APMF: Singapore pricing itself out of business while Malaysia resurgent?

The last few months has seen some disturbing signs for Singaporean business competitiveness, and a consequent boost for it’s poorer neighbour Malaysia. It is not the stuff of which headlines are made, but it is a trend nevertheless that is growing in substance at each announcement of a new contract going to Malaysia, that in previous years would be odds-on to go to Singapore. Singapore has always been the premium cost/high standards business and manufacturing base in South East Asia, and is a strong competitive player with South Korea, Hong Kong and Japan in the Asian region as a whole. This high value was earned in most part by a strong commitment to education and transparency, promotion of English as the global business language, long term strategic planning based on existing competitive strengths such as the air and port hub, and their security advantages of a cohesive population living on a small island.

Prior to the Asian currency crisis, the cost of doing business in Singapore was becoming enough of an issue for companies to consider moving to lower cost centres, Malaysia being the most obvious. Many of these companies did indeed leave. The Asian crisis however exposed the security risks of doing business in South East Asia in particular, from shady business dealings in Thailand to corruption and various levels of political instability in Indonesia, Philippines and Malaysia. While previously South East Asia was seen as a low risk- high profit potential arena for investment and manufacturing, suddenly Singapore, with it’s lower risks though higher costs again seemed the place to be. Add to this Singapore government initiatives to attract highly qualified foreign workers to build up their information and labour infrastructure as neighbouring countries burned bridges to the outside world as they re-grouped, and Singapore, as our survey respondents predicted so well at the time, was by far the first to recover.

However, early 2002, has seen manufacturers and businesses carefully assessing the new value added of a base in Singapore, as the region as a whole (ex-Japan) leads the recovery of the global economy as a whole. The increasing competitiveness of China, not only in low value manufacturing but in the potential of the upgrading of its workforce is a threat not only to low to medium cost centres, but also high tech/ high quality centers such as Singapore. The immediate competitor to Singapore however is the country from which it split off from a few decades back to fuel its rise as the leading business centre of South East Asia.

Quietly, Malaysia has been creeping up to Singapore in the value of it’s offerings to business. ..And it’s not all subsidies and spin…

Lets review some of these quiet decisions in the early parts of 2002.

The Taiwanese shipper Evergreen Marine and Denmark’s Maersk Sealand chose Kuala Lumpur’s Klang port over the Port of Singapore’s Tanjung Pagar port, the former previously a symbol of incompetence and inefficiency, the latter a jewel in Singapore’s crown. In fact, amateur economists working near the port often swear by the height of containers at Tanjung Pagar as a sound indicator of the Singaporean economy. Singapore is the world’s second busiest container port after Hong Kong and handles nearly nine times the container traffic of Malaysia’s Port of Tanjung Pelepas. The reason? Just one really …Simply costs

Seiko Epson stated yesterday that it would stop producing scanners in Singapore and would lay off 700 local employees to cut costs, production facilities to be transferred to Indonesia and China. Seiko Epson cited falling prices and the need to ‘…ensure survival and increase profitability…’.

BMW reached an agreement with Malaysia to set up some operations in Malaysia’s Multi-Media Super Corridor, surprising auto industry analysts who expected BMW to favour South East Asia’s answer to Detroit, South Thailand, where they already have made much investment.

Royal Dutch Shell has chosen to locate their global IT centre in Malaysia, in preference to 8 other locations including Hong Kong and Singapore; with the Malaysian choice beating even favourites like India. (Thanks to APMF Network Member Michael Chua for this one from the ongoing related discussion on the Malaysian MSC. ) Its too early to state unequivocally that Singapore is pricing itself out of the business it needs to continue prospering. The trade investment board in Singapore is aware of the cost problem, but for good reasons has preferred to concentrate on adding value rather than decreasing costs. Singapore workers from mid to top levels continue to attract some of the highest salaries worldwide. The quality of life in Singapore is far more related to salary level than in other countries, and in the absence of a state religion, consumerism has become the defacto religion for many years. In a country where the promise well-delivered was and is ‘let the government take care of politics and the rest of you just work hard and you will make money’, salary cuts are a very sensitive issue. Malaysia is not without it’s problems, and lags far behind the work- performance culture developed in Singapore. Yet since the Asian crisis, and the exposure of the inadequacies of traditional Malaysian ?ite-business relationship models, Malaysia is cleaning up it’s act. Its still hush-hush, and performed in the normal slowly-slowly cha- cha Malaysian way behind closed doors, but the dead wood and favour- exchanged basis of Malaysian business is feeling just a bit uncomfortable. The impetus is coming from the only place it has always come from in Malaysia – from the top down. Examples are the quiet removal of the Finance Minister Daim, weakening his own crony network, and the government refusing to offer the extent of patronage they have in the past to high profile politically-favoured sons of the soil.

Just as importantly however, Malaysia has managed to keep price rises down during and post Asian crisis. That is a great achievement, and makes costs on a comparative basis to their South East Asian neighbours start to look very good. Now add business incentives to influential and powerful global companies, when costs have become more of a factor world-wide and it looks even better.

On the other hand Malaysia needs to do far more in the fields of employee training, and encouraging highly qualified foreign workers with measures established to ensure they do pass on their knowledge and experience to local workers. In that area, they can learn much from Singapore. Politically, it was important for Malaysia to ‘withdraw’ from the global economy and culture while she regrouped. The recent imposition of a 50% tax on steel imports, and the continuing putting back of AFTA deadlines for the removal of auto tariffs however, suggest that Malaysia is still not quite ready to play with the big boys yet. Now with the leadership in a position of power and authority, partly due to the events of 9/11 which ‘proved’ Mahathir’s exhortations on the ‘perils’ of dissident activity, there are signs that Malaysia is entering a positive period.

The composite indices in Singapore and Malaysia back this up – A slow, but steady and substantive rise of the Malaysian KLSE vs. a stuttering recovery for the Singapore STI in this second recovery of the decade (global recovery) vs. the opposite in the Asian crisis recovery.

Malaysia may well have moved too fast in developing infrastructure far beyond its time while neglecting to a large extent the maintenance and human resource infrastructure to support it. The imposing Kuala Lumpur International Airport is an example of a lot of face – too little substance. Face may have worked will in years past, (in Singapore for instance) but the world has grown up now. The KLIA never has a chance to become a regional air transport hub, while Singapore and Bangkok with their convenience, strategic location, and competitive costs stay on the ball. It will take more years than expected for KLIA to pay its way. Yet pragmatic minds seem to be prevailing. Landing fees have been reduced from their ridiculous levels set in a time of plenty. Malaysia, we feel, no longer relies on the lie that “…If you build it.. they will come…”

With a Malaysia now focussed more on the ball rather than the man, Singapore must prove that their costs justify their value added. It’s a difficult call, but it is clear that Singapore’s smartest strategic minds are being stretched. For the first time for several years, costs are becoming a significant factor not just in Asia, but throughout Asia, and just adding value may not be enough.

On the other hand Malaysia is generating a bit of excitement right now. This time it’s not for the entertaining political shenanigans, but for the right reasons.

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