Manufacturing firms are concerned that the coming cuts in the S Pass quota for the sector will raise wage costs and lead to labour shortages.
But analysts expect that the change will not have a damaging effect on the growth of the manufacturing sector, where productivity has generally been improving.
The maximum proportion of foreigners on S Passes in manufacturing firms will be reduced from 20 per cent now to 18 per cent from Jan 1 next year, and 15 per cent from Jan 1, 2023, Deputy Prime Minister Heng Swee Keat said in his Budget speech on Tuesday.
Singapore Manufacturing Federation (SMF) president Douglas Foo said companies are worried that competition for a limited pool of local talent may push up operating expenditure as it is difficult to attract and retain local talent in the sector.
"The SMF will continue to help our members relook their business models and implement digital solutions to soften the reliance on foreign manpower," he said.
S Pass holders must earn a fixed monthly salary of at least $2,500 and are typically degree or diploma holders who take on roles such as technicians.
Older and more experienced workers must meet a higher salary bar to qualify for an S Pass.
Workers need to earn a fixed monthly salary of at least $4,500 a month and meet other criteria to qualify for an Employment Pass, which is not subject to quotas.
Mr Foo said S Pass holders in manufacturing companies could be earning $3,000 a month or more in roles such as food manufacturing line managers and supervisors, or specialists in software, shopfloor, electrical and electronics engineering.
Mr Lau Guan Wen, deputy managing director of industrial distributor and engineering company CLLS, said he employs S Pass holders in jobs such as machinists, service engineers and general engineers in the workshop, which many Singaporeans do not apply for.
"You don't see Singaporeans complaining about foreigners taking away machining jobs," he added.
Mr Nilay Khandelwal, managing director of recruitment firm Michael Page Singapore, said companies find it challenging to hire for automation and instrumentation or electrical roles because these are niche skill sets, and the demand is higher than the supply of Singaporean talent.
"Employers have been known to compromise a little on skill sets by hiring Singaporean professionals who meet 50 per cent to 60 per cent of the requirements, and then providing the necessary on-the-job training," he said.
Several economists expect that the manufacturing sector will be able to cope better than other sectors also facing quota cuts.
DBS Bank senior economist Irvin Seah said in a note on Wednesday: "The impact for the manufacturing sector will be marginal, considering that this sector has invested significantly in automation over the years and that this sector was also the outperformer last year."
In the Unity Budget in February last year, DPM Heng had said that the manufacturing S Pass quota would be cut when conditions allowed for it.
Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye noted that rising productivity and technology adoption have already helped manufacturing firms do more with less - the sector's employment declined by 17 per cent over seven years, from 2013 to last year, despite output expanding by 26 per cent over the same period.
Dr Chua added that segments such as electronics, biomedical and precision engineering with higher labour productivity are probably in a better position to cope with stricter foreign manpower rules than general manufacturing and transport engineering.
However, taken together with other measures announced last year - such as higher qualifying salaries for Employment Passes and cuts in the S Pass quota for construction, marine shipyard and process firms - the stricter foreign manpower rules may dampen Singapore's economic recovery as firms will not be able to hire as readily to capitalise on any demand upswing, said Dr Chua and Ms Lee.
UOB economist Barnabas Gan said manufacturing performance this year will be supported by a better external environment. The sector outshone others last year, expanding for six consecutive months from July to December.
The move to cut the S Pass quota also comes amid Singapore's push to become a global business innovation and talent hub for advanced manufacturing.
Trade and Industry Minister Chan Chun Sing said last month that Singapore aims to grow its manufacturing sector by 50 per cent over the next decade.
SMF's Mr Foo said firms which are further along the digitalisation transformation journey are less likely to be affected by the coming quota cuts.
He added: "With digitalisation and adoption of technology such as cobots (collaborative robots) and artificial intelligence, the quantum of human labour required is likely to be lower than before.
"The excess human labour can then be retrained and redeployed to other job functions. This softens the reliance on foreign labour."
Still, CLLS' Mr Lau said there are limits to automation as people are still needed to operate the machines when producing small amounts of varied items, known as high-mix, low-volume production, so his firm is looking at options for operating overseas in order to cope with the tightening manpower policies here.
Dr Jonathan Cheah, executive director of food ingredients manu-facturer Faesol, said that so far, he has not had to rely that heavily on S Pass workers to run his firm's high-tech processes, but there could be manpower shortages coming up as demand rises.
"The food manufacturing industry is poised for growth as fast-moving consumer goods consumption rises and people are spending more locally because of the pandemic.
"So, hopefully, local workers will want to come into the industry as we need higher-skilled talent," he added.