It’s been six months since Hanjin Heavy Industries and Construction Philippines (HHIC-Phil) declared bankruptcy and closed the gates of the shipbuilding giant at Subic Bay, yet its future remains uncertain. The five Philippine banks that invested a total of $412 million in loans are working for the quick sale of the facility, while the Philippine Navy has called for its transformation into a naval base and shipbuilding hub.
So far, however, selling the Subic facility has proved challenging due to a price tag that would include covering HHIC-Phil’s liabilities, and the $12-million monthly working capital required for its operations. Daunting, too, is the need for additional investment to reconfigure the facility, fitted solely to produce large cargo vessels for the external market that had long soured due to sluggish global trade.
To thrive as a shipbuilder would likely mean diversifying its product lines to cater as well to domestic buyers—an option that might crowd out Filipino shipbuilders and, given the small market, include securing government contracts. The easier alternative could be to reduce the facility into commercial space, consisting of real estate and port, but this would mean losing the equipment, infrastructure and technical know-how that had made the country the world’s fifth largest shipbuilder.
Clearly, getting out of the current fix requires strategic thinking from the national government.
In this light, the Navy’s proposal deserves serious study. In a forum organized by the University of the Philippines Center for Integrative and Development Studies, Rear Adm. Giovanni Carlo J. Bacordo argued that the Philippine government should acquire the facility, citing security concerns due to its proximity to the disputed waters of Scarborough Shoal, and the Navy’s need for a secure and ready deep-sea harbor, especially for vessels newly acquired to strengthen the country’s defense in the high seas.
It is, however, the Navy’s interest in shipbuilding that suggests developmental thinking. Bacordo argued that if the country develops its naval shipbuilding capacity, it could benefit from the global trend of rising defense spending. By buying locally made vessels, rather than relying on imports, much of the money spent in the purchase can also be reinvested in the domestic shipbuilding industry.
An added incentive is the potential of technology transfer. One industry practice when partnering with a foreign naval shipbuilder for the delivery of specific models is to have at least one or a few of the commissioned ships be built domestically — a condition that would allow for technology transfer, increased local content and job creation.
Apparently, the Philippine Navy is informed by the experience of Indonesia, from which it recently bought two amphibious landing docks for P3.8 billion or $76 million and that launched in April its first Indonesian-made (20-percent local content) diesel-electric submarine — a product of a joint venture with Daewoo Shipbuilding and Marine Engineering (DSME).
History is replete with examples of how developing countries’ shipbuilding industries got their start with the State, specifically the Navy, as lead player. Given the huge investment needed to build even a single long-distance, export-quality maritime vessel, governments stepped up both as producers and procurers — an arrangement true not only for states but also for private corporations in which shipbuilders operate shipping lines.
In Indonesia and Malaysia, the state-owned or -led PT PAL and Boustead Naval Shipyard, respectively, build ships for the Navy, Coast Guard and other government agencies in contract-based joint ventures with foreign shipbuilders (e.g. the Dutch Damen Group, Naval Group of France and DSME). The Indonesian Navy (TNI-AL) and Royal Malaysian Navy shape the domestic industry also by ensuring technology transfer and placing work orders with local shipbuilders.
With Hanjin’s closure, the country finds itself at a defining moment. Do we, as an archipelagic nation, have a stake in strengthening our maritime industry and defense? If so, then the national government needs to step up, rather than opt out, in the face of such colossal market failure.
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Antoinette R. Raquiza is associate professor at the Asian Center and convener of the Center for Integrative and Development Studies Political Economy Program, University of the Philippines.