Global pressures weigh down on ST Malta

By Kurt Sansone
The significant downward revision in the Central Bank’s GDP growth forecast for 2003, partly prompted by a deterioration in growth prospects for the semiconductor industry, comes at a time when ST Microelectronics is contending with profitability issues.
An interview with ST CEO Pasquale Pistorio in the November issue of influential American business magazine Forbes highlighted a number of aspects related to the global semiconductor market that could have an impact on Malta.
The magazine says that although semiconductor sales are recovering, profits are still lagging. ST hopes to sell 13 per cent more chips this year but with prices falling profits have stalled and it is estimated that ST’s global profits are down 59 per cent year-on-year.
The global company is still one of the world’s strongest in terms of profits and sales – ST is the sixth largest semiconductor company in terms of sales and fourth largest in terms of profit - but is now consolidating its operations. And according to Forbes magazine consolidation means the closure of a number of European plants.
Over recent years ST has closed most of its manufacturing plants in Europe and moved them to south east Asia and north Africa. The Malta plant is one of the last remaining manufacturing plants of its sort in Europe and things are not looking good.
The ST management at the Kirkop plant has been saying that the cost of production in Malta is higher than that of other similar plants in Asia and Africa. Labour costs in Malta were three to four times higher than in Morocco, two to three times higher than in Singapore, four to five times higher than in Malaysia and five to six times higher than in China.
Despite the Malta plant turning a profit it is less competitive than other ST manufacturing plants.
The first signs of this profitability strain have already appeared on the horizon: ST will transfer up to 20 per cent of its Malta operations to a plant in Morocco by June next year.
Management and union representatives have been engaged in constant talks to find possible solutions to the problem.
ST employs 2,400 people and accounts for some 565 per cent of Malta’s total exports. It has a payroll of Lm30 million and any downsizing would have a significant impact on unemployment and the economy as a whole.
It is unclear whether government has any contingency plans to deal with any negative impact that may be forthcoming if ST’s Malta plant buckles.
But the precarious situation has prompted former Labour minister John Attard Montalto to comment about the issue in Parliament on Monday. Dr Attard Montalto warned of a competitiveness trauma, which was highlighted by ST’s decision to relocate some of its Malta production to Morocco.
The Labour MP said that government, the opposition and the nation as a whole had to act now to tackle the competitiveness challenge.
However, the woes with ST are not solely linked to the domestic market. The global forces at play are putting pressure on companies to constantly change.
Forbes magazine highlights another issue that can have an impact on ST’s European operations and that is the euro.
Forbes states: ‘ST reports its earnings in dollars, but most of its costs are in euros... hence the imperative to shut European plants.’
With its pro-American editorial policy, Forbes magazine is bound to paint a negative picture of Europe, but beyond the rhetoric there seems to be truth in the assertion. Low-end manufacturing is definitely more cost-effective in south east Asia and Africa but a more flexible job market in Europe could help attract the higher-end of business operations.
Along with Motorola and Philips, ST has just opened a research plant in France costing USD1.4 billion. The money to invest is definitely there. The question is how many of it will find its way to Malta.
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