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Tax Incentive Entices Affy to Relocate Array Manufacturing to Singapore by End of Year

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Enticed by tax incentives and prompted by a need to cut costs, Affymetrix last week said it plans to move the majority of its array manufacturing from its West Sacramento, Calif., plant to its Singapore facility by the end of the year.  
 
The company will continue to manufacture instrumentation and reagents in West Sacramento, John Batty, Affy’s chief financial officer, told BioArray News in an e-mail this week.
 
Batty declined to disclose how many employees will be affected by the relocation, which he said would occur in “three phases of consolidation.” He said that each phase will affect “about the same number of employees.”
 
As of Dec. 31, Affy had 1,141 employees, according to its annual report filed with the US Securities and Exchange Commission.
 
“We are adjusting headcount and resources as we shift a larger percentage of our array production to Singapore,” Batty said. “This action allows us to optimize our cost structure and remain more competitive in the marketplace.”
 
In last week’s SEC filing, the company said it approved the move on Feb. 28 as part of an ongoing effort to reduce costs. Affy said it expects to incur non-cash charges of around $12 million to $15 million related to the “abandonment of certain manufacturing assets,” and approximately $500,000 related to employee severance in the first quarter. 
 
The company said it may also “incur additional expenses associated with the reduction of capacity” at the West Sacramento plant depending on the rate at which it transfers its production capacity to Singapore.
 
Singapore has granted Affy a 10-year tax holiday, and the firm expects “to see increasing tax savings through the balance of 2008 as our production volumes in Singapore ramp,” Batty said. Batty did not disclose how much Affy will save following the move.
 
Affymetrix began leasing a 150,000-square-foot facility in Singapore in 2005. By comparison, the West Sacramento plant measures 170,000 square feet. The company has not discussed plans to expand the Singapore facility.
 
Batty told investors during the firm’s fourth-quarter earnings call last month that as of Dec. 31, 25 percent of Affy’s arrays were being manufactured at the Singapore plant.
 
Affymetrix manufactures its arrays in wafer format using mask photolithography. It compares its manufacturing technique to the semiconductor industry, and Singapore’s competency in semiconductor manufacturing was one reason why Affy decided to locate its plant there.
 
According to last week’s SEC filing, Affy has recently streamlined its manufacturing process to enable it to shrink the feature size of its chips, thereby increasing the amount of content it can synthesize on a wafer and reducing the cost associated with making the arrays.
 

“We expect to have three phases of this consolidation and each phase is expected to impact about the same number of employees.”

The decision to relocate follows a string of restructuring steps Affy has taken over the past few years. In September 2006, Affy decided to relocate its instrumentation-manufacturing facility from Bedford, Mass., to West Sacramento, laying off 80 staffers in the process (see BAN 9/19/2006). At that time the company also added array manufacturing capacity in West Sacramento.
 
The following year, the firm announced plans to consolidate the activities of its Sunnyvale, Calif., facility into its Santa Clara, Calif., headquarters.
 
Affy completed shuttering the Bedford and Sunnyvale facilities by the third and fourth quarters of 2007, respectively. Batty said that Affy still holds the leases to each site and has already sublet the Bedford plant as it looks to sublet the Sunnyvale space.
 
In addition to its Santa Clara, West Sacramento, and Singapore facilities, Affy maintains administrative and research and development space in Emeryville, Calif.; South San Francisco, Calif.; Shanghai, China; Osaka and Tokyo, Japan; and Wooburn Green, UK. According to the annual report, around 50 percent of Affy’s sales in 2007 were in the US, while more than a third were in Europe, and roughly one-tenth were in Japan.
 
Singapore Fling
 
Affy isn’t the only array shop enticed by Singapore’s tax incentives. Last month, Illumina said that it has leased a facility in that city and is gradually adding manufacturing capacity to the site as part of an overall effort to reduce the firm’s corporate tax rate. Illumina, which also has a 3,200-square-foot administrative facility in Singapore, currently manufactures all of its arrays at its headquarters in San Diego.
 
According to an SEC filing late last month, Illumina leased a 33,000-square-foot facility in Singapore last October. The five-year lease starts this month and gives Illumina the option to extend it by an additional five years. The company expects to start shipping products from Singapore by the second half of this year.
 
During the firm’s fourth-quarter earnings call, Chief Financial Officer Christian Henry said that the financial benefit of manufacturing in Singapore probably won’t be felt until 2009 and will depend on how much of the firm’s BeadChip fabrication will be done overseas, and how fast the firm’s revenues grow outside of the US (see BAN 2/8/2008).
 
Illumina said 57 percent of all 2007 sales came from US customers, 30 percent came from Europe, and around 10 percent were from Asia.
 
During last month’s call, CEO Jay Flatley said that Illumina has the “ability to move over five or 10” of the instruments used to manufacture its BeadChips into Singapore “and begin to shake those out without having any impact on the capacity here in San Diego.”
 
Flatley said the firm will ramp up the Singapore facility in a “gradual way,” and that it is a “very manageable process” as the lease is signed an Illumina is now beginning to hire personnel. “We’re pretty confident we can pull that off without too big a hiccup,” he said.
 
The firm has not disclosed how the ramp-up of the Singapore manufacturing space will affect its headcount. Henry said last month that the firm currently employs 1,000 staffers worldwide.

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