THE Iskandar region has long been touted as a cheaper destination for Singapore companies grappling with escalating costs at home, but the shine seems to be fading.
Industrialists cite the rising cost of real estate and labour, a lack of skilled workers and low labour productivity as among the reasons holding them back from shifting to the sprawling development across the Causeway.
"I've heard that it's difficult to hire skilled labour... Also, most of our customers are in Singapore and we would have to deal with Customs fees and longer lead times if we were there," said Mr Johnny Mok, assistant general manager of electronic component assembly firm Add-Plus.
Mr Mok visited Iskandar, which at 2,217 sq km is three times the size of Singapore, to scope out opportunities. But he eventually decided the company should stay put in Singapore.
It is a similar story for Mr Paul Lim, managing director of Craftech Printing Services. He has had to cope with a 10 per cent rise in rent every two years for the company's MacPherson premises, yet remains unconvinced that shifting to Iskandar is the solution.
"We have considered the possibility, but the workmanship and attitude of workers in Singapore tend to be better," said Mr Lim.
Mr Kurt Wee, president of the Association of Small and Medium Enterprises, said the association is "extremely conservative towards moves to Iskandar".
"It hasn't been an entirely successful low-cost venue... When people move there, it's a whole new set of problems," he added.
Wages, for instance, are only 10 per cent to 20 per cent lower than those in Singapore, and sometimes even on a par due to the tight labour supply, said Mr Wee.
Iskandar's proximity to Singapore also makes it tough for firms to hire Malaysians, as many tend to prefer working here and being paid in Singdollars, said Mr Victor Tay, chief operating officer of the Singapore Business Federation.
OCBC economist Wellian Wiranto said productivity levels in Malaysia have yet to catch up with wages. Coupled with rising inflation and government policies put in place to cool the property market, this is "likely to put a bit of a dampener on investor sentiment", he added.
In addition to wages, the rising cost of space in Iskandar is also giving companies pause.
Demand for sites was strong in the first half of last year as the buzz about the region drew companies, said Mr Wong Hsun-Min, head of business banking at RHB Bank Singapore.
The surge in demand since January last year led to a spike in prices, which rose from between RM250 and RM320 per sq ft (S$96 and S$123 psf), to between RM300 and RM400 psf depending on location.
Buying interest was "more muted in the second half of 2013" as a result, said Mr Wong.
While prices in Iskandar are rising, overall land costs are still lower than those in Singapore, said Mr Sam Cheong, executive director and head of the foreign direct investment advisory unit at United Overseas Bank.
Firms can benefit from industrial zones within the Iskandar region that offer freehold industrial property, "which is rare in Singapore", he said.
"Businesses expanding into Iskandar see it as a cost-competitive logistics and processing hub."
Some companies are still finding it worthwhile to have a presence in Iskandar.
Singapore is the biggest investor in Iskandar, accounting for 16 per cent of its total foreign investment as at June last year.
Singapore Chinese Chamber of Commerce and Industry president Thomas Chua said it recommends that Singapore companies "look at Iskandar Malaysia as a complementary production base to their Singapore operations, rather than as a low-cost base".
He is also the chairman of printing and packaging firm Teckwah Industrial Corp, which has bought three factories in Iskandar.
"When I made the decision to start Teckwah's plant in Iskandar, I was very clear-minded about one thing - that my operations had to be highly automated as I could not rely solely on manpower resources, even though the overall labour pool was more affordable," Mr Chua said.
Dr Elgin Tan, managing director of confectionery and ice cream-maker Sugalight, bought a factory there earlier this year.
The 13,000 sq ft factory in Gelang Patah - about 15 minutes from the Tuas Checkpoint - cost RM3.8 million, about one-third the price of similar space here.
"We're planning to move more labour-intensive operations there - for instance, the baking of Chinese New Year cookies," said Dr Tan.
The company's Singapore operations at Jurong Food Hub will continue making ice cream.
"We want to penetrate the Malaysian market, and the proximity to Singapore will help us keep a close eye on the factory," he said.
Mr Cheong said the region still holds long-term potential.
"Iskandar complements what Singapore now has to offer, as Singapore's value-add comes from its financial hub status and marketing and trading expertise."