Corporate Watch

In January last year, Hanjin Heavy Industries and Construction Philippines (HHIC) delivered to the French Maritime Freighting Company, CMA CGM S.A., fourth-largest container company in the world, its flagship Antoine de Saint Exupery, its largest container ship (with a deck of three football fields combined) and the largest Europe-based ship in the world (World Maritime News, Jan. 5, 2018). Made in the Philippines, at the 326-hectare HHIC shipyard in Redondo peninsula, north of Subic Bay, Zambales.
This new vessel, the first of three ordered by CMA CGM S.A., represented a breakthrough in global shipbuilding, according to HHIC-Phil President Gwang Suk Chung. He said “the intensive support of the Philippine government gave the Korean shipbuilding company a robust head start in the shipbuilding industry” (, Jan. 27, 2018). Present at the completion ceremony and keynote speaker was former President and now Pampanga Representative, House Speaker Gloria Arroyo, in whose presidential term the Hanjin shipyard was inaugurated in 2007. In her speech, Arroyo cited the “$2.3-billion investment of HHIC in the Subic Bay Freeport” and thanked the Korean firm for the “massive training facility for workers” (Ibid.). Subic Bay Metropolitan Authority (SBMA) Chair Atty. Wilma T. Eisma read the message of President Rodrigo Duterte (who was then in India for the ASEAN meeting), thanking Hanjin for “its vital role in national economic growth, and “expect(ing) HHIC Phils. to remain a pillar and partner in the growth of the Philippine maritime industry” (Ibid.). Hanjin has delivered 123 ships from the shipyard in the past 11 years, or about 12 ships a year.
But just short of a fortnight a year after the launch of Antoine de Saint Exupery, the Korean shipbuilder HHIC Phils. filed for bankruptcy on Jan. 8, 2019, after it suffered liquidity problems to repay its debts. Hanjin is reported to have incurred around $400 million in outstanding loans from local banks and another $900 million owed to South Korea lenders (Sunstar, Jan. 14, 2019).
What happened? Why did not all see that HHIC Phils. was going to die?
In September 2016, Subic Bay Metropolitan Authority (SBMA) Chairman Roberto Garcia assured workers at the Subic shipyard that HHIC Phils. was not going to be affected, that Hanjin Shipping Co. Ltd., the world’s seventh-largest shipping line, had filed for bankruptcy protection in the United States. “HHIC Phils. is not related to Hanjin Shipping (it is a subsidiary of Hanjin Heavy Industries and Construction Co. Ltd.), so there is no need to worry,” he said, pointing out that the Subic shipbuilder has separated from the Hanjin Group in 2005 (, Sept. 08, 2016). Management assured the workers that orders for container ships were still coming, and additional workers to the 35,000 direct and indirect employees already working on various operations will be needed for these (, Sept. 8, 2016).
HHIC then confidently accepted big orders from Singapore and France, among other smaller orders from other countries who were coincidentally refreshing their fleets. But perhaps cash planning was not efficient enough to address the shipping industry practice of progress billing to the buyer starting late in the building process (called the “heavy-tail” contracts) — which ate up production cash flows that then had to be advanced by HHIC. And so the local Hanjin, 100% foreign-owned (Korean) as allowed for non-utility companies under Philippine laws, borrowed heavily: $412 million from Philippine banks and another $900 million from Korean banks — which it cannot now pay back. It has been reported by some sources that the Subic shipbuilder has incurred at least $100 million in losses because of stiff global competition, the lower prices of ships because of decreased demand from uncertainties in the world economy, and slow production at the local shipyard due to technical limitations and the lack of skilled manpower.
How did the financial mess happen, when there are the generous subsidies from the Philippine government to make sure HHIC Phils. stays at Subic and generates revenues for the economy and for itself? Support was provided by the Philippine government under R.A. No. 9295 and the Investments Priorities Plan (IPP).
HHIC Phils. and all manufacturing investors at special economic zones enjoy a wide array of tax holidays, including full exemption from paying corporate income tax for a minimum of its four years of operations; a five percent preferential tax rate on gross income earned in lieu of all national and local taxes, tax and duty-free importation of raw materials, capital equipment, machineries and spare parts; exemption from wharfage dues and export tax, impost or fees; VAT exempt on local purchases; exemption from payment of any and all local government imposts, fees, licenses or taxes; and an exemption from expanded withholding tax. Besides taxes, HHIC Phils. also received subsidized power rates from the Arroyo administration, amounting to more or less P4 billion over a 10-year period (Sunstar, Jan. 14, 2019). The last $30 million of this was payable this month (January 2019). Note that SBMA, who pays for HHIC power usage, has reflected losses in its own financial statements citing this heavy expense for the HHIC power subsidy (SBMA 2016 f/s).
“This is the biggest corporate bankruptcy to ever hit the Philippines,” economist Gerardo P. Sicat said (The Philippine Star, Jan 16, 2019). Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier immediately said that “[i]f the creditor-bank is proactive in monitoring the developments in Hanjin, then the bank should have already provided for an allowance for credit losses… the bank would be able to cushion the impact of this default on its profit” (BusinessWorld, Jan. 16, 2019). And the four leading lenders in the country who all lent to HHIC said, yes, they did provide for the losses, and their capital adequacy ratio would be far from compromised: Rizal Commercial Banking Corp. (RCBC) lent the most at $145 million; Metropolitan Bank & Trust Co. (Metrobank), $70 million; BDO Unibank, Inc., $60 million; and Bank of the Philippine Islands (BPI), $52 million (BusinessWorld, Jan. 16, 2019). State-owned Land Bank of the Philippines (LANDBANK) is estimated to have lent $85 million to HHIC Phils., for which the government bank is now being questioned that loans should have been prioritized for the agricultural sector (The Philippine Star, Jan. 15, 2019).
Has HHIC Phils. “borrowed to complacency” and availed of government subsidies and incentives likewise “to complacency,” that so nonchalantly, it could up and file for the biggest corporate bankruptcy ever to hit the Philippines? The banks and other lenders can shrug off the bad loans, but the Filipino people cannot, because it is their money that pampered HHIC’s apparent opportunism for the exuberant offerings of subsidies and incentives by some hopefully-not personally motivated government leaders.
The Department of Finance’s Train Two program that proposes tighter time limits for subsidies and incentives to certain foreign business locators and the phase-out of the older subsidies is good, as in the negative example of abuse of welcome and favor, in the HHIC Phils. bankruptcy case.
P.S.: Defense Secretary Delfin Lorenzana broached the proposal for the government to take over Hanjin’s facility, so it could have access to a strategically located naval and maritime asset. Presidential spokesman Salvador Panelo said President Duterte said he will study this (The Philippine Star, Jan. 18, 2019). Indeed, this must be studied very well, and honestly, for conspiracy theories are rising that some beneficial partnerships might be formed with reportedly-favored individuals and government (Ibid.). But even disregarding such probably-unfounded anxieties, the more urgent focus should be that the government should not go into “reverse privatization,” a one-step-forward, two-steps-back action that will re-entrench government in private business, and deter goals of fair competition and free enterprise.
Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.