May 28, 2014

    Mystery over plunge in chip output

    A SURPRISE production cutback by a semiconductor player here has ended two consecutive months of double-digit expansion in Singapore's factory output and left questions in its wake.

    Electronics production last month fell 8.8 per cent year on year, mainly due to an 11 per cent contraction in the key semiconductor segment, which accounts for one-fifth of all manufacturing output.

    While a surge in biomedical manufacturing output helped to offset a contraction in the electronics sector, industrial production overall slowed last month to grow 4.6 per cent year on year.

    The Economic Development Board (EDB) said the semiconductor drop - the first year-on-year contraction in the sector's output in over a year - was "due to a firm-specific factor", but declined to reveal the name of the company, the reasons for the output fall, and the nature of the company's operations, citing reasons of confidentiality.

    While EDB characterised the disruption as "a one-off event" and stressed the continued attractiveness of Singapore as an investment location for electronics companies, the fact has left analysts wondering why it even happened at all. That's especially when the impact is expected to linger.

    "Although this is a one-off event, the decline will be registered in the year-on-year growth for the rest of the year," the government agency said.

    In the absence of further details from EDB, analysts were left to decipher last month's industrial performance; none of the experts The Business Times spoke to could indicate which firm was behind the cutback in semiconductor production.

    Said DMG analyst Edison Chen: "It's quite puzzling. To affect the entire semiconductor (segment), it must be quite a big event."

    Major semiconductor players here include Broadcom Corporation, Infineon Technologies and GlobalFoundries.

    Said Barclays economist Leong Wai Ho: "We interpret this to mean a permanent, one-off reduction in production capacity in this area."

    DBS economist Irvin Seah wondered whether the news reflected a "hollowing out" of the semiconductor segment.

    "If a plant has closed down, what were the reasons behind this? Was it simply one firm's one-off decision? Or does it have to do with something broader, which hints at the competitiveness of (Singapore's) economy, or structural issues?"

    But in response to queries from BT, EDB director of electronics Terence Gan said: "We are confident that Singapore remains an attractive investment location for electronics companies.

    "It is important to reiterate that this is a one-off drop, attributed to a single company, and for reasons specific to the company.

    "We continue to see investment interest. Even the specific company itself is growing in Singapore in other areas."

    UOB economists Ho Woei Chen and Francis Tan were also optimistic about the electronics sector.

    "On the whole, we believe that outlook for the electronics sector remains positive, given the improvement in the purchasing managers' index from the US, while the US semiconductor book-to-bill ratio stayed above 1.0 in April for the seventh consecutive month."

    Even though last month's industrial production growth slowed from March and February, the 4.6 per cent expansion still reflected a faster pace than the market consensus.

    Economists polled by Bloomberg before EDB released the numbers on Monday had been expecting industrial production to rise by 4.3 per cent.

    Excluding the volatile biomedical sector - which, with an expansion of 23.8 per cent, was the main driver of growth - output would have fallen 0.7 per cent year on year.

    Apart from the electronics sector, all other manufacturing clusters - biomedical, chemicals, precision engineering, transport engineering and general manufacturing industries - posted year-on-year increases in output.