Impact of Restructuring on Company Formation and Cessation Trends in Singapore

The Singapore government had followed an open immigration policy for many years favouring easy movement of foreign labor and talent to facilitate business growth. This helped the city-state bereft of natural resources to attract investments and multinational corporations to its shores that resulted in job creation for the locals and helped in sustaining a robust local economy. However post global financial meltdown, a sense of uneasiness was brewing among the locals who started considering the foreign talent as a competition for their rightful jobs.

The foreign talents available for lower salaries were deemed as unfair competition. Besides the competition at jobs the foreign labor influx was also deemed to cause stress on the infrastructure resulting in overcrowding and inflation of housing prices and rentals. Although the widespread discontent that the locals held against the unbridled influx of foreigners partly paved the way for an economic restructuring program, the government had already shifted its gear towards developing a more innovation driven economy. Given the competition from the developing regional neighbors, Singapore was at the crossroads and it chose to pursue the innovation and productivity path and simultaneously reduced its dependence on foreign labor.

Singapore launched a 10-year economic restructuring plan in 2010, centering on raising the economy’s productivity and lifting the salaries of its workers. The program aims to curtail the foreign worker influx and raise the productivity. The objective is to raise the productivity of the country’s workforce by 2 to 3% annually from 2010 to 2019.

The government had to embark on this path in order to create better employment opportunities for the newly qualified locals as well as the existing Singaporean Professionals, Managers and Executives (PMETS). The government unveiled a series of measures to calibrate the influx of cheap labor; mainly by increasing the labor levy both for work permit holders as well as S-Pass holders and lowering the foreign worker quota otherwise known as dependency ratio. Likewise the qualifying criteria for employment pass, applied for PMET positions, were also raised.

The government hopes the economy to grow at an average of 3-5% a year from 2010 to 2019. Although slower than the growth in the preceding years, it is believed that the growth will be of a better quality, improving the efficiency and skills of the workforce, raising the real wages and enhancing the innovation capital of the country.

The government announced several incentive schemes to help the companies to cope with the challenges posed by the restructuring measures including the Productivity and Innovation Credit (PIC) and the Wage Credit Scheme, as well as a government data bank to help the employers find potential candidates from the local talent pool to fill their job vacancies. There is also an Internationalization Scheme in place to help SMEs to venture overseas to capitalize on the regional and international markets.

It has been five years since the restructuring program was announced and we are at a halfway mark, therefore it is time to look at the impact of the program on the enterprise ecosystem. The report focuses on the company formation and cessation statistics, which, though not a comprehensive indicator, will shed some light on how the companies in different sectors have faired and adapted to the restructuring program. The report does not cover business registration and cessation trend.

The company formation and cessation trends in Singapore for the five-year period preceding (2005-2009) and following (2010-2014) the implementation of economic restructuring has been analyzed for the purpose of this report. The review periods has been referred to as Pre-restructuring and Post-restructuring period. A sector wise analysis has been carried out for the top five sectors in terms of share and also the growth rate in the formation and cessation has been analyzed.

The report has the following sections:

• Company Formation & Cessation Trend
• Company Formation & Cessation Growth Rate
• Company Cessation Per Formation Vs. National GDP
• Company Formation by sector (Top Five)
• Company Cessation by Sector (Top Five)
• Company Cessation Per Formation by Sector

Company Formation & Cessation Trend

A total of 118,636 companies were formed during the five-year period (2005-2009) preceding the economic restructuring measures as against 174,944 companies formed during the five-year (2010-2014) period succeeding the implementation of the restructuring program. This is a 47.5% increase over the pre-restructuring period. However on the other side the cessations also increased in the post-restructuring period by 55% to 90,053 during 2010-2014 as against 58,108 cessations during 2005-2009. The marked difference between five-year growth rate of formation and cessation during the review period, by itself depicts a clear picture of the prevailing scenario. The statistics reveal that the survival is challenging and only the toughest can last.

Company Formation & Cessation Growth Rate

The annual growth rate of company formation which remained well above 10% in the years preceding recession dipped in 2008, during the global financial crisis, by -2.2% to 26,414. It registered a reversal in the following year with 29,798 new company incorporations, a 12.8% growth. But in the subsequent years the growth rate moderated to below 10%. This is largely attributable to the slowing Chinese economy and the beleaguered western economies that kept the external demand low. Again in 2014 the number of company formation has gone up 11.5% to reach 41,589 companies being formed, the highest ever in the decade. This surge is aided by the gradual and sustained improvement in the US economy, whose latest quarterly data have been assuring.

The number of cessations trends along with the number of formation generally. However year 2009 is a sharp anomaly, when a record number of 22,396 companies wound up marking a whooping 113.4% increase over the previous year. It was during the global financial meltdown when several companies, unable to fight the crisis, buckled and folded. In the following year although the cessations appeared to moderate in 2011 it registered a sharp spike of 25.6%, the companies were mauled by the double whammy of continued recessionary trend in global economy as well the tight labor market and rising operation costs due to restructuring measures in the domestic economy. The cessations again appeared to moderate in 2012 and 2013 however it again went up sharply at a Year over Year (YoY) growth rate of 16.2% to reach 20,199 cessations in 2014. The sharp increase in cessation appears to coincide with the new worker levy hikes and lowered quota, which kicked in during 2014, this is also the time when transition support provided for earlier levy revision came to an end. The increased competition for the scarce labor and associated costs are hurting the companies and stifling them out of the enterprise landscape.

Company Cessation Per Formation Vs. National GDP

In the pre-restructuring review period (2005-2009), on an average for every 10 new companies registered 4 companies were struck off, except in the year 2009 that took the full brunt of the global economic crisis.  During the three-year period immediately preceding the onslaught of global recession, the GDP grew by an average of 8.5%. In 2008 and 2009 the GDP receded to abysmal levels of 1.8% and -0.6%, the cessation ratio spiked to a sharp number, 8 companies ceased operations for every 10 companies that were newly formed.

Aided by the government stimulus measures, the economy swung back in 2010 to 15.2% and helped to moderate the catastrophic closure rates to 5 companies per 10 new companies formed. However the restructuring measures resulted in tight labor market and higher labor and operating costs resulting in an upward swing in the ratio, which shot up to 6 companies being closed for every 10 companies formed in 2011. Although the restructuring measures were phased in progressively several small companies folded up because they were not able to quickly adapt to the new realities.

In the subsequent years the cessation to formation ratio moderated to 5 companies per 10 new companies being formed, this is still higher than the numbers during pre-restructuring period. The fact that the global economy has been dithering on another spell of recession and the road to recovery has remained painfully slow has also not been in favor of the local enterprise landscape. The national GDP has hovered around 3% and this has not been in favor of several small companies that were already exasperated by the tight operating situation.

It must also be noted that not all the folding up would have been caused by the challenges posed by the restructuring measures. There were significant growth in mergers and acquisitions during the period due to the influx of investment aided by the liquidity in the market. So some of the folding up, a very minor portion, would have been the outcome of such consolidations as well.

Company Formation by Sector

Overall in the pre-restructuring and post-restructuring review periods the Wholesale and Retail trading sector accounted for the largest share of companies being formed. However, the average share declined from 27.6% in the 2005-2009 period to 26.3% during 2010 -2014. Singapore’s reputation as a regional distribution hub and a trade center is the primary reason for the predominance of this sector in company formation. But post recession, the global trade has slowed may be this is attributable to the small decline in its share driven by fall in foreign wholesale and domestic wholesale sector’s performance. The retail sector also lost its sheen because of high rentals and manpower costs. The drop in visitor arrival, which fell by 3.1% in 2014, also worsened the situation.

The Professional, scientific & Technical activities sector registered the second highest gain in share in the total company formation numbers from 14.7% it shot up to 16.2% in the post-restructuring period.  This may be attributable to the shift in government’s focus towards a more productive, high value innovative economy. Singapore is increasingly becoming a startup hub and more locals are actively venturing into innovation driven ventures and a mature private equity and venture capital market is also aiding in this sector’s growth. Alongside the boom in construction activities the need for professional consulting works has escalated leading to the growth of architectural, engineering and management consulting firms.

Financial & Insurance Activities sector registered only a marginal increase in its share of company formation. It is only natural, given the cautious move of investments after financial crisis. Yet it is a sector where the third largest number of incorporations is taking place, this is a strong endorsement of Singapore as an international financial center. The activity in the sector remained muted amidst the volatile market conditions and weaker credit markets.

Information and Communications Sector registered the highest gain in share between the two review periods. The sector gained nearly 2 percentage points against the pre-restructuring period. This is aided by the government’s push towards productivity enhancements through automation and adoption of ICT technologies.

The Education, Health and Social Service sector also witnessed a significant gain in shares in the total company formation in the post-restructuring period. Again the government’s push towards skill upgrading through continuing education and training, and the growing market for healthcare in the ageing Singapore has prompted the increase in the number of companies being incorporated in this sector.

Company Cessation by Sector

It is of interest to note that the Wholesale and Retail Trade’s share in the total companies being struck off has registered a downturn, from 35.8% it dropped to 31.3% in the post –restructuring review period. The increase in wages has kept the domestic consumption strong and the recovery of the global economy has also aided in the moderate growth of foreign wholesale trade. Nevertheless, the tight labor market has hit the retail segment and the share has remained consistently high during both review periods.

The share of professional, scientific and Technical services sector ceasing operations has markedly increased in the post-restructuring period. The number of companies being formed in this sector has also been rising thus leading to increased competition for the sector specific resources, may be this has contributed to a rise in cost of doing business forcing companies to close. Mergers and Acquisitions would have also contributed to this spike to some extent because of the good prospects that is currently prevailing in this sector.

The share of companies ceasing operations in the Financial and Insurance services has also increased albeit marginally. To some extent, the macroeconomic factors such as drying of liquidity as well as mergers and acquisitions would have resulted in companies folding up.

It is of interest to note that while the share of ICT sector in new companies being formed increased significantly during the post-restructuring review period, the share of companies closing down has increased only minimally. This is reassuring to note that the strong market keeps the sector buoyant despite the challenges thrown at them by the restructuring measures.   Likewise the share of Administrative & Support Services sector also increased only marginally and the strong market forces have sustained this sector.

The shares of the sectors that conventionally led the cessation figures had dropped or had only increased marginally during the post-restructuring period. But it does not give a complete picture of the landscape. We can gain a clearer picture of the sectoral performance only if we read the sectoral shares along with the no of cessations in these sectors per new company formation. Please refer the chart below.

Company Cessation Per Formation by Sector

Excluding year 2009, which is an anomaly, the number of companies ceasing operations per new company formed has markedly increased in the post-restructuring period across all sectors. The number of companies folding up per 10 new companies being formed hovered around 3 to 4 during the period 2005-2009 but it has increased to 5 to 6 companies during the period 2010-2014.

Closing Note

It can be observed from the above chart that the despite the efforts to raise the productivity it has dropped during the post-restructuring period. On the other hand the unit labor cost has been increasing consistently during the same period. Alongside, the rentals of office spaces, industrial units as well as retail spaces have been witnessing an uptrend, especially in 2014 when the office rentals posted strong growth of 9.8%, as compared to 1.3% in 2013 and the rentals of private retail space rose by 0.9%, compared to the 0.8% contraction in 2013. The fall in fuel prices in 2014 has driven the utilities costs down, yet the overall business cost has registered an upswing forcing many companies to fold up. Although there are productivity enhancement schemes in place, several businesses are finding it tough to compete amidst the tight labor market, where the unemployment rate hovers below 2% and the foreign labor option is getting difficult. It is taking longer than usual to fill vacancies and this hampers the productivity of organizations. Besides, the strong Singapore dollar and the spike in costs of manufacturing are making Singapore exports uncompetitive. Though there is an urge to dismiss the prevailing scenario, as teething problems before the economy adapts to the new reality the slowing global economy will delay the intended outcomes. This will dampen the business sentiments and bound to spell trouble down the road. Government has rightly delayed the hikes in Foreign Workers’ Levy in the latest budget but has also announced that the PIC Scheme will be allowed to lapse. The overall view is that with no strong signs of robust global recovery, the going will get tougher and loosing the competitiveness is a major concern. Business owners are looking forward to turn the corner hoping to find all the pain endured during the restructuring process is made worthwhile.