Business in Singapore Failed Because of These 2 Costs

Various stages of business yield different results in various geographical regions and the various tiers of the country’s development. A startup will be good in Cambodia, Chile and such because they are still developing countries. A startup will struggle in England, France and such even if the business is going to be disruptive. This is what happens when a country is developed while the people are leaning towards the traditional route, which is why startups tend to raise funds from elsewhere even if their homeground is wealthy. The United States on the other hand is widely diversified, a startup in Silicon Valley is much better than in Wyoming because there is low demand. It would be struggling though because there are way too many other startups in California trying to become a millionaire or even billionaire overnight.

Starting business in Singapore is relatively attractive because we are a strategic hub to the rest of asia or ASEAN. Do note that there are significant differences between the two regions as mentioned. Asia is the entire continent while ASEAN consists of 10 members and is a very crucial economic zone in Southeast asia. As starting a business is almost immediately for the locals and if you appoints a nominee director, we can be quick to market and minimise opportunity cost. Firms that are establishing in Singapore are always perceived as having a better reputation in ASEAN as compared to the neighbouring countries, which makes our barrier to enter the rest of Asia much easier. The rest of the framework such as legality, accounting, ease of business and etc. are just another value for us but are not the critical success factor one should consider. Overall, our tax is pretty attractive too. The rest of the benefits you can find all over the Internet but what I am going to discuss now are the reasons why many businesses failed after starting for 3 years in Singapore.

There are downsides of starting a business in Singapore that could overrule the entire range of benefits too. The room to grow is moderate and the room to breathe is very tight, we are in an environment where mistakes are intolerable. Let’s put it this way, the law is incomplete and it will continue to complete itself when someone does something out of the norm and is not acceptable. Many of our forefathers with brilliant business loopholes have already done what they are not supposed to do but still consider legal back in their times. Even for most giants in Silicon Valley, almost everyone gets sued in their journey to greatness - which further emphasizes the phrase “no risk no reward”. Legal may sound like one of the factors I want to share with you unfortunately it is not, we are strict but the government does close an eye at times.

Rental

Here are some statistics: 

• Retail rental in Singapore is the 7th most expensive in asia pacific
• $36 psf for in town or prime shopping area like orchard or marina bay sands
• $12 psf for CBD area in town

Unless your company is an established brand from abroad, it is nearly impossible to rent at any prime location. More than 90% of the retail shops in prime areas are overseas brands and there is high turnover whenever they achieve their marketing purposes or the budget has run out. Even Victoria’s Secret is closing their 12 stores in Singapore by the end of the year. Who are the culprits and why is the rental so expensive?

Naturally the first thought in our mind is the government because they are imposing heavy taxes, high deposits and fees like qualifying certificates. The reason our government does this is to curb the reckless and rogue behaviours in the real estate industry with all the hoardings, sub sell, ridiculous inflation and such. In fact, most prime areas that are already freehold are not under the control of the government and acquiring a leasehold land is not that expensive afterall. Even if the lease is expired or purchased through an en-bloc, the development charge and differential premium is still affordable. The problem is with the purchase price where every previous owner wants to have maximum profit because of the market price but this will put the tolls on the developers and the unit buyers. These new buyers who bought the unit at a ridiculous price will want to rent it out at a rate to justify their price and wait for their turn to sell at a high profit.

“The vicious cycle will never end.”

What about the developers? More than 40% of the top 100 richest in Singapore are all real estate related. They are one trade where you can never bargain because your stake is simply too small. When they name a price of the unit, they can give a discount and such, but you can never bargain even if you know their cost. Developers can easily make more than 400% profit from a project that they developed from the scratch. Unless you are talking about buying an entire floor or block, otherwise you are just dealing with the agents. Dyson managed to buy Wallich’s penthouse at $74m because it is a direct developer deal and with all the additional buyer stamp duty, he still bought the unit at around $100m.

So now we know that both the developers and landlords are greedy, this is why the rental price will continue to rise. Hopefully you will understand the government is pretty innocent when it comes to rental and they are still trying to help the retailers. As the developers and landlords are also taxpayers, governments constantly have to find ways to achieve a win-win for the both parties, which in the real world there is no such thing. For the landlord it is an investment, for you rental it is a sunk cost. It is important to think about how financial works before committing to high rentals, there are many cases where the rental agreement can bankrupt the leasee. Landlords at prime locations will demand for high paid up capital or personal guarantee before renting out the units.

“If we are not doing anything to this, we will continue to be suckers.”

As we all know Paragon was owned by a Japanese owner and the Royal Brothers took over at a great price. They flipped and sold to SPH reits (which puzzles initially why a news media company is interested in real estate because real assets make so much more money than kachang puteh wrapper) at a pretty high amount so SPH reits have to diversify to the public. Guess who are the final suckers? Making money out of real estate is just so easy when you are rich, you have plenty of friends and deals for you to mix and match.

Government has many lands, conservations and properties that are available for renting but they usually do not get their hands dirty as they are not the subject matter experts. To cut internal cost and potential maximising their profit, they get 3rd parties involved through bidding. Unfortunately we do not have any industry hero who is not part of the cronies to outbid the rest and provide a justifiable rental. The government may not receive high yields from their properties but why is the rental so high? It is because these developers or building management companies charge high management fees, and if everyone’s bid is high the government will still have to select one regardless. There is essentially no benchmark of how much should psf be charged but because every landlord is increasing their rent, it just simply becomes the norm.

In the past, rental expenses was a simple accounting term that determined your profit and loss. Currently, rental becomes a complicated expense that could appear in different expenses from the chart of accounts. Rental has become a marketing item, branding item, employee incentives and you name it. Just imagine, the famous HaiDiLao Hotpot flagship restaurant at Clarke Quay is renting at more than $300k a month, how many pot soups they have to sell before only the rental can achieve breakeven? These costs should not belong to rental anymore. However, there are some good examples. Kevin Seah is a famous high end male boutique and a Singapore brand. They are doing well without having a prime frontage and their events are all very successful. Imagine located at the outskirt in Jalan Kilang but making the revenue of a Prada in Orchard.

“The paradigm of rental will be shifting.”

Rental is not all scary and thanks to COVID-19 it will slowly change how we perceive offices and retail. A big business decision to ask yourself next is “do I need the space?”. There are way too many alternatives like home office, incubator office, service office, shared office, online store and even Starbucks could be your office. We used to think Singaporeans are highly distracted and will not be productive when they are put at home, it is surprising during this period people who worked from home are actually pretty productive. Well, one of the possibilities is that everyone is bored and there is no entertainment so might as well kill the time with work. It is a good start where more performance measurements and proper structures are being developed to encourage working from home. Not only the company can reduce expenses and keep their employees, the employees will have more family time too.

Staffing

The bosses may agree with me on this one but not the employees - Singaporeans are getting very entitled. We cannot have both left and right hands to be against us. If the rental is bad, the staff should be good. If the rental is good, there is less tension on the staff. If both rental is bad and staff is bad, the business is just pending its imminent doom. Every boss I spoke to told me the same thing - they do not mind paying any amount of salary as long as the staff can perform. This is a right and wrong statement because if I pay you $20,000 a month and I expect $100,000 of profit from you a month, only the boss wins. If an employee is so good at doing what he does, likely he is already a boss himself. The hiring market is always good in Singapore, there is no lack of good jobs but some job openings remain untouched for months.

“There are plenty of applicants but a serious lack of talent.”

It is better not to waste money and try an employee while the boss and co-workers cover that particular person’s role, rather than hiring someone who may screw up the situation and everyone ends up with more work. Employees, especially the millennials, are so entitled that they constantly feel underpaid and overworked, they have no idea what economic value they are bringing to the company. Well, it is not easy to educate every employee on finances, some would fall asleep in the first 10 seconds when it comes to numbers. Honestly many of them should be greatly to even have a job and be able to pay their bills, there are way too many good people who are out of job and ready to work twice as hard and twice less the pay.

Salary is always a very sensitive topic because you can be doing the same thing as your coworkers but there is a variation. There are no minimal wages in Singapore but the market aligns itself through online means. I searched the Glassdoor for my position, it was not as I expected, I looked for a new job and negotiated with my boss during my resignation. Sounds familiar? An advice to the bosses: if any employee throws a resignation letter before discussing with you, he has no heart to work for you anymore, no matter what terms you agreed upon. It would be a matter of time before he resigns, cause a major screw up or slowly siphon your customers away. You cannot sue them even if they are in agreement because our Ministry of Manpower protects employees, especially the low income ones.

Look, the government is not pro-employee or making a hard time for the employers. Singaporeans are made up vastly by employees and many of them have a salary of below $4,500. Some employers made their employees sign non competition but this is the only skill they have so MOM will rule this out and favours the employee. When dealing with employees, we should be as tactful as dealing with our customers - they are also human beings and they will do to us what we do upon them. Of course, additional effort should be spent on the good employees. Speaking of good employees, we do remember the fast, cheap and good triangular relationship. In Singapore, you can never have all three as they will be poached till they are no longer cheap. You can promise them anything but because these people are so hot in the market, once they do not get what they want after a couple of years, they will seek for greener pastures. Millennials have zero loyalty and do not blame them as this is how they are culture and brought up upon, it is a totally different topic in society. Millennials expect results fast yet have zero initiative and have to be spoon fed.

Can your business do without the millennials when they are the current workforce?

To plan for human resources, always allow a 3 to 6 month period for them to settle down and start performing. If you are starting a new business that requires 5 people, allocate a budget of 5 x 6 x {salary}. Do not make the mistake of only allocating 1 to 2 months and expect them to start generating their own income. It may have happened 30 years ago but not now, if they know you are out of cash the more they will exploit you or will not join you in the first place. Even for hiring in MNCs, give the new hirer at least 3 months to see some results. Ask yourself this question, with such speed to normalise, will the company ever become the next phenomenon?

There are always alternatives like hiring part-timers, getting overseas freelancers and hiring foreign talents. Outsourcing has been very popular since around 15 years ago but it is not widely adopted. Big companies are afraid of liabilities but the risks can be easily mitigated with proper structuring and procedures. It is not because the government allows more work permits in Singapore but if the locals are not willing to perform and the businesses start to collapse, it will be an ugly economic issue all over again. Government has been trying to curb the number of work permits and give plenty of incentives to hire locally, think about it for a second when can we ever be self-sufficient in this manner? Read my post on how money is being created and you will understand. A company is forced to hire locals that cannot perform and is bad for the business, the company spends less and pays less taxes, adjacent companies get affected and the government receives less tax in overall while they still have to continue to support the businesses. You do not have to be an economist to know what will happen next.

“Besides, hiring foreign workers means you have their loyalty (forced or willing) for the next few years.”

Different motivations produce different results - whether it is fear or greed or self breakthrough. As long as you have someone under your wing and not leave, there is always a chance to mend and strengthen the relationship. Unlike the locals, they do not give you any chance and can leave you company anytime without fear of being deported. Another possibility is to modularise your business functions and let the local freelancers be involved. This could be the future of employment where everyone is a business owner and takes full responsibility for their work. Instead of someone working for you and taking a fixed salary, this someone will get paid on his effort and have zero salary if he cannot perform. There is no limit on how many roles he can take up as long as he has the capacity and he cannot outsource the overloaded jobs as there will be a governing body on such arrangements. It is almost like freelancing but with more accountability. Try it out.