Ayala IR

AC Industrials

COVID-19 weighed on AC Industrials in 2020, as it did with many other participants in the global, interconnected economy. While we expect the effects of the pandemic to persist into 2021, we are confident that our efforts over the last year to strengthen our businesses’ fundamentals have fortified them against uncertainty in the medium-term while preparing them to capitalize on post-pandemic recovery and transformation.”

Arthur R. Tan
Group President and CEO, 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 eleven 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

Navigating a business landscape upended by the COVID-19 pandemic was the most significant challenge for AC Industrials since the group’s inception in 2016. Around the globe and in AC Industrials’ key markets, national lockdowns imposed to halt the spread of the disease disrupted supply chains, hindered manufacturing operations, and cratered demand.

The worldwide automotive industry, already challenged in 2019, faced further difficulties across its value chain. International travel, a lifeblood of the global economy, ground to a halt, dragging the wider aerospace industry. As a global business that operates in openly competitive markets, AC Industrials was disproportionately affected by these external factors vis-à-vis other Ayala subsidiaries.

On the domestic front, the Philippine automotive industry was similarly tested, with lockdowns impacting dealership operations across the country for extended periods of time. These restrictions, complicated further by weak consumer sentiment and reduced financing appetite from the banking community, resulted in 248,050 units sold in 2020 nationwide, a 40% drop from 2019. Prior to the pandemic, the automotive sector had grown by a compounded annual growth rate of 12% from 2009 to 2019.

In 2021, AC Industrials expects COVID-19 to continue to impact operations, especially in the first half of the year. Key markets such as the Philippines, Germany, the United Kingdom, and the United States remain under varying degrees of restriction until vaccines are substantially rolled out. Nevertheless, the global EMS sector, for example, is still expected to grow by a post-pandemic CAGR of five percent from 2020 to 2026. Meanwhile, the global automotive sector is projected to grow seven to nine percent up to 2022 while we see the Philippine auto market expanding by 12% through 2025, as it recovers from the steep downturn in 2020.

CAPITALS

Financial
Balance sheet that can be readily deployed to capture opportunities

Manufactured
38 manufacturing and engineering sites around the world with over 130 surface-mount technology production lines and 432,000 square meters of manufacturing space

Majority stake in the KTM production plant in Laguna and management of over 100 dealerships nationwide across five automotive and two motorcycle brands

Intellectual
Emerging suite of proprietary technologies and intellectual property for the benefit of our customers and partners

Human
Over 18,500 employees and executives who deliver operational excellence, customer satisfaction, and value-adding technical expertise

Social and Relationship
Operations that adhere to Ayala’s standards of sustainability and good governance and good, lasting relationships with partners and customers

HOW WE CREATE VALUE

Portfolio Management
Actively managed portfolio to drive high impact synergy opportunities across the group and a management team that can provide a broad range of corporate functions such as strategic planning, governance, resource allocation, and financial management.

Global Manufacturing Services
Delivery of full manufacturing solutions to customers, partners, and own portfolio of companies.

Emerging Technologies Development
Acquisition and commercialization of key technologies to enhance and protect competitive position

Vehicle Distribution and Retail
Partnerships with multiple OEM brands to competitively source and distribute a broad, complementary, and integrated selection of vehicles for a wide range of Philippine automotive customers.

BUSINESS REVIEW

COVID-19 took its toll on all AC Industrials business units, with the group incurring a net loss of ₱1.8 billion in the face of plant shutdowns, slow demand, and dealership closures.

Integrated Micro-Electronics Inc. was first to feel the effects of the pandemic, with its facilities in China shutting down as lockdowns were implemented at the start of 2020. Its plants in other operating regions soon followed as forced closures or workforce restrictions were imposed in the remainder of the first half of the year. However, IMI was also quick to recover once health and safety measures were put in place to prevent transmission of the virus. Alongside healthy recovery in manufacturing demand, its facilities were able to return to full capacity by the third quarter of the year. On the back of a strong second half of the year, IMI was able to close 2020 with revenues of US$1.1 billion, declining only nine percent from 2019. By streamlining the group’s operating structure and focusing on manufacturing efficiency, net losses were minimized to US$3.5 million, an improvement from 2019’s net loss of US$7.8 million.

$1.1BRevenue of IMI

IMI’s core subsidiaries, Via Optronics and STI, Ltd., posted combined revenues of US$269 million, an increase of nine percent from the previous year. Slowdowns in VIA’s and STI’s traditional automotive and aerospace and defense markets were offset by increased participation in the medical sector which saw significant growth in 2020

$269MCombined revenues
of Via Optronics and STI

IMI designs and manufactures power modules, a key component for electric vehicles, as well as power generation and storage applications.

AC Motors, AC Industrials’ Philippine vehicle distribution and retail arm, recorded a net loss of ₱886 million on lower sales volumes across four of its five automobile brands – Honda, Isuzu, Kia, and Volkswagen. An already soft local automotive industry at the start of 2020 was worsened by lockdowns which shuttered dealerships for several months. By the fourth quarter, signs of a recovery were in place with volumes already averaging 70% of pre-pandemic levels. The group also took the opportunity to sizably rationalize its resources and assets, and re-focus its transformation initiatives to put AC Motors in the best position to accelerate and take advantage of the industry’s global transition.

AC Motors’ motorcycle business also saw a decline in 2020, though an increase in exports of KTM units to China meant that manufacturing sales dropped by only nine percent from 2019. Domestic sales had also normalized by the fourth quarter of the year, with average sales already exceeding pre-pandemic volumes. Another bright spot in 2020 and beyond was the addition of the Swedish Husqvarna brand, another member of the KTM family, with several models already being assembled on the KTM production line in Laguna for delivery in 2021.

AC Industrials’ startup investments continued to develop and mature in 2020. MT-C-CON mitigated the impact of the pandemic on auto industry demand by resource rationalization and improving gross margins. Merlin Solar, on the other hand, doubled its revenues from the previous year. The San Jose, California-based firm continues to strengthen its pipeline through developing relationships with channel partners. Merlin has also rationalized its manufacturing operations in both the United States and the Philippines.

KTM’s manufacturing facility in Sta. Rosa, Laguna, in operation since 2017 as a joint venture between AC Industrials and KTM AG, now produces a variety of KTM and Husqvarna models for the Philippine market and for export to Southeast Asia and China.

STRATEGY	2020 PERFORMANCE	2021 PRIORITIES
Legacy, larger-scale operations
Strengthen and optimize Ayala’s at-scale operations in electronics manufacturing and automotive distribution & retail.	IMI was able to rebound strongly in the second half, posting a 39% increase in revenues over the first half. IMI’s core business recorded revenues of US$868 million, 14% below 2019. While AC Motors’ Honda and Isuzu dealers retained their leadership of their respective brands’ networks, retail sales dropped to 32% and 29% from 2019, respectively. Honda Cars Philippines’ plant closure in February and retrenchment costs also led to equity losses for AC Industrials. Volkswagen’s dealer network remained challenged throughout 2020, with retail sales seeing a 68% drop versus 2019.	IMI will continue diversification into the industrial and aerospace and defense segments to reduce reliance on the automotive sector. Continue to rationalize the AC Motors’ dealer network and physical assets to improve profitability and resource utilization. Augment Volkswagen’s product lineup with competitive offerings in growth segments.
New growth operations
Scale up recently acquired businesses that boost and complement the larger-scale operating units.	STI’s opportunistic entry into the medical sector allowed it to increase revenues in 2020 although the impact of the pandemic was evident in the aerospace sector. While Kia nationwide sales fell by 58% overall to 2,129 units, average monthly sales in the fourth quarter rose to pre-pandemic levels. KTM manufactured over 6,500 units, nine percent lower versus 2019. Swedish motorcycle brand Husqvarna was also added to the group’s portfolio, with selected models being manufactured on KTM’s Laguna production line for 2021 sales. Maxus saw a 151% increase in retail sales in 2020, supported by the launch of two new models— the T60 pick-up and G50 MPV.	Continue scale-up of STI’s operations and drive synergies with IMI when available. Kia will launch several new models in 2021 and continue its network expansion efforts as it pursues its goal of becoming one of the Philippines’ top volume brands. Continue to augment KTM’s dealer network and support the launch of the Husqvarna brand. Expand KTM’s manufacturing capacity to support planned sales push. Maxus will launch an additional model in a key market segment while strengthening dealer network and continuing brand-building efforts.
High-tech investments
Provide financial and strategic support to unlock the potential of our investments in high potential technologies.	MT-C-CON improved synergies with VIA, booking key auto projects. The group improved gross margins and lower losses over 2019 through resource rationalization and other initiatives. Merlin Solar started to gain market traction and developed relationships with several channel partners, resulting in a doubling of revenue vs 2019. Manufacturing operations in San Jose and the Philippines were also rationalized.	MT-C-CON aims to deepen cooperation with VIA and IMI for possible new OEM projects while expanding into non-auto segments such as green energy, aerospace and medical. At the same time, old customers are being reactivated to boost revenue. MT-C-CON is continuously working on the modernization of facilities and optimization of resources. Merlin is focused on further driving sales growth and maintaining a healthy revenue pipeline. Developing a new grid technology to further improve cost and increase profitability is a priority.

THE VALUE WE CREATE
Investor and Shareholders	Shareholder returns that are diversified IMI group consolidated revenues of US$1.1 billion. AC Motors consolidated revenue of ₱13 billion. MT-C-CON group revenues of €31 million Merlin Solar revenues of US$5.8 million
Government and Policy Makers	Quality manufacturing operating markets, in support of government thrusts to promote the sector as a pillar of national development. Prioritizing the Philippines while utilizing key frameworks to generate value throughout economic and regulatory cycles.
Customers	Products, services, and solutions that exceed customer requirements and global quality standards Focus on acquisition of capabilities and experience in emerging technologies
Employees	Opportunities to build meaningful, long-term careers
Partners	Long-term strategic partners are treated fairly and can reap consistent returns

32nd floor Tower One Exchange Plaza,
Ayala Triangle, Ayala Avenue
Makati City 1226 Philippines
+63 27908 3328
https://acindustrialtech.com.ph/

Sustainability
milan.fr@acindustrialtech.com.ph

Learn more about AC Industrials’
SDG initiatives

Learn more about AC Industrials
in our 2020 Integrated Report

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