19 June 17 The Business Times by CHAI HUNG YIN
SINGAPORE institutional caterer Catering Solutions has been tapping the strengths of both sides of the Causeway to optimise its operations and to enter new markets.
The sister company of Indian restaurant Gayatri has moved some of its processes to Johor Bahru (JB), Malaysia, as part of its cost-cutting measures, to internationalise and to complement its operations in Singapore.
The move to set up a central kitchen in the small town of Gelang Patah just across the Tuas Second Link in 2014 has led to cost savings of about 15-20 per cent, says its co-director S Mahenthiran. His father Shanmugam and brother Vikineswaran are the other directors.
The catering company, which provides 15,000 meals daily for 5,000 foreign shipyard workers in Tuas, has seen its volume grow and was finding it hard to cope with rising business costs and property prices over here.
He tells The Business Times: "During this period, we had expanded our institutional catering to Malaysia already. We were doing 4,000 meals a day then for an international school.
"We are expecting to grow to 100,000 meals a day in Singapore and Malaysia. So why not we bring this business over to Malaysia because the cost of the products are cheaper."
Prices of fresh ingredients and supplies such as vegetables are lower in JB. Mr Mahen says: "The prices of vegetable, spices, rice and flour increase the moment they cross the border. This is usually due to the numerous middlemen involved in the supply chain.
"Positioning ourselves in Malaysia has given us the advantage to work with farmers directly. However, we still require high volumes to negotiate pricing. We save approximately 10-20 per cent on these products."
The company uses 2,000kg to 3,000kg of vegetables a day.
Having direct access to the farms means the company can cut out middlemen and thus save cost, as well as get better quality vegetables. It can also inspect the farms for better quality control.
Mr Mahen says: "Suppliers there, they keep the Grade A for themselves and they send the Grade B over to Singapore.
"Sometimes we get better quality vegetables over there in Malaysia than what we get over here."
Vegetables are also fresher, as there is no delay in transportation, "which allows us to process the vegetables immediately and vacuum pack and then send it over to Singapore, instead of waiting for it to be transported in ambient temperature, which causes these perishable products to deteriorate".
The central kitchen in JB washes and processes vegetables into various cuts, produces ready-to-cook pastes and chappatis.
In total, it produces 40 different products, including peeled, sliced and diced onions; shredded cabbage; julienned carrots and pastes such as curries, sambal and brown sauce.
The processed vegetables are then vacuum-packed so that they can last longer and are transported in chilled trucks to Singapore daily for use in its restaurants and two central kitchens in Tuas. The products can last between two and six days at temperatures below five degrees Celcius, depending on the type of cut.
Says Mr Mahen: "So we save time, instead of cooking the gravy from scratch over here, we can make it in bulk over there.
"The same thing can be done here in Singapore, of course, but again the overheads are actually higher."
Utilities and labour costs are also lower. When the water price hike kicks in here next month, the cost savings will be bigger.
However, operating in a foreign country has its own set of challenges. For one thing, not all processes can be done in Malaysia.
Says Mr Mahen: "AVA (Agri-Food and Veterinary Authority of Singapore) has restrictions on meat.
"Currently there are no AVA approved establishments in Malaysia for red meat importation to Singapore, therefore red meat has to be imported from other sources. All the meat has to be processed here."
Complying with the restrictions of both countries can be challenging too, as there are certain regulations that Singapore allows but Malaysia does not and vice versa.
He says: "We have to see the common ground between Singapore and Malaysia, where they both allow this - that's when we can move forward."
Paperwork to get the processed products over into Singapore can be a hassle. In Singapore, you need the various import licences from AVA.
Over in Malaysia, you need the various licences such as hazard analysis and critical control points (HACCP) certification, halal certification from the Islamic Religious Council of Singapore (Muis) and an export licence.
Says Mr Mahen: "Every SKU (stock keeping unit) that you want to produce has to be submitted to the Ministry of Health in Malaysia.
"If we have 15 different pastes, we have to provide them with 15 different formulae."
Besides, currency fluctuations affect the company's earnings, although ringgit depreciation is better for its asset loan repayments in Malaysia.
Changes in the law are also a risk, which the company mitigates by having a business contingency plan - exploring new clients in Malaysia and ensuring the central kitchens in both countries are each capable of supplying to its clients in the respective countries.
While the company can tap government grants here to help it automate, scale up, boost productivity and tackle labour issues, it is left on its own over there.
For example, the Capability Development Grant by Spring Singapore defrays up to 70 per cent of qualifying project costs such as consultancy, training, certification and equipment costs.
Mr Mahen says the company's profitability grew about one and a half years after it tapped the grants.
He says: "You can see the increase in profit because automation decreased the number of man hours needed. Labour cost was lower.
"When we moved to Malaysia, all the equipment we bought over there was very expensive because we had no funding. So your ROI (return on investment) is longer."
Hiring in JB can also be challenging as most skilled workers are already working in Singapore. So the company ended up having to pay more to attract talented staff there.
While the company saves on labour, supply and utilities costs, it incurs other costs such as transportation costs to maintain the cold chain, licensing and consultation fees.
Taxes are also higher in Malaysia, notes Mr Mahen. Corporate tax for non-resident companies in Malaysia is a flat rate of 24 per cent, while the corporate tax rate in Singapore is 17 per cent for both local and foreign companies. Besides, companies here enjoy corporate income tax rebates.
He says: "Sometimes it could work out the same. Instead of going overseas, we do it over here."
As Mr Mahen weighs the pros and cons, he has his sights set on the long term. To him, moving certain processes to Malaysia is another step in his company's internationalisation and diversification efforts, such as expanding its client base in Malaysia.
Having automated the company's processes here, he is looking to export pastes and other products made in Singapore to countries such as India and China.
He says: "Singapore products actually have greater value overseas. When you make in Singapore and export to China, people tend to perceive the product as premium."