Iskandar woos Singapore companies

When Tastyfood Industries decided to boost production to meet demand in Africa and the Middle East, the maker of Mr Cafe instant coffee and Vitamax cereal did not expand its Singapore factory or the one it owns in Xiamen, China.

Instead, it is planning to close its Singapore plant next year and move up the road to Malaysia's Iskandar economic zone, where it will set up a factory three times the size on low-cost freehold land and hire willing workers as cheaply as it can in China.

Singapore companies dominate the firms setting up factories in Iskandar, accounting for around 15 per cent of the RM32.7 billion committed as of June, according to the Iskandar Regional Development Authority (Irda).

Firms from Spain, Japan, the Netherlands and Germany are other large manufacturers in the zone in Johor, while companies from the United Arab Emirates are involved in housing and other property projects.

Tastyfood founder and managing director Joseph Lim, who will keep Tastyfood's marketing and product development operations in Singapore, said an average factory worker in Malaysia and China earns S$400 to S$500 (RM1,000 to RM1,300) per month, less than half the wage in the wealthy city-state.

Proximity is also key. The new Iskandar factory is just a 30-minute drive from Tastyfood's home base and major market, he said, against the four-hour flight from Xiamen.

"Doing business in China also carries a lot of risks, although things have been improving there," Lim said.

Singapore manufacturers are not the only ones heading to Iskandar. Theme park Legoland and Britain's Marlborough College chose Iskandar for their first forays into Asia. US-based Simon Property Group Inc set up its first Premium Outlets shopping centre in Southeast Asia there through a joint venture with Malaysia's Genting Group, eyeing Singapore's affluent customers.

Siegfried Boerst, general manager of Legoland Malaysia, said: "We are really convinced that the whole development of Iskandar will help create major tourist destinations in southern Malaysia."

Being cheaper, and yet close by, is making Iskandar and nearby areas popular among bakeries, dry cleaners and other small- and medium firms that have shop-fronts in Singapore but do much of the work just across the border.

Awfully Chocolate - a Singapore cake and ice-cream retailer that has expanded into China, Taiwan and Indonesia - makes some of the items for the 10 stores in its home market at a facility near Johor Baru.

In recent years, Singapore has begun to focus on banking, wealth management and other services, moving on from the manufacturing boom of the 1970s and 1980s that first brought prosperity to the city.

Iskandar, a 2,200-sq-km zone three times the size of Singapore, is just across a narrow strip of water and Malaysia is pushing its many advantages for factories looking to relocate.

Land prices are far lower and electricity costs are about half of Singapore's rates. Tax incentives are also on offer.

Tastyfood paid RM6.5 million for its freehold site in Iskandar that is the size of two soccer fields - about US$15 (RM45) per square foot. Singapore prices industrial sites by the potential built-up area and the cost could have been up to 30 times more.

Many see the budding relationship between Johor and Singapore as similar to the role that Shenzhen, once home to fishing villages and now a vibrant manufacturing centre, played in the growth of Hong Kong.

The territory's companies now employ about 11 million people in Shenzhen and other parts of the Pearl River Delta, but still use Hong Kong for logistics, marketing, banking and other services.

Singapore firms were initially lukewarm about Iskandar and interest picked up only after the two countries signed a broad agreement in 2010 to address longstanding issues.

A number of Singapore residents have already bought homes in Iskandar, including Templeton fund manager Mark Mobius, who has a bungalow for weekend getaways.

Malaysia's IHH Healthcare Bhd is building a 300-bed hospital that will provide medical treatment to Singaporeans at half the cost.

The many changes "gave us the extra encouragement", said Singapore businessman Ricky Tan, whose Kinderworld group is building a private school with boarding facilities in Iskandar.

Datuk Ismail Ibrahim, head of the Irda, said the Singapore companies in Iskandar are mostly small and medium enterprises but he is confident the larger firms will follow.

"We have the space, we have the geographical position and we have all the necessary infrastructure," he said. "With the right signals from both governments, big players from Singapore will be definitely coming in."

One of them could be engineering and property conglomerate Keppel Corp, which is in talks to buy a 30 per cent stake in a power plant that will supply electricity to Singapore, according to media reports.

Singapore state investor Temasek Holdings is involved in two large developments in Iskandar that will cost an estimated RM3 billion.

Still, some analysts warn that improved Singapore-Malaysia relations could hit a few speed bumps in the medium term. Ties could sour if there are changes to the political leadership in either country, said Chan Chong Beng, president of Singapore's Association of Small and Medium Enterprises.

Many however say there is a mutual interest in having Iskandar flourish.

"I think the economic benefits will drive the politicians in the future," said Kinderworld's Tan.

By Reuters