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The Innovation Imperative: How Enterprises Accelerate Industry Competitiveness and Inclusive Development Jaime Augusto Zobel de Ayala, Chairman and Chief Executive Officer, Inclusive Innovation Summit 1 June 2017, Thursday Rigodon Ballroom, The Peninsula Manila, Makati City

For confirmation

Secretary Lopez, a pleasure to be here with you

Secretary Fortunato de la Peña,

CHED Chairman Patty Licuanan, an old friend,

Former Secretary Greg Domingo, who we’ve worked closely with in our APEC

year,

To our good friends, Dado and Maria Banatao, thank you for everything you do

for science in the Philippines and in the work you’re doing in conjunction

with BPI,

And Doris Ho, an old friend. Thanks, Doris, for leading the way with your great

remarks on innovation.

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I am delighted to be in this Summit. And Secretary Lopez, I can’t think of it being more timely. The country is doing well economically, we’re moving forward, and what a great time that we’re pushing with this agenda.

I thought that the only way I can add value to the group and the organizers of this session is to talk about this notion of inclusive innovation within a multi-business setting, which is one that I represent. Innovation and inclusiveness should not just within the purview of small companies and start-ups. There is a role that we play as large companies, and I think Doris highlighted it very well: how all of us have to keep changing and adjusting to these changing times. But before I start on that, I want to congratulate all the organizers. I had the chance to attend part of yesterday, and I thought that the sessions which I was able to listen to—on the hard sciences, on analytics, robotics and artificial intelligence—were just great, and I hope that, for all of us involved here, this will be a tradition that we can continue in the following years. Let me thank you on behalf of the community here for getting this going.

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The innovation imperative

To follow on the remarks of Doris, we live in a world of accelerated change—I think that’s clear to all of us. The breakneck pace of technological progress and new means to create and deliver value have given rise to new possibilities, while dismantling those who were not nimble enough to adapt. You see names there of companies whom we have all dealt with when we were younger, but who now no longer exist or exist in a much smaller way.

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For big businesses, the implications of this new status quo can actually be quite distressing. A 2012 study by Innosight — a strategy and innovation consulting firm that we’ve worked with in Ayala to better understand and navigate disruption — found that the average lifespan of the top 500 US companies has fallen quite dramatically: From 61 years back in 1958, it went down to 25 years in

1980. By 2012, it further slid to just 18 years.

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Even more disconcerting is the recent global wave of social unrest. It is well noted that current anti-establishment sentiments are rooted in growing income inequality, lack of access to resources, and the widening gap in the overall quality of life.

Thus, I think, regardless of size, a paradigm shift is necessary for enterprises to remain relevant in this day and age. Businesses, and even countries, should realize that what brought success in past years, will not be the same ones that will bring success in the future.

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So now, we have a new innovation imperative, one that is very much in theme of this conference: Organizations should remain curious, vigilant, and agile enough to respond to rapidly changing technological and behavioral trends.

More importantly, however, enterprises must also develop unique but effective ways to address structural gaps and societal needs. And I think that’s the new imperative that we have for all of us in the business sector.

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Conglomerates accelerate innovation

Let me turn to the topic of large enterprises and multi-business groups. I believe that they too play very important roles in driving innovation at an industry and national level. Large enterprises possess a diverse set of capabilities, significant resources, and a wide network—all of which are not easily replicable and can potentially accelerate innovation efforts. Most especially, conglomerates have the incentive and the moral obligation, I believe, to harness these capacities to likewise accelerate progress in the communities that they serve.

On this last point, I remember reading quite recently a report published by Dr.

Raul Fabella on large business groups and inclusion. In his report, Dr. Fabella posited that large enterprises have the competence and capital to boost a nation’s ability to deliver crucial public goods and promote welfare, most especially when government resources are limited in certain sectors. And we’ve

Page 8 of 25 been seeing that dedication to funding and putting capital behind some of the infrastructure needs of the country over the last two decades by local companies.

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There are examples to draw from across the world. In terms of innovative responses to technological change and market preferences, consider the 125-year old, “Digital Industrial” General Electric. GE remains highly advanced both at the high-end and/or the mass market through its open innovation platforms and partnerships with start-ups. Or consider Apple: Apple continues to be a trailblazer through cutting edge design and the ecosystem it has begun to create. In the field of social impact innovation, global groups such as Coca-Cola and Nestle have institutionalized inclusive business models through community-based entrepreneurship in many of the emerging markets that they deal with.

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Might I also add that multi-business groups also function as catalysts for entrepreneurial activity on a fairly large scale. We see it in our own experiences within the Ayala group. In our malls, our commercial spaces provide many entrepreneurs a marketplace for their goods or services. Through the bank, we are able to support the needs of various SMEs to grow their businesses. At Manila

Water, for example, we engage SMEs and barangay-level businesses to be our contractors and equipment providers. And at companies like , a network of distributors, dealers, and sari-sari store owners ensure that people would never have to go far to replenish their prepaid credits. So, I would argue that multi-business groups do have a significant capacity to create strong amounts of economic activity, if directed correctly, and consequently, grassroots growth through their broad ecosystem.

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The Ayala Innovation Story

At Ayala, I’m proud to say, we have a long history of innovation that involve, many years ago, establishing the first bank in the country, the first streetcar system, and our pioneering effort in land distribution, and land planning and development. But in recent years, we have taken a more systematic approach to encourage innovation across our established businesses, rather than have them remain static.

Coincidentally—and credit to Dado on this—my own renewed approach to innovation, together with our team in Ayala, which I will talk a little later about, started with a conversation with Dado sometime back. I don’t know if he remembers it, but we all remember it because we always reference it on a regular basis. At the time, Dado and us were exploring a renewable energy pilot project

Page 12 of 25 for off-grid islands in the Philippines—we were interested in the space, and Dado was also working with his family on making it happen. It was during one of our conversations that Dado said that perhaps Ayala can establish a much more coherent innovation group, and we did not take those words lightly. After that conversation with Dado, we got together within our organization and actually formed it.

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And thanks to that thought, Dado, we now have Ayala Innovation. It is a think- tank and center of excellence within the corporate center that coordinates many innovation teams across the Group, as well as with our external partners. It’s now structured formally within the group, and it is guided by an Advisory Council, composed of the innovation leads across all our businesses.

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Ayala Innovation is mandated to perform three key functions, and this is how we instituted it within the setting of a large business group: First, the unit monitors emerging technologies, market trends, and behavioral shifts that may impact our businesses – either as opportunities or threats. Secondly, the unit brings together capabilities across our group, to develop new business concepts and facilitate synergy projects between our business units. The unit also hosts inter-company learning and thinking sessions, market-discovery studies, and a variety of fora and workshops, to continuously catalyze innovation thinking and activity.

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Allow me also to highlight how we celebrate innovation—so we now have that structure in place, but then to give it impetus, we continue to celebrate the great ideas that come out. Every year we hold group-wide innovation conferences including an “Innovation Olympics” and our annual Innovation Summit, called

Spark. The summit brings together the Ayala Innovation community and external experts to surface insights; elicit critical thought; and inspire the community to keep the innovation spirit aflame. So, thank you, Dado, for having inspired us with that thought; and I would also like to thank Paolo Borromeo, who is with us today, who has led that charge and who was part of that conversation originally.

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We celebrate innovation directly through the Ayala Innovation Excellence

Awards. Through the Awards, we recognize the various initiatives within the

Group that address customer or business pain-points in an inventive and financially-sustainable manner.

Most importantly, Ayala Innovation helps us unearth new business opportunities, usually in unexplored, but potentially high-growth spaces. As you know, large companies, by their very nature, can become a bit static in the way they view the future. And I believe this created a new impetus for generated excitement around new ideas. I will detail this later, but our recent investments in healthcare, e- commerce, and financial technologies were motivated by the continuous research driven by this very innovation group.

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Examples of innovation at Ayala

Allow me to outline a few specific illustrations of how we at Ayala respond to the innovation imperative, both in response to technological and behavioral trends, and in response to structural and societal needs.

Among our efforts to adapt to shifting technological and behavioral trends is

Kickstart—our incubator and venture capital firm within Globe Telecom umbrella that actively funds start-ups to help us discover these trends. Included in

Kickstart’s portfolio of investee businesses are enterprises offering software-as-a- service, e-commerce solutions, social impact platforms, and digital lifestyle applications.

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Secondly, to build our presence across selected sectors of industrial technology, particularly in the automotive sector which we’ve become very interested in, as well as to contribute to the country’s industrialization agenda, we established AC

Industrials. I think, Art Tan, the CEO who runs industrials group, explained some of these efforts that we’re making. AC Industrials, currently, has strategically built its capabilities to manufacture and supply components of advanced driver assistance systems to Tier 1 and original equipment manufacturers. And we’re moving heavily into that space, including buying some medium-sized companies in Europe to help us with this trend. And as a first foray into full value chain participation with an OEM, we partnered with KTM, the largest motorcycle manufacturer in Europe, to locally produce motorcycles for distribution in the

Philippines, but more importantly, for export to China and Southeast Asia. Most

Page 19 of 25 noteworthy is that we aim to include local suppliers to significantly be part of our

KTM manufacturing value chain. I’m grateful to Secretary Lopez and Assistant

Secretary Fita Aldaba for all the support they have given us, and encouraging us to build this manufacturing base.

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However, more importantly, we are innovating to close important structural and societal gaps. Our principle is that innovation should also serve a clear social purpose when possible. Innovation should address a problem or an unmet need—whether to improve business efficiency or to increase the affordability and accessibility of essential products and services to serve a broader segment of the population. Here, I believe, is where inclusive innovation comes to life: It is about seeing potential in often ignored and seemingly unattractive spaces, and then finding imaginative and meaningful ways to create and deliver value. Let me illustrate some of these.

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Through AC Education, a newly formed group within Ayala, we established APEC

Schools, a high school network designed to be affordable and to train students with relevant skills and values that will enable them to become employable upon graduation. Developed in partnership with UK-based Pearson Education, APEC

Schools’ curriculum combines new digital methods, together with traditional ones for teaching, while integrating practical and soft skills in learning. We presently have 10,500 students are enrolled in APEC schools in 27 sites, and key to our model is a focus on affordability with professional skills integrated into the latter stages of the curriculum. Doris in her remarks made reference to Germany and its method of having students involved in industry at an early stage, and some of those ideas have influenced us in our own thinking as APEC Schools get rolled out.

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Meanwhile, AC Health, another new group—which was the first major project of our innovation unit—operates a chain of six community-based primary care clinics called FamilyDoc. The clinics offer consultation and some of the regular items. I was just there this morning, visiting one of the clinics. I was just so happy seeing remote diagnostics taking place at a local clinic through shared digital platforms, and really making a difference to the way we provide access to knowledge and price to individuals who normally will not have access to it in those districts. I saw it in action today, using GE equipment, and it was fabulous to see. We have over

20,000 unique patients have been served by these clinics at the grassroots level, generating up to 40% savings on consultation and treatment compared to other private out-patient facilities. We aim to take this number up to 60,000 unique patients by the end of this year. The clinics also promote the use of generic medicines, which are estimated to be up to 85% cheaper than some of the branded products in the market today.

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And my final third example is Mynt, our FinTech company under Globe, which saw an opportunity to serve a market where 80%, as we all know, do not have a bank account, 90% had no credit history, but had a 117% mobile penetration rate.

Mynt’s non-traditional credit scoring model enables clients to apply for microloans without the need for documents and have these approved in as fast as

30 minutes. Ayala Corporation, together with Ant Financial, an affiliate company of the Alibaba Group and one of the world’s leading organizations engaged in digital payments, invested in Mynt a few weeks ago. This is in recognition of the great transformative potential in financial services and we’re giving this a big push. TG Limcaoco here from our group, is responsible for the Ayala side of this investment.

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Moving forward

To close, it is imperative, I want to reiterate, for businesses of all sizes to harness innovation to remain competitive and relevant amidst emerging technological and behavioral trends. But beyond innovations of this type, it is essential that businesses seek effective ways to also bridge structural and societal gaps. And I think for all of us in the private sector, that component of it, rather than pure innovation in and of itself, has become a very important imperative.

While multi-business groups are well-positioned to accelerate innovation through its capabilities, resources, and network, imagine the impact if entrepreneurs are also seamlessly engaged in a joint effort. I believe that a shared platform, empowered by a common framework, and supported by strong resources will facilitate richer and more refined breakthrough ideas.

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On this note, I congratulate the DTI, DOST, DICT, CHED, PhilDev, and all the partners involved in this undertaking for taking the first steps in establishing inclusive innovation centers. I am delighted that to be a part of this, and certainly it has helped align our own aspirations within Ayala group on the concept of innovation and how to transform our businesses, and please consider us as continuing partners in this undertaking moving forward. It is a great initiative, we’re proud to be part of it, and we’re delighted that this is taking place in the

Philippines at this time.

Thank you.