SINGAPORE -- In Singapore, waiting for a bus has gone high tech.

In March, a new bus stop was put up along Singapore's trendy Orchard Road shopping district. Equipped with sensors and a ceiling camera, the structure collects data on commuters' flow and waiting time, as well as detecting possible suspicious items. The bus stop also has a cooling and purification unit on its roof, which keeps the air inside fresher and cooler than the surrounding area with its automobile exhaust fumes and tropical heat.

The "smart bus stop" was developed by Singapore Technologies Engineering, a state-backed defense conglomerate that is expanding its solutions businesses. For ST Engineering, the bus stop is a test bed for its new technologies in the areas on which it focuses -- transportation, security and energy. By testing and showcasing its innovations in the city-state's main retail area, the company aims to further develop technologies and provide useful services for public spaces by targeting customers such as the government.

The Airbitat Oasis Smart Bus Stop was developed in ST Engineering's open innovation laboratory, which it unveiled last year. About 40 engineers in the lab were trained in new types of skills, including data analytics and developing algorithms. "This enables them to approach product innovation from a more integrated and holistic viewpoint," a company spokesperson said.

Other developments from the lab include a "smart wheelchair" system for Singapore's Changi Airport, allowing a single operator to handle three wheelchairs simultaneously in order to address the manpower shortage. ST Engineering collaborated with Nanyang Technological University, one of the top-ranked universities in Asia, to develop the system, which features an accurate trajectory-following technique and obstacle detection that allows the wheelchair convoy to weave through high-volume human traffic.

ST Engineering has developed a “smart wheelchair” system for Singapore’s Changi Airport, allowing a single operator to handle three wheelchairs at the same time. (Photo provided by company)

As digital innovation in the fourth industrial revolution, known as Industry 4.0, transforms businesses and people's lives, ST Engineering increasingly is catching up with those technologies.

Last year, ST Engineering also launched a corporate venture-capital fund to explore new technologies outside of the company. With capital of $150 million, the fund invests in companies with technologies that would complement ST Engineering's own. So far, the fund has invested $5.8 million in U.S. cybersecurity firm Janus Technologies, and 4 million Singapore dollars ($3 million) for a minority stake in Azendian Holdings, a Singaporean data-analytics company.

The venture-capital unit, ST Engineering Ventures Fund, is led by a team of four employees with experience in investing, private equity, fund management, and mergers and acquisitions.

"The speed of engineering and innovation is moving very fast," ST Engineering Chief Executive Vincent Chong said in a January interview with the Nikkei Asian Review, stressing the need for external collaboration. "Unless you have access to those brain power and creativity, you may be left behind."

“The speed of engineering and innovation is moving very fast,” ST Engineering CEO Vincent Chong said earlier this year. “Unless you have access to those brain power and creativity, you may be left behind.” (Photo by Ken Kobayashi)

ST Engineering, in which state-owned investment fund Temasek Holdings controls a 51% stake, was founded in 1967 as a defense company and has grown with government-related businesses. In a nod to the company's significance, Prime Minister Lee Hsien Loong highlighted the "critical role" it has played in Singapore's security and defense. "The story of Singapore would be incomplete without recognizing the contributions of ST Engineering," he wrote in the company's 50th anniversary book last year.

Ho Ching, executive director and CEO of Temasek and the wife of the prime minister, began her career at the Ministry of Defense. She went on to work for Chartered Industries of Singapore, the first of ST Engineering's entities, formed in 1967. She took charge of the enlarged group in 1997 when the merger of various defense and engineering-related companies gave birth to the present form of ST Engineering.

With a market capitalization of more than S$10 billion, it is one of the largest technology companies in Singapore.

"ST Engineering is very strong in terms of driving technology advancements," said OCBC Investment Research analyst Eugene Chua, adding that the company has put ample investments into research and development -- S$117 million in 2017 -- and has successfully adapted to new technologies.

While the company's core business is defense, it has also expanded its commercial enterprises, such as aircraft maintenance and electronic devices. Last year, the company's revenue from its commercial businesses accounted for 65% of the total S$6.619 billion.

The company also has expanded ambitiously overseas, with Asia -- including Singapore -- accounting for 61% of total revenue last year, 21% from the U.S. and 11% from Europe.

ST Engineering's largest business segment within the combined defense and commercial operations is aerospace, which accounted for 38% of the company's revenue last year. Other major segments include electronics, land systems and marine, accounting for 32%, 19% and 10%, respectively, of revenue.

The biennial Singapore Airshow, Asia's largest aviation event, is a major showcase for ST Engineering. At this year's show, held in February, ST Engineering displayed a range of products and technologies, including a system that can control multiple drones at one station and could be used for parcel deliveries. It also unveiled new armored fighting vehicles that boast a camera system for an improved situational awareness setting for the crew.

The company did not disclose its sales figures from the airshow, saying that the event was more for promotion than actual deals.

ST Engineering's recent efforts to explore and develop new technologies reflect the evolving nature of its traditional businesses. The company's net profit reached a high of S$580 million in 2013, but it has since failed to top that record.

Meanwhile, the outlook for the company's defense business is favorable as governments around the world increase their military spending.

The Singaporean government will increase its defense budget for the current fiscal year ending March 2019 by 4% to S$14.7 billion, or about 18% of the city-state's total expenditures. "Tensions on the Korean Peninsula and in the South China Sea can dampen investor confidence, while the threat of terrorism across the region remains very real," Singaporean Finance Minister Heng Swee Keat said in his budget speech in February.

Wei Kiat Ng, an analyst at Standard and Poor's, noted that Singapore's defense ministry will continue to account for about a third of ST Engineering's revenue. "Given the sensitive nature of the information and technologies involved in the defense programs that ST Engineering is responsible for, we see the risk of substitution to be very low," Ng said in a report.

Some of the company's other businesses, however, face structural challenges.

In 2017, ST Engineering's aircraft maintenance and modification operations recorded a 20% drop in profit before taxes to S$136 million, which accounted for 22% of the total. The decline was due to the completion of a passenger-to-freighter aircraft conversion program for FedEx on Boeing 757s.

The biennial Singapore Airshow, Asia’s largest aviation event, is a major showcase for ST Engineering. This year’s event was held in February. (Photo by Kentaro Iwamoto)

Yet a changing industry landscape is looming.

"Competition in the maintenance industry is intensifying as other major Southeast Asian countries all aspire to be an MRO [maintenance, repair and overhaul] hub like Singapore," Corrine Png, CEO of transport research firm Crucial Perspective, told Nikkei. "Labor rates are much lower in these neighboring countries, which is a key competitive advantage, as wages typically constitute half of an MRO operator's total cost."

"ST Engineering needs to invest more in big data analytics and robotics to help improve the operating efficiency of its services and cater to the airline industry's future need for predictive aircraft maintenance," she said.

Profit before tax in the marine segment also dropped last year, by 70% to S$22 million due to weakness in the shipbuilding industry. The slump dragged down ST Engineering's share price in the second half of 2017. This year, the stock price is up 7.4% through June 7, outpacing the Straits Times Index, which is up 2.1% over the same period.

To confront these challenges, ST Engineering is shifting toward what it calls "smart city" business, which can help societies address problems stemming from urbanization, demographic change and scarcity of resources. For example, population aging provides the company with an opportunity to develop efficient hospital operation technologies that would reduce health care costs.

At this year’s Singapore Airshow, ST Engineering unveiled new armored fighting vehicles that boast a camera system for an improved situational awareness setting for the crew. (Photo by Kentaro Iwamoto)

The company is aiming to double its smart city related revenue by 2022 from about S$1 billion last year, Chong said to investors in March. It has already partnered with governments in the Middle East, Europe and elsewhere to sell smart city systems, and it is expanding that business in Singapore, too. The global market for the smart city industry will more than double to $2.1 trillion in 2025 from $900 billion in 2016, according to ST Engineering.

The new technologies coming from the open lab and corporate venture-capital initiatives are expected to help accelerate growth in that area.

While ST Engineering's recent moves have attracted investors -- most analysts have derived target share prices of more than S$4 a share from its growth potential, giving "buy" ratings -- they also point out potential concerns.

"In the event of a global macro downturn, local government spending will likely see a pullback, and hence pace, of new projects, and contract awards could materially slow down," said Neel Sinha, an analyst at Maybank Kim Eng, noting that such projects are typically awarded by governments. ST Engineering has smart city projects in the U.S., Europe and the Middle East.

Chua of OCBC said that investments in new projects potentially affect the company's dividend. Embarking on new projects "may cast doubt over the potential for higher dividends." With its dividend policy of paying out "a substantive portion of earnings," the company paid back about 90% of its net profit to its shareholders last year.

Moreover, ST Engineering's weapons production poses another potential risk. Some institutional and other investors may avoid buying shares of defense-related companies for ethical reasons, according to U.S. rating firm MSCI, which has a research unit devoted to environmental, social and governance, or ESG, business practices. "ST Engineering faces high exposure to risks of engaging in unethical business practices, given its reliance on defense contracts," according to a recent MSCI report.

"ST Engineering's involvement in aerospace and defense contracts exposes it to relatively high risks of violating bribery laws," the report warned. "Companies involved in providing aerospace and defense products and services are susceptible to bribery demands and government interference due to large, one-off contracts, and weapons trade regulations."

A spokesperson from ST Engineering told Nikkei in an emailed statement: "ST Engineering and its group companies are committed to the highest standards of conduct in our business throughout the world. We are guided by the group's 'Code of Business Conduct & Ethics' on how to conduct business in a fair, ethical and legal manner. We take a zero tolerance approach to all forms of corruption including fraud and bribery."

The spokesperson also noted that the company is a component stock of the Singapore Exchange's SGX ESG Transparency Index and the SGX ESG Leaders Index. "The inclusion into these indexes is an indication of our commitment towards being a responsible company that keeps environmental, social and governance (ESG) factors in mind while conducting and pursuing business growth."