SINGAPORE — Recent moves by companies such as Gardenia and H&M to shift some operations from Singapore across the Causeway have put the spotlight on Malaysia’s growing appeal as a more affordable base for businesses facing high costs and a tight labour market in the city state.
But while the trend may look like an easy win for its neighbour – bringing investment, jobs and spillover opportunities – analysts say the gains could come with trade-offs, as an influx of firms drives up competition for skilled workers and risks leaving lower-skilled staff further behind.
The shift also points to a wider regional recalibration, with other Southeast Asian economies such as Vietnam and Thailand positioning themselves as alternatives for companies moving lower-cost or labour-intensive functions out of Singapore.
On May 20, food manufacturing company Gardenia announced it was shifting its bakery production from Singapore to Johor Bahru, resulting in 141 employees being laid off.
The company said the move was part of an ongoing effort to improve operational efficiency and remain competitive amid an increasingly challenging global environment.
Earlier this month, Malaysian media reported that fast fashion retailer H&M would relocate its Southeast Asian headquarters from Singapore to Kuala Lumpur, affecting close to 80 roles in the city state’s office.
Wye Chung Khain, an associate professor of economics at Universiti Kebangsaan Malaysia, said Kuala Lumpur was a “highly complementary partner” to Singapore, given the lower costs offered by Malaysia’s tax incentives and cheaper labour and land costs.
“Malaysia’s larger population may also contribute to a higher availability of English-speaking, tertiary-educated youth specialising in human resources, finance, IT (information technology) support and legal operations,” he added.
In March, drink companies Yeo’s and Asia Pacific Breweries Singapore (APBS) announced they were moving production to facilities in Malaysia and Vietnam.
Yeo’s said the shift would streamline production and use capacity more efficiently but its Singapore site would remain its headquarters and logistics hub.
Heineken, who owns APBS, said the brewery’s facility in Singapore would be redeveloped to support regional logistics and product development.
Brian Lee, an economist at Maybank Securities, noted that rising production costs were prompting Singaporean firms to relocate labour and land-intensive production activities overseas, while retaining knowledge or capital-intensive operations locally.
Analysts say firms most likely to relocate include those in industries such as food and drink, manufacturing, data centres and cloud infrastructure.
“Back-office corporate functions have been offshored to more cost-competitive hubs, including payroll, IT help desk or basic accounting processing,” Lee said.
While Malaysia might benefit from the entry of more Singapore-based operations, such as increased job creation and foreign direct investment, Wye warned that the process could strain resources and worsen income inequality between skilled and unskilled workers.
“A race for tech and business talent from Malaysia may trigger skilled labour shortage and drive up wage premiums for skilled workers. Local enterprises may find it hard to compete, while skilled-unskilled income inequalities may worsen,” he said.
While offshoring is far from a new trend, analysts say inflation and the Johor-Singapore Special Economic Zone (JS-SEZ) could accelerate firms’ move to Malaysia.
“With easier cross-border travel, the JS-SEZ will facilitate twinning operations where certain functions or activities are offshored to Johor,” Lee said.
The economic zone, which seeks to add US$26 billion annually to the Malaysian economy by 2030, incentivises investors with special company tax rates of 5% for 15 years and lower income taxes for knowledge workers.
Other Southeast Asian economies such as Vietnam and Thailand could also benefit from the relocation as attractive destinations for Singaporean companies, analysts say.
Vietnam’s geographical advantage, free-trade agreements and relatively cheaper high-skilled workers could offer Singaporean firms a smoother penetration into East Asia, while Thailand’s Eastern Economic Corridor (EEC) might serve as an alternative investment hub, Wye said.
The EEC is a key initiative of the Thailand 4.0 blueprint, which aims to elevate the Southeast Asian nation from middle-income status by developing innovative and advanced industries.
“These countries, in turn, may benefit from Singaporean firms’ investment relocation from Malaysia in terms of global value chain upgrading, domestic technological spillovers,” Wye said.
Offshoring had yet to negatively affect Singapore’s economic growth, said Lee, who underscored the importance of attracting high-value industries to the republic.
“Singapore will need to continue leveraging this strategy to attract and anchor leading industries,” he said, noting the recommendations from the city state’s economic strategy review earlier this month. The review was launched last year to secure the city state’s future as a trade and financial hub.
Outlining the recommendations earlier this month, Deputy Prime Minister Gan Kim Yong said Singapore was seeking to attract high-quality investments in sectors including advanced manufacturing, logistics, finance and technology.
“We can become one of the best places in the world to develop, test and deploy artificial intelligence (AI) solutions that solve real-world problems at scale,” Gan said, underscoring the country’s goal to become a global leader in AI.
Lee said, however, that Singapore would also need to ensure displaced workers were re-skilled and remained relevant as the economy evolved.
Firms from Singapore and Malaysia could also work together to create a mutually beneficial relationship, Wye said.
“Singapore provides the source of financial capital and intellectual capital, and Malaysia enhances it with value-adding production capacity flanked by cost-competitive input resources and abundant skilled manpower,” he said.
