Asian opportunities

Jaime Augusto Zobel de Ayala, who leads one of the Philippines’ biggest conglomerates, explains how Southeast Asian companies are taking advantage of the changes in East–West dynamics.

Ayala Corporation of the Philippines is a prime example of a new breed of progressive, family-controlled conglomerates that have their sights set on global expansion. It may not be a household name in the U.S. and Europe, but it has a long corporate pedigree in Southeast Asia, stretching back to its founding as a distillery business in 1834 when the Philippines was under Spanish colonial rule.

Ayala’s business includes extensive land and property interests through Ayala Land, telecom companies through Globe Telecom, and consumer industries and banking through its ownership of the Bank of the Philippine Islands. In the first nine months of 2018, Ayala reported revenues of US$4.1 billion (Philippine pesos 223 billion); the corporation and its listed subsidiaries account for about 20 percent of the Philippine Stock Exchange Index’s total capitalization.

Much of its recent growth has been helped by buoyancy in the Philippine economy, which has been a star performer in the 10-nation Association of Southeast Asian Nations (ASEAN). Recently, Ayala has been expanding into high-tech automotive supplies in Europe with the 2017 acquisition of MT Misslbeck Technologies, a German company that makes plastic parts and tools.

Jaime Augusto Zobel de Ayala, chairman and chief executive of Ayala, wants the business to expand further overseas and has said that he expects the company to be generating around 10 percent of its equity earnings from outside the Philippines, up from 7 percent. In 2018 he sat down with strategy+business and discussed how the standoff between the U.S. and China can benefit his region, the advantages conglomerates have in the ASEAN region that they don’t in the West, and why it is crucial to invest in talent now to prepare for the future.

S+B: From your vantage point in Asia, what do you think has been the fallout from trade tensions between the U.S. and China in the region?
ZOBEL DE AYALA:
The escalation of trade tensions that has taken place between China and the United States is actually leading to renewed opportunities within ASEAN. We are seeing an emerging realignment of supply chains as people look to a “China plus one” model [adding a second location in Asia] — or perhaps even move out of China — to be able to continue selling to the U.S. from an acceptable “country of origin.”

“The escalation that’s taken place between China and the United States is actually leading to renewed opportunities within ASEAN.”

ASEAN countries, the Philippines included, will be beneficiaries of this shift. We are seeing this development have an impact on our own businesses. In our electronics business, Integrated Micro-Electronics Inc. (IMI), we have had two or three American companies that were China-based move their operation to the Philippines.

The other trend is a significant change in the competitive landscape of Southeast Asia. Vietnam is relatively well placed geographically to receive a boost from increased exports at the expense of China. To a lesser extent, Malaysia, Thailand, and the Philippines are also better positioned than many other countries in the region to benefit.

S+B: Have you seen any impact of this on your business at Ayala?
ZOBEL DE AYALA:
Yes. One of our subsidiaries, IMI, is technology-enabled for the automotive, industrial, and aerospace sectors, and is our most global business, with manufacturing sites in China, Bulgaria, Serbia, Germany, Mexico, and the U.S. Its Philippine site has been the direct beneficiary of companies’ realignment of supply chains. Two North American customers of IMI recently decided to move part of their operations from China to the Philippines to mitigate the impact of trade-war tariffs. IMI is in discussions with several more customers that are looking to move their China operations to other operating sites of IMI.

 
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Interestingly, on the real estate front at Ayala Land [a listed Ayala subsidiary], we’ve received increased commitments from Chinese companies for our industrial parks, with most to be situated in our Pampanga site north of Manila. This includes a ceramics company that wants to build its largest facility globally in the Philippines. Ayala Land expects more Chinese companies to relocate their operations in the coming months as a result of the trade war.

So it’s a very interesting phenomenon, and I don’t think the Philippines is the only one in this situation. I see us as just a proxy for what’s happening in Vietnam, Thailand, and Indonesia. So out of the negative trend of tension on trade come the positives of supply chain realignment to Southeast Asia.

S+B: ASEAN economies have collectively outpaced many other national economies in recent years, with the Philippines growing at more than 6 percent in 2018. What threats to growth are you most concerned about — geopolitical uncertainty, the speed of technological change, climate change?
ZOBEL DE AYALA:
I am most sensitive to anything that affects employment. From a broad perspective, if we look at the issues that have negatively affected the world — from political discontent to immigration and inequality — they all revolve around employment-related issues and the resulting inequalities that are generated: people either not finding work, losing their jobs, or finding alternative employment. Add to that the fact that you’ve got new technology shifts beginning to take place because of artificial intelligence or digitization. People’s employment options are changing.

At Ayala we have started to invest in education, because I believe that there is an increasing disconnect between the skills of people coming out of school and the skills needed for the range of jobs that are emerging. This dynamic is even more pronounced in a country like ours, where the vast majority don’t make it through college. Essentially, many people end their education in high school, if they even manage to get that far, and it is only a very small percentage who go on to further their education in college or aim for a post-college degree.

I have always argued in policy discussions that we’ve got to prepare young people in high school to be able to get jobs. Countries like Germany and Switzerland have had this great tradition of apprenticeship models, which we have not had in our part of the world. So [at Ayala,] we decided to invest quite heavily in the primary and secondary education space, on a for-profit basis, because we believe that there has to be this closer link between educational outcomes and the changing needs of the workplace. There have to be some new models.

S+B: Many Asian economies have relied on manufacturing to create entry-level jobs for people moving into cities as urbanization has swept the region. Is artificial intelligence a threat to this trend?
ZOBEL DE AYALA:
Yes. In ASEAN, manufacturing is a major provider of employment, and Industry 4.0 will have a crucial impact on jobs in the region. It is imperative that we help our workforce prepare and adjust to the changing landscape by retooling and re-skilling them, while also reexamining current educational curricula. The onus is on government, the private sector, and academia to work together to ensure that people reach a required proficiency in technology, science, engineering, and mathematics. And there must also be an emphasis on creativity and critical thinking embedded in the curriculum.

Businesses are best positioned to identify the impact that AI and automation will have on their industries. The responsibility to implement the required re-skilling program for our current workforce lies with us. But policymakers in the Philippines must consider creating an enabling policy framework that will incentivize research and development and innovation to encourage progressive thinking among enterprises. 

S+B: How fast do you think AI will affect jobs?
ZOBEL DE AYALA:
I do not think AI is going to have as rapid an effect over the short term as people fear. Over 10 years, say, it will have a bigger effect. We have a couple of key industries in the Philippines that could be susceptible to AI.

For example, one of the big drivers of our country’s economy is the business process outsourcing (BPO) sector. At Ayala we have a window into that because we run and rent space to service centers, not only for clients but for our businesses also. Much of it is already driven by AI. These days, when you either call or write an email to a center, you are getting answered by machines; people are having trouble telling the difference.

That said, I remain an optimist. I do believe that jobs change and shift, and just because one series of jobs changes, it doesn’t mean new ones won’t crop up. The Philippines is an extraordinary place. One of our strengths is that we are very imaginative and incredibly resilient. We are also flexible.

We also have a strong creative side: You will find Filipinos around the world providing leadership and unique skills to the creative industries. We create music, we make film, we draw and design. Take a look at any film and you’ll find many Filipinos in the credits. It’s a natural strength that I think we haven’t fully developed.

In addition to our investments in schools, from our perspective at Ayala, we are investing much more now in reeducating our workforce. Our human resources and education teams are currently in discussion with various educational institutions for the up-skilling of our people to ensure their relevance for the future.

Asia rising

S+B: Ayala is one of a new breed of groups in the region — many of them family-owned businesses — that have started to expand beyond their domestic markets and ASEAN. Has the “de-globalization” trend that we are seeing elsewhere caused you to focus more at home?
ZOBEL DE AYALA:
No, we are in expansion mode. Over the last decade, we’ve overweighted in the Philippines because the growth story here has been quite compelling. And the [efforts] have paid off handsomely. The increasing scale of our operations here has led us to also build up some solid regional expertise. The increasing scale of our projects, the growing abilities of our management teams, the stronger the balance sheet we have, and the increasing size of the capital we are allocating have led us to start saying maybe we could extend this expertise…outside our country.

We have some [subsidiary] companies that already have global footprints. Our electronics company, IMI, has always been a global company and has kept expanding. Beyond that, for the first time in recent history, our real estate company has begun to look at buying companies abroad and has bought a medium-sized company in Malaysia. Most people do not know this, but about 50 percent of the water supply of Ho Chi Minh City in Vietnam is generated from an Ayala project.

The list goes on. In energy, we started just seven years ago. We had zero capacity in the Philippines. But now, as we have built up some expertise — particularly on the renewables side — we have begun to deploy capital into projects in Vietnam, Indonesia, and Australia. We have put up wind farms in Indonesia and invested in a geothermal facility. We are also developing solar farms in Vietnam, where the government, similar to Australia’s, is in a hurry to deploy renewable energy. Just last January [in 2018], our AC Energy tapped the capital market for the first time with the issuance of a $410 million green bond. We are proud to say that this is the first climate bond–certified and publicly listed U.S.-dollar green bond in Southeast Asia. The Asian Development Bank and the International Finance Corporation have invested a combined $95 million. This highlights Ayala’s ability to grow its renewables portfolio.

So we are beginning to stretch beyond our national shores. And although we are still in the early stages, I see this as a successful model that we’ll continue to build on over the next 10 to 20 years.

S+B: Your business is essentially a conglomerate model. Some might argue that it’s gone out of fashion in Western economies, but it seems to be thriving in emerging markets, including in Asia.
ZOBEL DE AYALA:
I would differentiate between the conglomerate in a country like the U.S. and a conglomerate in Southeast Asia. The reason conglomerates, at least the bigger ones, have been successful in an Asian setting is that in many cases we are living in emerging market environments where the foundations and institutions necessary for economic growth are not there. Conglomerates have taken up the slack and filled many gaps.

Take the Philippines: Back in the [former president Fidel] Ramos administration [1992–98], the water distribution system in the city of Manila was falling into massive disrepair. Rather than allocate more government funds to it, the Ramos government encouraged privatization. Ayala won one of the concessions, and we have invested heavily in modernizing. It was only because we were a conglomerate, and understood the various linkages, that we were able to move into a business like that with the right resources, people, and partners. This model could be a proxy for other conglomerates in Southeast Asia, where governments have failed to build the infrastructure needed for progressive development fast enough.

S+B: There are examples of this in India, where conglomerates have stepped in and built airports, for example.
ZOBEL DE AYALA:
Yes. We have been very frustrated for a long time now that our international airport in the city of Manila is behind where it should be in terms of accessibility and capacity. We have pleaded with past governments to upgrade our airport infrastructure.

Finally, seven of the Philippine [business] groups, who generally do not work together, formed a consortium, and we made an “unsolicited offer” to renovate the airport. We drew in Changi [Airport Group] from Singapore to be a partner, and submitted a plan to upgrade the facilities for Ninoy Aquino International Airport in Manila.

To date, the government has given us [what is called] “original proponent” status and allowed us to move forward with the process. Again, it’s only because we are multi-business groups that we’ve been able to get together and allocate funds for an infrastructure project of this nature. Whether it’s Thailand, Indonesia, or one of the more emerging countries, there’s been a very strong proposition for conglomerates to use their balance sheets and their expertise to fill in some massive gaps on the economic development side. Some are better than others, but generally conglomerates have been a positive force in our economy.

Author Profile:

  • Jeremy Grant, a former Financial Times correspondent, is an editor with PwC based in London and international editor of strategy+business.
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