2. Speeches

Mr Lee Yi Shyan at the SCCCI’s 15th SMEs Conference / 16th Infocomm Conference / SME Expo 2013

14 August 2013

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Speech by Senior Minister of State for Trade & Industry and National Development, Mr Lee Yi Shyan, at the Singapore Chinese Chamber of Commerce & Industry’s 15th SMEs Conference / 16th Infocomm Conference / SME Expo 2013, 14 August 2013 (Wednesday), 9.30 a.m., Suntec Singapore

Mr Thomas Chua,

President, Singapore Chinese Chamber of Commerce & Industry (SCCCI),

Distinguished guests,

Ladies and Gentlemen,

Good Morning. I am delighted to join all of you here today, and am happy to see such a big turnout at today’s conference.

We are here today to learn from and share with one another on leading-edge business strategies and practices, so that we can stay relevant, rise above the challenges and thrive in our rapidly changing economy. Over the years, I have made some observations through my interactions with various companies and stakeholders in the industries. Allow me to share rest of my speech with you in Mandarin.

Productivity and value creation – two sides of the same coin

“Productivity” has become one of the buzzwords for our economy. Many of you are familiar with the narrative – that we need to restructure our economy to continue to create exciting opportunities for ourselves and Singapore, and achieve sustainable, quality growth.

In fact, some of you may say that our renewed productivty movement is not new, as we have called for higher productivity in the early 1980s too. Yes and no. In 1980, our GDP per capita was US$4,990¹. Now we are US$52,051. As we move up the value chain, one could argue that incremental improvements leading to cost savings while good, would not be sufficient to maintain or improve our businesses. The key lies in value creation.

There is no doubt that businesses play an instrumental role in creating value. The question is whether our companies sense the urgency, know what is available out there in terms of technology and methods, and could mobilise their organisations and human resources for the change.

The national productivity drive to spur the productivity transformation has so far gained good traction. We see more and more companies taking steps to improve their productivity. Many of these initiatives focus on reducing reliance on manpower, through automation and technology adoption. These are important first steps. However, the real and sustainable change or improvements must come from value creation. No business can simply grow the bottomline by cutting costs only. Sooner or later, there is a limit to how much cost you can reduce.

At per capita US$50,000, Singapore is no longer a low cost country. If our business models remain stuck at per capita US$30,000, we are no longer competitive. No amount of subsidy can prolong our businesses of yesterday. Instead, we should study and benchmark ourselves with firms operating in economies with similar economic characteristics and performance. Some of these countries include Austria (per capita US$47,226), Belgium (US$43,413), Finland (US$46,179), Sweden (US$55,245), and Denmark (US$56,210)².

For today’s discussion however, I would like to focus on Switzerland. Many of us know of today’s Switzerland being outstanding in many ways. Switzerland is a leading competitive economy, as evidenced by their 1st place and 3rd place ranking in the World Economic Forum (WEF) World Competitiveness Yearbook (WCY) and Institute of Management Development (IMD) Global Competitiveness Review (GCR) respectively. They are also a global leading exporter, with a per capita export value of US$32,722 in 2011. Switzerland’s watch industry is the 3rd largest manufacturing industry in Switzerland, and produces more than half of the world’s watch output by value. Switzerland is also the world’s biggest producer and consumer of chocolates. Switzerland has also produced 27 Nobel Laureates, more than any other nation. These are just some of the accolades, as highlighted in a recent issue of the Global Views Monthly magazine, that demonstrate Switzerland’s leading economic prowess.

Few of us would know that just about 100 years ago, Switzerland was amongst the poorest in Europe. Her people had to work as export labourers and mercenary soldiers for a living. As a landlocked country, Switzerland faced many constraints in economic development. Switzerland’s transformation in these hundred years therefore has been remarkable. Today, it remains a beacon for wealth and ideas in Europe and for the world. Switzerland’s products command a premium.

Switzerland and Singapore share some similarities in our economic circumstances. Both countries are relatively small, with populations of 8 million and 5.3 million respectively. Both of us face high business costs and limitations in manpower. Unlike Singapore though, which sits in the heart of a growing Asia, Switzerland is surrounded by economic uncertainty in the immediate European Union region. However, the Swiss economy continues to do relatively well at around 1.4 per cent forecasted GDP growth in 2013

[3]

(versus a 0.3% contraction for the euro area

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), despite the challenges that they face. The Swiss have also built a strong reputation for premium quality and high value, which differentiates their products from cheaper competitors elsewhere.

Allow me to share what the Swiss have done in value creation in three very different areas – chocolates, watches and pharmaceuticals.

Case Study 1: Lӓderach chocolates

First, something close to our stomachs – chocolate. The Swiss are famous for their chocolate. In Singapore, some of the more popular chocolate brands are Swiss, such as Lindt, Lindor and Toblerone. In 2012, Switzerland exported 104,000 tonnes of chocolate⁵⁶ and that only includes exports of Swiss-produced chocolate. Swiss chocolate companies also have many franchising arrangements to produce their chocolates anywhere in the world.

The largest chocolate-maker in Switzerland today is Lӓderach chocolates. Started in 1962, the founder Rudolf Lӓderach Junior, who was then working in his father’s small bakery, decided to strike out on his own and set up his own chocolate atelier producing specialty hand-made chocolates and confectionaries⁷.

However, Rudolf Junior was not satisfied. He continued to research and experiment with new recipes and ingredients. In 1970, he successfully created and patented a revolutionary process for producing thin-sided hollow truffle shells, which enabled him to make better tasting truffles in a simpler way. The truffle shells became an instant hit and set the company on a strong growth path.

Today, Lӓderach continues to innovate in order to stay competitive and grow. They have expanded aggressively in the last decade by acquiring Merkur, a Swiss specialty chocolate retailer, so as to expand their value chain. Lӓderach has also grown its international business and is doing very well, with exports to the USA, Japan, Korea, Southeast Asia and the Middle East. They now have more than 50 franchise stores and 800 employees worldwide.

By comparison, many other chocolate manufacturers compete at lower price points. Putting aside mass market chocolate products such as those produced by Cadbury, Van Houten and Nestle, we see that Lӓderach prices their chocolates even above competitors in the specialty chocolate space. For instance, for a box of 24 chocolate truffles, Lӓderach prices at around €28, whereas Ferrero Rocher prices at €11 and Guylian at €17. Despite pricing at a premium, Lӓderach still enjoys healthy sales due to the popularity and quality of their chocolates.

Innovation to create new, higher value products; aggressive growth through acquisitions; and internationalisation to capture a wider customer base – these have helped Lӓderach to grow from strength to strength, from its humble beginnings.

Case Study 2 – Swiss watches

Another product that is synonymous with Switzerland is watches. The Swiss are the world’s largest exporters of watches, with a total export value of 21.4 billion francs⁸ (US$23.0 billion) in 2012. Some of the world’s biggest watch names, such as Rolex, Cartier and Mont Blanc, all hail from Switzerland.

How did Switzerland become such a strong player in the global watch industry? As with many stories of successful businesses, it was partly serendipitous. Few of us know that jewellery was outlawed in Switzerland in 1541 on religious grounds. As a result, many jewellers moved into the watch-making industry, attaching their jewels to watches instead. This helped to satisfy the customers’ demand for luxury. On top of that, Swiss watches also exhibited superior performance due to the strength of the local Precision Engineering industry supporting it. The combination of performance and aesthetics enabled Swiss watches to grow in stature internationally and allowed them to command a premium for their watches⁹.

When the digital watch, which were mainly made by Japanese brands such as Casio and Seiko, cornered the market in the 1970s and 1980s with its low prices and reasonable performance, more than 1,000 Swiss watch manufacturers went out of business. However, other Swiss watch companies such as Rolex stood firm and did not enter the digital space. Instead, they focused on positioning their watches as higher value and upmarket products. This paid off when digital watches became too mass-market and mainstream, and consumers began to re-embrace the beauty and status of mechanical watches. This led to a revival of the Swiss watch industry, which in 1995 once again took over the lead in world watch production with 38 million units shipped as compared to 30 million for Japan.

In 2012, the average export price of Swiss watch was US$739¹⁰ per piece. China shipped the most pieces, at 662.5 million units but at an average price of US$3 per piece. Hong Kong was the second in terms of units shipped at 354.4 million units and Switzerland third at 29.2 million units. Swiss watches are never a volume mover, but they are the most profitable.

The takeaway for our companies is that we do not necessarily need to compete on price. Instead, we should look at improving quality and value and cater to the rising middle class and high-end markets in Asia. This is the core principle of value creation.

Case Study 3 – Roche

The third and last product is one that Singapore is also strong in – pharmaceuticals. The pharmaceutical industry is very big in Switzerland, making up 30 per cent of their export share in 2010. In fact, the Swiss are so dominant in this industry that they occupy 5 per cent of global pharmaceutical exports. I believe most of us here will be familiar with household names like Roche, Novartis and Lonza.

How many of you know that Roche did not start out as a pharmaceuticals company? When it was founded in 1896, it was better known for making vitamin preparations and derivatives. In 1934, it became the first company to mass-produce synthetic vitamin C, under the brand name Redoxon. However, Roche recognised that the production of vitamins would be highly competitive; and to avoid a strong dependency on vitamins, Roche intensified its research into pharmaceuticals¹¹.

In the 1950s, Roche’s researchers came across a powerful compound, benzodiazepine that sedated without causing drowsiness. It was very effective when used as tranquilisers and achieved overwhelming success. Roche subsequently began to branch out into related products such as agrochemicals and medical instruments. Today, with its strong capabilities in both pharmaceuticals and diagnostics, Roche is well-positioned as one of the world’s leading companies in personalised healthcare.

Recently, I visited Super Group’s very modern plant in Johor Bahru. Its investments there is about US$100 million and close to 100% of the Group’s instant soluble coffee powder is produced there. I was very impressed by how modern the production process was. In fact it resembled many pharmaceutical plants I have visited, with perhaps the difference in clean room specfications. The plant, which hired 905 employees, has plans to produce herbal extracts beverages such as flavoured teas, chicory coffee, ginseng coffee and high-value nutritional beverages such as traditional Chinese medicines, teas or herbal concentrates. Because it is a Singapore brand, there is a premium associated with Super Coffee products in the region and beyond.

Value creation is crucial for companies

Yet Switzerland’s manufacturing prowess is not limited to these three product families. It also has niche players producing high-end precision machineries used in the electrical, metals and nanotechnology industries. And beyond these, Switzerland also has other world leading industries such as its banking and finance industry.

A recent article in the Global Views Monthly magazine credited Switzerland’s success in the technology sector and quality products to their emphasis on craftsmanship. In Swiss society, craftsmanship is accorded with high respect, similar to how education is highly regarded in Asian societies like ours. After graduation, two-thirds of Swiss students go on to vocational schools, embark on apprenticeship through work-study programmes and acquire vocational skills. Through such arrangements, young people are put in touch with the workplace ecology very early and learn important vocational skills needed for their jobs. To a Swiss employer, academic background is not important; it is the skills of the worker that is important.

Our earlier three examples underpin the fact that the Swiss companies are strong and successful because of their focus on value creation. In the case of Lӓderach, they continued to develop better and tastier chocolates. For Rolex, they firmly believed in improving the beauty, performance and perception of their watches, and not bow to the pressure of low-cost competition. For Roche, they did not stay stagnant but continued to venture into related industries that added value to their niche.

It is important that our SMEs draw lessons from these positive examples and focus likewise on value creation. The main areas of value creation are innovation, product branding and product quality. Innovation allows the delivery of new products that consumers need and are willing to pay for. Branding and quality generate positive goodwill among consumers by improving their experience with the product. It also provides a springboard for companies to roll out new products in related areas in the future.

There are many resources out there that SMEs can tap on in the pursuit of value creation and productivity improvements. For example, SPRING supports six Centres of Innovation (COIs) in the areas of food manufacturing, marine and offshore engineering, environment technology, precision engineering, electronics and logistics. These COIs support SMEs by providing laboratory facilities, technology consultancy and training courses, and assistance to test and develop technology projects. SPRING also administers assistance schemes under the Capability Development Grant banner, to help companies build and use their brands as a strategy for business competitiveness. I strongly encourage all SMEs to make use of these resources to improve your business capabilities.

Technology to Watch - The potential of 3D printing

To wrap up, I would like to show a short video on a particular technology that has been generating a lot of excitement, and has the potential to transform the way we go about our design and prototyping efforts. 3D printing, also known as additive manufacturing, is a process of making a three-dimensional solid object of virtually any shape from a digital or physical model. For example, I can send a softcopy design to the printer and it will produce the model, or I can also use the printer to produce an identical copy of an object.

3-D printing is exciting in that it has reached the point where mass customisation of products is becoming possible. Manufacturers can customise their products quickly for customers, at cost levels which are making low volume production viable. This has enabled suppliers to quickly create custom cases for mobile phones and have it 3-D printed. Our SMEs will need to embrace such technologies, and new ones that come along, in the process of value creation.

Conclusions

It is one thing to hear the successes of businesses in other countries like the Swiss, but definitely more challenging to put them into practice. I am happy to see that SCCCI has been working together with business associations in the food and beverage and retail services sectors to organise business missions to Hong Kong, South Korea and Japan to learn from and exchange information on business best practices, as well as invite industry experts to Singapore to share their experiences and develop middle managers. At today’s event, SCCCI will also, together with the Singapore Institute of Manufacturing Technology (SIMTech), sign a cooperation agreement with the Taiwan and China Productivity Centre to leverage on their resources to help local enterprises upgrade their capabilities. I therefore strongly encourage our SMEs to strive hard to improve and grow your capabilities. The Government will continue to support your efforts in productivity, innovation, capability development and internationalisation.

I wish all participants a fruitful time at the conferences and expo, and a good day ahead. Thank you.

¹ Source: Department of Statistics Singapore

² Source: World Bank

³ Source: Switzerland State Secretariat for Economic Affairs

http://www.seco.admin.ch/themen/00374/00375/00376/?lang=en

⁴ Source: European Commission

http://ec.europa.eu/economy_finance/publications/european_economy/2013/pdf/ee1_en.pdf

⁵ Source: Association of Swiss Chocolate Manufacturers

http://www.chocosuisse.ch/web/chocosuisse/en/documentation/facts_figures.html

⁶ Chocolate exports make up 0.27% of Switzerland’s exports.

⁷ Source:

http://www.laederachprofessional.com/en/about-us/the-company/history.html