Reviews

Singapore's Bling

The government's wealthy investment arm is moving billions offshore—and taking Singapore Inc. global

Nov, 8 issue - You've heard of Singapore Airlines. You've heard of Raffles hotels, and the telecoms giant SingTel. But have you heard of Temasek Holdings? It's the enigmatic and little-known state holding company that funded and built the global brands above. It's also largely responsible for Singapore's rise from swampland to superefficient First World city-state. Established in 1974 to oversee government-led modernization, Temasek has nurtured strategic industries like electronics and transport, built state-of-the-art power and telecommunications grids, and even bought the local zoo. Today its portfolio is worth $56 billion. It controls seven of the top 10 companies listed on the Singapore Exchange and its affiliates make up 34 percent by value of all shares traded. Yet the entity at the core of Singapore Inc. recently revealed a long-kept secret: between 1993 and 2003, its first annual report noted, it delivered average shareholder returns of 3 percent per annum—peanuts compared with the 13 percent annual gains recorded by America's S&P 500 companies during the same time.

The cause of the stunted growth is obvious: Singapore's economy has passed its glory days of white-hot expansion. Thanks to lower-wage rivals like Thailand, Malaysia and China, it's lost its edge in manufacturing, and is increasingly challenged in services. That slowdown is driving Temasek literally off-island. "We expect to steadily increase our exposure to Asia," says chairman S. Dhanabalan in the report, signaling a partial divestment from Singapore itself.

Singapore Inc. is thus tying its fortunes to growth in the rest of the region. Within a decade Temasek wants a third of its portfolio in Asia—double today's ratio. New offices in Beijing, Mumbai and (coming soon) Ho Chi Minh City attest to where that money will flow. Traders now await the company's first-ever bond sale—widely rumored but still unannounced—which could garner as much as $3 billion. Temasek, in essence, is set to mortgage its domestic portfolio to fund acquisitions overseas. Clifford Tan, director for market analysis at Citigroup in Singapore, forecasts that the company will invest some $15 billion abroad during the next five years. "It's the next stage," he says.

Once again Temasek is driving Singapore into the future, in a strategy that could well transform the tiny island's neighbors. Using capital and expertise amassed during Singapore's boom years, it can now act as a regional hedge fund, investing in smart companies from Manchuria to Bangalore. It is pushing the island's top firms to expand offshore while investing billions to take minor stakes in foreign companies with promise, like Telekom Malaysia and the Tata Consultancy Service. With stiff regional competition, and growth in domestic consumption limited by the city's small population (4 million), nesting at home is no longer an option. Like Hong Kong, Southeast Asia's other glittering port city, Singapore must reinvent itself by moving higher up the food chain.

For its part, Temasek must shed the stigma of being labeled Singapore's official investment arm—a challenge given that, essentially, that's what it is. Wholly owned by the Ministry of Finance, it attained dominance at home by managing (and eventually taking public) a host of state enterprises. Temasek still owns more than half of companies like Singapore Airlines and SingTel, and bears primary responsibility for their performance. Yet a few years ago Singapore insisted that the description "government-linked company" be dropped from the vocabulary. Its Oct. 10 annual report pledged to deliver "shareholder value," as opposed to serving Singapore's diplomatic agenda with overseas policy investments or by bolstering losing ventures at home. As managing director for strategic development S. Iswaran says: "Now we're an Asian investment house."

Unlike private investment funds, Temasek must still balance the lure of booming overseas markets with the need to promote stability at home. But it must also manage fears its potential targets may have of being controlled by the Singaporean government. "Sometime it's quite sensitive if you want to invest overseas in strategic sectors like banking or telecom," says Suan Teck Kin, an economist at OCBC Investment Research. "So Temasek is trying to shed that kind of image, but yes, behind [the scene] it's still a state-owned company."

In hindsight, Temasek was painfully late to realize that its model had faltered. Over the past 10 years, the state enterprises run by Temasek have delivered "lower returns than private firms in Singapore, the top-50 companies in Asia excluding Japan and, shockingly, even Malaysian and Indian government-linked companies," concluded a major CLSA study in August.

The first public hint of the problem didn't come until July 2002, after the Stanford University-trained engineer Ho Ching (wife of Singaporean Prime Minister Lee Hsien Loong) took the helm as CEO. She immediately launched a major shake-up. "We will work to transform our portfolio from a proxy for the Singapore GDP into a balanced portfolio," she said early in 2004, "leveraging on the growth and promise of Singapore, ASEAN, Asia and the world." It wasn't just talk. Under Ho's tutelage, Temasek began partially divesting from companies, including defense contractor ST Engineering, SingTel and developer CapitaLand. At the same time, 10 companies it controls were restructured to shed peripheral assets. Three CEOs were moved aside; half of Temasek's 30 managing directors lost their titles. Linked companies were encouraged to expand offshore, and, in a change of strategy, Temasek itself began ramping up spending overseas. It took small stakes in Telekom Malaysia, China's Minsheng Bank and India's outsourcing giant Tata Consultancy Services. It also purchased a controlling interest in Bank Danamon Indonesia.

That's not to say that Temasek just discovered Asia. On the contrary, CLSA estimates that it earned $750 million in dividends from overseas holdings in 2003. In China, the company has been a force for many years. The property arm of Keppel Group, for example, has plowed almost $200 million into China's burgeoning property market to offset weak demand at home. And PSA, a port operator 100 percent controlled by Temasek, now runs four container facilities in Liaoning, Fuzhou and Guangdong provinces that saw their combined freight volume increase by 17 percent in 2003.

India is the beachhead where Temasek's footprints are freshest. Over the last year it has invested $1 billion on the Subcontinent and reportedly has numerous high-profile deals in the pipeline. It arrived with a bang last December when the company spent about $400 million on its way to acquiring 9 percent of ICICI Bank, the country's largest private commercial lender. Then it snapped up 5 percent of Apollo Hospital and a 28 percent stake in Hyderabad-based Matrix Laboratories, which produces pharmaceuticals. In a matter of months, Temasek became India's second-largest equity investor. More than half a dozen deals from banking to telecom and aviation reportedly are still on Temasek's radar in India. Keppel recently announced its first foray into the country—a $15 million residential project in Bangalore—and said it was exploring other key Indian cities including Mumbai, New Delhi, Chennai, Hyderabad and Kolkata for opportunities.

When feasible, Temasek aims to integrate its overseas holdings into Singapore's home economy. Take eG Innovations, a Chennai-based software company: it was initially funded through a Temasek-backed incubator program and eventually grew into a specialty-software vendor with clients around the globe. Not surprisingly, its biggest market today is Singapore. "Through Temasek's network we got contracts from top companies like SingTel and the Ministry of Defence," says Srinivas Ramanathan, the company's founder and president. "Also it provided us a test market before we bootstrapped to the United States."

Back home, Singapore hopes the outward investment will stabilize the local economy. Just as Corporate America invests heavily around to globe to stay competitive, Singapore must too. The vision: Singapore Inc.'s seed money helps fuel greater dynamism within the region, which in turn boosts demand for Singaporean services, and raises local manufacturing prowess.

Even as Temasek continues to expand abroad, though, it is not completely freed from charity at home. Its most troubled holding, Chartered Semiconductor Manufacturing, employs 3,500 workers but lost $708 million during the past two years. Temasek continues to pump money into the failing entity, in seeming deference to the government's goal of keeping 25 percent of the economy in manufacturing—an area many economists say they should continue to divest.

To ease the burden on Temasek, the government is aggressively trying to draw new foreign investment into both higher-end manufacturing and services areas, including petrochemicals, pharmaceuticals, health care and financial services, where it believes Singapore can be competitive. Still, there's an entire generation of old-school manufacturing workers that will be hard to retrain in these new industries. Big questions remain about the responsibility Temasek has to those workers, and whether the company will be allowed to operate solely on private-sector profit principles. How the government answers will be a telling measure of Temasek's true identity.

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