SINGAPORE— Just as things are picking up for some businesses after the toll of a prolonged pandemic, the much-dreaded R-word has re-emerged.
“I’d say that most of the world has adapted to living with COVID-19, so our orders have actually been increasing during this period,” said Ms Joyce Seow, group executive director of contract manufacturing firm Watson EP Industries.
“But now, we are talking about recession again.”
Warnings about another global recession have been sounded – from Prime Minister Lee Hsien Loong at his annual May Day Rally speech to political and business leaders gathered at the World Economic Forum in Davos.
For Ms Seow, the topic came up at a recent meeting with the company’s bankers, who hold a worst-case scenario of a global downturn in late-2022.
These concerns come amid a host of worrisome developments. Russia’s invasion of Ukraine, crippling lockdowns in China due to COVID-19 outbreaks and major central banks, in particular the US Federal Reserve, stepping on the monetary tightening pedal have all raised alarm bells over global growth.
Singapore has said that it sees its economy expanding “at the lower half” of its forecast range due to the Eastern European war and sustained supply chain snarls.
While reiterating an earlier 3 to 5 per cent growth projection for 2022, the Ministry of Trade and Industry said on May 25 that “the external economic environment has unfortunately deteriorated”.
Already, businesses are feeling ripple effects.
More than half of the large companies and 60 per cent of small and medium-sized enterprises (SMEs) polled by the Singapore Business Federation (SBF) last month said they have been negatively hit by the ongoing Ukraine war.
The top two areas of impact were in the form of rising business costs and supply chain disruptions.
“Businesses entered 2022 with greater optimism for recovery and growth. However, the war in Ukraine, as well as rising inflation and interest rates, have somewhat dented business outlook,” SBF’s chief executive officer Lam Yi Young said.
Watson EP Industries noted that the Russia-Ukraine conflict has raised the price of plastic resins by as much as 20 per cent, given how the price of the raw material – a byproduct of petroleum refining – is pegged to that of crude oil.
Manufacturers also continue to grapple with long lead times for electronic components. The set-up of new chip plants by global chip makers have not helped with the supply shortfall, which first emerged in 2020 due to pandemic interruptions and a boom in demand.
In some instances, lead times for components have gone up from 111 days to 400 days, Ms Seow said.
“The solution is place orders even earlier or buy at higher prices from what we call ‘stockists’ or buy more and stock up,” she added. “All this is resulting in borrowings that we have to work with our banks. The higher cost of borrowing definitely adds to our overheads.”
Another homegrown company Tocco Toscano has seen production uncertainties due to the strict COVID-19 measures in China. While its factory is located in Guangzhou, the retail brand known for its leather bags sources for raw materials from other parts of China.
“Without the materials, we can’t make our products,” said chief executive Joseph Lor. “The worse part is not knowing how long the delay will be … there’s just so much uncertainty.”
This is coming at a time when the retailer has “recovered” from the pandemic’s hit, with in-store sales back up to pre-pandemic levels as shoppers return amid a major easing of COVID-19 rules.
“April has been amazing … overall sales are up with lesser operational expenses. It’s all really good,” said Mr Lor, before adding: “At least for now.”
LESSONS FROM COVID-19
Economists have told CNA that “an outright recession looks unlikely at this juncture” but the possibility of shorter recession cycles may be something that businesses have to be prepared for.
“In the past, we’d say that a global recession occurs maybe once every 10 years but obviously, business cycles are now a lot more compressed,” said OCBC’s head of treasury and research Selena Ling.
A recession, if it happens, will have an “outsized impact” on SMEs, said Mr Mark Micallef, managing director of APAC at software maker Anaplan.
One reason is because smaller businesses do not have pricing power – the ability to raise prices without losing demand. This can “drastically” impact profit margins, especially those in the retail and food and beverage industries where margins are tight, he noted.
“COVID-19 turned business continuity planning on its head, as it forced companies around the world to rethink their operations and in many cases, embrace totally new models for work,” said Mr Micallef.
“As the recovery from the pandemic continues, forward-thinking companies’ stance will be to create and review easily accessible business continuity plans.”
In addition, businesses should look to “further develop, expand and diversify revenue sources, while remaining as efficient as possible through operations and expense management”, he added.
Echoing that, SBF’s Mr Lam said businesses should put to use the lessons learnt from the pandemic.
“The pandemic has taught our businesses many useful lessons including the need to diversify their supply chains for greater resilience,” he told CNA in an emailed response.
“SBF encourages companies to continue with their digitalisation and transformation efforts to remain competitive. With the reopening of borders, companies can also proactively seize opportunities in overseas markets.”
BRACING FOR TROUBLED TIMES
And that is what businesses that CNA spoke to are doing.
Watson EP Industries is pushing ahead with the deployment of automation technologies at its factory. This has not been easy, as such solutions are most viable for high-volume manufacturing.
“But our production is usually high-mix low-volume (the process of producing a high variety of products in small quantities) so it’s not so feasible to automate all our production processes … But we will try and see what can be done because we feel it will help if the recession does come,” said Ms Seow.
This will also require some hefty expenditure but the company said it is “necessary spending for the future”.
Among other strategies, the local contract manufacturer is also looking to broaden its customer base after observing that not all sectors experienced declines during the COVID-19 pandemic.
Mr Lor said he is not too concerned about the risk of a recession for now, noting that Tocco Toscano’s mid-range pricing will be able to withstand the pullback in consumer spending in the event of a downturn.
Coming up, the retailer is planning an expansion into Thailand – the first market outside Singapore where it has a business development office – and will be launching a more affordable brand.
“If you’re talking about contingencies, this new brand is one that fits multiple needs,” said the chief executive. “One, newer markets with lower disposable income. Two, the potential recession so that people can still make purchases without having to think so much.”
The company is also hoping to tap “more high-level data analytics” moving forward. While it currently has data on what products have done well, it wants “to go to the next level to predict what (it) can sell on a quantitative level”.
“Right now what we’re doing is still rather qualitative, in the sense that we think this will sell but we don’t have numbers to support like this design did well when matched with this colour and at this price point during this season,” Mr Lor explained.
The use of “more and better data”, alongside analytical capability to derive “actionable intelligence” from this information, is essential for businesses to stay agile in an unpredictable climate, said Mr Micallef from Anaplan, which provides planning software as a service for businesses to model different forecasting outcomes.
“Organisations will have to combine data, powerful analytics and subject matter expertise to build new predictive models and solutions,” he added.
Back at Watson EP Industries, Ms Seow definitely agrees with the need to be nimble.
“If the COVID has taught us anything, I think it is to be prepared that things can just happen,” she told CNA.
“Recession is one, another wave of pandemic is another, but hopefully after all that we have been through, we will find ourselves in a better position to handle the next challenge, be it another pandemic or recession.”