INJURY OR THREAT THEREOF

Rule 9.4(c) of the IRR of RA 8800 states that the Commission shall
determine “the presence and extent of serious injury or the threat thereof to the
domestic industry that produces like or directly competitive product.”6

1. Domestic Industry Requirements

In the original investigation, Mariwasa Siam Ceramics and Lepanto

Ceramics, Inc. accounted for 67% to 69% of the total domestic production of
ceramic tiles from 2002-2006. Sec. 4(f) of the IRR of RA 8800 which, for purposes
of determining serious injury or the threat thereof, defines “domestic industry” as
“the domestic producers, as a whole, of like or directly competitive products
manufactured or produced in the Philippines or whose collective output of like or
directly competitive products constitutes a major proportion of the total domestic
production of these products.”

Based on available information, production at rated capacity of the three (3)

remaining domestic manufacturers in operation will not reach actual production of
Mariwasa and Lepanto.

Table 6. Domestic Industry Requirements

Actual Production
(in ‘000 sqm)
2004 13,996
2005 14,233
2006 13,420
2007* 6,342
Source: Mariwasa and Lepanto
* - January to June 2007

6
In the original investigation (SG 2001-02), the Commission found that the domestic industry
suffered a significant overall impairment in the position of the industry. In SG 01-2004, the
Commission concluded that non-extension of the measure will likely lead to significant quantity of
low-priced imports which will be the dominant cause again of significant impairment in the overall
position of the domestic industry.

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

2. Injury Factors

2.1 Market Share

Table 7. Apparent Domestic Consumption of Ceramic Tiles

Year Domestic Imports/b Apparent % Share to Estimated
Sales /a Domestic Apparent
Consumption Consumption
(‘000 sqm) (‘000 sqm) (‘000 sqm) Domestic Imports
2004 13,647 4,206 17,853 76 24
2005 13,742 7,642 21,384 64 36
2006 12,957 8,978 21,935 59 41
2007* 6,427
/a
Source: - Mariwasa and Lepanto
/b
- NSO Foreign Trade Statistics
Monitoring Report on the Adjustment Plan of the domestic industry
* January to June 2007

2.2 Production, Sales and Ending Inventory

Table 8. Production, Sales and Ending Inventory

Production Sales Ending
( ‘000 sqm) ( ‘000 sqm) Inventory
Year
% % %
Total Domestic Exports Total Total
Change Change Change
2004 13,996 4 13,647 520 14,167 7 1676 (11)
2005 14,233 2 13,742 70 13,812 (3) 1526 (9)
2006 13,420 (6) 12,957 73 13,030 (6) 1976 29
2007* 6,342 6,427 128 6,555 1709
Source: Mariwasa and Lepanto
Monitoring Report on the Adjustment Plan of the domestic industry
* - January to June 2007

2.3 Capacity Utilization

Table 9. Annual Rated Capacity, Actual Production and Capacity Utilization

of Applicant Companies: 2004-2007
Year Rated Capacity Production Capacity Utilization
(‘000 sqm) (‘000 sqm) (%)
2004 18,394 13,996 76
2005 17,124 14,233 83
2006 16,373 13,420 82
2007* 8,143 6,342 78
Source: Mariwasa and Lepanto
Monitoring Report on Adjustment Plan of the domestic industry
* - January to June 2007

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

2.4 Cost of Production

Table 10. Percentage Change of Cost Components

June-
Cost 2004 2005 2006 % Change % Change % Change
2007
Components (%) (%) (%) (04-05) (05-06) (06-07)
(%)
Raw
28.72 26.84 25.27 24.84 (0.82) 5.11 4.88
Materials
Direct Labor 2.03 1.72 2.29 2.77 (10.00) 48.96 29.02

Variable
43.72 45.65 47.90 46.01 10.82 17.13 2.51
Overhead
Fixed
25.54 25.79 24.53 26.38 7.14 6.21 14.73
Overhead
Cost of
100.00 100.00 100.00 100.00 6.11 11.63 6.72
Production
Source: Mariwasa and Lepanto
Monitoring Report on the Adjustment Plan of the domestic industry

2.5 Profitability

Table 11. Combined Income Statement of Applicant Companies

(in thousand pesos)
2007
Particulars 2004 2005 2006
(Jan.-June)
Sales 2,485,197 2,532,234 2,421,673 1,285,763

Less: Cost of
2,140,789
Sales 2,215,032 2,220,059 1,128,534

Gross Profit 344,408 317,202 201,614 157,229

Less: Operating
450,974
Expenses 457,634 462,342 181,417
Income(Loss) from
(106,566)
Operations (140,432) (260,728) (24,188)
Other Income
(686,298)
(Expenses) (178,659) (294,481) (21,754)
Income(Loss)
(792,864)
before Income Tax (319,091) (555,209) (45,942)
Source: Mariwasa and Lepanto
Note: Mariwasa uses calendar year as their accounting period while Lepanto uses fiscal year.

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 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

2.6 Employment and Productivity

Table 12. Employment and Productivity of Applicant Companies

Production No. of Labor

Year % Change % Change
(‘000 sqm) Employees Productivity
2004 13,996 1,455 39.23 9,619 (11.97)
2005 14,233 1,188 (18.35) 11,981 24.55
2006 13,420 1,194 0.51 11,240 (6.19)
2007* 6,342 1,264 5.86 -
Source: Mariwasa and Lepanto
* - January to June 2007

2.7 Return on Sales

Table 13. Return on Sales (based on Income from Operations)

Income from Operations Sales Revenue Return on Sales
Year
(P’000) (P’000) (%)
2004 (106,566) 2,485,197 (4.29)
2005 (140,432) 2,532,234 (5.55)
2006 (260,728) 2,421,673 (10.77)

2007* (24,188) 1,285,763 (1.88)

Source: Mariwasa and Lepanto

* - January to June 2007

___

Page 21 of 24
 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

EFFORTS OF THE INDUSTRY TO ADJUST TO IMPORT COMPETITION

Sec. 19 of RA 8800 provides that subject to the review under Sec. 16, an
extension of the measure may be requested by the petitioner if the action continues
to be necessary to prevent or remedy the serious injury and there is evidence that
the domestic industry is making positive adjustment to import competition.

In case one or more firms of the benefiting industry which applied for
safeguard measure failed to comply with their commitments as reflected in the
approved adjustment plan, the safeguard measure shall continue to be in effect,
provided however, that the firms which complied with their commitments constitute
the majority in accordance with the definition of the domestic industry under
Section 4 of paragraph (f) of RA 8800. 7

In summary, the adjustment plans submitted by Mariwasa Siam Ceramics

and Lepanto Ceramics Inc. contained the following:

1. Mariwasa Siam Ceramics, Inc. Adjustment Plan (2005-2007):

A. Provide even better products.

Introduce 180 new designs and features using the latest technology.

Monitoring Report (March, 2007): - 199 new series from 2004 to 2006

B. Improve distribution
The key to sustaining market leadership is keeping an extensive distribution
network. Mariwasa will expand its distribution network by appointing new
distributors throughout the country.

Monitoring Report : 13 new distributors from 2004 to 2006

C. Strengthen brand equity

Various marketing programs are in place to improve the Company’s brand

equity like increased advertising, participation in trade exhibits and upgrading
product displays.

Monitoring Report: Acquired 35 billboard sites and placed 39 ads on broadsheets

and glossy magazines from 2004 to 2006

D. Reduce manageable costs.

Three variable cost elements have the greatest impact on production costs
are power costs, fuel costs and glaze raw material cost. Mariwasa will continue to
maintain and operate its own power plant. It also plans to reduce debts in 2005 by
asset sales and additional capital infusion.

7
TC Manual on Safeguards Investigation, p. 11b

Page 22 of 24
 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

Quantifiable targets:

1. Reduce LPG cost by 12% over the next four years.

Monitoring Report : LPG consumption (kg./sqm) from 2004 to 2006 is less than
1.00 resulting to higher savings. (recognition from DOE.)

2. Reduce bunker fuel cost by 12% over the next four years.

3. Further reduce electricity consumption by 10% over the next three years.
Monitoring Report: Power consumption (kwh/sqm) for 2004-2006 is less than 4.00
resulting to higher savings. (Recognition from DOE)

4. Reduce glaze costs by 8% over the next three years.

Monitoring Report: Glaze consumption (kg/sqm) for 2004-2006 is less than 1.00
resulting to higher contribution.

5. Reduce maintenance cost by 8% over the next three years.

6. Lower cost of funding.

E. Increase production yield.

Monitoring Report: Produced at higher efficiencies above 90% from 2004 to 2006;
reduced raw materials costs (P/ton) at 12% from 2004 to 2006 resulting to
improved margin.

1. Improve knowledge and skill of people in production line

2. Improve line management systems
3. Improve equipment performance

Monitoring Report: Under its Enercon Projects, the following actions were
undertaken in 2006:
1. Installed heat recovery systems. Invested millions for the heat recovery
systems resulted to savings equivalent to 300% of said investment.
2. Modification of various equipment. Investments on the modification/reduction
of power ratings of several equipments resulted to savings.

2. Lepanto Ceramics, Inc. Adjustment Plan (2005 – 2008)

A. Competitiveness through Cost Reduction and Efficiency

- Increasing production volume to an average of 600,000 square meters/month

- Cost down scheme to result in 10-12% reduction of production cost.

Monitoring Report: The rate of rejects was brought sown to 5% in 2006 and
targeted to be at 4% in 2007. The efficiency of the spray dryer was
increased by increasing the density of the slip (glaze) to reduce milling

Page 23 of 24
 Staff Report – Petition for Extension of the Imposition of Safeguard Duty on Ceramic Tiles, SG 01-2007

time. The gain made in increasing efficiency was wiped out by increase
in cost of fuel and power.

B. Working Capital Management

- Maintain finished goods inventory at under 60 days stock;

- Trade receivables at maximum of 90 days
- Stockpiling of body materials to hedge on cost and seasonal constraints;
- Terms kept to 120 days maximum;
- Debt reduction by 50%.

Monitoring Report: Based on Lepanto’s submission, substantial compliance to its

adjustment plan was not met.

C. Product and Service Quality

- Rationalization of product mix by reviewing product mix and increase designs by

50%;
Monitoring Report: Product mix ranges from low to high end; 2-3 new designs every
6 months since 2005.

- Selective price increases where possible;

Monitoring Report: Average selling price improved by 9% in 2006.

- Distribution network
Monitoring Report: Expansion in distribution is concentrated on the local market.
Exports remain a plan in 2007.

x-x-x

Page 24 of 24