State of the Economy
The picture painted by the recent release of the first quarter Economic survey was a gloomy one. Growth slowed from 3% in the final quarter of 2002 to 1.6% in first quarter of 2003. All major sectors worsened, except for Manufacturing.
The 11% growth in the chemical sector was a silver lining the clouds. Singapore's refiners enjoyed higher profit margins. Specialty chemicals segment also grew in response to higher regional orders. Petrochemicals segment was boosted by the wide range of products coming from the downstream.
Impact of SARS
We have to keep in mind that the Survey results have yet to reflect the impact of SARS. The second quarter results will be poorer. SARS has created greater uncertainty for the economy. The impact of SARS is likely to be felt in the current and next quarters. Far Eastern Economic Review estimated that the damage to regional gross domestic product growth has already cost Asia some US$10.6 billion. The hardest hit was the tourism and transport-related industries.
The chemical sector though not significantly affected can experience the spillover effects. For example, there is indirect exposure due to the fall in demand for manufactured goods that contain chemicals. The falling consumer demand in China has contributed to a drop in both consumption and prices of chemicals throughout Asia.
The SARS outbreak hurts tourism and cuts demand for air travel, reducing demand for fuel. Demand for oil products has since plunged by as much as 10-20%.
The outlook for oil refinery companies is also uncertain. Singapore Refining Co had its profit down 12% in the first quarter despite higher oil prices. Although Shell and Exxon Mobil reported higher earnings, the operating conditions will be challenging with stronger downward pressure on oil prices.
Businesses will also be affected by the travel restrictions imposed, hence reducing business development plans. There will also be additional cost due to precautionary measures taken.
Businesses are operating in a globalised world. SARS can affect chemical manufacturers throughout the region, including those that do not export directly to China. As it is, our main buyers of petroleum products are Hong Kong, Australia and the Asean region. Petrochemicals trade in Hong Kong and Southern China had slowed significantly.
These are tough times. Therefore the tough measures recommended by NWC are necessary. No one likes to have wage freezes or wage cuts. It is understandable. However, we must recognize that some companies are seriously affected by the SARS outbreak. It is between workers losing their jobs completely and workers keeping their jobs, but with cuts to their wages. Getting another job can be a difficult in this current climate. So we, as union leaders, must help our workers keep their jobs for as long as possible, by bearing some pain. We must help those who are affected cushion the dislocation. The Skills Redevelopment Programme and job matching services in NTUC are set up to help affected workers get back into the job market. Make use of them to help affected workers.
We hope that wage freeze and even cuts for those badly affected companies would help soften the impact and save more jobs. On the other hand, those companies that have done well should reward their workers through better bonuses. They must not expect the workers to paddle the company forward under stormy weather, when the workers are not recognized for their efforts during better times.
Wage restructuring
Apart from recommendations to deal with the current situation, the NWC made a bold one for the longer term. We have to move away from a wage structure based on seniority. We need to build up a strong MVC.
Within the unionized chemical and petroleum companies, wages are still largely based on seniority. Long service workers are paid more than newcomers for doing the same job. Based on a 2002 survey on the unionized private companies, longer service bargainable workers in the Petroleum and Chemicals manufacturing companies were paid, on average about 1.81 times more than newcomers doing the same job. Some of us may ask, what is wrong with a wage system based heavily on seniority? Does it not give a sense of security and certainty for our workers?
In a situation when there is no competition, local or globally, this is perfectly alright. However, we don't live in world like that. Companies will have to compete. They will have to make sure that their costs are able to fight with other companies.
Let me give you an example. Two companies - a new company and a 20-year-old company. They provide the same service and compete for the same customers. The new company starts on a clean slate and employs workers without a wage bill burdened by the seniority-based structure. The 20-year-old company has a big lot of employees being paid a salary close to the top of their seniority-based wage system. Clearly the younger company would immediately have a cost advantage. The 20-year-old company can fight back with its track record. However, it would not go far with that. The reality is that it would still be under tremendous pressure to maintain a competitive cost structure. What happens? Retrenchment. Workers lose their jobs. Worse still, the older workers would be the first to be affected.
Today we have quite a few 20- or 30-year old companies. They have a significantly high proportion of longer service employees. Therefore wage costs are higher. They have to compete with younger companies. Trouble is, these younger companies are not necessarily located in Singapore, but elsewhere! Our wage costs are higher than theirs, and these companies are additionally burdened by the seniority effects.
We have to restructure the seniority-wage system. The wage structure must be responsive to the performance of the company and the worker. We need to strike a balance between rewarding loyalty and productivity. The competitive base-up system is to tackle this.
The wage system must have more flexibility built in. It is a choice between losing a job completely and adjusting the wages to keep a job. We built up the flexible bonus after 1985-86. Now we have to build up the Monthly Variable Component.
We have been talking about these measures for quite a while. I spoke up on this in 1985. We have achieved some re-balancing. However, we need to move at a quicker pace. The pressure of global competition will make us see an even more pressing need to restructure our wage system. Otherwise, we would not be able retain companies that are here nor would we be able to attract new companies to start operations here. It means that we will not be able to keep jobs and create new ones. If we had moved at faster pace, we may have been able to deal with the current downturn in a less painful manner.
Conclude
The tasks ahead are by no means easy. We need to gear up for a long haul. The cost cutting measures are for immediate survival. The real solution is in containing SARS. Unfortunately, it means containing SARS not only in Singapore, but in the region. That could take a while. We will have to bear with the pain and move on.
There is still some hope. There is strong potential growth for the petrol chemical industry in the long-term. For those of you who are lucky to be in companies that are doing well, I would urge you to use the situation around you as a reminder of the realities of economic competition. If we do not enhance our wage competitiveness, we would still lose the race eventually. If we do not continue to upgrade and learn new skills, we would still be left behind when new jobs are created. To be aware of the dangers ahead of our workers and to act decisively to avert the dangers must be the goal of every responsible union leader!
Finally, let me say that we have some things in our favour. Firstly we have first-mover advantage in concluding Free Trade Agreements. Secondly, the way we have handled the SARS epidemic has won us kudos from around the world. Investors will take these two factors favourably when they consider new investments. Let us add a third factor - a competitive, flexible wage system.
Let me wish you success in your delegates' conference.
