Restructuring Singapore series: Singapore business goes global 0 comments

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When you see our Prime Minister making state visits to foreign countries all the time (latest being Europe) and our Senior Minister (Middle-East) and Minister Mentor (latest being India) chipping in, you know that Singapore is embarking on a renewed globalisation drive right from the top.

This is not to say that we were not globalised before. As a trade-dependent and export-oriented economy Singapore's fortunes have always been tied to global business cycles. But it is clear that the trend of increasing local affluence and consequently costs (land, labour) together with the rising production capabilities of mega-economies of China, India and even Vietnam are likely to provide major obstacles to the long-term growth of our export sector.

There is a multi-pronged approach being developed to counter this threat. (1) The development of higher-end manufacturing ie. a continuation of the export strategy, albeit in new high-margin sectors like pharmaceuticals; (2) The stimulation of domestic consumption, where attracting tourists is sort of an "out-of-the-box" thinking to increase consumer base; (3) Investment in overseas assets, which is what Temasek and GIC have been up to aggressively in recent months; (4) Expansion of operations overseas, such as manufacturing and engineering services.

In particular, Temasek has espoused its 1/3-1/3-1/3 strategy: 1/3 in Singapore, 1/3 in developed economies, 1/3 in rest of Asia. In short, exposure to the local economy would be trimmed down to generate funds for overseas asset purchases. GLCs (government-linked companies) have taken the hint and expanded operations overseas (for some years now) to generate Singapore's "external economy", especially in major economies like Australia (Optus), China (mainly property, through Keppel Land and Capitaland), and the latest flavour of the month, the Middle East (Surbana, CPG).

It has also been natural for private companies to venture overseas to capture the comparative advantages offered there, in terms of cost and consumer base. Electronics contract manufacturers have had to build plants overseas to support their customers that have relocated to China (eg. Brilliant moved to China to support Maxtor), resulting in the recognition for a restructuring of local jobs. Higher-margin service-based companies are, in particular, doing a roaring business overseas, as they build on the Singapore brand of quality, integrity and technical knowledge to deliver solutions to a previously-untapped gargantuan consumer base: think Raffles Education in China, Hyflux in the Middle East, Inter-Roller for airports across the Asia-Pacific and Middle-East.

Previously the expansion overseas had been undertaken with seemingly half-hearted and sporadic endeavours (think Suzhou Industrial Park), in view of the buoyant global economy throughout the 1990s providing a strong tailwind for Singapore's export sectors. However, the need for a structural shift in Singapore's economic model has emerged with the rise of China and India as production and service outsourcing hubs, creating urgency for the development of a significant external arm to Singapore's economy. Hardly a week passes nowadays without hearing of a stake increase in some major overseas asset by one of the GLCs, Temasek or GIC.

There is a way to ride this trend for the investor. The government has been pledging strong support to help companies expand overseas, through its chief agency IE Singapore. Business entourages following ministerial state visits overseas are now common, such as that following SM Goh to the Middle-East; government-to-government interactions and business-to-business contact take place concurrently and often reinforce each other. Temasek itself has taken stakes in local companies which it believes have strong potential: Hyflux, Osim and KS Energy have been beneficiaries. It is no surprise that these companies embody key competitive sectors and strengths of Singapore: Hyflux in water, KS Energy in oil rigs, Osim in brand management (as distinct from manufacturing per se). Look out for service companies with significant overseas scale and contacts and enjoying comparative advantage in operation (perhaps as a result of being from Singapore). They may well be the next vehicle for Temasek to drive private sector expansion overseas. Even if not, strong governmental support for overseas expansion will provide a favourable environment (possibly in terms of taxation) for businesses looking to go global.

References:
(1) Newsweek article Nov 8 2005: Singapore's Bling
(2) Bloomberg news article Aug 6 2004: Temasek goes shopping to build a new Singapore