Contech Precast Pte. Ltd. is in the business of Supplying Precast slabs for HDB Housing and LRT, MRT & Tunnel Infrastructure projects in Singapore. With increasing competition from Malaysia, Contech is going out of business.

Malaysia and Singapore are separated by Johor Straits which is roughly about 2.5 Kms wide. The Island Nation is connected to Johar Bahru, Malaysia by road. The cost of living in Johar Bahru is less than 25% of that of Singapore and labor laws are much more lenient in Malaysia. Singapore imports most of the construction raw materials including cement from Malaysia. Therefore, precast manufacturing costs in Singapore are typically much higher than that of Malaysia. Several Precast manufactures in Malaysia are already supplying for projects in Singapore and more plants are coming up around the border areas.

Precast manufacturing typically comprises of land for casting and storage, overhead cranes, raw materials, labor and transportation. While land and machinery consist of the initial investment required, raw materials and transportation are typically a function of the output generated (variable cost). Labor in Singapore is not available easily on daily basis and is usually hired for longer duration. Therefore, the labor cost is more of a fixed cost rather than variable cost unless one can plan output months ahead of time.

Since labor and land both cost higher in Singapore, the fixed costs of operating a precast plant in Singapore turns out to be much higher than that of Malaysia. As raw materials primarily come from Malaysia, plants in Singapore do not have any transportation cost advantage against those in Malaysia. Unless import duty makes it possible, factories in Singapore cannot outbid factories in Malaysia when supplying same product.

When Contech started it enjoyed preferential treatment as a Singapore based company and it was a preferred supplier for all government housing and transportation projects. The plant capacity was designed considering the same. Operating the plant at less than 35 percent of the capacity, doesnot cover up the fixed cost. Contech could move up the value chain and make more specialized products such as precasted bathrooms but given that market demand for such products, it wouldn’t be able to utilize more than 25 percent is its available capacity.

Operating from Singapore is simply not an option for Contech. Its primary valuation arises from its project track record and physical assets in place. Selling out land and machinery and establishing a plant in Malaysia should be actively considered if the management wants to retain the brand and project track record. Contech could also use it project track record to expand to other markets such as India and Middle East.

Given that the competition is stiffening and the parent company is a construction company subcontracting most project works, it is highly recommended that the parent should find a buyer for Contech by getting the best valuations from those willing to buy Contech’s project track record.

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