Nations are rushing to onshore semiconductor production but only some will be viable. Image: Screengrab / CNBC

SINGAPORE – Singapore’s economy expanded at its fastest pace in over a decade in 2021, a rebound from the city-state’s worst-ever recession led in large part by a manufacturing sector that fired on all cylinders to meet soaring global demand for electronics products as well as semiconductors.

The city-state’s economy expanded 7.2% last year, a robust bounce from a pandemic-induced 5.4% contraction in 2020. Singapore’s manufacturing sector expanded 12.8% compared to 7.3% the previous year, while exports rose 24.2% in November, the largest gain in nearly a decade. Exports are estimated to have grown by 10% year on year in 2021.

Electronics output alone grew 16.5% in the first 11 months of last year compared to the same period in 2020. Yet while the island nation’s broad economic recovery seems poised to continue in 2022, economists say its manufacturing-led momentum may have already peaked amid incipient signs and warnings of a slowdown.

In particular, cost pressures from rising input prices and skyrocketing freight costs are intensifying for electronics manufacturers. More significantly, perhaps, the specter of a potential slowdown in demand from China – Singapore’s largest trading partner – caused by Beijing’s “zero-Covid” policy is clouding the trade-reliant city-state’s outlook.

Singapore-based semiconductor firms are nonetheless ramping up operations, with billions of dollars worth of related investments announced in the past year. The city-state has notably set a target to grow its manufacturing industry by 50% by 2030, with advanced manufacturing set to account for a bigger share of economic output.

“When we talk about manufacturing in Singapore, advanced manufacturing is key,” said Ang Wee Seng, executive director of the Singapore Semiconductor Industry Association (SSIA). “We have been adopting digitalization solutions into our manufacturing operations and driving productivity for several years, and we are now seeing the results.”

Indeed, Singapore’s manufacturing sector marked 18 straight months of expansion in December driven by rising orders, exports and factory output. The city-state’s Purchasing Managers’ Index (PMI) inched up 0.1 point to 50.7 and electronics sector PMI rose 0.2 points to 51 over the period. A reading above 50 on the index indicates growth from the previous month.

While electronics manufacturing has been an important driver in Singapore’s recovery, DBS Bank senior economist Irvin Seah foresees the sector losing impetus. “Recent data is suggesting that global demand in this aspect has peaked and this all-important driver of Singapore’s growth could see weaker performance in the coming quarters,” he told Asia Times.

A chip production facility in Singapore. Image: Twitter

Seah cited moderating PMI data from key markets including China in recent months. Though China’s official PMI has inched up since November, it fell below 50 for two consecutive months in September and October, a slowdown he attributed to electricity supply disruptions and Covid-19 lockdowns in parts of the country.

Samsung Electronics and Micron Technology, two of the world’s largest memory chip makers, recently said they have had to adjust operations at their manufacturing bases in Xi’an, a Chinese city of 13 million people that has been under strict lockdown since December 22, and warned of delays in the supply of their DRAM memory chips as a result.

“All eyes will be on China in the coming six to 12 months as the biggest risk to Singapore’s growth,” said Seah. “There is a real danger of growth undershooting in China, and consequently on the region, which would then imply both a direct and a second order impact on Singapore’s growth prospects in the coming 12 months.”

With the semiconductors used in smartphones, cars and televisions increasingly being viewed as a strategic resource, measures to protect against supply chain disruptions caused by the pandemic have become a pressing issue for governments, prompting many countries to try to expand semiconductor production within their own borders.

Though better known as a financial and trade hub, Singapore accounts for nearly 5% of the world’s wafer fabrication capacity and has a 19% share of the global semiconductor equipment market, including lithography systems that mass-produce tiny patterns on silicon that are critical to the production of integrated circuits or chips.

Though still dwarfed by regional chip-making leaders Taiwan and South Korea now spearheading the production of coveted 3- and 5-nanometer chips, Singapore is rapidly emerging as Southeast Asia’s most important semiconductor manufacturing base and plays host to 21 wafer fabrication plants operated by the world’s biggest chipmakers.

Roughly one in ten chips used in electronics globally come from Singapore, which is a large-scale supplier of NAND flash memory chips from Micron automotive and specialty chipsets from Systems on Silicon Manufacturing Company (SSMC), a joint venture between Dutch NXP Semiconductors and Taiwanese chipmaking giant TSMC.

Amid a strategic push for supply chain diversification, US semiconductor maker GlobalFoundries announced plans in June to invest S$5.4 billion (US$4 billion) in a new semiconductor factory in the city-state that will boost its annual capacity by 450,000 wafers, increasing total capacity to 1.5 million chips per year when completed in 2023.

US semiconductor producer GlobalFoundries will invest over $4 billion in its Singapore plant, increasing its capacity to about 1.5 million wafers per year. Photo: GlobalFoundries

German manufacturer Siltronic similarly broke ground on a new wafer manufacturing facility in October, injecting S$3 billion ($2.2 billion) to its Singapore-based operations. The investment will reportedly create 600 jobs and turn Singapore into one of the world’s largest suppliers of high-end silicon substrates that are essential to producing chips.

Other industry players such as France’s Soitec have also scaled up their operations in Singapore, with the firm investing S$440 million ($326 million) as part of its efforts to manufacture one million wafers a year by 2026, while German chipmaker Infineon Technologies pledged S$27 million ($20 million) last year in a push to develop artificial intelligence (AI) applications.

SSIA’s Ang told Asia Times that the investment influx reflects the strengths of Singapore’s local manufacturing ecosystem, which has been developed over decades, but was not yet an industry game-changer: “For it to be a game-changer, there has to be more than just footprint expansion, I think there needs to be an expansion in technological capabilities also.

“What’s happening now is not really introduction of the latest and greatest leading, bleeding-edge technologies into these new facilities, just an expansion of the existing facilities in essence. I think more expansions will be announced in the coming months, and hopefully, we will reach a point where we can talk about this being a real game-changer.”

At present, the electronics industry is the largest manufacturing sub-sector in Singapore, contributing 8% to annual gross domestic product (GDP). The manufacturing sector as a whole accounts for about 21% of GDP and 450,000 workers, or around 12% of the workforce, making it one of the country’s largest employers.

While Singapore’s manufacturing sector has been relatively resilient amid challenging market conditions created by the global chip shortage, OCBC chief economist Selena Ling says it is highly likely that manufacturing growth will moderate to around 3% to 4% year on year in 2022 given the high base effect created by Singapore’s post-recession rebound.   

Despite expanding for several consecutive months, Ling said Singapore’s manufacturing and electronics PMIs had peaked in July 2021 and December 2020 respectively, and while she did not anticipate a sharp drop-off, she suggested that manufacturing “may not play the main driver role in 2022.”

“What would likely move the dial… would be if the services sector momentum steps up, especially if borders re-open further and there are more vaccinated travel lanes (VTLs) reinjecting life back into the hospitality-related sectors [and] the construction sector, which has been weighed down by foreign manpower shortages,” said Ling.

Singapore has so far established so-called VTLs with about two dozen countries, allowing fully-vaccinated travelers to enter the city-state without having to quarantine. Ticket sales for the lanes have, however, been on hold since December 23 in a bid to thwart steadily rising local transmission of the highly contagious Omicron variant.

A man wearing a protective facemask walks past the Rain Vortex display at Jewel Changi Airport in Singapore. Photo: AFP via Getty Images/Roslan Rahman

Oxford Economics senior economist Sung Eun Jung agreed that growth in 2022 is likely to be led more by Singapore’s service sector than manufacturing as domestic demand improves. “Domestic demand will drive growth this year given the pent-up demand and excess savings, which will support above-trend consumer spending,” she said.

China’s strict Covid-19 containment policies will “result in abrupt disruptions this year, similar to what we saw last year,” Jung told Asia Times, adding that the impact of such disruptions is expected to be milder than in 2021 and “likely to be resolved relatively quickly,” with global supply chain disruptions easing by the second half of 2022.

Ling added that while global demand for semiconductors and the products they fuel would be sustained, pandemic uncertainty as well as “China’s growth slowdown and its ‘zero-Covid’ approach” would continue to contribute to supply chain bottlenecks, with cost pressures likely to persist for at least the first half of 2022.

Although China was the key driver of Singapore’s export recovery in 2021, “it could easily flip to become the biggest drag as well,” said DBS Bank’s Seah, pointing to the recent policy shift against tech companies and Beijing’s so-called “common prosperity” agenda as drags on future growth in China, which could, in turn, lead to diminishing export demand.

Follow Nile Bowie on Twitter at @NileBowie