China or Japan? The contest for Hanjin, the Philippines’ largest shipyard

A commentary

The search is on for the White Knight that shall save the financially distressed Hanjin Heavy Industries and Construction, the largest shipyard in the Philippines at Subic Bay Freeport. As Hanjin Philippines plunges toward insolvency, Defense Secretary Lorenzana immediately suggested that the Philippine government adopt the shipyard and appoint the Philippine Navy to manage the facility. Lorenzana argued that such a move will benefit the Philippine coast guard in need of more ships—a proposal that President Rodrigo Duterte supported.

Foreign investors from China and Japan, being the top two leading shipbuilders alongside South Korean firms, are similarly candidates poised to take over the shipyard located in a former U.S. Naval base. However, Japan seems to have quite the advantage, as Philippine officials including Lorenzana worry about a possible Chinese takeover. The possibility could stem from Beijing’s strategic calculations, similar to its militarization of illegally reclaimed islands in the South China sea. As two Chinese firms intend to manage Hanjin shipyard, a strategic national asset, the security risks outweigh whatever investments they offer.

Given the strategic, economic and political considerations of the Philippines then, Japan and its associated firms present a near-ideal candidate to succeed in the shipyard’s operations.

Japan’s naval diplomacy

The Philippines and Japan are not embroiled in any maritime dispute, eliminating any conflict of interest that could compromise national security and territorial integrity. On the contrary, Japan is actively upgrading the Philippines’ maritime capacity to amid series issues it has with China over its expansive claims and island building in the West Philippine Sea.

Since 2016, the Japanese government has been supplying military equipment to the Philippines under the Transfer of Defense Equipment and Technology agreement. The Philippine Coast Guard completed its acquisition of 10 44-meter multi-role response vessels (MRRVs) built by the Japan Marine United Corp. On a recent visit to Japan, Lorenzana also thanked the Japanese government for the transfer of five TC-90 aircraft units seen to strengthen the Philippine Navy’s capacity to patrol the West Philippine Sea. Japan is also exporting air defense radar equipment to the Philippine Air Force for monitoring of aircraft and vessels within Philippine territory.

These efforts that underpin Japan’s naval diplomacy are tangible contributions to Philippine security. Under special circumstances, Japanese shipbuilders, known for their technical expertise, could extend assistance to ensure the longevity and durability of ships provided by the Japanese government.

The possible takeover of Japanese firms then will further the Philippine-Japan Joint Committee under its strategic partnership framework by facilitating maintenance and technical know-how of managing defense supplies and equipment.

Japanese reputation in shipbuilding

Tsuneishi Heavy Industries (Cebu) Inc., a joint venture between Japan’s Tsuneishi Holdings and Filipino-owned Aboitiz group, boasts of credible prestige on the local and international shipbuilding stage. In fact, prior to Hanjin’s venture in the local industry, the Philippines is already on the international shipbuilding map courtesy of Tsuneishi.

According to the Department of Trade and Industry, Hanjin and Tsuneishi account for nearly all exports with 75% employment and 97% of revenues in the Philippines’ shipbuilding industry. In the face of Hanjin’s declared bankruptcy, Tsuneishi remains optimistic, planning further expansion in the global shipping business, in line with its goal of becoming the “mother shipyard” among Southeast Asian Countries.

Applied to this context, Tsuneishi could be a viable partner in the proposed-public private partnership in the resumption of Hanjin’s shipyard operations. As one of the big industry players, it could also attract other partners and establish a maritime industrial park. This can mitigate the impact of unemployment and maintain the Philippines’ positive image in the aftermath of Hanjin’s bankruptcy.

The Duterte factor

A fundamental factor that shall determine Japan’s takeover of the former U.S. naval base is the political blessing of President Rodrigo Duterte, who recently expressed his intention to meet anew with Prime Minister Shinzo Abe. In recent years, Duterte and Abe expressed deep regard for their working relationship in various bilateral meetings. In the grand design of Duterte’s foreign policy often characterized by his friendliness toward China and antipathy toward the U.S., Japan occupies a distinct spot.

Recent developments in the bilateral relations of both countries is a testament to this “longstanding friendship.” Last February, Japanese Foreign Minister Taro Kono personally met with Duterte and inaugurated the Japanese Consulate General office in Davao City. Japan also pledged $200 million in loans for the Road Network Development Project in Conflict-Affected areas in Mindanao. Likewise, in January, the Philippines and Japan signed two loan deals amounting to $1.54 billion to improve the rail system.

Conclusion

The quest for the perfect candidate to helm Hanjin’s shipyard is symptomatic of a larger dilemma that confronts Philippine foreign policy today. Despite Duterte’s pro-China overtures, recent undertones of government officials and perceptions of majority of the Filipino population echo fear and anxiety toward the ever-increasing Chinese clout in political and economic spheres in the country.

Notwithstanding the potential legal or financial hurdles for an interested Japanese investor, based on strategic, economic and political criteria mentioned above, Japanese firms could present the ideal “win-win” scenario—restoring the Philippines competitiveness in global shipbuilding without compromising its national security.

Mark Manantan is a research fellow at the Center for Southeast Asian Studies in Taipei. He is also the founder of BryMan Media. Views expressed are entirely personal.