Manufacturing jobs depart from Philippines for Vietnam

By Buena Bernal Economics/Business, Philippines, Oct 20, 2017

Korean firms are leaving the Philippines, and something has to be done.

South Korean companies, the third-largest investor in the Philippines, are increasingly departing for Vietnam and other Southeast Asian destinations, driven by lower costs, red tape and an aversion to Filipino worker militancy and their preference for labor unions.

The growing numbers of corporate departures are not only a human blow to workers but a setback as well to the Philippines’ hard-to-acquire image as Southeast Asia’s go-to investment destination, fostered by healthy foreign direct investment and a growing gross domestic product rate.

Shock data from the country’s central bank, Bangko Sentral ng Pilipinas, shows a 90.3 percent decline in new FDI and foreign equity placements (excluding reinvestment) in the first six months of 2017, down from US$1.45 billion to US$141 million year-on-year. Over-all FDI already including net equity capital, reinvestment of earnings and net debt instruments saw a 14 percent decrease in the same period. The first six months of 2017 saw an influx of US$3.6 billion in FDI compared to healthier US$4.2 billion net inflows posted in the same period last year.

The effects playing across the Philippines are no better exemplified than with 40-year-old Menchu Pinangay, who toiled for almost six years as a machine operator at Faremo International Inc., a garments manufacturer located south of Manila and owned by Korean firm Hansoll Textile Ltd. Until October 2016, Faremo’s workers spent eight hours a day machine-sewing in-fashion clothes sold by established American apparel brands at prices their daily pay couldn’t afford. The factory operated at least a dozen sewing lines for Gap, JCPenney and Kohl’s.

But a year ago, Pinangay learned from her manager that the entire plant was shutting down. Company management insisted that the shutdown was part of a strategic corporate decision, a move that affected at least 800 regular Filipino workers. Hundreds of others who worked there on a casual status also lost their income source.

A regular factory worker at Faremo was paid around PHP315 (US$6.30) a day, according to union president Jessel Autida.

Unionists routinely petition for incremental hikes in minimum wages before regional wage boards, with other more radical groups opting out of the system of petitioning the board and instead demanding through awareness campaigns for an across-the-board national floor wage.

After work hours, many garments factory workers like Jessel proceed to community-based tailor shops to supplement their income, sewing in the evening for local shops on a piece-rate basis. The pay is even sparser, dependent on the number of tailor-made clothes that clients place.

Union members have had to rely on such shops in the aftermath of Faremo’s closure. Union members were granted sewing machines as part of a livelihood project on top of their separation pay.

Union negotiations towards a collective bargaining agreement that stipulates wage and working conditions in the Philippines are company-based instead of industry-wide.

Shift of Orders

Like a number of Korean businesses in the Philippines this past year, Hansoll said it intended to transfer Faremo’s existing manufacturing operations to Vietnam. In public documents made available by the independent non-profit Business & Human Rights Resource Center, Hansoll disclosed that Faremo’s closure was “done for purely business reasons.”

One of Hansoll’s clients, Gap Inc., said it “has increased its orders with Hansoll from 2015 to 2016.” That admission drove suspicions that the shutdown was for other reasons than diminishing business. Gap Inc. did clarify that “Hansoll has shown, with sufficient evidence, that this decision was driven by their global business strategy.”

“Hansoll made a business decision to close its Philippines facility, Faremo International Inc., in October 2016. This information was shared with Gap Inc. in September, during which time we implemented our facility closure protocol to ensure all aspects of the closure are in compliance with local laws and Gap Inc. policies,” the American clothing company explained.

“We assume that the reason behind our customers’ reduction of orders is due to the manufacturing difficulties including increased manufacturing costs compared to Vietnam and Cambodia,” Faremo said in a confidential email exchange obtained by Asia Sentinel.

Long-time trade unionist Leody de Guzman of the Bukluran ng Manggagawang Pilipino (BMP) said this has always been a business trend, citing a similar move by Smart Electronics Manufacturing Service Philippines Inc, which counts Samsung among its clients, to let go Filipino workers because of “red tape in the government of the Philippines” and instead to favor business expansion in Vietnam. He said among those left jobless were members of BMP.

Businessman Ho Ik Lee, president of the Korean Chamber of Commerce Philippines (KCCP), has in fact acknowledged to local media that the cost of doing business including and especially logistics in the Philippines is “too high.”

“It’s almost three times higher than Vietnam’s. This higher cost is killing manufacturing and that is why the Korean companies are leaving and moving to Vietnam,” he told Philippine Star. Asia Sentinel reached out to Mr. Lee’s office for this article but has yet to receive a comment.

Manufacturing costs include raw materials, labor, and other indirect costs or overhead costs related to the former two including movement of supplies and power rates. Additionally, supply chains management is hampered by severe traffic congestion caused by poor infrastructure and road management.

Business Climate

In the 2018 ASEAN Business Outlook Survey, Vietnam is the economic bloc’s top investment destination for surveyed executives of US companies. Philippines ranks fifth, behind Myanmar, Indonesia, and Thailand.

Vietnam also ranks second among ASEAN member-states in terms of an improved investment environment with 54 percent of surveyed American business executives in Vietnam reporting a positive improvement there.

Meanwhile, the Philippines had the most positive profit outlook with 85 percent of surveyed business executives expecting profits to be higher by 2018. It is, however, closely followed by Vietnam with 84 percent of the businessmen also expecting profit growth.

In January, the Korean Chamber of Commerce Philippines wrote a strongly-worded statement expressing shock over the kidnap-slaying of Korean businessman Jee Ick-joo in the country’s national police headquarters in the middle of President Rodrigo Duterte’s ill-considered drug war as well as demanding “doubled efforts” from the government to “assure the safety” of Koreans in the country.

“We strongly condemned any kind of violence and unjust treatment not only to Korean businessmen but also to 120,000 Koreans residing in the Philippines… In South Korea, we strongly protect the welfare and respect almost 50,000 Overseas Filipino Workers,” the statement read. The country is host to the largest South Korean diaspora in Southeast Asia.

Philippine President Rodrigo Duterte had launched a controversial crackdown on the illegal drug trade upon assuming office last year. His past remarks emboldening the police to be more aggressive in anti-drug operations are criticized as having spiked police brutality and their excessive use of force.

Although civilians such as Jee have been among the casualties of violence and abuse by police authorities, there has yet to be a recorded concrete impact directly correlating safety issues brought about by the unrelenting drug war to investor confidence, but past remarks by foreign business groups have expressed concerns about the human rights conditions in the country.

‘Strong economy’

Trade unionist Rene Magtubo of Partido Manggagawa is wary that Korean companies are closing in the Philippines simply to avoid unionization. Magtubo cited the case of Korean firm Sein Together Phils. Inc., which temporarily shut down in September. He said the garments factory reopened last October 23, but only after almost 400 workers lost their jobs.

Union membership is a hard sell in the Philippines. Latest state figures show that the proportion of union membership to total employees in establishments employing 20 or more workers from 1995 to 2014 decreased from 30.5 percent to 7.7 percent. (While Article 298 of the Philippine labor code considers closure of an establishment as a management prerogative, closure as well as relocation of production operations to overseas to avoid a union is an unfair labor practice.

“Corporate officers may not only be civilly liable but criminally liable,” said labor lawyer Jose Sonny Matula of the Federation of Free Workers (FFW).

Matula explains that runaway shops or businesses that relocate for the purpose of avoiding a union can be dealt with by invoking the Organization for Economic Co-operation and Development (OECD) guidelines on freedom of association but only if the company in question is headquartered in an OECD member-state.

FFW has secured legal victories in the past before the Philippines’ top court, citing the OECD guidelines, which goes by the International Labor Convention 87 or the 1948 Convention on Freedom of Association and Protection of the Right to Organize. A complaint may also be filed with the contact person of the OECD country where the company is based in.

Matula says there are currently no preventive mechanisms to ensure that there are no runaway shops among foreign investors leaving the Philippines. To increase exit costs, he said “some sort of a bond to answer liability” may be a good provision to add to the requirements for closure of establishments.

But Mr. Lee’s earlier remarks about the general sentiment of members of the Korean Chamber of Commerce Philippines regarding the cost and difficulty of doing business in the Philippines reveal problems not just at the corporate level but at the state level.

There is no burden for foreign corporations to continue operating in the Philippines, as long as the minimum requirements set by law for voluntary closures are complied with. These include separation pay and a prior notice filed before the labor department, among others. Separation pay requirements are waived if the business closes due to bankruptcy.

There is, however, a burden on the part of the government to attract and retain investors such that its working-age citizens have jobs that enable them and their families to live decently.

The government is sticking to its guns that the administration’s “economic strategy is paying off.”

In a statement, Presidential Spokesperson Ernesto Abella pointed to “signs of improvements,” such as the 6.4 percent GDP growth and the 57 percent employment gain in the first half of 2017, the Philippine Stock Exchange index’s 8,400-point all-time high in October 12, the 9.3 percent rise in total exports in August 2017 to US$5.5 billion, and the global ranking of the Philippines in the World Bank’s 2017 Global Economic Prospects as the world’s 10th fastest growing economy.

Framed as Abella did, these numbers are reassuring. But those left jobless by the transfer of manufacturing jobs from the Philippines to Vietnam seemed to have fallen through the cracks. They live from one pay cut to the next. Their choices are few and the future though not necessarily dim is too far ahead for them to plan for. Their focus is on how to pay for the next meal.

Unless strong macroeconomic fundamentals trickle down to Filipinos in the grassroots like them, much has yet to be done.