Better known for turning AEM around, Loke Wai San is doubling down on the tech manufacturing sector, which he believes is enjoying a renaissance amid the pandemic and trade war.

As an industry insider, Loke Wai San, who heads investment firm Novo Tellus Capital Partners, is close to the pulse of the tech manufacturing sector. Since 2019, he has spent at least $234 million in past and ongoing deals to acquire strategic stakes in various Singapore-listed tech manufacturing companies, each focusing on different parts of the wider technology and manufacturing ecosystem.

These companies included Grand Venture Technology, a manufacturing solutions and services provider; ISDN Holdings, which specialises in making motion control components; and Procurri Corporation, which buys, services and resells IT hardware. Novo Tellus also privatised Sunningdale Tech jointly with Koh Boon Hwee, the latter’s chairman.

Its investments are not limited to Singapore-listed companies only. On April 22, Novo Tellus announced a US$40 million ($53.11 million) investment into India-based semiconductor engineering solution provider Tessolve. 

Separately, as chairman of AEM Holdings, Loke is acquiring CEI, which is known for building printed circuit board assemblies with a very diversified customer base from industries ranging from medical to semiconductor to oil and gas.

At the end of last year, Novo Tellus closed its Fund 2 that has a funding level of US$250 million with the help of various backers — including a sovereign wealth fund that requires no introduction — to fund its acquisition spree.

While each of these companies Novo Tellus invested in have their unique potential, they also possess something in common which endears them to Loke. He says their management understands innovation, appreciate technology differentiation and are committed to these values.

More importantly, they have something extra: Great customer relationships. “That drives trust, and if you can then land engineering talent in front of the customer as well as listen and understand the customer and translate that into a technology or solution, then yes, I see that trait in all management teams across the companies,” says Loke in an interview with The Edge Singapore.

Renaissance of manufacturing

Given the companies are all in the same tech manufacturing ecosystem, does Loke have a broader, higher-level plan to incorporate these individual entities? Could these companies be part of an informal federation of sorts? Or is he planning to eventually combine them into a much bigger entity?

Loke says that is not the case. To him, all these are “independent investments” made by Novo Tellus. Rather, Novo Tellus is making all these bets on these companies because of its strong conviction that a “renaissance of manufacturing” is taking place.

In 1Q2021, Singapore’s GDP recorded an unexpected overall y-o-y growth since the pandemic began more than a year ago. The increase was spearheaded by the manufacturing sector which maintained its growth momentum and grew 7.5% y-o-y even as sectors such as construction languished.

This renaissance, according to Loke and other industry observers, is shaped by broad underlying advancements in technology. One is 5G high-speed mobile networks which enable industrial machinery and systems to be integrated more efficiently in the so-called Internet of Things (IoT) ecosystem. 

The other is AI which is becoming more mainstream as companies are won over by the competitive advantages it offers, driving the need for more computers and servers.

Shifting geopolitics have affected the global manufacturing ecosystem too. Tensions between the US and China are still simmering although former US President Donald Trump has vacated the White House. 

According to a March 1 report by the Office of the US Trade Representative, the US government says it will use “all available tools” in a more “systematic” approach to fighting China’s perceived unfair trade practices. 

Political rivalry between the two superpowers has created a “bifurcation of technology and, therefore, supply chains”, says Loke. The existing order of the global supply chain is under threat, affecting even the largest players. No longer can companies take it for granted that parts or raw material will be quickly manufactured and shipped halfway across the world. This threatens even the largest players such as Taiwan Semiconductor Manufacturing Co which on April 16 warned for the first time that trade tensions between the US and China may cause “delays” or “denials” to its operations. This means a company that supplies US customers with parts from its factories in China might be forced to set up an alternative manufacturing presence in the US or Southeast Asia.

“It’s very unlikely that we’d be investing behind in a company where the leaders focus on cost and quality but don’t have the curiosity to understand the customers’ needs down a roadmap,” says Loke.

A supplier’s traditional attributes of meeting quality standards at acceptable cost will also no longer be sufficient. Loke calls them mere “table stakes” for “yesterday’s game”. “If you don’t have cost and quality, forget it. Now, we’re not going to be able to compete with China and Vietnam on cost and quality alone,” he says.

Rather, the new requirement in the manufacturing landscape is “availability”. Regardless of whether the customer is in Nagoya or New York, suppliers must be able to meet their demands, 24/7. “You’ve got to compete with others on-site. When the customer wakes up at nine, you’re there to take his call. Singapore companies that just compete on quality and costs will have no value proposition because they fail to address availability and technology,” says Loke. 

Understandably, it may not be possible for manufacturers to clone factories all over the world. Therefore, they need to refine their manufacturing practices and processes, in what can be briefly described as “Open Innovation 2.0” where open collaboration — even with competitors — is embraced. There is also “Industry 4.0” where automation, data analytics and AI all come together to make manufacturing more efficient and remove the chinks in the supply chain. 

Also, Novo Tellus is nudging the companies to invest in material sciences, expand into software and offer customers an integrated solution. 
In any case, even as Southeast Asian economies are forced to choose between the US and China, regional companies can find their niches and capitalise on the new world order. China, Loke believes, will look toward Southeast Asia as a “natural landing point” for expansion in the region. On the other hand, with US President Joe Biden’s call for US$50 billion in US semiconductor investment to strengthen supply chains, Loke thinks that Singapore can “straddle both markets inbound”. 

Burden of restructuring
Loke won street cred among the local investment community by investing in AEM at 7 cents before the share price surged to around $4 now. To recap, Novo Tellus in 2011 took a controlling stake in the then floundering semiconductor testing provider, which was on the SGX Watchlist. In fact, Loke did not expect AEM to remain public at that time. “But we couldn’t get anyone excited about the company. So it remained public,” he recalls. 

In an interview with The Edge Singapore last November, Loke said he spent the next eight years in AEM identifying what he calls the “AEM DNA” — attributes and values that endear the company to its customers. As Loke explains, being a partner is not simply about making presentations but about “keeping a promise, and delivering and understanding how to be a partner for your customer.”

Evidently, AEM had serviced its key customer, semiconductor giant Intel Corp, well. From its precarious financial situation, AEM’s earnings gradually rose to hit $42.3 million for the FY2020 ended December 2020. At the end of FY2020, total shareholders’ returns since the start of FY2011 hit 4,500% on price change alone and 5,643% with dividends reinvested, according to Bloomberg.

Loke’s track record is recognised by veteran corporate figure Koh Boon Hwee, who was the first local managing director of Hewlett-Packard and later chairman of top GLCs such as DBS Group Holdings, Singapore Airlines and Singapore Telecommunications.

Koh says he did not get Loke’s help to privatise Sunningdale just because of Novo Tellus’ financial muscle. “You need to work with somebody who has got the experience ... as opposed to, say, somebody who is just a financial provider but will leave almost all of the burden of the restructuring on me,” says Koh, adding that Sunningdale had to be privatised because time and hefty investments were needed to turn the company around.

Balancing conflicting demands

In some sense, the need for patience and heavy commitments are traits the tech manufacturing industry is familiar with. Long-time AEM shareholders will recall that its turnaround was not immediate and the payoff for Novo Tellus took quite a few years to achieve.

Indeed, technological capabilities require hefty capital expenditure and investors might not see returns for the first few years. Public-listed companies have to convince shareholders to forgo large dividends or take smaller payouts to free up funds for new investments. This situation was most recently seen in the case of CEI, which is now being acquired by AEM. For years, CEI has rewarded shareholders with a dividend payout at over 90% of profit after tax. In contrast, AEM, mindful of the need to conserve cash for M&A purposes, has a relatively low payout ratio of around 25%.

As part of AEM’s offer, CEI shareholders can choose to receive part of their payment in the form of new AEM shares. As such, they have to accept a lower dividend yield than they were used to as CEI shareholders.

The stance is somewhat similar to Grand Venture Technology, which does not have a formal dividend policy although its CFO Robby Sucipto told The Edge Singapore in an earlier interview that this is under review. However, he added that the company’s priority now is to channel earnings back into the business itself in the form of working capital to meet higher demand from customers. 

“At the end of the day, it’s how the company creates value. You can give dividends but then it’s gone. Shareholders don’t get anything more,” says Sucipto. “But if you hold on to the money, you can reinvest it into something that is going to help the company grow a lot more.”

Although not all investors will agree with this view, remember that before AEM, Novo Tellus got back three times what it paid for MFS Technology when it exited the investment. 

Ever since Novo Tellus’ investments in the recent companies were announced, their share prices have generally appreciated (see sidebar “Loke’s Touch”), so Loke and his team must be doing something right all this while. When asked if any investments went sour for him, Loke quips with a laugh, “Fortunately for us, not many.”

That is good news for Singapore’s tech manufacturing sector too. 

Tap existing culture with ‘operational empathy’

The late legendary management guru Peter Drucker once said, “Culture eats strategy for breakfast.” For Novo Tellus, whose entire team comprises entrepreneurs, these are words of wisdom they can fully appreciate. 

Quite often, venture capitalists are too impatient in trying to introduce changes to the companies they invest in by bringing in supposedly experienced managers to help the founders change.

“When people hand $20 million to a founder to, say, build your team, you start hiring this guy from a big name company, that guy from a big name company. But you don’t create a culture in six months by hiring six functional leaders, it just falls apart,” says Loke.

Loke knows that while the companies he invests in are not perfect, there’s at least a company culture to bind the people together and make them chase after the same goal. “When marketing hates engineering, who hates quality, who hates field service, that’s a horrible place, right? People don’t get along, they don’t work and the whole place fails.”

When Novo Tellus invests in a company, it tries not to shift its business direction too drastically. Loke takes pride in what he calls “operational empathy” where “we move at a speed that’s comfortable for our leadership partners or management partners. And we try to challenge them to do more”.

Most private equity firms, Loke says, have a 100-day plan when they take a stake in a company. For Novo Tellus, the first 100 days are used to build trust and understand the company. “Once you form a common understanding of why things are done, you can then at least challenge, what else can you do differently? And this has to be bought in [by management], Without buy-in, there’s no execution,” he says.

Among other traits, Loke looks for resilience too. He recalls some of his early investments made in Silicon Valley companies went sour after the dotcom bubble burst, including one which ran out of cash six months after he invested. He persuaded his partners to stump up another US$2 million. That company was eventually sold for US$300 million when they exited the company. 

The way he sees it, that company, which he declines to name, was able to pull through and eventually thrive was because of “the benefit of the power of resilience”, with the company management appreciating the need to “readjust costs, tighten belts, hunker down” and to gear up for the moment they could get up again. “That is what I’m looking for,” says Loke.

The concept of resilience should apply to the company even after Novo Tellus leaves the scene. Novo Tellus exited its investment in AEM on March 26, 2018, although Loke, with his personal stake of 1.98%, is staying on as non-executive chairman. 

He believes that CEO Chandran Nair, a former senior executive at ST Engineering, is shaping AEM up to be a very good MNC. “We look for great platforms that we can grow and will survive even after we leave the company or exit the company,” says Loke.