Advantech : 2024 Annual Shareholders' Meeting - Annual Report

I. Name, title, and phone of the spokesman: 【Spokesman】Name: Eric Chen

Title: President of General Management

Tel.: (02)7732‐3399

E‐mail: [e-mail]

II. Headquarters, Branches, and Plant address and phone:

【Headquarters】Address: No. 1, Alley 20, Lane 26, Rueiguang Road, Neihu District, Taipei City

Tel.: (02)7732‐3399

【Factory】 Linkou Advantech AIoT Co‐Creation Campus

Address: No. 27, Wende Road, Guishan District, Taoyuan City

Tel.: (02)2792‐7818 (Representative No.)

III. Name, address, and phone of the Stock Agency

Name: KGI Securities Co., Ltd. - Stock Agency Department

Address: 5F, No. 2, Chongqing S. Road, Sec. 1, Taipei City

Website: www.kgi.com.tw

Tel.: (02)2389‐2999

IV. Name, Firm, address, and phone of the acting independent auditors:

CPAs: Liang, Hua‐Ling and Lin, Yi‐Fan

CPA Firm: PricewaterhouseCoopers, Taiwan

Address: 27F, 333 Keelung Rd., Sec. 1, Xinyi District, Taipei City, Taiwan

Website: www.pwc.tw

Tel.: (02)2729‐6666

V. Foreign securities exchange corporation listing: None

VI. Website: http：//www.advantech.com.tw

Table of Contents

I.	Letter to Shareholders	01
II.	Company profile	07
	1.	Date of Incorporation	07
	2.	Company History	07
III.	Corporate Governance Report	08
	1.	Organization	08
	2.	Directors and Management Team	13
	3.	Implementation of Corporate Governance	31
	4.	Information Regarding the Company's Professional Fees	95
	5.	Audit Fee	96
	6.	Replacement of CPAs	96

7. Changes in the shares held and pledged by directors, supervisors, managers, and majorshareholders holding over 10% of outstanding shares in the most

recent year and up to the publication of the annual report

96

8. The Top-10 shareholders who are the spouses or relatives within

second-degree to each other

98

9. The shares of the invested company held by the Company, the Company's directors, supervisors, managers, and companies controlled directly or

		indirectly, and the aggregated overall shareholding ratio	99
IV.	Capital Overview	102
	1.	Capital and Shares	102
	2.	Corporate Bonds	109
	3.	Preferred Stock issued	109
	4.	Global Depositary Receipts	109
	5.	Employee Stock Options	110
	6.	New Restricted Employee Shares	111
	7.	Status of new Shares Issuance in Connection with Mergers and Acquisitions	111
	8.	Financing Plans and Implementation	111
V.	Operational Highlights	112
	1.	Business Content	112
	2.	Main Applications of major products and their manufacturing processes	125
	3.	Employee information	129
	4.	Expenditures on Environment Pollution Control	129
	5.	Labor-Employer Relation	135
	6.	Information Security managemen	141

	7.	Important Contracts	145
VI.	Financial Information	146
	1.	Condensed Balance Sheet, Income Statement, Name of the Auditors and Audit
		opinions with the lastfive years	146
	2.	Financial Analysis within the last 5 years	150
	3.	Audit Committee's Report in the most recent year	154
	4.	Financial Statements of the most recent year	155
	5.	The consolidated financial statements of the parent and subsidiary audited by	155
		the CPA in themost recent year

6. Financial difficulties, if any, encountered by the Company and its affiliated companies in the mostrecent year and up to the publication of the annual

		report, and its impact on the Company'sfinancial status	155
VII.	Review of Financial Conditions, Operating Results, and Risk Management	156
	1.	Financial Conditions	156
	2.	Analysis of Financial Status	157
	3.	Cash Flow	158
	4.	Major Capital Expenditure	158
	5.	The impact of material capital expenditure on financial business in the most	159
		recent year
	6.	Risk analysis and evaluation	159
	7.	Other Important matters	162
VIII.	Special Disclosure	163
	1.	Affiliated company's Consolidated Business Report	163

2. The status of issuing private placement securities in the most recent year and

		up to the publication of the annual report	173
	3.	Acquisition or disposal of the Company's stock shares by subsidiaries in the
		most recent year and up to the publication of the annual report	173
	4.	Other necessary supplementary notes	173
IX.	The occurrence of any events as stated in Section 3 Paragraph 2 in Article 36 of
	the Securities Exchange Act that hadsignificant impact on shareholders' equity or
	securities prices in the most recent year and up to the publication of theannual
	report	173

I. Letter to Shareholders

Letter to Shareholders

Dear Shareholders,

Financial Performance

In 2023, Advantech achieved consolidated revenue of NT$64.568 billion, a decline of 6% compared to 2022. The gross profits reached NT$26.162 billion (gross margin of 40.5%), while consolidated net income after tax was NT$10.838 billion, representing a 0.8% increase compared to the previous year. EPS for the year reached NT$12.65. In US dollars, Advantech's 2023 revenue amounted to US$2.074 billion, a decrease of 10% compared to the previous year. In terms of regional performance, the Japanese market performed the best with a 10% increase, while China, Taiwan, and Emerging markets experienced double‐digit revenue declines. In terms of business units, only the Embedded‐IoT Group (EIoT) and Applied Computing Group (ACG) maintained flat in YoY due to demand slowdown, while the rest of the business units generally experienced declined in YoY.

During the off‐peak season, Advantech accelerated its strategic deployment in key technologies and regional markets, including expanding its production capacity to enhance manufacturing resilience in Malaysia; expanding its operational base in India and establishing a local software development center; completing the merger and acquisition of Bitflow, a North American Image Capturing Solution Provider, and improving its AI machine vision technology blueprint. Advantech continues to deepen its presence in the AIoT industry, speeding up the company's future development and growth.

Key Development Strategies

Advantech is committed to cultivating the AIoT + edge computing sector, with a long‐term strategic framework that (Figure A) composed of three key components: Platform, Orchestration, and Sector.

Figure.A：Advantech's Longterm Strategy Structure

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I. Letter to Shareholders

Orchestration Buesiness model:

Advantech's vision for the next decade is to integrate its existing AIoT + Edge Computing hardware platform products with the mature WISE‐IoT software platform developed over the past eight years. This integration will be further enhanced by incorporating industry‐specific AI solutions and domain knowledge, culminating in an "Orchestration business model" that facilitates industry‐wide integration and application.

As shown in Figure A, the bottom layer represents the hardware platform, where Advantech has accumulated numerous mature products over decades of entrepreneurship. We will continue to cultivate and develop innovations in the listed areas to become the most comprehensive Edge Computing supplier. The top layer, Sector, represents the application market areas that Advantech will target, focusing on serving equipment manufacturers and integrators in these sectors.

The middle layer, Orchestration, signifies the synergy of Advantech's various sectors using the WISE‐IoT and EdgeSync 360 software platforms. This enables customers to efficiently complete projects in the AIoT application development process with minimal development effort.

The next decade is expected to be a golden period of high development for AI/IoT/Edge Computing applications across various industries. We are prepared to embrace the new opportunities in AIoT

• Edge Computing with the Sector Driven and Orchestration business concepts, further realizing the long‐term corporate vision of Enabling an Intelligent Planet. While this operating model may pose challenges and require time to accumulate results, it is expected to be a sustainable and strongly defensible model, making significant long‐term contributions to shareholders and society.

Platform: Industrial Edge Development Strategy

According to estimates from the international research firm Gartner, the AIoT industry's market value projected to reach USD 450 billion by 2025. In 2024, Advantech will focus on development in the AI + IoT + edge computing sector, with a particular emphasis on emerging edge computing platforms.

High‐Performance Edge Computing

As 5G technology and infrastructure approach maturity, there's growing demand for high‐performance edge computing platforms. This demand arises from 5G's low latency and high‐speed transmission advantages, the ability to distribute workload from cloud data centers, and low data transfer risk. Currently, the market for CPU chip architectures is dominated by x86 and Arm/RISC, both of which produce high‐performance computing (HPC) chips to meet the rapid computational needs of various industries (e.g., 5G, network communication, health care, transportation, automated equipment, and robots). Advantech co‐develops high‐performance edge computing platforms with mainstream chip manufacturers, but also launches them simultaneously, helping industries upgrade their systems for HPC applications.

Edge AI Computing

In the rapidly evolving world of AI and edge computing, Advantech's comprehensive edge computing platform holds a significant share of market across various industries. This fully integrated AI software platform features an AI acceleration module (AI On Module), an AI inference system, an AI large language model (LLM) training system, and an edge AI software development kit (SDK) that helps clients evaluate and validate the performance of their AI platforms, thereby accelerating their implementation of AI at the edge.

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I. Letter to Shareholders

Advantech's existing hardware platform is compatible with all types of mainstream AI chips, contributing to the successful launch of high‐performance edge AI computing solutions. Moreover, international research institutions such as Gartner highlight the rapid deployment of generative AI across multi‐modal AI applications, including text, images, and video. Edge AI will thus present massive business opportunities that will not only greatly benefit Advantech but also refine our customization capabilities to meet demand for emerging AI applications.

Industrial Wireless Solutions

Wireless technology is a key component in IoT solutions, with protocols such as Wi‐Fi 6, Wi‐Fi 7, 5G, 6G, and Bluetooth/BLE commonly used to accelerate iterative development and meet various needs across the IoT domain. In considering our long‐term strategy, Advantech has established the Industrial Wireless BU, a department dedicated to providing value‐added services such as industrial wireless modules, industrial wireless antenna design planning, firmware optimization, and wireless testing and certification. Currently, we have consolidated our internal RF R&D resources and testing capacity to offer integrated wireless design‐in services.

Industrial Display Solutions

Industrial displays are essential peripheral modules for various industrial application scenarios, such as electronic digital signage, industrial automation equipment, retail self‐service systems, and medical device displays. Demand for contactless applications surged in the post‐pandemic era, with industrial displays and touch screens showing great development potential. Thus, Advantech created the Industrial Display Solution Group, offering integrated supply chain and procurement system efficiency for industrial displays and design services. In Q12024, we plan to build a new industrial display production and testing facility at the Linkou Intelligent Campus, expanding both the capacity and quality of our services.

Sector Driven Approach

AI, IoT, and ESG are set to be the next growth drivers for the industrial IoT sector, with developments focused along two key directions: edge AI and sustainability. Edge AI is expected to push digital transformation across various sectors as the importance of visual and image testing applications grows, especially in medical imaging, industrial quality testing, machine motion control, and safety monitoring. With respect to sustainability, we will promote global energy transition and accelerate the deployment of infrastructures for energy management, renewable energy, energy storage, and electric vehicles. Advantech foresees the global market trend driven by AIoT and ESG emerging applications in the near future. For this reason, we will focus on eight sectors and achieve complete deployment through global strategic organization to cultivate these sectors and engage closely with clients and the market, thereby reinforcing our competitive advantage in the rapidly changing market.

The aforementioned sectors include four main ones, namely embedded design‐in, embedded KA‐DMS, industrial edge solution, and industrial automation; and four sub‐sectors -iHealthcare, Retail & Hospitality, iLogistics, and IoTMart/AOnline. Embedded design‐in/KA‐DMS takes aim at the needs of major clients, providing deep technology services and customized product designs. Industrial edge solution uses AI, IoT, and edge computing as a stepping stone to providing innovative products for industrial and semiconductor facilities, intelligent transportation, edge cloud, and AI applications. Industrial automation aims to deepen customer relations with a focus on smart factories, energy, and ESG to establish a partner ecosystem for value co‐creation. As for the four sub‐sectors, we will provide total product solutions. Our IoTMart cross‐border e‐commerce model built in 2023 will effectively bring clients closer to us and secure long tail customers with transparent information and faster delivery services.

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I. Letter to Shareholders

Figure B. Advantech's sector‐driven focus

Plans to Push into Generative AI (Gen AI)

As a way of demonstrating the high level of importance that we attach to the future development of Gen AI, Advantech has established the AI Orchestration Center. The center is responsible for introducing external AI applications, applying use cases to promote AI in various application domains, and ensuring alignment with and fulfillment of the needs of AI technology units and application units. Our 2024 plan is to target Gen AI for rigorous development in three key areas: product development, marketing, and supply chain management. In the area of product marketing, we aim to use Gen AI to produce advertisement texts and materials as well as content translation to facilitate brand development, overcome language barriers, and increase customer reach, thereby enhancing brand impact and market share. In terms of supply chain management, Gen AI applications will be focused on improving supply chain transparency and flexibility to optimize inventory level. AI technology can automatically identify and predict latent problems in the supply chain, help employees make prompt responses, and subsequently improve overall operational efficiency.

Generally speaking, the introduction and internalization of Gen AI represent not only a technological revolution but also a significant change to the way we work. Making good use of this tool will enable us to focus on higher‐value tasks and spend less time on repetitive tasks. This will greatly increase team productivity and creativity and sustain competitive advantages for the company.

Sustainability Achievements and Corporate Value

In 2023, Advantech achieved many breakthroughs in ESG, including its first‐time inclusion as a constituent stock of the Dow Jones Sustainability World Index (DJSI‐World); officially becoming a member of the RE100; moving up to the 12th place in the Excellence in Corporate Social Responsibility; and winning for the first time Global Views Monthly's ESG Award - Electronic Technology Award These achievements show that Advantech's persistent commitment to sustainability has translated into a positive impact on society, its employees, and the IoT ecosystem.

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I. Letter to Shareholders

In the future, our development in ESG will revolve around three pillars:

1. Green operations and sustainable development:
   Our medium‐ and long‐term targets include achieving an A level rating in the 2025 CDP Climate Change Questionnaire, using 100% renewable energy by 2040, and achieving net zero emissions by 2050. We have comprehensive plans for addressing climate change, quantifying risks in accordance with TCFD recommendations, and achieving SBTs through carbon pricing and low‐carbon transformation. Moreover, Advantech is committed to biodiversity risk assessments, AIoT for Biodiversity projects, smart agriculture and species identification, coastal forest restoration, and wetland adoption.
2. IoT popularization:
   By using the WISE‐IoT Suite platform, Advantech nurtures innovative talents in the field of IoT and incubates innovative solutions to achieve the sustainability goal of "helping students find their future and connecting businesses with talented individuals." Our 2025 target is to expand IoT education to 70 universities in 14 countries worldwide by providing Advantech's industrial IoT technology and resources to assist worldwide colleges and universities in cultivating innovative talents. Regarding higher education curriculum and certification for IoT at AIoT Academy, we have collaborated with the NTUST Center For IOT Innovation, uniting scholars from other universities to co‐create basic IoT courses. Our AIoT InnoWorks Program had 224 student teams and over 856 students participating from 34 schools and 7 countries.
3. Mutual prosperity:
   In 2023, Advantech Foundation focused on three main pillars of community development - sustainability education, IoT innovation, humanity, and cultural literacy - to promote intellectual well‐being, and established a unique brand for which we pledged an investment of over NT$74 million. Given the great level of importance we attach to diversity, equity, and inclusion (DEI), Advantech has completed a DEI strategic blueprint and announced its phased targets in 2023. Talents are a source of talent attraction and innovation. In 2023, we refined our talent development mechanisms, including talent recruitment/employment/training/retention, and launched digital transformation programs for talent and information management. These mechanisms and programs are aligned with the company's long‐term strategy to ensure talent sustainability at Advantech.

In 2023, Advantech celebrated not only its 40th anniversary but also the completion of the AIoT Co‐Creation Campus, which took a decade to complete. For our 40th anniversary, we organized a series of cycling events in more than 40 cities around the world, bringing over 4,000 employees and partners of Advantech together to celebrate this special occasion. The post‐pandemic Worldwide Partner Conference (WPC) was held to promote the formation of an AIoT ecosystem, attracting 3,000 partners and guests of Advantech from around the world. Regarding brand value, Advantech secured 5th place in the 2023 Best Taiwan Global Brand award with a brand value of US$881 million and an impressive growth of 13%, consistently positioning the company among the top five Taiwan global brands for six consecutive years.

Outlook and Expectations

Looking ahead to 2024, business operators will face economic challenges and regional conflicts, but they will be presented with enormous business opportunities from energy transition and carbon management. Gen AI will also instigate a new wave of industrial revolution. As computing power increases, AI applications will slowly expand in scope, encompassing not only data centers but also the edge environment, including such domains as healthcare, retail, smart storage,

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I. Letter to Shareholders

production testing, and factory automation. The popularization of edge AI and demand for widespread application will significantly propel the continued and rapid growth of the IoT industry.

Advantech has continuously optimized its SBU, RBU, and operations in response to emerging market trends and changes in industrial sectors. As a business entity, we actively adopt edge AI solutions, targeting high‐growth applications such as equipment manufacturers, factory automation, energy management, and smart healthcare. In terms of regional business organizations, Advantech will slowly transform into an industry‐focused organization and provide integrated software- hardware solutions that more closely meet industry demands. In terms of production, manufacturing, and logistics units, we implement lean management in key areas such as destocking of high‐risk inventory, increased delivery of popular products, and material convergence. Looking ahead to our mid‐/long‐term development, Advantech's overall operational growth will rebound as new applications, new projects, and organizational teams slowly take shape. Advantech has been upholding its belief over the past 40 years and will continue to do so to create new value for our customers, employees, shareholders, and society.

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