Full Annual Report 2006 - Singapore Technologies Engineering

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THE WINNING SPIRIT ST Engineering AR 2006 82 Operating Financial Review Labour Supply Skilled labour is a concern in the Aerospace sector as there is a high demand for skilled technicians both in the US and in the growing China aviation industries. Training, manpower retention incentives and alternative sources of supply are some ways in which the Group overcomes this skilled labour shortage. Defence Spending Defence spending in Singapore has generally been increasing year on year. However, this does not necessarily translate into more orders from the Singapore Armed Forces (SAF). Like the armed forces of other countries, the SAF is purchasing in smaller quantities to keep pace with technological change. Technological advances also mean that new equipment, such as fighter jets and the ever more efficient commercial aircraft, require less maintenance in their early years. The Singapore government has introduced private-public partnerships, where public projects and services are outsourced to the private sector. This development brings new opportunities for the Group, particularly with its strong record in defence, government and public projects, ranging from transport and subway systems to homeland security and defence solutions. With emphasis on lowering total cost of ownership, the Group’s commercial business helps to bring commercially available technologies and practices into the defence business. In the US, the defence budget has also grown, in view of global geo-political unrest and the war on terror, including expenditure on homeland security. The US Navy has proposed increasing its current fleet to over 300 vessels, with US$8.9b requested for building seven new ships*, and the US Coast Guard‘s budget for 2007 has allocated US$1.06b to the 25-year long Deepwater programme to upgrade its fleet.** Training in the defence sector is also employing simulation techniques and programmes, in addition to ground combat exercises. * source: American Shipbuilders dated March 2006 ** source: Defence News dated 9 October 2006 Homeland Security As terrorism continues to be the scourge of world communities, governments are increasingly aware of the need for homeland protection technologies. This awareness will take time to be translated into budgets and implementation and, in the longer term, presents opportunities for sensor, biometrics, surveillance and monitoring technologies, as well as patrol vessels and fast interceptors to guard coastal waters. Similarly, some of the Group’s defence and homeland security products and technologies can be used in disaster recovery. Emerging Markets The Group’s continued global expansion and inroad into new markets – South America, Africa, the Middle East, Central Asia – will further diversify its business, making the Group less dependent on traditional markets. The new markets can also serve as lower cost manufacturing or procurement bases for the Group. They are also potential new businesses for the Group in terms of infrastructure, such as transportation networks and intelligent buildings. Free Trade Agreements, like the one between the Panama and Singapore governments, will further widen the scope of collaboration and economic exchange at various levels between nations. Disasters Being in new markets also exposes the Group to other risks, such as natural disasters and terrorism. For example, the Group’s Aerospace and Marine’s operations located along the Gulf Coast of the US are on hurricane watch each year from June to November, requiring preparedness and robust business continuity planning. In the aftermath of a disaster, recovery operations often field emergency response equipment and vehicles. Post disaster operations see the rebuilding of infrastructure as people’s lives slowly return to normal. New buildings, such as housing and schools, roads and other transportation systems benefit providers of expertise and equipment in these areas. RISK MANAGEMENT As the Group drives towards globalisation to expand its market, much effort has also been focused on the Group’s aim to build a robust risk management practice. Such practice allows the Group to align its risk appetite and strategy; to identify, manage and monitor key risks; and to allocate resources more efficiently. A clearer understanding of risks also enables risks to be taken knowingly and optimally. This would not only minimise surprises and losses, but also enhance the Group’s performance and competitiveness when faced with opportunities. The Group will
83 Operating Financial Review continue to build a strong risk management culture as well as strengthen its existing risk management practices. • Risk Management Governance: The Group’s Risk Review Committee works with the management to ensure that the Group has adequately prioritised and addressed the risk management issues within the Group. • Risk Reporting Dashboard: A structured dashboard that provides an overview of risk profile as well as key risk indicators and risk incidents to management and the Risk Review Committee. It enables the monitoring of key risks and appropriate mitigating actions being taken on a timely basis. • Risk Management Infrastructure: Various enabling policies, methodologies, guides, checklists and IT applications are constantly being developed and improved in order to support the practice of risk management at both Group and business unit level. a) Strategic and Operational Risk The Group operates in 20 countries spread across the Asia Pacific, Europe, and North and South America. As part of the Group’s plan to grow its business internationally, it will continue to focus on increasing its operating activities and presence in Europe, Greater China and the US. In 2006, 23% of the Group’s assets were in the US (2001: 5%). Revenue from customers located outside Asia increased from 26% of Group revenue in 2001 to 47% in 2006. As part of its business strategy, the Group seeks to increase the proportion of its international business and customers, thereby achieving greater geographical diversification. Likewise, the Group also plans to raise the proportion of its commercial business while maintaining strong support towards the local defence business. The commercial business helps to bring commercially available technology and practices into the defence business, thereby allowing for more cost effective systems and solutions. A more diversified base of commercial and military customers will reduce the risk of customer concentration. b) Investment Risk The Group seeks to grow its businesses on three fronts: through organic growth of its existing capabilities and capacities; through development of new capabilities; and through acquisition or joint ventures of business entities or operating assets. Investment activities, ranging from the identification of targets to conducting due diligence, are supported by a dedicated team of investment professionals and augmented by external professionals for specialised services. The business proposals are guided by a given set of internal investment criteria, evaluated by senior management and endorsed by a Business Investment and Divestment Committee before seeking final Board approval. c) Interest Rate Risk The Group’s cash balances are placed with reputable banks, financial institutions and a related corporation. The Group manages its interest rate risk on its interest income by placing the cash balances in varying maturities and interest rate terms. For loans taken by the Group, long term interest rate swaps are taken to mitigate short term interest rate risk. 06 47% 01 26% 06 23% 01 5% Assets located in US Revenue from customers located outside Asia
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Full Annual Report 2006 - Singapore Technologies Engineering

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