Singapore’s economy: Manufacturers struggle as the city-state changes its economic model

Singapore’s economy: Manufacturers struggle as the city-state changes its economic model

CONTRARY to what many imagine about affluent Singapore, the economy is not all about banks and shopping malls. Manufacturing and industry account for about 30% of the country’s GDP, a strikingly high figure for an advanced economy. In Britain and France the figure is about 12% and in America even less. Nor is it all about sophisticated multinationals: three-fifths of Singapore’s economy is made up of small and medium-sized enterprises (SMEs). The government is proud of the mix of big and small, manufacturing and services, which has helped to spread risk during global downturns.

Now the model is under strain. While other South-East Asian countries have posted impressive, even record, rates of growth over the past few years, Singapore has struggled. In 2012 the economy grew by just 1.3%. This year will probably see only a marginal improvement, especially after the economy contracted in the first quarter, by 0.6% compared to the same period last year. The problems have much to do with the waning competitiveness of Singapore’s metal-bashers.Chuan Heng Signcrafts is a family-run SME that specialises in making vehicle number plates. Tucked away on a trading estate in the middle of the city, the firm is surrounded by scores of small mechanical and electrical-engineering businesses. The boss, Iris Seah, employs four staff and has a turnover of about S$300,000 ($250,000) a year. She is still making money, she says, but compared with a few years ago, “it’s a completely different story”.

She is struggling on but others are not: a car-repair workshop opposite has recently packed up, and other neighbours may follow suit. The main problem, says Ms Seah, is a squeeze on margins caused by rising costs—above all, labour. The government has imposed rises in a tax called the foreign-worker levy. Paid by the employer, it is charged on every foreign worker. Ms Seah employs a mainland Chinese. Two years ago the levy on him was S$250 a month. Now it is S$330 and going up every six months. She has to pay for his food, insurance and accommodation as well. So although she pays him a salary of just S$1,050 a month, Ms Seah has to shell out a further S$650 to cover the extra costs.

It is part of the government’s three-year-old policy to restructure the Singaporean economy and wean it off its dependency on low-skilled, low-wage immigrants—who have become politically unpopular—and improve productivity. As well as increases in the levy, businesses have been made to cut the ratio of foreign workers to local hires.

But companies are passing on the extra labour costs to consumers, fuelling an inflation rate that is one of the region’s highest. Meanwhile, rising costs make exports less competitive, especially with low-wage economies such as Vietnam snapping up business. Ms Seah wants to export to Indonesia, but she will be hit by the strong Singapore dollar, priced to reflect the booming services economy.

The government is supporting the transition to its new higher-productivity economy with schemes such as the “productivity and innovation credit”. With it, Ms Seah recently bought a German machine that can stamp out an aluminium number plate in two minutes, rather than the hour that it took previously. She was able to claim back 60% of the S$8,000 it cost. The scheme was extended in the most recent budget. The government also helps with technical know-how and training. It is nurturing potentially more profitable manufacturing industries, like biomedical engineering that makes scanners and other advanced diagnostic tools.

Ms Seah is moving up the value chain, just as the authorities would want. With her new plates she can charge more for a better-quality product, staking out a new position at the higher end of her market. Assuming, that is, that customers have enough money to buy them.