High Value-Added Industries To Drive Growth
BMI View: In order to maintain economic growth and to overcome reduced international competitiveness in traditional manufacturing, Singapore will have to shift to increasingly high value-added industries in the coming years. In our view, chemicals, electronics, biomedical manufacturing and HQ & professional services will be key growth sectors in the coming decade.
Singapore's longer-term growth will hinge heavily on maintaining its current competitiveness in the global market. Notably, aside from having a small population base (5.0mn) and no natural resources, rising costs of doing business (through a stronger currency and rising wages) will also increasingly become a drag on economic growth. In our view, Singapore will be able to maintain its economic lead in the South East Asia region over the coming decade despite rising costs, and we flag up chemicals, electronics, biomedical manufacturing, and HQ and professional services as the key sectors that will lead the way.
Investment Growth Underscores Strength
Singapore's international competitiveness can be measured by the amount of new investment that companies are willing to undertake, and the growth trend has thus far been impressive. Indeed, fixed asset investment commitment (used to quantify goods-producing investment) and total business spending (used to quantify services investment) has been generally robust over the last decade. In 2010, total investment commitment (comprising both fixed asset investment commitment and business spending) reached SGD21.5bn (US$16.8bn), slightly below the peak of SGD25.8bn registered during the height of the global economic boom in 2008.
Broadly speaking, while manufacturing investment has remained largely stable, services investment has been growing at a quicker pace (a trend which we will elaborate on later). Overall, continued strong investment suggests that Singapore's positioning as the Global-Asia hub (an initiative by the EDB) is gaining traction, and we believe this strategy can be maintained for the foreseeable future.
Identifying The Growth Sectors
In order to determine the industries that are more suitable for Singapore's economic makeup, we have to analyse the amount of value-additions a worker can provide (the total value of output is less appropriate as Singapore has to import almost all its raw materials). By deriving the value-added per skilled worker for 2010 from data taken from the Economic Development Board, we picked out four segments that have the greatest potential. In descending order of value-added per skilled worker, biomedical manufacturing leads the way with SGD1.2mn, followed by HQ & professional services (SGD1.0mn), chemicals (SGD1.0mn) and electronics (SGD0.8mn).
Indeed, the government's industrial policy is already reflecting increased investment in these sectors. Using 2010 as a gauge (combining fixed asset investment and total business spending), HQ & professional services, chemicals and electronics (which drew in investments amounting to SGD3.0bn, SGD2.0bn and SGD7.6bn respectively) were three of the top four segments in terms of investment draw for the year. The exception lay with biomedical manufacturing which drew in only SGD0.5bn.
However, we believe that this is an anomaly and investment in the biomedical cluster should pick up in the coming years, as the government continues to promote Singapore as a biomedical manufacturing hub. Similarly, we believe that the EDB will continue to play up Singapore's feasibility as a regional headquarters for firms intending to tap into growth in the region.
Services May Be More Sustainable In Long Run
The strategy of adding greater value-added industries into Singapore is a workable plan applying to both manufacturing and services for the coming decade. However, as wages continue to pick up, manufacturing with less value-added may become less feasible and services will become even more important in Singapore's economic makeup. Indeed, over the last two decades, manufacturing wages have risen by an average of 6.0%, outpacing that of services (5.0%). On an absolute basis, the average monthly wage differential between the two sectors is negligible at SGD37 (as of 2009).
Regarding services, we are more optimistic that higher wages can be sustained. Indeed, Singapore has a commanding lead in the region when it comes to the business environment, boasting strong infrastructure, institutions and market orientation. In our view, it will be multiple decades before other countries in the region can compete and firms will continue to view Singapore as an ideal place for locating a regional HQ, financial services and professional services purposes.