A tight labor market and reliance on older technology products are making Singapore’s manufacturing sector uncompetitive, concludes European investment bank RBS in a new report.
“We believe parts of the manufacturing industry, particularly electronics, are likely to become unviable,” says RBS, which stands for Royal Bank of Scotland. “The balance between automating production by investing more capital in Singapore, or utilizing low-cost labor in other countries in the region continues to tilt in the favor of the latter for several products.”
That said, the bank still forecasts 4% expansion of the Singapore economy in 2014. “The impact on growth [of deteriorating manufacturing] . . . should be muted as the services sector continues to develop,” says the report. “We expect the transition to a much more services-oriented economy to pick up pace in the coming months and quarters.”
No to foreign talent
Responding to protests about the influx of foreign labor, the government has moved to restrict recruitment by companies of foreign talent. The Dependency Ratio Ceiling for manufacturing has been set at 60%, meaning that there can only be six foreign workers for every ten people in a manufacturer’s workforce.
The ratio for services is even lower at 40%, while that in construction, which is work that do not attract most Singaporeans, is set at a higher 87.5%.
“The number of Singapore residents employed as plant/machine operators and assemblers has been consistently falling since 2005, as more of them prefer to work in white-collar jobs,” says RBS. “This automatically builds in an overall cap on the number of employees available to firms, given the 60% Dependency Ratio Ceiling.”
The bank also attributed the decline in manufacturing to the product mix. “Much of Singapore's exports, especially in electronics, are still in the older technology products where prices have been falling rapidly,” it notes.
“The top five electronic products alone contributed 2.3% year-on-year or nearly the entire decline in non-oil domestic exports over the past four quarters, despite higher electronics production.”
“Without investment in newer technology product lines, the decline in non-oil domestic exports is likely to be sustained,” says RBS. “New investment, though, remains unlikely, in our view. If anything, we expect existing manufacturing to exit as well.”
In part because of the restrictions on foreign labor, the share of wages in overall manufacturing output rose by 10% in 2013. Manufacturers are unlikely to continue operating in Singapore when wages in other ASEAN countries are far lower.