Restructuring Singapore series: Targeting high-end engineering / manufacturing 0 comments

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Any discussion of the economy restructuring process cannot be complete without an overview of the manufacturing sector, which employs about one-tenth of Singapore's population and contributes one-quarter of its GDP.

The manufacturing sector is divided into a few clusters: electronics, chemicals, transport engineering, precision engineering, biomedical engineering and general manufacturing. Electronics has always been recognised as the mainstay of the manufacturing sector, contributing about 40% of its output; however this is set to change with the rise of low-cost production centres, hence the recent push to drive growth in other manufacturing sectors.

In particular, the rise of China as the factory of the world and the impending threat of India as another alternative has meant that manufacturing work with a high labour component will be increasingly outsourced to these regions. Electronics, high-tech though it may sound, is actually rather labour-intensive in its manufacturing process, involving mainly manual assembly of electronic components. That is why local electronics companies are following their customers (Seagate/Maxtor, HP etc)and increasingly moving manufacturing operations overseas: it is a matter of do-or-die. One might remember that in the 1990s Singapore used to be a hub for electronics manufacturing. Veteran investors would remember the likes of Omni Industries, JIT, Natsteel Electronics, Natsteel Broadway: each of these had mega-scale electronics manufacturing operations in excess of S$300M (Natsteel Elec had $3B). These have since been taken over by MNC manufacturing operations like Celestica and Solectron; consequently the local electronics manufacturing base has been hollowed out: the factories are still around, but these foreign MNCs have no roots in Singapore and hence are likely to move out when they perceive costs to outweigh benefits.

In recognition of this trend, the government embarked on initiatives to increase the perceived value-add of Singapore as a manufacturing centre (it is too great a revenue driver and jobs employer to scale down). I would see these as constituting a multi-pronged approach: (1) targeting higher value-add manufacturing sectors; (2)increasing R&D investment; and (3) promoting the regional hub status of Singapore.

The biomedical cluster has been a result of (1) above. From a standing start of nil in the late 1990s it is now contributing 10% of Singapore's industrial output and 20% of the value-add in 2004. One can not only see how important it is as a growth driver, but also the high value-add nature of the sector from the above figures. However, as a jobs provider it only employs <3% of the total under manufacturing sector: such is the problem with high value-add manufacturing: it is usually capital intensive.

Another means of increasing value-add is to move upstream ie. to design engineering and innovation through R&D. That is the reason why A-Star was formed and also why high-powered civil servants like Philip Yeo and Dr Tony Tan are driving the national R&D effort. Why is Chartered Semicon still in existence despite years of red-ink? It undertakes intensive R&D, is at the forefront of electronics developments and hopefully one day it can drive the development of downstream electronics manufacturing. Such a vision has come true for Samsung, which leveraged technology from its world-leading semiconductor arm to drive innovation and branding for its consumer electronics brand to great effect. One may have heard of the trend of outsourcing: the first wave is manufacturing, then non-core services like IT and after-market support, and possibly R&D and design engineering (the rise of ODMs) in the future (leaving the brand owners to focus on building their brand and manging their supply chain). Singapore does not have competitive advantages in the first two, but it would be wise to position ourselves for the next outsourcing wave.

And for (3), I guess we have been pushing our hub status for the last two decades. Transport hub, logistics hub, finance hub, preferred regional headquarters for MNCs. I remember reading an article about the Indian founder of eSys, the budget PC manufacturer which is based in Singapore but operates worldwide (billion-dollar revenue I believe), and he said after surveying all the countries for his manufacturing operations he found that Singapore was the best, on a total cost basis, because the high labour costs were offset by the efficient and reliable infrastructure compared to say, China where logistics was still a problem. Now, his opinions might well have been tempered by the fact that he was speaking to a Singapore newspaper, but my view is that as a production centre Singapore suffers from high costs in the mid-stream (manufacturing) while possessing strengths on the upstream (the above-mentioned R&D and design, together with high national educational qualifications) and downstream (last-mile supply chain management, post-manufacturing transport and distribution).

It is interesting to note that some of the most promising sectors were not ostensibly targeted as growth sectors by the government until recently when it became clear that they had emerged as possible world leaders in their respective industries. In particular, I am talking about the offshore rigs and marine industry, where Keppel Fels and Sembcorp Marine are between them building 80% of the world's offshore rig platforms, KS Energy is rapidly expanding its rig refurbishment business in the region, while shipbuilders in Singapore like Labroy and Jaya are getting fresh shipbuilding contracts every other month. They have driven the transport engineering sector which has outperformed the other manufacturing sectors significantly over the las two years. Environmental engineering has also come into the picture, in particular water engineering. Wastewater treatment has become a major focus of municipal governments in China, while Middle-East countries flush with oil money look to build up water resources through advanced techniques like desalination. Singapore, in its paranoid years where water from Johor was so critical to survival, has now developed four different sources of water that it can depend on: the domestic reservoirs, water from Johor, Newater, and water from desalination. The weakness has been turned into a strength. Just look at the number of companies listing on the SGX that do water treatment: Hyflux, Biotreat, Asiawater, United Envirotech, Sinomem, Dayen, Darco etc. In a manner analogous to top tech companies choosing to list on the Nasdaq, I would think this is an acknowledgment of the reputation of Singapore as a potential "water engineering hub".

One may well classify the above-mentioned engineering sectors as more of services than manufacturing (in its original "mass production" sense); it is simply indicative of the way Singapore's manufacturing sector have to restructure to add value. Typically, since the 1970s, developed nations worldwide have witnessed their labor move from agriculture to manufacturing, and then from manufacturing to services. Although Singapore is looking to develop the services sector, the manufacturing sector is too big a job employer to ignore in this transitionary period. Promoting our strong integrated support for manufacturing (infrastructure, logistics, design and R&D) and low country risk is the way to go, to keep current manufacturers locally as well as to attract new investments.

References:
(1) Statistics Singapore: Principal statistics of manufacturing by industry cluster 2004