Post-Covid-19 industrial and logistics market – The winners are starting to emerge

Some sectors, like retail here, have an uncertain path ahead, while for offices, at least for the short to medium term, there is increasing probability that human resource policy will veer towards having a greater work-from-home culture. For manufacturers and retailers, both users of industrial and warehousing space, there are emerging views proffered by thought leaders as to how they may reorganise themselves post COVID-19. From these, we have identified the first tranche of winners in the industrial and logistics space market. Owing to the constraints of space, we shall run through some of these very briefly and their impact on the local industrial and warehousing space market:

• Supply chain consolidation;
• Inventory management moving from Just-In-Time to Just-In-Case;
• Increased urgency to diversify the sourcing and production ex-China;
• Greater leaning towards innovative and easy to adopt supply chain solutions;
• Manufacturers needing to adapt quickly to changing consumer demand for final products;
• Manufacturers concentrating production and storage in or near markets with the biggest potential.

1. Supply chain consolidation

These two words, ‘vertical integration’, of the supply chain have been getting increasingly audible amongst thought leaders in the manufacturing and logistics field. Vertical integration is the growth of a business enterprise through the acquisition of companies which produce intermediate goods needed by the business or helps to it market or distribute its product. This process is needed when it is desirable to secure the supplies needed by the firm to produce its product and to help market it. This will precipitate to greater M&A activity in the manufacturing sector. Mid-to-small and medium sized enterprises (MSEs) both globally and locally may be the targets of acquisition. Whether this will lead to greater or reduced demand for industrial and warehousing space depends on point 6. But even without considering that point, there is a possibility that the balance may tilt towards the negative because mergers often engender redundancies.

2. Inventory management

Just-In-Time inventory was originally coined in Japan where because of the country’s limited resources, they had to minimise wastage. A related technique is lean inventory management, which when paired with drop shipping (this is used by retailers who do not keep goods in stock but instead transfers customers’ orders and shipment details to either the manufacturer, another retailer, or wholesaler, who then ships the goods directly to the customer) makes it very appealing to retailers. Basically, the latter could sell goods before even buying them. Going forward, the massive supply chain disruptions happening at the moment has made all parties in the web realise the need to adopt a Just-In-Case inventory management system. Just-In-Case is an inventory strategy in which companies keep large inventories at hand to hedge against disruption. As far as inventory management goes, Singapore’s logistics and warehousing industry would generally benefit from the evolution to the Just-In-Case model as greater spatial demands should arise from the switch to this model. However, with the extra costs associated with holding spare inventory, related to point 1, we would not be surprised if manufacturers end up acquiring logistic providers.

3. Increased urgency to find other diversification sources

This is contingency planning for alternative sourcing and production. The move to diversify from overconcentrating in China may result in new hub and spoke regions which, although still unsettled , but once are identified, will result in the sprouting of new manufacturing centres across the globe. Post pandemic, it will be a new construct where we see solar systems of manufacturing take shape. Within Southeast Asia, arising from the trade war, Vietnam has already benefitted and, post pandemic, should cement its position as one of the many manufacturing hubs round the world. To minimise any disruption to their supply chains in the event of future contagions, manufacturers may wish to keep the supply chain vertically integrated with as small a cross-border footprint as is possible. For this, our industrial and warehousing space may not benefit because we lack depth and breadth in manufacturing.

4. Greater leaning towards innovative and easy to adopt supply chain solutions

This point is neutral on the real estate front as technology can be transplanted to any country.

5. Manufacturers needing to adapt quickly to changing consumer demand for final products

For some countries which just came out of a long period of strict lockdown, consumers have been observed to have changed their purchasing habits. Whether it is for the long term or not, consumption habits are likely to change for several reasons, chief amongst which is the uncertainty of holding one’s job. Even if there is job security, sharp pay cuts have shrunk their wallets for luxury or self-actualisation goods and services. Manufacturers like retailers are still searching for hints of how global consumption patterns may turn out to be when countries emerge from the pandemic. Consumption patterns may also change over time when societies and economies restructure to align themselves with a post-pandemic world. Therefore, they may have to be quick to change their production lines from one product to another with minimal downtime and reconfiguration costs. With an efficient air and sea port and the relatively short distances from warehouse to the ingress and egress points to the country, Singapore’s logistics facilities may stand to benefit from this fleet-footed, perhaps even bespoke approach to manufacturing and warehousing.

6. Manufacturers concentrating production and storage in or near markets with the biggest potential

This means a manufacturer would choose to set up base in a country or region that has the largest market potential for its products, be it a vertically integrated manufacturer or one that is specialist product producer. In Southeast Asia, the three countries with the largest population are Indonesia, Philippines and Vietnam. Amongst the three, Vietnam has the advantage of having both land routes to large markets like Thailand and the Indochina region as well as sea routes to markets further afield. With regards to the prospects of space for physical manufacturing and warehousing of the six points that have been highlighted, this point that matters the most. The small market potential of Singapore may not benefit from this. Therefore, it seems that Singapore would only benefit from a narrow spectrum of the new industrial structure. These will be concentrated in the need for greater last-mile physical storage space (logistics) and the expansion of demand for warehousing Just-in-Case inventories. However, while the existing players may restructure and that process may result in companies moving out, new areas of demand are expected to spring up. Also, there will likely be even greater interest in certain sub-sectors, which prior to COVID-19 had already been seeing investors’ interest. Some of these are highlighted below.

• Vertical farming and agrotechnology
• Cold chain storage
• BCP centres
• Data centres
• Sustainable industrial and logistic facilities
• Industry 5.0
• Tech incubator/research facilities

We shall briefly discuss each of these.

1. Vertical farming and agrotechnology

Vertical farming is the process of growing crops in a controlled environment by vertically stacking the nutritional substrate. It is often soilless farming which uses hydrophobics, aquaponics and aeroponics to optimise plant growth. While the start-up costs for this type of farming are high, together with issues such as high energy usage and pollution (not effluent discharge but high carbon footprint arising from high energy inputs), the need to have greater food self-sufficiency is likely to override some of these concerns here. As of April 2018, there were 26 indoor farms in Singapore, but giving our agri-food industry’s target 2030 to produce 30% of our nutritional needs by the year 2030, demand for this type of farming is going to climb the wall (Please refer to Chart 1). Presently, vertical farms are found in the far West and North-West of Singapore and to the central regions, and even one in Orchard Road. Post pandemic, some industries will see decline and rather than invest more on constructing new buildings, the vacated ones can be recommissioned as vertical farms, saving a significant amount of capex which has been a hinderer of this type of farming.

2. Cold chain storage

Before the pandemic begun, demand for cold room facilities here had been lukewarm. The efficient distribution channels that brought food straight from ports of ingress to final customers’ storage facilities reduced the need for such infrastructure. The heavy energy consumption of cold rooms plus the rapid obsolescence of their refrigeration systems also meant that they required short payback periods. However, this could not be achieved as cold storage demand, due to the efficiency where food and other perishables being delivered almost directly to end customers, was lacking. With the need to buffer in Just-in-Case inventories, cold chain storage should see an uplift in demand. With the pandemic, demand for Singapore’s existing cold chain storage stepped up and greater capacity should be expected in future. Most cold rooms are located within Food Zones and together with central kitchens, they form a synergistic cluster with a future looking brighter than before the pandemic. Please refer to Figure 1./p>

3. BCP centres

Business Continuity Planning (BCP) is closely linked with the term strategic resilience. BCP expands to cover fields that include equipment, supplies and suppliers, back up work area recovery sites and documents. Here, we shall look only at back up work area recovery sites. In this regard, the lessons learned from this pandemic is likely to spur companies to either have staff spend more time working from home or set up satellite back up offices for staff to work on rotational basis. For some trades, given the need to maintain high confidentially and/or quick response time, working from home may not be a solution. The need to set up BCP centres could therefore be the next best solution (other than for staff to work out of the same office). As business activity is not expected to return to levels prior to the viral outbreak, companies may enter an austerity drive. Taking up commercial space for BCP may be resisted because of the relatively high rents. However, there exists the opportunity for them to move into industrial space. Unfortunately, the current use guidelines for industrial space disqualifies many companies from leasing such premises. A change in regulations may have to be made for this to happen. After all, amongst the various industrial properties, multi-user factory space has been seeing elevated vacancy levels.

4. Data centres

Even as late as the third quarter of 2019, there were fears of saturation for the data centre market here. However, the advent of 5G, working from home, wider use of video conferencing and e-commerce ratchets up demand for bandwidth and data storage. Prior to the entry of the abovementioned demand drivers, data centres were already popular amongst investors. However, although data centres have been highlighted as a likely beneficiary from greater end user and consequently investor demand, the future growth of this industry in Singapore depends heavily on government policy. Because this industry is power hungry, which runs counter to efforts to fight carbon emissions, and because this industry employs relatively few people, the cost benefit to Singapore could be negative. Still, we do not discount a greater request for land for data centres moving forward, due to Singapore’s track record in its ability to maintain continuous power supply, low natural disaster risks and global connectivity. Figure 1 shows the major data centre clusters in Singapore. These are annotated as ‘DC’ .

5. Sustainable industry and logistics facilities

Within the core of sustainable industries lies Clean Energy and Green Building. These non-polluting, environmentally sustainable industries tend to be more labour-intensive and less resource-intensive than traditional processes. The key features of a sustainable industry are energy efficiency, resource conservation to meet the needs of future generations, safe and skill-enhancing working conditions, low waste production processes, and the use of safe and environmentally compatible materials. Three major industries in line for sustainable innovation include Biopharmaceuticals, Information Technology and Energy Generation. These three industries occupy a large footprint in our industrial map and the drive towards sustainability would simultaneously draw in companies which offer solutions to them. Therefore, the case for greater demand for Clean Tech space is strong. For logistics facilities, the dark warehouses should number more in future. The incentive for this is Singapore’s good connectivity squaring off with high cost of labour, as well as corporate social responsibility to minimise energy consumption.

Within this sub-sector of sustainable industries are logistics facilities for e-commerce and 3PL providers.

With or without COVID-19, e-commerce is expected to be the fastest growing segment in Singapore’s digital sector. In 2020, the revenue from the e-commerce market is expected to exceed US$2.7 billion. The growth rate for the next five years to year 2024 is anticipated at a rapid 9.1% CAGR, resulting in a market volume of US$3.9 billion by the end of the forecast period. (Please see Chart 3).

6. Industry 5.0

The likely change in the global supply chain order may give rise to smaller hub and spoke manufacturing bases and this can have suboptimal economies of scale. However, the pandemic has shown the need to restructure where the need for having a robust supply chain outweighs the specter of higher costs. To overcome the latter, manufacturers may leapfrog over Industry 4.0 to land on the Industry 5.0 platform. Industry 5.0 is a co-existence of robots and humans. Present production models churn out generic products, leaving the end user to customise it himself/herself. Industry 5.0 allows for the mass customisation of the product. High value-add jobs will be created in this process and fits in well with Singapore’s labour constraints. New factory and warehousing facilities will have to be built to accommodate this new version of manufacturing. Although still at an infancy here, we expect greater focus towards this new production process with new factories built.

7. Tech incubator/research facilities

7Although there is already an facilities for start-ups here at JTC Launchpad@one-North and Launchpad@Jurong Innovation District, the new venture community will begin to veer towards what’s hot in the post-pandemic world. The slate of knowledge-based companies is likely to skew towards tech healthcare, remote offices and sustainability ideas. Arising from this pandemic, fresh graduates or those soon graduating, and even those who have graduated recently, may find it a challenge to land full-time jobs. Rather than letting the Gig economy get to them, many could find it more meaningful to put their knowledge to good use. More launchpad type of facilities would come in to fill those needs.