MANILA -- In 1989, Philippine conglomerate Ayala teamed up with two Japanese corporate giants to develop an industrial park south of Manila, cashing in on Japan Inc.'s bubble-era enthusiasm for overseas expansion.

Thirty years later, Ayala is taking a page from its 1989 playbook, but this time the $11 billion company is turning to China. In April, real estate unit Ayala Land announced plans to develop the first Sino-Philippine Industrial Park and said it was in talks with a potential Chinese partner.

The project, analysts say, symbolizes how Philippine President Rodrigo Duterte's diplomatic pivot to the world's No. 2 economy is transforming his own country's oldest and second-largest conglomerate by market capitalization.

There is much to be gained, especially as Ayala seeks access to cutting-edge technology for a digital transformation of its complex empire, spanning property and utilities to health care. But companies that follow Duterte's lead are also taking a risk. Distrust of China runs deep among Filipinos, not least because of a South China Sea territorial dispute their president chose to shelve.

Duterte's term ends in 2022 and there is always the possibility that his successor will do a U-turn.

For now, though, "the political environment makes sense" for Ayala to step up dealings with China, said Maya Baltazar-Herrera, who teaches management and strategy at the Asian Institute of Management in Manila. "The business case has always been there, it's just that it was not as easy as it is today. Remember the previous government was actively quarreling with China, which was why Ayala was even silent" about its interests there.

Ayala is no longer playing coy.

"If you look at the way Ayala Group has engaged with China, I think it is one of the largest in the country," Chairman and CEO Jaime Augusto Zobel de Ayala told reporters in late April after the company's shareholders meeting.

The new industrial park would bolster Ayala's burgeoning ties with Chinese companies, which cover financial technology, cars and telecommunications after a string of deals struck since Duterte took power in 2016. The company forged these connections despite its lack of Chinese roots: Ayala was founded by Spaniards in 1834, whereas chief rivals SM Investments and JG Summit Holdings were both established by ethnic Chinese who came from the mainland before World War II.

Ayala's main businesses were banking and real estate before it expanded into telecommunications and water, which were deregulated in the 1990s. Over the last decade, it invested 1.4 trillion pesos ($26.6 billion) in those businesses and diversified into power, transport infrastructure, manufacturing, education and health care.

But as technological advances disrupt the company's old and new operations, Ayala is making a deep drive into the digital economy. The company is digitizing business processes and pushing into fintech and high-tech manufacturing, including next-generation vehicles -- a thrust that dovetails with Duterte's courtship of China, an emerging tech superpower.

"China has arrived in terms of technology," Baltazar-Herrera said. "It's not like it used to be, that China is a good alternative. For many things, it's now the best alternative."

Chinese President Xi Jinping and Philippine counterpart Rodrigo Duterte share a toast at a state banquet in Manila last November. Duterte has embraced China as a development partner. © Reuters

After his inauguration, Duterte quickly embraced China as a development partner and shrugged off the South China Sea issue. In return, Beijing lifted travel warnings on Manila and a ban on Philippine agricultural products. Investment and tourism surged: Chinese direct investment in the Philippines ballooned to nearly $200 million last year from a negligible $570,000 in 2015. Chinese visitors nearly tripled to 1.26 million from 491,000.

When Duterte went to China for his first state visit in October 2016, Ayala Vice Chairman Fernando Zobel de Ayala and other group representatives accompanied him. The delegation to Beijing signed deals and investment pledges totaling billions of dollars. Ayala's Globe Telecom reached $750 million worth of agreements with Huawei Technologies, Nokia, and Wuhan Fiberhome International Technologies for mobile network modernization.

That was just the beginning.

In February 2017, Alibaba Group Holding affiliate Ant Financial Services Group acquired a 45% stake in Mynt, Globe Telecom's fintech unit. In the year after Ant Financial moved in, Globe's once-languishing GCash e-wallet service achieved explosive growth, doubling its user base to 12 million. Moreover, the Philippine company acquired some Ant Financial technology.

"Ant Financial has been an extraordinary partner," Chairman Zobel said. "A lot of their facial recognition security and the like -- they are giving it for free for our joint venture."

Last year, Ayala won a contract to distribute Chinese automaker SAIC Motor's Maxus brand, as China's auto industry looks to crack a Southeast Asian market long dominated by Japanese players.

"Those are just quite a few touch points with major [Chinese] companies and I don't see that slowing down," Zobel said.

Duterte's China charm offensive has benefited Ayala in other ways as well. In 2018, half of Ayala Land's residential sales to international buyers were to Chinese. Online gaming companies run by Chinese now occupy nearly 10% of its office spaces, up from virtually zero before Duterte -- a shift that has offset a slowdown in the business process outsourcing industry, a major office tenant.

The group's malls and hotels are riding the influx of Chinese tourists, which could help Ayala meet its goal of becoming one of the Philippines' most profitable companies by doubling net income to 50 billion pesos by 2020 from 2015.

The company also aims to significantly increase the share of nontraditional businesses like energy to 20% of equity earnings, and the share of foreign businesses -- mainly in Southeast Asia -- to 10%.

The U.S.-China trade war, meanwhile, creates uncertainties as well as possibilities.

Ayala Chairman and CEO Jaime Augusto Zobel de Ayala has overseen a string of deals with Chinese companies. (Photo courtesy of Ayala)

The new industrial park may be an attempt to take advantage of the conflict. "The opportunity has presented itself," said Jeffrey Lucero, an analyst at RCBC Securities. "Some operations are being moved out of China to Southeast Asian countries because of the trade war."

To escape the tensions, two North American clients of Ayala-controlled Integrated Micro-Electronics have transferred production from China to IMI's plants in the Philippines.

In its 2018 annual report, Ayala told investors it was still evaluating whether the trade dispute was a boon or bane for Southeast Asian economies. But the company said, "What remains clear is that China's influence in the Philippines continues to grow as the current administration continues to ally itself with China."

Ayala said it will continue working with China "on multiple fronts" and "increase investments strategically."

Astro del Castillo, managing director at First Grade Finance in Manila, said the warming Manila-Beijing relations open the door for deeper relationships among companies, just like when Japanese trading houses Mitsubishi Corp. and Marubeni invested in the Philippines. "Anything can happen -- investments, joint ventures -- when you open a floodgate of opportunities."

The 1989 industrial park project, developed with Ayala shareholder Mitsubishi and what was then Kawasaki Steel, is still paying off. The 4.6-sq.-km Laguna Technopark hosts the likes of Honda Motor, Fujitsu and Panasonic. For Ayala Land, the venture spawned demand for residential estates in the area. For the Philippines, the park provided over 100,000 jobs and generated roughly $7 billion worth of exports -- around a tenth of the country's outbound trade -- last year.

But Ayala's shift toward China comes as Mitsubishi reduces its exposure. The trading house has been pressured by shareholders in Japan to rebalance its portfolio, forcing it to cut its stake in the Philippine partner. Mitsubishi and related companies owned roughly 20% of Ayala in the 1970s, but in 2017 the trading group began gradually reducing its interest from 10% down to 6% as of May 22.

Still, Mitsubishi said in April that it intends to remain a key Ayala shareholder, with a seat on the conglomerate's board. Keiichi Matsunaga, general manager of Mitsubishi in Manila, who occupies the board seat, said he believes Ayala is simply taking advantage of growing inbound Chinese trade and investment.

It is too early to tell whether Ayala's Chinese partnerships will prove as enduring as its relationship with Mitsubishi.

While Sino-Philippine ties have improved dramatically under Duterte, relations remain shaky. Only 27% of Filipinos believe the Chinese have good intentions in the Philippines, according to a Social Weather Stations poll last month.

Chinese loans for Philippine infrastructure projects are widely seen as "debt traps." And Chinese bidders' attempts to rescue a bankrupt shipyard run by South Korea's Hanjin Heavy Industries on Subic Bay, a gateway to the South China Sea, sparked a backlash over national security.

The Philippines' recent midterm elections also fanned anti-Chinese sentiment, with opposition candidates attacking Duterte's pro-Beijing policy to drum up support. Even though Duterte's allies won in a landslide, companies could still face reputational risks.

"Having a close association [with China] could negatively affect public image these days," said a local analyst who declined to be named. Recently, a mall operator faced calls for a boycott when it said it would screen the movie "Avengers: Endgame" with Chinese subtitles to accommodate Chinese tourists and workers in Metro Manila.

Ayala has a sterling reputation to protect. Its chairman has been recognized by the United Nations as a champion of global sustainability. His father, former Chairman Don Jaime Zobel de Ayala, last year received Japan's Order of the Rising Sun, Gold and Silver -- one of the highest honors Tokyo bestows on private individuals -- for establishing Laguna Technopark and other efforts to promote business ties.

Filipinos protest China's territorial policy in the South China Sea outside the Chinese Embassy in Manila on April 9. © Reuters

A shareholders meeting in April provided a taste of the danger. One investor asked why Globe Telecom had partnered with Huawei despite the security issues raised by Washington. Chairman Zobel defended the Chinese company and insisted it had given Globe a competitive advantage: "We think that Huawei has been an excellent addition to our supplier base. It is a company that has provided excellent service, great price points and technology."

Jomar Lacson, research head at ATR Asset Management, said Philippine companies like Ayala stand to benefit from Chinese capital, expertise and connections. But he believes they will ultimately prioritize partners that are "aligned with their values."

A lot may depend on the next Philippine president's view of China. "There is always a risk that it will hurt the economy and the companies if the next government adopts a different policy," Del Castillo said. "I'm sure Ayala has a backup plan."

The Asian Institute of Management's Baltazar-Herrera said perceptions of China will improve once the investments start to create jobs for citizens. "It's perfectly possible that it will be difficult for the government to walk back," the professor said.

If Ayala wants the government to stay the course regardless of who is in charge, she suggested, its best bet is to make the Sino-Philippine Industrial Park a success.