Saturday, August 9, 2008

Getting manufacturing's golden goose to stay put

Business Times - September 27, 2001

The Singapore economy will suffer greatly if the government ignores crucial measures to keep the Republic attractive to MNCs

By Ong Yong Hwee

MANY employees in Singapore currently feel uncertain, rather than confident, about their jobs and their future. Those in the manufacturing sector seem most concerned.

The present hollowing out of multinational corporations (MNC), particularly in the electronics manufacturing sector in Singapore, is disturbing. And it is extremely stressful for Singaporeans who feel they are drawn into a Russian roulette game with their careers - you know you could be next in line to be chopped, but don't know when.

Harvard guru Michael Porter, during his recent visit, said that Singapore should focus more on services and less on manufacturing, and move away from a foreign direct investment (FDI) driven strategy to an innovation-driven strategy. Anxious Singaporeans working in the manufacturing sector, already at a loss, became even more distraught, as they interpreted the advice as confirmation that manufacturing has no future in Singapore.

Is this indeed the case? Is China going to become one giant manufacturing plant and leave a big manufacturing hollow in Asian countries?

In the much longer term, China may indeed be the manufacturing centre of the world with its huge market potential, which will work as a magnet for MNCs. But this does not mean that developed countries like Singapore should stop attracting foreign investments in manufacturing.

Attracting MNCs' manufacturing FDI is, in fact, a 'no risk, golden goose' strategy for Singapore. They invest their capital, time and technology, whilst the direct risk to Singapore should the investment fail is a reduction in jobs which can, with some foresight and planning, be replaced by new MNC investments. Singaporeans do not lose everything in the process of transition; they merely change their jobs for a different one. Although there are investments on Singapore's part in infrastructure and manpower training, these investments have to be sunk in anyway before any golden goose will come to roost.

The manufacturing sector is an important anchor for Singapore's economy. This sector, particularly electronics manufacturing, has played an important role over the last few years and allowed Singapore to ride out the 1997 downturn with less pain than otherwise. The electronics sector during this time was the bright spot, and factories were kept busy with Internet dotcom and Y2K orders, providing considerable spin-offs to the rest of the economy through its linkages with design, IT, logistics and finance.

Contrary to the perception that manufacturing is labour-intensive, with low returns to the workers, great strides are being made in further automating assembly work through the use of IT and complex robotics. Productivity per worker (and hence, earnings) can increase many fold, and is more quantifiable than productivity strides in the service sector. And it is precisely because of the ability of this sector to use unlimited machines and robots to generate a higher level of economic activity that this sector should continually be nurtured.

A recent case in point is that of Seagate's 'Factory of the Future' in Ang Mo Kio, showcasing one of the world's most sophisticated assembly lines and an intelligent tracking system. These high-tech machines allow a very flexible production system of producing a wide range of disk drives, depending on demand requirements. At the same time, workers have not been displaced, but are upgraded to process the data from the machines, hence increasing overall productivity.

To quote Seagate president William Watkins: 'Singapore is the central location for our disk-drive manufacturing. China is meant to be the satellite, a second plant.'

Hopefully, Singapore can develop to be the central Asian base from which design, innovation and new manufacturing processes will evolve. Manufacturing can have an important future role to play, and continue to be a 'golden goose' for Singapore provided we provide a comfortable and competitive nest for the goose to lay the golden eggs.

Singapore already offers the political stability, transparency, rule of law, infrastructure and efficiency which attract top businesses to locate here. But the one snag foreign and local companies face is the issue of cost.

What appears to be missing in the equation is the Republic's hands-off approach in allowing internal market forces to determine pricing levels. In land-, resource- and labour-scarce Singapore, a slight shortage of any one factor of production tends to lead to a quick escalation of costs. The tight and inelastic supply of these factors in a small country leads to a bottleneck of unmet demand and, ultimately, irrational spiralling costs.

We have to recognise that the cost of doing business in and from Singapore is now high. The government must respond quickly and react with an appropriate strategy. The present mantra in electronics manufacturing is swift restructuring through significant cost-cutting measures. As a pro-business environment, the Republic has to respond accordingly. Otherwise, Singapore will continue to see an erosion of MNCs as they move out to more cost-competitive locations.

The latest casualty in Singapore is 3Com, the computer networking giant which is relocating part of its manufacturing operations to Ireland - and the speed of the departure after they had just moved into their own building is telling. Earlier, Aiwa closed down its fairly large R&D facility in Singapore. This is a significant signal indicating that the cost structure here may not be favourable to an innovation-driven strategy as well.

It would not pay to adopt a wait-and-see attitude or shrug off yet another relocation; fast counter-measures are needed. After all, there is a critical mass required for any one sector to flourish, and the electronics manufacturing sector is no exception. Looking ahead, it is going to be more difficult to promote new foreign direct investment. Hence, it is up to the Republic to ensure that it is even more attractive for the existing ones to remain.

A concerted effort to consider all aspects of the cost structure in Singapore and how to best create flexible and elastic solutions needs to be part of the new masterplan. Only then will Singapore be able to maintain a strong manufacturing base and continue to enjoy the fruits of this 'no risk, golden goose' strategy.

(The writer is a mechanical engineer by training and a business consultant by profession, with CEO Search & Services)