SINGAPORE ELECTRONICS SECTOR RECOVERING, BUT FUTURE IN

UNCLAS SECTION 01 OF 02 SINGAPORE 000715

STATE PASS USTR

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EINV SN

SUBJECT: SINGAPORE ELECTRONICS SECTOR RECOVERING, BUT FUTURE IN
DOUBT


1. (SBU) Summary: Singapore's electronics manufacturing sector is
facing a transformative shift as it begins to recover from
recession. The economic downturn gave a further push to a trend
already underway as high-volume, lower value-added manufacturing
departed Singapore for lower-cost producers in China and elsewhere.
Although analysts say electronics manufacturing will not disappear,
the sector will emerge from recession smaller and with a new focus.
The industry is moving toward higher-end products that capitalize on
Singapore's advantages in engineering talent, R&D facilities and the
country's reputation for rule of law and protection of intellectual
property. The GOS is focusing on attracting investment in new
"green tech" industries like solar energy, and searching for new
markets outside its traditional export destinations in the United
States and Europe. End Summary.

Recession Short Circuits Electronics Sector
--------------


2. (SBU) The financial crisis has hit Singapore's electronics
manufacturers harder than other industries as consumers froze
discretionary purchases and business saw no need to increase capital
expenditures in the face of declining demand. Members of the
Singapore Association of Electronics Industries told Econoff that
sales began to slow last October, but fell off a cliff in November,
and finally bottomed out in January and February. Electronics
production was off nearly 45 percent in the first two months of this
year compared to the previous year; exports fell by similar
amounts.


3. (SBU) Although far from full recovery, the sector is showing
signs of revival. Electronics output in June was off by 20 percent
compared to last year, but was still the best showing for the sector
in seven months. Exports were down 21 percent as well in June, but
the latest release of the Purchasing Managers Index, an early
indicator of upcoming manufacturing demand, was unexpectedly healthy
for the electronics sector. New orders and new export orders are up
for the third month in a row. Even employment stayed flat after
months of contraction.

The Long Slow Decline
--------------


4. (SBU) Despite the budding recovery, analysts say Singapore will
be unable to slow a steady decline in electronics manufacturing that
was well underway before the recession hit. Electronics has long
been a major contributor to Singapore's economy, making up 22
percent of manufacturing employment (over 90,000 workers),and 30
percent of non-oil exports. Singapore still has the world's top
three wafer foundries, 20 semiconductor assembly and test
operations, integrated circuit design centers, and produces about 80
percent of the world's enterprise hard disk drives. However,
production has been slowly shifting to China and other lower-cost
countries since at least the mid-1990s, led by hard disc drives and
consumer electronics. In just the last five years, electronics
output has dropped from 38 to 27 percent of Singapore's total
manufacturing output. Electronics exports have not had a monthly
gain in over two years. Motorola and Seagate, two major employers
in Singapore, have each recently scaled down employment in Singapore
and shifted some manufacturing elsewhere.

The Shift Up
--------------


5. (SBU) Terence Wong, head of research for DMG Securities, told
Econoff that electronics manufacturing was in Singapore to stay, but
post-recession the industry would inevitably be smaller. Singapore
suppliers have been moving manufacturing closer to companies in
China that provide final assembly. Taiwanese companies,
particularly contract manufacturers, have been challenging Singapore
manufacturers at all levels. However, companies were hesitant to
put all their manufacturing eggs in the China basket, and are
therefore keeping some manufacturing in Singapore. Wong said the
manufacturing that would survive would be the highest-end production
that the Chinese have yet to develop the capacity to produce.


6. (SBU) Despite the strong competition, analysts say Singapore
still has advantages that will continue to attract manufacturing.
Damian Chan, Director of Electronics at the Economic Development
Board (EDB),Singapore's investment promoter, told Econoff that
although the cheap labor model is dead, Singapore's engineering
talent keeps manufacturing here, providing trouble shooting and
quality control superior to that in China. The advantage is
particularly great for products that are mission critical and
therefore less sensitive to price such as high-end servers.
Superior R&D facilities and research technicians also anchor some

SINGAPORE 00000715 002 OF 002


manufacturing, necessary to conduct experiments and develop
prototypes. Raju Chellam, a spokesman for Hewlett Packard, the
largest electronics manufacturer in Singapore, pointed out that
Singapore's tight rule of law attracted production with valuable
intellectual property or subject to strict export controls.

Singapore Looks for the Next Big Thing
--------------


7. (SBU) Although the GOS is trying to manage the reorientation of
the electronics industry, EDB's Chan admitted that it was difficult
to focus more than two years into the future. David Peck, owner of
the medium-sized Arrow Technologies, told Econoff that he saw no new
Next Big Thing on the horizon that would drive the next wave of
electronics production. Earlier hot products like personal
computers, laptops and cell phones ensured a steady supply of
consumer demand for new electronics products, but no obvious new
product is in sight that could drive similar demand.


8. (SBU) EDB is placing a bet on green technologies and alternative
energy, particularly solar energy, as the next industry for
Singapore. The GOS provided S$350 million (US$240 million) to
develop research and manpower capabilities in the industry. EDB and
the National University of Singapore provided S$130 million (US$91
million) to establish the Solar Energy Research Institute of
Singapore (SERIS) to lead solar R&D in areas such as nano-structured
solar cells and silicon photovoltaics. EDB managed to attract
Norwegian solar manufacturer REC to build a US$2 billion solar
manufacturing complex, slated to be the world's largest. EDB is also
looking at attracting manufacturers of portable power devices, i.e.
fuel cells, and nanotechnology.


9. (SBU) EDB is also promoting Singapore as a site for regional
headquarters for multinationals and local Singaporean firms to
operate as a "control tower", supervising production, distribution,
and managing supply chains in Asia. Chan said some Singaporean
companies have moved manufacturing overseas but maintain much of the
rest of their operations in Singapore, capitalizing on Singapore's
reputation for quality but at the same time getting the "China
price" for their manufactures. Singapore's low corporate tax rate is
another incentive to keep income based here.

Opening Markets
--------------


10. (SBU) International Enterprise (IE) Singapore, the GOS's export
promotion arm, is expanding its efforts to open up new markets,
particularly for its small- and medium-sized electronics
enterprises. In the face of declining sales in the United States
and Europe, IE is subsidizing trade shows in new markets to spark
interest in Singapore products. Thian Thai Chew, Director of
Electronics for IE Singapore, told Econoff that Singapore companies
were still finding demand in China, and IE was focusing on opening
new markets in "Tier 2 and 3" cities in the hinterlands of China.
China's new 3G telecom system and subsidies for rural consumers are
driving a wave of electronics purchases in those areas. India is an
interesting market, Chew said, but Singaporean companies were
finding it difficult to get a foot in. IE has opened offices in
India to lead the way, as well as in the Middle East, and has
established a presence in Brazil to try to open markets in Latin
America.

SHIELDS