The report on possible retrenchments in the chemical sector is certainly unexpected, given that the industry produces higher-value products (“Possible layoffs in chemical industry: NTUC”; Thursday). But the greater concern is the knock-on effect, when players in the supply chain follow suit.
The root causes of the possible retrenchments have been identified as spiralling costs in rent and utilities.
The Government needs to identify and implement effective ways to contain escalating costs.
Cost reduction through higher productivity, though often touted, has its limitations. At best, it can be only one of several measures.
Rental cost is, undoubtedly, the main culprit behind rising costs. Businesses have no means of controlling it, short of buying over the premises.
Rising rentals are behind the high turnover of businesses, especially among retailers.
I recently spoke to a watch retailer in a shopping mall located in the east, whose shop rent was $3,000 a month when he started some years ago, but is now $20,000. Small wonder that he is the only surviving watch retailer there.
There are two major factors driving up rents.
First, the buoyant real estate market has increased property valuations. And when properties change hands, the buyer has to raise rents in order to achieve a sensible yield.
Second, many landlords have turned over their properties to real estate investment trusts (Reits). Reits spell bad news for tenants because rental income is the major contributor to the profits of these trusts. And the easiest way to continually provide higher payouts to their unitholders is to increase rent.
It is important to understand that business cost depends on many factors, not all of which are within the control of business owners.
We also need to appreciate that increasing productivity is not a panacea. Not every operating component lends itself to productivity gains. Even for those that do, the gains can be offset by cost factors.
So any attempt to improve the situation must begin with tackling the root causes.
Lawrence Loh Kiah Muan
* Letter first appeared in ST Forum (25 Jan)