Singapore is losing its attractiveness to global multinational companies (MNCs) as a location from which to manage business in Asia, a new survey by The Economist Corporate Network (ECN) suggests.
Concerns about inflation, soaring property prices and staff shortages are taking some of the shine off Singapore's reputation as a regional headquarters hub, says the 2013 Asia Business Outlook Survey (ABOS).
Singapore has also lost some popularity as a priority market for investment growth, slipping from being the fifth most important Asian market in 2012 to seventh this year, behind China, the Indian sub-continent, Indonesia, Malaysia, Thailand and Vietnam - this, even though more than a third of the MNCs polled plan to raise their level of investment here.
"Singapore continues to be highly regarded as an investment destination, but its role as a regional management hub for global multinationals is coming under pressure," says Justin Wood, ECN director, Southeast Asia.
Responses from 207 senior executives surveyed across Asia mostly reflect the views of Western multinationals in Asia. More than three-quarters work for large companies headquartered in North America or Europe.
Of the 74 respondents whose regional HQ was in Singapore in Q3 last year, more than half saw rising costs as either a major constraint or a reason to relocate. Close to 40 per cent thought so of property prices, while about a third found the shortage of staff troubling.
Hong Kong faces problems that are just as acute. Property prices and inflation were major concerns for more than 40 per cent of the respondents based in Hong Kong.
But this is perhaps "mitigated by the fact that costs have long been so high there that firms have already recalibrated their expectations" while Singapore's spike in costs is "a more recent shock", the report notes.
While these challenges dim the allure of Singapore and Hong Kong, companies are not likely to start looking for an alternative regional management hub right away, the ECN thinks. "It is still vitally important to have a critical mass of management in places where travel is convenient and the financial system works well," it said.
Possible alternatives include Shanghai, Tokyo and Kuala Lumpur. For respondents with regional HQs in all three cities, inflation and property prices are less of an issue to them compared to peers in Singapore. But a shortage of staff was cited more frequently as a major issue or reason to relocate away from Shanghai (43 per cent) and Kuala Lumpur (48 per cent), than it was for Singapore (34 per cent).
And even as Singapore and Hong Kong retain regional HQ hub status for now, firms are not doing nothing either.
"Anecdotally, some firms are moving parts of their operations that don't need to be in their regional hubs into less expensive cities in other countries. Other firms are exploring more distributed management models, spreading their senior team across several markets rather than putting them all in one place," says the ABOS report.
That lends support to the view that some foreign business chambers in Singapore have expressed in recent months: that rising business costs and foreign- worker policy changes may hit not only local SMEs but global MNCs too.
A report from Citi economists last month also noted that regional HQ activities may be hit by the stronger Singapore dollar, higher labour costs and tighter immigration policies. "Uncertainty over the foreign worker policy could dissuade some MNCs from setting up regional HQs in Singapore," the economists said then.
Also, companies are relocating their operations more frequently today than before, the ABOS survey found - 31.1 per cent of respondents say this is the case, compared to 4.6 per cent who say they are relocating less frequently.
The good news is that business sentiment across Asia is improving. Close to half the ABOS respondents said their business expectations have improved over the past year. Only 15 per cent turned more pessimistic than they were a year ago. Companies are also predicting faster sales growth in 2013 than in 2012 in every Asia-Pacific market except Japan.