Iskandar to move away from being low-cost centre

SINGAPORE — Iskandar Malaysia is set to focus more on attracting higher-value manufacturing companies, in a move that may result in some lower-end Singapore businesses having to look for an alternative overseas destination where they can shift some of their operations as they grapple with higher costs and manpower constraints at home.

Mr Ismail Ibrahim, the chief executive of the Iskandar Regional Development Authority (IRDA), told TODAY in an interview that the special economic zone is shifting away from activities dependent on cheap labour.

“For the manufacturing sector, we are moving Iskandar Malaysia towards higher levels of the value chain. We want to see more of what we term as technology-intensive manufacturing activities and less of the low-cost kind of industries,” he said, adding that this has always been part of the IRDA’s planning.

“Of course, in the early days of Iskandar Malaysia, we couldn’t have been too aggressive in pushing for this. But we have to do it gradually — and now is the right time to not only push for the high value-add manufacturing to come in, but also to restructure the current ones,” he said.

“So, now it leaves investors from Singapore a choice — if they wish to have low investment and high returns, they may have to assess and decide Iskandar Malaysia is not attractive for them. We are okay with that — they may want to go elsewhere in Malaysia where their requirements can be met.”

Mr Ismail said the IRDA has been working with public- and private-sector partners to create awareness among companies in Singapore and elsewhere of this strategy.

ISKANDAR’S COST ADVANTAGES DIMINISHING

The CEO’s comments come as anecdotal evidence suggests that some Singapore manufacturers do not see a compelling reason to move operations to Iskandar.

Two weeks ago, the prime ministers of Singapore and Malaysia lauded the progress being made there, highlighting the role it can play in complementing the Republic’s economic activities.

At their leaders’ retreat, Prime Minister Lee Hsien Loong and Malaysian Premier Najib Razak declared their satisfaction with the joint projects and initiatives in the special economic zone, with Mr Najib noting that if Iskandar can offer advantages at more competitive rates, it will be more attractive for Singapore businesses.

Although some Singapore manufacturers have moved some operations north, others have decided that, around eight years after Iskandar was launched, it does not offer the same value it once did.

“Cumulatively, the numbers of Singapore businesses in Iskandar should be climbing up, but the momentum isn’t that strong,” said Savills senior director for research and consultancy Alan Cheong, citing feedback from his industrial property agents active in the economic zone.

“All the nitty-gritty issues eventually come to play and these can swamp the broad brush advantages,” he said. “For instance, SMEs (small and medium enterprises) going there are competing for the same pool of skilled Malaysian workers who could easily just ply the Causeway every day drawing Singapore-scaled wages.”

PricewaterhouseCoopers Singapore’s international tax partner Abhijit Ghosh agreed that a key reason for the reluctance among some Singapore manufacturers to move to Iskandar is the shrinking cost advantage.

“What our clients told us is that whereas they used to enjoy around 30 to 35 per cent savings on combined labour and real estate costs when they relocated to Iskandar, that advantage has narrowed to 10 to 20 per cent now as wages and, to a lesser degree, land prices continue to edge up,” he said.

Nevertheless, Singapore remains the biggest foreign investor in Iskandar, having committed a cumulative RM11 billion (S$4.23 billion) to the area as of January, showed data provided by the IRDA. This forms a key part of the RM133.07 billion overall investment that the region has attracted so far, of which RM47.82 billion has been committed to the manufacturing sector.

However, a closer look at the data reveals that although the overall investment amount has been increasing, the proportion of foreign investment in Iskandar has been steadily shrinking, from 55 per cent of the total in 2008 to 35 per cent currently, suggesting a slowdown in overseas interest.

ISKANDAR STILL OFFERS benefits FOR S’PORE MANUFACTURERS

International Enterprise (IE) Singapore’s Kuala Lumpur centre director Adeline Quek acknowledged that Iskandar is a work-in-progress for foreign companies, but the longer-term view is positive.

“Bearing in mind that Iskandar Malaysia is essentially a greenfield development, it will take some time for the development of softer aspects such as a suitable talent pool and supporting industries such as consumer and business services,” she said. “In the meantime, Singapore companies need to be prepared to manage teething issues such as manpower constraints and even a possible construction crunch.”

Whatever the headwinds, eroding financial benefits should not be seen as a deal breaker, Ms Quek added.

“For Singapore companies, the real advantage of Iskandar Malaysia lies in its connectivity. Its proximity allows companies to shuttle efficiently between both locations, creating an integrated business ecosystem as they expand.”

Mr Ismail added that momentum is gathering to create a business environment that companies from Singapore and elsewhere should find very appealing.

“In Iskandar’s case, we are creating an ecosystem that you simply can’t ignore. We have the best infrastructure, we will provide the necessary talents and we are making efforts to ensure we are environmentally sustainable while improving processes for greater ease of doing business. At the end of the day, senses will prevail and I believe businesses will find Iskandar an attractive choice, even though the costs might be higher.”

And he added that the push to move Iskandar up the manufacturing value chain may act as a spur for some Singapore companies looking to shift some operations.

“We’re happy to note that most Singapore companies we’ve talked to welcome this change — which shouldn’t be a major challenge for them anyway, given the advanced standards of the manufacturing industry in Singapore.”