SINGAPORE – Mr Ryan Ng, general manager of precision toolmaker Chong Feng Engineering, is surprisingly sanguine in the face of worsening business conditions.

“A downturn is a good time to look at internal processes, how to improve things, how to be more productive, and more competitive – so that when the upturn arrives you can catch a larger share of the market,” he told The Straits Times.

His small and medium-sized enterprise (SME) serves the aerospace industry and Mr Ng also believes that if the current downturn persists, it may see some smaller players collapse and give stronger players such as his company more pricing power.

However, that is precisely the scenario – a massive wave of bankruptcies and retrenchments – policymakers would want to avoid. Looking at the current data and the global economic environment, that will not be easy and it is clear that people like Mr Ng are the exceptions in the market.

On Aug 11, Singapore’s Ministry of Trade and Industry slashed its gross domestic product (GDP) growth forecast by a full percentage point to a range of 0.5 per cent to 1.5 per cent. In comparison, GDP increased by 3.6 per cent in 2022 and 8.9 per cent in 2021. Economic growth in 2021 was the fastest in 11 years.

Singapore has also downgraded its 2023 forecast for non-oil domestic exports and now expects a contraction of 9 per cent to 10 per cent.

Meanwhile, inflation has peaked but remains at a higher level than the previous decade’s average. All-items inflation reached 4.5 per cent in June, down from its peak of 7.5 per cent in August 2022 but above the 1.5 per cent average between 2010 and 2019.

This combination of slowing growth and rising prices presents a conundrum. High inflation is usually tackled with a tighter monetary policy – which also hampers growth.

GDP and inflation data are aggregates – like a bird’s eye view – of the overall economy and do not provide the full extent of the pain on the ground.

Export-driven manufacturing firms, especially those in the electronics sector, have endured steep declines in their sales and net profits in 2023, as global end-consumer demand eased off the peak achieved in the aftermath of the Covid-19 pandemic when people needed electronic devices to work from home.

Singapore’s top semiconductor equipment maker AEM Holdings’ net profit dropped 76 per cent in the first half of 2023 and its peer UMS Holdings suffered a 27 per cent fall in the same period.

With demand off the boil, companies are cutting back on operating costs, such as staff benefit expenses, and drawing down inventories while lowering materials purchases. Other precision equipment and component manufacturers are facing even more complex challenges.

Singapore-listed CDW Holding, which makes products used in consumer and office electronic devices, said the company faces intense price competition and shortening product life cycles.

“The challenging operating environment is further exacerbated by macro-economic factors like geopolitical tensions, in particular the US-China trade tensions, raw material shortages, supply chain disruptions and other inflationary pressures like rising labour costs in China. This has led to greater market volatility and uncertainty,” CDW said in a statement to its shareholders.

Challenges such as low demand for goods, price wars, and high operating expenses and capital costs are linked to slowing global growth and high inflation and are thus cyclical in nature. At some point in 2024, GDP growth could worsen to a level where it takes steam out of inflation and prompts central banks to cut interest rates and relax their tight monetary stances.

But trade tensions between the United States and China have turned into an unavoidable structural challenge for all manufacturers who have set up production plants in the world’s second-largest economy.

CDW, which has plants in Shanghai, Wuxi and Dongguan, said its major customers – producers of end products like mobile phones, printers and television monitors – are requesting it to adopt a China plus-one strategy.

In response, the company has begun a feasibility study of manufacturing in Vietnam. It has also started negotiations with a customer to restart its Philippine production base and is working with a business partner in Thailand for the manufacture of its products.

InnoTek, another mainboard-listed firm that makes precision metal components and has six plants in China, also believes the shift of manufacturing activities from China to South-east Asia is a longer-term challenge.

The company said in a statement on business outlook that its facility in Rayong, Thailand, has been ramping up capacity to secure new orders for office automation equipment and strengthen its foothold in the region. Its facility in Bac Ninh, Vietnam, has successfully started producing TV bezels in the first half of 2023 and is expected to increase production in the coming months.

However, experts such as Mr Stewart Paterson, a research fellow at Hinrich Foundation, and Mr Tom Kidd, a Singapore-based partner of consultants Bain & Company, have said in research reports that global businesses are already looking to diversify their supply chains outside of China, and that presents an opportunity for businesses in South-east Asia to play a larger role in the global supply chain.

Last year’s surge in investment commitments testifies to the trend.

Singapore received a record $22.5 billion worth of commitments towards fixed asset investments, while total business spending rose to $6.2 billion in 2022, even as competition for investment grew worldwide. Two-thirds of investment commitments came from the electronics sector despite the slowdown of global demand, particularly for semiconductors.

The investments, if realised, will create more than 17,000 jobs when the projects become fully operational in the coming years. Some 61 per cent of the jobs will be created from hub and business services, while 27 per cent would be created from advanced manufacturing, with 12 per cent from research and development.

And even in cases where companies shift their manufacturing bases, logistics and supply chains to South-east Asia and India, Singapore stands to gain. It is an obvious candidate to host some of the manpower when companies look eastward.

For instance, when port operator DP World decided to develop its services ranging from contract-logistics to freight forwarding and warehousing, it chose Singapore as its Asia-Pacific headquarters in 2021.

“With its location at the crossroads of major shipping routes, world-class infrastructure, transparent regulatory frameworks and efficient customs procedures, Singapore is the gateway for trade between Asia, Europe, and the Americas, and therefore plays a pivotal role in our growth trajectory,” said Mr Glen Hilton, chief executive of DP World Asia Pacific.

“Major companies have also made Singapore their regional headquarters and supply chain hub, so it is important that we have a presence here to engage with existing and potential customers,” Mr Hilton added in an interview with The Straits Times.

Like other multinational companies, DP World also made the point that its decision to move its regional headquarters to Singapore was “also encouraged by the strong pipeline of talent which we can tap into, to facilitate the company’s next phase of growth”.

That workforce demand has helped keep the overall unemployment rate running at 1.9 per cent, which is just a tad higher than the multi-year low of 1.8 per cent hit earlier this year.

And it is not just large companies but SMEs as well that are constantly hunting for talent even when they are exercising restraint on other expenses to preserve cash flow.

Mr Tan Ting Wei, a second-generation manager at a local family-owned SME, said his company has become very conservative in resource allocation, is reducing costs wherever possible, and halting expansion plans.

But it still managed to put its 40 or so staff through skills upgrade courses – funded by the Government’s SkillsFuture scheme – so that they can be more productive, said Mr Tan, who is the transformation lead at Fire Armour, which makes firefighting equipment.

“Even though the economy has not been doing really that well, we have not laid off any of our staff,” he said.

The fact that Singapore companies, both big and small, are investing in deploying digital infrastructure to become more productive and competitive and hence survive the downturn was corroborated by Ms Susan Follis, managing director of Kyndryl Asean in an interview.

Kyndryl was spun off from IBM in 2021 as an independent IT infrastructure services provider with 90,000 people in more than 60 countries and with about US$19 billion (S$25.86 billion) in revenue.

Recently, the company worked with Singapore Airlines (SIA) to transform the digital workplace experience for its employees worldwide, modernise its end-user services and consolidate all back-end infrastructure. 

Kyndryl is also working with homegrown brand, BreadTalk Group, to migrate its cloud services to Amazon Web Services. So even in the face of the downturn, some companies are tapping opportunities, while others are trying to become more efficient.

Economists such as Ms Selena Ling, head of research and strategy at OCBC Bank, believe that even though the growth prognosis for 2023 has turned south in tandem with the global economic environment, Singapore should be able to ride through any stormy weather and stay well-positioned to capitalise on the rebound when it materialises.

She said in a research report that Singapore continues to remain relevant to global trade and it is seeking to reinforce its position as a hub for finance, manufacturing, talent, and innovation. For this, it relies on deliberate policy interventions, careful planning, and the credit it has accumulated over the decades among investors and businesses.

• OCBC is the presenting sponsor for the Asia Future Summit 2023. The event is also supported by Guocoland and Kingsford Group.