Singapore Business Review (Aug-Sept 2014) by Charlton Media Group

Display to 30 September 2014 S$5.90

Daily news at www.sbr.com.sg

Storage wars Who’s winning Singapore’s self-storage wars?

the rise of

asean affluence dual key units defy

market crunch

what’s troubling the

once-steady ipo market? Singapore’s debt levels mirroring pre-crisis US

Dodgy food labels go

under the microscope

MICA(P) 244/07/2011 KDM No: PPS1645/3/2008

FROM THE EDITOR The self-storage industry in Singapore is becoming more and more popular with shrinking apartment sizes and SMEs wanting to achieve operational efficiency. The industry has developed rapidly over the past 10 years, growing from a single facility in 2003 to an estimated 41 facilities in December 2013, according to Colliers International. Singaporeans now have access to over 25,000 self-storage units and more than 1.8 million sq ft of leasable self-storage space. In this issue, we bring you a report on how this industry started in Singapore and how self-storage operators are faring today. You will also find an exclusive coverage on the inaugural International Business Awards, an event organized by Singapore Business Review to honour the contributions of international firms to Southeast Asian economies. SBR awarded 39 companies from 17 countries, spanning the globe from Vietnam to Luxembourg to New Zealand. SBR also went all the way down to Brisbane, Australia, the host city of this year’s G20 Leaders Summit, to find out what opportunities the city offers the Singaporean investor. We also bring you regional reports on Asian inflation, global trade, and ASEAN’s rising affluence plus other stories about Singapore’s retail, taxi, and aviation industries. We have a lot in store for you so start flipping the pages. Enjoy!

Tim Charlton Singapore Business Review is available at the airport lounges or onboard the following airlines:

Singapore Business Review is available at the following clubs and hotels: American Club Hollandse Club Laguna National Orchid Country Club Raffles Country Club Raffles Town Club RSYC Seletar Club Sentosa Golf Club Singapore Cricket Club Singapore Island Country Club Swiss Club The Tanglin Club The China Club The Legends Fort Canning Park The Pines Club Tower Club Singapore Fullerton Hotel Grand Plaza Park

Royal Hotel Inter-Continental Le Meridien Orchard New Park Hotel Pan Pacific Raffles Hotel The Hilton The Regent Singapore The Ritz Carlton The Swiss Hotel Stamford Traders Hotel Singapore Darby Park And to 16 serviced residences

SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 3

CONTENTS

analysis Beyond El Niño: Re-assessing 48 regional Asia’s food inflation risks

DBS replaces UOB in second 28 Rankings place, Citibank remains first

STORY 26 CoVER How Singaporeans can pack up, store and stow away

FIRST

FEATURE

REGULAR

12 Here’s why Tigerair prowls

38 Investing in Brisbane: What

24 Financial Insight

opportunities await the

28 Rankings

Singaporean investor?

fewer skies

13 Taxi drivers get appy 14 Where have all the Chinese

tourists gone?

16 Singapore’s debt levels mirroring

pre-crisis US: should we be worried?

18 Dual key units defy market crunch 20 Meet Singapore’s 10 hottest

restaurateurs aged 40 and under

22 Spotlight on SingTel’s Optus

Published Bi-monthly on the Second week of the Month by Charlton Media Group #06-09 E, Maxwell House 4 20 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 Maxwell Road

32 CMO Briefing

ANALYSIS

PROFILE

40 Global trade unbundled 44 Demographic Techtonics:

The rise of ASEAN affluence

46 Can Singapore’s banks take on

19 Why Earth Arts is one of

the most preferred stone

suppliers in Singapore

rivals in Asian market?

For the latest business news from Singapore visit the website

www.sbr.com.sg

co-published Corporate profile

Castlewood Group stands out with sound investment scheme and sterling global brand Why keep your savings when you can invest it in a 5-star hotel for higher returns?

hat is the big question Castlewood Group poses to Singaporean investors who may not know that their S$35,000 can already afford them a stake in a buy-to-lease hotel investment. Headquartered in Singapore with operations in the United Kingdom and Thailand, Castlewood Group disproves the notion that only multimillionaires can buy into hotels – and the secret lies in the commercial real estate developer’s innovative investment structure. Transparent investments Castlewood Group recognises that many Singaporean investors outside of the super wealthy are also curious to invest in the luxury hotel market. But they refrain from doing so due to fears of risk and a high cash outlay. This is why the developer devised a buy-to-lease hotel investment where an investor can reap higher profits and be protected from the usual traps that come from unproven schemes. “The resilient sector of luxury buy-to-lease hotel rooms is an incredibly viable opportunity for investors looking for returns in such volatile times,” says Chris Comer, CEO and Property Developer, Castlewood Group. Under the Castlewood Group investment scheme, investors may choose between fixed or variable returns paid annually to suit their portfolio needs. Investors are also protected with full title insurance through coverage from the world’s leading title insurance company, First American Title Insurance, and by the fact that Castlewood Group’s assets are held in trust by Intercontinental Trust. Of course a sound investment scheme means little if not backed by a sterling 5-star luxury brand with strong global appeal among the jet-set crowd, which is why Castlewood Group partnered with international brand Nikki Beach in 2012. The partnership led to the creation of the Nikki Beach Hotel and Spa Phuket in Thailand which is slated to have its soft opening by the end of 2014. This property boasts state-of-the-art amenities

Prime villas with luxurious private pools

at a premium location in the beautiful Bangtao Beach that will impress even the most discerning clients. Comer says demand for luxury hotels in Asia has reached “unprecedented levels” and Singaporean investors can expect the Nikki Beach Hotel and Spa Phuket to attract a steady stream of high-end clientele from all over the world. “The Nikki Beach Hotel & Spa Phuket is an opportunity for Singaporean investors to have foreign investment in real estate, benefiting from favourable tax conditions while providing peace of mind dealing with a local company,” says Comer. Strategic difference More mature investors may have encountered other buy-to-lease hotel schemes, but Castlewood Group has altered the traditional model to cater to a wider Singaporean investor base. “The Nikki Beach Hotel & Spa Phuket investment, for example, has a predefined exit strategy in 2020 with the option to exit as early as 2016. Investments start from as little as

“Demand for luxury hotels in Asia has reached unprecedented levels.”

State-of-the-art interior design

Innovative ergonomics

S$35,000 as well, a departure from the expensive and complicated schemes of the past which had investors buying entire hotel rooms,” says Comer. For more information, visit www. mycastlewood.com.sg or call 85019812 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 5

News from sbr.com.sg Daily news from Singapore most read

ECONOMY

Money slap: 1 in 50 Singaporeans a millionaire We are only ever a stone’s throw from the affluent, especially in the smallness of Singapore where everyone rubs elbows with everyone. SPEARS’s research reveals that Singapore has the highest percentage of millionaires in Asia, with over one in 50. Singapore is ahead of other wealthy global cities such as Hong Kong, Paris, Venice and San Francisco in terms of millionaire density.

ECONOMY

Singapore hit the hardest by China’s economic waves: Moody’s Singapore is the most vulnerable ASEAN country when it comes to China’s economic exposure, a report by Moody’s says. The regional average of exports as a share to GDP is 7.9%, a far cry from Singapore’s 16.4%. Moody’s adds that Singapore’s loans to the mainland range from 7% to 19% for the top Singaporean banks. Much of this lending is dominated by short-term trade financing.

RESIDENTIAL PROPERTY

Private home supply glut hits 14year high in Q2 Plenty of brand-new private homes remain cold and empty, as private home supply hit record levels in Q2 while new take-ups remained painfully lacklustre. Net new supply reached 4,715 completed units in 2Q 2014. The last time the net new supply exceeded the 4000-mark was in 2Q 2000. “Downside pressures from the increase in new home completions continued to weigh on rents,” according to Colliers.

The Rare Luxury of Exclusivity at the

ockwell Land, one of the Philippines’ most trusted property developers, adds to its portfolio of architectural masterpieces with its greatest original yet – The Proscenium. Expanding the world-class community of the Rockwell Center in Makati, The Proscenium bears the unmistakable signature of global starchitect Carlos Ott, best known for his work on the L’Opera de la Bastille in Paris. The Proscenium will rise within the neighborhood of Rizal Tower, Luna Gardens, Hidalgo Place and Amorsolo Square, the preferred dwelling places for many of the most prominent names in the country. Named after esteemed theaters around the world, the four towers of the Proscenium have already been unveiled – Kirov, Sakura, Lincoln, and Lorraine. In each tower is a premium selection of fine unit cuts, expertly crafted to suit the lifestyle and preferences of the Next Generation Rockwell. Masterfully designed space Carrying on the legacy of the West Block of the Rockwell Center, the Proscenium sets the stage for a life lived in exclusivity and privacy will be a standard for its residents. Kirov and Sakura boast of unit cuts as large as 300 square meters, and as few as three units to a floor.

Offering a diverse lineup of unit cuts, Lincoln and Lorraine features, among others, studio units with space nearly as large as typical onebedroom apartments in other developments. Like every Rockwell development, the Proscenium is skillfully planned to serve as exceptional residences to Rockwell’s exclusive clientele. Consistently placing a premium on safety and security, Rockwell has equipped the Proscenium with a CCTV system, rigorously trained and highly competent security personnel, 100% standby energy power and a reliable fire detection system around the property, guaranteeing the safety of its residents and guests. The fine art of living well

The Proscenium provides the finest luxuries of space, with units fitted with generous walkin closets, louvered utility areas that are rare finds in high-rise developments, and spacious balconies that open up to majestic views of the city.

The Proscenium is designed to be not only a residence, but an experience. From its design to its features, this iconic development bears the unparalleled Rockwell touch. The experience begins with majestic water walls welcoming its residents at the lobby drop off, creating a grand entrance at the Proscenium.

development offers its residents exceptional amenities, with almost a hectare of space devoted to luxurious swimming pools, a gym, a jogging path, a day care, a game room, and more. The Proscenium, in itself a work of art, will also be another architectural addition to the Rockwell community’s tributes to local arts and culture. The Proscenium’s grandest feature will be a 550-seater performance hall, complemented by a museum. Completing the experience of elegance at the Proscenium will be retail row with a remarkable lineup of unique luxury brands and fine dining restaurants. Completing the community, the fifth tower of the Proscenium will house firstclass office spaces for thriving and established businesses. Another prestigious address rising within the Rockwell Center, the Proscenium will be the home of those living a life of culture, design, and exclusivity – the lifestyle lived by the next generation Rockwell.

Beyond living spaces suited to the needs of its exclusive community, this revolutionary

Prepare for the Next Generation Rockwell. For inquiries, visit www.prosceniumatrockwell.com.

Agenda PEOPLE | PLACES | SERVICES | OPPORTUNITIES

Places Places

WOOLOOMOOLOO

the prime society Located in the lush surroundings of Dempsey Hill, The Prime Society steakhouse specialises in the finest Australian beef; the restaurant also serves an enticing variety of fresh seafood and vegetable dishes. The set lunch menu offers 2 courses for $38, 3 courses for $48 or 4 courses for $58/ including Grass fed tenderloin, potato puree with mushrooms, Pumpkin, ricotta pasta ‘rotolo’, mustard, pumpkin seeds or Scottish salmon with white asparagus risotto and salsa verde. For reservations please call: +65 6474 7427

PLACES

marina one Marina One, the upcoming Star project at the Marina Bay area, an integrated development of residential, offices and retail services, is developed by a renowned and strong team. Enjoy this distinguished address and World Class Destination with magnificent landscape, new Financial Business Hub, Marina Bay Sands is nearby. With three awards, it’s sustainable and environmentally friendly design, this is truly a gemstone for business, leisure and stay, the world at your playground. Please contact 9798 4691 or email penny.ho@dtzresale.sg to know more.

places

Picc A culture of hospitality. Serving our guests and making sure that their needs are well taken care of are the inherent characteristics that exude naturally from the people in Malaysia. With its charming disposition, PICC was designed on the premise that everyone who uses the facilities will feel very much at home. Rising majestically on Putrajaya’s highest point and commanding a panoramic view of the entire Putrajaya Precints, PICC straddles the peak to ensure that the safety and security of its guests are well guarded. PICC is the brainchild of Malaysia’s fourth Prime Minister, Tun Dr Mahathir Mohamad. It is built for the nation to offer the best possible venue and hospitality to host world leaders.

visit

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FOR MORE INFORMATION on EVENTS AND ADVERTISING

Taking its name from a bay side town in Sydney, Australia, Wooloomooloo Steakhouse is situated in a stunning locale with impressive views of the city. Comprising 6,300 sq ft of wining and dining space, the stylish restaurant promises a memorable dining experience with its premium steak selection, Australian-inspired offerings, as well as an outstanding range of wines and cocktails. The 140-seater restaurant also hones a semi-private dining area that is created using chain link curtains, aiming to provide diners a more intimate spot for private occasions. Address: 2 Stamford Road, Level 3 Swissotel The Stamford, Singapore 178882 Contact Number: 6338 0261 Email: woo-singapore@wooloo-mooloo.com

Places

peach Pattaya Exhibition and Convention Hall (PEACH) is a world-class multipurpose meeting facility of the Royal Cliff Hotels Group which provides complete versatility as a convenient ‘one-stop convention solution’ for all meeting needs. It can accommodate up to 10,062 delegates theatre-style or 4,340 for banquets. With over 10 years of specialized events experience, topof-the-line services and a dedicated international team, PEACH enjoys a global reputation of excellence making it a premier meeting and event destination in Southeast Asia.

Nothing escapes Romer Labs.

FIND OUT MORE ABOUT ROMER LABS TESTING SOLUTIONS AND CONTACT: Romer Labs Singapore Pte Ltd 3791 Jalan Bukit Merah #08-08, E-Centre@Redhill, Singapore 159471 Tel: +65 6631 8018, Fax: +65 6275 5584 E-mail: salesasia@romerlabs.com, www.romerlabs.com

co-published Corporate profile

Hollywood: The Asian investors’ next frontier Scott Morgan of Creative Genius Asia shares why businessmen from Singapore and Hong Kong should consider producing films and television shows in the US.

t’s not as difficult as winning both the pot money and the girl in Slumdog Millionaire but it’s also not as easy as duping people in the Wolf of Wall Street. Investing in films and television shows takes a lot of guts and street smart but its rewards are tenfold. Scott Morgan, an award-winning writerdirector and production consultant, says the time is ripe for Asia to dip its hands into Hollywood and see what films and television shows have to offer in terms of profits. Since the rise of the Internet in the 1990s and the recession in 2008 that affected many studios, substantial shifts have been experienced by the US entertainment industry. “Fifteen years ago, at least 60% and up to 90% of all released films were funded by studios. Now, less than 20% are,” Morgan says. He explains that many studios had their levered advertising cash in real estate values and many of them never recovered after the economic crash. Nowadays, a lot of financing comes from hedge funds and other sources like Singapore, Shanghai and Hong Kong.“The natural un-tapped source is Asia. This vacuum of investments filled by such business-profit-savvy cultures in Asia will surely change the dynamics of profit,” Morgan says. A sweeter fruit Morgan, who won awards in three film festivals for his film “Playing Solitaire,” has since worked as a producer and consultant for investors interested in entering Hollywood. He says outside investors are

Scott Morgan directing a TV show

10 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

often clueless and naïve on how to go about producing films and television shows in the US. His advice is not to take everything by face value and to find the ‘coveted secret fruit.’ “Basic truth in all business: don’t swallow what those in power throw, seek the sweeter fruit higher in the tree they hope you don’t see,” he explains, pointing out that others often take advantage of outsiders. Morgan says an investor should start with a good script and later build on the other requirements. “All it takes to join this world is access to the best material, and true understanding of what drives the people in Hollywood,” both of which he is willing to provide. He warns that many agencies shortchange newcomers to benefit themselves. He suggests investing in television, which generates revenues that dwarf film profits. By investing in both film and television, investors are able to diversify their sources and maximize their capital. Many independent investors had made a killing at the box office because they were able to spot valuable screenplays. Examples of these include “The Conjuring,” which had a budget of $17 million and $148

“Fifteen years ago, at least 60% and up to 90% of all released films were funded by studios. Now, less than 20% are.”

Scott Morgan with Vietnamese orphans

million in revenues. “Slumdog Millionaire,” which cost $15 million earned as much as $417 million. With decades of experience in the film industry, Morgan has started working with businessmen from Asia who seek guidance when it comes to investing in Hollywood films.“Very few professionals in the film Industry reach a level of deep understanding of both the creative and business sides of the Entertainment business anymore,” he says, adding that many of his mentors were film icons like Freddie Fields and Barry London who was the vice chairman of Paramount Pictures. “I’ve worked as an actor, cinematographer, photographer, writer, producer, director, financier, stunt man, and consultant,” Morgan adds. “Every one of these skills gave me another perspective to write or produce with more realism, more artistry, but also with more financial wisdom.” The Asian connection Morgan says he started taking an interest in Asia after recognizing the region’s potential for future film producers. “I recognized the rise of Asia as a market and financial giant in films almost 20 years ago,” he explains. The former actor-turned-screenwriter said he has since been going around Asia not only for work but also for charity. For the last 14 years, he has been caring for orphans in three Asian countries. Through his travels, Morgan discovered that the “cinematic art of many Asian films surpasses American films.” He further enhances this by guiding the producer into tweaking films for international audiences.

FIRST according to Daniel Tsang, founder & chief analyst of Aspire Aviation. First, the airline could not establish a foothold in the hyper-competitive Indonesian market and grow enough to benefit from increased economies of scale. Second, it was not able to differentiate enough to rise above the overcapacity of LCCs in Asia Pacific.

pIN: 1234 or 0000?

If you’re one of the many Singaporeans using the same PIN for all your cards and phones, then you might just be in danger of losing your savings to thieves and scammers. A survey carried out for leading financial services website EnjoyCompare.com reveals that many people’s choice of PIN was “terrifyingly lax”, with easy-to-remember number combinations being worryingly popular. “All it takes is an observant criminal to watch you unlocking your mobile device, and there’s every chance he’s got your bank number as well,” said EnjoyCompare.co’s Mark Hall, “Then it’s a case of a well-timed pickpocketing or purse snatch, and you’re in real trouble.” Lack of imagination According to a phone poll of over 500 credit and bank card holders in Singapore, results show that 85% use the same numbers for their bank PIN and phone unlock screen; 73% would change the PINs so they were all the same if they had more than one bank card; and 34% use easy-to-remember number combinations like “0000” and “1234” for their security numbers. EnjoyCompare.com notes that Singaporeans’ lack of imagination in thinking of personal pass codes is alarming, not to mention that most survey respondents say they use common combinations. An analysis carried out in the UK two years ago found that over ten per cent of card holders used 1234 as a PIN, with another 6% choosing the equally insecure 1111. Earlier research by a US-based data security analyst found that the most common numbers for phone lock screens are 0000, 1234, 1111, and 2580, with 15% of people using the same ten number combinations.

12 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

Tigerair Mandala, the latest casualty in the competitive industry

Here’s why Tigerair prowls fewer skies

any low-cost carriers (LCCs) are slowly but surely dying off in Asia, with Tigerair Mandala being the latest airline to fall victim to profit starvation. It’s not that the region has a dearth of passenger demand. In fact, Asia Pacific is brimming with growth potential, according to analysts, but there are simply too many LCCs operating now that are incapable of sustaining the level of margins required to appease investors.

Losses lead to service closure Tigerair Mandala, the latest casualty in the lethally competitive industry, has consistently racked up heavy operating losses since its inception in 2012, says Suvro Sarkar, analyst at DBS, which led investors to cease operations on 1 July. Tigerair made a last-ditch attempt to turn things around by grounding almost half of Mandala’s fleet in FY14, but it was not enough to save the ailing airline. “Mandala’s financial results reflect the challenges that it is facing in the difficult operating environment,” says Mr Lee Lik Hsin, Group CEO of Tigerair, in the press release announcing the service closure. Tigerair Mandala’s demise came about due to two key failures,

AirAsia has postponed deliveries of 19 A320s this year and next, with Tigerair cancelling 9 deliveries, and Jetstar Asia suspending growth.

Supply-demand imbalance While there is no doubt Asia Pacific is a market with promising potential, Daniel Tsang, founder & chief analyst of Aspire Aviation, says too many LCCs in the market is tilting the demand-supply balance and crowding out profitability among airlines. Already, LCCs are feeling the competitive pinch. Tsang notes that AirAsia has postponed deliveries of 19 A320s this year and next, with Tigerair cancelling 9 deliveries, and Jetstar Asia suspending growth. The oversupply situation will not let up anytime soon with Spring Airlines Japan, V Air of Taiwan, Tigerair Taiwan, Thai VietJet Air, and NokScoot set to join the plethora of LCCs in the foreseeable future, says Tsang. Credit Suisse’s lead transport analyst in Asia Pacific, Timothy Ross, notes that LCCs in the region are finding it hard to expand their footprint outside their country of operation and generate profits consistently. Ross expects LionAir and JetStar to be among airlines likely to shrink their discount ventures outside their country of operation. He also expects more mergers and acquisitions in the sector in the short term, as a result of the difficult environment.

Low Cost Carriers - Airlines’ Key Challenges

Source: Abacus LCC/Hybrid Study, Asia Pacific 2014

FIRST the verdict is that mobile booking apps are not so much of a threat. After all, taxi operators earn the bulk of their profits from taxi rentals, which mobile booking apps don’t generally offer as a service. “We do not see this as a threat to existing taxi operators as the booking income stream amounts to a small portion of their total income, which is made up mostly from taxi rental,” says Lim. According to Maybank Kim Eng analyst Derrick Heng, any loss incurred by operators on booking fees will be offset by an expected hike in rental charges. Also, according to Heng, one of the greater benefits of mobile booking apps is the efficiency it introduces in matching demand and supply. “What we are offering is a means of improving the taxi system so that it benefits both passengers and drivers,” according to Jianggan Li, co-founder of Easy Taxi Singapore.

Jianggan Li

Kell Jay Lim

Are taxi operators threatened by GrabTaxi?

Taxi drivers get appy

hen GrabTaxi first entered the Singapore market, it had only one mission: to rectify the genuine social problem in the transport industry, which is taxi availability. But Singaporean taxi operators’ booking income is feared to take a knock as more mobile booking apps garner a slice of the pie. Mobile booking apps like the GrabTaxi and Easy Taxi are making it easier and faster for passengers and taxi drivers to connect. “In Singapore, the key consideration is to ensure commuters get their taxi fast. To achieve this, we ensure

that GrabTaxi efficiently matches our commuters to taxis when they need it,” says Kell Jay Lim, general manager at GrabTaxi Singapore. The basic model lets passengers use the app to broadcast their destination and location, and nearby taxis get to bid for the trip. Is this threatening the profits of incumbent taxi operators? According to a Premier Taxi spokesperson, “third party applications are neither complementary nor competition as long as the same purpose is delivered.” As far as industry revenues and profits are concerned,

Global rankings of GrabTaxi and Easy Taxi July 2014

Source: AppTweak.com

The Chartist: SINGAPORE BANKS History is threatening to repeat itself as Singapore banks suffer a phenomenal drop in total deposits. The deposit pool is drying up; which last witnessed 11 years ago. According to CIMB, DBU deposits shrank, led by an outflow of fixed deposits. A shrinking deposit pool is alarming as banks will have to compete aggressively for a shrinking pie, hiking up funding costs for all. As the reports season approaches, Barclays also gave a gloomy forecast on the banks’ NIM trends. “We expect modest margin pressure (down 1-3bps q/q), largely driven by lower interbank rates and easier liquidity conditions in China which could put pressure on China-related loan, interbank and investment securities yield,” it said.

DBU deposits shrank 0.8% mom and 0.2% YTD

Source: CIMB, Company Reports

Singapore banks-net interest margin trends

Source: Company data, Barclays Research estimates

SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 13

FIRST

Where have all the Chinese tourists gone?

STARTUP WATCH

Interns for hire

hen Edna Ng, general manager of All Watches, exclusive distributor of Swiss-made watches along Orchard Road, saw a massive 30% drop in sales, she was troubled. It turns out that Chinese tourists, which make up half of the store’s regular patrons, were slowly vanishing from Orchard Road and other shopping sites. Ng’s experience is not isolated, as Colliers International data show that discretionary consumer categories such as watches and jewellery have been the most vulnerable retail sector following a marked decline in Chinese visitor arrivals. The current operating environment is indeed challenging for Orchard Road retailers, but the near-term outlook has a couple of silver linings. For instance, Chinese visitor arrivals are on the decline, but total arrivals are still expected to grow at a 5% compound annual growth rate over the next three years to 2016, according to Maybank Kim Eng forecasts. Savvy retailers must be able to identify shifting tourist arrival demographics. For instance, Ng notes that there has been an increase in tourists from other Asian countries such as Vietnam

All Watches store in Orchard Road

and Myanmar, a trend that may help alleviate, if not replace, their waning sales from Chinese tourists. Retailers should also get some additional breathing room by not having to pay increased rents for the rest of the year. Colliers expects Orchard Road rents to remain level at -1% to 2% growth for average monthly gross rents in prime ground floor retail spaces. If sales still continue to plummet in Orchard Road, the government may intervene. Whether through new promotions or refurbishings, there is a compulsion to make sure Orchard Road “stays relevant and remains a people magnet,” says Ong Kian Lin, analyst at Maybank Kim Eng.

Discretionary consumer categories such as watches and jewellery have been the most vulnerable retail sector.

survey

One in two fraud incidents perpetrated by employees More than one in three Singapore-based companies have been victimized by fraud in the recent year, up from more than four companies in 2011. Security against outsiders is a given, but the company must also be on close watch inside the office as KPMG’s 2014 Fraud Survey revealed that 58% of fraud incidents reported in 2014 were perpetrated by employees while 17% involved board members and senior management. The survey, accomplished in partnership with Singapore Management University and released every three years, showed that 53% of the respondents believe the fraud occurred due to weak or overridden internal controls, despite already present fraud risk management measures. Bribery and corruption are of greatest concern to the respondents, especially regarding Singaporean companies that are doing business overseas. 14 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

Three men in their twenties have founded a startup named Glints, dedicated to equipping young people with necessary real world skills. Oswald Yeo, Looi Qin En and Seah Ying Cong, the youngest entrepreneurs in the Joyful Frog Digital Incubator (JFDI) program, got acquainted with a local community of entrepreneurs and began running a startup-intern matching program for their companies. Glints, which started operations in January this year, had not only local youths but also youths from USA, UK, Germany, and even the Czech Republic, keen to be involved in the business environment of Singapore and Asia. Glints has received $50,000 in funding from private angel investors and $25,000 from JFDI.

Job bidding system

The lack of a centralized platform to connect businesses with each other inspired an industrial designer and a business administration graduate to start museCrowd. Billed as the first of its kind in Singapore, museCrowd is a business-sourcing platform allowing companies who require jobs to be done to post a project which suppliers can bid for through a tender/bidding system. Founders Jacob Toh and Nancy Lai, both 26 years old, says museCrowd has closed projects with combined value in excess of SGD40,000 prior to museCrowd’s targeted launch. Its combined total seed funding exceeded $100,000, which puts its value at nearly SGD1 million.

Room to grow In an environment of constant change, leaders require new approaches to survive. The Deloitte Greenhouse assists leaders and organisations to forge new paths by providing an immersive environment that allows for the exploration of innovative ideas to create and increase business value. Contact us to find out how you can unearth insights, spring forth ideas and grow relationships within your organisation. www.deloitte.com/sg/deloittegreenhouse

ÂŠ 2014 Deloitte & Touche LLP

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7/22/2014 8:20:24 AM

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FIRST

Singapore’s debt levels mirroring pre-crisis US: should we be worried?

oncerns abound that Asia is headed for a financial crisis similar to that of the US in 2008. But since the general outlook on the region has been optimistic, many of these contrarian opinions have been dismissed as misguided, or simply inconvenient. It seems people are forgetting that, in hindsight, the US probably would have benefitted from a few more ‘inconvenient truths’ before the 2008 crisis. Particularly in Singapore, debt-to-GDP levels are pointing to a wake-up call. Disturbing facts Currently, Singapore’s private sector is collectively borrowing almost twice the value of what the entire economy is producing, like a person borrowing twice what he earns. Singapore’s private sector debt-to-GDP ratio is hovering above 180%, the highest in more than twenty years. What is more disturbing is the fact that this level is about ten percentage points higher than the US’ during the 2008 crisis. Why is this relevant? The 2008 crisis was largely driven by irresponsible lending which allowed the debt-to-GDP ratio to rise to its peak. More specifically, this was driven by irresponsible lending to households. As of 2013, household debt in Singapore

was equivalent to about 75% of GDP, crudely implying that households are liable for almost half of total private sector debt. That is notably less than the US pre-crisis level, which is at least a little comforting. But household debt nevertheless accounts for a very significant portion of private sector debt, which means that this is not the time for complacency. Is an uncomfortably high household debt-to-GDP level necessarily indicative of the irresponsible lending seen in the US before the crisis? No need to panic According to Chew Soon Beng, a professor of Economics at Nanyang Technological University, the underlying characteristics of household debt are not necessarily worrying yet, and “the financial sector in Singapore is healthy.” According to him, an average Singaporean household has enough resources to pay for more than four times what they actually owe, unlike in the pre-crisis US, where banks went as far as to lend to individuals who had no jobs. So although there are uncanny similarities between Singapore’s debt level and the US’ pre-crisis, these similarities are not necessarily cause for panic. But they still point to areas of concern about Singapore’s

Debt-to-GDP levels point to a wake-up call

economy. “Household debt may not be as big a systematic financial risk as it was in the West, but it highlights a potential growth problem in Asia: without it, how resilient would consumption spending really be?” notes Frederic Neumann, economist at HSBC. What Neumann’s questioning teaches is that debt levels aren’t only supposed to be watched in light of the 2008 crisis, but also how they in themselves are telling a unique story about Singapore’s economy.

OFFICE WATCH

Pratt & Whitney Singapore opens flagship office The new Pratt & Whitney Singapore office at Seletar Aerospace Park spans three floors with a combined size of 47,000 sq ft, located within the 200,000 sq ft facility. The concept proposes a modular approach that was designed to suit unique business compartmentalization whilst providing a flexible, future-adaptable footprint. A central “spine” that connects public and private areas simultaneously segregates the office from the industrial premises. The central nexus of the spine is a dynamic “Engine” heart on each floor; serving as an employee chill-out area and café. The team behind the project is led by Phillips Connor, Senior Creative Director of DB&B. “Our holistic approach applies a language of aeronautical and aerospace elements which pervades the planning, form, detailing and finishing of all spaces,” he notes.

16 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

Arrival lobby

Meeting room

Boardroom

Chill out and café

FIRST NUMBERS

Finance experts in Singapore Singapore -

Around Aroundthe theworld world

Finance professionals in 2014: 2014: Career driven, loyalists or or opportunists? opportunists?

26%%

What What they they are are looking looking for? for?

most mostactively actively

looking for looking foraa 11 new newposition position... ...

34% 34% 37%

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UK 34% UK 34% US 43% US 43% SG 41% SG 41% HK 34% HK 34% Aus 37% Aus 37% GU 53% GU 53% 34% 34% FR 26% FR 43% 26% 43% DE 13% DE 41% 13% 41%

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of finance finance professionals professionals of actively in Singapore Singapore are are actively in or open open to looking or to looking

36%%

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65%

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41%

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45%

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43%

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73%

Around the world

Finance professionals in 2014: Career driven, loyalists or opportunists?

93%

77% 24% UK 77% 24% 77% UK 77% 74% 26% 26% US74% 74% US 74% 62% 39% 62% 39% 62% SG SG 62% 65% 35% 65% 35% 65% HK HK 65% 77% 23% Aus 77% 23% 77% Aus 77% 61% 39% GU 61% 39% 61% 68% 32% GU 61% FR 68% 32% 68% 72% 28% FR 68% DE72% 72% 28% DEPlease note total may72% not add

1 Q: Which of the following best describes your current employment situation? A: Actively seeking. Open to opportunities. Not interested in changing jobs. Q:Which Is yourofcurrent employer andescribes enjoyable your placecurrent to workemployment at? A: Yes. No. 12Q: the following best situation? A: Actively seeking. Open to opportunities. Not interested in changing jobs. Q:Is Regardless of your level an of satisfaction with your job,at? on A: a scale 1-3 how burnt out do you feel? A: 1. Not at all. 2. Somewhat. 3. Totally burnt out. 23Q: your current employer enjoyable place to work Yes. of No. 3 Q: Regardless of your level of satisfaction with your job, on a scale of 1-3 how burnt out do you feel? A: 1. Not at all. 2. Somewhat. 3. Totally burnt out.

Dual key units defy market crunch

UK UK US US SG SG HK HK Aus Aus GU GU FR FR DE DE

Top 3 employers Top 3 employers of of in Singapore in Singapore

Why are dual-key units gaining popularity?

key units has increased from 3 developments in 2011 to 8 in 2013.

77%%

2. JP Morgan 2. JP Morgan

3. DBS Bank 3. DBS Bank

People they People they work with work with

ingaporeans looking to snap up more than one property but wanting to avoid paying for additional buyer’s stamp duty (ABSD) on their second property have found a neat solution: Invest in dual-key units. A dual-key unit is an apartment unit comprised of two sub-units with a shared common main entrance. Due to this innovative design, it effectively circumvents the ABSD rule and has become a popular investment pick in the past year, says Christine Li, research head at Orange Tee.

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52%

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10%

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Aus UK GU US FR SG 12% 10% 19% 13% 20% 18%

14%

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13% DE US

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28%

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18 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

24%

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36 26

Singapore Around the world Demand evolution Finance in 2014: Prior to the rollout professionals of ABSD, most ... of finance professionals Finance professionals andopportunist the Career driven, loyalists or opportunists? demand for dual-key units was in Singapore are actively in the Gulf are Singapore Around the world are in Germany or open to looking driven by multi-generational most actively Finance professionals in 2014: Finance professionals looking for a households thatloyalists want opportunities toorlive Soon Beng % Career driven, opportunists? Chew Increased the Gulf are new position ... Professionals What they are %in Finance together while maintaining privacy compensation most actively in the UK and Australia looking for? Career looking for all parties. “Young couples like % find their workplace prospects for a What new position ... What theykeeps are most enjoyable2 to stay on their own, but housing 1. Goldman Singapore’s finance looking for? Career Their colleagues in Sachs professionals is getting more expensive. At theprospects % 2. JP Morgan the Gulf and Fran most happy are most moo ...the and theburnt of finance professionals same time, the extended family at work? opportu actively in Singapore are can be sometime challenging. most ... and the of finance professionals 3. DBS Bank they are in Ger or open to People looking opportunist actively inHence, Singapore the are dual key apartment is with work are in Germany.1 or open to looking opportunities Singapore Around the world one of the solutions,” says Chew opportunities Finance in 2014:professor% Soonprofessionals Beng, economics atIncreased More dual-key concepts Finance Professionals Top 3 employers Christine Li Finance professionals Increased compensation Finance Professionals driven, loyalists or % opportunists? compensation Gulf are in the of Nanyang Technological University. More dual-key concepts have been Career choice in the UK and Australiain the UK and Australia most actively Singapore find their workplace find in their workplace Demand has increased introduced in the past three years. What keeps looking for a What keeps % enjoyable2 most enjoyable2 1. Goldman new position most ... they are 1. Goldman evenSingapore’s more asWhat second property Nearly half or 35 out of the 74 Singapore’s finance finance Their colleagues in Sachs Their collea looking for? professionals Sachs % purchasers flock to dual-keyCareer units private residential and executive 2. JP Morgan the Gulf and France professionals prospects 2. JP Morgan most happy the Gulf and are the most burnt out to avoid paying the hefty ABSD condominium (EC) large-scale most happy are the most at work? UK 77% 24% 3. DBS Bank rate.at work? developments with 400 units and UK 77% 24% People they most ... and the finance professionals US 74% 26% “Buyers more likely to treat3. DBS Bank above launched with dual-key inofSingapore US 74% 26% workare with opportunist are actively People they SG 62% 39% SG 62% 39%1 these as investment properties to units between 2011 and the first looking are in Germany. or open to HK 65% 35% work with HK 65% 35% opportunities two months of 2014, Knight Frank earn a better rental return Aus 77% 23% Top rather 3 employers Aus 77% 23% GU 61% 39% of Increased data show. than stay in them. For developers, % compensationchoice Finance Professionals GU 61% 39% FR Australia 68% 32% in Singapore in the UK and Even amid a tight property dual key units can usually fetch a Top 3 employers FR 68% 32% DE 72% 28% A combined find their workplace DE 72% 28% market, the number of dual- What keeps higher price on a dollar per square of choice 2 most enjoyable 1. Goldman dual-key in Singapore finance key units in private non-landedSingapore’sfoot basis. Therefore, to the market, 1,976 Their colleagues in Sachs professionals units were % JP Morgan the Gulf and France developments and ECs more than this is a win-win situation2.for most happy are the most burnt out launched since doubled. As of the latest countatofwork? both,” says Chris Marriott, CEO of 2011 with 931 3. DBS Bank Southeast Asia at Savills. Knight Frank, a combined 1,976 People they units in private Investors dual-key units were launched since work with looking to buy a condominium dual-key unit can expect to pay 2011 with 931 units in private projects, between S$950,000Top for3one located condominium projects, and 1,045 employers and 1,045 in suburban areasofrising to around units in EC developments. The choice Source: eFinancial Careers number of new large-scale private $2 million in prime areas, Marriott units in EC in Singapore development launches with dual adds. developments.

co-published Corporate profile

Here’s why Earth Arts is one of the most preferred stone suppliers in Singapore The 18-year-old company has proven its customer-centric philosophy over the years and has garnered multiple industry accolades.

Marina Bay Financial Centre Tower 2

Group photo at pier

s the design business quietly involved in Singapore’s 21st Century journey, Earth Arts, a stone mason, has already nailed significant CBD contracts and enjoys a healthy pipeline. The organisation’s ability to weather and survive the economic turmoil of the last fifteen years is due to the business’s customer-centric philosophy, a philosophy that is evidenced by a growing number of industry accolades, the most significant of which are: Enterprise 50 Award, 2013; the Green Mark Gold Award for an Existing Building, 2013; Circle of Excellence Award – Singapore’s Top 5 Building Materials Firm, 2012/2011 (a major feather in the cap, given the competitiveness of Singapore’s cut-throat building and construction sector); Most Promising SME Award, 2007; Singapore SME 1000 Company – Yearly Award; PUB Award – Water Efficiency Building, 2012 and Singapore Health Award – Bronze, 2012. Customer centricity “Every customer is important and has different requirements. We try to cater to their needs as much as possible,” says executive director Thomas Tan. “When a customer comes to us with requests that sound difficult or even impossible, we will try our best to find efficient workable

solutions. These awards help demonstrate our ability and commitment to creatively solve problems and innovate.” The overflowing awards’ cabinet proves that the 18-year-old company punches above its weight. The awards are based on a strong foundation — tangible project-based work and involvement in such significant and groundbreaking developments such as Marina Bay Financial Centre, the Singapore Management University and Marina One, in the pipeline. All of these have showcased Earth Arts’ ability to manage and complete projects and deliver outstanding client results. “As a result of this success in high-profile projects, we have become one of the preferred stone suppliers within the construction industry,” says Tan. When it comes to big ticket projects, Earth Arts backs its reputation with muscle. Problem-solving is the key to the company’s meteoric rise to prominence in the stone mason industry. One example of Tan and his colleagues’ tenacious grip on a seemingly unsolvable problem surrounds

“We always place our customers as the top priority, we try to cater to their needs as much as possible.”

Changi Airport Terminal 3

a customer request for an intricate design to be carved into the stones of a water feature. “Many suppliers we consulted dismissed the client’s needs as impossible to realise,” recalls Tan. “Undeterred, we developed a sensitive and special piece of machinery that could carve the stones precisely as the client had demanded.” It takes a special kind of vendor to be a pioneer. Management has to obsessively watch the cost base, fight for revenue and retain good staff, and on the other hand, handle and discharge all manner of client demands, be a trusted and responsible partner, and innovate and ensure that such innovation pays off as a material win. It’s a treacherous and risky see-saw of competing pressures. Earth Arts founder Ms Celine Teh and her son Thomas faced these challenges and now enjoy the collateral of a wellearned reputation. SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 19

FIRST cafe in Melbourne during his student days. He set up Assembly Store’s 5th and largest store to date – the 4000 sq ft multilabel store. He is also the brain behind the Assembly Store @ The Cathay and the adjoining cafe, the 2000 sq ft Assembly Ground. 1

7-8

Meet Singapore’s 10 hottest restaurateurs aged under 40

ingapore Business Review has been featuring new restaurants since late last year and we noticed that most of the hardworking owners are actually young entrepreneurs. Don’t they deserve the spotlight too?

1-2 Dylan Ong and Joshua Khoo, 27 and 29 Founders, Concetto by Saveur After their success in setting up a French cuisine restaurant at Purvis Street and Far East Plaza, the duo decided to bring a new offering of Italian dishes through Concetto by Saveur. Dylan, who holds a Diploma of Culinary Arts from Shatec, started Saveur at 24 years old. Before setting up his own restaurant, Dylan worked at Raffles Hotel, and in a semi-fine dining restaurant, Flute @ The Fort. Joshua took up Engineering Informatics at Nanyang Polytechnic but dropped out to join the army. Like Dylan, he also studied Culinary Arts at Shatec. His work experience can be traced from Raffles Hotel’s grill and butchery to Tetsuya in Sydney, Australia, Restaurant FiftyThree, and Guy Savoy. He started Saveur at the age of 27.

Marie-Charlotte Ley, 30, founder of O Batignolles Wine Bar & Le Comptoir Marie-Charlotte is a Parisian woman who previously worked in the consulting industry. She has a background in business management and political science. She 3

20 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

was so in love with the district she used to live in Paris, Batignolles (part of the 17th district) that she named her first restaurant after it. O Batignolles Wine Bar on Club Street opened in July 2012. Her second restaurant, Le Comptoir, a French creperie and bar, opened in May 2014. 4 Indra Kantono, 31, Co-founder of Sugarhall and Jigger & Pony From his first brush with cocktails as a beer-loving undergrad in New York, to heading a leading cocktail bar and a newly-opened rum and grill-house in Singapore today, Indra has come a long way from his first Manhattan. Born in Indonesia, Indra first came to Singapore in 1995. After studying at Anglo Chinese School and Raffles Junior College, he packed his bags for the US. Graduating with a Finance and Economics degree from New York University in 2005, he started work as an Associate Consultant for Bain & Company in Singapore. In 2007, he moved on to Quvat Management, a private equity fund with an investment focus in Indonesia, where he was a former Principal. 5 Nelson Yap, 32, Founder and Managing Director of Benjamin Barker Aust, The Assembly Store and The Assembly Ground Nelson holds a Bachelor of Creative Arts degree from the University of Melbourne. Prior to founding his own restaurant, he was a barista/cafe manager of a small indie

6 Ivan Yeo, 33, Founder, 1925 Microbrewery and Restaurant Despite having his own game development agency, Ivan realized that he could no longer enjoy his work as a Creative Director as the industry slowly dwindled and offered nothing to fuel his passion. He decided that he no longer wanted to offer his talents and insights to clients, but to build something of his own instead.

Grace Chia and Bernard Toh, 34 and 36, Founders of The Missing Pan The entrepreneurial couple has come a long way since their first F&B venture in 2007. The husband-and-wife duo is behind the all-day dining establishment, The Missing Pan, an online bakery and distributor for artisan breads, The Organic Baker, as well as the now-defunct gourmet sandwich shop Uppercrust.

7-8

9 Steven Teo, 34, Co-chain owner, Yoogane Singapore Steven is a senior Financial Services Manager at a financial advisory company and at the same time a co-shareholder and general manager of Yoogane Singapore. He holds a business degree, majoring in marketing. He had no prior experience in the food industry but had a strong interest from a young age. He worked as a trainee waiter in one of the outlets in Yoogane Korea for a month. 10 Jez Lim, 35, Co-owner and general manager, BLVD Jez spent 14 years in the Beverage industry with her last 6 years attached to leading luxury Wines & Spirits company, Moët Hennessy Diageo, subsidiary of LVMH Group, developing the brands of various champagnes and whisky. Apart from a strong Sales & Marketing background, she also has vast experience in staff training, recruitment, administrative and logistics management, and sees to all administrative and logistic matters to ensure smooth operations.

thought leadership series 3: education

4 keys to supply chain success Dr. Dawei Lu of the University of Warwick says supply chain and logistics managanement businesses should be unique and agile to whip up a profit.

Dr. Dawei Lu WMG, University of Warwick

n today’s volatile global marketplace, the successful businesses are the ones that shine even amidst global uncertainties and economic challenges. Dr. Dawei Lu, principal teaching fellow at the University of Warwick, says companies seeking profitable supply chain and logistics operations amidst a relatively weak global economy should apply what he calls the “World Class Diamond Model.” He says that the model has “four diamond facets” that represent four business dimensions: operational excellence, strategic fit, capability to adapt, and unique voice. “Without particular order, the model specifies that to achieve business excellence and utmost profitability companies must deliver satisfactory performance in the four dimensions,” he explains. Dr. Lu explains that supply chain success and profitability are hinged on a business

operation’s level of excellence. “Operations directly add value and define the supply chain performance and competitiveness. Whether it is in internal operations or in customer service, the customer expects nothing short of excellent operations,” he says. At present, supply chain and logistics companies face several challenges when it comes to operations. It requires hiring and retaining talent, as well as keeping up with operational complexity. “Supply chain management covers multiple disciplines and it can therefore be difficult to find that all-round supply chain person,” Dr. Lu says, adding that reducing attrition is also a challenge. The complexity of supply chain and logistics networks also necessitates the hiring of “problem solvers” who can pinpoint the clog in the system. Strategic fit & capability to adapt Dr. Lu points out that, “If the operational excellence is ‘doing things right,’ then the strategic fit is ‘doing the right things.” He says companies should be able to formulate and implement the right supply chain and logistic strategies that “fit their internal resources to the market opportunities.” He adds that by far, the most popular challenge is finding and implementing the right metrics for a problem in supply chain management. He explains that it is difficult to find the right metrics in benchmarking and reporting. Adaptability is an important factor in any business endeavor. The supply chain and logistics industry continue to face increasing global market volatility, especially since the 2008 recession. This has resulted in increased market transparency and price sensitivity. With the industry becoming more

“The University of Warwick is one of UK’s leading research universities with a reputation for excellence in teaching and for links with business and industry. Warwick’s master’s programmes (Engineering Business Management and Supply Chain and Logistics Management) are offered in Singapore via SIM Global Education.”

reliant on the growth of global customer bases, models and trends are shifting towards a more global facing business model. “In Asia, the shipping sector is suffering from a combination of plummeting demand and an oversupply of ships, as vessels ordered during the growth years are delivered,”Dr. Lu reveals. He says although demand picked up in 2012, there is still overcapacity. Companies like China Cosco Holdings Co has been reporting losses because of the uncertainties of the international shipping market. Dr. Lu says because of constantly shifting global markets, technological development and environmental and social challenges, supply chains “must enhance the capability to adapt themselves into the new business ecosystem in order to secure long-term survival.” Businesses should be cautious so they don’t lag in performance. “Often improvement on one set of metrics results in deterioration on the other,” he says. Unique voice An interesting addition to Dr. Lu’s Diamond Model is the idea of a unique voice. “There are overwhelming evidences that all companies that have achieved utmost profitability have exhibited something unique in managing their supply chain. The truly successful stories never repeat themselves,” Dr. Lu says. He adds, “Benchmarking on other supply chain’s best practices will only make the company the second best. Unique voice calls for innovation and creativity.” In the end, Dr. Lu says that despite all the guidelines and models made available on the supply chain and logistics industry, “there is no ready-made one-size-fits-all approach.” Dr. Lu, as part of the University of Warwick’s partnership with SIM Global Education (SIM GE), teaches the Supply Chain Management module for the Master of Science in Supply Chain and Logistics Management programme at the institute.

SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 21

FIRST The Analysts’ call

Will Adconian help or harm SingTel?

Key strategies include ramping up nationwide 4G coverage

Spotlight on SingTel’s Optus

on 4G by March 2015 (from 75% metro coverage as of March 2014).” Increasing coverage is an important element of Optus’s operating strategy, especially since it is a requisite for the achievement of its other major goal – growing market share. This is especially true since Optus’s strategy to increase its share involves focusing on the upper segments, which are typically highly demanding consumers. Optus’s move to increase coverage will serve its prospective consumers’ need for high quality service. In addition, consumers’ demand for high value is also being met by Optus’s revamp of its service offerings. We see competitive pressure in has updated its mobile plans the Australian mobile market increasing “Optus with significant increases in data through FY15. allowances, higher voice minutes and pricing adjustments,” says Martin. Meanwhile, its Digital Advertising business, Amobee, resorted to strategic analysts are unanimously comfortable with acquisitions to speed up breaking even, and how SingTel is handling these challenges. increase synergies. Amobee forked out a For Optus Media, SingTel’s principal play total of USD359 million to acquire Adconian on the Australian telco market, the key goal for the medium term is grabbing market and Kontera. share, especially after losing 160,000 mobile Were the acquisitions reckless, or subscribers in FY14. “We see competitive strategic? The downside of the acquisitions pressure in the Australian mobile market is a less attractive EBITDA, which could increasing through FY15, slowing industry further add to uncertainties over Amobee’s mobile service revenue growth,” says Ian future. Gregory Yap, analyst at Maybank Kim Eng, believes that the acquistions are a Martin, analyst at CIMB. The company’s key good move. competitors in the Australian market are “Digital Life investments were never about Telstra and Vodafone. short term returns. The investee companies’ Optus’s key strategies include ramping up nationwide 4G coverage. According to bigger objective is to enable the operating Anand Ramachandran, analyst at Barclays, companies to better compete via more Optus is “aiming for 90% national coverage advanced technology.” ingapore Telecom (SingTel)’s recently concluded Investor Day 2014 reaffirmed the positive outlook that investors have for the company. However, some aspects of the business merit closer observation than others, not necessarily because they are fledgling, but because these challenges are critical to the company’s solid standing. Of the all challenges SingTel currently faces, its business in Australia (Optus Mobile) and its Digital Advertising initiative (Amobee) are the ones navigating the trickiest waters. But on the bright side,

22 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

Carey Wong – OCBC Research While the acquisitions will help SingTel further its Digital Life strategy of being the global leader in the mobile-led digital advertising space, we believe that it is still a ‘work in progress’. Firstly, the integration could take some time to bear fruit. Secondly, SingTel alluded that it may still take three to five years for Amobee to break even and start becoming profitable. Nevertheless, SingTel stresses that it is not just about cash and profitability, but value too. It also calls the move to buy Adconian and Kontera as “a game changer” for Amobee. Ian Martin – CIMB We expect a more competitive Australian mobile market in FY15 ahead of device and M2M-driven growth in FY16. For example, we have Telstra’s mobile service revenue growth falling to 2.7% in FY15 after 7.3% in 1H14 and 4.7% in 2H14. We think these developments mean there is further mobile subscriber and ARPU downside at Optus as it continues to narrow its subscriber and network gap with Telstra. Gregory Yap – Maybank Kim Eng Amobee’s acquisition of Adconian and Kontera will transform Amobee from a mere digital advertising company operating on a single channel/screen into an all-rounded mobile-led digital marketing company that provides advertising & data analytics solutions on multiple channels/screens on a real-time basis. This makes sense, as the market has evolved since 2012, when SingTel first bought Amobee. There is a good chance that Adconian and Kontera will accelerate the process of breaking even for Amobee.

co-published Corporate profile

Marrying quality and lower costs PacificLight CEO Yu Tat Ming says efficiency is key ingredient.

any would say that a tradeoff is crucial in every marriage but in business, there are things that cannot be compromised. For companies like PacificLight, which owns and operates an 800 MW combined cycle plant on Jurong Island in Singapore, marrying quality and lower costs is not only ideal but easily realized through continuous efficiency enhancements without compromising on quality service and reliability. It is similar to a married couple finding ways to make daily life together better and easier by finding how their strengths can work together to make a perfect partnership. “PacificLight aims to consistently provide all of our customers with first class service whilst at the same time continuing to achieve cost efficiencies,” says Yu Tat Ming, CEO of PacificLight. He says quality service and cost efficiency complement each other instead of requiring a trade-off. “If we provide a sub-standard service quality this will inevitably lead to additional work to correct which costs time and effort,” Yu adds. He explains that PacificLight’s brand is hinged on flexibility, reliability and efficiency. PacificLight, which is based in Singapore, was founded on a joint venture between FPM Power Holdings and Petronas Power Sdn. Bhd, a subsidiary of Malaysia’s national oil company PETRONAS.The combined experience of these two shareholders provides PacificLight with a strong

PacificLight Water Storage Tank for Fire Fighting

presence in Singapore. FPM Power Holdings is a joint venture between Hong Kong-based investment management and holding company First Pacific Company Limited (First Pacific) and Meralco PowerGen Corporation (MPC), a subsidiary of the Manila Electric Company. Thrust in efficiency “Our Operations and Maintenance team are constantly looking at ways to reduce costs and improve efficiency whilst ensuring the plant maintains its high reliability,” Yu says. PacificLight’s success in implementing energy and water-efficient systems in its plant was recognized by the Certified Greenmark status which was awarded by the BCA in May 2014. “An inherent part of our corporate values is to behave responsibly in the environment we operate in by utilising resources such as water and electricity wisely,” Yu says. He says the design and construction of PacificLight’s 800MW facility involved both the installation of high quality

“PacificLight’s success in implementing energy and water-efficient systems in its plant was recognized by the Certified Greenmark status which was awarded by the BCA in May 2014.”

equipment and implementation of sustainable practices. “Maximising efficiency allows us to produce electricity with lower emissions to the environment whilst also producing electricity at competitive prices to the benefit of our customers,” he adds. To maintain cost efficiency, Yu says PacificLight ensures that it has a continuous supply of fuel, namely natural gas. This is especially crucial for a country like Singapore where natural gas is the dominant fuel used for power generation. All of Singapore’s piped natural gas is imported from Malaysia and Indonesia while liquefied natural gas (LNG) is sourced globally. “Given the importance of a secure fuel supply, PacificLight has a long term arrangement in place with BG Singapore Gas Marketing Pte Ltd for the supply of LNG. Having a reliable and proven fuel supply from a respected company like BG gives us comfort that the supply chain will remain intact and is robust,” Yu says. He says, “BG delivers LNG to the recently built Singapore LNG terminal that is operated by Singapore LNG Corporation.” The terminal itself was completed in May 2013 and PacificLight, the largest consumer of LNG in Singapore, has been impressed by the timely completion of the terminal and its seamless operation thus far.“

PacificLight Heat Recovery Steam Generator

SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 23

FINANCIAL INSIGHT: IPOs

Investor confidence is going down

What’s troubling the once-steady IPO market?

There is a massive increase in de-listings as owners who are put-off by decline in trading volumes opt to take companies off the market.

barrage of de-listings and negative sentiment have punctured holes of doubt in the strength of the Singapore Exchange (SGX), and everyone from investors to companies are jumping ship. In response, officials have been rolling out measures meant to reverse flagging investor interest. Hopes are high among analysts that this will be enough for the exchange to ride out the current slowdown into a better performance in the second half of 2014, buoyed by a stronger pipeline of initial public offerings (IPOs). The first half of the year has been lacklustre, even alarming to some observers, due to a steep dive in IPO activity. “The Singapore IPO market had a weak start in 1H14 as the crash of penny stocks in the second 24 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

Proceeds from Singapore IPOs totalled only US$1.1 billion during the first half of this year, a 61.3% year-on-year decline.

half of 2013 hampered retail investor confidence. Moreover, the country has seen an increase in the number of de-listings over the past few months as owners being put-off by decline in trading volumes and encouraged by cheap credit, are opting to take companies off the market,” says Ringo Choi, Asia-Pacific IPO leader at Ernst & Young. Thomson Reuters data show that proceeds from Singapore IPOs totalled only US$1.1 billion during the first half of this year, a 61.3% year-on-year decline. The Singapore IPO market experienced its slowest first six-month period since 2012, as issuers turned instead to rival market Hong Kong, where there is stronger demand from Chinese and international investors. Among the companies that

opted to list in Singapore, PACC Offshore Services Holdings was a standout with its US$375.5 million proceeds, making it the largest IPO in Southeast Asia this year. The offering is also the largest in Singapore since the IPO of Soil Business Space REIT, which raised US$395.7 million in August 2013. The SGX attracted mainly real estate investment trusts (REITs) and business trusts deals, but very little else, says Elaine Tan, senior analyst, Deals Intelligence, Thomson Reuters. Singapore is now under pressure to shore up its IPO pipeline and address potentially higher interest rates if it hopes to become more competitive with Hong Kong and the rest of the bourses in the region. Follow-on offerings also faltered in the first six months, reaching only US$1.04 billion, down 74.5% year-on-year. This is the lowest first-half period since 2010 when it reached US$1.03 billion, according to Thomson Reuters. One notable offering during this period was from South Korea’s Hanwha Chemical Corp, which

FINANCIAL INSIGHT: IPOs completed a US$340 million global depository receipt offering in Singapore during the first half. So far this year, Singapore Stock Exchange has witnessed at least two listings from South Korean companies raising funds from overseas investors. Combining IPO and follow-on offerings, total equity issuance in Singapore amounted to US$2.1 billion during the first half of the year, a whopping 69.2% decline, as the number of new issues dropped 38.9% from the first half of 2013. This is the slowest first six-month period since 2012 when total equity issuance reached US$1.4 billion. A “reasonably well” market In what could be seen as a half-glass full perspective, Dr Ernest Kan, chief of operations, clients & markets at Deloitte Singapore, believes the IPO market in Singapore has “done reasonably well” in the first half of 2014 after taking into account the headwinds it faced. Kan notes that a total of SGD539.9 million was raised through the listing of eight corporations, the largest contributor being the previously mentioned PACC Offshore Services Holdings. This is a significant increase compared to the SGD200 million raised by seven corporations over the same period last year. “The total amount would increase by SGD346.6 million to SGD886.5 million if we include the IPO for the OUE Commercial Real Estate Investment Trust that was launched early this year. Although this is currently the only REIT listing this year, this asset class remains popular with a wide variety of individual and institutional investors,” says Kan. Compared with last year when technology companies led the charge, the first half of 2014 has been dominated by the shipping and the real estate industry. While there are debates on the extent to which the Singapore IPO market has slowed down, it is clear by the actions of SGX

that investors are now more cautious about entering the market. SGX has cut clearing fees on stock trades to revive investor confidence and is amending secondary listing rules to attract more overseas firms, says Choi. Reviving investor confidence Despite the underperformance in recent months, several bigname listings seem undeterred and are slated to list on the SGX. Namely, Accordia Golf Business Trust – Japan’s largest golf-course operator’s upcoming US$626m cross-border listing – which will be the largest IPO in more than a year. SGX measures will go a long way in pushing the IPO market past the rough waves brought on by volatile macroeconomic conditions and short-term fears, says Kan. “While the IPO market may be seemingly hampered by global issues, undermined by owners who are put off by decline in trading volume and encouraged by cheap credit options to take firms off market, many of the measures that SGX has introduced will continue to have a positive influence over the performance of the market.” “For instance, SGX has been strengthening its listing standards by requiring companies seeking a listing on the Mainboard to show that they have been significantly more profitable with a larger market capitalization than under the bourse’s previous rules. This move to attract larger capitalizations would in turn serve to instil confidence and improve investor interest in the mainboard to attract more overseas firms,” adds Kan. SGX is also courting Chinese listings in Singapore, which should help it attract companies that may be considering options outside of Hong Kong. “A direct listing framework was established last November between SGX and CSRC for Chinese companies incorporated in China that will result in a

growth of Chinese listings in Singapore who are looking to differentiate themselves by listing on an international platform outside of Greater China to access a more global investor base,” says Kan.

Ernest Kan

Expanding beyond REITs Choi believes that SGX could go a step further, focusing on growth stocks and shifting from a niche market popular for REITs toward other big listings around Singapore’s IPO market. Seeds of these strategies are already being planted with Singapore’s stock market becoming an active player in the energy and resource industry, according to Kan. Deloitte data predicts that from 2014 to 2020, global demand for liquefied natural gas will likely double, with Asia accounting for over 60% of demand, including significant growth from China and India, and new regional importers such as Vietnam and the Philippines. “SGX is actively pursuing and making moves to strengthen its standing in this sector,” says Kan. He also notes that the Singapore bourse has liberalized listing rules for Mining, Oil and Gas (MOG) firms that are not yet in production. “This liberalization is also crucial for the emerging economies and their growth that needs significant capital for the production of commodities to meet global demands and thereby secure Singapore’s niche position within the energy and resources industry,” says Kan.

Elaine Tan

Ringo Choi

IPO in Singapore stock exchanges First half-based volume trend

Source: Thomson Reuters

SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 25

ANALYSIS: self-storage industry units and more than 1.8 million sq ft of leasable self-storage space islandwide.” Over the past two years, Colliers said small-to-medium sized players like D’Storage, S-Store, Store4You, and StoreFriendly have been competing in the market. And existing self-storage players in Singapore such as SingPost and CapitaLand have upped their investments by acquiring other companies. Extra Space, Lock+Store, StorHub and StoreFriendly account for 27 of the total estimated 34 self-storage facilities islandwide in September 2013. By December 2013, these four major operators accounted for 32 of the 41 self-storage facilities.

Lock+Store, a member of the Singapore Post Group of Companies

How Singaporeans can pack up, store and stow away For business owners in Singapore, self-storage is the way to go.

hen Helen Ng ended her restaurant business, she was faced with a huge problem: where to store all of the remaining stuff? Her solution was no shoebox idea: she decided to just do it herself. “There weren’t many self-storage service providers back then. That got me interested in the business,” says Ng, who became Singapore’s first and only self-storage hub chief executive officer when she joined Lock+Store in November 2010. By December 2012, Singapore Post (SingPost) acquired General Storage Company, which operates a self-storage business in Singapore under the Lock+Store brand. And with four facilities in Singapore, Lock+Store will be opening its first overseas facility in Glenmarie, Malaysia in October 2014. “We found that the business is largely

26 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

The local selfstorage industry has grown rapidly over the past 10 years, burgeoning from a single facility in 2003 to an estimated 41 self-storage facilities.

supported by Singaporeans who need the additional storage space with shrinking apartment sizes, hobbyists who store their collectibles, SMEs who wish to achieve operational efficiencies and reduce their operational costs and blogshops owners who operate from home,” Ng says. Self-storage has become extremely popular in the US and in Asia Pacific countries, such as Australia, Japan and Hong Kong, and recently in Singapore. There are no official statistics on the self-storage industry in Singapore, but Colliers International’s market research indicates that as of December 2013, “the local self-storage industry has grown rapidly over the past 10 years, burgeoning from a single facility in 2003 to an estimated 41 self-storage facilities, supplying over 25,000 self-storage

Vibrant self-storage industry The market is catching on quickly to Colliers’ prediction that Singapore’s self-storage industry is expected to become even more exciting in the coming years. “We are very optimistic about the self-storage industry in Singapore,” says Heng Tze Kiang, General Manager of StorHub. StorHub, which started in 2003, is the pioneer of shortterm monthly self-storage service in Singapore. In July 2013, it acquired Big Orange to capture the rising demand of self-storage in Singapore. As a result, it now has 10,000 storage units across 11 facilities, spanning over 1 million sq ft. “The expanded operations offer us greater economies of scale and allow us to offer our services at more convenient locations in Singapore and at affordable prices,’’ Heng adds. He believes the internet has created awareness among consumers of the advantages of self storage. “Many customers now view self-storage facilities as an extension of their living space and for them, reliability and security are their top storage priorities,” Heng says. Extra Space, which operates six facilities in Singapore, also has operations in Kuala Lumpur

ANALYSIS: self-storage industry and Seoul, and is looking to open up more facilities in Malaysia and Korea this year. Daphne Lim, Marketing Manager for Extra Space, says the company, which has increased its customer base 15-fold since it started in 2007, saw an 11% surge in the number of clients from 2013. ‘’We remain optimistic because there is simply a great deal of latent demand for self storage. Homes are getting smaller while incomes are getting larger. Singaporeans don’t always have the space to accommodate all their acquisitions,’’ she says. Growing demand It’s a curious situation where less space actually means more money. “The self-storage industry is primed for growth, especially in land-scarce Singapore,” according to June Chua, executive director at Cushman & Wakefield. In rising urban meccas like Singapore, rental fees have skyrocketed, bloating business costs. The space leased is usually less than 40 square feet, which is ideal extra space for residents who live in shoebox units of only 50 square metres (538 square feet). Home sizes in Singapore have been shrinking by 25-30% in the last five years, along with condo units. The study found that 45% found the size of their rental apartments too small. “Self-storage facilities are a boon to these groups of users, who are likely to travel frequently. The shorter lease period allows them the flexibility of storing their possessions without the need to

Ella Sherman

Helen Ng

Heng Tze Kiang

Sigrid Zialcita

extend or renew their residential leases,” it states. Small and medium enterprises (SMEs) also find storage facilities cheaper. In Singapore, rentals for warehouse space have risen by 16% in the past two years. “Selfstorage facilities as such are an alternative and viable avenue for entrepreneurs to cut back on space requirements,” according to the study. Sigrid Zialcita, Managing Director of Research in Asia Pacific at Cushman & Wakefield, says the survey results reflect the landscape of rising business costs. “On average, rentals for warehouse space have risen by 16% while prices of warehouse space have risen at a faster rate of about 36% in the past two years,” she says, quoting Singapore’s Urban Redevelopment Authority. For both groups, apart from cost, it’s important to be able to easily access their storage units, and pick up or drop off goods at any time, the survey found. And even more important than that is the security that these facilities provide. Lock+Store’s storage facilities at Ayer Rajah Crescent, Chai Chee, Serangoon and Tanjong Pagar DistriPark are accessed via a unique passcard system that gives users easy access while ensuring the security of their belongings. Ella Sherman, Managing Director of Animal Merchandise, a local SME that distributes and retails homeware products, couldn’t agree more.

“High warehousing costs are a huge barrier to starting a distribution retail business in Singapore. We learnt it’s actually more cost effective to store our inventory at Lock+Store rather than with a logistics company. We like the flexibility of being able to access our storage unit 24/7, the state-of-the-art security, air-con, cleanliness and helpful customer service,” says the executive who leased a 250 sq ft storage locker at Lock+Store Serangoon in September 2013. Who are the clients? The Cushman & Wakefield survey reported that 60% of the users were between 31 and 50 years old, and were most likely to be male. The typical self-storage user is also very mobile, it found, and about 40% of users are using their self storage in a business capacity, up from 30% in 2011. Among noncorporate users, 9% are hobbyists who are using the space to park their collection of figurines and antique collections, the report said, adding that air-conditioned units drew them to use the facilities. The demand for storage also rises by 10% in December and January each year, Ng notes, when SMEs need storage when closing their books, and households prepare for their annual spring cleaning. “Typically the SMEs would order about 300 to 500 boxes at a go for their whole year’s storage needs. They use the boxes for files and documents,” says Ng.

Types of business operating models adopted by major self storage operators in Singapore (as of September 2013)

Source: Colliers International Research

SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 27

Singapore’s 20 largest banks with our customers able to access banking and brokerage products under one roof, a number of employees from DBS Vickers moved to the bank.” The other local bank, OCBC, settles in fifth place with just around 6,000 staff. The fourth spot goes to foreign bank Standard Chartered Bank (SCB) of which total employment grew to 7,400 from 7000. Altogether, the top five comprise more than 75% of the 53,144 total employment of the 20 largest banks in the list.

DBS Marina Bay Financial Centre branch

DBS replaces UOB in second place, Citibank remains first Regulatory changes heat up competition between local and foreign banks in Singapore.

itibank Singapore remains Singapore’s largest commercial full bank in the city, based on the number of employees at 10,000, according to Singapore Business Review’s second annual survey. It is again followed by two local banks, but with reshuffled positions. DBS Bank replaces UOB in second place after adding 1,000 more to its 2013 staff strength of 7,800. UOB, on the other hand, only added 150 to its last year’s total of 7,850. Theresa Phua, Singapore Head of Human Resources at DBS Bank, explains that the bank has had a number of long-standing programmes in place, including the Management Associate Programme and Technology &

Altogether, the top five comprise more than 75% of the 53,144 total employment of the 20 largest banks in the list.

28 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

Operations Graduate Programme. “To further strengthen our talent pool, in 2013, we launched three new talent development programmes designed to groom leaders in different parts of the bank such as consumer banking and SME banking. In 2013, we increased the number of new graduates recruited through these programmes,” says Phua. Phua also adds that in 2013, DBS executed an initiative to enable its customers to trade shares without the need to maintain separate accounts with the bank and its broking subsidiary, DBS Vickers. “[The move] is in line with our ambition to become a leading wealth player in the region. To support the creation of this ‘one-stop shop,’

Competitive pressure Apart from competition in attracting local talent, experts note that local banks may face tougher competition in deposits from foreign banks with new regulatory changes in place. A framework for domestic systemically important banks (D-SIBs) is currently in the works. According to Maybank Kim Eng analyst Ng Wee Siang, the immediate implication is foreign banks with a large retail presence in Singapore will have to locally incorporate their retail units. On a larger scale, the change could lead to greater competition from foreign banks in search of higher returns. Ng notes that the retail operations of both HSBC, ranked 6th, and Maybank in 8th place, may be required to be locally incorporated with a minimum of SGD1.5 billion in paid-up capital. While this may level the playing field, the analyst cautions that foreign banks may go up the risk curve in search of higher returns commensurate with higher capital requirements. Fitch Ratings also believes that the new requirements are not expected to pose major challenges for the local banks, but it expects deposit competition to heat up.

Singaporeâ&#x20AC;&#x2122;s 20 largest Banks

The 20 largest commercial (full) banks in Singapore No. of employees 2013 2014 Ranking

bank

No. of employees 2013

ceo country head

Citibank

10,000

Michael Zink

dbs bank

8,800

7,800

Sim S. Lim

united overseas bank

8,000

7,850

Wee Ee Cheong

standard chartered bank

7,400

7,000

Neeraj Swaroop

oversea-chinese banking corp.

>6,000

Samuel N. Tsien

hongkong and shanghai banking corp.

3,500*

Guy Harvey-Samuel

australia & new zealand banking group

2,300

Vishnu Shahaney

malayan banking (Maybank singapore)

1,800

1,700

Datuk Lim Hong Tat

bnp paribas

1,800

1,700

Pierre Veyres

cimb bank

1,100

900

Mak Lye Mun

bank of china

580*

580

Zhang Qingsong

mizuho corporate bank

500*

500

Katsuyuki Mizuma

rhb bank

500

Jason Wong

credit agricole corporate and investment bank

240

252

Pierre Finas

industrial and commercial bank of china

180*

100

Zhang Weiwu

state bank of india

143

165

Anil Kishora

bank of india

Dinabandhu Mohapatra

icici bank

85*

B Krishna Iyer

indian bank

66*

A. Ramu

uco bank

64*

Ms Kalpana

53,144

Total

51,144

Data provided by companies *estimates, media reports, company websites, previous data **latest annual report JP Morgan Chase declined to give numbers Survey period until March 2014 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 29

CMO Briefing We also do a lot of retargeting across both Facebook and the Google Display Network.”

Facebook vs Google in mobile marketing

Choosing either – or even both – comes down to your target audience and brand goals.

t’s hard not to discuss mobile marketing in Asia these days without mentioning Facebook or Google in the same breath. Both technology giants offer amazing platforms for brand promotion. Via Facebook, mobile marketers can share content and build communities, while via Google, they can run search ads and viral YouTube video campaigns. Which side should you take in this titanic battle for mobile marketing dominance in the region? Most industry gurus believe the question is flawed -instead, they advise marketers to think of only their own side, that of their brand’s, then cherry-pick Facebook and Google services to help them win. “I don’t think it is fair to draw direct comparisons between Google and Facebook, as they serve different purposes in any given marketing strategy at different stages of the buyer journey,” says Camille Baumann, APAC senior director, marketing at Avanade. “Facebook and Google are actually very complimentary and for the most part are not really competing for the same marketing dollar,” concurs Roger Egan, founder of Redmart. Google paid search allows for ‘intention’-based marketing, while Facebook allows for demographic-based marketing and community building, and he believes most marketers should be spending on both. But he admits one channel could be more effective than the other depending on a brand’s market and products. From their end, Egan says that Google search only accounts for 10% of their spending as they focus largely on targeted Facebook CPC and promoted post adverts. “We generally spend as much on Google search as we can. However the “supply” of searches is modest. The good thing about Facebook is that it has a lot of inventory, but the challenge is that the conversion rates are not always that strong.

30 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

Facebook has seen a 34% increase in mobile monthly active users over the past year.

When to use Google Business-to-business or B2B companies, for example, will more likely find value in Google’s marketing platforms than Facebook, says Frank Feldmann, senior director, marketing at Red Hat Asia Pacific. “For now, B2B companies like us will probably continue to split a larger piece of the pie for Google’s ad platforms, until Facebook is able to provide better tailored services for the B2B audience.” Baumann says Google search engine marketing – including organic, paid keywords and remarketing – is very effective in generating targeted brand awareness and drive leads through content. Mobile marketers have the potential to capture a many new customers through Google by letting users discover brands when they search for particular products, services or even just related phrases. This marketing strategy is especially suitable in Asia where Google is primarily used as the preferred search engine, says Rika Sharma, Singapore head at Social@Ogilvy. When to use Facebook Google may be the king of mobile search, but Facebook is the king of building communities, says Baumann. Brands that want to approach customers through the influence of family, friends, co-workers and other social acquaintances will find great results in Facebook. The social network is also fantastic in creating all-day touchpoints among users. “Facebook is a great channel to engage ‘fans/ friends’ whom have opted in by ‘liking’ or adding your brand, page or content and hopefully sharing it further. Building a community may take some time but the engagement is ongoing once you have established a community of interested followers,” says Baumann. “Facebook is great because marketing content and messages are served with social context. People are more likely to engage with your content if their friends or people similar to them have done so. Facebook also offers a variety of products and makes it easy for brands to reach out to their fans based on their social or campaign objectives,” says Sharma. Mobile penetration is especially high in the Asia so more and more people are accessing Facebook through mobile devices, and marketers would do well to engage them through the platform, says Kenneth Bishop, director, marketing (APAC) at Facebook. He notes that Facebook has seen a 34% increase in mobile monthly active users over the past year, and that Facebook was ranked as the third most popular activity on iPhones and Android phones behind email and web browsing globally. In fact, combined with Instagram, users spend on average 34 minutes a day on mobile with Facebook or around a fifth of all their time spent on mobile.

Electrolux wins iba ‘14

lectrolux Major Appliances SEA was cited by the Singapore Business Review at the recently concluded International Business Awards 2014 at the Conrad Centennial Singapore. IBA 2014 sought to recognize Singapore’s outstanding companies whose work has enriched the lives of many throughout the Asia Pacific Asia region. The International Business Award is given for new projects that have significantly enhanced the company’s business in the region. The award for Consumer Products – Home Appliances was given to Electrolux

Major Appliances SEA for the success of its Passions marketing campaign, and was received by Mr. Terry Sales, regional marketing manager-EA and Ms. Pamela Tan, regional communication manager-AP. Electrolux Major Appliances SEA is recognized for its region-wide marketing campaign covering Hong Kong, Indonesia, India, Malaysia, the Philippines, Singapore, Thailand and Vietnam. The Passions campaign speaks of what consumers are passionate about and how Electrolux shares in their passions by offering them appliances that help

them do what they love. At its heart, the Passions campaign speaks of Electrolux’s philosophy of understanding its consumers and developing products based on this understanding. This can be seen in the launch of the new Time Manager washing machines which combine time management and efficiency for better results while saving time, and making doing laundry an easy and stressfree experience. In the same spirit, the new FlexFresh refrigerators give consumers the flexibility to store food according to their own needs to help keep food fresh and healthier for longer. The judging criteria for the award focus on uniqueness and innovation, effectiveness and dynamism. Electrolux’s philosophy of thoughtful innovation has helped the company launch products and marketing campaigns that have embodied this philosophy. With its successfully creative and consumer-centric campaign materials and activities, the Passions campaign has done that and much more in the SEA region.

“At its heart, the Passions campaign speaks of Electrolux’s philosophy of understanding its consumers.”

CO-PUBLISHED CORPORATE PROFILE

Not your average accounting practice

K.G. Tan & Co. PAC’s principal describes how the intricacies of legal, accounting, tax and management consultation combine to form a learning culture.

Tan Khoon Guan, Founding Director

he accountancy profession has long been associated with dry, humourless pencil-pushers ploughing through client tax returns, and has been the subject of myriad clichés and gentle jokes aligning the profession with all things conservative. While some of these clichés are necessarily true – it is a virtue that a good accountant possesses a keen eye for fine detail and enjoys masterful numeracy – many are more dying stereotypes than clichés. Imagine an accountancy practice with a brightly lit and colourful reception, more akin to a young, dynamic infocomm start-up; one that speaks of its clients as business partners, understands their businesses and makes a point of creating symbiosis within its clientele. K.G. Tan & Co. PAC is one such practice. K.G. Tan & Co. PAC’s, eponymous founding director (“KG” to his friends) long ago broke the mould of the typical accountant. After a successful career with one of the “Big Four” international accountancy firms, followed by a stint with a major organisation as CFO, KG mustered the courage that few can – he went solo… well almost. KG started his practice with his cousin in a serviced office. Despite the challenges of starting out, they were fortunate to be presented with more opportunities even amidst 32 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

From strength to strength: the dynamic team at K.G. Tan & Co. PAC

post-2009 crisis. From strength to strength is an understatement. K.G. Tan & Co. PAC - which offers an atypically broad range of corporate services, including audit, tax, accounting, transaction and advisory services has grown to 40 staff since 2006, a tremendous growth rate in a highly competitive industry of some 600 firms, and a rise to prominence that sees the firm ranked 24th on Singapore Business Review’s list, the youngest among the 25 Largest Accounting Firms in Singapore, having started only seven years ago. In 2011 K.G. Tan & Co. PAC was admitted to the Alliott Group, a legal, accounting and management consultancy alliance that includes 180 members and spans 80 countries. Admission to the Group is rigorous, however, once a member, the benefits in terms of branding, the global network and knowledge sharing is massive. Being part of the Alliott Group also enables K.G. Tan & Co. PAC to provide a platform to assist its clients in globalising their businesses. “One excellent example involved our assistance in providing professional

“Our practice is imbibed with a learning culture rather than a training culture. We could never lose our belief.”

services to global brand Mango when it established a presence in Singapore.” Another major factor spurring K.G. Tan & Co. PAC’s greater than 30% annual growth since inception is the firm’s development of a groundbreaking, proprietary practice management solution. KG places enormous focus on innovation and it is this in-house technology that has allowed the practice to expand its pipeline in a manner that would have otherwise not been possible. “We believe that we are the only accounting firm to develop a web-based practice management application that automates the entire workflow of our operation and integrates fully with our accounting, payroll, administrative and CRM functions.” This application is currently being adopted by 28 accounting firms, supported by the IDA’s push for collaboration between accountancy firms and IT vendors. IT may be the spine of K.G. Tan & Co. PAC but the heart is its people. “Our practice is imbibed with a learning culture rather than a training culture – our people are naturally placed at the centre of the firm, it is quite a flat culture which is unusual in this profession. We could never lose our belief and foundations and if you want to run a successful business, you have to put your people first – and select people that will put their clients first.”

Event Coverage: Iba 2014

SBR’s inaugural International Business Awards

ingapore Business Review made history this year with the first ever International Business Awards (IBA). The event is an initiative to honour the contributions of international firms to Southeast Asian economies. SBR awarded 39 companies from 17 countries, spanning the globe from Vietnam to Luxembourg to New Zealand. Nominations were judged by an esteemed panel, including Choo Eng Chuan, international and corporate tax services partner at Ernst & Young; Stephen Chang, regional managing director at Deloitte Consulting; Roger Loo, head of management consultancy services at BDO Singapore; Henry Tan, managing director at NEXIA TS; and Toh Kim Teck, assurance partner at Foo Kon Tan Grant Thornton. Speaking at the awards night, SBR publisher Tim Charlton said, “We are honouring the foreign companies who have worked hard to improve the lives of people not only in Singapore but also in the entire Southeast Asian region. This is truly a night of winners.” The IBA 2014 was held in partnership with the Japan Chamber of Commerce and Industry, European Chamber of Commerce in Singapore, Advantage Austria (Embassy of Austria), the French Chamber of Commerce in Singapore, the Dutch Chamber of Commerce Singapore, Business IndonesiaSingapore Association, the Spanish Chamber of Commerce Singapore, the Swiss Business Association Singapore (Embassy of Switzerland), the Singaporean-German Chamber of Industry and Commerce (SGC), the AICEP Portugal Global with the Portugese Embassy, the Danish Embassy, the Irish Chamber of Commerce Singapore, and the Italian Chamber of Commerce Singapore. The awarding ceremony was held on 24 July at the Conrad Centennial Singapore. IBA salutes all the awardees, as follows:

• Business Services Adecco • Legal ASBS Pte Ltd • Food and Beverage Barilla • Agriculture Bayer CropScience Asia Pacific • Advertising BuyAssociation Singapore • Accounting Deloitte Singapore • Consumer Products - Durables (Major Appliance) Electrolux Major Appliances - South East Asia • Materials & Construction Enware Asia Safety Systems Pte Ltd • Computer Software ERI Banking Software 34 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

Alexander Knight of BuyAssociation Singapore

Andrew Chong of Infineon Technologies Asia Pacific

Eric Fiechter of ASBS Pte Ltd

Hideki Baba of Panasonic Factory Solutions Asia Pacific

Ian Douglas of Global Marine Services

Michael Zheng of Romer Labs Singapore

Olivier Roth and Judith Purnomo of Pro-DataLGI Singapore

Tim Phillips of Deloitte Singapore

Feinmetall Singapore Team

Romer Labs Singapore Team

Imagination Asia Ltd. and Shell Team

Patrick Schulze and YuLin Tang of simpleshow Asia

Imagination Asia and Shell Team

PM Group Team

The Panasonic Factory Solutions Asia Pacific Team

NTT Singapore Team

SINGAPORE BUSINESS REVIEW Zurich Life Insurance Team

| SEPTEMBER 2014 35

• Retail Ethnicraft Online • Electronic Manufacturing Feinmetall Singapore Pte Ltd. • Engineering Global Marine Systems Ltd. • Residential Building Construction Group8asia Singapore Pte Ltd. • Residential Product Manufacturing Hansgrohe Pte Ltd • Health Products & Services Hocoma Pte Ltd • Corporate Advisory Hoffman • Diversified Services Imagination Asia Ltd. • Electronics Infineon Technologies Asia Pacific Pte Ltd • Furniture and fixture JANUS et Cie • Consumer Products-Durables (Small Appliance) Jura SEA • Technology KABA SECURITY PTE LTD • Consumer Products - Non-Durables Kimberly-Clark • Human Resources Consulting Mercuri Urval • Hospitality & Leisure Mövenpick Heritage Hotel Sentosa • Data Center NTT Singapore Pte Ltd • Food Manufacturing Solutions Panasonic Factory Solutions Asia Pacific • Architecture PM Group • Consulting PM Square • Computer Services Pro-DataLGI Singapore Pte. Ltd. • Executive Search Randstad Pte Limited • Food Safety Romer Labs Singapore Pte Ltd • Motion Picture & Video simpleshow asia Pte Ltd • Energy SOLID Asia Energy Services Pte Ltd • Human Resource Technology SONRU • Manufacturing tesa tape Asia Pacific Pte Ltd • Internet/New Media Tigerspike • Luxury Retail UOMO GROUP SINGAPORE • Building Services & Facilities Voltas Limited • Personal Insurance Zurich Life Insurance (Singapore) 36 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

Olivier Roth of Pro-DataLGI Singapore

Oscar Carrillo of Zurich Life Insurance

Pat Ryan of PM Group

Patrick Schulze of simpleshow Asia

Sam Chee Wah of Feinmetall Singapore

Sarah Tan from ERI Banking Software

Terry Sales of Electrolux

Theodoric Chan of NTT Singapore

FEATURE: investing in brisbane

Eagle Street Pier, an iconic waterfront precinct with a great view of the Story Bridge

What opportunities await the Singaporean investor?

Discover why Brisbane was chosen to host this year’s G20 Leaders Summit and what it has to offer as a gateway to Australia. By Roxanne Primo Uy

any people would consider Sydney or Melbourne as the gateway to invest in Australia, but another city is slowly gaining ground as a key business and investment hub in the Land Down Under. Brisbane, tagged as Australia’s new world city, was selected to be this year’s host city of the G20 Leaders Summit, the principal forum for international economic cooperation and decision-making. Brisbane will be in the global spotlight on 15 and 16 November, with around 4,000 delegates from the world’s most influential economies and 3,000 international and local media gathering at the Brisbane Convention & Exhibition Centre. In the lead-up to the 2014 G20 Leaders Summit, Lord Mayor Graham Quirk tasked Brisbane Marketing, the city’s economic development board, to embark on

Graham Quirk

John Aitken

38 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

a series of initiatives to ensure that the city fully capitalizes on the global attention captured by this important event. The economic benefits of G20 are expected to inject more than $100 million into the local economy so the whole city is involved in making sure that they do it right the first time. According to Quirk, one of the most important things for Brisbane is its identity. “If people don’t know the name of your city, they won’t visit it and certainly can’t invest in it. We are gaining momentum in terms of visitations. Last year we had a 10% growth in tourism and a 20% growth in business and international conventions in the city. The G20 will provide an opportunity for that momentum to continue.” John Aitken, CEO of Brisbane Marketing, says Brisbane was the first host city to have almost two years’ notification that the G20 is coming.

They have since been very active in coming up with various initiatives to make sure that there are enough opportunities to promote tourism, build international networks and highlight the best Brisbane has to offer. According to Quirk, “It is true that when you talk to people overseas and talk about Australia, Sydney is the city that is best known and that’s natural because it’s the biggest city. But we are an emerging global city and this international recognition that we are given to host G20 is a terrific opportunity for us.” Investing in Brisbane Brisbane has a $135 billion economy that benefits from a strong mining and energy sector, servicing many countries around the world with coal and other commodities. Jones Lang LaSalle recently named Brisbane as the fastest growing mature city in the world in terms of GDP, with a forecast average annual GDP growth rate of 5% over the period 2012 to 2020. Brisbane not only holds the enviable position of being Australia’s sub-tropical capital with 261 days of sunshine, but is also the closest Australian capital city on the eastern seaboard to Asia, making it a strategic location

FEATURE: investing in brisbane for investments in the Asia Pacific region. But one of the most distinct features of Brisbane lies not in its architecture but in its people. A business-friendly city Walking down the streets of Brisbane, one will notice the friendly and relaxed mood, which translates to ease of doing business in the city. In fact, the 2013 World Bank Doing Business Annual Report named Australia one of the most businessfriendly countries in the world. “Brisbane was also named the most business-friendly region in Australia as part of the Regional Australia Institute [In]Sight Index. The results of the index also show Brisbane as the number one city in Australia for local government assistance to business and Brisbane City Council as the local government with the most influence on its state and federal counterparts when it comes to bettering the business environment,” adds Quirk. The Brisbane City Council is unique in that it is the largest local government authority in Australia. According to Quirk, “We’re 20 councils amalgamated into a single local government authority in 1925. So in Brisbane, if you go out 20 kilometres from the centre of the city, you’re just in one council. You do that in Sydney, you’re dealing with 35 different councils. In Melbourne, it’s 31 different councils.” He adds that Brisbane is the engine room of much of Australia’s continued economic growth, in defiance of the global downturn of the past five years. With an economy predicted to grow to $223 billion by 2031, Brisbane offers an attractive business environment in a region supporting an ever-increasing share of global economic growth. There are several Singaporean companies with a presence in Brisbane, especially in the hotel and hospitality industry. Ascendas REIT owns the Pullman and Mercure King George Square which accounts for 14% of their total portfolio. CDL Hospitality owns the Mercure at North Quay, Ibis on Ann Street and Novotel at Spring Hill. Hotel Grand Central owns and operates the Hotel Grand Chancellor in Spring Hill.

Toga Far East, a joint venture partnership between Toga and Far East Orchard, owns the Adina Hotel at the Story Bridge and Rendezvous Hotel on George Street. Brisbane and Singapore According to Paul Bloxham, chief economist for Australia and New Zealand at HSBC Global Research, strong ties to Asia have been a key driver of Australia’s relative economic success in recent years. Australia’s financial links to Asia are still fairly small, but are growing quickly. Bloxham notes that Asia accounts for only 13% of total foreign investment in Australia. Brisbane Marketing’s Aitken says Singapore is one of the most important Asian markets with which they do business because of its large investment portfolio. “At the moment we are talking to quite a number of Singaporean companies around the opportunities in tourism and tourism infrastructure, particularly hotels. There are a number of Singaporean companies looking at setting up here and beginning their first investment in terms of their hotel chain in Brisbane, rather than Sydney and Melbourne because of the favourable conditions here,” he adds. Singaporean companies Frasers Hospitality and SilverNeedle Hotels are also currently developing new hotel projects in the city’s central business district. SilverNeedle is spending $50 million to redevelop the landmark Chifley at Lennons Hotel after acquiring the Queen Street Mall site for $57 million. The refurbishment will see the hotel converted from its current 150 rooms into a 300-room new

Brisbane city centre skyline

“With an economy predicted to grow to $223 billion by 2031, Brisbane offers an attractive business environment in a region supporting an ever-increasing share of global economic growth.”

generation NEXT Hotel. “SilverNeedle was attracted to Brisbane by the ease with which you can interact with government authorities through Brisbane Marketing and Brisbane City Council,” says SilverNeedle CEO Iqbal Jumabhoy. Meanwhile, Frasers Hospitality’s office tower-to-hotel refurbishment project in Albert Street will open early next year. The project is Frasers’ first foray into the Brisbane market. It received development approval to convert a central office tower into a 239-room four- or five-star hotel in April 2014. “Amongst other factors, the government’s unwavering support throughout the development planning process has further reinforced our view that Brisbane is a great place for us to invest in,” says Choe Peng Sum, Frasers Hospitality CEO. “We are a city with a lifestyle obsession, global ambitions and a contagious energy and entrepreneurial spirit that lubricates the business environment. This, coupled with a single local council that governs the entire city and a strong economic development focus, is giving Brisbane a bright glow on the international radar,” notes Quirk. Roxanne Primo Uy was a guest of the city of Brisbane

Forecast economic growth (2013-14 to 2016-17)

Source: Australian Government, Mid-Year Economic and Fiscal Outlook 2013-14; Queensland Government, State Budget 2013-14 and Mid-Year Fiscal and Economic Review 2013-14

South Bank - River Quay

SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 39

REGIONAL ANALYSIS 1: GLOBAL TRADE (i.e., harmonised regulations) or the single currency had been established. Over the last decade, the EU is still the largest source of trade growth, but accounts for only around a quarter of the total increase. Excluding intra-European trade, Asia is the largest contributor to trade.

Global trade has increased more than four-fold

Global trade unbundled

Trade has been weak since the 2008-09 crisis. Is there a looming structural slowdown?

lobal trade patterns have changed dramatically in the last two decades. Emerging markets (EMs) now account for 42% of world exports, up from 19% in 1990, or 52% excluding intra-EU trade. Asia has firmly established itself as the centre of the ‘made in the world’ vertical global supply chain, with China emerging as a mega-trader. Historically, trade growth has averaged about 1.4 times GDP growth. But since the 2008 peak, world exports have risen only 5%, while nominal GDP is up by more than 10%. Some fear that this slowdown is structural. We, however, believe trade growth will pick up and this ratio will be restored. Growth in developed countries is accelerating, while manufacturing, still the driver of goods trade, is coming out of the doldrums. Constraints such as lower trade finance availability and rising protectionism are 40 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

The 1990s were a golden age of trade expansion, with the volume of trade growing twice as quickly as real GDP.

fading. Numerous bilateral trade pacts have been agreed in recent years and new multilateral trade pacts are in the works. The rise of emerging markets Global trade has increased more than four-fold in value terms since the 1990s, touching USD 18tn in 2012 or about 25% of global GDP. The expansion in trade shows three important trends: the rise of EM economies as important trading partners; the growing importance of regional trade, particularly in Asia; and the expansion of global supply chains, usually with China playing a key role. In the 1980s the EU accounted for almost half of global trade growth. This reflected the pulling down of trade barriers within Europe, encouraging both vertical and horizontal trade integration. It shows what can be achieved by comprehensive trade liberalisation; this was before the single market

The rise and rise of Asia The 1990s were a golden age of trade expansion, with the volume of trade growing twice as quickly as real GDP. This partly reflects trade liberalisation, as the Uruguay Round concluded in 1994 was the most comprehensive to date. There was also the fall of the Berlin Wall in 1989 and the collapse of the Soviet Union in 1991, which led to the opening up of Central and Eastern Europe. Asia is often characterised as following a ‘flying geese strategy’, where the production of manufactured goods continuously moves from the more advanced countries to the less advanced ones as labour costs rise. Elements of this approach are visible elsewhere in the world too, particularly in Europe. A key issue for trade and development in the long run is the extent to which India and eventually Africa will join the formation. Asia’s growing role in SouthSouth trade has been fuelled by rising trade within Asian economies. Asia’s intra-regional trade accounts for nearly half of all of Asia’s trade with emerging markets. Much of this relates to the expanding supply chains, though especially as trade is liberalised, Asia is likely to see increasing horizontal trade, as is seen most notably in the European Union. This will include both intermediate goods and final products. The extent to which this happens will be another key factor in the development of trade in coming years. Most countries have seen a profound shift in the proportion

REGIONAL ANALYSIS 1: GLOBAL TRADE of their exports going to emerging markets rather than developed markets. Some of the most dramatic shifts include Korea, up to 60% from 16% since 1990, Brazil to 57% from 25% and Thailand and Indonesia, also both up about 30ppt over the same period. Among developed countries, Greece stands out with an increase to 52% from 17%, while the US has increased to 46% from 24%. African countries have also reoriented, with Nigeria’s share up to 35% from 8% and Uganda’s up to 66% from 10%. India’s share has increased to 54% from 34%, while China’s share, perhaps reflecting its role in final assembly, has increased only to 32% from 16%. Is trade slowing on a structural basis? The GFC was accompanied by the sharpest collapse in world trade in the post WWII period. World merchandise exports fell nearly 38% from peak to trough, much more than the roughly 5.0% drop in global output. Massive fiscal and monetary stimulus aided a V-shaped recovery in trade in 2009, but trade growth has been weak in the post-GFC period, with world exports only 5% above the 2008 peak even five years into the recovery China led the surge in exports during the 2000-08 period, with exports rising nearly 700% from 2000. The peak-to-trough drop in exports was broadly similar across most regions, though Africa and China’s export/GDP ratio has fallen % share of exports to GDP

Source: IMF, DOTS, Standard Chartered Research

China led the surge in exports during the 2000-08 period, with exports rising nearly 700% from 2000.

MENA saw the largest declines, reflecting the fall in commodity prices. Still, overall world trade is only about 5% higher than the preGFC peak, whereas GDP is now higher by more than 10%, driven by strong growth in emerging markets and especially China. Unsurprisingly, the trade weakness reflects anaemic trade growth in the advanced economies, which have not recovered pre-GFC export levels (still about 5% lower than pre-crisis peaks). While US exports are above pre-GFC levels, Japan and Europe have seen a substantial weakening in export growth, partly related to the recession in the euro area. But another reason why GDP has grown so much more than trade since the pre-GFC peak is that the value of trade in China’s GDP has fallen significantly since then, to 25% most recently from 35% in 2007, a point to which we return below. The end of the commodity boom Exports of fuels and minerals increased as a share of global exports from 14% in 1990 to 22% in 2011. Over half (52%) relates to fuel exports. This partly reflects greater demand from emerging markets, whose economic growth is commodity-intensive as they build factories, cities and infrastructure, but was mainly due to rising commodity prices that magnified commodity export values. This demand-led rise in commodity prices has spurred a supply response that is expected to help moderate oil-price gains over the next few years, or even allow them to fall back. Worries about a 1980s-style oil supply glut might be overdone as demand from commoditydeficient emerging markets is expected to push up volumes traded, while political uncertainty in the Middle East is holding back supply. The IEA estimates that global energy demand will grow by 33% by 2035 (compared with 2011). Emerging markets will account for

90% of this increase in net energy demand, with India replacing China as the primary demand driver after 2025. This increase in demand will offset some of the rise in availability and will likely keep price declines in check over the coming period. Offshoring and ‘flying geese’ At the same time, vertical global supply integration likely has further to go, while claims that developed world producers will look to bring back or onshore production seem over-stated. It is very hard to find reliable data that would help disentangle the impact of re-shoring/onshoring on world trade from that of the steep crisis-led decline in global demand. However, according to a survey conducted by the Boston Consulting Group, around half of 200 US companies with sales of over USD 1bn is considering the possibility of bringing production back to the US. Still, 20% of these companies are actually looking to bring back production over the next two years. Moreover, even if some companies bring back factories from overseas, their suppliers may still be in cheaper wage countries. What is evident is that the rise in labour costs in China and other countries has led to the inclusion of more countries in the global supply chain. Anecdotal evidence, as well as rising trade, shows that countries such as Vietnam, Bangladesh, the Philippines and several others are now being viewed as alternative offshoring destinations by companies no longer finding China and other East Asian companies profitable. As already noted, this is known as the ‘flying geese’ pattern of trade, where industrialisation in one country and resulting wage increases trigger further offshoring to other economies. Not only does this process help low-income countries to develop, it also lowers the costs for consumers and thus improves global welfare. By Madhur Jha, Macroeconomic Research, Standard Chartered SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 41

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Homing in on Penang

A holiday home only makes sense if it’s accessible. With approximately 76 flights a week from Singapore to Penang, access to your second home is literally a short flight away.

ith a strengthening Singapore Dollar, there’s never been a better time to invest in a holiday home or to consider property investment. Not only is it an ideal way of securing holidays and weekend breaks for you and your family for many years to come, there is potential for these holiday homes to appreciate over time to act as an effective hedge against inflation. Take a journey to the Pearl of the Orient A fascinating fusion of eastern and western influences, Penang is Malaysia’s most visited tourist destination. With its colonial past and heritage, the island successfully embraces modernity while retaining its local traditions. In recognition of its well-preserved heritage buildings; George Town, the capital, was accorded a listing as a UNESCO World Heritage Site since 2008. Penang also accounts for 60% of medical tourism in Malaysia, indicating a mature and reliable healthcare infrastructure, which are accessible by Singaporeans and long-term residents of Singapore by way of MediSave. One of Asia’s most liveable cities ECA International has consistently listed

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Penang as one of the most liveable cities in Asia, ahead of competitors Bangkok and Jakarta (years 2011, 2012). Coming on the radar of ECA is no mean feat, especially when it is the world’s leader in the development and provision of solutions for the management and assignment of employees around the world. Traffic gridlock is a frustrating norm in Southeast Asia. So Penang is transforming the city to one that promotes public space. As a first step, officials have earmarked more than 200km for specially designated bicycle routes around the state. In August 2013, a 1.2km trial stretch was set up in the serene Tanjung Bungah suburb, where motorists began to see green lanes on the roads. The next phase is a 12.5km shared-lane project from the affluent Queensbay neighbourhood to the city centre. This approach not only rejuvenates communities but also plays an important role in keeping the city sustainable. Balancing the past, present and future,

“The Andaman Edition 18 East is the latest E&O offering that offers residents a home that is a resort.”

the state government’s strategic vision is to establish the city as a well-rounded attraction all year round for tourists and attracting businesses from every part of the world. It is clear that this vision is springing to life. Positive momentum Sun-kissed, tempered by sea breeze with walls covered in eclectic murals, Penang is a cultural and holiday destination, and more. Since stamping itself as manufacturing hot bed in the 1990s, Penang has continued to be a favourite amongst multinational companies (MNCs) seeking a foothold in a stable environment. Boasting an Englishspeaking workforce and a relatively low cost of living has been Penang’s calling card. Penang’s overall economic prospects will continue to prevail with positive opportunities in the long term. Penang Institute, the State government’s policy think tank, recently reported on the island’s growing importance as a shared service and outsourcing (SSO) hub, with major companies investing on its shores. A clear indicator of the confidence in Penang’s prospects is the entry of several major MNCs into the island economy. Citigroup opened its second transaction services hub in Penang last year, reported to be its largest regional trade and cash processing centre; handling approximately 20 million transactions. IKEA, the popular Swedish home furnishing store, has also committed to open its second store in Malaysia, in Penang. Wilmar International, Asia’s leading agribusiness group, chose Penang as the location of its first global business services centre. Japanese electronics and ceramics producer Ibiden Co Ltd is also increasing production at its second building in Penang Science Park by investing approximately US$4 billion in 2014. Other companies that invested in Penang in 2013 include American audio equipment manufacturer, Bose, and Swiss vacuum valve manufacturer, VAT Manufacturing. Barkath Co-Ro, a food manufacturer of brands such as Sunquick, invested in a factory expansion in 2013 and will move

CO-PUBLISHED CORPORATE PROFILE

into a new US$3 mil factory. Hacks Malaysia, also owned by Barkath Co-Ro, will move into a US$5 mil factory in 2014. Supporting this inflow of investments and economic activities are Penang’s infrastructure projects such as the recently completed Second Penang Bridge, which will provide greater accessibility and connectivity to commuters by connecting the mainland and the island. The Penang International Airport has also undergone expansion to accommodate greater traffic and tourist arrivals that increased from 4.8 million tourists in 2012 to 5.3 million in 2013, with momentum expecting to pick up as Penang anticipates to receive more than six million tourists this year, in conjunction with Visit Malaysia Year 2014. While this spate of new investments and business developments is a barometer of Penang’s longer term prospects, it also indicates the ensuing employment generation from these endeavours, which would include skilled expatriates. For instance, the Citigroup’s transaction services hub alone employs approximately 1,000 experienced professionals, while the SSO sector in Penang is reported to employ some 6,900 workers. Greater housing demand Insofar as the property sector is concerned, this will translate into even greater housing demand in the years to come. Coupled with Penang’s high liveability factor and limited land supply, more people will be considering Penang as a home base, thereby creating further sustainability for the property sector. Welcome to paradise If there is one name that stands out in Penang’s property scene, it is Eastern & Oriental Berhad, a lifestyle property developer listed on the Main Board of the Malaysian stock exchange with a track record of establishing desired addresses for years. Headquartered in Kuala Lumpur, E&O first carved a name for itself as the premier developer of prime properties in Kuala Lumpur in the early 2000s. When the company first entered the Penang property scene in 2004, the company made a lasting impression when it introduced Seri Tanjung Pinang. As Penang’s first masterplanned, township development, Seri Tanjung Pinang is a distinctive game changer for the island’s property scene,

establishing new benchmarks in design, planning and value. Seri Tanjung Pinang with its stylish Straits-eclectic homes paid tribute to the heritage of Penang, set within a meticulously masterplanned seafront location is now an aspirational address in Penang, favoured by both locals and expatriates. Today, the community of more than 20 nationalities living here reflect a strong recognition of the E&O brand and acceptance of its offerings outside of Malaysia. Be part of a world-class community The Andaman Edition 18 East is the latest E&O offering that offers residents a home that is a resort. From its fantastic location by the sea, dwellers get to enjoy the vista of the ocean, the hills or the scenic skyline of Gurney Drive. The gem within Andaman is its spectacular 4.5 acre waterpark amid 7 acres of green ... a luxury in land-scarce Penang and by any standards.

“As a lifestyle property developer, E&O infused their property portfolio with a host of lifestyle elements – from hotels to restaurants, performing arts centre to serviced residences, retail mall to Marina.”

Housekeeping concerns? With its Concierge service, owners can call ahead of time to ensure their apartments are in tip-top condition when they arrive. From changing bed sheets to cleaning toilets, E&O offers a pay-per-demand service so owners are ensured of a hassle-free holiday. E&O also filters through a roster of agents so should you decide to rent out your holiday home, you will be in good hands. As a lifestyle property developer, E&O infused their property portfolio with a host of lifestyle elements – from hotels to restaurants, performing arts centre to serviced residences, retail mall to marina. For example, while you and your family can expect to enjoy the amenities of a world-class clubhouse, you just need to take a stroll along the Promenade to catch a theatre performance at the Penang Performing Arts Centre, enjoy a latte at Starbucks while gazing out to the beautiful boats docked at the Straits Quay Marina. Living up to its credo, E&O adds the finishing touches to the concept of “livingby-the-sea”. Make that dream a reality The proverbial “far from the madding crowd” is now an exciting prospect with favourable financing terms, geographical proximity and a foreigner-friendly property ownership. Call 63371680 or email eospore@easternandoriental.com to arrange for a presentation or visit the E&O Gallery at One Raffles Link. SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 43

REGIONAL ANALYSIS 2: ASEAN’S RISING AFFLUENCE

ASEAN’s key advantage is its young and growing population

Demographic Techtonics: The rise of ASEAN affluence ASEAN 5’s growth is still outstripping the global average.

SEAN 5’s total income growth is slowing markedly over the next five to ten years, versus the last five to ten. As we outline in next section, this is due to the underinvestment in Fixed Capital per Worker over the last five years, a key driver of productivity alongside Education. We expect investment to pick up, and this is the first key investment theme we’d highlight, with Indonesia and the Philippines set for the biggest pickup. The good news is that, despite this slowdown, ASEAN 5’s Total Income growth is still healthy. The Global Demographics model elicits a +3.6% CAGR in Total Income for the ASEAN 5 over the next five years (2014–19). Whilst that lags China (+6.3%) and India (+4.3%), it is ahead of Affluent Asia (+1.6%) and the global average (+2.3%). Total Income already stands at a significant US$1.7tr in 2014, which

The Global Demographics model elicits a +3.6% CAGR in Total Income for the ASEAN 5 over the next five years (2014–19).

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is about 20% larger than India’s, but ASEAN 5’s Income per capita is 3.4 greater. When coupled with its solid growth rates, ASEAN 5 is a key consumer spending and savings market globally. Looking at it another way, ASEAN 5’s Total Income is growing by ~US$330bn in the next five years, which is close to India’s ~US$350bn (China is Asia’s monster market with a ~US$1.9tn increase). Indonesia is the largest and set to grow the most in absolute terms. Malaysia and Singapore grow fastest in percentage terms. The Philippines is an “inbetween” market in terms of size and growth. Thailand will be the region’s laggard over the next decade. Affluence is rising, giving birth to an ASEAN ‘Aspirational class’ The ASEAN 5 countries are also seeing good growth in Total Income per capita, a key measure of affluence.

The Philippines is an exception, as its metrics are diluted by a high birth rate. Rising affluence is driving upward class mobility as the higher income classes swell, opening new growth markets. Aspirational class is where the action is: The group of 20 million people in ASEAN 5 households earning over US$50,000 is set to rise by 25–50% in the next five to ten years. Moreover, all countries’ markets bar the Philippines are seeing their fastest Total Income growth in the Aspirational segment. Indonesia and Malaysia are key markets. As highlighted later, Indonesia’s Aspirational class more than doubles over the next decade in Income terms, while Malaysia is set to be ASEAN 5’s largest Aspirational class over that same period. Selective Middle class opportunities: The group of 61 million persons in households with an Income of US$20,000–50,000 is set to rise by 16–28% to 71–78 million in the next five to ten years. But ASEAN 5’s Middle Class Income is only growing in line with its overall Income. Two markets of interest: Indonesia’s Middle class market is both large and outgrowing all of its peers, while the Philippines’ Income is growing fastest in its Middle class segment. Lower class is a dull “1% growth” opportunity. People in households with Total Income of US$1–20,000 represent the bulk of the region’s population at 374m out of a total of 455m. This group’s size stays significant over time, but it is declining as a percentage. We see virtually no growth in Lower class Income in ASEAN 5 over the next decade. Adding the Age overlay: Empty Nesters are the sweet spot The Working Age Empty Nester cohort is the most valuable. This group encompasses persons 40–64 years of age. They tend to be working and have high disposable income due to below-average dependents. This cohort is already the largest Income generator in ASEAN 5, and it is set to deliver the

REGIONAL ANALYSIS 2: ASEAN’S RISING AFFLUENCE highest absolute growth. Tying in with the discussion above, we would further highlight the Aspirational Empty Nesters. That category looks especially attractive in Indonesia, Malaysia and Singapore. Thailand has a large Empty Nester segment today, but it doesn’t grow especially fast, and within that the Middle class Empty Nester opportunity looks about as compelling as the Aspirational segment. In the case of the Philippines, the Empty Nester category is growing fastest in the Middle class segment. The Retired market is growing fastest across all income classes in percentage terms. Whilst ASEAN 5 is relatively young, it is also ageing, and large numbers of persons are entering the Retired cohort over the next decade. Total Income growth is thus high in this segment, across all three income classes, but it is coming off of the lowest bases. Malaysia and Singapore are the best opportunities in terms of market size and growth, although we would still favour the Empty Nesters categories in those countries. The retired market does look reasonably compelling in Thailand. Kids, young adults, young Ffmilies: In general these markets are not especially big and not growing all that fast in Total Income terms, although there is an opportunity in The Philippines, where growth looks more balanced across age groups.

ASEAN 5’s productivity (GDP per worker) is also set to rise faster than the global average, but the rate of growth is slowing sharply.

Key Sectors A final overlay we can look at: Total Income can be allocated to three areas: 1) Personal Consumer Income per capita is growing fast enough to drive rising Affluence

Source: Global CEIC, HSBC Source: Demographics, Macquarie Research, April 2014

Persons 40-64 years of age are the largest income generators in ASEAN 5

Expenditure (PCE), 2) Savings and 3) Taxes. The Global Demographics model has deep intelligence on spending trends across these categories. In a nutshell: PCE tends to dominate Total Income spending across ASEAN 5, and Indonesia is the heavyweight by some distance. PCE is also the key market in Thailand and the Philippines by size. Within PCE, Retail is the biggest opportunity across all the markets, as highlighted in the next section. Retail includes Food, Clothing, and Personal Care. Malaysia and Singapore are key Savings markets not just in terms of absolute size, but also in terms of growth potential. Given the high levels of affluence, this would suggest good opportunities in financial and wealth management areas. Demographics drive affluence ASEAN 5’s population profile is a powerful demographic tailwind. The region’s key natural advantage is its young and growing population. Assuming no technological disruption to labour demand (eg robotics), this should result in ASEAN 5’s workforce growth continuing to outstrip the global average. Immigration policy can alleviate demographic headwinds. For example, Thailand has allowed an influx of immigrant workers from neighbouring countries to relieve the pressure of the tight labour market. The number of officially registered immigrant workers is ~2 million. There is also a large contingent of

unofficial immigrant labour, which some agencies estimate to be up to a further 2 million. The total immigrant workforce could be as high as 10% of the existing Thai workforce. Having said that, too big a dependence on immigration can carry negative externalities leading to a disaffected electorate, as we can see in Singapore’s case today. But its productivity needs some work ASEAN 5’s productivity (GDP per worker) is also set to rise faster than the global average, but the rate of growth is slowing sharply. This comes on the back of a period over the last five years when Productivity was well ahead of the global level, as one would expect given the low starting base in most ASEAN 5 countries. The Global Demographics model identifies the key culprit as the underinvestment in Fixed Capital Investment per Worker (FCI) in most ASEAN 5 countries over the last five years, which results in lower productivity for the subsequent five year period. ASEAN generally ranks well on the other key driver of Productivity, Education: Singapore, Malaysia and The Philippines rank well above the global average, and are poised to maintain this advantage. In Indonesia and Thailand, the Education Index is not far off the global average, with the gap is set to narrow over the next decade. By Conrad Werner, Analyst, Macquarie Capital Securities SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 45

ANALYSIS: local vs international banks an issue in Asia. If HSBC and StanChart don’t get their cost base under control, their profitability levels will very likely remain depressed and below the level of the Singapore banks. The consequence could be a gradual decline in competitiveness, with potential losses in market shares.

HSBC and StanChart should get their cost base under control

Can Singapore’s banks take on rivals in Asian market?

The may be cost efficient, but repeating the mistakes made by their rival.

nfocused expansion into too many new markets and too many new businesses can be damaging to banks’ profitability, risk profiles and share price. OCBC’s recent acquisition and the hopes for the China growth opportunity point to the risk that some Singapore banks may be tempted to repeat the mistakes made by the multinational banks. To be fair, Singapore banks have so far been relatively disciplined by focusing on a manageable number of priority markets and customer segments. This has paid off. At the moment, Singapore banks look in a much better position than most multinational banks appear to be and should be able to take advantage of the current situation. Given the outlook for rather moderate growth (particularly in property-related lending) in Singapore, the presumed benefits

Before the Global Financial Crisis, HSBC and StanChart traded at a premium relative to Singapore banks, which was a result of a higher ROE.

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of earnings diversification and high volume growth potential in overseas markets, Singapore banks may decide to go for expensive acquisitions to expand into new markets, new businesses and into new customer segments. A tale of two banks Before the Global Financial Crisis (GFC), HSBC and StanChart traded at a premium relative to Singapore (and Asia) banks, which was a result of a higher ROE. This has reversed. Western banks like to blame the tougher regulatory environment for their declining profitability. However, adjusting for too-high leverage, a too-low risk weight on assets with little correlation to underlying risks and often inadequate compliance and risk management standards pre-GFC suggests that previous ROEs were simply artificially inflated for many Western banks. This has been less of

Challenges of expansion At least on a relative basis, the Singapore banks have done a better job of expanding than the multinational banks and are now in a strong competitive position. Disciplined overseas expansion and remaining focused on the core businesses and customers is a positive, while expensive overseas M&A and an uncoordinated expansion into new businesses and customer segments is a negative in our view. In this context, UOB stands out strategically given its disciplined approach towards overseas expansion. Hong Kong and Taiwan are two markets that probably don’t need more banks, and in mainland China it is virtually impossible for a foreign institution to achieve scale in many businesses – particularly in retail banking. Cost inefficiencies as a result of internationalization Earnings diversification, network synergies, cross-selling opportunities and connectivity are the bull arguments used by the multinational banks to defend their global franchise. However, one question emerges: where do all these positives show up in profitability numbers? The problem is that they don’t. Most of the benefits of a large multicountry network get diluted by cost inefficiencies, regulation and increased complexity. It is a cost problem – and not an income problem – that multinational banks have. A poor cost/income ratio can either be the consequence of a high cost base or a result of weak asset productivity. Banking is all about scalability We prefer banks that have a decent market position in a few selected markets or businesses over banks

ANALYSIS: local vs international banks with a sub-scale position. It is pretty much the same across the world: if a bank is sub-scale in any given market or business, the result is most often sub-par profitability over the cycle. In Hong Kong, HSBC is very cost-efficient given its leading market position. Hong Kong is by far the highest profitability market for HSBC and a very profitable business for StanChart. The good cost efficiency of UOB and OCBC in Malaysia is mainly a result of a clear focus on defined target groups of customers and not trying to compete in every business with the local banks. Return on Total Assets in Malaysia for UOB and OCBC is above group average. A bank does not need to be the market leader across all businesses to achieve high profitability in a country. If a bank is strong in a few businesses and/or in a few customer segments, it can achieve good cost efficiency and good profitability, in our view. This is the case for UOB and it is now also the case for DBS in Hong Kong. The market share of each foreign bank is below 5% in Indonesia and the top local banks have a clear cost advantage. In order to make the cost efficiency numbers work and to increase profitability, a higher market share in the core businesses is probably needed. In our view, it would be a positive for the profitability profile of UOB

and OCBC to increase market share in their core businesses in Indonesia rather than entering new markets, new businesses or new customer segments. For Thailand and Greater China the picture is similar to that in Indonesia: foreign banks have a low market share and are cost-inefficient. DBS shows that you don’t need to have a large presence in all kind of markets (like StanChart) to be successful in trade finance. DBS has become a very strong competitor in Asia Transaction Banking for the multinational banks. The reasons for DBS’s success are past investments in its platform resulting in industry leading cost efficiency of 38% cost/income ratio in Transaction Banking, down from 47% in 2010. Cost efficiency is a point where HSBC and StanChart are struggling, which is an increasing risk for their competitiveness, in our view. Chasing high top-line growth and forgetting about profitability Most often international expansion is all about the top-line growth story but it rarely improves the banks’ profitability profile. Shareholder value is created by getting both the profitability and growth numbers right - not by building an empire. Multinational banks are now paying the costs for uncoordinated expansion in the past and OCBC is at

In order to make the cost efficiency numbers work and to increase profitability, a higher market share in the core businesses is probably needed.

risk of being the next. Recent deals such as the Wing Hang Bank bid by OCBC or the attempted Bank Danamon acquisition by DBS are a red flag to us. However, compared with the multinational banks, the Singapore banks have been relatively more disciplined (or were a bit more lucky) with overseas expansion and are now in a strong competitive position in our view. Apart from some expensive acquisitions, the expansion strategy of Singapore banks has actually been quite sensible. After the sector consolidation, all three banks have a strong position in their home market and a manageable number of priority markets. For the profitability profile we would see an organic increase in market share in the existing core markets as a positive, while, in our view, any expensive acquisitions or new market entries would be a risk. Lessons from the consolidation of the Singapore banking sector The consolidation of the Singapore banking sector took place during 1998 to 2001, followed by overseas acquisitions, mainly in ASEAN and Greater China. DBS clearly benefited from the pressure to consolidate, with the merger with POS Bank benefiting their funding costs even today. DBS’s bid for OUB, a smaller Singapore bank, however, failed. OUB was eventually acquired by UOB instead. Post the consolidation within Singapore, the focus turned to overseas markets. Given the rather small size of the Singapore market, banks had to expand overseas to keep the growth story alive. Leveraging Singapore’s positioning as a financial hub, the banks expanded mainly into ASEAN and Greater China, enjoying varying degrees of success. Domestic consolidation made a lot of sense and was a net positive for the three major banks in our view. Some of the overseas acquisitions have however been less successful. This was partially due to the lack of scalability, too-high premiums paid and too-optimistic synergy assumptions. By Thomas Stoegner, Analyst, Macquarie Research SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 47

regional analysis 3: asian inflation

India is facing relatively tame food inflation prospects

Beyond El Niño: Re-assessing Asia’s food inflation risks

The phenomenon’s increasing regularity is threatening the region’s food security and safety.

ust a few, short weeks ago, headlines suggested that a powerful El Niño was developing in the Pacific Rim. The warming of water temperatures, on the back of changing atmospheric wind patterns, pointed to the prospect of potentially large-scale weather disruptions, especially in Southeast Asia and the Indian subcontinent. Though the last strong El Niño occurred in 1997, several several episodes have developed in the past decade, causing moderate disruptions to agricultural production and having a noticeable, though luckily not severe, impact on food prices in a region where it constitutes the largest component of many countries’ CPI baskets. Fortunately, the latest forecasts are showing water temperatures returning to normal and increasingly lower probabilities of a serious El Niño event occurring. However, the risks to Asian food inflation don’t end 48 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

“As a region, food prices should be able to weather the multidirectional turbulence, given high levels of defences.”

there. Just ask the BSP (Bangko Sentral Ng Pilipinas) or the RBI (Reserve Bank of India): they have clearly expressed concerns that food CPI is too sticky. In the Philippines, agricultural production is still recovering from last year as the new typhoon season sets in, which is partly why we expect the central bank to tighten next week. In India, history shows that even a weak or moderate El Niño could correspond to a weak monsoon season, which would bring along widespread food and inflation disruptions. In Indonesia, where Ramadan is coming to an end, food prices may face additional pressures – in the past on average a 1-1.5ppt increase in y-oy food CPI. Outweighing all of these concerns, however, is a positive commodity outlook and better regional ‘defences’. Sure, headline-grabbing fish and dairy prices continue to rise. However, the broad CPI baskets will likely be under control due to

plentiful rice stocks in Asia and nearrecord grain production overseas, especially in the Black Sea region, from where cheap wheat is being imported, according to Reuters, at a lower cost compared to the usual alternatives. Our verdict? As a region, food prices should be able to weather the multi-directional turbulence, given high levels of defences. However, the risks should not be understated. Most at risk Looking at the most recent data from May and June, we are able to establish a view of the food inflation dynamic by country going into the summer, compared with the 2013 average to represent recent trends. Let’s start with Japan, which has the highest food inflation momentum compared to last year’s average (the May print was a 21-year high). While surprising at first, it can be easily explained by the effects of the

regional analysis 3: asian inflation “The rule of thumb we use is that if rainfall is deficient by 10%, this will boost food inflation by 2.8ppt, and headline WPI and CPI by 0.7ppt and 1.3ppt, respectively.”

Ramadan Indonesia is one other country where the food inflation dynamic seems under control. However, there is potential for a higher-than-expected July CPI reading on the back of Ramadan, which is observed by the majority of Indonesia’s population (and which falls mostly in the month of July this year). Although the effect isn’t as strong as in certain countries across the Middle East, back-of-envelope calculations suggest that food CPI is around 1-1.5ppt higher (y-o-y) during Ramadan months, with a slight lingering effect. While an uptick is likely, we aren’t expecting any dramatic food price increase. The government reported last month that the country has sufficient stocks of basic food commodities to contain any surge in demand that may lead to ‘runaway’ price increases, learning from historical episodes. Moreover, reports show that national authorities are starting to allow rice imports, potentially delaying an opti-

Vietnam has amassed excess reserves on the back of strong consecutive harvests

April tax hike and Abenomics, the latter through the weakening of the yen, and the pass-through impact on prices of imported food. Japan imports 60% of its agricultural consumption, while much of the rest is produced with the help of high subsidies. The second most-affected, the Philippines, is a more familiar case. Typhoon Haiyan and the lingering impact on domestic food supply have taken their toll, as new typhoons this season threaten further disruptions. Moreover, the government’s policy of subsidising domestic rice producers, while limiting imports in a bid to foster self-sufficiency, has contributed to high prices. In the case of Taiwan, a rise in food inflation comes alongside an overall increase in inflation, embodied by the 14-month high in June’s headline number. Food prices rose on the back of higher dairy, meat, fish and fruit prices. Two of the perennial food inflation-prone countries, India and Indonesia, seem to be facing relatively tame food inflation prospects. While it is true that the situation does seem relatively subdued, it nevertheless remains potentially volatile. We highlight two key reasons. El Niño and monsoons It is true that the most acute risks from a summertime El Niño have subsided. However, that is unlikely to calm the RBI or other Indian policymakers. Looking back, even

the less severe El Niño occurrences have had a notable impact on India’s economy, since the country is affected by a different channel when compared to Southeast Asia. In India, it all boils down to the impact on monsoon rains. Weak and moderate El Niño occurrences have led to serious drought conditions with almost double-digit deviations from the long period average rainfall. For example, in 2009-10, during a relatively mild El Niño, food prices jumped by over 20%. The rule of thumb we use is that if rainfall is deficient by 10%, this will boost food inflation by 2.8ppt, and headline WPI and CPI by 0.7ppt and 1.3ppt, respectively. We continue to see signs that this year’s rains are already significantly below target. This is likely to create a headache for RBI Governor Rajan. Although food CPI and WPI have been remarkably tame in recent months, a bounce is expected and many are debating whether or not a monetary policy adjustment is warranted. Concerning the impact on growth, we believe that GDP could be impacted by 0.5ppt in the case of a full drought. We are comforted by the fact that government granaries are well stocked, although there are nonetheless legal restrictions about drawing down reserves. The official NOAA forecast has set the possibility of an El Niño developing this summer at 70%. For Asia at large, risks still remain. The weak

and moderate El Niño occurrences of 2006-7 and 2009-10, respectively, have arguably led to cyclical momentum in food inflation. Moreover, just a small adjustment in rainfall risks exacerbating the forest fire season in parts of Indonesia, when agricultural crop burning can get out of control, creating widespread damage. The Indonesian meteorology agency BMKG has already announced a drought alert for Eastern Indonesia in August due to El Niño-related conditions. In other words, Asia is not yet out of the woods from El Niño-related issues, though we aren’t expecting any dramatic episodes this year.

Some of the commodities most affected by an El Niño

Source: FAO, HSBC

SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014 49

regional analysis 3: asian inflation mistic goal to achieve self-sufficiency by 2014. Got rice? The aforementioned risks are fortunately countered by a positive global outlook and better policy across Asia. First of all, while prices of certain food commodities such as fish, pork and chicken are continuing to rise on the back of rising consumption from an larger middle class, the short-term price dynamic for most cereals, used not only as a staple but also as a feed input for other agricultural undertakings, is favourable. Moreover, in terms of food reserves and grain stocks, emerging Asia has changed dramatically over the years. Take rice, for example. Lessons have been learned from the 1990s and the 2007-08 food crises in Asia, when rice prices tripled in a matter of weeks. Governments started to build up reserves and since 2008 it is estimated that Asia’s top grain-buying states have accumulated an additional 100m tonnes of rice and 90m tonnes of wheat – often far

“The world experienced more El Niño occurrences between 1979 and 2009 than in any other 30-year period during the past 600 years.”

Prices of key cereals remain subdued

Source: IMF, HSBC

Meats and fish are showing strong price increases

Source: FAO, HSBC

50 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

above official targets. Thailand is perhaps the most notable example. The country’s rice subsidy scheme started under the former government resulted in substantial financial losses and has created a 30m tonne reserve. The scheme also saw Thailand lose its position as the world’s primary rice exporter, although it will probably regain the no. 1 spot this year as some stocks were sold at a loss to compensate farmers and the government negotiates deals. Vietnam, another strong exporter, has also amassed excess reserves on the back of strong consecutive harvests. These stocks, while problematic for international rice prices, serve as a regional food buffer, and should be able to compensate for lost production (perhaps as a result of an El Niño or other weather-related occurrence) and guard against inflationary pressures. In recent weeks we have seen several intra-ASEAN deals facilitating the exports of rice to the Philippines and Indonesia. Other Asian countries India is also in a good position. As of April 2014, reserves at government warehouses stood at 30.3m tonnes (double the required buffer and strategic reserve of around 14m tonnes), following several years of good monsoon rains. This will prove useful, given the poor monsoon expectations this year (although there are some legislative restrictions limiting the use of reserves). As a result, India will also likely lose its role as the world’s largest rice exporter in 2014. There has also been a regional effort to prevent the type of food crisis that could lead to ‘runaway’ prices. In Indonesia, we already know that this year’s rice harvest is likely to be below target, the country does not have abundant reserves like India and Thailand and signs of drought have already been detected. Indonesia’s rice procurement agency, BULOG, set a 2014 rice procurement target of 3.85m tonnes, up 20% from last year. However, as of March 2014, the agency had only procured 86,000 tonnes from domestic sources, down 80% from last year. The US Department of Agriculture estimates that the government will

have to import around 1.5m tonnes this year (the Indonesian government forecasted in January that there would be no need to import rice in 2014). The region also benefits from near-record worldwide grain crops, especially in the US and the Black Sea region, resulting in contained wheat and corn prices. Recent reports suggest that several Asian countries, such as Japan and Indonesia, have been buying cheaper Black Sea wheat, due to a strong price differential compared to Australian and US variants. Though of inferior quality imports, the wheat will be mostly allocated to feed stocks and should contribute to an overall trend of tame food prices. In the event of a worse-than-expected El Niño, wheat is one of the most affected commodities, especially in Australia – a key producer. A long-term concern Across EM Asia, policymakers have taken commendable steps to improve the response mechanism to food crises, and the global outlook is currently favourable. However, over the long term, a rising middle class and world population will place increasingly strong price pressure on the ‘finer’ food commodities. Moreover, though the El Niño this year may not be too problematic, it seems clear that these events are happening with increasing regularity. The world experienced more El Niño occurrences between 1979 and 2009 than in any other 30-year period during the past 600 years (according to a study published in the October 2012 volume of Climate of the Past, a journal published by the European Geosciences Union), suggesting that more frequent extreme El Niño events are likely as a result of global warming. Given that there are likely to be more weather-related disruptions to agriculture and the environment, increased economic volatility appears inevitable. This means that policymakers across Asia need to ensure that proper stocks are maintained and contingency plans are in place, which is already starting to happen. Food safety and security is also an increasing concern in Asia. By Joseph Incalcaterra, Economist, HSBC Global Research