Short cuts just don’t work

February 20, 201410:42 am500 views

Four years into Singapore’s ambitious plan to restructure its economy towards higher productivity, signs of strain are showing.

The slower inflow of foreign workers has led to a manpower shortage and higher wage costs which, coupled with pricey rents, have forced some firms to shutter their doors.

Recent high-profile closures include Japanese speciality chemicals maker Ishihara Sangyo Kaisha, which laid off about 345 workers, and hard-disk maker HGST Singapore, which let 530 staff go.

Officials have warned of more possible shutdowns and retrenchments this year.

These may not just be in the low-level, labour-intensive industries unsuited for Singapore’s educated and expensive workforce but even in high-value sectors that the country wants to retain, such as chemicals.

This illustrates the increasingly challenging environment facing companies across the board. Unit labour costs have risen every quarter over the year before for three straight years.

Firms expect wage costs to jump another 20 per cent this year, as higher foreign worker levies kick in on July 1.

For all this pain, little gain has been seen so far.

In the three years to 2010, labour productivity growth averaged just below zero each year, factoring in both the 2008 recession and 2010 rebound.

In the three years since, productivity has done even worse. Until the third quarter of last year, the last period for which data is available, productivity has fallen an average of about 0.6 per cent a year.

How can Singapore step up its game to achieve its stated 2020 target of 2 to 3 per cent average annual productivity growth?

Overfocus on process

Labour productivity in Singapore is calculated in terms of economic value-added per worker. This is done by taking the total value-added output of the economy and dividing it by the total number of workers.

Value-added is the difference between what a customer pays for a good or service and how much it costs to produce that.

This formula means that productivity can rise in two ways: by accelerating the rise in total value-added, or by slowing the growth in the number of workers.

Given the clampdown on foreign workers – a policy partly accelerated by social pressures – economic restructuring has so far mostly taken the second route.

This approach has left companies scrambling to find fast-acting solutions that will allow them to make the most of fewer, pricier workers. Most of their productivity efforts so far have centred on cost-cutting, through what some experts call “low-hanging fruit”: namely, automating processes and training staff.

In fact, these are the two areas of productivity in which companies are spending the most, out of six categories defined under the Government’s Productivity and Innovation Credit (PIC) scheme.

As of April 30 last year, 62 per cent of claims under the PIC scheme were for automation equipment, another 35 per cent for training, and only 3 per cent for the other four areas combined.

Promoting innovation

Yey the four neglected PIC areas are more likely to prove game- changers.

They are: research and development; design projects; acquiring or licensing intellectual property rights; and registering original intellectual property.

These factors can improve productivity by increasing the value- added of products – the numerator in the productivity equation – without requiring a similar growth in staff numbers.

One company that has recognised the value of innovation in raising productivity is bakery and restaurant chain BreadTalk.

Since its founding in 2000, BreadTalk has continually looked for higher productivity. First, it improved processes: by varying its outlet sizes and staffing to suit different locations, the group raised its average sales per sq ft by 30 per cent.

The group has gone a step further by creating new concepts such as the Icing Room brand of cake decorating outlets. There are also junior chef workshops to teach children how to bake. These initiatives have helped BreadTalk increase sales while making full use its manpower during off-peak hours at the bakeries.

The new initiatives, together with its own market research, also helped the group understand its customers’ tastes. This gave it the confidence to significantly expand by operating restaurants such as Din Tai Fung and RamenPlay.

The restaurant division now makes up about a quarter of group revenue.

“As a group, we focus on continuous invention,” said James Quek, BreadTalk’s chief executive of the bakery division and China region. He told The Straits Times: “Innovation forms the core of our business approach… to overcome common limitations across all food and beverage businesses in Singapore.”

But such efforts at innovation are not typical. A survey by the Singapore Business Federation (SBF) found that more than 40 per cent of local small and medium-sized enterprises (SMEs) plan to invest in IT, employee training or machinery and equipment this year, while only 6 per cent will invest in intellectual property.

While the key goal of SMEs now appears to be saving costs, they need to shift their focus to “innovating and transforming their capabilities”, said Institute of Singapore Chartered Accountants (ISCA) president Ernest Kan.

More importantly, businesses that raise productivity by creating more value – such as with a distinctive product or clearly differentiated brand – have less need to reduce worker numbers and cut costs, noted MP Jessica Tan, who is chairman of the government Parliamentary Committee for Finance and Trade & Industry.

“Once you are creating higher value, you are playing a different game so you are not competing on cost any more,” she said last month at an ISCA roundtable.

Looking long term

Of course, this is easier said than done. Company bosses are preoccupied about daily survival. They can’t spare the mental capacity needed to craft new business strategies or allocate funds for innovative research ideas. And unlike automation and staff training, the benefits from innovation are likely to be seen only over the longer term.

Unfortunately, while the productivity schemes offered by the government have been quite generous so far, many have not taken into account this longer-term view. The PIC, for example, is due to expire next year.

The time limits are designed to foster urgency in restructuring. But they may discourage companies from diving into long-term projects, as they know the financial aid for these ventures will run out in a year or two, perhaps even before the results are seen.

A commentary in The Business Times by Deloitte director of taxes Daniel Ho and manager of R&D tax services Mael Garner last week noted that growth in R&D spending has barely budged from 1.27 per cent in 2010 to 1.3 per cent in 2012. This indicates “the journey to achieving R&D and productivity targets is more of a marathon rather than a sprint”, they said.

“Singapore can send a strong signal to businesses by making R&D tax incentives permanent,” they added.

Investments in areas such as research and development, design and intellectual property are hefty expenditures that are only worthwhile if the cost can be spread across a large enough product base.

As Singapore is a small and costly market, to achieve such scale, companies need to look overseas or band together within an industry. Either solution may be difficult to implement without a hand from the government.

Such aid already exists in some form, but the fact that SMEs are still asking for help indicates that these plans lack awareness. Four in 10 companies polled by the SBF said they were not aware of Spring’s intra-industry collaboration schemes to help SMEs grow.

The perks of these schemes can be significant. One such plan, which aims to build partnerships between large firms and SMEs, brought together HP Indigo – an HP-owned maker of digital printing presses – and two SMEs, Super Pak Manufacturing and Mega Plus Technology.

The two SMEs helped HP Indigo create new packaging for its ink canisters and in return gained new manufacturing knowledge and expansion into new product lines respectively.

One way to raise awareness of these schemes and give SMEs some breathing space could be to tie cost relief to a firm’s participation in innovation-boosting schemes.

Companies that agree to participate in industry-wide research and development could be rewarded with wage subsidies or rental rebates, preferably in upfront grants or direct deductions.

Similar cash perks could be given to companies to help them get started on innovation activities.

The government has recently headed down this route by expanding the use of the Innovation & Capability Voucher, which gives up to S$40,000 (US$31,773) in cash per company to upgrade its capabilities.

The bottom line is that the journey to make Singapore companies more productive is likely to be long and tedious before significant pay-offs are seen.

Rather than focus on short- term targets, we should recognise that the productivity drive will be a long haul, and design incentives accordingly. Only then will firms be able to catch their breath and change their mindsets to embrace more creativity and innovation.



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