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Singapore: Weak Links in the Chain to Prosperity?

30.10.2014 / Energyboardroom

Singapore’s Economic Development Board (EDB) reported in 2013 that Singapore is the largest manufacturer of jack-up rigs, responsible for 70 percent of global production. Singapore also delivers 70 percent of floating production storage and offloading (FPSO) conversion services. The renowned Keppel and Sembawang shipyards (amongst others) are highly capable, handling a fifth of the world’s ship repair operations as well as construction projects.

Sembcorp Marine is one of the world’s largest marine and offshore engineering companies. It is the proprietor of Sembawang Shipyard and reported a 27 percent jump in year-on-year turnover in the first quarter of 2014, growing from SGD 1.05 billion to SGD 1.34 billion (USD 872 million to USD 1.11 billion). Whilst figures like this paint a rosy picture, the full story is less positive, with gross margins shrinking by two percent to 12.8 percent in the same period. This is in part due to solid competition from other shipyards in the region. In some rival ports, the quality of the product delivered is increasing, and in others, assets are available at lower cost.

It might seem as if Singapore’s maritime construction industries are under siege: neighboring countries are clearly eager to take a share of the wealth that comes from courting the oil and gas sector. “Singapore’s rig building industry is facing colossal competition from neighboring markets such as China and Korea,” says Paul Carsten Pedersen, CEO of Jasper Offshore, which owns and operates oil rigs for deep sea drilling that are contracted out to oil and gas exploration and production companies. “These markets are now taking as many orders as Singapore and ultimately, Singapore has to develop much deeper engagement in this industry.”

Pedersen suspects that the sheer abundance of companies in Singapore might start creating economic strains, given the finite population that the island can house. “Singapore is a place where it is relatively easy to attract highly skilled expats, but the tight supply of local and talented people able to work within and service the offshore industry is fast becoming the city’s Achilles’ heel,” he adds. “The country must do more to abate this acute issue. If Singapore wants to ensure longevity in the offshore products value chain, then it must find solutions to this issue.”

Some worry that there are weak links in the chain that connects Singapore to its prosperity. “A conspicuous challenge that is threatening to derail Singapore’s offshore and marine status is the sheer annual cost of hiring people,” admits Steffen Tunge, managing director, OSM Ship Management, a global independent provider of offshore management services. “There is an acute talent issue here and this has been compounded by recent changes in labor laws.”

We are opening a new facility in the bordering regions of Malaysia that is nearly as large as our current one here,” says Mark Beretta, COO of KTL Offshore, one of the largest rigging outfits in the world. “Despite its obvious and fantastic advantages, Singapore is becoming an increasingly expensive place to operate. By gradually shifting some 60 percent of our production capacity, we are keen to reduce our cost base but also explore the opportunities present in Malaysia. Nevertheless, our headquarters will always remain in Singapore.Clearly, Singapore’s high costs are pressuring some businesses into seeking less fiscally strenuous surroundings.

“Everyone has a plan—until they get punched in the face,” boxer Mike Tyson once famously stated. However, economic competition lasts longer than the 12 rounds of a boxing match, and a number of Singapore’s innate qualities make the city a robust player that will not tumble easily. Arguably, much of the speculation over regional competition makes too much of high GDP growth rates in these countries; this ignores the fact that Singapore is simply a more mature economic unit. This city runs against the mantra of the oil and gas industry: that risk begets reward. Instead, Singapore’s success is built on its stability, but the cost of this stability is following the government’s economic vision.

 

To read more articles and interviews from Singapore, and to download the latest free report on the country, click here.

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