It's not an easy time to be a manufacturer in Singapore.
The sector is undergoing a painful restructuring process as the Government tries to ramp up productivity and phase out low-cost, labour-intensive manufacturing processes.
Tighter foreign worker quotas have led to labour shortages and higher wage costs as companies struggle to fill vacancies, while rising rents and utility fees have added to the squeeze.
At electronic component assembly company Add-Plus, for instance, profit margins are expected to be about 15 per cent this year, compared to 18 per cent to 20 per cent in previous years.
Meanwhile, demand from other countries for Singapore-made goods remains tepid five years after the global financial crisis - a bane for manufacturers here as two-thirds of manufactured goods are exported.
In the first half of the year, the manufacturing sector contracted 3.2 per cent, compared with growth of 5.5 per cent in the construction sector and 4.1 per cent in services- producing industries.
For the full year, economists expect manufacturing to grow by a mere 0.2 per cent.
Some factories have recently caved in under the pressure. Micron Semiconductor Asia and chemicals firm ISK Singapore shut their operations here last month, laying off 345 employees in total.
Such closures, on top of shrinking output, mean that the size of Singapore's manufacturing sector has shrunk relative to the overall economy. The sector's share of gross domestic product (GDP) has dipped from 27 per cent in 2005 to 20.7 per cent last year.
To some extent, this is an inevitable outcome of Singapore's ongoing economic restructuring.
Not all types of manufacturing lend themselves to the high value- added and capital-intensive processes that Singapore is targeting.
But painting the whole sector with the same gloomy brush is also misleading. Some segments are still doing well, even as others struggle to keep their heads above water.
Which segments will survive?
HEADLINING the woeful state of manufacturing here is the electronics segment. This is one of the largest industries in the sector, accounting for about a third of total manufacturing.
The industry has been struggling to remain competitive amid the emergence of lower-cost global players in China, Taiwan and South Korea, and technological developments such as the smartphone.
But while it has temporarily powered down, the electronics segment has not completely short-circuited. Output grew 1.9 per cent in the second quarter this year, although it is still down 4.1 per cent for the first six months of the year.
An encouraging sign of the resilience of the electronics segment comes from companies such as ASE Singapore. This company provides services to companies manufacturing chips for smartphones and tablets.
While the company expects a muted outlook for the rest of the year due to stagnating growth in demand, it is maintaining its presence in Singapore despite the difficulties of economic restructuring.
"There is the necessary infrastructure here to support a semiconductor cluster, and no semiconductor company can function in isolation... We need other companies in the industry here to provide support services and to be our customers," said Mr Lee Kwai Mun, ASE's president for Southeast Asia.
Less certain is the future of the relatively small food manufacturing and processing industry, often highlighted as one that could do more to raise productivity. Food, beverages and tobacco make up about 3 per cent of manufacturing output here.
Some companies in the sector have taken steps towards mechanisation: Seng Hua Hng Foodstuff, which manufactures Camel Nuts, installed new machinery on its production floor earlier this year.
This has more than doubled the factory's production capacity.
However, CIMB economist Song Seng Wun said food manufacturing and processing is moving away from Singapore and "increasingly done out of Johor".
"Traditional manufacturing processes like food processing have to be very mechanised rather than labour intensive... If not, companies would rather move to Johor where costs are slightly lower and they can still be close to their Singapore market," he said.
FORTUNATELY, it's not all doom and gloom in the manufacturing sector. A few industries are growing in importance, and are likely to grow in importance as restructuring continues.
Transport engineering, for one, has traditionally benefited from Singapore's geographical location.
The segment, which accounts for 16 per cent of manufacturing output and includes aerospace and the marine and offshore industries, is likely to continue growing on the back of the Republic's rising "hub" status.
OCBC economist Selena Ling said the recently announced expansion of Changi Airport will offer a host of opportunities to the aviation cluster, including better prospects for companies in aircraft engineering.
Meanwhile, the offshore and marine segment is going strong, with key players competing well in global markets. For instance, rigbuilders such as Keppel Corp and Sembcorp Marine are enjoying a strong year, with both expecting their order books to hit a record high this year.
Another industry with bright prospects is the more volatile biomedical segment, which makes up about 18 per cent of Singapore's manufacturing output.
Production of pharmaceutical drugs is highly cyclical and output tends to be choppy, but the sector's focus on research and development and high value-added production processes makes it a prime candidate for the local manufacturing scene, economists say.
The segment is anchored by global pharmaceutical giants like Novartis, GlaxoSmithKline and Pfizer.
One worry about an increasing reliance on the biomed segment is that the erratic pattern of drug output might skew the overall performance of the manufacturing sector. "We have to make sure that the manufacturing sector has a broad enough base such that (biomed) doesn't (cause) a boom-bust cycle," said Ms Ling.
Smaller, but here to stay FOR years, economic watchers have warned that Singapore's rising costs and emphasis on high value-added manufacturing will cause a "hollowing out" of the industry here.
These concerns have been exacerbated by the ongoing restructuring process, which might result in "collateral damage", said DBS economist Irvin Seah.
Originally viable companies which have yet to "reach a sustainable growth path" might go out of business because of an inability to handle cost pressures, he warned.
In addition to domestic troubles, the emergence of other countries in the region as potential manufacturing hubs will also be a challenge to Singapore, said UOB economist Francis Tan.
The planned integration of Asean economies by 2015, for instance, might prompt multinationals to think twice about setting up manufacturing facilities here.
"They might decide to base their plants in other Asean countries with lower costs of doing business... Even higher value-added industries might be attracted to other countries as they develop a talented workforce," Mr Tan said.
Still, economists continue to believe that manufacturing in Singapore will not die out.
"Investments in the manufacturing sector are still holding up - if the sector were hollowing out, we would see those fall off," said CIMB's Mr Song.
The Government has committed to maintaining manufacturing's contribution to GDP at 20 per cent to 25 per cent, he added.
"The only way to go about that is (moving towards) higher valueadd, and the current productivity drive is in the right direction," Mr Song said.
So even as the sector grapples with its challenges, and the service sector continues to eat into manufacturing's share of the economy, Singapore still needs its manufacturers for a more vibrant and stable economy and a wider range of jobs.
"Though there is no rule of thumb as to how much manufacturing should contribute to GDP, retaining a share of manufacturing is still important, because the sector has a second-order impact on the rest of the economy - for example, through the services provided to manufacturers," said Mr Tan. "We also want diversity in the workforce here, which manufacturing helps provide."
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