Made in Singapore, plugged into the world

Manufacturing in Singapore is not an outmoded sector. Instead, it is a job multiplier and can be a source of innovation as well as a vital way to plug the Republic into the global manufacturing network.
By Arnoud De Meyer, Published The Straits Times, 30 Mar 2016

For more than 30 years of my professional career, I have been passionate about manufacturing.

I love factories, how to streamline and operate them, how to automate them, how to enhance the quality of their output, and how to make the logistics flow smoother. But over dinner conversations in Singapore, I am often asked why this country still needs a robust manufacturing sector. Would it not be better for Singapore to become a pure services economy? As only slightly more than 15per cent of the world's GDP is generated by manufacturing, would it not be better to leave that to China, India, Vietnam and other countries with low labour costs?

My answer is a resounding no!

Manufacturing accounts for 20 per cent of Singapore's GDP. I am deeply convinced that we need to keep it that way, if not increase it.

Why? I see three good reasons.

JOBS AND INNOVATION: THE CASE FOR MANUFACTURING

First, many service jobs are directly generated by manufacturing activities, and often need to be located close to the factories. Think about simple service activities such as canteens, logistics and accountancy or security services. They are often related to the factories and need to be located in the vicinity.

Estimates of the service GDP generated by manufacturing vary considerably. The studies that I have seen for Europe and the United States indicate that at least 30 per cent of service jobs are directly linked to manufacturing, and, in some cases, the estimates go up to 55 per cent of all service jobs.

Second, according to a series of studies in the United Kingdom, manufacturers are more inclined to innovate. Of the manufacturers with more than 10 employees, 41 per cent carry out some form of research and development (R&D), 26 per cent engage in process innovation and 44 per cent in some form of product and services innovation.

The percentages for non-manufacturers are significantly lower: only 23 per cent of them carry out some form of R&D, only 14 per cent engage in process innovation and less than 20 per cent introduce services innovation. As a mature economy, Singapore needs more innovation, and manufacturers can help ensure that we engage in it.

Finally, without manufacturing, it is often difficult to capture the value in the other parts of the value chain.

You need manufacturing activities to be able to capture the value of R&D, engineering, distribution, service after sales, etc.

Take France, for example. It has a very sophisticated agri- and agro-industry because of its agricultural sector. Agriculture is very small, both in employment and GDP creation, but it is essential to ensure the existence of big companies in the food industry like Danone or in the wine and beverage sectors. It is also needed for the upstream producers of fertiliser, agricultural equipment, etc.

In the same way, Singapore needs a significant manufacturing sector in order to enable value-creating activities in the service sector.

I often hear that Singapore's manufacturing sector is no longer competitive because of labour costs, notwithstanding many other advantages. But that may be a case of looking at the wrong trade-off: that of creating a single plant to produce here versus building that plant elsewhere. That is not the way modern multinational manufacturers look at their plants.

In an empirical paper I recently co-authored with Kasra Ferdows (based in the US) and Ann Vereecke (based in Europe), we argue that these multinational manufacturers think a lot more in terms of networks, both those internal to the company and those external, with the latter comprising the networks of universities, suppliers, technical institutes, engineering companies and distributors in which these plants are embedded. The questions these multinational manufacturers often ask themselves are what kind of knowledge a factory can generate and contribute to the network, how a plant takes advantage of the external local network or what is also known as the industrial "commons", and how to evaluate the performance of a plant as a node in a global network.

Together with my colleagues, we elaborate on a model to characterise manufacturing plants. The accompanying diagram gives you a flavour of the model.

ROOTED V FOOTLOOSE PLANTS

We classify manufacturing plants according to two dimensions. One reflects the complexity and proprietary design of the products they produce and the second reflects the complexity and proprietary design of the processes they use to produce them.

Without going into details, you can imagine that in the right top quadrant (for companies with complex designs and processes) you find factories that produce products with unique and often advanced designs. Many plants in a company like Intel or Huawei are of such a nature.

Their products usually need to be supported by continuous research and their advanced and rather sophisticated process technologies must also be frequently upgraded. They need highly skilled operators and technicians as well as access to expertise and knowledge in their industries, resources that are usually found more easily in industrialised countries.

We call these factories "rooted", because they are so intertwined with the local technical capabilities, the schools and the suppliers, that it is difficult to uproot them.

At the other end are "footloose" factories. These are companies in the bottom left quadrant, whose products and processes are neither complex nor proprietary. They produce commodity-type goods using processes that are standard in the industry. For example, many plants making products for Ikea, Dell, Levi's, Li & Fung or Toys R Us are in this quadrant. While some of these companies have proprietary designs, they tend to be simple ones that are easily copied. Their products and processes are not complex.

The critical mission for these plants is usually minimising production costs while meeting the required quality and delivery specifications. Hence, being located in low-cost environments would generally be advantageous for the plants in these sub-networks.

Singapore is not the right place for such footloose factories. We need to attract and retain the rooted type of factories, the ones that do not require low-cost labour and can benefit from our industrial commons.

But how do we do that? How do we ensure that Singapore remains an attractive place for investments in rooted factories?

I have four suggestions.

First, our mindset has to be that of being a node in a network. Singapore is successful in logistics and supply chain management because it has been, for at least two centuries, an inescapable node in the maritime networks in East and South Asia. In the same way, we need to ensure that we envisage manufacturing investment in Singapore not as an investment in a local plant, but as an investment in a node in a global network.

The wrong question to ask about an investment in Singapore would be: What is it that the plant produces in Singapore? The real question has to be: What has the Singapore plant to contribute to the global network?

It also means that we need to see a manufacturing investment in Singapore as a sort of switchboard between other plants in that global network. A switchboard where information is generated as well as exchanged with and between other plants of the same company, or with partners in the local commons.

That will require a lot of flows of people. Indeed, a lot of manufacturing knowledge is non-codified and tacit by nature and needs to be exchanged through people moving around. That will require Singapore to remain a very open country where competent manufacturing experts can move in and out easily, or where foreign talent can come to be trained.

Second, rooted plants need long-term clarity of their development. That requires a stable macroeconomic environment. The Singapore Government, labour organisations and civil society can ensure that to some extent, but our macroeconomic environment does not stop at our borders.

We are part of a larger area, with more than 600 million people in South-east Asia. Hence, we need to play our part to help ensure that the macroeconomic stability extends to the whole of Asean. A strong commitment to Asean's continuing development is needed.

Third, these factories require an attractive industrial ecosystem. R&D on advanced manufacturing systems as planned under the Research, Innovation and Enterprise 2020 is necessary, but not sufficient.

We also need a sophisticated network of engineering firms, vendors and suppliers who are able to generate and share sophisticated knowledge. We don't need more suppliers that rely on cheap labour. I am convinced that those are actually poisonous to our long-term development in manufacturing.

Finally, we need an outstanding ecosystem of institutions that can provide good skills and human capital. Universities, polytechnics and ITE all have a significant role to play.

The private education sector needs further upgrading and has to embed itself in international networks so as to provide effective international exposure to our young people.

With the right mindset, a stable macroeconomic environment, a policy for open exchange of talent, a vibrant industrial commons and an outstanding ecosystem for talent development, we have a good chance of becoming an essential node in global manufacturing, thus ensuring our long-term economic prosperity.

The writer is president of Singapore Management University.