Thank you. Thank you everybody. I hope you had a good lunch. By sort of looking at your faces and looking at the discussions during the lunch, it feels that we have quite a good atmosphere. I sense that maybe you are also starting to feel the excitement of the rotating shaft, and the excitement around the bearing, and understanding that it's about the application. It's always about the machine where we are working, and that the rotating shaft is the key. That's why our vision is a world of reliable rotation. To understand that's what we're working for, and there's still so much to do. When I started in SKF in 1987, I think actually the bearing was more of commodity than it is today. Basically, also now what's coming is the digitalization.
For you who thought about it, we were talking about models of how we can simulate applications in a more and more sophisticated way with digital twins. Victoria will come back and talk a little bit about that. How fantastic that enables us to have quicker and quicker development iterations with our customers and add more and more value around the bearing. I'm going to start by talking a little bit about our strategic priorities. As you know, they're the same. There's no change, and I hope that in this visit today, you've seen how we work with them. We create and capture value, start always at the customer. I think it was clear in the Wingquist Test Center, one of the ways we're actually doing this. World-class manufacturing.
We need to be the basis, of course, as a maker of something, is that you're best in making the products, both from a cost, quality, and flexibility point of view, and more. That we are innovative. Victoria will come back to that. If there's one thing that can inoculate us from irrelevance, it's innovation. Of course, a company like us, we have to innovate faster than outside of the company. That is one of our main challenges. Of course, the cost competitiveness. The cost competitiveness in what we do is the basis. The rest is sort of the icing on the cake.
With the internal goal, I know you as investors and analysts, you have other parameters, but if I'm to say one, and this is why we chose this one, of course it must be that we should be able to maximize the cash flow from our business over time. I'll talk about a little bit what I think we've actually achieved since we last saw each other. We talked about the automotive turnaround, and if you remember, my then-head of automotive, he had already printed in the date of 2018 when he was going to reach it, and I thought that was a little bit too cocky. I asked to cover the page. You remember that?
Well, now, in retrospect, I shouldn't have, because actually we have sort of helped by the market, of course, I'm not saying that, but actually, we have made a fantastic turnaround in our automotive business. We talked about the balance sheet. We have strengthened our balance sheet, and now, as you know, we've been upgraded, and Christian will talk more about that. We have conquered new markets where previously we were sort of saying, "Well, we niche ourselves up in the higher-up performance levels. Some of the more contested markets, we will sort of not take them on." We have taken them on, and we are doing it. We're growing. I argue that we are growing faster than the market.
Some of you have saying to me, "Yeah, but you got help from the business climate." That's absolutely clear, but I think we are on a clear growth path, and we've had the best quarter results in the last few quarters in the company's history. Sorry. Pricing. There's been a lot of discussion whether the bearing manufacturer has the ability to sort of compensate for inflation, have a pricing power in the marketplace. If you recall during the last our quarter result webcasts, this has been always a topic. I think now, and I hear it from you're starting to understand, and maybe today also looking at the way we work, you understand more and more that this industry is a key component in all industries. If you differentiate yourself, there's clearly a possibility to be profitable and drive pricing.
I think you will see if you look what we've done, we've focused on costs. Kent will come back to that. We are doing the factory investments that we said we were going to do. I like to try to say to you, we try to be a team that do what we say. When we look forward, well, hopefully, we will be able to continue to do just that. What is going to happen? Well, we are really focusing on the customer, and we will continue to focus on growing our business. We have strengthened our balance sheet, and of course, now when we have a stronger balance sheet, we can now turn the page on that and start looking forward. We have the money to invest in our factories.
We also have money to venture into new interesting fields that are around the rotating shaft, and we also have money to make interesting acquisitions when so possible. Christian will talk more about that. We will continue to lower our cost. Everything that we have done, we have met the goal of all of the targets that we set ourselves in 2005, except the net working capital. With the flexibility, with the new logistics setups, with what integrated planning, and Kent will talk more about that, has installed for us in the future, I am sure that we will meet the target. If you remember, when I came in, we actually made this target a little bit more difficult for ourselves from 27 to 25. During the years to come, this is something that I'm sure we will also deliver on.
I'm going to talk about, during my 20 minutes that I left here, a little bit more about what I think is one of the biggest changes going forward, and that's part of what digitalization will actually do to our business. We have been working with documented solutions, with services as a part of our delivery to be able to differentiate around the rotating shaft for decades. Actually, when I joined in SKF in 1987, we had something called trouble-free operation, which was basically leveraging services and create a functioning function for the customer. What we can do now with digitalization, of course, is to scale this in a way that we've never been able to do before. We go from the products and services that have been very good. Look at condition monitoring. We are one of the leaders in condition monitoring in the world.
We've been selling condition monitoring equipment since the '80s. It's an innumerable amount of companies around the world that have been and are using our equipment to monitor their machines. Of course, in this environment, it was not possible to scale. It was not interconnected. There were islands of perfection around the world. We've been working since the beginning of the company with understanding the application. I think you saw that during today's visit, how this is absolutely crucial to everything we do. What's going to happen now with the possibility to actually interconnect this with modern connected sensors, new kinds of models of foresights in the bearing performance, is that we can now start scaling this. This is going to be a little bit what I will try to convince you that this is now what's going to happen. Sorry. SKF started as a performance company.
You know, Wingquist, when he started SKF, he went out and he said, "I have this new product. It works much better for you. You will save energy. You won't have breakdowns anymore. I've invented this self-aligning ball bearing instead of the rigid stuff that you're using today." He was met with a lot of skepticism in the beginning, and they were saying, "Well, what if it doesn't work? Do you have guarantee? You're a startup," et cetera. He came in and he said, "You know what? What if I guarantee the performance by actually installing these, and you pay me on the difference of the electricity bill?" Suddenly, all the resistance to purchase was gone, and the SKF business just exploded. Basically this thing with performance contracts is not new to SKF. We actually started that way.
In this particular, it's actually Wingquist saying, "If you use our bearings, you won't get a tired horse, and it will eat less hay." We lost that a little bit. We've always been working like that. We came back into a transactional model. Thanks to digitalization, we can now detect, analyze, and fix. There's a lot of companies out there who will tell you, "Well, I can monitor your machines, too. I can probably tell you the probability that it will fail within a certain time." We can not only do that, we can tell you with absolute certainty that it will not fail before a certain time as well. When it does fail, we will give you the foresight. We will work with you to eliminate the problem. Very few companies can actually do this in the machine.
The fee-based models that are now coming will actually help us capture value from this. It's going to be good for our customers, and it's going to be good for us. It is good for our customer, and it is good for us because we're doing it as I speak. I firmly believe this, I think this is one of those things that are coming, as you know, whoever you talk to is talking the same thing as I do. There's no contradiction in this. Our customers, our OEM customers, are doing this, and we are happy to help them, to help them to integrate our condition monitoring and our knowledge into their machines. You've seen it today what we're doing in the Wingquist Center. In the reality, there will be many business models.
There will be when I'm relying sort of on the OEM service packages, and there will be times when I cannot have, and I don't want to have the OEM service package, and there's SKF. We have a global reach, we have the service offerings, we have partners all over the world. We can do it. What's happening, if you see the things that we have been sort of the hardware and the software that we've been introducing during the last years, maybe you don't see what this is and understand. This is a connected grease gun. Why is that important? Because, of course, as I have a performance contract, I need to understand that all the relevant points have been truly greased, and maybe it doesn't merit an online lubrication system. With this, I will know that the operator has actually greased all the points.
It will be logged in the system. If he forgets, I get an alarm. This is the IMx-8. You can understand, just a few years ago, it was a gigantic box if you wanted to connect a machine. Today, it's like this. The IMx-1 is like a lipstick, a little bit bigger. Come back to that. Digital platform. When we integrate the understanding of what's happening in the machine with our own service offer through having a central where we can detect, understand, and proactively help the customer. Yesterday, we inaugurated our REP center here in Germany. Officially. It was already working, but they made me a favor. I could be the one cutting the ribbon. You say, "Ah, but everybody have these kind of control centers." Yes, this is different.
This is detecting, analyzing, and fixing. This, just a few years ago, didn't exist. This is one of those fantastic opportunities that digitalization is doing for us. If you take what we did, I was part of it. I was happily part of it, and that's why I'm so absolutely convinced that this works. We were starting to do sort of the performance contract. We started the work in the end of the 1980s. The first contracts were starting to appear, the idea of the contracts, in the 1990s. Then, basically in the 2000, we started to have these IMS contracts in Brazil and other markets. At that time it was, of course, very labor-intensive. This is basically what we've been doing since the 1980s. We've also had the service levels models.
When we go in and do monitoring and services around it, but the business model is still a transactional business model. I would argue, you ask me, how big is your service offering? I say, most of our businesses in industrial business, in the industrial aftermarket, in some way or the other, is intertwined with services. Otherwise, we wouldn't have the position we have. Now, it looks interesting. But now, with the new tools, we can give a distributor one of those QuickCollect, a cell phone connected to our REP center, and they can start differentiating their offers tomorrow. The future, where the whole value chain is interconnected. Of course, the health of the machine and the need to change a part or do an intervention is automatically put into the supply chain system.
We're coming to a completely different level, and this is the future. I am absolutely convinced that this is going to happen. It's happening in most businesses. It's happening with many of our customers who are going this way. Even the car industry, many of us today, we lease our cars, even as private people, and the only thing we do is we put the fuel and we drive them. Everything else is fee-based. The only question now, of course, is the race is on. I argue right now, as a bearing company, we have started the race, and as far as I know at this point, we're the only one racing. The amount of bearings that are monitored by SKF equipment, I don't know. You can imagine it's hundreds of millions throughout the years of condition monitoring equipment that we've been selling.
The ones that we are measuring is about 4 million points today, which are interconnected in the way I said to you before, is about 1.5 million, and it's growing fast. This is now how we're going to measure to ourselves how quickly we are changing the business model, because this is what's going to enable us. Here you have some examples of Sweden, Germany, Australia, Germany, Brazil. We are doing this. I'm going to Latin America next week, and we have new centers in all of the major Latin American countries where we are doing this with, of course, an enormous interest by our customer base. I'll name two examples to try to illustrate a little bit what this is. This is one of the first contracts that we made. It's Fibria. I was part of that.
Actually, I was in Brazil at that time in the 2000s. Look how we have been able to develop this business. If you think that by eliminating problems and helping the customer to get higher production and lowering their costs, that this is sort of a finite business model, you can see how we have since 2006 increased our business with Fibria six times. There's a direct link now with the possibility to take this now on a new level that we've been able to capture the last contracts. Is this scalable? Can you take it somewhere else? Yes. Big River Steel, Hot Mill in Arkansas, we have a five-year contract that John just finalized some months ago, where we're doing this. We're doing exactly the same thing.
We're going to help the customer to reduce his costs, increase his output, makes his equipment live longer and work more years. At the same time, as it's based on a fee arrangement. We will also be able to get our fair share. Now, can you understand, there's no conflict of interest between Big River Steel and SKF anymore. The better we can help Big River Steel reduce their need for repairs and the need for products, the better it will be also for us. Asking the CEO of Big River, basically, he said to John, I believe, "Why wouldn't we want this?" I argue, if you think that we are not able to capture value through digitalization, now maybe you believe me. Maybe when you've seen what we're doing, that you can understand also how we're going to do this.
There's no real contradiction with actually our customers if there's compressor or gearboxes or whatever, that they have their own systems. I was visiting a customer not long ago in China, and we're now looking on how together we can help them make these kind of contracts as well. Because sometimes the customer will want, the end customer, will want the OEM customer doing his or her service offering. Sometimes they will not. We intend to be both helping our customers and when the opportunity's out there, capture the value. Sometimes in many businesses, after a while, yes, I'm doing it, but I need somebody to take the total control. They're not big enough as individuals to be in my plant. I'd rather have somebody like SKF take the lead, and there we are. There's no conflict in this.
I think these are very good things, and we will still be good partners to our OEMs in their efforts to go forward. We talked about insights, and now it's happening. Right now, this is our SKF Insight-ready sensor. We have a cooperation with Siemens where our system is actually logging into their overall monitoring system for the train. Right now, we're looking at with the customers that we have sort of signed up or in the verge who have shown interest at this point, from going from the tests that we are doing today, where we have about 1,000-plus sensors in the field. With the 14 customers we're working right now, we have a potential of 30,000 sensors.
When you go with the 30,000 sensors and a fee-based sort of arrangement to go from maintenance per kilometer to maintenance when it's truly needed, you can understand that there is both uptime and cost to be had. Thanks to digitalization, this is now possible on a big scale. We intend to be there. I don't believe that we will at all be the only ones. Don't get me wrong. I think this is going to be many players coming into this. That's okay. With one of you, I had a discussion, saying, "Well, the market is big, and there's a lot of things to do," I agree with that. But if you want to remember one thing, don't believe that SKF cannot capture value through digitalization.
We can, and we have an absolute clear strategy and implementation plan on how we're going to do it. We're going to talk about the rest of SKF, and I will answer questions to you later in the question and answer session. What we're going to focus now is on the financial performance, a little bit more about what we have done and what we can do on the financial side and what we're doing with our ITs. Product development, of course, with Victoria, looking at the nice, cool stuff, some of it that's coming. We will talk about, I know something that you're interested in, the automotive turnaround and what we're going to do there with Bernd coming up. Then, of course, we're in Schweinfurt, the biggest bearing manufacturing town in the world.
Kent will take us through sort of the ideas around how we're going to drive our manufacturing. With those words, I leave the floor to you, Christian. Thank you.
Let's see. It's on. Good afternoon, everyone. Christian Johansson, CFO. I think most of you know me by now. When we were out in the factories there, I heard some of you impatiently asking for more numbers. I hope that I will be able to provide at least some of the answers to your questions, even though I know that you are difficult to satisfy fully, yeah? I would start with this picture. You see it now for the second time. The reason is simply that we are very proud on how we have worked the last couple of years in order to revitalize this 111-year-old business. We have strengthened our regional management. You've had John here, you have Martin, you have Erik, in order to be a bit faster and more customer-focused. M&A side has been very active.
We have done some small, although acquisitions, mostly, as you know, we have worked on pruning our portfolio, and I'll come back to that. Eight divestments the last three years. The divestments combined with the overall improved performance, and that we have closed our two largest defined benefit pension plans in U.S. and Germany, has certainly strengthened our financial position significantly. Cost, very important. We have lowered our cost per unit the last years, which has supported then what you've seen eight quarters in a row with good organic growth. I would say the last three quarters, the three quarters of 2018, are the three best ever quarters of SKF when it comes to the highest sales and the highest ever operating profit.
If you look at the performance versus our financial targets, if you take a 5-year perspective as I have in this, knowing that 2018 is nine months or a 12-months rolling value, we know that the targets are the average to be reached over a business cycle. If you take organic growth, in fact, if we look at that for the five year you have here, it's on average 5%. If you take operating result on the 12-months rolling, we are now above SEK 10 billion for the first time ever in SKF history, and we are above the 12% target level. Cash flow, cash conversion cycle, I think you can confirm that has been good over the period here. Debt equity development, certainly positive over the period. Working capital, as Alrik said, I will come back to that also.
This is the target we know that we have improved somewhat, slightly, there is a gap to the target, we are certainly determined you can trust on that we want to show you gradual improvement on this, I will touch a little bit on how we see it. Return on capital employed exceeded the 16% target for first time now in quarter three on a rolling basis, that felt very good of course, the last time we did that was 2012, a few years ago. We feel we are accelerating and we do it. Someone asked about the pace. Should we go faster or are we going too fast? We do it within what we see tight frames. We do it based on our priorities. Certainly we have increased our efforts on R&D. We have a fully loaded IT agenda.
I will come back to that. We have discussed that a lot in the morning. We are increasing our capital expenditures. We do that while we keep our fixed costs fixed over the period. We have reduced headcount, we have reduced our debt with more than SEK 11 billion. It's about accelerating and braking at the same time, we spend, I can assure you, regularly discussions in the management team on how we, for the time we are in, should not just now, but on a regular basis, how we should handle this balance. What I just said, we can see also in the numbers, fixed cost over time at fixed exchange rates. This one we have used in the quarterly calls also previously. We are just above where we were now in 2014, almost flat.
Headcount on the total level, we are 300, including agencies and temporaries now for the upturn. We are 300 persons less than we were in 2014. If you look on the low color there, which are the staff, we are more than 2,200 persons less than we were in 2014 by end of the third quarter. CapEx from a level of SEK 1.8 billion-SEK 1.9 billion, we have stepped up. We have guided up now from SEK 2.6 billion for this year. On R&D, we will reach a level of around SEK 2.5 billion this year, which is also a step up. Obviously we do this because we think these are the absolute right priorities for us in order to see to that we have a very strong competitive base for the future.
Also added, someone in fact asked over lunch today, sales per employee in fixed currency rates, not affected by the weak SEK, also decent development over these years. IT. IT competence, modern IT technology is certainly high on the agenda in SKF. I think you've got a flavor of that today as well. It's really core for us. You have heard now from Alrik that our digital journey starts with creating customer value through REP, connecting to the SKF Cloud for monitoring of customers' assets, assessing the health of the assets based on sensory information and based on SKF algorithm analytics and machine learning. This information can also be used for what we call Supply Chain 4.0 to predict and forecast the true demand of our products.
The connected shop floor or Industry 4.0, you've seen, of course, example of that today by installing automated channels, but also what we do to improve the productivity on the shop floor in general by installing, you didn't see any today, the automated guided vehicles, by having smart manufacturing execution systems, or by just providing the operators of devices that improve their productivity in their work. We do a lot of other things in IT as well, ERP. We've talked before quite a bit about our Unite program. We have a need to replace our ERP for the group, we do it based on SAP in order to have efficient and standardized ways of working. This is continuing, obviously. We are rolling on our Unite program, but we are also integrating acquired units in our common systems. Units like PEER, GBC, and the bearing business of Kaydon.
One of the effects of that is that it enables us to see the full product offer also these units across globally in the group. Productivity also, in other ways, we are rolling out a new digital workplace for the SKF employees. We are also working with RPA or robotics process automation. For example, you can talk to John in customer service, order handling, repetitive tasks that are manually handled or replaced by a computer with some learning that can do these things in an automated way. e-commerce, very important, of course, also, for example, in automotive aftermarket. I would say this is a fully loaded IT agenda, some were asking what happened in Q3, Q4 here on IT. You understand maybe a little bit more on what we do here. R&D. Kent will talk about what we do on industrial footprint.
We work with our footprint also on the R&D side, one sizable undertaking that we are presently doing is to move our testing closer to our customers. We do that, of course, to reduce the lead time in the development cycle. We have had a sizable part of our testing done in Netherlands since many years. The customer base is moved, other activities are moved. We are moving now testing partially to China. We are moving it to three other European sites of SKF, where we do the actual engineering work. We come closer with the testing to improve lead times. Should also say that China, we also move, Victoria can talk about that. We are also moving product responsibility engineering-wise. It's not just a manufacturing or an end market base. We truly believe in the abilities there for the future also.
R&D obviously give us new product offerings, which enables pricing, which enables market share growth. Some examples of newly launched products, it's been quite an intensive period. We have a new bearing for axle boxes for railway that lasts for 1.7 million km. We have a new range of hubs for agriculture industry. We have sealed spherical roller bearings for mining that has been launched. And we have, for example, the SKF Blue Line of bearing housings for food and beverage industry. We are also, as you heard, roll out the REP, and these are some examples of tailored offerings that are launched in Asia in order to solve specific industrial problems. For example, how to handle performance of a horizontal grinding mill in a process industry. Moving then to net working capital and how to improve in this area.
We are mainly targeting activities on the inventory side. We have activities and responsibility set that should give us stock value reduction in the range of SEK 2 billion over time. I come back to that on the next slide. The targets we have in terms of percentage to sales remain since we met last time. On the inventory side is 90% to sales. On receivable side, I would say we have improved since we met last. We are at around 17%. We would like to reach 16%. It is also clear on the responsibilities and in order to reach that. On payable side, we have a target of 10%. We have improved. We are almost on target, but I would say we have still some areas to improve where we see potentials on the indirect material purchasing. Wrong button.
On the inventory side then, as you know the stock levels are the results of a lot of activities that happens over the value chain. Obviously, there is not one quick fix to get this done, at least not if you want to have sustainable results. I would say these areas of activities were presented to you also in a similar way one and a half year ago, so there is consistency in this, but there is obviously some progress. Just to jump in to comment a few of them, integrated planning, so to have an end-to-end planning setup. Today we have our stock plannings that optimize individual stock locations. We would like to have a planning that optimize globally for a product line across stocking points.
Here we have now done some IT work, and we have also a rollout plan that is ongoing with the first phase ending in mid-2020. That should give us around SEK 300 million in stock reduction. Then we'll continue with additional phases after that. Manufacturing supplier footprint, region-for-region. I think you've heard from us before that we aim for a region-for-region supply chain. Obviously by reducing cross-regional shipping of material components, finished products, we will reduce stock. By moving component manufacturing from Europe to China for Asian needs, reduce stock. By having a supplier base in Eastern Europe instead of in Asia to European plants where it economically viable, of course, reduce stock. Here we have activities that we expect to improve our inventory levels. Factory flexibility, I think you've seen a lot of what we do on this today.
Obviously, lead times in the factory impacts our flexibility, and the less flexibility we have, the more safety stock we need in order to meet a certain service level. Also when it comes to manufacturing frequencies, the smaller batches we can run, the lower stock levels we have. Debt equity, you know, these are our SEK 11 billion of debt reduction. It brought us from a peak in early 2015 of 144% to equity down to 60%, and excluding the pension side, we are now at 25%. Debt structure, you heard it also from Alrik. We had a rating upgrade from Moody's here just recently. Baa1 based on our stable performance of our improvement of our performance. We are on Fitch, BBB stable. Let's see what they say here going forward.
We issued a new seven-year EUR 300 million bond in September, extending our maturity profile as you see it here at a record low coupon rate of 1.25%. Very pleasing. Capital allocation. We have a dividend policy guiding us to distribute 50% of net income. We are determined, I think you've heard that, assuming that, of course, the business environment allows it to continue to invest on a high level in CapEx and what we've done historically, and also to continue to work on innovation. Obviously also we have an M&A agenda here. If I move to that, divestments, as I said, we have mainly worked the last years very actively on our portfolio. We have concluded a number of divestments. I would say that a large part of these ones were previously part of what was called the specialty business area.
I think you remember that. We had a business area called specialty, which in 2014 had SEK 9 billion of sales. Out of our divestments, SEK 4 billion were part of specialty. The remaining five that were standalone units are now determinately integrated in our organization. In the industrial or in the automotive business, and here we talk about General Bearing Corporation, the bearing business of the Kaydon acquisition, and so on. With this, we do, as I said, also on IT, we get them fully in also to be able to have their offerings as part of the group's offering globally so we can capture the remaining parts of the synergies of this. Also competence-wise, these units are adding a lot of good things for us when we really get into working together.
Obviously some cash proceeds also, SEK 4.2 billion of the tax, and this excludes then the integration transaction that not yet is closed. Looking forward then, we do have gunpowder to acquire to support our growth with acquisitions if we find the right ones. Areas of interest, obviously we can strengthen our industrial solutions, bearing seals, power transmission, lubrication systems. We have industry segments of where the total solutions or maybe of special interest, wind, EV, railway machine tools. Also we could increase the speed on REP when it comes to services and digitalized solutions on this side. Regionally, I would say Asia is of special interest, India, China, Japan. On the automotive side, the biggest opportunities we see around new energy vehicles, so hybrid bearings and seals for high-speed electrical motors as well as monitoring.
I would also say that when it comes to light vehicle combustion engines and transmissions-related, we would say that will be phased out over time. Just business cycle, we have talked a lot about also during the morning here in the discussions and so on. Business cycle management is, of course, one of our agendas, and we have to be masters of managing the cycle, and we feel that we have done reasonably well in the upturn when it comes to timing of various actions. Obviously now we are, as we see it, at the peak. What we are focusing is, as always, pricing.
We're talking about inventory levels versus service levels, long versus short-term commitments in both ends of the value chain, production flexibility with cost flex, and obviously the portfolio or the toolbox to work with when it comes to flexibilities different in different countries, different sites, whatever you have there in terms of time banks, short-term weeks, different cost-sharing arrangements that can be used when required. As always, prioritization of cost is key for us. Yes, we have to, as a management team, give clear signals at the right time to the organization in order to manage the cycle. Also it's very important that this doesn't take over, that we continue to execute the strategic agenda because that's what's going to bring the profitability for the future. In summary, I would say that we are at historically best ever performance if we look to the numbers.
We are accelerating with the comments on the balance that we have. We are clearly determined to execute the activities that should bring us towards 25% net working capital to sales. We have a balance sheet in good shape. We do have gunpowder for acquisitions if we have the right type of targets for that, if we find them. Peak cycle management when it comes to the business cycle is where we are focusing right now. With that, I leave the word to Victoria.
Here comes the lady with the stuff. You always have to bring goodies. It's great to have you here. I'm Victoria Van Camp, and it's my 23rd year in SKF, but it's never been as much fun as now. I'm going to start with showing you a little movie about why this performance thing is so important, and what is actually new from the way people used to think about bearings.
Bearings are everywhere. In industrial applications, vehicles, airplanes, even household appliances. Anywhere where there is rotation. You seldom notice bearings unless they fail, causing downtime, production loss, and unnecessary costs and damage. Luckily, very few bearings fail because of overloading or fatigue. In fact, 90% of all bearings outlive the machine or equipment in which they're installed. 9.5% of the remaining 10% have to be replaced before the machine's life is over for a number of reasons. Of the remaining bearings, less than 0.2% fail due to what is known as sub-surface fatigue. In layman's terms, being overloaded, which is measured in terms of load carrying capacity or C-value. It's very difficult to do anything about these 0.2%, short of continuing to engineer even better bearings and focusing on more aspects of bearing performance and life than just C-value.
This is why we, together with our customers, are concentrating on the 9.5% that we can do something about. By focusing more of our competence and knowledge on these, we can get very close to our goal of zero bearing failures and, as impossible as it may sound, machines that in theory could rotate forever. There are a number of ways we can save these 9.5% that actually translates into millions, if not hundreds of millions bearings every year. If a selection is done properly, with application and working conditions taken into consideration, and if equipment is monitored, we can avoid millions of unnecessary failures. Many industries and customers already do this, not enough. To choose the right bearing for the right application, taking everything into account, you need in-depth knowledge.
This is why we help our customers select bearings in a proper way that meet their design requirements, performance needs, and application operating environment. We do this through advanced engineering design tools that are constantly updated. These can be used early in the design process and come with dedicated expert support from our design and application engineers. SKF bearings are more than just carefully engineered machine parts. They include all of our knowledge, support, and a promise. A promise that together we can reduce the 9.5% of bearing failures that occur as a result of operating conditions.
You can see that there are 90% of all bearings in operation that actually run very nicely, and that is good and great. That means there is a lot of potential in machine design overall, saving costs, upgrading performance, getting even more output. That is great news for many of our OEM customers and for us. We can't stop developing. The topic of today is going to be reliable rotation and how we can provide that. Of course, you see my little devices up here, connectivity is very important, but it is not the only thing that matters. How do we do this? How do we do it in environments that look like this?
These are real pictures from my colleague, Daniel Ortega, who travels the world. He gets to see a lot of dust, I can tell you, and very little Wi-Fi connections as well. This is from South Africa, from mining environment. That's a very typical one. How do we do this reliable rotation? The primary thing is to detect what is happening. Preferably, you want to detect before it even happens. You want to have a crystal ball where you can say, "These conditions are so bad that something will break." That is actually not vibration monitoring. That is intelligence before vibration occurs. Sure, if you can't do that, then you need to be able to detect vibrations.
You need to be able to solve or fix what is wrong, because detecting that something is failing, and then after three months it fails again and again, that's not so much good for our customer. Might be good for the bearing supplier, but not for the customer, and that's what we care about. Once you figure out what is wrong, you also need to fix it, as Alrik said. Rebuild or even remanufacture the parts, make them better, make the customer even better. With the digital platform and the connectivity, we now have a possibility that we never had before. In Sven's old days, they had to do it with pen and paper. Today, we have a digital platform where we can learn from everything we do, from everything that is going on at the same time, and make our customers even better.
Almost in real time, get information, what works, what doesn't work. This is really the key that we now have connected devices. Again, that is not enough. We have to use that knowledge to improve further. You have seen today a lot of bearings, but you haven't seen any really bearings with problems because they're all new. I just wanted to show you how things happen. When you run a machine, the P-F curve is something that maintenance engineers work with a lot. It means potential failure or real functional failure. They distinguish between that. When you have a defect, it might look like this, like a little bit of frosting on the inner ring of the bearing. That is hard to detect by vibration monitoring. It is possible to do it if you use the techniques that we are using.
Again, what I said is you should actually be able to pick up bad things are on the horizon already before they start becoming like that. Okay, let's say that is what happens. If it keeps running, if you don't do anything, it grows. It grows even further. This can run, this can run, even this can run. It's starting to probably sound a little bit rattly. You don't need any fancy stuff to hear that. Then it looks like this. When it fails, and this here it fails so bad that the machine actually stops. You would think that, well, does this really happen? Yes, it does happen. It happens every day. That is this 9.5%.
When this happen, and you might have a, maybe this is a specialty item that is not produced very often, or you have to get it sent from Schweinfurt or Gothenburg out to Australia, that might take some time. Your machine is down. Detecting before something start and making sure that we do not even have this kind of situations, that is key. We work on technology that enables these REP type of business models, Rotating Equipment Performance, because what you saw on the previous picture is not performance. The more we can detect, the better we will be at doing this. The more we learn, the more opportunities we generate. The number of points connected is very important. lrik mentioned 4 million points and hundreds of millions probably being detected without even us knowing it, but using our equipment.
4 million that we monitor and 1.5 million that are connected to our REP centers. This is really key because if it is just monitored and not going into the digital platform, then it is sort of lost. It is very important for us and for our customers that we have this collection of data into the digital platform. How do we get there then to this growth of points connected? One thing is for sure, it needs to be easy. It cannot be difficult to connect a device. Some years ago, it could be. People were happy soldering wires and doing difficult stuff. They are not anymore. You are not anymore. You are using your cell phones. They are supposed to work like this. You click and it is, "Oh, it does not work," then throw it. That app is no good if it crashes.
It needs to be really easy to use, and it needs to be part of your daily work process. If you are a maintenance engineer and your screen is not helping you in your work, you are going to leave the phone and you are going to use a piece of paper instead, or something else. It needs to also be seamless. Whatever you do, there should never be a gap where you have to shut something down, go into another system that looks different because you are not going to use it. Every such break is a reason to go and do something else and to not connect that data. The user experience need to actually be enjoyable. You should not be annoyed because then you are not going to use it. Then, of course, to connect both bearings and housings, our products from the very start.
You could almost think of that as a Trojan horse, that if you have a big machine, a conveyor belt like I showed you before, what if every of those bearings already was connectable when they were installed? Then you as a customer, you can actually choose, do I want to connect them? Yes, I can. Then I bring up my very easy, seamless app and I say, "Chaka, chaka," and I connect all my points in that, and it was supplied by SKF from a normal bearing factory. This is not a dream. It is actually something we are working on. Then with massive amounts of data, we cannot have massive amounts of people sitting and looking at these graphs. We need to have artificial intelligence, both for detection and for doing the analysis and recommending the actions. Because otherwise, this is not scalable.
We're going to have a lot of new colleagues. We want artificial intelligence colleagues instead. This is what we are really working on right now. Seamless connections. I think you have probably seen, we showed this, the QuickCollect sensor at the last Capital Markets Day. What we are working on there, it comes with an app, it's a little bit clunky. It's still been a box office hit, it can be definitely much better. It can be much easier to connect, and it can be seamless to other systems. That is what we are right now piloting in one region in the world. It will come because you pilot these things and you see how they work, then you roll them out. This is one.
By the way, API, if you don't know what that is, that means a standardized or easy communication protocol for apps to talk to a digital platform. It's really what you have all in your phone, why apps from different vendors can go into one Apple phone. They use the APIs, automated programming interface. We have devices that are a little bit more complicated. This is called the IMx-8. This is another kioskvältare, box office hit, because here was a device that we didn't have two years ago. Now we have it, and it's really increased the number of connected points. This, you can connect eight points. What we have now developed that will come out before the end of the year is the same box, the same architecture of hardware, but with 16 channels.
We can have twice as many in one in the same box. You can also connect this thing with over 4G or Wi-Fi. If you don't have Wi-Fi, you can store. This has a memory. It has a simple anomaly detection and filtration in here. In environments where you have poor connections like railway or those kinds of mines, this is key. Next generation systems, which is actually the work name of the project, they're not next generation anymore because I have one here. That's the lipstick, a little bit bigger than a lipstick. This is the prototype. It's called the IMx-1, and when you saw it last time, it was pictured on one of these product charts.
Now it's real, because besides being here, and I really had to fight to get one, besides being here, it's also out in the field in Brazil, in its first field trial. The IMx-1 is a sensor, but it's also an edge computer. This thing measures vibrations, temperatures, all kinds of interesting things for bearings, but it also does filtration, it does anomaly detection, and it can store a small amount of data, and it can send. Now we have the functionality of this, plus the sensor functionality is now in one device, and it's at a reasonable cost. Low cost, yes, we are striving for even better. With this device, we can now connect machines that are critical. The QuickCollect that you saw before is more for machines that are not critical. If you have really critical machinery, this is the device to use.
It can be put out all over. With all these connected devices, and these are a few of them, to increase the number of points, we also need smart gateways, because otherwise, customers are going to go crazy with the little devices that are supposed to talk to their Wi-Fi or their intranet or whatever. That's not possible. We have built a smart gateway, and this was actually something that didn't exist in the world. You would not believe that. We could patent this technology. We have filed a patent for the technology. This one can take all our devices and other people's devices and function as one connection point to the customer's network, if we call it like that. This is also quite a feat. Let's see next. Artificial intelligence. What are we doing there?
Well, you saw today, this is actually a picture of a bearing raceway. It's a cylindrical roller bearing of about this size, and we have been really bad to this bearing. We have created a damage in it. We are running it in highly loaded tests. Why are we doing that? We want to see how these balls, the problem, the pits form, and how they grow. I showed you that graph before where things go and fail very quickly. Well, some damages do fail quickly, but some damages, it can take half a year before they actually grow, and then the last week, they peak up, or last day. This is really important to understand, that just because you have a vibration signal does not mean that you immediately need to stop. You can continue to run.
Maybe you can even lower the load a little bit or the speed, and you can continue to run until the next planned maintenance stop. That is very important. We are generating our own control data. We are doing calculations, simulations at the same time, and comparing this with each other. We use this data as a training set for a detection algorithm. How does such damage look like? How can you identify what kind of damage it is? How does it grow? Here is where the artificial intelligence comes in, where you can start recognizing defects, comparing them from different machines, and make predictions about the future. Even about conditions where such things will happen. The crystal ball that I mentioned before. Okay, that was about the detection part.
The solving part I won't cover today, you heard about advanced engineering tools and application engineers, and that is really a key thing here. Rebuild or remanufacture. Yeah, bearings do need protection. You identify some damage, and you could put it the same thing back in again, but don't do that. This is from a cement press in Thailand where dirt has come in, and they run until it looks like this. Fortunately, there are solutions. The sealed spherical roller bearing. This is the biggest sealed spherical roller bearing in the world. Daniel Ortega is standing next to it because he's quite happy with this particular device here. This is also patented, the seal design, the way we've done it. This bearing, it says here that one equals four. What do we mean by that?
Well, this is a picture from a mine in Latin America, where they used to have open bearings, so no seals. This is during 12 months, you have a failure, you have a failure, you have a failure, and you have another failure. 4 failures during 1 year because dirt comes in. SKF replaces this with a sealed spherical roller bearing. There was a failure because this bearing was open. We replaced it with a sealed, and surprise, nothing happens. It just keeps running. This is really good. This is Rotating Equipment Performance. How can we get paid for that? Because you could think, well, this is really bad for your aftermarket. You could sell 4 instead of 1. That's no good. No, well, it could be that way. It's not good for the customer. Fee-based models. That is really the trick.
The spherical roller bearings, we can provide you with a sealed spherical roller bearing, and we charge you a monthly fee as long as this machine is running. In this fee, we're also upgrading your spherical roller bearing, because the next generation seal, when we need to replace this bearing, we will replace it with something better. Here is really where the monthly fee and the technology improvements that we do hang together. We talked about application-driven innovation. The sealed spherical roller bearings are really great, but there are worse environments. This comes from a copper mine in Australia. This is what goes into those bearings, and even with sealed bearing, normal sealed bearings are not enough.
We have something called the three-barrier solution for those really bad environments, where there is a sealed bearing in the middle, and then there is a big chamber for grease, and then there is a 3rd seal. That one looks like this, and it's us providing the housing and the bearing. Of course, it's possible to put monitoring also in this. This would be a solution that goes into a conveyor belt, for example. This is ideal for fee-based models, because this thing works actually up to 6 times better. We have got results with that one. Another example from steel and aluminum production in China. The working conditions for these, now we talk about a four-row CRB, so it's this wide and about this high, that bearing. A lot of rollers, a lot of steel.
These bearings go in to something where you have flooded housing with oil. You have about sometimes even 30% of water in the oil. Water is not good for bearings. It's not good for anything. You get rust, and you get something called fretting corrosion that locks the bearing in its housing, and this is really bad. Typically, these bearings, they run for 300 hours, maybe 2,000 if you're lucky, when they should be running 12,000. This is a normal working environment. Here, what we did here, not using the big test rigs over here. Here, we took a little bit different approach. We took 50% of the cost of the base bearing out. We actually told you about this 1 in the last capital market day. Here we worked on the design and on the roller supply.
Took 50% of the cost out, it would still be failing all the time. We had to do something else, we used a very simple test method that SKF developed, where we tested different coatings in this nasty environment. We did our simulations, as you have also heard about in the test center, then we put a prototype bearing out into the field. This means that we can be so fast in product development than we never could do before. Testing this in one of those big test rigs, you'd have to do this for 12,000 hours or something. Now we can put it out in the field with sensors to make sure that it works. It does work, there is no problem. We put this in in August 2017, and it's still running.
We are actually at 7,000 something hours now. My colleagues were there last week. Competition. There is one that manages 5,000, but also here is a perfect situation for a fee-based model. You know what else you can do? You can also put a lubrication system with a dewatering device on to take out this water, and we will definitely get to 12,000 hours. This situation is not abnormal. It happens all the time. Remanufacturing. If you can detect issues very early, before you have got big, big chunks of steel falling out like this. Here is a bearing that comes out of a mining truck from the drive shafts. It has a little bit of dents, you can see it here, and a bit of rust. It's not in really good condition, but it's not destroyed.
These bearings, by monitoring them, taking them out when you see the very early signs of failure, you can remanufacture them. You polish the raceways. You put in new rollers, usually, but rollers are not a problem to keep on stock. You wash and you pack them up again, and they go back into their refurbished axle. This is really, it's a cost saver. It's a time saver, because remanufacturing can also be done locally or in the same region, and it's certainly an environment saver. Instead of shipping big bearings across the world, you remanufacture them locally, and you can reman a bearing up to three times. Use the same bearing several times if you have good monitoring. Extreme environments, there are other things than just dirt. Some environments have not really even oil.
In large air conditioning units that can be used in plants like what you may be not on the conveyor belts, but inside the plants to cool the air, or in big residential buildings. Usually, because of new environmental regulations, these bearings in such a compressor are nowadays lubricated with the actual refrigerant. That is not so good for bearings. Why is that? If you take a ball bearing of about this size, and you take one of the balls and you kind of enlarge it to the size of the Earth. Just as a thought exercise. The oil film thickness, if you size that up, would be equivalent to the Shanghai Tower. That's quite thin steel, but for bearings, that's what they work in.
If you don't have oil, you instead have lubricant, you have 20 nanometers of separation between the surfaces, and that would be equivalent to the height of a tree. We are now in the regions where we have a couple of layers of molecules, actually, separating the surfaces. You can no longer use normal steel bearings because they will weld, surfaces will go together. Instead, we use hybrid bearings, and hybrid bearings with a special steel in the outer ring. Hybrid bearings means that you use silicon nitride ceramic rolling elements, and you use a special polymer cage as well, and you can run these bearings without oil.
This is something that right now it's used in compressors, with environmental regulations in other areas, we will be running machinery on very environmentally friendly lubricants that are not the same as we are using today. These types of bearings will be able to handle that. You can run at higher speed, you can run in tough conditions. They actually weigh a lot less because these weigh less than steel. Bernd will mention electric vehicles in general. These bearings are also, because of the ceramic, they insulate from electric currents passing, they're ideal to use in electric vehicles. One challenge with these bearings was that there was no design models. For engineers designing those compressors, there were no models for calculating what you could expect if you put in these kinds of bearings.
You would use the ISO life, the standardized life calculation for steel bearings, you get a certain result, it's no difference. The calculation will tell you that a steel bearing and a hybrid bearing are the same, even though in reality, this is not true. If I'm a design engineer and I have to justify, I have to show it. We developed a new life model for this combination of materials, now we can show that we can get two times the life, at least. My engineers are very, they take no risks. I think in real life, you're actually going to get it more. We can be safe and say at least twice the life under those conditions. This is really something to be able to do that calculation. Remember the simulation tools.
This is already in our simulation tools. We learn from the field, we can use the digital platform to share and reuse this knowledge. What else can we use it for? We can use it for taking costs out. It wasn't us inventing this heading, everything you need, nothing you don't. It's some other companies use it, I really like it, because that is optimization as it should be done. You design for what's really needed, you take away what is not needed. Sounds easy, you really need to know what you're doing. If you put in a too-cheap, bad steel in a bearing that's highly loaded, it's not going to work. It doesn't cost anything, it's not going to work. You have to know what brings value and where can you take cost out.
With data from the field and the data from our application engineers, we can do this. A couple of examples where we have done this. You see this is really the classical deep groove ball bearing, where there's a company in Malaysia called Kossan Gloves. They make gloves for medical. They had major issues with a competitor bearing. That was definitely probably a low-cost competitor. Of course, they wanted us to come with something that was more cost efficient. We analyzed this application, and we figured out what could be taken out from this bearing. We came down in cost so that we were lower cost than the low-cost competitor, and you can see the difference in performance after 12 months.
They have no issues with a bearing that cost less, that you have to be really good to be able to do. The other device I want to show you, this is actually going to be launched in January. It's called the SKF Blue Line. It's a food, a series of products for food and beverage. This is from a herring production factory in Gothenburg, outside Gothenburg. That's really nasty, salt and all kinds of stuff. We have also done design for what matters and save cost on the rest, because here the seal matters and the cover of the thing matters, and the ability to clean the device with high-pressure spraying overnight, because otherwise there is mold and allergens and whatever. You also cannot let your washing detergent come into the bearing because then it rusts. We have designed a new seal.
I think it is six patents we have on this device here. A new seal that has low friction and keeps the detergent out. It's possible to design when take out cost if you think before you start doing it. More things you can do with these insights that you gain, well, you can rebuild and remanufacture, but actually, you can also control your process. What do I mean with that? If we could measure load on the bearing, this would be a process control instrument. I'll give you one example. When you drill underground in underground mining, like up in LKAB in Kiruna, Sweden, the drilling machine, yes, they can measure load, but they measure it very far away from the drill point. When you drill, you don't know what kind of rock exactly will be there.
Very often the load on the drill is much higher than what they thought, they have to drill slower to be able to detect this. If we could measure the load on the bearings out in the drill head, we could have something to control the actual machine and the drilling speed. That's just one example. You can use it to control compressors and compress the refrigerant in a different way. Now we're not talking about sensing for the sake of the bearing only. We're talking about using sensing of load to do other things, to control the process. Load measurement is like the holy grail. You can do it with strain gauges, that's messy and they fall off, it's not easy. SKF have a new technology where we have been partnering, or we are partnering with a telecom company.
It's a Swedish company called Proximion, part of Hexatronic Group, where they do optical fibers. In optical fibers, there is a technology where you can do grating, so you make little scratches on the fiber. You wrap the fiber around the bearing, and when there is a load on the bearing, the fiber becomes some nanometer longer and the refraction index changes. You actually can measure the load with this fiber. It's also a technology that you actually could put in in a normal bearing factory, because what you need to do is a groove on the outside of the bearing, and you need to glue this fiber. There is no electronics in this. I think when you walked around here today, you might realize that you cannot really work with fine electronics in this environment, because to do that, you have to have ESD-proof environment.
You cannot have flashes when you touch, or people will destroy the electronics. With this one, we can actually do it in normal bearing factories. This is a development project that we are working on. We have prototypes out in the field right now with Howden and Flowserve, and it's going to be a big thing. We will come back to you on that. Summarizing, then. Our product development aims at providing reliable rotation, of course, at the lowest possible cost. Really for the customer, give them our technology in fee-based agreements so that we can create value, but also capture the value as it is created, as long as it is created. Use the insights we gain from every touch point to make us and the customer better all the time.
That is really why it's so much fun to work for SKF, even after 23 years. Thank you. I keep these. You can touch them if you want to, but I will hold them.
Also welcome from my side here to Schweinfurt. After you heard a lot about industrial applications and what we are doing, I'm talking here today to you about automotive and aerospace. You see here there are some equipments which combine these two things. There's flying cars and there's a lot of new ideas how to change mobility. This is all visions, but let's see what will happen in the near future. To go a bit into what is automotive and aerospace. You see here, if you look a bit from the region side, we are very strong in West Europe. A small part is East Europe. In Americas, we have also quite big business, including the South America. The rest is Asia. We have a quite good distribution globally where we are in our business.
If you see the product portfolio, the biggest part of it is automotive special bearings. That means it's all bearings designed for that application. It's nothing which you can find in the catalog. The same is in the aero bearings. Also, these bearings are special designed bearings for the application. Seals the same. We have also a part you can see here about 25% where we are using the standard bearings or variants of standard bearings. These bearings we are buying from our colleagues from the bearing operations, which Kent will report. That means the biggest part of automotive and aero is all special designed things for the customer application. If you see our market, I think we are here in the number of our competitors in number 4 position for the automotive bearing market.
We are number 1 in the wheel bearing business globally, we are number 4 in the automotive and number 6 in the automotive seal business. If you see the aero market, we are by far the number 1 in the aero business, aero bearing business. That is also, at the moment, a very high growing area. I come to that. If you see the automotive revenue in SKF is about SEK 27 billion, we are roughly around 10,000 employees worldwide. If you see our footprint globally, you see that it's well-distributed, our locations globally in all the areas where the business is active. You see in total these locations, 11 locations, Americas, 15 in Europe and 6 locations in Asia, that is all only automotive, without the industrial factories.
You see 12 of them are from the aerospace side, 9 factories plus 6 vehicle parts centers in automotive and 10 factories globally on the seals side. The customer base is all the top brands, you can say, on the automotive side, it's the OEM customers plus the tier 1 customers mainly. Also the same you find on the aero side, also the airplane producers, but also the engine producers here. If we see what we have done from 2015, we launched a turnaround plan for our automotive bearing business unit. It started in 2015, ended in 2017, this is what we have done here. That means we have worked on a plan, two years to get productivity. It was also a heavy headcount reduction involved in that. We changed our manufacturing footprint. We closed some sites and moved things.
We developed also new application-specific materials for cost reduction and also for aftermarket special products. That is also sometimes needed, that you don't need an OE product in an aftermarket or let's say 10-year-old vehicle, you don't want to run not another 300,000 km, maybe 100,000 is also good enough then. That is also a little bit what we changed the application specific performance. We made a supplier optimization and gained also from the purchasing side here benefits. We also changed manufacturing technologies for cost reduction in our factories. It has long-term, a very positive effect. Let's say here you see 2016, 2017, 2018 on our operating profit. We have a much more robust and also much higher profit level reached. It was really an excellent development in most of the markets.
You know also that we have the U.S. tariffs coming in, with duties, and we were also able to compensate ourself with that, and we were able to move this negative effect also to the customers. Very clear focus is here the new energy vehicles. I come to that. That is clearly seen that a lot of new vehicles with an electric powertrain or hybrid powertrain are coming into the market. Looking into the future, I think we are focusing here mainly on these five key points. We are working with the customer, and that is new product offering, especially for the new energy vehicles. We started at the beginning with Tesla in the U.S. to work with them on their drivetrain, and that was at that time a small thing. Today we have all the business there, you can say.
There's a lot of new players coming into the market, and the main business is popping up in Asia and there in China. We are getting a lot of new customer orders, especially for these drivetrains in Asia. The market in Europe, you know, and for sure in Americas is still quite small. Asia is really giving full speed behind this technology. We are there and we are working with all these customers. We also see in the aftermarket that new business models are coming in. We are working with different business models, including what Christian said before, the e-commerce is coming more and more. There we are also prepared to sell our products via e-commerce platforms.
If you go to the profitability management, we have managed in the last years very much our product portfolio and also worked with the customers on where to manage also on the pricing side, that we get a better profitability situation overall. Pricing, cost, and mix of the portfolio. From the innovation side, we are working very strong with the market to understand the new technologies trends and introduce new products. Victoria mentioned for hybrid bearing, for example. That is for sure something which we need for the electric vehicles and is a very powerful new product which gives us a nice share in that business.
Still, I think as long as we have the CO2 emissions in the market and targets for that, our customers are working on how to achieve CO2 targets, how to reach the emission or fuel consumptions. Therefore, our leadership here in friction reduction and also low weight is still very key. We are always trying to be more energy efficient and getting lower weight. The same is today also in the aero market. The new aero engines are much more fuel efficient and also weight reduction is key for the aero business. On the cost side, automotive is always under cost pressure. Therefore, this is a permanent process we are driving. It is also what Victoria mentioned, very important for automotive, design to cost.
We are selling a certain function for the vehicle and what this function, what we are delivering, should be reliable for the lifetime which is expected and should have the optimum cost. That we have really the benefit for the customer, therefore we are working here very close also with the customers, how to take cost out and getting the benefits. What we do for sure all the time, that is in automotive since years for us, in our DNA, is improving the competitiveness to continued value-added optimization. We have talked, you have seen here today, the Industry 4.0 technology that is also happening in all our automotive channels. We have to improve our manufacturing in a permanent way, getting higher automation, going even up to autonomous production.
For sure, the same we are doing with our purchasing partners or suppliers, you can say. How do we get cost out of all the components we are buying? Also, the efficiency in the organization is a key point. We have worked on that, organization efficiency and effectiveness. We have brought the business unit concepts in, I will show that. We are working on the manufacturing side with the same way, Industry 4.0. What we also do is we get the whole business process digital. That means we will have no papers anymore. We are working in a digital way end to end, that makes it also much easier to be leaner and more efficient. The target is for sure we're having this robust operating margin over the full business cycle. That has worked out so far quite well.
To come to this organizational efficiency, we have separated, in this year, the automotive OEM business from the aftermarket to get a better focus in each area. This is for sure the biggest area we have in automotive and aerospace, here we are focused fully on OEM customers and how we work with them. This is much different from the aftermarket business, where we are having complete different customers in most cases and also different performance requirements. Therefore, we have this global new business unit now in place and focused and dedicated to the aftermarket. On the sealing solution side and also on the aerospace side, we have strengthened our focus and also our leadership there. Also in these two areas, we are pushing for a turnaround or profitability improvement plan.
If you see the strategic positioning, we want to be the leading expert in the market, we want to be the cost competitive supplier to our customers. Also, we're delivering increased value to the customers with a focused leadership. At the end, we want to see also further productivity, profitability improvement in the plans we have. If you see that now, 2018 and beyond, what is the focus? I said it. On the automotive side, the new energy vehicles for bearings and seals. We will also launch additional product lines, widen the assortment in the aftermarket. We have quite a good footprint, what I showed before, with our factories. What we don't have is in all these locations, the right supply base.
Therefore, we are working on a project where localization of our supply base, so that we don't need to travel parts around the world, that we have local suppliers or even our existing suppliers locally available to deliver to us. For sure, further footprint optimization we have in seals, U.S.A. and Mexico. Also we have that in aerospace in North America. What we see in aerospace is a bit different at the moment from the automotive world. We have a very strong growth in 2018. We are really on the capacity limits producing, and that will also go on with the ramp up of the new engines, aero engines. We have installed four new Industry 4.0 channels, two in Europe, two in U.S., and we are just in the ramp-up phase of it.
Here also, we are focusing on profitability improvements, and I come to that. Also what I said, these four channels which we have installed are all full automatic Industry 4.0 standard. That is, let's say, a bit different from the automotive side here. Innovation drivers, I spoke a bit about that. One is the emissions and CO2 targets for the conventional powertrain, with internal combustion engine powertrain, which is ongoing. Minimum for the next 10 years, we see where that keeps going and where weight reduction with new design and materials are key, reducing the weight of the car. Also, the mechanical system efficiency is very important and there means friction reduction in the first place for us to see how do we make the vehicle more efficient and with lower weight.
If you see the new energy vehicles, which are now really coming up, we see the electrification that we need application-specific products and solution. We have, if you see today an internal combustion engine, there's a lot of plain bearings in it, and that is for sure not our area where we are focused on. Therefore, our content also in this internal combustion engine is quite low. We are more in the gearbox, but not in the engine side. In an electric vehicle, that looks different, where you can say all the bearings in the electric powertrain are roller bearings, ball and roller bearings. That means we are gaining here in this field quite a lot with our technology. It could be easily up to 17 bearings in an electric powertrain, if you talk about a four-wheel drive. That is good for us.
The hybrid bearing, Victoria mentioned that is one key technology for us because it is not only that we can do the high speed without problems, you can run really extremely high speed on the electric motor. Today we are at 18,000 to 20,000 RPM. It will go further up. Power density is an important thing, therefore everybody is developing to downsize the powerful engines. For us, it was very important to have that, and that is also, let's say, in the vehicles today. We have made this acquisition of a ceramic powder manufacturing Vesta, which is very key for us to have this base material available, and we are also investing here into ceramic ball and ceramic roller production. What we want to have is a complete ceramic bearing rolling element production in-house. High speed, low noise of the bearings is key.
If you drive an electric vehicle, there is no engine noise, you can say. Therefore, the noise level is very important. At the same time, when you have these high speeds. Not so easy. Sensor technology is coming also into our automotive bearings more and more. Why is that? I think you know ABS sensors and these things which we have on wheel ends for managing the brake system. If you take an autonomous driven car in the future, there's no driver understanding if there's ice on the road, snow on the road, rain or whatever. We have to measure the friction of the wheel against the street. The best position is the wheel bearing to do that. Therefore, we are also equipping our bearings with sensor technology to manage in the future this part which today the driver is doing.
To automize that. There's also a lot of new electric-driven accessories coming, like electric air conditioning, electric heating, electric cooling pumps for the battery pack and so on. There's a lot of new products which also needs bearings, and where we are also working on how we support our customers in this area. For the energy efficiency is also a point which we see in the aero engines. There's also CO2 reduction programs. Therefore, we are working also here for complete new bearing technology. For sure at the same time, weight is for an airplane key. Therefore, we are trying to make the airframe lighter. It means we have new bearing technology. We also, what I said, have new manufacturing technology and we go with new materials into the lightweight in the airframe.
There's one problem which we are facing at the moment. I think most of you have for sure heard about it. That is this new worldwide harmonized light vehicle test procedure, WLTP. The old cycle was from the '80s, NEDC, now since September 2018, all new vehicles which will be sold to a customer have to be certified under this test. That has created some problems. The test was mandatory to have the certification from 1st of September 2018, and it's based on a lot of data, real driving data. It's really global. Three continents, 12 countries have measured and have created this test as one standard, and it should matching much better the on-road conditions to measure real fuel consumption and CO2 data. What was the effect in Q3 of 2018?
I think a lot of vehicles were not certified mainly in the Volkswagen group, you can find that here on their internet page. We were in trouble because you have to measure vehicles, all engine types with all transmission types, with the different chassis systems and which tire combination you have on the vehicle. It is not that you certify one vehicle and when you have done it, no, you have to certify all variants which you can have. That is, if you see the vehicle configurators were partly stopped, that you could not configure that vehicle because there was no certification. The problem was for the industry that in September we had here from Volkswagen 42% drop in sales. Also October is still impacted.
We hope that that is phasing out soon, but it was, for sure, a heavy impact in Q3 and maybe also in Q4. We will see. If we go on focused areas, I think on the automotive OE, OEM side, we are focusing clearly on bearings, seals, and modules of it. We are focusing on new energy vehicles, what we are not doing is we don't move into system supply. We will be not a producer of a traction motor or a drivetrain. We want not to compete with our customers and not with our tier one OEM or tier one customers. That we see now works quite well because we got a lot of RFQs, especially from these guys for the new drivetrain. This goes up to one, let's say, new order per month in Asia. That's enormous speed.
For sure, not all of them will survive, I believe, but I think it is huge activity there. In the automotive aftermarket, we are focusing on new product lines and also the broader assortment. We have this global business unit. We want to have the right portfolio of products in each area. We are not all the same. You have different vehicles in different areas. You need different assortments. We focus also on more chassis parts and less engine parts. We have also with e-commerce, the business directly with the customer possible. In the aerospace area, what we are seeing there is extremely high sales growth at the moment, very high, full load. We need also here footprint optimization and managing the ramp-up with the new Industry 4.0 channels.
What is clearly driving us permanent cost down, pricing management, and also with the innovative products to go to the customer. If you see on the OE side, what do we see? In the next 10 years, I believe we see a heavy change in the drivetrain, that is not only for cars, it will be also for trucks and buses. There's a big phase of hybrid or electrification happening where we can play a major role. The business opportunities for SKF Automotive to gain rolling bearings and seals business by offering the right technology. I said in this vehicle is much more SKF than today in a combustion engine vehicle. Strategic direction is to remain in the component and module business and avoiding, let's say, the competition with our OEMs and tier ones.
What you see here for the growth, we see in the chassis a growth for sure with the volume in the wheel, the biggest growth for us is in powertrain. That means that is exactly the bearings and sealings I'm talking about. If you see the aftermarket, we want to have the best offer and the right assortment for the customers. We are adding here product lines to our portfolio, we want to grow faster than the market. We want to have an increased focus also on efficiency and cost down. That is on one hand, also the way of working, how we do it, how we manage the logistics, what cost we have to do the business, and also where and how we purchase certain components. That will improve our profitability further here.
What you see very clearly coming is the digitalization of this business, e-commerce as one is a key point, but also electronic catalogs, ordering system, and so on. We need to be ready for this big change. That is also changing in different areas with different speed, it's clear. On the aerospace, we have a clear focus on airframe, reducing the weight of the aircraft, also on the maintenance repair business and also more on helicopters. The profitability management is connected with that. The new market offer is the airframe and composite materials. We will see much more composite parts in the new aircrafts than we have today. There's the project Wing of the Future to make lightweight wings of the aircraft. For sure, we will focus more also on the MRO market. On the manufacturing side, heavy cost reduction.
You see also there with one-piece flow to manage an Industry 4.0 production. The channel is able to produce one bearing and makes this resetting more or less himself. That is what you have seen here for Aero. Cost reduction on the OEM business and also our footprint, we will make some tuning there. Finally, also on the cash side, we want to have a better inventory management. The supply chain has to be changed, and also the material flow needs to be much more simplified. It will get us all financial benefits. Finally, you know Elon Musk, he has dismounted a gearbox here, and he was tweeting that and say, okay, after 1 million miles, he's speaking, is that the gears look like after testing. The gearbox is like new.
You know the responsible part in the gearbox that the gears are meshing well is the bearing. And these things are our bearings here. Therefore, we are quite happy to reach 1 million miles with that car without any problem. Thank you, Alrik, for that. Key point, SKF Automotive Aerospace is delivering high performance and high quality products and solutions that help customers to gear up for the future. That is clearly we want to be the future partner of our customers with bearings and seals and modules. That is our strategy. Okay, thank you. That's over my side.
Thank you. Now we have a short coffee break. The first Fallin' too fast to prepare for this. Trippin' in the world could be dangerous. Everybody circling, it's vulturous. Negative, nepotist. Everybody waiting for the fall of man. Everybody praying for the end of times. Everybody hoping they could be the one. I was born to run, I was born for this. Whip, whip. Run me like a racehorse. Pull me like a ripcord. Break me down and build me up. I wanna be the slip. Word upon your lip. Letter that you rip. Break me down and build me up. Whatever it takes. 'Cause I love the adrenaline in my veins. I do whatever it takes. 'Cause I love how it feels when I break the chains. Whatever it takes. Yeah, take me to the top, I'm ready for. Whatever it takes.
Because I love the adrenaline in my veins. I do what it takes. Always had a fear of being typical. Looking at my body feeling miserable. Always hanging on to the visual. I wanna be invisible. Looking at my years like a martyrdom. Everybody needs to be a part of 'em. Never be enough, I'm the prodigal son. I was born to run, I was born for this. Whip, whip. Run me like a racehorse. Pull me like a ripcord. Break me down and build me up. I wanna be the slip. Word upon your lip. Letter that you rip. Break me down and build me up. Whatever it takes. Because I love the adrenaline in my veins. I do whatever it takes. Because I love how it feels when I break the chains. Whatever it takes. Yeah, take me to the top, I'm ready for.
Whatever it takes. Because I love the adrenaline in my veins. I do what it takes. Hypocritical, egotistical. Don't wanna be the parenthetical, hypothetical. Working onto something that I'm proud of. Out of the box and epoxy to the world and the vision we've lost. I'm an apostrophe. I'm just a symbol to remind you that there's more to see. I'm just a product of the system, a catastrophe. Yet a masterpiece, yet I'm half-diseased. When I am deceased. At least I go down to the grave and die happily. Leave the body and my soul to be at bodily. I do what it takes. Falling too fast to prepare for this. Tripping in the world could be dangerous. Everybody circling is vulturous. Negative, nepotist. Everybody waiting for the fall of man. Everybody praying for the end of times. Everybody hoping they could be the one.
I was born to run, I was born for this. Whip, whip. Run me like a racehorse. Pull me like a ripcord. Break me down and build me up. I wanna be the slip. Word upon your lip. Letter that you rip. Break me down and build me up. Whatever it takes. Because I love how it feels when I break the chains. Whatever it takes. Yeah, take me to the top, I'm ready for whatever it takes. Because I love the adrenaline in my veins. I do what it takes. Always had a fear of being typical. Making my mind feel miserable. Always hanging on to the visual. I wanna be invisible. Looking at my years like a martyrdom. Everybody needs to be a part of 'em. Never be enough, I'm the prodigal son. I was born to run, I was born for this. Whip, whip. Run me like a racehorse.
Pull me like a ripcord. Break me down and build me up. I wanna be the first word upon your lips. Ready for you to rip. Break me down and build me up. Whatever it takes. Because I love the adrenaline in my veins. I do whatever it takes. Because I love how it feels when I break the chains. Whatever it takes. Yeah, take me to the top, I'm ready for whatever it takes. Because I love the adrenaline in my veins. I do what it takes. Hypocritical, egotistical. Don't want to be the parenthetical, hypothetical. Working onto something that I'm proud of. Out of the box and the proxy to the world and the vision we've lost. I'm an apostrophe. I'm just a symbol to remind you that there's more to see. I'm just a product of the system, a catastrophe.
Yet a masterpiece, yet I'm half-diseased. When I am deceased, least I go down to the grave and I have to be. Leave the body and my soul to be a part of me. I do what it takes. Whatever it takes. 'Cause I love the adrenaline in my veins. I do whatever it takes. 'Cause I love how it feels when I break the chains. Whatever it takes. Take me to the top, I'm ready for whatever it takes. 'Cause I love the adrenaline in my veins. I do what it takes.
Fantastic. "Whatever it takes." What a better introduction than that to talk about world-class. I will never say that we are world-class in what we do. The only thing I can start saying is that we will always strive to be world-class in SKF Bearing Operations. I hope that what you saw today in the factory with what we are doing on world-class manufacturing on our CRBs, on our TRBs, a bit the flashes that we got from the film here, I hope it makes you just excited about bearing manufacturing as I am. I think it's a fantastic area to work in, with so much different opportunities, and not as dull as I know some people believe. It's one recipe to do something very standardized.
In reality, what I talk about is that bearing manufacturing, it's a wide variety of customer needs and a wide variety on technologies that you have to be able to cope with. I will talk about that. Alrik, I think you've seen it as a theme throughout the day already that the world-class manufacturing and the strive for world-class manufacturing is, of course, one of our key strategic priorities. It's clearly to have a world-class manufacturing is a prerequisite for SKF to be able to supply our customers with the best products at the right time, at the right quality, at the place where they need it in a very competitive way. This is what the strive for world-class manufacturing is all about. We talk about that in four different dimensions. We have to be able to drive a production system.
That's the way we work. I'm going to talk a little bit about that. I will also talk a little bit about input cost reduction, I'll actually spend most of the time today talking about technology step-up and about footprint. The time doesn't allow us to cover all the topics in detail. Before going into these areas, however, I'd just like to set the standard here. When someone asks, what is the world-class technology for cylindrical roller bearings manufacturing? The first answer from my side will always be, it depends. It depends on what the customers need. It depends on if the customer needs one piece, if he needs 10 pieces, if he needs a million pieces. We need to adapt our manufacturing recipe to the different customer needs. I'll come back to that as well.
To make sure that we actually adapt our technology development, our strategy development in these four different areas, we always try to start from the customer side. We make sure that we have a good customer understanding coming into the plants and to the operations in SKF. We do it basically mainly through two different dimensions. One is on this side, where we have very clear roadmaps for all our different product lines. What are the needs of our customers of tomorrow? What are the gaps that our customers see that we might have in our current operation, our current operational performance? What are the opportunities for us to find, as Victoria showed, less costly solutions? Can we compromise on something? Can we take away a certain feature for customers that need it and be more competitive?
Where are the areas where the customers actually need more performance from us? You saw examples, Bernd talked a bit about it, Victoria talked about it as well. Our recipe on the manufacturing side needs to be building on a very good understanding of customer needs. We get that from these roadmaps, but we also, of course, get it when we work directly with some of our leading customers. This we should never forget. It's easy, actually, for engineering people in a manufacturing environment to think about their vision of world-class and forgetting that it always needs to match a customer need. Before I talk about these four areas, I just want to give you a brief flavor of what bearing operations is all about. What you see here is the number of locations that bearing operations cover.
You can clearly see that we cover the world in a very good way. Wherever the customer need is, we have a possibility to a large extent to meet the customer on his local home base or a global home base. We make bearings from a size of four millimeters bore diameter to bearings three, four times the height of this room, depending on the application that you run in. You saw in the test rig, I think you got some flavor of the different requirements you have in certain application on the bearings than on the others. We cover really the responsibility for making sure the customer gets the right product. We cover everything from product management back to the purchasing. The stakes manufacturing.
Of course, this variation that I talked about with bearings from a four-millimeter bore to 10 meters diameter, it's easy to understand that you need a variation on that side. I also just take a very standard example. This is a 6205 bearing. You would say it's a very standardized component. Of course it's to a large extent a standardized component. This is the bearing that SKF sells directly to the biggest amount of different customers in the world every year. Close to 10,000 customers every year buy directly from SKF, the 6205. These close to 10,000 customers, they don't have one demand. They don't buy one standard iPhone or five different iPhone versions. Just give you a moment to think about how many different variants of 6205 do we sell in SKF today in a year. Not as many.
We sell more than 300 different variants of 6205. Of course, for cost reason, we always try to manage assortment variation, because adding assortment adds cost, but we cannot do it at the expense of the customer not getting a functioning bearing solution, the best bearing solution on their side. When you look at the variation that we have in batch sizes and demand here, we sell everything from one to 10 pieces of the 6205s to other customers buying per order 100,000 or even more. The reason why I'm talking about this is, of course, the manufacturing recipe and the supply chain recipe that we need to have to meet these different customer demands needs to be different. Similarities, but also differences. That needs to come back to the four boxes that I mentioned before.
The variation is, of course, not only if it's high volume or low volume, it's also the other prerequisites that we put on the product at the same time, where we need to vary the process to get the product to the customer. The production system, as I mentioned, that is actually the way we make sure that we have a very stable and continuously improving production process inside SKF. I'm not going to go through the details of this one, but I think the logic around it is very much what Victoria talked about in how we improve for our customers. The production system is the way we improve. Finding the problems or the opportunities to get better, fixing them, and then prevent the problems from ever coming back. We continuously actually raise the performance standard on manufacturing. That's what you basically see here.
To drive that forward, we actually have the production system as a base. We have a best-in-class set up, our current known standard to make CRBs in the best way, DDBs in the best way. Of course, we try to lift all our manufacturing plants to that level. Then we have the disruptive. Partly of what you're seeing today, it's actually setting a new standard for manufacturing in our plants. Once that's validated, we will roll it out to all the plants. I also made this red, so I didn't forget it. It was good I saw it. Of course, one very important area that we focus on right now, also connecting back to what Christian was talking about, is on flow and simplicity.
There's a big opportunity in SKF to actually even more work on throughput times, flexibility in manufacturing, and get a better supply chain. That's going to help us actually to improve balance sheet performance of net working capital as well. Input cost reduction. I think Bernd mentioned that already. It's actually working together cross-functionally, even involving our suppliers, even involving our customers, to find smarter ways to deliver the performance that the customer needs and help us to take cost out. Here we are running many, many projects every year, I'm not going to spend too much time on that today. I'll spend a bit more time on manufacturing footprint. What manufacturing footprint is about, it's again, making sure that we have the best supply chain for our customers, delivering the right products in the right place, and the right process at the right time.
To do that and to optimize our manufacturing footprint, we have two different starting dimensions. One is, of course, the product line strategy. Where do we see the market needs from tomorrow? What do we see as the market expectation or customer expectations on us? At the same time, we have to combine this with our manufacturing capabilities. Most of the products we will make local, sometimes we have to use economies of scale, and we have to consolidate some manufacturing volumes. We also, of course, have to look at the overall efficiency that we have in the system. If we have redundancies, if we have duplicate sites and so on, we of course, have to address that going forward. You saw the map I showed before on bearing operations and us having more than 50 sites today.
Of course, that picture, if we would have built our manufacturing today, would look somewhat different. There are two main differences in that footprint is we are today having more capacity in Europe than we would have built for the market. We are actually continuously, and this is happening as we're speaking, we are shifting production volumes from Europe to other regions. The other side is we are having more sites than we would have put in place if we would have built our manufacturing footprint today. We are also looking at that. That's what you see down here basically.
I cannot share the details with this plan with you, actually we are mapping all our manufacturing sites, and we have classified them based on these inputs, which factories are the factories that we need to keep and develop, maybe to some extent transform for the future, which are the factories and sites where we see a need actually to close them down. Then we have a number of sites where there is a question mark. The big chunk of sites are actually either A or C. Then we try to drive our activities to make sure that we get to that stage following market dynamics, following load situations, so we can do all these transitions on our footprint without damaging any customers. We have talked about that before. I'm just quickly showing you some of the projects running.
In Americas, I would say the biggest project that we announced already some time ago was the consolidation of our bearing manufacturing in Hanover, in Flowery Branch, and in Baltimore, where out of three sites, we are actually making two sites. We can exit the Baltimore site that we acquired together with Kaydon, which is not in a very good shape. We are consolidating the industrial manufacturing, our DDBBs, our angular contacts, and our spherical roller bearings into Flowery Branch. We're moving the aerospace production into Hanover. Giving us a more efficient footprint for the future and, of course, helping us to save cost. In Europe, we have a number of activities going on as well.
Recently, we also informed that we're going to consolidate some lubrication footprint, where we have the acquisitions of Vogel and Lincoln, two sites quite close to each other, and we have expanded the footprint in Walldorf as well. Here we are driving down and getting economies of scale in this operation as well. What's going on all the time, which is not on this list, is that we are actually shifting production volumes from Gothenburg, from France, from Italy, from Germany to our Asia manufacturing to be closer to the customers. In Asia, some people might believe that in Asia we're just adding capacity or adding sites. Actually, in Asia, we are adding capacity. I can ensure that we are adding a lot of capacity continuously in Asia. Even doing that, we are also consolidating.
One example here that we also communicated some time ago already is what we're doing in Changshan. It's a plant that we acquired with a PEER company already 10 years ago. There we are now expanding our presence in Changshan. We are moving into a new site, but we are moving the old Changshan site, plus we are moving the Shanghai and the Ningbo sites in China into that same facility, which means that we are creating a big center for small TRBs in China. We are getting a footprint that we think this is the right footprint for us to continue to expand for the future. As I mentioned, we also add capacity in other areas, and we actually grow our presence in China to make sure that we compete clearly with whoever else is in China here.
Also India, of course, India is also a strongly growing market for now. We are adding capacity into India as well. To wrap up on the footprint side, we basically follow a plan that looks like this, and it contains the factory names. The footprint activity goes beyond manufacturing. As Van said before, it's also about supplier footprint, it's about engineering capability, it's about customer footprint, and we try to make this whole chain work efficiently. We expand and we adapt to the customer base, we continue to consolidate, and we have a strong alignment also what we're doing on technology step-up. Of course, these big technology step-up activities that we take, they also have an impact on the resources that we need in the different regions. That actually takes me also into the technology step-up discussion here.
When we talk about the world-class again, I just want to share a little bit on this picture, because I think it's important to understand when we talk about world-class manufacturing needs overall and the world-class manufacturing opportunity. Basically, everything we do has some commonalities. All production, equipment that we have, we need to automate the logistics. We need to make sure that we have a truly robust technology. I actually think that some quite advanced companies, they don't realize that if you want to automate and digitize your factory and make it autonomous, the base technology needs to be extremely robust. You cannot have any disturbances. You don't have anyone to go and fix small topics that you might have in production area, which is quite common. We have decision support improving, we have data collection. You have machine learning coming in.
We have IT security as we digitalize. We have the network capacity. With all that increased traffic that you're going to have in your manufacturing sites, you need to have very stable, fast networks to handle all the data that is actually going to transmit in that manufacturing environment. You need to connect to ERP systems, to PLM systems, to product management system. There's a lot of commonalities on the need that every factory has. Up here, I just stick to this simplified model of differentiating our manufacturing volume and in weight. High volume, low volume, high weight, low weight. I'm just going to cover two boxes. Some of the additional requirements that you have up here on a low volume, high weight manufacturing is that we need zero resetting.
Resetting is a big loss factor if you don't make it fast, if you don't make sure that you can drive it in a good way. We need automation. We need high flexibility. We need to decouple the processes, as you heard Dan talk about on the one-piece flow. As you saw also out here in both the CRB and the TRB manufacturing, that it's not connected with any flex link or conveyor system. It's autonomous how you actually take the products to the manufacturing site. We need to make products REP ready. I would say all the products up here over time needs to be ready for REP. We need to have a traceability down on an item level. If I take the other corner of the box, high volume, low weight manufacturing that actually spits out bearing continuously. That's the base.
Here we need very fast and robust processes. We need automation, but here we also need high-speed automation. We need an automation that's capable to keep up with the machining speed. Autonomous production. Run complete shifts without anyone being in the production plant. High cost efficiency. Here we can start using advanced statistical methods to understand and control our process even better. It's a bit difficult when you run one piece at a time to have that advanced statistical method to help you to improve. We have to drive a continuous flow. I think this is in our setup, how we define the world-class manufacturing by need, really taking it from a customer perspective. This variation shows the variation on volume and weight.
Just to give you a flavor of some of the activities that we are running here, shop floor mobility, really making sure that we have decision support for the operators that he can use online, giving information when there's something happening in the process, when he needs to do something, he can have the instruction, he gets the alarms, he can sign off that these activities have been done. Really taking a much, much better control of helping the operators, but also making sure that work gets done according to what we have defined. DDBBs and ACBBs. If you watched the video, you would see that now we have developed a technology for resetting the assembly area for these products down to one minute automatic resetting, which is, of course, extremely useful for low volume production.
We are working on traceability. In this case, from our super precision bearing traceability, it's not just tracking process data, it's actually also sharing process data with our customers. When you select a super precision bearing, the bearing designation doesn't tell you everything you need to know to get the right assembly and the right bearing for use in your super precision or in your machine tool equipment. We are talking about DDBB China. When we talk about what we're doing here on DDBB China, we have moved the whole value chain footprint to China. It's not just bearing manufacturing, it's also the product development, the product engineering, a strong product management locally in China. They are driving a lot of the development together with Chinese customers on what are the needs that we need to get into and be better here.
The world-class SRB, I think many of you visited Gothenburg last year and saw what we are doing in that field. I can tell you this has been a learning journey. Now this production is very stable. We have very good improvement pace on getting the output from Gothenburg. Now we have started to have technologies from Gothenburg that we roll out in other areas, and some of them you have seen here already. We also work on machine upgrades. I've told some of you already. Some of you saw the signs of LMP or Lidköping machines out in our manufacturing area. That used to be the SKF machine tool manufacturing when we made our own machines. I would still say that for bearings up to a certain dimension, these are still the best machines from a mechanical property point of view. Extremely good machines.
What we are doing now, we keep those foundations. We upgrade these machines to become smart machines, which means that we can actually move into Industry 4.0 at a much lower cost than if we would buy new machines. A number of different things here that we put together. We are following this roadmap as well on how are we rolling this out then across all our manufacturing sites. We measure this in a number of different dimensions. As you see here, world-class factory. Here, what we are working on is to launch a project to get one factory that is fully world-class, not taking one channel, but taking the full factory concept, including the surroundings of the channels. We also run a number of world-class channel projects. We do the legacy channels and legacy machines upgrades.
This is this smartifying of the machines that I talked about. We are digitalizing our equipment continuously. Some of the latest news you managed to see today on the CRB side and on the LSP side, what is not mentioned here, but I think you will get much more storytelling about what we are actually doing uniquely in these areas when you are in the factory tours. We have actually also for Schweinfurt started a new roller project where we are doing world-class project on roller production. I think some of you might read the news today that we are also having a world-class finished order project going to France, where we actually also for our TRB manufacturing will be able to in Saint-Cyr handle the flexible part of the assortment in a much more efficient way.
Here we are combining high volume manufacturing for the high volume needs, the low volume needs will actually leave the flow and get into a separate matching operation. It will help us to be much faster responding to customers, it will take cost out in meeting customer needs, and it will help us take inventories up. If I wrap this up, now I still have this one as well, because I think this is also extremely important. Of course, the Industry 4.0 and the world-class operations. What I've talked about so far actually is what happens within the factory walls. The true Industry 4.0 will go beyond the factory walls. You see some examples of that already. Christian and Alrik and also Victoria, they show the examples how we connect our systems to customer systems.
We can connect them to condition monitoring in our customers' operations, getting an indication that now this large size bearing XY is starting to show failure properties in the application. It's time to prepare and make ready that we can supply another new bearing or even a remanufactured bearing to help the customer to not have any stoppage time. We are integrating, of course, also with our OEM customers. We are integrating with our distributors going forward. Here we are more piloting those areas. What we have piloted is actually to take this whole chunk of SKF planning properties. This is what Christian mentioned before, integrated planning. We don't have someone planning here, someone planning here, someone planning here, someone planning here.
With the system transparency that we have today, we have one person sitting and planning all these stocking points and optimizing these stocking points for SKF out of one location. This we do for all production out of our Steyr factory, we do it in France, and we do it in Italy. As Christian mentioned, we will roll this out to basically all the standard bearing plants where this makes sense until mid 2020. That's going to give us a good working capital improvement at the same time as it's going to give us better customer performance. I'll cut to the wrap up from my point of view. Bearing operations, I think we have very clear business priorities and improvement maps on what is that we need to do even better for our customers going forward.
When we design our processes and we design our supply chains, we work from the customer and backwards. We don't push inside out too much. We work on these four priorities, production system, input cost reduction, footprint, and technology step-up. We have shared plans, we continue actually to work and drive these plans. I should always start with this, but this time I decide I'll end with this. Of course, the key success factor for any of the activities that we have talked about today is to make sure we always have the right people and the right leadership in place. We spend a lot of time actually making sure that we have the right people here.
It's even more important, I would say, in a business like SKF that looks very standardized on the surface, but there are very many different customer needs that you need to respond to. We need to have true entrepreneurial leadership in all levels in our operations. That was all I had for now, and by that, I think it's time to hand over to Alrik to do the wrap-up.
Thank you, Kent. Have you ever seen a guy so passionate about manufacturing? I think I have absolutely one of the best aides in the world, and this is a fantastic team. I hope, before we start Q&A, that you have a feeling now that when we talk about our four strategic focus areas, that you understand what is our vision, what we want to achieve, that you have seen that the focus areas we have are relevant, and that you have seen that we do not only have the capability and the knowledge to do it, but also the passionate leadership to see to it that we continue to deliver on what we say.
I also hope that you have maybe during this day understood that the rotating shaft or the rotating machine, the bearing in the center, is one of the most interesting businesses you can be in. I hope that you're all sitting and said, "Why didn't I try to get into SKF when I was young and starting my career?" I tell you, I grew up in SKF, and it was a fantastic journey. I was outside. It was very good, but I'm so happy that I'm back to be able to be part of this fantastic journey that we are doing, and I know that we will be successful. Thank you very much for listening in. We still have a Q&A section, please, everybody, all the presenters come with me up on stage.
We do the Q&A, for you who are traveling back with us in the bus, we can continue to discuss. We can talk tomorrow. We can talk the next week. Thank you for listening to us. Thank you.
Hi. Over here?
Yeah. We see you.
There.
We see you.
Chris and Linnesini. Klas at Citi. I have two questions on cost inflation. First on the tariff impact. If we see another 25% hit, we're currently looking at 10%. Your analysis within the group, if we start there, how do you see this across end markets next year? When you look at the industrial side of the business compared to automotive, thinking about the pricing power you have in the different segments, will the 25% potential extra hit be more geared to industrial versus automotive? I'll start with that one.
As we communicated in the last call, is that we see that we enter 2019, that we have caught up in terms of getting price increases for what we have in terms of cost today. The potential risk that there is that you get for the portion that is still 10%, that you get 25%. When we have looked into that, if you see where that will impact us, it is towards industrial more, it's towards distribution. We are fairly confident, and we've started to prepare what will be required if that would happen. We are fairly confident that we will cover that.
It's a small number.
Sure.
It's a small number.
Sure.
They're meeting tomorrow, right?
Exactly.
They'll fix it.
Okay. All right. I'll quote you.
Second question.
The second one on cost is on R&D, IT, the production disturbances that you had because you were running production very hard. Thinking about next year, obviously, if the demand is slowing, the disturbances should go away. R&D and IT as a percentage of sales, if you, Christian, could comment a little bit whether this will be an incremental drag in 2019 over 2018.
First, I would like to answer that we're not sure that demand would slow next year.
Okay.
What we said that the next quarter, you've seen our guidance, we stick with that guidance. What we're saying is that instead of just saying, "Hey, everything will continue forever," we're starting to prepare ourselves for all eventualities. Just to be clear about that.
Yeah, sure. The cost side.
I think what you have seen and heard today and the discussions we've had, I think you see that we are a little bit lean forward here, and we are really pushing some actions we truly believe in. Obviously, you have to chip in something, and we do that in the areas that you mentioned, IT, R&D, and obviously footprints. Kent mentioned this consolidation in China, for example, three factories to one. I think there are some 400 machines that has to be transported and moved and installed in a new place, obviously that takes some cost. These were the type of things that we discussed in the last call. When that is done, the cost is also gone. Of course, this comes with activities. We are confident that we are in control of this.
If the market doesn't support it any longer, we will take the actions required.
My final one is on price mix and fee-based pricing. You're now being able to sell more total solutions contracts as digitalization is spreading across platforms. Should firm up pricing longer term in an industry that is typically seen as being more cost-led. Can you walk through a bit more how the pricing structure works? Is this tied into you being able to offer performance guarantees, longer warranties? Just to understand how much pricing power can change over time.
Yeah. Well, it's about sharing in the benefits in a more equal way. That's happening. We are now aligning what's good for the customer, with also good for SKF. This is more about sharing in the actual benefit that we're doing than the pricing as such. There's a component of actually lowering the customer's costs and sharing in that lowering in a better way. Of course, you can understand, as this develops and becomes a bigger part of the industry, it makes our industry much more stable in its revenue streams, and also market share becomes more stable. The other hand, there is another component normally in this, which is a performance bonus, if you understand. One is the fee base on the operations, and then there's a bonus.
On the bonus, if the factories are loaded and our customers are producing a lot, that is a good extra income that you will get. Of course, if the factories are not loaded, well, it's more difficult to argue that if you're not producing that you should share with me that extra uptime. You're in a way becoming more of a partner also in the gain and the pain. That's, of course, the minor part of the positive in this. The positive is we know how to reduce the cost, we know how to give that benefit to our customers, and we also know how we're going to share in this, and this is what you will see going forward. I argue that this is a good way of becoming more stable in earnings over a cycle.
Hi, everyone. Thanks for your presentations. I understand the idea behind the fee-based model. I can see how it could work very well. In terms of your KPIs, what KPIs will you have in the business to try and monitor how it's going? Is there any way you can help us scale it today? I know that's difficult. What the sort of timeframe might be.
Yeah.
Is this something that is a slow burn over 20 years, or is it something that could credibly be a material shift in three, four, five years?
I think in a way we've already started to give you that. We have now told you how many assets we're now, and bearings we're now monitoring. We will start showing how this is growing. This is a good parameter for you to understand because of course, it's related to not the exact amount of sensors, but as this becomes really a mass thing, it will also show how this is growing in the marketplace. To go in and tell you exactly, because already today I argue that we are doing this in a way. We've been doing this since I joined in 1987. We called it trouble-free operation. It was services helping the customer improve his performance, the business model was still completely transactional. In a way, I think we're already doing this.
Now we're transforming the business that we have and the businesses that we don't have to these new models. I argue you will see this being real. I can't give you more than this at this moment, James. I'm sorry.
Can I just follow up with one? When you talk about the number of connected bearings, I don't know what the total population is. Or is it-
The total population of bearings?
Your bearings or of new sales or of installed base will be two very different numbers.
People say that there is somewhere between 10 billion and 100 billion bearings installed in the world. It is a very difficult number to look at.
please understand that.
maybe of your annual delivery of bearings.
Yeah. you know.
what proportion is connected today?
Yeah. You will understand. There are many bearing applications where this is still not, as you saw in the movie, this is not going to be the relevant percentage of how many. If you have something in a small electric motor, I believe it's going to take a while before we're monitoring all the small electrical motors that sometimes have a good mean time between failure without even looking at them. You have to understand, we're talking about the end users in all kinds of industries, it's small and big we're talking. We've been talking about paper mills, steel mills, cement plants, if you have, in a municipality, a water treatment plant, for a distributor to go out and start measuring the pumps with a QuickCollect, that's already starting to be able to work with a fee-based model with a municipality water treatment plant.
You will see this big and small. Of course, as you see the numbers of connected bearings increase, you can understand that it's really happening. As I said, the race is on.
Hi, it's Andre from Credit Suisse. Thanks for all the disclosure and all the access. I'll try with a couple of questions as well, please. Firstly, on your point of the industry being able to price up, can we just hypothetically think about 2019 as maybe a low growth environment? Are you confident that you'll be able to price up in that?
I think this is interesting, this story. I think we have proven already that there is a possibility to differentiate your offer, that there is a possibility to work with a margin improvement during the last four years. I see nothing in the marketplace during 2019 at this point that will, as I see it today, that will change this.
Okay. Can I just, on manufacturing side, looking at Kent, if we take all those initiatives by geographies where you say this is done, this is being done, this is planned, and you put the numbers behind them, that you don't have to tell us, but just trying to aggregate this into what this has yielded as a savings or is yielding a savings in 2018 versus what that can be in 2019 if you implement everything you're doing as planned. Is there any way for us to gauge, A, if it's different and what level it is?
Maybe I'll start. If you're not talking about year by year, but if you take it and as we take the investment decisions for world-class or whatever investment, what we have said, we have four to five years payback on these investments. They are good ones for us. Which means, you heard ask that also, how long time it takes to come up to speed and so on, and we say that we are in a learning curve. This is new technology. It takes one and a half, two years until we are up to speed, which means that we should get pure cost savings in three years, we should get the money back with a time lag there to get. That's the magnitude we are at.
It should be safe to model it with the cost taken with that three to four-year pipe payback that gradually becomes three years rather than four years, and then accelerates.
Four to five years. You mean if we get quicker on installing it and shorten the lead time to get it, of course, we will go in that direction. Still reality is so that it will take certain time until you get up to speed and get the volumes and get it tuned in. That's reality.
Thank you. Just last one on REP on connected devices. On that example where you could've sold four bearings to replace the failed one or repeated failing one, and you switch it to fee-based, do you know what your revenue would be as fee-based over that period versus selling four bearings? More importantly, what the profit would be?
Yes.
I know it's very specific.
Yeah. All contracts are different, all negotiations are different. Yes. It's not so that we go in and make an agreement and a commitment without knowing what we're doing. Yes.
You can confirm that the profit from selling it as fee-based over those, I can't remember the time scale, five years-
12 months that was actually.
My apologies. Yeah, 12 months, you would generate more profit on that fee-based contract than you would've done than selling four bearings.
Yes.
It's obvious. We will, of course, share benefits with our customers. This is a little bit like we said in this, it's about aligning our interests. When we have a fee-based contract, we will do everything to improve our customers' costs. Because it's good for us and it's good for the customer. As these contracts evolve, like you saw the Fibria case, it will be more obvious how the customer also shares in this work over time. It's also a way of actually sustaining the possibility to improve your customer's cost at the same time as you're having a fair share of that.
It's Peter Reilly from Jefferies. Can I ask about ceramic bearings?
You weren't talking about it five years ago. Is it a niche business that's going to stay niche, or does it become much bigger? If it becomes much bigger, does it have a really big impact on your manufacturing footprint? I imagine almost all your factories today are essentially built for steel bearings.
Yes and no. First answer is, of course, it is. There are so many benefits that you heard a little bit through Victoria when she was talking about ceramic bearings, how it prolongs life. You can work with contamination in the bearing without it failing as quick. You can work with minimum lubrication and still having the bearing work, and even contamination in the bearing has a less effect. If all rolling elements are ceramic, you have an isolation that's complete. No electric current through the bearing. Why have we gone in and we have now a powder? We're gearing up for actually having the full value chain, which we already have, but increasing the full value chain of making rolling elements in SKF is as we can drive the cost down of this, basically, theoretically, most bearings could benefit from this.
Today, when you're looking at this compressor that Victoria talked about, it's a relatively high-end, and it's a no-brainer. Can you imagine if we could drive down the cost of this, how this could be a really common and a fantastic performance improver in most bearings. That's why it's so important.
Yes.
Second question. No. Why? Because it's a drop-in. When you're loading and assembling the bearing, if you do that with a ceramic or a steel bearing, there's no re-engineering of any factory.
No. Even the factories you saw today, it's very difficult to make ceramic rollers in that size, but you don't need to put steel rollers in, you could put a ceramic roller in as well. That is the factories already.
It's the rolling elements.
Yeah.
It's the rolling elements that are ceramics. The rings are still steel rings.
Yes.
And we-
Could you hazard a guess about what share of your business could be ceramic in five or 10 years? Or is it so early that no one's got any idea?
You could say the following. It depends. It's like we said before, today, we've already reduced the cost of our ceramic bearings during the last four years. We have actually taken a lot of, and expanded our business in ceramic bearings. You can understand, on the high end, it's already needed. The more we can, with engineering, reduce the cost, we can be more competitive in a much, much larger portion of it, and it can basically, theoretically, be in almost all applications. If we could, once in the future, reach steel and ceramic rolling elements at the same cost, well, it could benefit all bearings. I don't think I will see that, though, if I'll be absolutely honest with you. That we will be able to reduce the cost much further from where we are today, we're absolutely convinced.
Which begs the sort of final question, what is the cost difference today?
It's all over the place. We have some very large rollers, they're really expensive to make, I would say it's very big difference. There you have the real high end, and the more you go down, the differences go, but there's still a significant difference. That's why we are betting on the whole value chain, to be able to. It's not really the raw materials, it's the process.
Just behind you.
Thank you. Gaël de-Bray from Deutsche Bank. Two questions, I guess. The first one is on your M&A priorities. The chart you showed with some of the priorities you had by segment, by geographies, and so on. I was a bit curious to understand why, in particular, you would be interested in getting bigger in power transmission, firstly, and then in Japan too. That's some of the two things I've noted.
In Japan, SKF has a relatively. We have one manufacturing base for machine spindles, actually. That's what we're doing. We're doing also lubrication systems. In today's SKF, we are an importing country to Japan. Of course, as we leverage on our new technologies, there's no reason why we shouldn't have a bigger presence in Japan. Depending on what we can find and how it is, I think this is still an opportunity. Japan is still going to be a large market for anybody in rotating shaft for the foreseeable future. When you say power transmission, you mean elect.
Rail?
Yeah.
The powertrain.
Powertrain. Powertrain, of course. I mean, the powertrain, if you look at, there's still going to be gearboxes in electrical vehicles, probably. There's going to be a sort of a mixed view on it. When you're looking at certain technologies around that, it's still interesting for us to be looking at technology to be leading within the electrical powertrains, for instance, going forward.
Okay. Can I have a second question? Completely unrelated, I guess. Given how important it seems to be to get access to more and more data from your customers, what can you do in reality to accelerate the process so that you can get more access? Well, a stronger access and easier access to some of the data from connected bearings or some of the connected machines of your customers.
What I showed you there were some example. Of course, we can't wait until there is an SKF sensor on every equipment. There are other sensors as well. They may not pick up the same things, but you have enough of them, plus process data, you can draw conclusions out of that, too. From already installed sensor base with some machine learning and artificial intelligence and our knowledge, we can make sense out of data that otherwise would not have been possible to make sense of. That's one accelerator besides the ones that I showed you. We didn't really talk about that, there were a couple of devices like a connected grease gun and a connected little grease container. Those are also information points.
Even if they don't measure vibration, they tell you something about the machine that together, again, with process data, will be very valuable. Connected is not always the same as vibration. That's also important to know. Third, we collaborate, as we already said last Capital Market Day, we collaborate with process control system companies. Honeywell, but also with Siemens, you heard on rail. We collaborate with ABB in some process control systems as well. That is a way for us to get process data. What do we give to them? We give data around the rotating shafts, data and analytics that they don't have. This is another way of connecting more points. Then keep working on these sensors, connection points, the handheld devices, and make them easy and accessible for people.
Then we also have data already. We have been monitoring bearings for long time when it comes to-
'87.
Since 1987, basically. We have data that we can, with this new SKF Insight, we can reuse for certain applications to actually teach our algorithms as well.
What's the average difference between a non-connected bearing and a bearing with connectivity features?
In what sense?
In terms of the cost for the customer.
The good thing is that there is a possibility, as we have shown you today, in certain applications to put the load sensing, for instance, in the roller for large size bearings, et cetera. If you look at the devices that Victoria has shown you, they're not even on the bearing, right? They're on the housing.
You can measure the vibrations in the rotating shafts without actually having to have a sensorized bearing. This is the beauty of it. We can retrofit it. You saw the Insight for rail, for instance. I mean, that's a device that we're already putting on existing trains, and then just go. This is the beauty of it. There's no need to sort of re-engineer the application to be able to work in this new way. Cool, huh?
Mm-hmm. It is.
Hi, Tandy O'Donoghue from J.P. Morgan. It is probably just a quick one, but it might be quite a broad answer. In terms of what you see your competitors doing on this similar sort of direction, because this feels like obviously an extension of a theme, but potentially quite an exciting one. How much are you seeing-
It is exciting. Not potentially.
Definitely an exciting-
Come on, man.
What are your competitors doing? I guess if they're not kind of following you down this path, do you have any sort of insight into why?
I think that this is difficult. As you see, many of these devices that we show the IMx-8, for instance, it's just a development that we've done during the last four years. We have the IMx-1 coming now, et cetera. I think this is like many talk about digitalization, but we're all starting. I think that we will see everybody jump on this bandwagon very soon, and I think that this is the way forward for everybody. I have no illusion that we will be alone in this market at all. I'm just saying, it's my personal target to be the one who runs the fastest now in this race.
Hi, guys. Tom Swift on Credit Suisse. I just have a couple of questions. Bernd, I think this is for you, firstly. In light of kind of the softer picture we've just recently got from Detroit, and what we're hearing from some of the German suppliers, how are you thinking about the automotive industry in 2019 and maybe some bit of color on China? Then, Christian, if you can just give me some guidance for what you're thinking about net leverage, not as with respect to equity, but net leverage through the cycle as including kind of cyclical peaks and M&A. That would be great. Thank you.
On M&A and what we say that and what we showed as where we see the opportunities, I think hopefully we've been clear on today that the agenda we have and the growth that we have as targets, we are going to deliver with the portfolio that we have today. That's what we have presented to you. I mean, M&A is not replacing anything. It's simply hard work on what we have in the portfolio. We have some areas where we have an interest. Obviously if things comes up there, some of the companies that we work on technology together with, for example, we will acquire. That's also for sure. It will not be anything. I would say you have seen our cash flows, you know it. You know the free cash flow we generate. We expect to continue to do that.
It's out of the free cash flow. That's what I see when it comes to M&A.
You from the banking side, you can sleep well.
Maybe before Bernd, on the automotive, we are guided for the fourth quarter on that, and we don't guide for a full year of 2019. You know that. Just as an introduction to it.
But-
Please, Bernd.
Not much to add here. I think we are on a high side in the automotive business. We see maybe a flattening out or maybe even a slight decline could happen now. For sure, the automotive companies worldwide are preparing themselves also for the future. You see news every day there, what they do. The competition there also gets tougher. There is new players coming up, especially in the new energy vehicles. The old players have also to prepare themselves for it. It is a big change happening, but I don't see that so much for 2019.
Hi, yes, Matt Spurr from Exane BNP Paribas. I had two questions as well. The first one was, I know you've said that you don't want to speculate on whether there is a downturn coming or not, but we had a modest downturn in automotive and general industrial in 2019. A few low single-digit top line declines. Where would you be upset if margins in the two divisions fell below? You talked about flexible cost base and just trying to come at a different angle for where your downside protection kind of lies. The second question was just around you flagged a step up in investment generally. Just wondering whether you could give some color around whether these are sort of investments you see genuine paybacks in a few years' time.
It sounds like that with the footprint stuff, but how much is just a sort of a legacy of underinvestment?
No.
I know you had a supportive CEO for a few years.
All of it is upgrading. I mean, there's an assorted crane somewhere that after 25 years, you need to replace because otherwise you can't continue to operate for safety reasons and so forth. I would say the absolute vast majority of our investments have good payback. It's not those kind of legacy things that we're talking about. I think that if you look at what we're trying to do, without answering, because I'm not going to answer you, I will always try to make anybody who's short in SKF to lose money. That's one of my pre-prime objectives. We will always try to do that. If you look at SKF, I think honestly, in downturns, we are quite good at reducing costs and keeping our margins on a relatively good level. We always have a very strong cash flow.
If you look at SKF's forte, it's relatively stable margins, relatively stable volumes, and very strong cash flows. From a cash flow point of view, we're not a cyclical company. We're actually a very stable, cash-generating company.
Okay.
I will always be upset. When anything drops, I will be upset, I'll assure you.
Okay. 3 questions, please. First it's Andreas Koski from Nordea. The first one is on your presentation. You mentioned, Alrik, that you have gained market share recently. Could you please elaborate where you're gaining market shares?
No. What I'm telling you is, so to speak, that I think we're defending our turf in the marketplace. There are some places where we have increased a lot, and there are some places where we've maybe, for one another reason, lost a little bit. This is a very vast market with hundreds of thousands of different segments and customers and so forth. What I want to say by that is that I think we're holding our turf well in the marketplace, and we're well-geared to growth. With our innovation and the activity package here, I hope that we have convinced you that this is what's going to happen, that we're going to defend our turf and expand our turf.
Second question is on your EBIT margin. You are close to 12% now. You have a 12% EBIT margin target over the cycle.
At the peak of the cycle, which we are at right now, you should probably be at 13% or 14%. From here, we should see in the next upcycle, hopefully, we should see upside to margins, either in the Industrial division or in the Automotive division. Where do you see the biggest potential when it comes to margin improvement from where we are this year?
Yeah. I think you're absolutely right. Of course, we will always try to improve both the growth and the margin equation, because there's actually an equation there. You can take more competitive business. It gives you a little bit, maybe a lower margin for a while, but you are getting very good cash flows and so forth. On the other hand, you differentiate yourself, you get a better capturing of value, and you can create both growth. Of course, in all areas, I see that there's potential. All areas. It's always going to be around our ability to deliver on this one. I hope that we have convinced you by also showing you what we've done so far, that we have both the will, the determination, and the skills and the resources to actually do it.
The last question is on the cost development. A couple of years ago, you guided or talked about that the general cost inflation will be around SEK 150 million per quarter or SEK 600 million-SEK 700 million per year. Now in the last three quarters, and it looks like it will be the same in the fourth quarter, we have been at SEK 250 million-SEK 270 million per quarter. Would you say that that is a new level for the next coming quarters or years, or do you think it will come down to the SEK 150 that you guided for a couple of years ago?
Yeah. Firstly, I'm not going into mathematics, but the base is not fixed, since the business is growing, numbers follow. I'm not saying that we have a 40% increase of inflation. That I don't do. You know that, when you run on a high level in the cycle, and you get extra cost, you have logistics costs that are more expensive than on an average level. You have a lot of these things, and we guided for the energy price levels that have come up also after the summer and so on. I cannot say forward where these things will come and depending on where the overall business climate comes. It is what it is. We have compensated it. I think we managed this overall well in terms of taking out costs to compensate for what we get.
Of course, there's costs. You have seen. Look at what Kent has talked about, how digitalization will help us to move and make our operations more efficient all over. Of course, there's fantastic opportunities going forward to be more lean and agile. Definitely.
Yeah. The reason why I'm asking is that going into next year, I expect a slowdown, even if you maybe are not doing it.
In Q3, Q4, you will be able to offset the cost inflation through growth.
Going into Q1, Q2, you might not grow as much, which will make it more difficult to offset the cost inflation. That's why I'm-
What's going to happen with the steel prices in your equation?
Yeah, they will definitely come down.
Okay.
There is a lag, as I understand it.
Okay
before it impacts your P&L.
I promise you, we will take the actions required.
Thank you. Thanks.
Okay. Thank you very much, ladies and gentlemen. Again, you've come all the way to Schweinfurt to be with us for this last night and today, and I tell you, we are extremely grateful and humbled by the fact that you have decided to do this. We hope that it's been worth your while, and we are, of course, through Patrick. Where are you? Yeah. Through Patrick, we're continuously always ready to continue our dialogue about SKF and so forth, and we hope that you have had a good day. Thank you very much. Thank you.