Singapore companies enduring mixed fortunes in US-China trade war
- Firms in the city state relying on China are suffering, while others are picking up business from those in the United States looking to avoid Donald Trump’s tariffs
- Earlier this week, the government announced that Singapore’s exports fell by 2.6 per cent in November, the first such year-on-year slump in eight months.
Like most people in the freight business, Darric Teo used to look forward to the spike in trade brought by the annual Christmas rush.
This year though, Teo is not feeling quite so festive. Cargo volumes from China are slowing, ships are idling in the docks and global demand is weakening.
With the added air of uncertainty stemming from the US-China trade war, Teo has had to cut the headcount at his freight forwarding firm, ASL Solutions, from more than 20 to a dozen.
“Five or six years back, the run from October to December was always very strong,” the ASL Solutions director told the South China Morning Post.
“It seems to us that in China in particular, the manufacturing hub of the world, they’re not pushing things out, people are not buying them. Maybe the high value stuff, but for the low value items, I think there’s not much movement.”
The upshot is that the trade war is gradually rearranging the supply chains of Singapore-based companies with the city state more exposed to the worsening global trade picture than most nations.
According to the World Bank, Singapore’s trade in goods and services was worth three times the value of its gross domestic product in 2017, meaning that it sits in the middle of global supply chains, importing and re-exporting after adding value in the city state.
China is a major trade partner, with the mainland accounting for some 15 per cent of Singapore’s exports and Hong Kong another 13 per cent.
Logically, when demand in China slows, exports from Singapore slow accordingly.
Earlier this week, the government announced that Singapore’s exports fell by 2.6 per cent in November, the first such year-on-year slump in eight months.
This was weaker than the expectations of economists polled by Reuters, who predicted a 1.2 per cent drop, and highlighted the vulnerability of the economy in such unpredictable times for trade.
Demand for Singapore’s largest export, oil, has remained strong through the tensions, but with the economy of its largest buyer, China, slowing, this could be about to change.
Expectations of weakening demand caused JP Morgan to slash its forecast for the average crude oil price over the course of 2019 from US$83.5 per barrel to US$73.
“Oil exports were up by 18.9 per cent year-on-year in November, but it is expected that these will taper in 2019 as demand slumps,” said Carlos Casanova, Asia-Pacific economist at insurer Coface, who added that Singapore may hope for stronger demand from countries like Australia.
Asia Polyurethane Manufacturing, a manufacturer and exporter of the polyurethane systems used to fabricate parts for products from cars and ships to furniture and toys, is another of the businesses to have been hit hard by the trade tensions.
At least 20 per cent of the company’s customers are in China, according to CEO Erman Tan.
Since US President Donald Trump imposed a 10 per cent tariff on US$200 billion of Chinese goods in September, that portion of his company’s sales has fallen by between 30 and 50 per cent.
“The companies we sell to are export-oriented companies, selling outside China. Now because of the trade war between China and the US, those companies are exporting less. That means I am selling less to them. My business in China has dropped because of that situation,” Tan said.
To compound matters, the devaluation of the renminbi this year means that Chinese companies have been able to undercut his products in India and Pakistan, both of which are important export markets for the company.
Tan is attempting to reduce his company’s exposure to the Chinese market, courting customers elsewhere in Asia, but this plan will take months to implement.
“It’s not something you can just switch over,” he told the Post.
Indeed, it is some of those Singaporean companies that have been able to reduce their dependence on China that can be classed among the early winners of the trade war.
“There are some upside surprises from the trade war,” said Kurt Wee, president of the Association of Small and Medium Enterprises (ASME) in Singapore.
“There are more concerns, of course, but we have had some surprise news from companies who say the trade war has not been bad for them.”
Even before the US implemented the first tariffs on China in July, there was a growing trend of manufacturers shifting their production out of China into lower cost hubs in Southeast Asia, but the trade war has helped to hasten this shift.
“If the trade war did not happen, I would call it an evolutionary approach. That means [manufacturing] is slowly evolving from sourcing in China to Vietnam. But with the trade war coming in, it becomes a revolutionary approach,” said Ernie Koh, executive director of Singaporean furniture manufacturer Koda.
In a way, Koda has been a beneficiary of the trade war. The bulk of the company’s manufacturing is in Malaysia and Vietnam.
As American buyers try to dodge the current 10 per cent tariff on many Chinese goods and the 25 per cent levy that the US has threatened if not deal is agreed after the current 90-day truce, his company has been able to take business from competitors that still make their products in China.
“Many of my customers are looking into sourcing outside China as an alternative source to supply into the US market,” Koh said.
“That not only pertains to the furniture industry. We’re seeing many other industries moving to Vietnam as a primary country and other countries in Southeast Asia, as they take their production out of China.”
A twist in the tale, however, is that Koda’s retail subsidiary, Commune, operates 50 shops in China.
“At the ground level, we’re seeing consumption has dropped a little. The retail market is beginning to show some effect [from the trade war]. It’s not severe at the moment, but I think it will get worse,” Koh said.
The trade war is proving a double-edged sword for another Singaporean firm, Futuristic Store Fixtures, which manufactures store fittings for retail clients including Levi’s, Victoria’s Secret, Gap and Ralph Lauren.
The company produces in two facilities, one in Kunshan, an hour’s drive from Shanghai, and the other in Kuala Lumpur.
“The unforeseen trade war caused some disruption to our business,” said CEO David Low. “For fixtures we produce in China to be shipped to the US, we had to shift the manufacturing to Malaysian facilities.
“Similarly for some of the Malaysian facilities where we produce for the non-US market, we had to shift some of the manufacturing to China in order to balance the capacity.”
It took three months to complete the restructure, with the company incurring costs in training staff to produce fittings that were produced in their other location.
However, Futuristic has also fielded more inquires from new buyers eager to avoid US tariffs on China.
But despite their relative wins, neither Koh or Low are enthused by the prospect of a prolonged trade conflict, and the general feeling among Singapore’s traders is that anything that disrupts the flow of goods is bad for business.
“If you look at a macro basis, there will be some pluses, some minuses, but if it results in an overall reduction in trade from both the US and China, that might constrain global trade and that is going to impact Singapore businesses substantially,” said the ASME’s Wee.
The early winners realise that in such unpredictable times, it might be foolhardy to celebrate, while those who have suffered hope for an end to the tensions before the going gets any tougher.
“We cannot plan for the next year like before,” said Teo from freight forwarder ASL Solutions. “Now we’re just looking at the next quarter, living from quarter to quarter.”