AC Industrials

WHO WE ARE
AC Industrial Technology Holdings Inc. is Ayala’s industrial technologies arm, managing a primarily mobility-oriented portfolio composed of both operating units and investments in emerging high potential technologies. The company is founded on its dual core of Integrated Micro-Electronics, Inc., a Philippine electronics manufacturing services pioneer and now a globally leading manufacturing and technology solutions partner, and AC Motors, one of the country’s largest multi-brand vehicle distribution and dealership groups. AC Industrials operates in twelve countries around the world with its primary markets in North America, Europe and Asia.

Through AC Industrials, Ayala envisions growing its presence in the global industrial technologies space by capitalizing on opportunities opened by disruptive technological shifts, changing industry landscapes, and evolving end-user demand.

MARKET OUTLOOK
The year 2019 presented several macro-driven challenges for AC Industrials’ global markets. The U.S.-China trade conflict intensified, forcing firms who do business in either country to adapt to tougher operating conditions, including rising tariffs and tightening trade barriers.

Meanwhile, the global march toward increased digitization and connectivity continues to impact many industries. In the electronics manufacturing services space, the increased demand for electronic devices has resulted in not only greater need for customization and operational efficiencies among industry players, but also operational challenges in terms of material shortages and more demanding customer cycle times.

On the domestic front, the Philippine automotive market showed some signs of recovery in 2019. This was mainly driven by stable demand for commercial vehicles and gradual consumer acceptance of generally higher vehicle price levels, which rose in 2018 due to the implementation of the first tranche of a national tax reform program. Looking ahead, industry prospects remain bright, as evidenced by the Philippines’ continued status as a valued destination for many automotive manufacturers. Consistent economic growth of 5 to 6 percent, increasing disposable incomes, and continued industry underpenetration – at just 43 vehicles per thousand household – should remain an attractive recipe for OEMs.

As we look ahead to 2020, we expect most of these macro, political, and industry forces to remain in place. World geopolitics will likely remain volatile with the corresponding impact on our units which do business at a global level. Key technological trends such as autonomy, connectivity, sharing, and smart energy, meanwhile, will continue to shift industry profitability pools over the next decade. These global transformations will eventually reach the mass market level in emerging countries such as the Philippines, and otherwise leading domestic players will have to be prepared to manage their impact.

BUSINESS REVIEW
AC Industrials recorded a net loss of ₱2.4 billion as headwinds in both the electronics manufacturing services industry and the global auto industry hampered earnings across its several business lines.

The company’s EMS platform, Integrated Micro-Electronics Inc., continued to weather challenges in its main market segments, particularly the automotive, industrial, and aerospace.

Additionally, investments in capacity and technical capabilities for future growth increased the company’s overhead expenditures, which partly affected gross profit margins. Overall, these factors hindered IMI’s growth in 2019, with the company posting a net loss of US$7.8 million for the year.

Revenues from IMI’s wholly owned operations tallied at US$1 billion, down three percent from the previous year. The company’s Asian operating units dropped a total of 11 percent, as a function of the aforementioned slowdown in China’s automotive market for the year. This was offset by the performance of IMI Europe, also largely automotive based, which grew three percent year-on-year as the company’s newest production facility in Serbia continued its ramp-up in its first full year of operations. In parallel, IMI’s Mexico operations, which serve the North American markets, continued their robust trajectories with a 50 percent revenue growth in 2019.

IMI’s core subsidiaries, Via Optronics and STI, Ltd., posted combined revenues of $248 million, a decline of 21 percent from the previous year. VIA’s drop was mainly driven by the slump in the overall computing consumer segment and the delay in the release of a new generation component from one of its major customers.

Meanwhile, the uncertainty over Brexit, which persisted at least through 2019, caused some delays in the awarding of several contracts where STI is a key competitor.

AC Industrials’ Philippine vehicle distribution and retail arm, AC Motors, recorded a net loss of ₱337 million on lower sales volumes across its Honda, Isuzu, and Volkswagen brands. As the industry recovers from the previous year’s sizable, policy-driven decline, competition continues to be highly competitive, with over 50 players vying for slowly recovering customer demand.

Meanwhile, AC Industrials’ startup investments, Merlin Solar, MT Technologies, and C-CON, recorded higher net losses during the period as they continue to grow their revenue pipelines, invest in capacity and infrastructure, and manage underutilization of capacity resulting from the global downturn in automotive and manufacturing.