Hanjin Failure in Philippines Has Disturbing Implications

It could well be a tsunami in another form, yet the recent declaration of bankruptcy by shipbuilder Hanjin Philippines has attracted scant attention in the Philippines and almost none overseas. Yet the insolvency threatens the livelihoods of the approximately 22,000 employees of the Subic Bay concern, and potentially the security of the nation.

China, which invaded and occupies Panatag shoal which lies only 130 miles west of Subic Bay, is regarded as keen to come to the rescue of the Korean-owned business in the huge bay, which was once a US base and is regularly visited by US, Japanese and other naval ships challenging China’s claims to most of the West Philippine and adjoining seas.

A move by China to take over the base is a political and strategic as well as financial question for the government and one that will be closely followed by neighbors already nervous about the Philippines’ susceptibility to Chinese money lures. There is already concern over Beijing’s growing clout in the economy, to the point where, as Asia Sentinel reported last July, banners appeared on Manila overpasses proclaiming: “Welcome to the Philippines, Province of China.”

The possibility of a Chinese takeover of the Subic facility has stirred concern in the Philippines Congress, with opposition Sen. Antonio Trillanes IV warning against such an outcome, saying there are serious implications for national security

“Definitely, we need to keep a close watch over that,” Trillanes told reporters. “If [Hanjin] lands in the hands of Chinese companies, the problem is that China has a highly active initiative to expand its influence in Southeast Asia.”

Defense Secretary Delfin Lorenzana was quoted as saying President Rodrigo Duterte is “receptive to the idea” that government might partly nationalize the shipyard. Lorenzana made the proposal in order to have a strategic naval location and for the country’s naval force to produce their own ships. The government, Lorenzana said, should be a “minority owner” with private companies owning the preponderance of the shares, although Senate Majority Leader Juan Miguel Zubiri, argued that the government should own the most shares, leaving the minority to the private sector.

Through its Belt and Road Initiative, which is facing growing blowback in many countries, Beijing has offered US$24 billion in investment, loan pledges and credit to augment Duterte’s extensive “Build, Build, Build” infrastructure plans. That has led to concerns that Duterte, having buckled under to China over Beijing’s takeover of the South China Sea islets, is letting China take too big a role in the economy. The country has been flooded with hundreds of thousands of tourists.

Hanjin is the largest industrial employer in the whole country and a key to the maintenance of an industry capable of building large ships, whether for commercial or industrial use. Its bankruptcy is also the largest ever seen in the Philippines, with a reported US$900 million owed to Korean banks and US$400 million to Philippine ones.

The bombshell though was the January declaration by Hanjin Philippines seeking protection while undertaking rehabilitation or liquidation, the company’s troubles should not have come as a complete surprise. It is part of the Hanjin group whose principle operation, Hanjin Shipping was declared bankrupt two years ago, its ships sold off to other lines at knock-down prices and creditors – mostly Korean – left with huge defaults.

In the case of the Philippine company, Hanjin Heavy Engineering and Construction, orders and prices may have been hit by overcapacity in the container ships, slower growth of world trade and its own labour and management problems. Shipping sources say Hanjin’s yard suffered from quality issues, late delivery which led to cancellations and a very poor safety record.

Nor is it clear whether the local company suffered reputational damage from Hanjin Shipping’s collapse or itself was left being owed by the shipping company for vessels built or supplied. Details are hard to find as relationships between Korean companies and Korean banks are opaque.

What is clear is that the yard, which was only begun in 2006 and delivered its first ship in 2008, is a huge undertaking which, together with a Japanese-owned yard in Cebu, has in a short period made Philippines into a significant if little-noticed shipbuilding nation, reportedly the fourth largest in the world in terms of gross tonnage.

The Philippine government is determined to save the yard and is looking for a foreign majority partner. But with fears of a Chinese company being chosen, there is political pressure for the government itself to take control. That has other dangers, as the record of state-controlled enterprises in the Philippines indicate.

Other Korean or Japanese companies are possibilities but given the excess of building capacity in east Asia, potential buyers will be looking for a bargain which will hit Philippine as well as Korean banks, as well as government cash or at least guarantees.

Hanjin, according to the Subic Bay Metropolitan Authority, invested US$2.3 billion in the project. As a large and modern yard, it should in principle have a future, both for building and repair given its location, local vessel demand and its abundant, relatively cheap labor. But first it will have to be shorn of much of its debt and provided with new management.

So the question now is how the Philippine government can manage negotiations with creditors, Korean and local, and any potential buyers of equity in a reconstructed company, navigating around the Chinese and still keeping a company open that is vital to the economy.