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No swan song for Singapore semiconductors

Singapore

AS ELECTRONICS growth tapers from its recent highs, some analysts see a need to cushion Singapore's economy against the global semiconductor cycle's ups and downs.

The analysts are not suggesting the high-value chips industry is going to disappear. On the contrary, despite the supply chain fluctuations, many say it is here to stay.

The segment accounts for 31.9 per cent of the value of the electronics cluster's manufacturing output in 2000. Its share swelled to 72.1 per cent last year.

Still, some skittishness is not amiss. Latest industrial production numbers showed Singapore's factory output growth easing in both the overall electronics cluster and the semiconductor segment. Electronics exports fell 7.9 per cent from a year ago in the first quarter of 2018.

US information technology research and advisory firm Gartner sees annual growth of global semiconductor revenue slowing to 7.5 per cent in the year ahead to US$451 billion - down from last year's 22.2 per cent surge.

Equity analyst Jarick Seet, RHB Securities' head of small- and mid-caps, said: "I guess it will take some time to spread across the whole industry, as some semiconductor players are still doing well, but my take is there is indeed a slowdown globally and that should further show in the next one or two quarters, especially in earnings."

Rob Carnell, ING's Asia-Pacific chief economist and research head, told The Business Times: "Fortunately, at the moment, other sectors are pulling up the slack. But if that cannot be sustained, then exports and presumably gross domestic product (GDP) will be negatively affected. The Monetary Authority of Singapore might have to reconsider its recent slight appreciation of the effective exchange rate."

Singapore's manufacturing sector is split into the electronics, chemicals, biomedical, precision engineering, transport engineering and general manufacturing clusters. The electronics cluster includes computer peripherals, data storage, infocomms and consumer electronics, and other electronic modules and components, on top of semiconductors.

Semiconductors are more prone to cyclical swings than other segments of the electronics business - and one suggested way to soften the blow of the fluctuations is to shift production from chips to other electronic components. But Tan Khay Boon, senior lecturer at SIM Global Education, cautioned that it would mean heavy investments in research and development, and long-term commitment.

"To cushion the impact from fluctuations in electronics, it might be more effective to shift to other components of manufacturing, such as medical technology and engineering," he said.

Sanjay Mathur, ANZ's Singapore-based chief economist for South-east Asia and India, noted that semiconductor producers like South Korea and Taiwan have proven vulnerable to demand and price conditions.

"Other employment-generating industries need to be developed to maintain stability in growth. In both countries, the services sector is relatively less developed," he said.

Singapore's economic growth in recent years has broadened to include more services. Dr Tan is concerned that a further shift towards services might risk hollowing out the manufacturing sector.

United Overseas Bank economist Francis Tan said the current slump in semiconductors "may not be as significant as the services sector has also picked up pace".

But he remains "a long-term bull" on semiconductors, predicting a "structural uptrend" ahead. Mr Tan said there's still demand for electronic products such as Internet of Things-connected devices, even if smartphone sales struggle.

Others agree. Phillip Securities head of research Paul Chew said: "We may have hit peak momentum in semiconductor sales, owing to softer demand in smartphones and cryptocurrency. But structural demand remains healthy because end demand is diversifying into wider applications such as automotives, the Internet of Things (IoT), electronic cigarettes, lighting and solid state drives."

DBS Bank's senior economist Irvin Seah added: "We have to be mindful that it is not not just in the electronics industry, but also the Singapore economy, that the change has been an ongoing process of new technology coming in.

"In recent years, we have seen the emergence of new technologies like the IoT, which will spur demand for new parts and components. It really depends on how manufacturers want to manage their value chain and whether their manufacturing is based in Singapore."

Mr Seah pointed to the evolution of electronics production trends, from consumer electronics assembly in the 1970s to personal computers a decade later. "This is part and parcel of the evolution of the industry, and also of the Singapore economy."

Both Mr Tan and Mr Seah also noted the base effect from weaker electronics performance in 2015 and 2016, which gave a fillip to last year's growth figures. "Now, we are moving into normalisation," said Mr Seah.

"In the process of restructuring the Singapore economy, we are also diversifying into new clusters. Electronics may decline. Is that a worry? I don't think so, as long as we continue to promote growth."

Mr Mathur said Singapore has already "considerably" diversified its manufacturing base away from electronics. "But the problem with other industries such as pharmaceuticals is twofold: Its employment potential is low, and it is volatile owing to frequent shifts in the specific product produced.

"This tends to have an impact on the level of value addition."

Yet, regardless of the role of the electronics cluster, manufacturing - identified as a pillar of the economy since independence, when it was 14 per cent of GDP - will not be readily given up. Over the past three decades, the sector has consistently made up about one-fifth of the economy - a share that the state is committed to maintaining "over the medium to long term", as Economic Development Board assistant managing director Lim Kok Kiang put it.

He noted that the semiconductor industry "is export-oriented and driven by global demand and the industry's business cycles". But it is poised to ride the wave of new technologies.

"The pervasive use of these applications is expected to drive the demand for semiconductor content and greater innovation in the long term," said Mr Lim. "Semiconductor companies in Singapore are investing in capacity expansion to capture this growth."

He added that Singapore's manufacturing sector is diversified by design to yield "stable, sustainable growth even as each industry's business cycle varies according to its respective market trends".

In any case, the cyclical wild swings in the chips business are expected to ease. CK Tan, president of Singapore Semiconductor Industry Association, told BT: "It's the norm in the semiconductor industry. We go through periodic ups and downs. But these days, the cycle is shorter, and the ups and downs less steep."