In September 2009, Abu Dhabi's sovereign
wealth fund agreed to buy Singapore's Chartered Semiconductor Manufacturing
for $2.5 billion SGD or $1.8 billion USD. Abu Dhabi would merge Chartered's
operations into its GlobalFoundries venture. Chartered had been the third largest
independent foundry in the market. It was Singapore's only big indigenous player
in its burgeoning semiconductor industry. The acquisition marked the end of a 22 year
journey of challenges and financial losses. In this video, I want to talk about what
was supposed to be Singapore's TSMC. How it started, where it went, and
how it ended as an independent entity. In a previous video, I talked about some of the strategies Taiwan used in order to
launch its semiconductor industry. The gist is that they used public-private
arrangements that spun off small private entities to commercialize raw technologies. Some of these
companies would fail. Some of these companies wildly succeeded. Most are just okay, which
isn't bad because they can absorb employment. Singapore's industry development
strategy leans heavily on using its business-friendly environment
to attract large multi-nationals to establish a presence on the island. You start
getting spillover effects, transfers of technology and skillsets coming over from foreigners
to Singaporean locals. As the theory goes. I am kind of reminded of those
whalefalls at the bottom of the ocean. When a whale dies, its body sinks
to the sea floor. Soon thereafter, animals arrive to feast on the meat. Before
long, you have spawned an entire ecosystem. Where before there was nothing, now there is life.
Okay, weird metaphor but it gets the point across. In pursuit of this goal, Singapore considers
its well-educated, hard-working population as one of its most critical assets. This is in
contrast with other countries like Saudi Arabia, Canada, and Australia, which boast vast natural
resources like oil, forests, and iron ore. Singapore boasts vast reserves of human capital. Like Taiwan, Singapore has had a presence
in electronics assembly since 1969. It makes up one of the economy's big industrial
exports alongside refined petroleum products and fabricated metal products. The
country especially did well in disk drives and memory - Singapore at the
time was the world's disk-drive capital. But as time passed, new competitors were
emerging in the space and it was clear that this could not remain the status quo. The
global marketplace is intensively competitive. Multi-national disk drive makers were beginning
to decamp for places like Malaysia and Indonesia, chasing the next low cost locale. Singapore's economic planners
saw chip making as the natural next step for the country's electronics industry. It is not labor intensive but rather
requires highly skilled and educated workers. With Chartered Semiconductors, Singapore
sought to climb the value chain and nurture a semiconductor national champion of their own. Singapore has had success growing indigenous
national champions even in competitive areas like airlines. Singapore Technologies
Group (STG) is one of those champions. It started as a defense equipment supplier,
growing into one of Singapore's biggest companies. STG was selected to spearhead Singapore's
entrance into the semiconductor space. STG kicked off what would eventually
become Chartered Semiconductors in 1987 - the same year of TSMC's founding - with
a technology transfer agreement between itself and US fabless semiconductor
maker Sierra Semiconductor. STG had originally hoped that it could count on
the support of Sierra and US multinational company National Semiconductor. But National Semiconductor
dropped out and Sierra was not a big customer. But STG saw the success of TSMC's innovative new independent foundry business model
and restructured Chartered to copy it. Chartered thus spun off its Integrated Circuit
design house and moved forward as a pure foundry. Chartered moved forward, rebranded as
Chartered Semiconductor Manufacturing or CSM. In 1999, they went public on the
NASDAQ and Singapore stock markets. A year later, the company would
be restructured as a majority government-backed entity directly within
Singapore's sovereign wealth fund Temasek. At Chartered's founding, Sierra transferred over
its 3.0 micron process technology and trained 100 Singaporean technical staffs in how to use
it. This process technology was way outdated and it needed to be updated to the
cutting edge as fast as possible. Almost immediately, CSM began an in-house R&D
lab in order to improve the process tech they got from Sierra. Highly motivated to advance
as fast as possible, they pushed ahead quickly. 1990, they achieved 1.5 microns. 1991, 1.2 microns. 1992, 0.8 microns. 1993, 0.6 microns. A year later in 1994, CSM announced a new
deal with Toshiba to use their 0.5 micron process technology. They rapidly expanded
their production facilities throughout the 1990s with five foundries on some 60 hectares in
Northern Singapore. Plans had been drawn up for up to 25 such foundries in the near future. Meanwhile, CSM began to expand its product
assortment - seeking to capture as much of customers' business as possible. The more
of a complete, turnkey solution that they can offer to their customers, the more
locked-in their customers can be with CSM. The Singapore government put its muscle behind the
company by offering multi-national companies ample tax incentives and subsidies to come
and lodge their manufacturing facilities there. Government funds helped companies
pay for the costs of training staff. State-run universities started programs
to graduate electrical engineers. The same tactics that helped Singapore
get its start in the memory industry, government officials practiced to get leverage in
semiconductor fabrication. The government's muscle helped to get CSM to third place in the foundry
industry behind Taiwanese companies TSMC and UMC. So what happened to CSM? Why did they agree
to a buyout? They essentially got caught in a pincer movement that eventually led to the
company being squeezed out of the foundry market. The first has to do with the entry of low-cost
semiconductor foundries from Mainland China. I talked about this a little
bit in a previous video. In 2000, a few Chinese independent foundries
entered the market. China had recently entered the World Trade Organization, giving birth to
the biggest export machine in world history. The most notable of these Chinese startups
was Semiconductor Manufacturing International Corporation, or SMIC. Founded and led for
many years by a former TSMC vice president, the company rose to become China's
foremost independent foundry. SMIC took advantage of substantial
government subsidies and cheaper costs of living at the time to disrupt
the market from the bottom up. The same process technology licenses available to
CSM were also available to them too. Thus, they climbed the technology process tree just as fast.
Since the tech all came from IBM or the like, vendors could easily switch
to the lowest cost provider. The same tactics of cheap land, tax subsidies,
engineering talent, and more to lure semiconductor entrepreneurs and MNCs, China can offer just as
much as Singapore. But on an even larger scale. And then TSMC decided to bring the battle
to CSM on its own home turf. In 1998, TSMC executed on a joint venture with frequent partner
Philips Electronics to start SSMC in Singapore. TSMC casually threw down $2 billion SGD over 3
years to build a fab there with trailing-edge technologies - just good enough for many
customers in the Singaporean semi market. CSM discovered that they could not offer a product
differentiated enough from their cheaper Chinese and Taiwanese competitors. Ergo their prices had
to go down, eating away at the gross margins of everyone in the business. You can say that
gross margin is a rough financial indicator of just how special your product is and
how much people are willing to pay for it. In 2005, CSM made just 11% gross margin
on their product. 2003, they did -17.5%. During that same period TSMC's gross
margins were 44%. The company needed to go up the ladder, get to the leading edge and
differentiate their product in some other way. But suddenly that ladder vanished beneath them. In 2005, Samsung announced that they would
enter the standalone foundry business, bringing their immense resources and expertise
to the fray. They would leverage both to quickly rocket to second place ahead of CSM and
UMC. I did a video about them earlier. Samsung Electronics was already one of the
biggest electronics and semiconductor companies in the world. They owned the largest share
of an oligopoly in the digital memory market as well as the biggest handset business at
the time. They knew what they were doing, and they had a captive customer for their product (despite whatever they might say about
Chinese walls between the various divisions). So while the Chinese competitors ate away at the
lower rungs of the foundry market like Pac-man, Samsung stole the business of servicing high end
customers looking for either diversification, additional capacity, or better pricing from TSMC. Worse yet, Samsung kicked off a
war that CSM could not compete in. Samsung's entry into high end foundry
work directly threatened TSMC. Samsung not only brought formidable engineering
prowess drawn from their memory business but also billions and billions of dollars. TSMC then decided that it was
time to get real and hit the gym. Rather than using their profits to
boost their stock by buying back shares or paying more dividends, they
poured money into fabs, R&D, and more. The semiconductor world is highly cyclical.
There are good years that are great and bad years that are really bad. The
early 2000s saw consecutive bad years. Too many foundry players and not enough demand. It is not just about ponying up billions,
but also doing so during these hard times. TSMC had the wherewithal and the patience
to invest billions to pick up failing fabs and continue on their massive foundry
work without pause. Same with Samsung. Meanwhile, staying on the leading edge just kept
getting more expensive. In 2005, a leading edge fab cost $3 billion to build, six times higher
than what it would have cost in 1995. Fifteen years later in 2020, TSMC's leading
edge N5 fab in Tainan cost $17 billion. Its next generation N3 process fab (also in
Tainan) is estimated to cost $19.5 billion. CSM tried to lighten the financial load
by partnering with other organizations like IBM to develop new edge process
technologies. But doing so drastically slowed down product development and they fell
behind the curve anyhow. Not to mention that the tech partner would then license out their
learnings to competitors within a few years. Thus CSM found itself caught in a pincer movement. Not enough revenue to fund their work.
Not enough subsidies to stay in the game. Too far behind in the tech curve to catch up.
But can't stay where they were. The Singapore government was willing to spend money. They
allocated hundreds of millions of dollars to CSM and its dreams of having a national champion. But
hundreds of millions falls far short of billions. By the time the financial crisis came around, CSM
and its investors realized that they had lost. The Singapore government stuck around for 22 years
of financial losses, but it was time to let go. Abu Dhabi then came calling
with a bold idea. They wanted to build a global national champion in
semiconductors. They would use their voluminous oil profits to buy out a number
of foundries in search of a global giant. In doing so, the people of the UAE can learn
valuable STEM skills and business savvy. It's a classic journey by other Gulf states to head off
potential turmoil after the oil fields run out. GlobalFoundries offered $2.68 SGD for CSM's
stock in September 2009. The price was just 2 cents higher than the closing price. Since
majority holder Temasek backed the deal, the acquirer didn't feel the
need to offer much of a premium. For what it is worth, GlobalFoundries never
managed to execute on their business strategy. GloFlo as it was colloquially called could not
reach the necessary scale for escape velocity. It is more than just a money thing. Just around the time of GloFlo's founding,
TSMC and Samsung as the market leaders executed on a number of necessary technical moves
to lock in their premium leading-edge customers at a very deep level. It's hard to explain, but
it basically means that if you wanted to make a chip with the most advanced processes post
2010-ish, you can only use TSMC or Samsung. Unable to keep up with the tech race and
now locked out of the premium market, GloFlo in 2018 ended their 7nm development
to focus on specialized processes. Internet commenters immediately
began second-guessing the move. Singapore set out on its journey with CSM in
order to build its own TSMC. They had a lot going for them. They had an established strategy,
deep connections with powerful Multi-Nationals, and a well-educated work force. With this, they
sought to build a thriving semiconductor industry on par with what Japan, Taiwan or South Korea had. CSM failed and that is unfortunate because the
Singaporean government is extremely competent, patient, and effective at what they do. They
deserved success, but success is never guaranteed. Entering into such a market, it is like running
in a race with no ending. There is no finish line to celebrate, because your competitors
keeps pushing it further down the road. There are also unsettling questions about how
much the Singaporean natives actually benefitted from the massive investments the government threw
into CSM. A significant percentage of the jobs, including on the senior level, went to
highly paid expat foreigners. That did not much change throughout the 22 years of losses.
How much did the ordinary Singaporean benefit? These are difficult things to think about
and consider when reviewing the results. But of course, hindsight is 20-20. But I think the overall Singaporean semiconductor
sector continues to do alright. It remains a significant part of the economy, creates jobs for
Singaporeans, and makes a profit for its partners. That's a good thing and something we should not
ignore. Home runs are home runs for a reason. They are rare and hard to make. Doing a bunch
of doubles and singles can be perfectly fine.
Singapore tried its hands at being a major player in the semiconductor industry in the past. Chartered Semiconductor was suppose to be competing with the likes of TSMC and Samsung in this industry. What happened to it? Was Chartered outcompeted? Was it too reliant on a Singapore base? Was the senior management not competent enough? What I know is that a generation of local engineers were wasted in this industry and came out of it jaded with outdated tech competencies...
the terms "Singapore" and "Engineers" simply won't mix