BT EXCLUSIVE

Mind the gap? No, not yet, say chip exporters

Factory output in electronics manufacturing cluster has surged year-on-year - even as exports keep sliding

Singapore

A RECENT trend in Singapore's electronics manufacturing scene has left economists here stumped.

Factory output in this key cluster has surged year-on-year - even as exports keep sliding - amid a gamut of expert explanations for the gap, which range from the wary to the optimistic.

Still, some electronics companies here told The Business Times that they have not yet found serious cause for concern in their customer outlook.

Non-oil domestic exports jumped by 15.5 per cent in May, but this was in spite of a 7.8 per cent slide in electronics shipments - its sixth straight month of decline. Meanwhile, the electronics cluster saw production leapfrog an overall rise of 11.1 per cent, to grow by 17.1 per cent.

Pet theories that have been put out include the chipper notion that electronics orders are being booked here, even if companies outsource production to cheaper factories elsewhere.

Selena Ling, head of treasury research and strategy at OCBC Bank, noted in the wake of last week's purchasing manager index figures that "export sales have grown at a slower pace than total orders for two months, which reflects stronger domestic demand vis-à-vis external demand".

Or Singapore could be reaping benefits from its tech know-how without cranking parts off the assembly line. "Increasingly, we are doing the services part of manufacturing - for example, the design - not the actual manufacturing," said United Overseas Bank (UOB) economist Francis Tan.

But the value of those contracts would still be counted towards industrial production, he noted.

Yet, more cautious observers fret about the potential for a build-up in inventory, given the risk that that stock could end up unsold on a slump in demand. Economist Song Seng Wun, from CIMB Private Bank, said: "For now, I think supply has caught up with demand and prices are no longer 'chionging' (surging) like last year."

Some chip prices have fallen by one-third from last year's levels while others have stabilised, he added - which could explain why export value was down in the first five months of this year, despite rising chip output.

But supply for semiconductor parts is still "very tight" in the face of demand, according to Tan Ka Huat, managing director of mainboard-listed contract manufacturer CEI.

"The semiconductor components are in short supply because of booming demand in the automotive, robotics, Internet of Things and consumer device markets. Lead time and pricing are challenging, although we have been able to manage decently, working closely with our customers."

Other chipmakers are also keeping cool. Homegrown PBA Group and multinational Applied Materials both told BT that Singapore is home to their advanced manufacturing and high-value production operations.

In fact, about half of Applied Materials' worldwide semiconductor output comes out of the "Little Red Dot", according to Brian Tan, company vice-president for China and South-east Asia. "We're seeing very strong orders and backlog at this point in time."

Lavanya Karthikeyan, assistant manager for business development at PBA Group, said the group has not seen exports go down.

"For us, it's actually dependent on the markets that you look to, for the price point so far," she told BT. "We are able to look at a higher-value product because we are pivoting from purely selling components, to a more solutions provider model."

Pointing to demand from smart devices and other growth areas, Applied Materials' Mr Tan said: "There is always going to be inventory and there is always going to be correction. There is always going to be market demand, so I don't think that fundamentally has changed. If anything, a lot of these (trends) are very likely short term."

Of course, in the electronics cluster, products are not all created equal. Semiconductors, which hold the lion's share of the cluster, led the charge in May's factory output, even as other segments saw lower output. The fall in exports was also led by non-semiconductor products, such as integrated circuits, personal computer parts, diodes and transistors.

Still, Mrs Lavanya said: "There are a number of companies that we serve for their automation needs. Sometimes they accumulate inventory for testing purposes, and that could be for domestic use."

CEI's Mr Tan said: "My customers in life sciences, medical technology, aerospace, oil and gas, industrial and semiconductor sectors are doing fine." But, citing the ongoing spat between the United States and China, he added: "The wild card now is the tariffs topic."

But Apex Technologies International, a local mould fabricator that supplies chases for semiconductor packaging, sounded a warning note.

Managing director Alan Hoong told BT that costs are going up amid a slowdown in orders. "In our sector we are facing a serious shortage of designers," he pointed out. "Even the supporting industry is moving out of Singapore."

Maybank Kim Eng analysts Lee Ju Ye and Chua Hak Bin noted that there had been a year-long output-export gap in 2013. "Eventually, electronics production growth corrected and converged back closer to electronics export growth," they wrote in late June.

In the end, "there's always a mix of cyclical and structural reasons in economic data", said Mr Tan from UOB. "Only time will truly tell which it is."

READ MORE: Digitalisation to help drive Applied Materials' Singapore operations