COVID-19 and its potentially disruptive impact on Singapore’s industrial property market

The coronavirus outbreak first started in China, and affected many industrialists, suppliers, shipping and logistics players as their supply chain has been severely broken. Next came another spanner in the works when oil prices fell sharply on 8th March after Saudi Arabia invoked a unilateral price cut. It seems that the industrial market never had it worse for many decades. However, we believe that the latest oil price event would not derail the undercurrents that are sweeping through the industrial and warehousing markets. The key issue is how supply chain may reform post-COVID-19.

By this, we mean whether the COVID-19 event has permanent, long or just short-term effects on their businesses operating out of Singapore. The weaker Small and Medium Enterprises (SME) here would most likely feel this pandemic more than the multinationals. The twin effects of falling end-user demand has put further strain on many firms’ financial resources. Although most multinationals may suffer greater declines in revenues than local SMEs, they still have stronger financial muscle and their objective driven presence in Singapore may see them ride through this storm in better shape than smaller local companies.

In our view, what this outbreak has probably done is to quicken the sieving out process in the industrial landscape and accelerated the movement to rely less on China, something that manufacturers have already been planning before this. While their supply chains may be immediately impacted by events going on in China, multinational companies nonetheless are likely to weather through this well once they diversify and intensify their hub and spoke networks around the world (for example to Mexico for the automobile industry and Ethiopia for textile, just to name two hubs).

Treating the market share of selected industries by countries and region, we may abstractly view each industry supply chain as a function. There are two sets of functions. One set of functions map from countries that manufacturers intermediate goods or supplies raw materials to China. The other set of functions will be those that map from China to countries that receive intermediate goods for further processing or final goods from China for transhipment. The first set of functions feed from the cluster of countries (domain) to the hub (co-domain). It is like saying that the cluster of countries are the kernels of the supply chain function to China. The same concept applies for the other major hubs e.g. the Mexican group. This is represented by the red arrows in Figure 2.

The second set of functions, those in black in Figure 2, are supply chain functions that lead out of China and gets map to the various countries that either processes the products further before re-exporting them to their final destination, as final goods for transhipment or are end users e.g. Singapore contractors who purchase wall claddings from Chinese manufacturers.

For those red arrow functions, the post-COVID-19 industrial landscape may see a weakening of magnitude of flow of goods to China. It may not happen overnight but we believe that it should manifest itself within a year or two. The need to reduce single country or regional concentration would bring about reduced flow in the existing supply chain networks. What does this mean to the industries here that are plugged into the “feed-China” supply chain functions? As there are too many industries to contend with, we simplify to get a handle on this and decided to use the analogy of fluid dynamics. In a modified form (using Bernoulli's equation for fluid flow)and in reference to the supply chain functions feeding from Asia (countries gi)to China:

Trade Flow pre-COVID-19 > Trade Flow post-COVID-19

≡ Energy of trade flow pre-COVID-19 > Energy of trade flow post-COVID-19

= P1 + KE1 + PE1 > P2 + KE2 + PE2

≡ Demand + Rate of Flow + Cost pre-COVID-19 > Demand + Rate of Flow + Cost post-COVID-19

where,

P = Pressure, which can be analogised as the external Demand for goods and services manufactured in China

KE = Kinetic energy which can be analogised as the rate of flow of semi-manufactured goods and raw materials to China

PE = Potential energy which can be analogised as the relative Cost advantage manufacturing in China

Subscript 1 = pre-COVID-19

Subscript 2 = post-COVID-19

Post COVID-19, two things are likely to happen. One is there would be less reliance on China as a manufacturing engine. This means that there is less demand for China made goods as companies diversify to other manufacturing hubs. Secondly, as the supply chain capacity here and in Asia expanded in anticipation of a business as usual China expanding at 6% pa for the foreseeable future, there will be overcapacity. This means a reduction in the rate of flow of intermediate goods and services to and from China (a decline in kinetic energy). On the cost front, the pre and post-COVID-19 status for China should remain the same. Therefore, we can leave out looking at cost advantage. As supply chain functions are akin to those that regulate the rate of flow of trade, post-COVID-19, these functions should see less activity. As a result of a decline in demand and a reduction of trade flows, the energy in the supply chain with China should fall.

If one wants to see an increase in the rate of trade flow (KE), then the only way to do so, is to reduce capacity. That can be done in two ways. One is if manufacturers have production models that can adapt to reduced demand quickly and remain financially viable. Production lines will have to be streamlined. On the spatial front, it is to reduce land supply. This can be done in several ways: reduce new supply of lands for industrial and warehousing, not renewing leases for ageing ones, be open to industrialists handing back their premises before the lease term expires and allowing more flexible uses for industrialists who wish to discontinue but have found a replacement use. To illustrate the last point, say a company has an industrial land with just 10 years lease life left in a mature housing estate and wishes to discontinue operations. The company finds a replacement user e.g. say an international school, then flexibility would mean allowing that new use rather than holding fast to legacy plans for the site.

For countries (gi) that China exports semi-finished or finished products to (the black arrows in Figure 2), the effects are probably asymmetric to those afflicting exporters to China (the red arrows). The industries that take in semi-finished goods for final processing or finished goods for transhipment, should expect a reduction in trade flow and the implications are similar to the effects described in the previous two paragraphs. It is the flow that serves our domestic market that could react differently. For instance, they may have to stockpile more to ensure business continuity. That means greater demand for warehousing. For those that serve their respective domestic markets (black arrow in Figure 2) with goods manufactured in China, be it SMEs or MNCs, they may still have to upgrade their productivity, and for those in Singapore, they will have to contend with the continuing issues on the labour front and structural changes impacting the various domestic sectors. For example, in the retail sector, online purchases and food delivery will spawn further demand for last mile logistics and central kitchens.

Industry 4.0 already passé?

Post COVID-19 industries may have different corporate DNA structures from pre-outbreak days. Some of them are already here, some may probably be heading our way. As is with the impact of this outbreak on the other real estate sectors, it is too early to know with clarity what kind of industries will be left in the landscape. Nevertheless, we may still have a vague idea of what the future holds. Industry 4.0 may quickly be leapfrogged over by Industry 5.0 where there is greater customisation and robotics involved. The need to diversify away from China’s cost advantage may result in companies offering customers the ability to customize their products. This could mask the higher cost issue as alternative manufacturing hubs may not be as cheap in producing compared to China. Industry 5.0 plays into that need. Under the previous manufacturing construct geared towards Industry 3.5 and 4.0, Singapore was supplanted by China. But post-COVID-19 Singapore’s fortunes as a manufacturing hub for MNCs has the potential to look brighter. That is only if Industry 5.0 takes root here, there being enough supply of buildings spec-ed for this version of the industrial revolution (which we believe that are hardly any available today) and a change in the workforce profile where the tertiary educated are willing to be production workers again.