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Hanjin shipyard bankruptcy poses dilemma for Duterte

Chinese interest in strategically located Subic Bay site sets off alarm bells in Philippines

Hanjin shipyard workers, joined by their families and supporters, protest in front of the Philippine labor department headquarters in Manila on Jan. 28. The workers want government support as another 3,000 layoffs loom. (Photo by Cliff Venzon)

CASTILLEJOS, Philippines -- In the good times, when the giant Hanjin shipyard in Subic Bay was humming with orders, workers would gather in the nearby Hanjin village housing project to sing and drink into the night.

The celebrations took place twice a month on pay day, the fifth and the 20th. But this month, says Arnel Casta, a shipyard worker laid off in what is believed to be the Philippines biggest ever corporate default, "it has been quiet."

Casta, 51, is one of the 7,000 workers let go in December by Hanjin Heavy Industries and Construction Philippines, also known as HHIC-Phil. The company is the local arm of Hanjin Heavy Industries and Construction, one of South Korea's biggest engineering groups.

HHIC-Phil sought a local court's protection on Jan. 8 for failing to pay $412 million in debts to five local banks, and $900 million more to South Korean creditors.

Beyond the human cost, the bankruptcy of the country's largest shipyard poses a dilemma for President Rodrigo Duterte's government. Subic Bay, formerly housing a deepwater US naval base, lies on the South China Sea where China has steadily been building up its military presence, stoking tensions with its neighbours.

Arnel Casta, 51, a welder at the Hanjin shipyard for 10 years, was retrenched in December 2018. (Photo by Cliff Venzon)

With state-backed Chinese shipbuilders expressing interest in acquiring the 300-hectare Hanjin yard, Mr Duterte must weigh whether to offer the Chinese unlimited access to a vital naval and maritime asset.

Former Philippine navy chief Alexander Pama delivered a stark warning. "Let's be aware that this Hanjin shipyard issue is not just about business, financial and other economic issues," Pama said. "This is a very significant national security issue."

Philippine relations with China have warmed under Mr Duterte. Chinese companies have proposed a natural gas project in Subic and a railway connecting Subic and Clark, a former U.S. air base. Manila and Beijing have also agreed to conduct joint oil exploration in the South China Sea.

Yet, a sense of wariness remains toward a Chinese takeover. Defense Secretary Delfin Lorenzana has asked Duterte to consider a state-backed rescue, in which the government owns a minority stake and the Philippine navy plays a role in management. Lorenzana said the president was "very receptive" to the proposal.

Hanjin Village, located 20 km from the shipyard in the northwestern province of Zambales, hosts 500 homes and a school that sit on land donated by Hanjin. The houses were payable through salary deductions for up to 30 years, underlining how shipbuilding was supposed to offer a long-term livelihood for thousands of Filipinos.

But HHIC-Phil, established in 2006, sank into financial distress due to an industry practice of delayed payments by clients, which depleted the company's cash flow, according to a Jan. 14 court order announcing the start of corporate rehabilitation.

HHIC-Phil was once one the country's largest employers, with 35,000 workers at its peak in 2016. Its $2.3 billion investment is the largest in the Subic Bay Freeport Zone. The base was converted to an economic zone after US troops were told to leave the Philippines in 1992 amid an upswell of nationalist sentiment.

The Hanjin yard, one of the largest worldwide, has delivered 123 ships including container vessels and oil tankers, making the Philippines into the fifth-largest shipbuilding economy in the world.

The work there was not always safe. Last year, two employees were killed in a scaffold collapse, according to reports. Despite these problems, surrounding municipalities and tens of thousands of locals have come to depend on the shipyard for their livelihood.

Marilyn Ochon, 59, who runs one of the 22 small eateries outside the shipyard, is feeling the impact of HHIC-Phil's downfall. "I used to cook 15 kilos of meat every morning," she said. "Now, I can barely sell 3 kilos."

Around 14,000 people from the town of Subic once worked for Hanjin, whose presence gave rise to new businesses like retailers and dormitories, said Mayor Jeffrey Khonghun, who is running for provincial vice governor in May.

"We are very aggressive in helping them look for jobs or teaching them new livelihoods," he told Nikkei.

HHIC-Phil's lurch into bankruptcy protection swiftly attracted interest from companies in Australia, North America, China and other parts of Asia, government officials say.

The global shipbuilding industry faces strong headwinds amid oversupply and strong competition. But Hanjin shipyard's location makes it a highly attractive asset.

Subic Bay played a critical role as a supply and maintenance hub for the U.S. military during the Vietnam War and Cold War. Today, geopolitical rivalry centres on the South China, with Beijing vying for territory and influence against other claimants such as Brunei, Malaysia, Vietnam and the Philippines.

So when state-backed Chinese shipbuilders expressed interest in taking over the yard a few days after HHIC-Phil filed for bankruptcy protection, it set off alarm bells in Manila.

HHIC-Phil's business is worth $1.2 billion to $1.3 billion, and it needs monthly capital of $12 million to continue operations, Philippine officials say. Trade Secretary Ramon Lopez said he has asked U.S., South Korean and Japanese shipbuilders to weigh possible involvement.

The 300-hectare Hanjin shipyard in Subic Bay is one of the largest worldwide and has delivered 123 ships including container vessels and oil tankers. (Courtesy of Hanjin)

But the Subic Bay Metropolitan Authority, the agency in charge of promoting investments in the freeport zone, wants the shipyard rescued as soon as possible, regardless of who plays the white knight.

Wilma Eisma, the agency's chairwoman and administrator, touts Subic as an alternative destination for companies looking to escape the fall out from the U.S.-China trade war.

She fears that a prolonged search for an investor in the shipyard could hurt the zone's reputation, as when American logistics giant FedEx abandoned Subic in favor of China's Guangzhou as its Asian hub in 2009.

"This is not the fault of Subic, but still it happened in Subic," Eisma told Nikkei Asian Review. "That is why I'm very careful in making sure that the image of Subic is intact." She was one of the volunteers who helped establish the freeport zone in the early 1990s.

While the government mulls options for the shipyard, workers wonder what went wrong. Just last year, Hanjin delivered the huge container vessel Antoine de Saint Exupery for French shipper CMA CGM. The ship was the first container vessel with a capacity of 20,600 twenty-foot equivalent units to be built in Subic, and one of the biggest ships ever built anywhere, according to reports.

The vessel's unveiling in January 2018 was attended by Hanjin's top officials, former Philippine President Gloria Macapagal-Arroyo -- who secured the Hanjin investment during her term -- and local government officials.

"Were we affected by the problems of the mother company?" said Efren Vinluan, president of the Hanjin Workers Association, the de facto union. "Or maybe they used the money in their other businesses."

Vinluan was alluding to the bankruptcy of Hanjin Shipping in 2017. But Hanjin Heavy Industries and Construction was spun off from Hanjin Group in 2005, supposedly insulating it from the troubles of fellow businesses. An HHIC-Phil official did not respond to a request for comment.

Workers are growing impatient. Over a dozen employees, together with their families and supporters, marched to the Department of Labor and Employment office in Manila on Monday. They met with Labor Secretary Silvestre Bello to ask for assistance in securing a temporary reprieve from monthly home payments, as well as subsidies and job guarantees.

Vinluan, a Hanjin Village resident, said another 3,000 workers including himself are scheduled to be cut next month, leaving the shipyard with just a few hundreds of employees for facility maintenance.

"It doesn't matter who takes over the shipyard. We need jobs," he said in Filipino. "People at Hanjin Village are worried they, too, will default on their home loans."

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