Labour costs bite, but SMEs cling to old ways

SINGAPORE - Rising manpower costs are starting to bite businesses hard, a leading survey of more than 10,000 small and medium enterprises (SMEs) in Singapore shows.

While this is to be expected as the labour landscape is repainted and government nudges companies to take the "productivity" route, most are still dragging their feet on this, the survey suggests.

Some 72 per cent, or more than seven in 10 SMEs, said that their profits last year were most deeply eroded by labour costs.

In fact, 15 per cent of SMEs in the survey reported losses in 2011 compared with 11 per cent the previous year.

Of the outfits polled in the SME Development Survey by DP Information Group, those in the construction sector were most affected by rising manpower costs.

As many as 87 per cent of construction firms indicated that this was the chief reason for their eroding profits.

In the information and communications (infocomm), services and manufacturing sectors, the higher manpower costs have also affected the profitability of 79 per cent, 77 per cent and 75 per cent of the SMEs in these sectors respectively.

High material costs were listed as the second biggest concern to SME profits.

They also had the largest impact on the profitability of 70 per cent of construction and 65 per cent of manufacturing companies in 2011.

The report showed that the SMEs surveyed were also substantially concerned about rising rental costs as the commercial property rental index for office space increased to 142.7 in the first quarter of 2012, compared with 138.9 recorded in the corresponding period the previous year, while commercial property rental index for shop space increased from 106.1 in the first quarter of 2011 to 108.9 twelve months later.

SMEs in the retail, infocomm, transport/storage and services sectors were most impacted by rental increases and many blamed them for eroding their profits.

About half of the SMEs felt that "unreasonable" lease terms by landlords were behind the rising rental costs.

About one-third of the construction companies and those in the transport/storage sectors said the root of the problem was a lack of suitable space.

"This may be a reflection of the smaller market share held by JTC, which currently holds 323,000 square metres of multiple-user factory segment (3.7 per cent of the total market segment," the report explained.

The Reit mechanism is a critical reason for rental costs of commercial property in Singapore escalating, 17 per cent of the SMEs surveyed indicated, particularly those in the transport/storage, construction and manufacturing sectors.

At a macro level, 56 per cent of the SMEs felt that the manpower policies on foreign workers - including higher levies and revised foreign-worker quotas - were a big challenge and had affected the business environment in which they operate.

Nine in 10 firms felt that the policies affected them through higher manpower costs.

A smaller number complained about a manpower crunch or the lack of capable managerial staff.

Would this push companies to raise their productivity, as the government hopes? That's still work in progress.

Less than one-third of the firms indicated that they would look into raising productivity to help them manage rising costs.

The adoption of the Productivity and Innovation Credit (PIC) remained low among SMEs at 27 per cent in 2012, even though this was a marked increase from the 6 per cent which applied for the scheme in 2011.

"Productivity improvements become secondary if SMEs are struggling to stay afloat," said DBS Economist Irvin Seah.

"The take-up is also low because the criteria is stringent. We need more relevant criteria so that the measures become accessible."

The encouraging sign on this front was that fewer firms, 52 per cent in 2012, said that they do not intend to apply for the PIC.

The previous year, 72 per cent had planned to stay away from the PIC, reflecting that more are now starting to accept the scheme.

Another positive sign was that fewer SMEs are facing financing challenges as 13 per cent indicated it as an issue this year compared to 15 per cent last year.

Among these, most are facing cash-flow problems, due partly to a low turnover.

But on the whole, SMEs are looking less towards external financing, and take-up rates for government schemes have declined.

Rising oil prices was the biggest cause for concern on a macro level to the operating environment of the SMEs, as they appeared to worry 73 per cent of them.

Meanwhile, 43 per cent said a strengthening Singapore dollar had affected them more than the US economic situation or the eurozone crisis.