Firms restarting face supply snags, higher costs, weak demand

Singapore

BUSINESS costs will rise as Covid-19 disrupts supply chains and necessitates safeguards, adding to the challenges of covering costs amid suppressed demand.

However, firms see the need for safe-management measures as the price to pay for resuming business sooner, with lower demand or production constraints being their bigger concerns.

Global and local supply chain disruptions are one source of increased costs. With commercial flights grounded, air-freight capacity is much reduced and thus costlier; land and sea cargo are facing delays at borders and incurring costs, noted Singapore Business Federation chief executive officer Ho Meng Kit.

Association of Small & Medium Enterprises (ASME) vice-president for strategies, development and digitalisation Ang Yuit said that, with countries in varying degrees of lockdown, "re-routing of trade flows means previous suppliers who were cheaper will have to be partially replaced by suppliers who are more expensive".

Singapore Manufacturing Federation (SMF) president Douglas Foo said most firms think it is too early to say if future resource costs will rise.

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After Singapore's circuit-breaker period ends on June 1, the phased re-opening will require firms to put in place safe-management practices before resuming operations - and these will be another source of costs.

These practices include regular cleaning of common spaces, split-team arrangements that could entail separate ferrying of workers, and masks for employees - with these costs being run up at a time when the order pipeline may have dried up, said OCBC Bank chief economist Selena Ling.

Cleaning costs varies across companies and industries, and some SMF members have reported a four-fold jump in monthly cleaning expenses.

Mr Foo said: "The expectation would be a continued larger investment in cleaning expenses and in PPE (personal protective equipment) for staff on the floor."

Then there are also the extra costs incurred for remote working arrangements: new laptops, servers for remote access, or even the cost of setting up broadband connections in employees' homes if they previously did not have access, he said.

But he said SMEs can tap pre-approved funding under the SMEs Go Digital scheme and the Productivity Solutions Grant for such costs.

Mr Ang cited the general cost of adjustment: "Very few of us are optimised to handle this 'new normal'. Costs naturally rise because of that."

Companies have to adjust to the inefficiencies of telecommuting, or new workplace layouts and workflow with safe distancing.

"These are the little things that could add up for smaller companies," said Mr Ho. Smaller firms may need support for these added costs - and guidance. "It's not just a cost issue."

SMEs have said that they would like more clarity on the guidelines and how to comply, said Mr Ang.

Ultimately, these cost increases are more of an added complication to the much bigger issues of existing costs, weakened demand and production capacity. He added: "(Regarding) costs and compliance, they are willing to pull together with the authorities to make it happen. SMEs are less concerned about safe-distancing costs right now than about being able to resume activities."

The bigger worry for most manufacturing firms is the challenge of production capacity, said Mr Foo.

Contract manufacturer Racer Technology, which has been cleared to operate during the circuit breaker, has come up against higher general and material costs. As it makes medical devices, it faces a shortage of parts and materials now in high demand.

Company CEO Willy Koh said that although the Covid-19 safeguards mean higher costs, they are necessary: "We think the safeguards are good as our most important asset is not equipment, it's people." He regards manpower and delays in production as the firm's main costs.

Mr Ho noted that among consumer services - such as retail or food and beverages, which will not fully re-open July, at the earliest - "the demand side" is the issue.

The Singapore Retailers Association (SRA) said that supply chain disruptions and currency fluctuations will add to increased business costs, on top of challenges from rentals and labour costs, all amid the weakened economic climate and subdued demand for discretionary purchases.

But safety is key, and keeping consumers' confidence has never been more important, it added: "SRA is certain that retailers will put in place all necessary safe-management guidelines and even go beyond to assure their consumers."