South Korean companies, the third-largest investor in the Philippines, are increasingly departing for Vietnam and other Southeast Asian destinations, driven by lower costs, red tape and an aversion to Filipino worker militancy and their preference for labor unions.
The growing numbers of corporate departures are not only a human blow to workers but a setback as well to the Philippines’ hard-to-acquire image as Southeast Asia’s go-to investment destination, fostered by healthy foreign direct investment and a growing gross domestic product rate.
Shock data from the country’s central bank, Bangko Sentral ng Pilipinas, shows a 90.3 percent decline in new FDI and foreign equity placements (excluding reinvestment) in the first six months of 2017, down from US$1.45 billion to US$141 million year-on-year. Over-all FDI already including net equity capital, reinvestment of earnings and net debt instruments saw a 14 percent decrease in the same period. The first six months of 2017 saw an influx of US$3.6 billion in FDI compared to healthier US$4.2 billion net inflows posted in the same period last year.
The effects playing across the Philippines are no better exemplified than with 40-year-old Menchu Pinangay, who toiled for almost six years as a machine operator at Faremo International Inc., a garments manufacturer located south of Manila and owned by Korean firm Hansoll Textile Ltd. Until October 2016, Faremo’s workers spent eight hours a day machine-sewing in-fashion clothes sold by established American apparel brands at prices their daily pay couldn’t afford. The factory operated at least a dozen sewing lines for Gap, JCPenney and Kohl’s.
But a year ago, Pinangay learned from her manager that the entire plant was shutting down. Company management insisted that the shutdown was part of a strategic corporate decision, a move that affected at least 800 regular Filipino workers. Hundreds of others who worked there on a casual status also lost their income source.
A regular factory worker at Faremo was paid around PHP315 (US$6.30) a day, according to union president Jessel Autida.
Unionists routinely petition for incremental hikes in minimum wages before regional wage boards, with other more radical groups opting out of the system of petitioning the board and instead demanding through awareness campaigns for an across-the-board national floor wage.
After work hours, many garments factory workers like Jessel proceed to community-based tailor shops to supplement their income, sewing in the evening for local shops on a piece-rate basis. The pay is even sparser, dependent on the number of tailor-made clothes that clients place.
Union members have had to rely on such shops in the aftermath of Faremo’s closure. Union members were granted sewing machines as part of a livelihood project on top of their separation pay.
Union negotiations towards a collective bargaining agreement that stipulates wage and working conditions in the Philippines are company-based instead of industry-wide.
Shift of Orders
Like a number of Korean businesses in the Philippines this past year, Hansoll said it intended to transfer Faremo’s existing manufacturing operations to Vietnam. In public documents made available by the independent non-profit Business & Human Rights Resource Center, Hansoll disclosed that Faremo’s closure was “done for purely business reasons.”
One of Hansoll’s clients, Gap Inc., said it “has increased its orders with Hansoll from 2015 to 2016.” That admission drove suspicions that the shutdown was for other reasons than diminishing business. Gap Inc. did clarify that “Hansoll has shown, with sufficient evidence, that this decision was driven by their global business strategy.”
“Hansoll made a business decision to close its Philippines facility, Faremo International Inc., in October 2016. This information was shared with Gap Inc. in September, during which time we implemented our facility closure protocol to ensure all aspects of the closure are in compliance with local laws and Gap Inc. policies,” the American clothing company explained.
“We assume that the reason behind our customers’ reduction of orders is due to the manufacturing difficulties including increased manufacturing costs compared to Vietnam and Cambodia,” Faremo said in a confidential email exchange obtained by Asia Sentinel.
Long-time trade unionist Leody de Guzman of the Bukluran ng Manggagawang Pilipino (BMP) said this has always been a business trend, citing a similar move by Smart Electronics Manufacturing Service Philippines Inc, which counts Samsung among its clients, to let go Filipino workers because of “red tape in the government of the Philippines” and instead to favor business expansion in Vietnam. He said among those left jobless were members of BMP.
Businessman Ho Ik Lee, president of the Korean Chamber of Commerce Philippines (KCCP), has in fact acknowledged to local media that the cost of doing business including and especially logistics in the Philippines is “too high.”
“It’s almost three times higher than Vietnam’s. This higher cost is killing manufacturing and that is why the Korean companies are leaving and moving to Vietnam,” he told Philippine Star. Asia Sentinel reached out to Mr. Lee’s office for this article but has yet to receive a comment.
Manufacturing costs include raw materials, labor, and other indirect costs or overhead costs related to the former two including movement of supplies and power rates. Additionally, supply chains management is hampered by severe traffic congestion caused by poor infrastructure and road management.