Stalled in Singapore

Its plan to turn state companies into world-beaters is sputtering

A few months ago, SembCorp Industries CEO Wong Kok Siew had big plans for his $1.8 billion Singapore conglomerate. Wong hoped to make major investments in his core businesses, which include ship repair, logistics, and waste management, while selling off unneeded subsidiaries and selling more shares.

Instead, Wong has suffered through a year of frustration. He put Nasdaq-listed Pacific Internet Ltd., the group's Internet service provider, up for sale: The tech market crash scuttled that plan. And in late March, SembCorp postponed a private stock placement of $166 million. "We try to do our best," says Wong. "But sometimes, along the way, we cannot."

SembCorp's woes are also those of Singapore Inc. Like many of the city-state's other conglomerates, SembCorp is controlled by the government, which has a 58% stake through Temasek Holdings Ltd. After the 1997 Asian crash, the government mapped out ambitious plans to unload its holdings and encourage these conglomerates to invest elsewhere in Asia. Temasek, which owns more than 100 companies with assets of some $30 billion, said it would divest itself of shares. At the same time, the companies were supposed to recruit senior foreign talent, and Singapore would open up its financial-services and telecom markets to outsiders.

ECONOMIC CHILL. It was to be a bold remaking of Singapore Inc., one that would replace technocrats with entrepreneurs as drivers of the economy. But market conditions and lethargy have conspired to make this transition more difficult than foreseen. So far, Temasek has divested few holdings. Foreign execs have been hard to come by, and government-linked companies (GLCs) have not done much investing overseas. Divestitures haven't been "as fast as we would like because it's not a good market in which to sell," says Deputy Prime Minister Lee Hsien Loong, who is known as B.G. Lee after his old army rank of brigadier general. As for making big acquisitions, says Lee, "you want to be very careful not to make a mistake."

Now, another economic chill is settling over Asia. And with GLCs still stuck with poorly performing businesses, that leaves Singapore's economy, with its heavy reliance on electronics exports, badly positioned for the slowdown. On Apr. 10, the government cut its 2001 growth forecast by a third, to a range of 3.5% to 5%.

Not that Singapore is sitting on its hands. Development Bank of Singapore (DBS) is offering $5.3 billion for Hong Kong's Dao Heng Bank Group Ltd. Singapore Telecommunications Ltd. has offered to buy Cable & Wireless Optus Ltd., Australia's No. 2 mobile carrier, for $8 billion. A new management team led by foreigners has turned around Chartered Semiconductor Manufacturing Ltd. And at SembCorp, Wong has managed to sell $600 million in assets.

But these moves are far short of what's needed to create freestanding, world-class multinationals. "I would say there have been more misses than hits, and the hits were not spectacular," says an economist at a local brokerage who asked not to be named.

SembCorp was to serve as the model for restructuring. It was created in 1999 from a merger between ailing state-owned Sembawang Corp. and subsidiaries of Singapore Technologies Engineering Ltd. Early last year, Wong gave the heads of five divisions until yearend to turn themselves into global competitors through mergers and acquisitions. So far, only one deal has closed: SembCorp Logistics paid $357 million for 20% of Kuehne & Nagel International, a Swiss freight forwarder. But analysts say all SembCorp Logistics got was a boost in its number of clients in Asia from 30 to 80. Not bad, but they say the deal was an expensive way to win new clients.

SembCorp plans new investments in soon-to-be-privatized power plants and waste incinerators. But these will cost up to $2 billion, and SembCorp will probably have to borrow. Some analysts say its debt is high--when all subsidiaries are included--and could hit 150% of equity. "The worry is that these guys will go out and overstretch themselves," warns a Singapore analyst who tracks the company. Wong disputes the analysts' accounting methods and says SembCorp's debt level is safe. On the earnings front, while Wong has wiped out SembCorp's red ink, aftertax profits rose just 2%, to $72 million last year.

At SingTel, which was supposed to lead the offshore push, the challenges seem even bigger. Already plagued locally by falling telecom prices due to deregulation, the company saw its takeover bids in both Hong Kong and Malaysia rebuffed. And since the Optus deal was agreed on, a 25% drop in SingTel's stock price has wiped out $5.25 billion in market capitalization. Investors apparently don't approve of the 15% premium SingTel paid. Now, security analysts suspect it will have to pony up more cash. Much of its investment was to be in the form of stock, which now is worth less than when the offer was made. Meanwhile, Australia's Defense Dept. may raise objections to the deal, an issue SingTel declines to comment on.

The broader effort to liberalize Singapore's telecom sector is behind schedule as well. The Infocomm Development Authority (IDA), Singapore's telecom regulator, was supposed to raise billions of dollars by auctioning third-generation cellular licenses last year. But as the IDA considered how to proceed, 3G mania fizzled in Europe. Only three of the four licenses were sold on Apr. 11 for the minimum price of $55 million each. Officials at IDA, and B.G. Lee himself, counter that this is a minor problem, given the overall gains made in deregulation. "Perhaps we should have sold our 3G licenses last year," Lee admits. "But we are not in this for a few hundred million dollars here and there."

TOO BORING. Singapore's biggest dreams are to match Hong Kong as a regional finance center. And if it can pull off the Dao Heng acquisition, DBS will get a major foothold in Hong Kong. It needs a victory. The purchase of Thai Dhanu Bank Ltd. in Bangkok brought more faulty loans than DBS expected. In January, J.P. Morgan veteran John Olds, recruited in late 1998, resigned after only two years at the helm. Olds says it will take five to seven years to build DBS into a regional powerhouse, and that it would be "boring" to remain at the bank that long. Other managers say he had grown frustrated at his inability to turn it into a pan-Asian player. DBS's acquisitions so far "have been more complicated than they expected," concedes Lee. "But that's part of the learning process."

That can be said for the entire restructuring of Singapore Inc. To their credit, officials have made enough good moves--from luring an influx of foreign investment to lowering telecom costs--to keep the economy relatively healthy. But with global markets reeling, it may be some time before Singapore Inc. has another good chance to become a more important global business power.

Corrections and Clarifications "Stalled in Singapore" (Asian Business, Apr. 23) contained a reference to Singapore Technologies Engineering Ltd. The reference should have been to Singapore Technologies Ltd.

By Michael Shari in Singapore

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