BUDGET 2014

Manufacturers 'need a giant leap forward to thrive'

Restructuring Singapore's economy and raising productivity, so as to reduce the country's reliance on foreign labour and raise average wages, has been a big challenge. In the run-up to Budget 2014, The Straits Times is running a series on how companies are taking steps to transform their businesses, with varying degrees of success. Today, Yasmine Yahya looks at how the manufacturing industry has fared and challenges that remain.

Change is the only constant for Singapore's manufacturing sector, which has evolved over the decades from a group of low-cost producers to the high-end, high-value players of today.

And so it may come as no surprise that manufacturers have been among the quickest to raise their game amid the country's restructuring drive.

But three years in and despite widespread adoption of productivity-raising measures across the sector, productivity numbers are still low.

What is needed now, experts say, is for manufacturers to take a giant leap forward to become more innovative and perhaps even reinvent themselves in order to not just survive in the new economic landscape, but also thrive.

Of course, this will not be easy, and the Government will have to help, they say. This could be done in a variety of ways, whether with funding support for research and development projects or by making it easier for small and medium-sized enterprises to win government contracts.

Since 2010, as the Government tightened quotas and raised levies on foreign workers, many manufacturers have adjusted by investing in automation and streamlining their processes, noted OCBC economist Selena Ling.

However, their productivity numbers have been patchy thus far because of global economic trends, she said.

Labour productivity in Singapore grew a healthy 11.1 per cent in 2010, but decelerated sharply to a 1.3 per cent rise in 2011, and then shrunk 2.6 per cent in 2012.

"The last few years have been very challenging due to the global business environment being very tepid. Hence, it has been a continual struggle for manufacturers to upgrade, innovate and move up the value chain," Ms Ling said.

CIMB economist Song Seng Wun agreed, adding that manufacturers tend not to retrench staff as quickly as service firms when facing an economic downturn.

"Labour is so tough to come by, so manufacturers tend to hold on to their staff while awaiting an upturn. And staff in the manufacturing sector now are more skilled and specialised, so businesses also want to retain them," he said.

With the global economy recovering over the past year, productivity numbers in the manufacturing sector have improved, but are still not stellar, noted KPMG Singapore tax partner Chiu Wu Hong.

Labour productivity in the sector was flat at 0.2 per cent in the second quarter of last year, before rising to 1.6 per cent in the third quarter.

These statistics seem to indicate that Singapore still has some way to go to achieving its target of 2 per cent to 3 per cent annual productivity growth for the overall economy, Mr Chiu said.

One reason for this hump is the fact that there are still some pockets of resistance to change.

"There are still sectors such as shipbuilding and precision engineering which have yet to embrace productivity as being a key driver for business," he noted.

Also holding back productivity gains in the manufacturing sector are the perennial challenges of high business costs and a shortage of skilled talent, said Ernst & Young's government and public sector leader for Asean, Ms Mildred Tan.

"We can't run away from these issues. So far, embracing productivity has helped manufacturers, but it has not brought them to new heights," she noted.

"So, what they need to do to get themselves to the next level is to increase investments in R&D activities. In other words, they should not just invest in automated processes, but also reinvent themselves and their operations."

The Government could help by providing more funding support for R&D, she said.

It could also work together with bigger industry players to come up with productivity solutions that are suitable for mass adoption across the industry.

Mr Thomas Chua, a member of the National Productivity and Continuing Education Council, who is also chairman and managing director of Teckwah Industrial as well as president of the Singapore Chinese Chamber of Commerce and Industry, said companies should also look at internationalising their businesses.

"In the manufacturing sector, you should look into leveraging on resources in the region, for example, setting up part of the business elsewhere instead of locating everything in Singapore, to address manpower issues and business costs," he said.

PwC Singapore corporate tax partner Lennon Lee said government schemes should serve only to help businesses manage costs in the interim, as Singapore's economy restructures.

"At the end of the day, Singapore companies must innovate and seek out new markets and growth areas in order to thrive. Raising productivity so as to manage cost increases is only one aspect of the overall strategy," he said.

M Metal chief executive John Kong noted, however, that for smaller companies like his to be able to invest more in productivity and expand abroad, they first need scale. And to scale up, they need more recognition from bigger players, including government agencies.

"Smaller players whose products have been tested and proven to meet international standards should be given a chance to bid for government projects," he said. "The construction industry which I supply, for example, is dominated by a few big players. SMEs like us want a level playing field."

yasminey@sph.com.sg

This article was first published in The Straits Times on Feb 5, 2014