The Chips Are Down in Singapore

With the city-state now officially in recession, postponed plant openings and obligatory vacations for high-tech workers reflect the growing anxiety

By Bruce Einhorn

In mid-July, the Singapore government announced that the local economy had contracted for the second consecutive quarter. So it's official: Singapore is in recession (at least by the consensus shorthand definition for recession). The city-state, Asia's would-be technology paradise, is suffering more than most other Asian countries from the global tech wreck. That's because Singapore depends on electronics-related exports for such a big chunk of its total growth.

The recession means a lot of additional vacation days for the employees at one of the island's biggest technology companies, ST Assembly Test Services. The state-controlled company, better known as STATS, is 51% owned by Singapore Technologies, with Singapore Technologies Semiconductors owning another 20%. That makes STATS a prime example of the sort of government activism for which Singapore is famous. That government role may have helped STATS to grow, but may now turn out to be a burden for the company as it tries to cope with the current downturn.

STATS fills an unglamorous part of the electronics supply chain. The company takes semiconductors made by customers like Infineon and Alcatel, tests, and packages them. It's not a high-margin business, but STATS has done pretty well at it. STATS is one of the biggest chip-testing and packaging companies in Asia. Since its IPO in 1999, revenue has grown nicely, hitting $330 million last year. That translated into profits of $54 million.

Now, of course, the good times are over. With STATS reeling from the plunge in the chip industry, the company is desperate to find ways to cut costs without actually laying people off. So starting in August, all of the company's 2,400 employees in Singapore will be taking four days leave. "It's mandatory," explains Lim Beng See, the spokesperson for STATS, who points out that the company's operations were scheduled to be closed anyway to commemorate the anniversary of Singapore's separation from Malaysia. "We are having the four days leave in August coincide with the National Day holidays in Singapore," says Lim. "So we can close the operations for a week."


  STATS is not the only company in the Singapore government's portfolio that is ailing. The most prominent IT company in the country is Chartered Semiconductor, the chipmaker that is the world's third-largest foundry, or made-to-order semiconductor manufacturer -- behind Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp., also of Taiwan. In mid-July, Chartered said that it suffered a loss of $107.6 million in the second quarter of 2001, with sales dropping 63%.

Chartered also forecast further bad news in the third quarter, and postponed by a year the opening of a new $3.5 billion chip fabrication plant, now slotted to launch in 2003. In mid-July, both TSMC and UMC had to deny rumors that they were interested in acquiring Chartered.

With giant Chartered suffering, smaller players in the chipmaking supply chain, such as STATS, are feeling the pain. One look at STATS's numbers shows why the company needs to shut down its plants. According to Lim, the capacity utilization figure is a mere 35% compared to about 85% during the boom times in 2000. Back then, STATS splurged, like so many other companies, on new equipment. It spent $277 million last year on new capital expenditure, including adding 80,000 sq. feet of new clean-room space, giving the company a total of 300,000 sq. feet.

Today, most of that is sitting idle. Hence the mass vacation, which Lim says follows up on a policy implemented during the previous quarter requiring that STATS workers take two days leave. She says that many employees had accumulated many days of vacation that they hadn't taken in 2000 because the company was so busy. Now that things are slow, "We will be able to reduce the backlog of leave that a lot of staff may have still," she says. "In 1999 and into early 2000, it was a very busy time for us. A lot of people have leave to clear."


  Still, even though many workers have nothing to do, STATS is not yet laying off employees. Instead, the company is trying other ways to save money. It has cut management salaries by an average of 10% and frozen annual wage increases. STATS also has stopped hiring, and it has cut back dramatically on its capital expenditure plans. The original budget was $100 million, Lim says, but STATS has slashed that to $60 million. And even that is not certain, she adds. "Most of it is in the second half and subject to business demand," says Lim.

There's nothing wrong, of course, with trying to find ways to cut costs without cutting jobs. It will be interesting, though, to see how much longer STATS can pull that off. If the company continues to utilize just one third of its total capacity, the pressure will surely build to make adjustments to the workforce. But if unemployment rises in Singapore as the recession continues, will government-linked STATS be able to make those changes?

In other Asian countries, many companies -- even those without government links -- are far more reluctant to fire people than their Western counterparts. For STATS, a company controlled by the Singapore government, making adjustments to the workforce is even more problematic. That means that workers at STATS may have many more paid holidays in their future.

Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BW Online

Edited by Beth Belton

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