Companies venture abroad to survive

Rising costs, labour shortages said to be hurting both SMEs, multinationals

SINGAPORE firms have for decades been encouraged to spread their wings into foreign markets.

But given the twin challenges of rising business costs and manpower shortages, an increasing number of companies are now taking flight just to survive.

As Singapore restructures its economy, the Government has been encouraging companies to regionalise, and the upcoming Budget is expected to include new measures to help firms venture abroad.

At the moment, says Singapore Business Federation (SBF) chief operating officer Victor Tay, there is a growing number of companies which want to move out of Singapore altogether.

"In the past, companies would keep their headquarters and operations here and replicate another centre elsewhere for marketing purposes," he said. "Now there is a group saying, we are actually uprooting part of our operations and shifting it out because we can't survive here."

Some companies are even thinking of relocating their entire operations elsewhere, he added.

The SBF began noticing this trend last year, Mr Tay said, as business leaders from both small and large companies kept bringing it up in their focus groups.

"Three years ago, we started hearing people talk about not having enough manpower and rising costs but they seemed to be able still to sustain their growth by introducing productivity initiatives or streamlining their costs.

"But last year, not only SMEs but multinational companies, too, were telling us that because it is now so expensive, they are considering moving out."

Mr Chan Chong Beng, president of the Association of Small and Medium Enterprises (Asme) agreed.

"We have been getting more complaints from SMEs that they can't get workers," he said. "Rising costs, plus the problems of not having enough workers - 2012 was a very tough year for SMEs."

In its most recent survey of 3,000 member firms, the SBF found that 15 per cent of those polled planned to relocate their businesses, either partially or entirely. Another 1 per cent said they were winding up their businesses.

R-Logic, an SME which provides repairs and customer care services for consumer electronics, is relocating the more labour-intensive part of its operations to Johor Baru to save costs.

"Even when we take into account the added transportation costs of moving the goods between JB and here, the cost reduction is good enough for us to have decided to shift there," said managing director Ken Tan.

"The cost reduction comes from cheaper land and labour, and is further helped by the exchange rate."

Singapore's story of internationalisation

SINGAPORE'S history of internationalisation has three chapters thus far, says IE Singapore chief executive Teo Eng Cheong.

The first, which encompasses the decades prior to 1990, is what he refers to as Singapore's "growing up" years.

Local companies were mostly young and supporting the MNCs that had come into Singapore in the 1970s and 1980s, he said.

"These were companies that were providing services such as metal stamping, plastic moulding, transport and logistics to the MNCs that had invested in Singapore."

Few ventured overseas. In 1990, Singapore companies - home-grown firms as well as the locally incorporated units of MNCs - had only $17billion worth of investments abroad.

But over the next decade, this number grew exponentially. In 2000, direct investments abroad had surged to almost $100billion.

That decade is what Mr Teo calls the "global outsourcing phase".

"Previously, MNCs would only have one or two manufacturing locations. But now, a lot of MNCs began looking for the most cost-effective location for each component part of their products."

Meanwhile, other South-east Asian countries had become more skilled and competitive, and China was starting to open up.

"So our companies had to respond, and by that time they had gained a lot of expertise and competitiveness, so they were able to go to other South-east Asian countries and China to support those MNCs even as they moved out of Singapore," Mr Teo said.

It was also during this decade that Singapore set up industrial parks in Batam and Bintan. These locations were low-cost enough to be a good draw for MNCs wanting to move out of Singapore, but still near enough so that Singapore firms could continue supporting and providing services to them.

Singapore also helped to build an industrial park in Suzhou, both as a way to maintain business with MNCs that were shifting to China, and also to allow Singapore companies themselves to explore opportunities in the fast-growing market, Mr Teo said.

The third chapter of Singapore's internationalisation story began in 2001.

In the wake of the 1997 Asian financial crisis, countries in the region realised that they had to strengthen their economies, he said.

Within a few years, these countries made a lot of progress, and Singapore firms saw the opportunities that came about as governments built more infrastructure and consumer incomes rose.

"And Singapore companies, by that time, had some experience working overseas already," Mr Teo noted. "So, after 2000, they went abroad not just to support MNCs but to address market opportunities that arose in Asia."

By 2010, direct investments abroad by Singapore firms had quadrupled from $100billion a decade before to $400billion, with Asean countries being the biggest beneficiaries.

A new chapter now amid rising costs?

TWO years into a new decade, we could be witnessing the start of a new chapter in this story - one in which Singapore firms are forced to venture abroad because of rising costs.

Citi economist Kit Wei Zheng noted in a recent report that this might just be the case.

"Unlike the opportunistic merger and acquisition driven regionalisation of the 2000s, regionalisation in the next five to 10 years could see a heavier involvement by local SMEs hit hardest by real exchange rate pressures, much as yen real exchange rate appreciation in the mid-1980s led to an acceleration of overseas direct investment from Japan," he said.

This is what worries SBF's Mr Tay, who believes that if too many firms move out, Singapore's business scene could eventually hollow out.

"Say a manufacturer moves out. Its contract manufacturers will likely follow, and then the component manufacturers will go too," he said.

"And soon the service firms, such as logistics providers supporting them, will start moving. Eventually, they all might consider using the seaport, airport and banks in that new market too.

"Unknowingly, the regional headquarters and strategic shared services in Singapore might be uprooted, compromising our competitiveness."

Barclays Capital economist Leong Wai Ho says rising costs are simply a reality that companies have to deal with.

"I think this is an age-old dilemma that has been with us. This was why we set up cost review committees and the Economic Review Committee in the past - to make sure we are not more expensive than necessary," he said.

"But these are merely delaying actions. As we become more developed and expensive, the cost pressures will increase for relatively labour-intensive business operations."

And when companies relocate, they do so at the expense of Singapore's gross domestic product (GDP), he said.

But IE Singapore's Mr Teo believes this is not a big problem.

"We have to make full use of each square metre of land so that it generates the most activity, the most GDP for us," he said.

"Say a particular activity brings in $1 of value to Singapore and requires 10 people, while another activity brings in 50 cents but requires only one person. Which one is better? You have to make the choice."

However, relocation is not easy either, especially for smaller SMEs, notes Asme's Mr Chan.

"If you look at the Iskandar Development Region in Johor for example, a lot of the developers are building landed factories, which may be too big and expensive for SMEs," he said. "There aren't a lot of flatted factories there, like the ones in Singapore."

Maintaining Singapore as home base

ONE thing all the experts can agree on is that even as companies strike out for new markets, or relocate parts of their operations, they should keep Singapore as their headquarters.

"Singapore is still a competitive place for companies to put their decision makers. Singapore is a meeting place of brains," said Mr Teo. "Furthermore, Singapore is a financial centre and a great distribution centre. Even if your products don't pass through our ports, we have a lot of experts here who know how to move things around at the lowest cost from the best locations."

Singapore also has a good brand name, which is important to small firms building up their reputation, said IDV Concepts' business development manager, Ms Jen Lee. The firm makes interior design fixtures and furniture.

"We reject the stereotype that Made-In-Singapore products are too expensive. We can make high-quality products here and give that assurance to our customers, which allows us to command a premium."