How Singapore firms can navigate the red ocean of cut-throat competition

In a recent Straits Times article, Mr Ang Yuit, president of the Association of Small and Medium Enterprises, described the Singapore business landscape as becoming “increasingly cut-throat” with persistently higher business costs and an influx of foreign investors, particularly from China with integrated and established supply chains that sideline local companies.

He cited geopolitical tensions and the enhancements to the China-Singapore Free Trade Agreement (CSFTA) as push factors for Chinese investors coming to Singapore. As a result, he likened the situation to a “red ocean” where local businesses must fight tooth and claw to survive.

Apart from the competition from China, the Johor-Singapore Special Economic Zone will also present a challenge to our businesses, especially those that remain rooted to the domestic market.

So what should local businesses do? First, they should accept that competition is not a bad word, per se. Instead of viewing foreign companies as threats, they should explore opportunities to partner with them. They should also look at expanding their own footprint overseas. And instead of just being content to grow organically, they should consider when it makes sense for them to enter into mergers and acquisitions (M&As). Of course there are risks to be addressed. But there are also opportunities.

For example, it is worth remembering that FTAs are reciprocal agreements. Recent upgrades to the CSFTA mean that Singapore companies have greater access to the Chinese market, including the services sector, along with better investment protection. Singapore companies should also explore whether there is scope for them to partner Chinese investors to help them access the region. This, after all, is what happened with previous waves of foreign investors from the US, Europe and Japan who established HQs in Singapore as a gateway to the region. This, in turn, built up our local SME ecosystem.

The thrust of Mr Ang’s comments is that rather than viewing this red ocean as a deterrent, small and medium- sized enterprises (SMEs) should see these turbulent times as a clarion call for doubling down on innovation and global ambition. We support this sentiment.

Ayrton Senna, the legendary Formula 1 driver, once said: “You cannot overtake 15 cars in sunny weather... but you can when it’s raining.” Just as Senna thrived under adverse conditions, the current challenges and uncertainties could be the perfect catalyst for bold moves should we be prepared to seize them. This includes, as Mr Ang suggests, embracing technologies such as AI and being prepared to venture overseas.

The Singapore Business Federation and PwC recently released a set of Budget recommendations titled Forging Ahead In Times Of Uncertainty, which include suggestions for how government schemes could be enhanced to better support businesses. For example, we propose that the Productivity Solutions Grant could be turbocharged so that companies can use it more flexibly for customised and modular digital solutions.

To help businesses internationalise, we propose enhancing the scope and quantum of the Market Readiness Assistance Grant. We would also like to see new Singapore Enterprise Centres being set up to deliver services such as business advisory, market information, and business matching in emerging markets such as India and the Middle East.

The M&A option

We also feel that more can be done to support inorganic growth strategies as a way of jumpstarting the process of expansion and market penetration.

Organic growth relies on a company’s existing operations, like boosting sales and expanding product lines. It is sustainable but often slow. In contrast, inorganic growth involves M&As, or partnerships, that enable rapid expansion and direct access to new markets.

Smaller companies confronted with intense competition and high costs may lack the resources and risk appetite to invest in the kind of innovation necessary to fend off the competition.

Venturing into new markets can also prove challenging for such companies as they lack the resources and expertise to effectively market their products and services abroad and navigate complex regulatory environments. Ongoing geopolitical tensions and rapidly shifting global trade policies further exacerbate these challenges.

That is why, in our report, we spotlight the significant role M&As can play in helping local enterprises grow and expand.

One primary benefit of M&As is the ability to tap into new customer bases. Take, for example, I Can Read, a Singapore-based English language learning and enrichment centre that acquired onSponge, an educational content and technology platform. This acquisition strengthened I Can Read’s local competitive positioning by expanding its curriculum and digital learning offerings, enabling a broader reach for its educational services.

M&As also allow companies with different strengths to come together, pool their expertise and even develop new products and services. Take, for example, fashion specialist Love, Bonito’s acquisition of Cheak, a company offering female activewear. This move marked Love, Bonito’s expansion into the fast-growing activewear category and caters to the growing demand for wellness-related offerings, especially in the wake of the Covid-19 pandemic.

Then, of course, there is the pooling of funds that comes with M&As. This enables companies to invest more readily in R&D, innovation and technology so that they can stay ahead of the game.

By joining forces with international partners, local enterprises can also access new markets. For example, Synagie’s acquisition by a consortium of investors has not only strengthened its position in South-east Asia, but also opened doors to global markets.

Some need help

Here, we must add that M&As are not for everyone. Some companies may shy away from them on account of the high costs related to due diligence and rebranding. Others may be put off by the legal and regulatory landscape, including the need to comply with local and international laws. Plus, there are financial risks involved as many SMEs may simply lack the experience and expertise to identify suitable targets, negotiate favourable terms, and manage the integration process effectively.

Despite these hurdles, we believe that with careful planning, adequate resources, and the right advisory support, SMEs can navigate these complexities and potentially reap the benefits of successful M&As.

In our Budget recommendations, we have advocated some policy moves and reforms to address the legal and financial hurdles that might be deterring businesses from pursuing M&As. This includes expanding existing grant schemes and reviewing some laws.

We further propose that the Government partner trade associations and chambers (TACs) to offer advisory services and educate SMEs on exploring inorganic growth strategies. This should include advice on the financing solutions available to SMEs.

Such initiatives are not new. The Scale-Up SG programme under Enterprise Singapore provides high-growth local companies with access to expert partners to help them develop and implement growth strategies and targeted assistance to execute their growth plans. Since its launch in 2019, the programme has supported more than 100 companies and enjoyed significant success with 80 per cent of participating companies launching new products and services, 70 per cent entering new markets, and close to half expanding their business via M&As or joint ventures. Both I Can Read and Love, Bonito are alumni of the Scale-Up programme.

Is there scope, though, to expand the programme to cover more companies? How can the Government tap the broader business support ecosystem including the network of TACs to support the next tier of promising SMEs?

Yes, the competition is getting more fierce. The business landscape is evolving rapidly, and many of the challenges confronting SMEs will persist. Yet as we enter the Year of the Snake, we remain cautiously confident about the future. Individuals born under this sign are known to be brave, agile and resilient, and we hope that this year, businesses too embrace agility, boldness and resilience to reinvent themselves for a brighter future. If there is anything we can learn from the animal kingdom, it is that it is possible to thrive even in the reddest of oceans.

Musa Fazal is the Chief Policy Officer of the Singapore Business Federation and Patrick Yeo is a Markets Leader at PwC Singapore.