INCENTIVES TO LOCAL BANKS

Mr Inderjit Singh asked the Minister for Finance to inform the House (i) what led to the closure of Micropolis just under 2 years after Singapore Technologies acquired the company; (ii) what went wrong in the process of the acquisition; (iii) how much money was lost from the acquisition to the closure of the company; and (iv) where did the money for investment come from.

Dr Richard Hu Tsu Tau: (i) What led to the closure of Micropolis just under 2 years after Singapore Technologies acquired the company?

Singapore Technologies saw opportunities in the hard disk drive business of Micropolis and decided to buy over Micropolis' worldwide HDD business in April 1996. The new Micropolis management, which led the acquisition, had expected to turn the company around from its previous losses and re-establish it as a profitable high-end disk-drive manufacturer.

Following its acquisition by Singapore Technologies in 1996, Micropolis refocused its range of product offerings and changed its market strategy to focus on the OEM (Original Equipment Manufacturing) market. With the phasing out of obsolete products, and the launching of new products, Micropolis managed to secure several new OEM customers. Micropolis also continued to reduce operating losses throughout 1996, and turned in a profit for the month of December 1996. Therefore, although total operating losses amounted to S$76 million in 1996, Micropolis was actually showing gradual improvement in its performance.

However, the high-end disk drive industry took a dramatic turn in 1997, with the aggressive entry of several major players. As most of you may know from the various press reports, there was severe over-capacity in 1997 as a result of simultaneous investments by existing and new players. This resulted in over-supply and intense price competition. Prices were dropping at 16% to 18% each quarter in 1997, some 3 times the normal rate of 5% to 6% price erosion each quarter as manufacturers competed for market share. Industry analysts believed that the disk drive industry is in the throes of a major adjustment stretching into 1998. The leading players have either sounded alarm over their earnings prospects or have taken steps to consolidate their operations, including closing plants, laying off workers or delaying new investments.

Throughout 1997, Micropolis' operating losses mounted, as sales continued to fall below projections and product margins were eroded faster than expected. There was excess inventory in the market. Micropolis was unable to turn around with 1997 operating losses progressively worsening in the first half of 1997. By mid 1997, Micropolis was already exploring various alternatives for partnerships or mergers with other market leaders but without success. Prospects for recovery worsened considerably with the sharp change in the competitive environment as 1997 progressed. By October 1997, the operating loss for the year had reached S$200 million. Having reviewed the company's business performance, resources and prospects, the Micropolis Board of Directors was left with no choice but to wind up the business.

(ii) What went wrong in the process of the acquisition?

We have to accept that risk-taking is part and parcel of all investment decisions. In acquiring Micropolis, Singapore Technologies had believed that the new management could turn the company around by focusing on the high end niche market which had been a profitable industry segment. Singapore Technologies carried out a four month due diligence with its external consultants on the investment before the acquisition. As it turned out, the severe over-capacity in the high-end disk drive market which was not anticipated by Singapore Technologies was the main reason which made this investment a loss-making venture.

(iii) How much money was lost from the acquisition to the closure of the company?

The company is under liquidation. This means that the financial affairs of Micropolis are now independently and professionally managed by experienced liquidators from reputable international firms. They will determine how best to recover and dispose of the assets of the company in the process of liquidation.

Based on the Statement of Affairs lodged by the Liquidators of Micropolis in December 1997, Micropolis does not have sufficient realisable assets to fully repay the unsecured creditors, including ST. Recovery expectation is about 10% of the debts claimed.

ST has S$80 million as equity in Micropolis, plus loans totalling S$550 million. Part of the loans were provided in 1996 to fund working capital and production equipment for Micropolis. As Micropolis managed to improve its bottomline in 1996, and turn in a profit by December, further loans were extended by ST in 1997 for additional working capital to increase production capacity for key OEM accounts, and to fund R&D for new products.

Thus total losses to ST are expected to be the S$80 million equity plus some 90% of the outstanding loans.

(iv) Where did the money for the investment come from?

Singapore Technologies had funded this investment through its own internal funds and external commercial borrowings.

The Government did not provide Singapore Technologies with any direct funding whether through loan or equity for this particular investment. However, as Singapore Technologies is a 100% government-owned company, this investment loss would result in a dimunition of Government's assets.

Mr Shriniwas Rai asked the Deputy Prime Minister (a) if he will offer incentives to local banks to merge so that the banks may pool resources to compete with foreign banks and (b) if he will consider reviewing shareholding ceilings of the banks incorporated in Singapore.

BG Lee Hsien Loong: The financial services industry is in ferment worldwide. The driving forces are information technology and globalisation. Financial institutions are merging and restructuring, in order to derive growing economies of scale and serve customers more efficiently.

It is impossible to insulate our domestic banks from these larger trends. The smallness and openness of our domestic market makes us even more susceptible to them. By international standards, our local banks are quite small. They need to grow large enough to have the economies of scale, the mass and reach to offer efficient, high quality services to Singaporeans, and to become significant regional players.

Bank mergers are one way to achieve this, provided the mergers are followed through and the previously separate businesses are properly integrated and rationalised.

The Minister for Finance has publicly encouraged the local banks to consider mergers. The driving forces in the industry give them strong incentive to do this, even without Government persuasion. Keppel Bank and Tat Lee Bank have just announced their intention to merge. The Government will study what more it can do to encourage the banks in this direction.

We have also informed the local banks that if they wish to bring in foreign minority partners to support a strategy of growth, and to bring in expertise and technology, the government will be supportive.

MAS has no immediate plan to raise the foreign shareholding ceilings. But the matter will be studied, together with all other aspects of the Government's policy towards the financial sector, as part of the review of the sector now underway.