The Subic Bay Metropolitan Authority is building the former US naval base into one of the Philippines' most attractive locations for commercial and industrial investment. Taiwan entrepreneurs are providing much of the money and the managerial muscle.
November 1992 saw the departure from Subic Bay of the helicopter carrier USS Belleau Wood, the last ship to leave what until then had been the United States' largest overseas naval base, thus ending an American military presence that had continued unbroken for the best part of a century. A land area of 15,000 hectares eighty kilometers northwest of Manila was returned to the government of the Republic of the Philippines, along with dock facilities, an airport, power and water supply systems, roads, warehouses, and offices--assets that together were estimated to be worth a total of US$8 billion.
But resumption of sovereignty did not bring much joy to the newly established Subic Bay Metropolitan Authority (SBMA) and the 300,000 residents of the neighboring city of Olongapo, because without the US military, virtually all the local employers, customers, and work opportunities dried up. Looking out over a vista of deserted streets, empty buildings, and locked doors, Richard J. Gordon, chairman and administrator of SBMA, described the place as looking like the aftermath of a nuclear attack.
Something obviously had to be done if serious social and economic problems were to be averted. The first thing SBMA did was recruit about 10,000 workers from Olongapo to safeguard the facilities and keep them clean. That found something to keep the small army of unemployed people busy, while at the same time making the place more attractive to potential investors. Although SBMA had no money to pay these workers, it did promise that they would be first in line for jobs as soon as there were any.
The authority resolutely stuck to the line that Subic, with its prime location, available work force, and excellent facilities stood a good chance of being redeveloped into an industrial city, transshipment center, recreational area, or other job-creating enterprise. The Philippine government showed a willingness to help by designating Subic Bay a free port soon after the Americans left. But there was one major problem: Neither the government nor SBMA had the money and the technical skills needed to make the dream come true. It was clear that help would have to be sought from abroad.
The first port of call was Japan, which readily agreed to send experts to run their slide rules over Subic. "Careful evaluations are absolutely necessary for any investment project," says John Twan (段立德), Taiwanese marketing manager of the Subic Bay Development and Management Center (SBDMC), a Taiwan-SBMA joint venture. "But the people here had already been unemployed for some time, and they just couldn't afford to wait any longer." So while the Japanese were still analyzing and researching, the Philippine government turned to Taiwan.
The response from Taiwan's private sector was immediate and encouraging. "Timing was the key," Twan explains. "Many [Taiwan] industries were establishing overseas production bases because of increasing costs at home; the ROC government was promoting a Go-South investment policy, to mitigate the risks of putting all our eggs into the mainland Chinese basket; and Subic was badly in need of jobs. Our coming here benefited everyone." In September, 1993, Brian Liu (劉炳煌) became the free port's first Taiwan-born manufacturer. He rented a warehouse, brought in machinery, recruited and trained 1,500 local workers, and started to manufacture sneakers. Just three months later, he shipped out his--and also the free port's--first container-load of goods.
Taiwan's Chung Nan Textiles was another early bird, setting up its first overseas factory in Subic early the next year. "Convenient transportation was what appealed to us most," says General Manager Yen Haw-cheng (顏浩正). "I have access to daily direct flights to Taiwan, container vessels every week, and a dock that's right next to my factory." With an investment of NT$200 million (US$6.06 million) and 155 local workers, the factory now produces one million yards of gray cloth a month. It is either exported directly to the United States or shipped to Taiwan for dyeing and finishing.
Some of Taiwan's larger enterprises also showed interest in Subic Bay. The Acer Group, Taiwan's biggest computer manufacturer, set up Acer Information Products (Philippines) Co. in one of Subic's capacious warehouses. "When production reaches a certain level, enterprises need to diversify their operations among a number of production centers, to spread the risk," says Kenny Wang, general manager of Acer's Subic operation. "Everything here looked right for an offshore production center: location, facilities, manpower, transportation, everything." With an investment of US$1 million, Acer managed to complete the preparatory work and start up in just fifty-seven days, beginning in April 1995. By October, the factory had become the group's Production Base of the Year in terms of efficiency.
Apart from Subic's desirable location, transportation, production costs, and work force, investors also found a variety of tax incentives. Because the zone is a free port, machinery, raw materials, semi-finished products, and labor-training materials all come in and go out without attracting duty. Moreover, the top rate of tax for investors is 5 percent of gross income.
Another attraction is the flexibility of the US import quota system. Products manufactured in the Philippines and ex ported to the United States are subject to strict quotas, but even so, the country's domestic industries are too weak to fill them. Subic investors can take up the unused slack without having to worry unduly about domestic competition. Using the Philip pines' quotas also allows Taiwan manufacturers to export products at low prices, yet avoid any danger of being accused of dumping.
Subic Bay owes much of its rapid success to the cooperative attitudes and efficient administration of SBMA. While in other parts of the country, investors have to traipse around various government agencies to amass the necessary licenses and permits, Subic investors can have all their paperwork done at SBMA's one-stop window. "They really tried to make things as easy as possible for investors," John Twan says. "They realized that the earlier investors could start up, the earlier local people would have jobs."
He illustrates his point by reference to the free port's container traffic. At the beginning, all container movements required the authorization of one particular SBMA employee. "That guy was in a meeting all day long, and of course ships won't wait for you to get that vital signature," Brian Liu says. "Getting to the guy in time was the biggest headache for investors." But the minute Liu complained to SBMA, four more employees were immediately empowered to authorize container movements. "You couldn't really blame them, because they didn't have any prior experience of free-port administration," Liu says. "The good thing is that you can reason with these people. They're willing to communicate, learn, and make improvements."
While learning from individual Taiwanese investors, SBMA was also receiving an encouraging response from the ROC government. Nine months after the Americans moved out, a Taiwan delegation led by then Minister of Economic Affairs Vincent Siew (蕭萬長) visited the former naval base and suggested that it could be developed into an industrial processing zone similar to those that Taiwan had set up several decades previously. Siew, who is now the ROC premier, said that Taiwan would be pleased to offer financial and technical assistance.
After several more visits by economics experts and industrialists, a KMT-owned private enterprise called the China Development Corporation (CDC), one of Taiwan's largest investment companies, entered into an agreement with SBMA to set up the Subic Bay Industrial Park. Under the terms of this agreement, SBMA offered CDC the right to use 300 hectares of free-port land for fifty years in exchange for US$1, while CDC undertook to provide development capital of some US$60 million, along with management and marketing expertise. In July, 1994, SBDMC, a joint venture between SBMA and CDC was set up to implement and oversee the project.
The physical process of turning 300 hectares of swampy virgin land into landscaped flatland with roads, electricity, and a proper water supply began in mid-1995. By mid-1998, the work was half completed, and plots have been leased to thirty -five Taiwanese investors, several of which have already completed factory construction and commenced operations. Acer, one of the early arrivals in the original zone, invested another US$120 million to set up a production line that replaced the one in the warehouse it had rented at the outset. This new factory is now Acer's largest production center for desk-top PC motherboards. Taiwan-owned Contex Corporation, the Philippines' number one exporter specializing in medical-related textiles, is about to finish building a three-story factory that, given the labor-intensive nature of the textile industry, should create as many as 2,000 new jobs.
Up-and-running production lines and construction projects in the industrial park have already provided local inhabitants with 5,000 jobs. Another 10,000 are to be created by December, and a total of 27,000 local people are expected to be employed there by century's end. Total 1998 production is expected to rise from last year's US$68 million (13 percent of the free port zone's total) to US$2.1 billion (87 percent).
From an investor's point of view, is the best deal to be had inside the industrial park, or outside it but still within the free port zone? Leases of plots within the park are for fifty years, with an option to extend for another twenty-five, while leases outside the park are usually for no longer than five years. Moreover, rents outside the park are approximately US$5 to $6 per square meter per year, with annual increases of up to 10 percent, whereas rents in the industrial park run from US$65 to $75 per square meter for the whole fifty-year term.
One advantage of being outside the park, however, is that the plots come with empty warehouses on them, and these can be turned into factories more quickly and for much less money than it would take to build new ones. But Liu warns that things can still get complicated. "Fit your production line into the original design of the warehouse," he advises. "If you try to change something--tear down a wall, say--to meet your needs, well, it took a bulldozer-sized drill a whole week to open a window in the wall of my office, which used to be an ammunition depot."
Investors inside the park have to build their own facilities. For some of them, it is not a problem. Mark Hsing, general manager of U.J. (Philippines) Construction Management Corp., has plenty of experience building factories in Taiwan and in other Asian countries, and he is now responsible for putting up a textile factory in the industrial park. He points out that most construction materials have to be imported into the Philippines, which means that they cost from 30 to 100 percent more than they do in Taiwan. Moreover, although workers are paid a much lower daily rate than those in Taiwan, manpower costs are not necessarily lower once efficiency is factored in. "It's usually no cheaper to build a factory here than in Taiwan, and it may actually work out to be more expensive," he says.
Whether it is better to rent a warehouse or to build a new factory depends on the individual, but there are certain common problems that everyone has to face. According to Hsing, financing comes at the top of the list. Many of Taiwan's small and medium sized enterprises laid out good money for the right to use land at Subic, hoping to use their sites as collateral for the bank loans that would pay for factories, machinery, raw materials, and wages. It then transpired, however, that local banking regulations did not permit banks to lend money on the security of land that was neither freehold nor leasehold, but merely held under license--as indeed is the case in numerous other jurisdictions.
SBDMC did eventually manage to persuade local banks to accept these licenses as collateral, but by then many investors had lost interest. Some of them simply walked away, while other construction projects have been put on hold. "The interest on a bank loan here is 23 to 24 percent, compared with 10 or 11 percent in Taiwan," Liu explains. "And even if someone's willing to pay that kind of interest, I'm not sure if the [Philippine] banks have the money to lend."
Financing is less of a problem for larger enterprises, which tend to base their overseas investment decisions on other considerations. "There are problems that can be solved by law and a reasonable attitude, and there are problems that can't-- political issues and anti-Chinese feeling, to be specific," Hsing says. "In the Philippines, I can take anyone to court if I think I'm being treated unfairly. But in Indonesia, for example, who am I going to reason with and what law can protect me when I'm surrounded by a group of rioters or racists? I'd be lucky to get out of there in one piece."
Anti-Chinese sentiment is conspicuously absent throughout the Philippines, and Subic is no exception. Moreover, the zone does not suffer from the strikes that bedevil employers elsewhere in the Philippines, where investors commonly have to deal with periodic minor stoppages and one major strike every year. "The Constitution of the Philippines guarantees workers the right to strike, but in most cases I don't think strikers have a particular reason," Liu says. "They don't need one. It's like some kind of a festival activity that just happens every now and then."
SBMA has eliminated this problem by banning strikes completely within the zone, using special powers conferred on it as a free-port administrator. Although there is some uncertainty as to whether this local regulation is unconstitutional, it is a fact that so far there have been no strikes within the zone.
This is only one of several differences between Subic Bay and other parts of the Philippines. After nearly a century of US administration, the place is still much more American than Filipino. Take traffic, for example. "When you're driving else where in the Philippines, a stop sign usually doesn't mean anything," says Keryi Yang (楊克義), president of Contex Corporation. "But here, a stop sign means stop-or-get-a-ticket--and that's guaranteed."
Environmental awareness is another example. Relevant laws and regulations at Subic comply with American standards, which are much stricter than those applicable to other parts of the Philippines. And those laws, like all other laws, are properly enforced, evenhandedly and without the insidious kickbacks and corruption that stain the reputations of authorities in other areas. The result of this sound law enforcement is an unpolluted environment, good social order, and a sense of genuine public security--factors that top many people's lists when it comes to evaluating expensive overseas projects. "Investors based in Manila live in the fear of being kidnapped," says Kevin Chen (陳克彥), manager of Taian (Subic) Electric Inc. "We go jogging at midnight, and we leave our doors open after dark."
Impressed by the success that Taiwanese enterprises have enjoyed at Subic, other foreign businesses, such as Federal Express and AT&T, are coming on board. Currently, over 300 businesses from 18 countries have invested more than US$2 billion in the free port, creating more than 40,000 job opportunities. Speedy development, coupled with an influx of visitors, has also brought exciting opportunities for the local finance, real-estate, transportation, telecommunications, and tourist industries. Every major bank in the Philippines has opened a branch there, and tourist hotels and recreational facilities are mushrooming to meet the needs of an ever expanding population, both transient and fixed.
"When the Americans left, people didn't think Subic Bay had a future, but now it's becoming the Philippines' economic showcase," says SBDMC's John Twan. "Taiwanese and Filipinos have been working together to create another 'economic miracle' here." It began in December 1993, with Brian Liu's first container-load of sneakers. When it will stop, and how big it will grow before then, is anybody's guess.