A NEW OPERATING ENVIRONMENT

Notwithstanding the optimistic outlook, the current economic slowdown should serve as a sober and timely reminder of our vulnerabilities as a small country heavily dependent on world trade.

With a limited domestic market and few resources, we have no choice but to be open and to compete in the world market to survive and prosper. We can grow faster by taking advantage of global markets and advanced technology, and by riding on opportunities including the worldwide electronics boom which has prevailed over the last few years. However, our openness exposes us inevitably to the fluctuations of global business and demand cycles. When market conditions change, we are rapidly affected.

We have no choice but to stay internationally competitive and trim, even during boom periods when opportunities are plentiful. When a slowdown occurs, we will then have the resilience to weather it, and can use the respite to consolidate our economy, preparing ourselves to rebound when market conditions change yet again.

Staying competitive, however, will not be easy. International competition is becoming keener in all sectors in our economy. It is not just that we face more competition than before, but that we are now in a new and qualitatively different environment.

Singapore Airlines

Singapore Airlines is a good example. Twenty years ago, SIA stewardesses were paid an average of about $1,000 per month, a fraction of their counterparts from developed countries. SIA's excellent cabin service and high operating efficiency were its trademark. Today, the pay plus allowances of an SIA stewardess is about $3,400 per month. But if we add in profit sharing, inputed gratuity and SIA's CPF contributions, the total cost to SIA of employing one stewardess can be as much as $4,200 per month. This is higher than what many other airlines in the world pay. Meanwhile, the service quality and the operating efficiency of other airlines have improved tremendously, closing the gap and posing strong challenges to SIA.

For example, British Airways, one of the strongest challengers, has, over the last 4 years, reduced its costs by about o750 million (S$1.8 billion) through single-minded management action. Through strategic alliances with other airlines like Qantas and American Airlines, British Airways is striving to grow in the major markets of North America and the Pacific region. Notwithstanding BA's current problems with some of its unions, the company has turned around dramatically, from an overall deficit of o544 million (S$1.29 billion) for 1982, to a pre-tax profit of o640 million (S$1.5 billion) announced in May this year.

The pattern of regional competition in the airline industry has also changed. The fast growing regional economies have fuelled demand, leading to more direct flights from countries in the region to other destinations in the world. This has made it harder for SIA to route passengers from the region into its main trunk routes through Singapore.

In response to these changes, SIA has had to find new ways of offering better services at lower costs, and to seek tie-ups with other airlines to protect its market share. SIA also has to ensure that it continues to have first class management and strong internal consensus with harmonious relations between workers, managers and unions.

Singapore Telecom

Singapore Telecom's experience with the liberalization of our telecommunications sector provides another illustration of the pressures of this new operating environment. The past 3 months have seen major changes in our telecommunications market as Singapore Telecom faced domestic competition for the first time. Mobile phone and paging charges have fallen sharply. For international telephone services, even before we introduce competition in Singapore, SingTel's IDD rates have been coming down. Otherwise SingTel would have lost business to incoming calls charged at lower rates than outgoing calls. Come Year 2000, when other fixed-line operators come on stream, Singapore Telecom will face even fiercer competition.

These are, however, just signs of the turbulence sweeping the telecommunication markets worldwide, fueled by new technologies and the breakdown of old regulatory barriers. These trends are irreversible, and will affect every country. Even if governments do not proactively liberalize their telecommunications market, technological developments will de facto bring about the changes regardless of regulatory restrictions.

In Hong Kong, for example, Hong Kong Telecom has a monopoly in international calls until 2006. However, through innovative sales tactics including packages offering both resale of Hong Kong Telecom's IDD service as well as call-back, other fixed-line operators in Hong Kong have managed to garner 30% of Hong Kong's international-calls market. There are reports that Hong Kong Telecom has started talks with the Hong Kong government about terminating its monopoly early in return for compensation, because the new operating environment is reducing the value of this monopoly. This is what we did in Singapore with SingTel.

Singapore will not be spared this turbulence in the telecommunications market. Even if we succeed in protecting our market and insulating it from the new forms of competition, this would only be at a high and unacceptable price to the rest of the economy. We will raise business costs, stunt the growth of the telecommunications industry, and undermine our position as a regional telecommunications hub. Singapore Telecom thus has to transform itself quickly and adapt to the ways of the market. It has to move into new technologies, services and markets to tap new revenue streams. Manufacturing

The challenges of a new operating environment are not restricted to the services sector. For example, Singapore faces increasingly tough competition in the electronics industry. Both developing and developed countries understand the key importance of this sector to their manufacturing base, and are going all out to attract MNCs to locate projects there. We have had many successes, but the Economic Development Board has also seen some desirable projects slip through its hands.

While Singapore has managed to maintain the manufacturing sector at about 24% of our GDP, other countries with high per capita incomes have seen their share shrink. Hong Kong, at the extreme, has practically de-industrialized. Manufacturing now constitutes only about 8% of Hong Kong's GDP. Unless we make a special effort to maintain the manufacturing share of GDP, we run the risk of weakening a key pillar of our economy and losing a primary means to generate wealth.

The competitive environment, however, has changed tremendously. Unlike the past when we were one of the most liberal countries seeking to attract foreign direct investments, both developed and developing countries are now going all out to attract high-value projects, offering very generous incentives, including in some cases outright grants.

Many of our competitors have the advantage of lower land and labour costs. Singapore, on the other hand, is constrained by our small size and limited resources. Industrial land in Singapore costs three to four times that in Johor and Bangkok. Even compared to Taiwan, we are more expensive. Labour costs in Singapore are high too. The cost of hiring a production worker in Singapore, while lower than the developed countries, is much higher than our neighbours in other dynamic economies in Asia.

The Government cannot artificially depress labour costs, as these are set by market forces. In any case, our aim must be to create better paying jobs for Singaporeans. We also cannot underprice our land as we have to ensure that each piece of land is used efficiently, and yields full economic returns. We also need to balance the country's needs in housing, industry, commerce and recreation.

But at the same time, we must watch the overall cost of doing business in Singapore. For us to remain competitive, higher costs in Singapore must be justified by higher capabilities and performance. The Government has thus made special efforts to improve key supply side factors. In manpower, for example, we have continued to grant work permits and employment passes liberally. The Ministry of Labour has also recently cut the foreign worker levy for the manufacturing sector. In addition, we have created new schemes or customised existing schemes to train engineers and skilled workers in specific areas in the electronic, chemicals, logistics and communications industries. We are also continuing to develop competence in various high technologies sectors including production engineering and biotechnology.

The Government recognizes that the cost of industrial land is a key issue for manufacturing investors. Prices of industrial land have escalated sharply in the past few years together with the rise in the residential property market. We cannot afford to let the high prices of residential or commercial land overwhelm the industrial land market, and crowd out manufacturing industries and MNCs. MNCs generally have more choices of where to site their projects, are more sensitive to cost factors, and are less tolerant of high prices for land in Singapore. Singaporean companies in high technology manufacturing face the same cost pressures and have the same options. These companies cannot operate in Singapore if their industrial land prices are inflated by our residential land prices.

The Government has therefore taken steps to allocate adequate land for industries, especially for strategic projects, and to price industrial land realistically, considering the likely tenants, to keep Singapore an attractive destination for manufacturing investments.