Despite a difference in market size, Singapore’s manufacturing sector has strong parallels to the US’s.
I’ve just gotten back from Singapore, and I continue to see parallels between its manufacturing market maturation and that of the US. Both markets offer advantages to companies that focus on total cost in their outsourcing equations. Both markets have successfully developed regional strategies that place higher labor content manufacturing in lower-cost countries adjacent to their borders. And, both countries are trying to maintain some level of localized manufacturing presence for higher complexity projects.
However, companies in Singapore have one challenge that companies in the US do not. Onshoring or nearshoring back to North America is now a popular discussion in boardrooms as China’s labor costs increase and Mexico’s labor costs become more competitive. Nearshoring in Southeast Asia for Asian markets or outsourcing in Southeast Asia as an alternative to China is not nearly as popular a topic. The rush to China a decade ago shipped a lot of projects that weren’t a good fit for a market focused on higher volumes and predictable demand. For companies not overly familiar with the region or the supply base, Southeast Asia may seem like more of the same.
The reality is that China’s popularity as a low-cost, high-volume production center drove many Singaporean suppliers to focus their business models on higher-mix, variable-volume production to compete in niches where China suppliers were less competitive. Many of these companies have factories in Malaysia, Indonesia or Vietnam, where labor rates are below those of China. A key difference is that Singaporean-headquartered manufacturing companies tend to have management and program management teams that speak English and are very experienced in mature contract manufacturing business models.
There has also been a focus on attracting industries with mission-critical quality requirements such as aerospace and medical. That has created a core of precision engineering suppliers capable of working with tight tolerances, very specific materials requirements, lower volumes, robust product validation processes and very rigorous quality requirements.
There are still high-volume players in the region, but the strong core of small-to-medium enterprises (SME) ensures the high-mix, variable-demand model is well served. As costs have increased, most of these companies have moved production to lower cost countries, while maintaining a core management and engineering team in Singapore that divides time between an office and satellite factories across the border. Today’s model looks a lot like the US/Mexico border region, with daily commutes via car or ferry to factories in Malaysia or Indonesia.
This doesn’t mean that high-mix, variable-demand production is inherently better sourced to Southeast Asia. However, it underscores the rationale that the sourcing equation should be carefully analyzed. Well-run regional contract manufacturing SMEs, whether in the US or any other part of the world, generally offer high-service, highly customized solutions. The challenge in lower-cost regions is often that the supply chain either isn’t interested or isn’t capable of supporting complex product or dealing with variable demand. Companies in Singapore have addressed this issue fairly well, both at the contract manufacturer and precision engineering supply-base level. While it doesn’t make sense to build complex lower-volume, variable-demand product for use in North America on the other side of the world, it does make sense to look at Singapore and the surrounding region if some or all the output is destined for Asia or Europe.
The challenge for sourcing teams in a world where regional cost structures continue to evolve is to figure out the best mix of suppliers for their particular project needs. Regional SMEs are an integral part of outsourcing strategies that include low-to-medium volume, complex projects. In the US, these firms prove their competitiveness every day. And, within Asia, Singapore has an established cluster of SMEs capable of supporting that region equally well.