Electronics has for a long time been the key determinant of Singapore's economic success. But the current economic boom has arrived amid an electronics slump

JUST six years ago, a global slowdown in electronics dragged Singapore into one of its worst recessions.

But this time around, the economy is booming despite an electronics slump.

What has changed? Has Singapore outgrown its reliance on electronics?

The start of success

A LARGE part of the phenomenal growth that has made Singapore one of Asia's storied economies was its ability to harness the huge growth in electronics. From the 1960s, foreign companies came here, attracted by low labour costs, and set up assembly plants making anything from transistor radios to hairdryers. With big names like Hewlett Packard and Philips, the industry burgeoned to employ almost one third of the labour force.

In the 80s and 90s, Singapore became a key manufacturing base as production costs increased in countries such as the United States and Japan, forcing companies to find cheaper locations. At

the same time, state-owned enterprises such as Chartered Semiconductor and NatSteel Electronics and private firms such as Creative Technology joined the mix. By the mid-1990s, electronics was contributing over half of the economy's manufacturing output.

But Singapore soon became a victim of its own rapid success.

Good economic growth led to a rise in living standards. Wages went up and Singapore became too expensive. Companies began to outsource most of their production and design work to new low-cost countries such as Thailand and China.

Singapore, once a place to assemble low-end electronics, has become a major player in hard-disk drives and has concentrated production in more sophisticated components such as semiconductors. These are the silicon chips that essentially form the brain of electronic systems such as computers.

Electronics has clearly been the driving force behind Singapore's rapid transformation from a Third World to First World country.

But the 1997 financial crisis brought the Asian miracle to a painful and abrupt end. Economists wondered if Asian economies were losing their competitive edge, with New York Times columnist Paul Krugman infamously claiming that Singapore's success had been more 'myth' than 'miracle'.

Government officials understood the need for change and the following years saw the economy undergo a gradual but necessary makeover.

The recessions in 2001 and 2002, largely caused by a global slowdown in the demand for electronics, lent urgency to the makeover.

That painful experience was set against a backdrop of the rise of China and India, and their frightening manufacturing gravitational pull.

Change was needed. And change would come in the form of diversification, in the hope that Singapore would one day no longer be subjected to the vagaries of the electronics demand cycle.

Then deputy prime minister Tony Tan said on Oct 15, 2001: 'The next five to 10 years will be a very different scenario, but if we make the right decisions and pursue them with energy and determination, there's no reason why Singapore cannot continue to progress.'

In less than six years, Singapore has begun to see results of the makeover. The emphasis on growing the biomedical, educational and tourism sectors has created a host of new jobs as well as an expanded export sector for pharmaceutical products.

The services sector now employs 1.7 million people, or almost 70 per cent of the total workforce (2.5 million), while last year, Singapore exported close to $19 billion worth of pharmaceuticals, more than five times the value in 2000.

The property boom has spurred a furious recovery in construction, while the rise in oil prices has been reflected in a surge of demand for oil rigs. It has all generated high economic growth and left economists scrambling to upgrade their growth forecasts.

This all amidst the terrible funk in exports of electronics which had contracted for the fifth straight month.

Breaking out of dependence

ECONOMISTS interviewed said there is no doubt that Singapore has diversified its economy.

Mr Song Seng Wun of stock brokerage CIMB-GK said diversification means that the economy is not dependent on just one industry, and is therefore not held hostage to its demand cycle.

Today, Singapore's manufacturing sector has expanded to include chemicals, of which a large part is pharmaceuticals, and transport engineering equipment which includes oil rigs and aircraft parts.

In terms of share of total non-oil domestic exports (Nodx), which is the overseas sales of made-in-Singapore goods, exports of pharmaceuticals and petrochemicals, which comprise the bulk of chemicals, have grown from about 4 per cent in 1995 to 18 per cent last year, and is worth over $30 billion.

Electronics' share of Nodx has fallen from 70 per cent at its peak in 1995 to 46 per cent last year or $78.5 billion, according to International Enterprise Singapore (IE), which tracks export data.

Outside of manufacturing, construction has been a huge growth driver, while Singapore offers a much wider range of services from finance to education to tourism.

The tourism hub is expected to provide a cushion for the economy in the future with the completion of the integrated resorts (IRs) and the upcoming Formula One race.

Mr Jimmy Koh, United Overseas Bank's head of economics and treasury research, said this will provide even further expansion to the services sector as it will generate more jobs in tourism-related sectors such as retail, entertainment and restaurants.

Revenue from casino gaming could be worth as much as US$2.2 billion (S$3.3 billion) by 2011, just a year after both IRs have opened their doors, according to a June report from accountancy firm PricewaterhouseCoopers.

Mr Koh said that with the risks hedged on so many different cycles, 'the Singapore economy is now a little more resilient to a downturn'.

'The Government is trying to create a stronger domestic growth engine with the tourism hub and IRs, so as to provide a cushion in a global downturn.'

Is the cushion big enough?

BUT has Singapore really weaned itself off its reliance on the electronics cycle? Or is it just fortunate to be in a period where everything but electronics is booming?

The consensus seems to be that it is still too early to tell.

The importance of the electronics industry goes beyond that of GDP figures.

This sector still does and will continue to be a big job churner.

As of the first quarter of this year, electronics contributed almost one-fifth of the jobs in manufacturing, with 110,400 people employed, according to the Ministry of Manpower's statistics.

DBS economist Irvin Seah also pointed out that 'a wide array of services are spun off from the electronics sector including business services such as accounting and also maintenance services'.

While pharmaceuticals is an increasingly dominant industry that rivals electronics in terms of GDP contribution, it accounts for only 34,800 jobs or just 6 per cent of those in the manufacturing sector.

Mr Song said that pharmaceuticals are ultimately 'hit and miss.'

'There is a huge capital outlay in R&D, and when you do get a result, the windfall is enormous. But the problem is that you don't know when you will get the results. '

Which makes the thought of a shrinking electronics sector even more disconcerting.

It has already lost most production of hard-disk drives to countries such as China.

Mr Song said Singapore missed out with the iPhone, citing the country's involvement as very small compared to Taiwan and South Korea.

The electronics sector evolves at a fast pace and is highly cost-sensitive - and Singapore is in danger of being caught out.

Down but not out

THE economists believe the electronics sector's poor performance is cyclical.

While its share of exports will continue to fall, it should bottom out 'at a level of 30-35 per cent', Mr Song said. It is at 40 per cent now.

The executive director of the Economic Development Board's electronics cluster, Mr Lim Swee Nian, said the sector is in transition as it adjusts to the loss of the hard-disk drive players to China.

The key is yet again to diversify and to move up the value chain so that Singapore can still be relevant.

This can be done by expanding the range of products made here as well as broadening the mix of companies so that Singapore will be better able to weather a severe electronics downturn.

With 14 wafer fabrication plants in operation, Singapore already has the second largest wafer fab capacity among all the world's cities and is fifth if ranked by country, according to a report by Strategic Marketing Associates, a California-based market research company.

Wafer fabrication is the process of making silicon chips where skill rather than cost of labour is valued, which Singapore offers.

Already the share of silicon chips in electronics exports has almost doubled from 18 per cent in the 90s to 33 per cent today.

In the next few years, this country will see two more billion-dollar plants. One is from memory chip company Qimonda and the other is a joint venture by American semiconductor giants Intel and Micron Technology called IM Flash.

Qimonda is a big player in Dram, which is the most common form of memory chips used in computers. Besides Dram, IM Flash will also make Nand, a newer type of flash memory chip that is used to store data in popular consumer electronic items such as MP3 players and digital cameras.

According to Mr Song, another way forward may be to build up a foundation of larger electronics companies. With deeper pockets for R&D, they may be more nimble in adapting to technological changes and compete with the big players in the global market.

He said Taiwan Semiconductor Manufacturing Company, which has since 1987 grown to become one of the world's largest dedicated semiconductor makers with sales exceeding US$9 billion last year, may be a model for Singapore's electronics companies.

If the economy today were likened to a jigsaw puzzle, it is clear that the size of the electronics piece has shrunk. Its removal might distort the picture without completely ruining it.

Perhaps, in the distant future, it may not even be part of the picture.

» Electronics down but not out

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