As Singapore's high-cost economy restructures, some short-term pain

By Masayuki Kitano and Aradhana Aravindan

SINGAPORE (Reuters) - Data centre operator IO is just the kind of company Singapore wants to see in its future as cost pressures erode its competitiveness in the traditional low-end manufacturing that once helped make it an "Asian Tiger" economy.

U.S.-based IO took space last year in what was once part of Seagate Technology's factory after the computer hardware maker shifted its hard-disk production in 2010 to cut costs. But whereas Seagate cut 2,000 employees when it moved out, IO Singapore brought just 20 when it moved in.

IO is not alone in picking Singapore, which is an important base for other data centres and many global banks, as well as a regional headquarters for multinational companies.

Singapore's data centre market is expected to more than double to $550 million (338 million pounds) by 2017 from $223 million in 2010, according to consultancy Frost and Sullivan, despite challenges such as an equatorial climate and limited land.

As Singapore's prosperity leaves its manufacturing base vulnerable to cheaper neighbours, it is banking on a business-friendly environment, advanced infrastructure, and its status as an Asian hub to attract high-value investments and businesses.

But the transition, which is getting added impetus from the government's push to increase the economy's productivity while reducing reliance on foreign workers, will not be smooth or immediate.

"Some of these companies which find the rising costs in Singapore too hard to bear, I think we'll increasingly see them move to lower-cost locations," said Michael Wan, an economist for Credit Suisse.

"There will definitely be some short-term pain, where you'll see some relocation of some companies, but I think the more important thing to note is that there are also other companies shifting up the value chain," Wan said.

Services, including data centres and the financial industry, accounted for 70.3 percent of Singapore's gross domestic product in 2013, up from 64.4 percent in 2003, while manufacturing's share fell to 18.8 percent from 26.0 percent.

The Economic Development Board said 21,400 new skilled jobs were created in 2013 from projects it brought in, led by gains in headquarter location and professional services.

The transition could hit some industries more than others.

"Restructuring is impacting manufacturing disproportionately and accelerating the shift towards a services-based economy," said Bank of America Merrill Lynch economist Chua Hak Bin.

Output of electronics rose 2.2 percent in January-August from a year ago, lagging the 5.0 percent rise in total manufacturing output, data showed on Friday. In August, total manufacturing output rose 4.2 percent year-on-year.

Domestic electronics exports slid 11.8 percent in January-August from a year ago, a drop that economists say may be in part a result of some electronics production moving to lower-cost countries.

In March, U.S. semiconductor company Broadcom shifted some of its operations from Singapore to Ireland as its tax incentives in the Southeast Asia nation expired.

Asked about the move, Jennifer Baumgartner, a senior manager for corporate communications at Broadcom, said in an email that "Singapore remains an essential Broadcom location and we are not materially changing any production".

Seagate has not left Singapore completely. It has a recording media plant in the city-state, and is investing S$100 million (49 million pounds) in a research and development facility.

(Editing by John Mair and Eric Meijer)