Iran war pressures Singapore’s tech sector to focus on energy efficiency, diversification

[SINGAPORE] Logistical bottlenecks and escalating freight costs are among the challenges being faced by players in Singapore’s technology sector.

As a result, the semiconductor manufacturers, data centre operators and other tech players in Singapore are leaning further into contingency strategies to cope with the issues thrown up by the Middle East conflict.

These include diversifying supply chains, improving material usage efficiency and exploring recycling where possible.

“At this stage, the semiconductor industry in Singapore is more pressured than disrupted,” said Ang Wee Seng, executive director at Singapore Semiconductor Industry Association (SSIA).

Singapore serves as a key global node for semiconductor manufacturing, producing approximately 10 per cent of the world’s supply, and 20 per cent of global semiconductor equipment.

The semiconductor industry itself contributes close to 6 per cent of Singapore’s gross domestic product.

Operations for Micron – one of the world’s largest producers of dynamic random access memory (Dram) chips with significant presence in Singapore – remain “normal” in the Republic, with the semiconductor company noting that it has sufficient inventory and has diversified sourcing for manufacturing materials.

Singtel-owned data centre operator Nxera told The Business Times that it sources its equipment and infrastructure from various sources, ensuring that it is not reliant on a single source or geography.

“This approach has helped mitigate potential disruptions in the global supply chain,” the spokesperson told BT.

But it is clear that the sector is coming under strain.

Higher energy costs

Data centre operators – which consume about 7 per cent of Singapore’s total power consumption – are keeping a close eye on the power-grid situation within the Republic.

The Energy Market Authority has already warned that Singapore should brace itself for further increases in electricity tariffs.

Sharad Somani, partner and head of environmental, sustainability and governance consulting at KPMG in Singapore, noted that data centre operators should expect some near-term pressure on margins, but the impact will vary depending on the operating model and power-contracting structure.

Hyperscale and wholesale arrangements often allow for power cost pass-through, while fixed-priced or legacy leases may leave operators absorbing more of the increase until the contracts are repriced, explained Dr Karryl Trajano, research fellow at the S Rajaratnam School of International Studies, Nanyang Technological University (NTU).

A spokesperson for Singtel unit Nxera said that the operator has already secured its energy needs to operate its key data centres in Singapore through a long-term power purchase agreement.

Energy-linked pressures

Other parts of the value chain are also affected.

On the semiconductor front, Ang observed early signs of cost pressures, particularly from energy-linked inputs such as helium, alongside upstream fuel costs.

Helium is an essential, non-substitutable material used in semiconductor manufacturing processes such as cooling, precision manufacturing and leak detection.

Approximately a third of global helium supply comes from Qatar, which is disrupted by the closure of the Strait of Hormuz.

Bloomberg Intelligence noted in a report that Micron, like its peers such as SK Hynix and Samsung, may have excess inventory to manage temporary shortages.

“But in a prolonged conflict, the company may be forced to cut production given a lack of substitutes and limited alternative sources. That would hurt utilisation and profitability,” the report noted.

Stanley Loh, executive director of precision engineering firm UMS Integration, told BT that helium “does not form a big portion” of the material the company uses in its operations – which mainly focuses on component manufacturing and sub-assembly services.

Bloomberg Intelligence noted that recent Dram price hikes – which have been exacerbated by the global supply shortage – should help cushion the energy-cost impact on operating margins of semiconductor firms.

Higher energy costs have translated to higher logistics costs

Rising logistics costs, caused by increasing fuel prices, is the “more immediate headwind”, said SSIA’s Ang.

Because semiconductors and its manufacturing equipment are mainly imported through air freight, an increase in air-freight prices might result in higher cost of production, said Amit Sinha, group head of telecommunications, media and technology at DBS.

Singapore’s jet fuel price has risen more than 80 per cent to US$168.49 per barrel, from US$91.70 prior to the start of the conflict.

The freight crunch is also impacting data centre operators which have significant operations in Singapore, driving up cost and lead times for essential components in data centres such as servers, graphic processing units and networking equipment.

KPMG’s Somani told BT that such delays could eventually “slow deployment schedules for new data halls”. Data halls are walled spaces that contain server cabinets of various sizes.

Currently, the impact is still contained. NTU’s Dr Trajano noted that there is “limited evidence of disruption to live data-centre operations at this stage”.

Preparing for a long-drawn scenario

Local companies are bracing themselves for the sustained energy and logistical impact as the war enters its sixth week.

Ang from SSIA noted that most companies will lean further into strategies they have already developed. This includes diversifying supply chains, improving material usage efficiency and exploring recycling where possible.

To manage energy needs, Loh said, UMS will take “necessary measures” to support its long-term growth plans.

“The group’s sustainability measures, such as the use of solar energy and other energy-saving initiatives, will also help to manage our energy needs,” he added.

Ang noted: “These are not new reactions, but an acceleration of ongoing efforts to build long-term resilience.”

In the longer run, industry observers noted, the higher costs in the tech sector could hit Singapore’s competitiveness.

Dr Trajano said: “Higher electricity costs can make Singapore relatively less competitive on pure pricing compared to other hubs like Johor or Batam.”

However, Singapore competes on factors beyond cost – such as connectivity, regulatory stability and high-density artificial intelligence-ready infrastructure, she added.

Somani noted that geopolitical uncertainties – such as the ongoing Iran war – tend to reinforce enterprise priorities around political stability, legal predictability, regulatory clarity and connectivity.

Singapore “ranks strongly” across all of these dimensions, he said. “On these dimensions, Singapore continues to hold a clear advantage that energy price volatility alone does not erode.”