May 14, 2001

Flextronics - Singapore Slip

By Eric Ellis

The new economy might have been designed in California garages, but a lot of it was built on Singapore assembly lines.

The island's parts-to-ports production package was tailored for companies like Flextronics International, one of the biggest electronics outsourcing operations in the world.

Sure, Singaporean widget makers cost more to hire, but Lee Kuan Yew's well-oiled machine ensured power that hummed and planes that ran on time-necessities its neighbors couldn't guarantee.

While tech roared, Singapore's higher salaries could be balanced against its efficiencies. But with inventory piling up and squeezing margins, Lee's "Singapore model" now looks pricey. "In this market, with this competition on margins," says Ash Bhardwaj, Flextronics' Asia-Pacific president, "we have to go where it's cheaper for our customers."

Last month the company announced that it was moving its assembly-line operations from Singapore to China and Malaysia, where wages are as much as 90% lower. The move makes sense in light of Flextronics' fourth-quarter loss of $109 million and its announcement April 24 that it would lay off 10% of its 65,000 employees worldwide.

Shares of Flextronics, which is run out of San Jose, Calif., but is legally based in Singapore, are down 50% in the past year. "There really isn't an option," says Bhardwaj. "Singapore couldn't compete."

Singapore has been good for Flextronics, which outsources for Nokia, Microsoft, Compaq, Ericsson, and Hewlett-Packard. Sales have zoomed from $93 million to $12 billion since Flextronics CEO Michael Marks' 1993 management buyout.

But Flextronics pays its Singapore line workers $1,200 to $1,500 a month, and the same job costs only $300 to $400 a month just a few miles away in Malaysia's Johor state. In China semiskilled workers start at $125 a month.

Flextronics' recent deal to assemble all of Ericsson's mobile phones concentrated its mind. Ericsson's main plants are in Sweden, England, and the U.S., but fabrication will progressively shift to Asia.

And each time the Swedes stumble-as they did again when they announced a first-quarter loss of $480 million-Marks is pressured by Stockholm to further ratchet down his margins.

About 1,000 jobs will be lost as Flextronics moves lower-tech assembly lines off the island over the next few months, leaving Singapore with only the company's design and testing labs.

Government officials are downplaying the loss of jobs at Flextronics, noting that most line operators were foreign "guest workers" who will be sent home to places like Bangladesh and Sri Lanka.

Still, Flextronics' departure has locals reaching for the Codral, as ominous tech-flu symptoms are diagnosed elsewhere in the economy. Electronics makes up more than half of Singapore's manufacturing output and two-thirds of its non-oil exports.

Singapore's 2001 economic growth forecast has been slashed from 7%-8% to 3.5%-4%, largely because of the U.S. tech meltdown. With a local election due soon, a weather eye is being kept on unemployment, which rose from 2.5% to 2.8% in December but is now more likely closer to 3.5% as local dot-coms die and pink slips arrive from the U.S. and Japan.

That's still low by world standards, but the layoffs have just begun. Two other electronics companies could soon follow suit: Hewlett-Packard and Singapore's own Chartered Semiconductor, the world's No. 3 contract microchip maker, which just announced a $31 million first-quarter loss.

Losing even part of HP would be harsh. It employs 7,000 Singaporeans, who design and build printers and hand-held computers. HP is so prominent in Singapore that cabbies are more likely to know the address of its headquarters than that of their own Parliament. But as America's tech wreck sputters into a second year, an ailing Silicon Valley is learning that this is no time for nostalgia.