If you are a subscriber of The Edge Singapore, chances are you are reading this story on a smartphone or laptop rather than in print. Given how prevalent electronics devices of all kinds have become, the industry ecosystem that designs and builds these gadgets and the many components residing in them has become an even more massive and complex web.

Think of electronics manufacturing and foreign names like Taiwan Semiconductor Manufacturing Company, Hon Hai Precision Industry and Samsung Electronics come to mind. However, local component manufacturers, though smaller in stature, are also punching way above their weight and standing secure in their niche market as advanced technology becomes a significant part of everyday life. 

Indeed, a December 2020 report from IHS Markit reported several Asian economies experienced strong growth in electronics exports in the second half of 2020. 

In Malaysia, production of electrical and electronic products fell by 34.2% y-o-y in April, as the government’s strict Covid-19 lockdown measures resulted in a sharp contraction in industrial production. However, as the lockdown restrictions were eased from May onwards, production rebounded. By October, production of electrical and electronic products rose by 9.8% y-o-y. Electronics exports also rose 3% y-o-y.

In South Korea, semiconductor exports increased 16.4% y-o-y in November, boosted by newly launched mobile phone products as well as increasing sales of mobile phone parts.

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In Taiwan, exports of electronic components rose by 19.5% y-o-y in November, driven by strong demand for integrated circuits.

For Singapore, the electronics industry also makes up a sizeable part of its economy, accounting for more than a third of fixed assets investments of $17.2 billion in 2020. MNCs like Micron Technology and Infineon Technologies have also set up shop here. In turn, the various MNCs are supported by a vibrant ecosystem of homegrown suppliers and service providers. These include well-known listed companies in the semiconductor space like AEM Holdings and UMS Holdings. 

The accelerated pace of digitalisation over the past few years has shaken not only the US stock markets but stirred the Singapore stock market too. As recent as a couple of years ago, the electronics manufacturing sector was shunned by local investors, who preferred to hunt for yield in the expanding universe of REITs or chase after big and sexy tech firms listed in the US and Hong Kong.

Since last year, there have been a string of investment deals involving companies in this sector. Most recently on March 4, Aztech Global, which supplies electronics parts and products such as smart plugs and data communication products, launched its initial public offering to raise $297 million. The public tranche was 18.4 times subscribed. Last November, the IPO of Nanofilm Technologies International, the provider of advanced coatings for precision parts and gadgets, was launched with much fanfare. As of March 29, it had a closing price of $4.90, 89% higher than the IPO price of $2.59.

If market reports are to be believed, US private equity firm, Platinum Equity, which privatised local electronics manufacturing services provider PCI back in 2019 for $265 million, is weighing a relisting or sale that values the latter at US$400 million ($539 million). 

Secondary market deals were aplenty too. Firms like Hi-P International, Sunningdale Tech, CEI, Grand Venture Technology and Fu Yu Corp all saw offers to buy out the companies or invest in them through the acquisition of a substantial stake.

Notably, several of the offers were made by investment firm Novo Tellus Capital Partners, led by co-founder Loke Wai San. The firm bought strategic stakes in Grand Venture and ISDN Holdings; made a joint buyout of Sunningdale with its chairman Koh Boon Hwee; and offered $1.15 per share to privatise contract manufacturer CEI through AEM, which is chaired by Loke. One of the units of Novo Tellus also tabled a voluntary conditional cash offer of 36.5 cents per share to buy 27.91% of Procurri Corporation, to bring its total stake to 51%.

An electronics industry veteran, who declined to be named, told The Edge Singapore he is upbeat with how things are moving. “Hopefully, we see more of such transformations in the coming years. New owners or substantial shareholders can play an active role, help the management institutionalise deep capabilities to move up the value chain, create differentiated IP through sustained organic and inorganic investments. Ultimately, this will help make our advance manufacturing and engineering base more competitive on the global stage,” says the veteran, who has transitioned from running businesses to making investment decisions.

Despite the Covid-19 pandemic, business for these electronics manufacturers has never been better. In FY2020 ended Dec 31, 2020, AEM saw revenue jump 60.6% y-o-y to a record $519 million while earnings surged 85% to a record $97.58 million. Meanwhile, UMS posted a smaller 25% y-o-y jump in revenue to $164.4 million and a 9% increase in earnings to $36.5 million.

Needless to say, the stocks of these companies have done well too. As of March 29, AEM is trading at $4.18 compared to $1.64 a year ago while UMS is trading at $1.34, 2.1 times higher than a year ago.

But even at these lofty levels, CGS-CIMB analyst William Tng says that the sector’s outlook remains bright given there is strong retail liquidity and earnings upside in the current cycle. He expects further upside as investors gain interest in these stocks and rerate the sector, especially when the valuation gap between SGX-listed tech manufacturing stocks and others in the region has been widening. 

Maybank Kim Eng analyst Lai Gene Lih is also positive on the sector. He expects UMS and Frencken Group to benefit from the current chip shortage. As chipmakers expand manufacturing capacity, equipment manufacturers such as Applied Materials and ASML Holding, which are customers of the two companies, will also benefit.

Lai also sees Venture Corp, the leading blue-chip of this sector, and Frencken as beneficiaries of recovery in medical or life-science end markets. This is as elective surgeries return, and pharma and biotech companies develop pandemic-related testing and diagnostic products. Lai explains that both Venture and Frencken have customers who are launching new products this year, which he believes is favourable for revenue dynamics.

Frencken has seen an increase in share price to an all-time high of $1.48 on March 29 while Venture has recovered and powered past its pre-pandemic share price, trading at $20.04 as of March 29, compared to around $16.35 just before the crash in March 2020.

To be sure, in recent months, there is a growing preference for so-called value plays over the growth sectors such as the technology stocks that have been hotly chased after over the past year. DBS analysts, in a March 19 report, note this is better interpreted as a sign that investors are broadening their appetite.

“We believe there is still ample room for technology stocks to run as we are still in the early days of economic recovery. The stock market cycle is forward-looking and tends to lead the economic cycle. Technology stocks typically outperform in the early stages of the bull market due to the lower interest rate environment, as we had seen last year,” says DBS.
 
Shift to deeper value

What drives the attractiveness of the electronics manufacturing sector here? Industry players and government officials tell The Edge Singapore this is due to a few factors. These include the city-state’s highly skilled workforce and geographical connectivity as well as the willingness of companies to adopt advanced solutions in automation and digitalisation to improve their work processes.

To be sure, manufacturing was identified as a key plank of Singapore’s economy ever since independence. In the early years, manufacturing was more of a rudimentary assembly line activity meant to help create jobs than anything else. 

At the Advanced Semiconductor Technology Conference (ASTC) in January, Ng Bee Bee, president of SEMI Southeast Asia, the association of electronics manufacturers and designers, remembers her early days in American tech giant HP, where she supervised a team of 200 operators assembling gallium arsenide LEDs. “Basically, they are all tasked to do just one job, and do it well,” she says.

Very quickly, the whole industry grew to become a leading contributor to the economy. In 1989, Singapore was the world’s largest producer of disk drives and disk drive parts. Other products included integrated circuits, data processing equipment, telecommunications equipment and radio receivers. 

Along with the expansion, there was a push for deeper levels of technical know-how as Singapore scaled up the value chain. As Singapore transitioned away from making low-value goods to a knowledge-based industry, the sector also moved into capital-intensive industries, which included the manufacture of semiconductors and precision materials.

A similar observation was made by the electronics industry veteran who notes that a lot of Singapore’s engineering and STEM (science, technology, engineering, mathematics) resources were previously deployed in somewhat repetitive functions such as maintaining and sustaining manufacturing lines or manufacturing products based on clients’ designs. 

However, with renewed investments and commitment to grow this sector, things are poised to change for the better. “I think a portion of the engineering talent base should be deployed to making new exciting products and services, leveraging R&D, leveraging our public research capabilities and building real product development capabilities. We should be building new, highly competitive, scalable products. That’s the kind of value creation we should strive for. It would certainly be more exciting: ideating new products, developing products that are globally competitive,” he says.

Amid Singapore’s push to grow other economic sectors such as wealth management and life sciences, the electronics manufacturing sector remains a key source of employment and investment. According to the Economic Development Board (EDB), electronics manufacturing draws about 37% of foreign direct investment headed Singapore’s way. It is also the largest sub-sector within the broader manufacturing sector, with 70,500 workers. Electronics manufacturing also contributes 39% of Singapore’s manufacturing GDP, making up the largest contributor to Singapore’s GDP at about 21% or $80 billion. 

The city-state now aims to grow its manufacturing sector by 50% over the next 10 years, Trade and Industry Minister Chan Chun Sing said on Jan 25. To meet the aim, Singapore has to innovate and produce higher-value products rather than look to lower the cost of production or labour, he adds.

However, given that the government wants to reduce reliance on cheap foreign labour, more locals will have to work in the sector. Singapore will also try to attract the best global and local firms in niche areas to ensure it remains a critical node in global value chains, Chan says.

As the economic planners have it, the manufacturing activities here have been well supported by Singapore’s transport and logistical connectivity. Singapore has established itself as a key node in the global supply chain for electronic goods ranging from semiconductors and memory products to tiny integrated systems known as micro-electromechanical systems (MEMS).

The conducive environment to operate is a factor supporting decisions by companies to invest in technical know-how here, which pushes the whole industry ahead. Says SEMI’s Ng, “The evolution is very much from very labour-intensive to a highly automated and capital intensive [sector] right now … In the past, we have had high-volume, low-value products. But right now, a lot of the products are of high value, low mix.”

Based on knowledge

But manufacturing can sometimes be costly. With China and countries in Southeast Asia and Latin America able to produce electronic components more cheaply than Singapore, how can the latter maintain its attractiveness to electronics manufacturers?

Tan Kong Hwee, executive vice-president overseeing account groups in EDB, the agency charged with attracting global businesses and investments to Singapore, acknowledges that while cost is an important consideration for companies, higher manufacturing costs do not immediately price the city-state out of the market. When it comes to manufacturing high-value parts such as semiconductors and wafer fabrication, finding the lowest cost base is not necessarily always the top priority.

Tan notes that many electronics manufacturers are operating in countries like Germany and the US with costs higher than Singapore’s. As such, Singapore can and should still “go after manufacturing activities that are suited to the kind of environment that we provide.” 
Thanks to a sufficient pool of trained people, Singapore is particularly suited to develop such high-value parts. “Not every location can produce semiconductors because it’s so knowledge-intensive. You need very technical people, you need good engineers who can develop the right manufacturing processes for us to produce the semiconductors,” he says.

Also, the manufacturing process must be consistent to be able to produce “hundreds of thousands of chips” without compromising on quality. “It’s not a trivial engineering problem, which is why the knowledge and ability to develop these processes become important,” Tan says.

Various executives from the companies in this industry share his sentiments, pointing out that one of Singapore’s selling points for electronics manufacturing was that the country has the capabilities and people to enable these companies’ operations. 

“The skill sets you need now to produce the most advanced products are a combination of different skills,” says Koen De Backer, vice-president of smart manufacturing and artificial intelligence at Micron Technology.

He tells The Edge Singapore that workers need technical knowledge, which Singapore has a strong base, but this now has to be combined with new skills such as data science and data engineering skills. “Typically [people with] these skills come from very different backgrounds, different worlds. The real trick lies in how do you combine these different new skills into the workforce.”

De Backer not only lauded Singapore’s efforts in developing the current crop of skilled workers but also in ensuring there is a constant supply of university graduates to maintain Singapore’s skilled workforce. 
 
Industry 4.0

The tech manufacturing industry has also been actively reinventing itself. No longer satisfied with assembling products most efficiently, the industry is now harnessing technology to make itself more productive: Industry 4.0. 

“Industry 4.0 is basically about the use of technology to make ourselves more productive, to make our operations more intelligent,” explains EDB’s Tan. Citing German semiconductor firm Infineon as an example, Tan says that as the company has invested in industry 4.0, productivity has improved. For example, labour costs are down 30% while the efficiency of capital is up 10%.

Eng Seng Meng, Infineon’s senior vice-president and global head of industrial engineering, says how a decade ago, his company set about doubling its throughput, without increasing headcount. How did they pull it off? “The first was to strengthen the fundamentals in automation, putting in digitalisation solutions, training up the people, and so on,” he says.

Eng explains that to start this process, the company must have “very strong fundamentals, internal processes and equipment connectivity”. “You can start with mechanical automation, then try to eliminate manual processes and introduce a machine,” he adds.

Following that, the company has to implement digital solutions to replace some of the more mundane tasks. For example, using a process control solution to implement automated scheduling for engineers instead of using an Excel sheet. 

“Engineers then will have more free time to innovate, to think of new ideas,” Eng says, adding that there are multiple benefits for companies. “[Because] at the end of the day, it’s about productivity, it’s about quality, customer commitment, it’s the bottom line.”

Micron’s De Backer says the implementation of such solutions is key because the products that are being manufactured here are of high value, and therefore, increasingly complex. For example, to build Micron’s advanced NAND flash chips, nearly 1,000 steps are required in the whole production process. “To do that is already far beyond anything manual, so if you look to our front-end manufacturing sites, the operators have moved into remote operating centres and are remotely accessing and monitoring the equipment,” says De Backer, stressing the importance of training so operators are proficient at using the machinery to execute the steps correctly.

To increase efficiency, he points at AI and simulation tools. This is paramount as “every new technology that we develop, complexity goes up, and so you need a lot of advanced tools, collaborations with equipment providers and material suppliers to drive that next wave of innovation and bring these new products onto the market.”
 
It’s also about who you know

The famous saying goes that “it’s not what you know, but who you know” also applies to the tech manufacturing industry. Simply having the right skills is not enough. Another selling point that differentiates Singapore from competitors is its connectivity to the wider region as well. 

The city-state’s advantage of being at most seven hours away from economic powerhouses China and Japan cannot be ignored, as well as its proximity to the Asean region which is projected to be the fourth-largest economy in the world by 2030.

EDB’s Tan says that for semiconductor parts, which have tighter turnaround times and usually are conveyed via air transport, connectivity is particularly critical. He also cites factors such as Singapore’s multiple bilateral and multilateral agreements with the region “that makes us competitive because it lowers the entry barrier for our goods when we export them to the destination countries.” 

This was brought into focus when the pandemic hit. Tan says Covid-19 has reminded us that a trustable location is a location that you probably want to pay a premium for. “We have kept our ports open. We have made sure that the plants that form a critical part of the global value chains for these companies continue to be able to operate and function well despite Covid-19, which has won us some good recognition.”

But no company exists on its own, and SEMI’s Ng thinks that this connectivity also allows companies to learn and connect in conferences such as the ASTC, where the industry can come together to discuss the top challenges it is facing.

The objective, according to her, is to find out “how do we provide a platform for the industries that may not be as advanced as companies like Micron and Infineon, [to] provide a platform for them to learn from cases that Micron, Infineon has gone through and accelerate the path of learning”.

Changing dynamics

With such a promising outlook, investors might be tempted to sink money into every single company in the sector. Amid the recent spike in activities, the unnamed industry veteran says investors need to discern what are the innovative technological and engineering competencies that can sustain a competitive advantage in the near and mid-term. Furthermore, they need to ask if these companies are investing today to win in the future, and if so, why their strategies are plausible and better than that of competitors, taking note of how superior value is created when solving customers’ pain points.

In an interview with The Edge Singapore, Koh Boon Hwee, Sunningdale’s chairman and a veteran investor in numerous tech companies, flags the importance of differentiating how different companies play within the broader technology industry.

For one, there is a difference between brand owners like Apple and Huawei, electronics manufacturing services providers like Venture and Hi-P as well as component manufacturers like Sunningdale and Fu Yu.

With the digitalisation wave, Koh believes that new gadgets are still going to be invented but “not everyone can get to produce a product that is so ubiquitous around the world”.

He points out that brands that have succeeded will continue to be entrenched, which means that the industry’s growth will depend on how these brand owners grow. “So, if they grow, then the guys who put the products together, like a Hi-P or a Venture, or a bigger name, Foxconn, will continue to do well,” adds Koh.

However, component manufacturers occupy a vulnerable position in the value chain. Their success not only depends on the quality of their manufacturing, but also depends on their relationship with electronics manufacturing services companies as well as what the customer ultimately wants.

In fact, despite their close association to the tech sector, Koh says that component manufacturers are not tech companies. They may have tech customers as customers, but they are primarily manufacturing companies. 

As such, with the shifting geopolitical landscape, component manufacturers also need to be near where the customers are — given how supply chains are seen as being at risk from disruption. According to Koh, 10 years ago, every customer wants him to manufacture in low-cost China. “Well, I will say that today is a little bit different … I think other considerations have crept into the equation [like] resilience and security of supply,” Koh says.

As he told Sunningdale’s shareholders at a dialogue on Jan 19, “I can tell you exactly what customers are demanding today. Come to my backyard. Or we might have to find an alternative.”