Welcome to SKF.
We're pleased to welcome you all here today inside SKF's studio at headquarters for the first ever virtual edition of Capital Markets Day for the year 2020. SKF recently relocated to this building, which was once the central warehouse, and it's been completely refurbished for the new headquarters, transformed into a state-of-the-art, energy-efficient office space, even recognized by local architects as well. Transformation is our theme of the day. We're going to be talking about the different focus areas of transformation across SKF to really make it a stronger company. Transformation is nothing new for this ever-evolving company. It's been a company in transformation since the days of Sven Wingquist. Change is in their DNA. Welcome. I'm now joined by President and CEO, Alrik Danielson. Welcome.
Thank you.
2020 has been a big year of change for all of us, inside, outside SKF, for the entire world. Today, we're going to focus on structural changes you've been undergoing the past few years and going forward. I know you have four focus areas that you're focusing on. The first one, let's start with that, transforming how we bring value to customers and how business is done. What does that mean?
It's incredible to see how digitalization, automation is changing the possibility for a company like SKF to provide value and also capture value. I joined SKF in 1987, and already at that time it was a great company, and we were focusing around the rotating shaft. The rotating shaft is probably the world's most common industrial application. Everywhere where you are, there's a shaft that rotates, and wherever there's a shaft that rotates, SKF has an opportunity to provide value.
When I joined as a young man, people were saying, "I work for a company in the truck business." I said, "So do I." They were saying, "I work with dishwashers." I said, "Oh, so do we." They were saying, "Well, aerospace is important for my company where I work." I would say, "Hey, so it is for mine." When you look at it's incredible. It's so exciting because we're in all these industries. SKF groups them into 40 industry groups, but honestly, it's much more. Now, what is the difference? We've always been around how can we provide value to the customer for their specific applications and so forth, but with digitalization, it can be done in a new way.
We can truly adapt ourselves rapidly to reduce cost, to improve performance, to improve environmental impact, so reduce environmental impact, and in that way, doing it in an efficient way like we never could before. That's what's so exciting with the changes that are coming. This is what we've been working on during the last years, to adapt ourselves and truly try to be in the forefront of this change.
We'll hear more about that, concrete examples, throughout the afternoon.
Yeah.
If we move on to the second area, which is new businesses and future technologies.
Yeah. You can understand, around the rotating shaft, there's all these opportunities, but it's not only the bearing, it's not only the seal, it's a lot of things around it. We are now focusing on truly bringing to our customers all the relevant technologies and businesses that can help them in their machines, making them work. Lately, what have we done? Well, we have acquired RecondOil, which is a technology that cleans oil. If you can have absolutely clean oil in a machine, you can understand debris, dirt, is one of the main reasons why a machine fails. Here, we have an opportunity to eliminate that. Most importantly, we can then prolong the life of the oil, meaning that you can also reduce cost and reduce environmental impact from that aspect as well. It fits very well into this, and that's what we're doing.
AI, you come in with artificial intelligence, which is basically a possibility to, with a collective knowledge of what it means, a certain vibration or change in temperature or energy consumption in your machine, and have the machine, the AI machine, tell you what's wrong. Many can measure. Some can analyze. Very few can also fix the problem. SKF is now in the position with these technologies to monitor, analyze, and then fix the problem. That's why I say SKF is really in the pole position to do this, to create mean time between failure. What can we do then? We can go into these new business models, like fee-based business models. Of course, that's one of the few ways that you truly align the interests of a customer and the supplier when you go fee-based.
Today, there's always a sort of a sub-optimization in it. We started to talk about fee-based business really massively six years ago. Honestly, I was part of making the first fee-based contracts already in the beginning of the 21st century in Brazil when I was there. I know this works. What I see now is that customers are truly understanding that this is the way forward. All these technologies will make this into a reality and will give SKF the possibility to create this value and capture this value. We will continue to invest in this. One of the new things that we're doing right now, which is just coming out, is, for instance, laser cladding, which we have now started to see we can crack that nut. What is the problem?
Today, you have a bearing coming in, we want to remanufacture it to reduce cost, to improve the life, and to reduce environmental impact, but we have never been able to add material. When a bearing comes in and there's been material removed because of some misalignments or some problems, we've never been able to add material before. Now we're starting to see that we can also add material, increasing immensely our possibility to provide that kind of value for our customers. Again, improve performance, reduce cost, improve environmental impact. This is so exciting. This is what we have been doing during the last years, and we will continue to do so. There will be new, more, and interesting technologies, and maybe also acquisitions in this respect that we will be doing.
I know Victoria actually will give us some examples.
Absolutely
Talk a little bit about that. If we move on to manufacturing then, and Kent will talk more in detail about that, what's been done in the development of the factories?
Well, you can imagine, if we now have this ability to interact in this new way with customers, where we now have these tools, and I forgot to say that, we actually have these enormously interesting tools to be able to digitally redesign a gearbox or a machine and know for a fact that when we make the prototype, it will actually work. We now have to be enormously flexible, right? We now have to be able to supply the customer with exactly the kind of products that the customer needs for that specific application that we're talking about. Before, in manufacturing, there was either you had costs, and then you made large series, or you had flexibility, and then it was very expensive. With modern manufacturing technology, you can have both. This is what we're doing.
We're taking that opportunity to bring together then this way we work with the customer into the value chain in SKF and to our suppliers to be both flexible and having that flexibility with a very competitive cost. Before it was always, "We have too many variants." Well, now we can have more variants because we know how to do it without adding cost. This is what we're doing. If you go down to the factory in Gothenburg here and you see how we have completely transformed the way we manufacture these bearings, you will understand what I'm saying. Of course, it also means in other cases, like for the automotive and for electrical motors and so forth, they're long series. There we're going for the kind of automation which is different.
Yes, there's long series, there's machines that are completely just set up, and they're working very efficiently. Tool changes are being made automatically. The machines are adjusted automatically, so we can reduce all variations in the process using these modern technologies to have state-of-the-art manufacturing. What does it mean then? It means, of course, we need to consolidate. We need to change. We need to maybe reduce the amount of sites we have. It also means that obviously it becomes Americas for the Americas, Asia for Asia, and Europe for Europe because that's the way you can be close to the customer and truly have this rapid possibility to react to the customer's needs.
There you talked a lot about way of working in your manufacturing, changes made there. I'm thinking not in the factories but the rest of the organization. How are you changing the general way of working across the organization?
Well, you can understand, in the old world, when change was not so fast, you could actually have divisions and matrix organizations and rigid sort of chains of command because it was okay, because you didn't have to be this quick that you have to be today. Today, you have to be very fast, and you have to respond very quickly to the customer's demands, so you need a completely different structure. You need actually connect the whole value chain, but actually allowing the people to make the right decisions within the much leaner and more direct and simplified structure. It's about empowerment, it's about accountability, but instead of control, it's about follow-up. It's about actually letting people go, making them do things. We talk about the owner's mentality.
We want people to sort of, "What would I do if this company was mine?" This has been something we've been driving now for the last 6 years, and it's starting to happen. That's why so many things are actually happening in SKF now. People ask, "How could you adapt so quickly to the swings in the marketplace?" People are truly empowered to take the decisions. It doesn't mean that it's just do whatever you want. No, it's clear strategy, clear understanding where we're going, and a clear follow-up, but you're empowered to act. It's wonderful to see. I'm not saying we're there yet. This is something that we need to do continuously.
What I thought was going to take, for instance, when we talk about creating remote teams, working together, having a different way of interacting with customers, maybe more digital and so forth, what I thought was going to take 10 years has now taken a year due to this crisis that we have. Now, when there's not been any possibility other than using modern tools to connect, we've actually done it. Of course, I don't say that we will stay as we are. We will travel more when things normalize, but we've learned how to use these tools to be efficient and innovative despite the fact that we are not seeing each other and necessarily being all at the same spot all the time. What does that mean? It means productivity. It means speed. It means adaptability to the customer needs.
We've taken a big step during the previous five years. During this year, we've really made an enormous advancement in this sense.
Yeah, because I'm thinking it can't be easy. I know you're 40,000+ employees.
Yeah.
For a company of your size to change this way of working.
Yeah
it's no short quick fix.
No. We've been trying for six years now sort of talking about this. We need to change. We need to work in this way. When I started, we were 50,000-ish kind of company, and now we're a 40,000-ish kind of company. I really hope it's not about being less. That's not an interest per se. I hopefully now think that we will be able to grow in a way that we can stay this way. It's going to mean that, of course, a lot of kind of jobs that today have been seen as normal will not be there tomorrow, and we will be doing other things instead. We will become more efficient, and we will use the tools and the ways of working. Deep inside, when people get used to it, they like it. I say, things easy.
Before, it was very difficult sometimes to get a complete customer decision group together because everybody could not meet, et cetera. Can you imagine now using modern tools to do it virtually, suddenly everybody's available, and you can be in much more places. This is why this remote presence also when we talk about how we support our customers is so important, meaning today, we can have an expert sitting here in Gothenburg supporting a customer wherever they are in the world through actually being visually there on digital connections, actually helping the customer on-site even though the expert is not there. Can you imagine what kind of improved efficiency this means? Right now, the customer is there. They're waiting for this. They're asking for this, and this is what's so exciting.
You mentioned briefly earlier about electrification, EVs. I'm curious, how much will that development in the electrification business do for SKF business?
It's a fantastic opportunity, and we already see it. First, I just want to try to once and for all say, SKF is predominantly an industrial company, so the automotive is only a minor part of the SKF business. Having said that, we're leaders in several fields, and the fields where we're leaders in the wheel bearings and the suspension bearings and things like that, they will remain, and we will continue to be that. Here, we've actually now done big changes. We're taking the last parts of it. We're integrating manufacturing in the SKF manufacturing community, so to speak, also in the automotive manufacturing so we can work together here.
We're streamlining and creating a very focused team, taking away a lot of waste so that we can be this innovative, fast company to help our customers in this transition towards the old powertrains to the electrification. With what we're doing as far as sealings, bearings, ceramic rolling elements, engineering, simulation tools, et cetera, we are absolutely in a pole position to support all customers in this like never before. I see it. From my point of view, we're already bigger in EV than we are in traditional powertrains in many respects. It's a fantastic opportunity. Here, this is not just a bearing. Here, we're talking about electrical motors that are sealed for life and with very high speeds and high demands. This is very high tech. I'm really excited about this.
If we look then at this overall transformation, obviously, it's nothing new. You've undergone many changes for several years. What are the effects of this transformation thus far?
Well, you can imagine, if you look at it, this is an opportunity for us like never before to help our customers to develop technically, to develop in their environmental footprint, in their innovation. It's a possibility for us, all these things that we've talked about, to become as lean and as efficient as ever before. You can imagine that when you add this together, you intuitively understand, wow, SKF, as they move on this. We've been not talking so much about what we are going to do but more about what we've done, and now I feel confident enough, and you can see it, I think, in our results, that we're actually doing this now. It's not like I'm saying this is something we will do.
This is something that we're actually doing. From that point of view, well, you can understand that we have very ambitious targets for ourselves.
Yes, those ambitious targets. I know Niclas will go into them more in detail. Tell us why have you updated those?
Well, when we set our targets in 2015, we understood at that time that reaching 14% EBIT margin was not in a reach within the next coming few years. We needed to be something that we could actually feel that we could reach. If you look at our EBIT target now, basically you can see that we've already reached it more or less, not through some kind of one-off, but actually gradually, working our way up towards it. If you take all the things that we've been discussing now here, and all the things that you will see in the details, when you sit and analyze SKF, you will understand, wow, SKF will probably overshoot its current targets. Of course, that's true. We are absolutely convinced that this is going to be like that.
What we said then is, it's not that we haven't had these targets, it's just maybe now then it's time to go in and say, well, growth. Yes. We haven't, so far, reached our growth target, but with the way we're working now, with new technologies this way, we're confident, including acquisitions, that we will be able to grow faster than the market. EBIT margin. Of course, if you look at what we're talking about, how we add value, capture value, and we're already basically at the current target, of course, there's more to come. When you look at what we're doing and you realize the investments, the effects that we will have, et cetera, even if you look at some pricing competition, it's clear that SKF will have an improved profitability in the forthcoming future. You look at the targets around the balance sheet.
I mean, cash flow has always been our forte. We're going to continue to ride cash flow, and we say that. You look at our debt ratio. We have worked very hard on reducing that debt that we had a few years ago, and we will continue to do so, and all this to give this commitment that we will have the money to give good dividends, to invest in our business, and in new technology, make acquisitions, and stay financially strong. You look at the last point, the new one, environment. This is a statement to say that we put them into our main targets. Why? Because it's so central, not to only to what we can do for SKF, but what we can do for our customers. From my point of view, that we will reach carbon neutral by 2030, I have no doubts.
What blows my mind is when I think what we can truly do for our customers and their environmental targets, how they can reach them. This is what makes us so enthusiastic around this that we say, "Hey, we better put this up on our agenda to be seen by everybody." Let's be clear about it. It's one of the reasons I think that we're here, right? To do this.
Very exciting. Okay.
Thank you.
Let's go over to some questions now. I'm sure we're going to get lots of questions about these financial targets and more. Let's get to our questions now. Alrik, our first one we have is how will you achieve a higher growth going forward than in the past? This is one of the targets you've not met in the past.
Correct. If you look six years ago, when we started this strategy we're on right now, it was more of trying to focus on the core businesses. We divested, we strengthened the balance sheet, we did all the things. We were not really in an acquiring mode. We were also in a way of getting our act together around the rotating shaft. Now, we have the technologies, we have RecondOil, we have our fee-based business models, we have our services. We're really starting to take market share on application-specific offers, and we're ready to acquire. Look at our balance sheet. I am confident that organic growth, together with acquisitions, we're now in the position to actually reach this target, and that's why we have it there.
Okay. Next question, this is from Daniela Costa at Goldman Sachs. Daniela wants to know, Alrik mentioned acquisitions as possible in his initial speech, but the net debt to equity target is lower. Can you make a bridge between these two, please? Does it signal that M&A is more than bolt-ons and less about large deals?
If you look at our new target, yes, it's lower, but we've taken out the pensions. The pensions are closed. It's a fund. We cannot really influence that. What we've said is that we have lowered our targets, but it's actually excluding the pension debt of SKF. There's still plenty of room for us to, with the kind of cash flow we are looking to generate, to give dividend, to invest in our factories, invest in innovation, and continue to look at bolt-on deals, yes, but also bigger deals. The truth is, of course, we're looking at strengthening ourselves around the rotating shaft. That's where we see our possibility to have profitable growth.
Okay. Do we have any further questions? One more on the way here. Okay. We don't have a name with this one, but can you say what the average revenue growth in the fee-based business was in the last two to three years, and what we might expect in the next five years for fee-based revenue growth per annum?
What we're looking at is, of course, as you realize, we started to institutionalize this understanding that we need to go for the fee-based arrangement with our customers. At present, we're at about SEK 1 billion on an annualized basis. We're selling today, truly fee-based arrangements, SEK 1 billion. There's a lot of businesses that are coming around this, but as you understand, this is one of these true ways of actually eliminating the conflict of interest between a supplier and a customer, where both are working for mean time between failure, eliminating costs, eliminating waste, because both earn. What I see is, from six years ago, when we sort of started to push this aggressively as a corporate sort of strategy for the future, we're now at SEK 1 billion, and we're going to grow that fast. I see it coming now. We're ready now.
We have the technology to, in a cost-effective way, interact with our customers with condition monitoring. We have our AI solutions to sort of massify this and grow this strongly. We're ready from an application engineering point of view, and we're ready to do that from our manufacturing footprint and so forth. That's how you should see it. It's SEK 1 billion now, and it's going to grow. I'm sure that in the future, and it's not only about SKF, most of businesses to large customers will be, in one way or the other, fee-based arrangements.
Okay, Alrik. One more from Gael de-Bray, Deutsche Bank. "How shall we think about the margin target for industrial versus automotive?
Well, I think that you should look at it from a situation that it's more difficult in the very large businesses with high volumes, et cetera, to have the same kind of margins that you can have in a more fragmented business. I think we all understand that. It's also true, and I know it. Before rejoining SKF, I was running a 15% EBIT company that was basically all automotive. I also know that if you have the right technology, if you have your costs under control, and if you work with innovation and work with following the trends in the marketplace, there's, of course, possibilities to have better margins than we've had in the past, also in automotive.
What you see is now, and I was saying that when we were talking just now, that this is actually what I see now with the last push we're doing. Yes, they will be lower, but they will be better than we have had so far.
Okay. One more. James Moore from Redburn. Hi, Alrik. It's James Moore from Redburn again.
Hello. Yeah. Hello, James.
Could you rank the growth opportunities from RecondOil, fee-based EV application, and any others in terms of size and speed? How fast are they growing?
If you allow me to dream a little bit here, James, and look at it. I have not met anybody, when I come to a customer and talk about RecondOil, and it doesn't matter if it's a big steel mill or whoever it is, they're all super excited because it's smack in there, right? You help them to reduce the contamination in the oil. You help them to lower their costs. You help them to improve the performance of their machines or whatever they're doing, and you help them with the environmental issues that they may have. RecondOil is one of the things that is mind-blowing. I don't think, of course, I'm not suggesting that you should think that it's going to happen just overnight. We acquired it one year ago. It's installed in Italy, we have two installations.
We have it in Latin America, we have it in China, we have it in Germany, et cetera. We have the first real external customers. We have many in the pipeline. This is going to be a fantastic addition too. It's not only about RecondOil, it's also about selling the whole SKF sort of value proposition. It has a fantastic opportunity, and I don't want to exaggerate, but I think it can be really important in the decade to come. Fee-based, basically, if you look at fee-based arrangement, do you remember when you paid for a telephone call and every call was sort of costing you money? As opposed to today, you're in a fee-based arrangement, it seems so natural, nobody would want to go back to where you pay for-
Seems so long ago.
Yeah. This is what's going to happen here, too. I believe that if I were running a paper mill or an automotive factory or anything, if I could have a fee-based arrangement with my key suppliers that really truly have an impact. If they don't have an impact, yes, let's be transactional. If you truly have an impact and can do something for me around, for instance, a rotating shaft, why would I not go fee-based?
That's when the whole focus of the customer is going to be to reduce my cost, my consumption, as opposed to having this, where the more I sell, the better it is for the supplier, and the less I buy, the better it is for the customer. I believe that as we can now offer this in the way we are, and as I said, we're at SEK 1 billion, and we see the potential now that people are really hooking on. This is also very big, and in the future, I believe, and I'm talking, of course, beyond our planned strategy horizon now, but I think all major businesses will, in the end, just like in other businesses, become fee-based. EV, clearly, look at it. There's such a difference between EV powertrains and many others. These are highly sophisticated motors. They're sealed for life.
They're supposed to run 2 million km. You really have to be a development partner. You are truly differentiated. If you look at the offers to an EV customer compared to a, let's say, more normal electrical motor customer, it's completely different. As the EV drives grow, this is, of course, a fantastic opportunity as well. James, when I joined SKF in 1987, my assessment is that the bearing was more mature, or the rotating shaft around was more a mature business with less changes and less opportunities to create value and capture value than it is today. These areas that you mention here are smack on. All three of them have fantastic growth opportunities going forward.
Great. We got all that covered. From Olof Cederholm at ABG Sundal Collier, can you talk a little bit around potential acquisitions? What type of technologies are you looking for, and are any regions more interesting than others?
Yeah. If you look at, if we take that question and make it in parts, if you look at regions, it's clear that, as we have said now for some years, we're looking at have a region-for-region kind of supply chain. You can intuitively understand that as automation become a bigger and bigger part of the supply chain, and that the cost of labor is less of an issue, well, transportation, closeness to the customer, et cetera, is what's going to make the difference. Of course, things that can give us this kind of regional balance is of interest in our current business. We're looking at technologies around the rotating shaft, just like we did with the AI acquisitions we have done, and the acquisitions around technologies that support us around there.
Of course, if there's some interesting cleantech technology, even if it's a little bit further away from our core, I would be so interested in this because I truly believe that SKF, with our global reach, we could truly make a difference on the cleantech arena, and we want to make a difference on the cleantech arena.
Okay. Next question. We're getting lots in. From Kunal Thanvi from Banyan Tree Advisors, how important is the Indian market for you from both a domestic and export perspective?
Namaste, Kunal. Intuitively, we all understand that India is an enormous potential just by the sheer size and the fantastic people that lives in. I visit India a lot. Well, I used to. Now I hope to soon be able to come back. I'm so impressed of what's happening and how India is really poised to make that industrial and economical development that we all know is in there. We're investing a lot in India now. We are looking to be really part of this, and India is one of the key markets for us going forward. I'm so impressed, I must say, with all I see every time I go to India, visit the customers over there in the truck markets, in aerospace market, in whatever. You see it there in general machinery, in construction equipment, et cetera. It is really fantastic.
India is up there on the top of the agenda.
Okay. Next question, Klas Bergelind from Citi. Just to make it a little bit easier.
Yeah.
Can you see it, Alrik?
cash out versus higher CapEx, yeah. Well, if you look at it, you could say that one third when we do a project like this is cash out and two-thirds is CapEx. Please understand, all of these investments are highly profitable. It's something that would really drive our possibility to be more competitive but also strengthen our bottom line.
Okay. I think we'll wrap this section up.
Thank you.
with you, Alrik, and you'll be back again later.
Thank you.
for our summary Q&A. We'll just get set up for Victoria van Camp, and we'll see you all again shortly. Thank you.
Thank you. Thank you for good questions. Thank you very much.
Welcome, Victoria. We heard about the Orbital case. Now we see on this picture you have the huge hub unit, which is 17 tons of iron that you've got under the ocean there with these tidal turbines. Tell me, what are the risks?
The risks here, everything can break. To minimize that, we actually build a digital twin in the computer of this entire assembly with bolts, with the inside, with everything, and we load it up so that we do know that it's dimensioned right. That is SKF's engineering in real life. Really cool.
Very cool. Okay, let's hear more from you then. Thank you.
Thank you, Stephanie. We're not here really to talk about Orbital in the continuation of this. We will instead talk more about what's going on in the process industry and what is SKF doing when it comes to providing reliable rotation to our customers. What you see here is a paper machine. It's running, and it's full of bearings. There are sensors, there are seals, there is lubrication. The key thing here is that that machine is running. It is a picture of reliable rotation. SKF has these contracts all over the world where we get paid in the form of a fee or in relation to the performance where the machine runs and the customer is happy, SKF can do really good things. You've heard about this before, and many of you have asked, "Well, how much is it? What are we talking about?
Is it growing?" I'm really happy to be able to tell you that we are now at a level of fee-based and performance-based business of about SEK 1 billion per annum. That is something. If we look at where is this business, it is really in process industries. If we, for example, in pulp and paper, fee-based business stands for more than 20% of our direct sales. In other process industries like mining, metals, it's less, but it is growing. It's growing all over the world. We have presented cases that you have seen in the Nordics, in North America, in Asia, and in different places. Watch this space. Now, the fee-based business and providing reliable rotation requires something different from the R&D organization.
We can't work with the same way of developing or the same location even of people if we are to provide reliable rotation to our customers. The last three years, we have really made a transformation of the research and development organization in SKF. We have done both a competence shift and we have done a geographical change. All this while actually keeping the R&D expenditure almost flat. This is quite a feat there. Going through a competence shift, for example, we have increased from five to 56 data scientists that all work with using data science in practice to provide these reliable rotation contracts. We have increased the number of software engineers and people working with digital twins, as you saw with the Orbital, with 50% since 2017. We have rebalanced the geographical footprint.
Compared to 2017, we're 45% more in number of people and in expenditure in China. We have also increased in North America with 60%, and that's both software, material science engineers, and product developers. In Europe, we have stayed flat. The competence shift has happened under the flat surface there. This is not an easy feat. We have done it in a good way while documenting and maintaining knowledge and training the new teams. It's been done in three years, and it is staying. This is one part why you can actually see growth in other regions than Europe. Now let's get back again to reliable rotation. What you see here is a part of a paper mill. You can see the rolls of paper.
If you look closer and with the glasses of SKF, it's not just walls and beams and a crane in here and rolls of paper. There are drive lines, there are electric motors, there are pumps, fans, compressors, gearboxes, and they're all hiding in here. All these machinery, in order to keep a big process industry running, you have to have all those machines running and spinning. They all rotate, so rotating equipment performance, that is what you see here. They're just a little bit hidden. Let's look a little bit closer on one such setup. This is an air compressor. The man in the picture, he's doing something with the air compressor. Next to it, there is a blue thing. That's the electric motor that is driving the air compressor.
Compressed air is used for all kinds of things in process industry, and it's crucial that it works. We will look a bit more at compressors and pumps and drive motors because they are so crucial, and they're everywhere. If SKF then is providing rotation as a service instead of selling ball bearings when something breaks, we instead take responsibility for keeping those machines running. We need a few more tricks in the bag than only bearings. Of course, we do need the bearings. You can see if we start at noon in this picture, there is a bearing that goes in in some kind of machinery, and that is when the machine builder is designing in the machine. It could be ABB designing the e-motor or Atlas Copco designing the compressor.
We provide them with the original product. There are a number of other things that also need to work for this machine to keep running, and that's what we're going to take a little closer look at here. Let's start with those bearings. We look at the electric motor here. You can see it's a fairly simple machine. It has a shaft, it has a rotor, a stator, and it has at least two bearings and some seals. It's a very difficult machine to keep running because it's hot, it is high speed, it needs to run, and it needs to run quietly. What you need here is low friction and low noise at the same time, and high reliability, long life, because nobody wants their electric motors to stop running, then all the rest stops.
The e-motor has bearings like that, and many electric motor manufacturers are today in China. For us, it made all the sense in the world to develop these bearings in China, where our deep groove ball bearing development center is for the globe. We developed it in China for the Chinese market, but for the world, because e-motors are developed there and provided all over the world. It's actually working with the leading manufacturers. E-motors, by the way, we talk now about process industry, but electric motors, traction motors are, of course, in electric vehicles, electric cars, in trains, in anything that is driven by electricity. Electrification is a massive trend, and we are in it. In China, we developed the so-called AEM silent bearing range.
We have a range of ball bearings that is both low friction and low noise, so that you won't hear all these motors running around you in the plant. They're made in our new bearing factory in Xinchang, and they are, as I said, provided both to China but also around the world, and of course, at a competitive cost level. We have the original product to get started in our circle. If we look at this machine now, it's not enough to have good bearings in the beginning. It's far from enough. If those bearings are not lubricated properly, they won't be running much long at all. Now we're looking at the compressor. The e-motor drives a compressor. The compressor contains compressor oil. As you know, in 2019, we acquired a company called RecondOil.
RecondOil has technology where you can continuously clean lubricating oil. It's almost like your kidneys cleaning your body fluids and your blood, but except for a machine then. With RecondOil, we are right now working with compressor manufacturers to look at what if we take some of your used oil and we clean it with the RecondOil technology, and we put it back into service again. How does this work? We really would like this to be like running on clean oil all the time, if possible. Lo and behold, I won't go into the details here, but what this slide tells you is that we get close to new oil when we have treated an oil that has been running for months in a compressor. We treat it with RecondOil, and it comes out almost as new.
This was actually on the first shot, it came out as new. There is a little bit of development to be done here, but actually, we can go right away with RecondOil and use it on compressor oil. You could use oil maybe forever, if we call it like that, at least until it is washed out and can't be refurbished again. No oil changes, no maintenance, no oil that has to be disposed. This is really a beginning, a cornerstone of a circular economy. Proper lubrication, that's good, but again, it's not enough. Other things happen when something is in a process industry. People mount machinery wrong. They use hammers when they shouldn't. They heat, they put in the wrong lubricants. There are things happening. If it's not with the bearings, it could be with the process.
If we are in a paper mill and we are chipping logs, suddenly there is a big log or there is a metal piece that comes in and the loads become much higher than what we thought. This is really difficult to keep track of. This is why during 2019, it's almost to the day a year ago, that SKF acquired the Israeli startup company Presenso. Presenso had a patented portfolio of automated machine learning. Presenso did not invent new algorithms, but what they did was even more important. They helped us to find the right algorithm for the right set of data. This is really key because if you don't have automated machine learning, you need an army of data scientists, and they need to come in every time there is a change in the data set. You need to find the right algorithm.
This is not productivity, and it's actually not very reliable either. With Presenso's technology, we utilize existing or specially built algorithms, and we deploy them, and we change them all the time so that they say the right thing from the set of data. When we speak of data here. Remember, it could be bearing data, but really the key thing is that with artificial intelligence, we can use process data. We can use massive amounts of data. Are we doing this? Yes, we are. We acquired them in end of October of last year. Presenso is integrated into SKF. The name Presenso is no longer. They are the center of excellence for artificial intelligence of SKF, and we are using the technology in our performance contracts, in the fee-based contracts.
One case that I will show you here is from Brazil, in a pulp mill, where we have used the Presenso algorithms on data sets from 15 drivelines, so motors and pumps, what I showed you before. We have analyzed, looked at the data, and seen, okay, if we use AI, could we have found the faults that were happening? Because that's the first step. You train your algorithms, and you see if you can find the faults. How does this look like? Well, here you can see data from one of the 15 pumps and motors, and you have one set of data that comes from the motor, and this is current, it's bearing vibration, it's temperature, it's all kinds of stuff. There is also process data, so some information about what kind of pulp we are pumping, how fast, the machine maintenance log.
It's all kinds of data in there. There is the pump data. Also here, bearing data, but also other things, pressure and flow from the pump. All those three streams of data are taken in by the artificial intelligence algorithm and analyzed. What we do know is that on the 29th of December of this year, there was a failure of the pump. The pump failed, and two days later, they had to stop the plant at a great cost of downtime because that was not really at all planned for. Using the artificial intelligence algorithm, we looked at this data, the historical data, and by the way, the data scientist and the algorithm did not know that there was a failure on the 29th.
It looks blindly at data, and it says, "Uh-oh, on the 17th of December, we already see that there will be a failure on the 29th." Wow. That means we get 12 days of warning. Remember, this is 12 days where no human being could have seen that that would happen. There is no signal from any vibration or temperature or motor current or anything. It's the combination of data, the pattern that the artificial intelligence picks up here. It warns us 12 days in advance. Then 12 days, we can do a lot. We can change the process parameters. We can run slower. Maybe if we happen to have a bearing on the shelf, maybe we go in there and replace it in advance when we have the time. Here is the power of artificial intelligence.
What I showed you here was a training set that we are using the SKF AI algorithms in process in this pulp mill right now. We are scaling it to many, many more, and not only to pulp and paper, but to metals, to wind, to oil and gas, and some other things. When SKF acquires a startup, we don't sit and incubate it somewhere. We bring it in, and we have it all over in the company. Let's continue thinking around this circle that we had with our compressors. Let's say that in this case, we did have failures. The AI predicted it, but that's of course nice, but is there something we can do about it so that we avoid the failures?
Well, SKF simulation tools, they can actually help here to say what should we do about it so that we get longer and longer running times. What you see here is a simulation using our very powerful simulation tools together with computational fluid dynamics. Here you can see how the refrigerant and the lubricant flows inside a bearing. What you actually see, it's kind of hard if you don't know what you're looking at, but you can see that there is way too little lubricant in the contacts and that that particular bearing will have a big problem. It's not much to do about it, except you can actually upgrade this compressor. Let's say that it was running with steel balls. That would have been a problem.
The upgrade is to put in a hybrid bearing, a bearing with silicon nitride balls and steel rings, like what SKF manufactures in Austria and in other places of the world. This is the ideal bearing for that kind of situation. When we use these simulation tools and the life models that we have on such a compressor, you can see in the right-hand column here, if we would have used a steel bearing, we would have had a calculated life of 4,200 hours. That's not very long in operation. If we use hybrid bearings with the life models and the simulation models that we now have, we can see that you could actually get up to 420,000 hours instead of 4,200 hours. That is by upgrading from steel bearing to hybrid bearings. This is pretty fantastic.
Without simulation models, people might think this is a bit of a risk, but we have proof, and of course, this is verified in all kinds of ways in laboratories and in the field. We have here now an upgrade as well for a compressor that might have been ticking along, and where the AI predicts issues. We don't need to get any issues again. There is one more hidden thing in here. In that little box, it says, we have in this calculation, we assumed that there was a contaminated oil being used because that's the normal thing to do. If you remember what I said about RecondOil, we could take that factor away, and then we're going to reach even more than 420,000 hours. Probably something at least double and maybe five times with perfectly clean oil.
I can't promise that your compressor lasts forever, but I can promise that it will last a lot longer if we work together with our customers and provide them with reliable rotation, because the technology is there. If you think about this, combining all this technology with a fee-based model and keeping machinery not only running but extending the time between failures, that is really the circular economy. Extending the time, going in and upgrading, remanufacturing if it's needed, and not really throw away anything until it's super worn out. The oil, the bearings, the compressor, the motor, all of that. We think we have a great future ahead. It's circular, and there is business value in it. Thank you.
Great. Really interesting, Victoria. I'm sure we have a lot of questions from our audience out there about all these future technologies at work here at SKF. Let's go to our Q&A. Okay, Victoria. Let's get started with the Q&A. I know the questions are starting to roll in here now. The first one is from Rizk Maidi at Jefferies. "Have you been able to sign fee-based contracts in industries outside of pulp and paper and steel?
That's a very good question because we have signed contracts in metals and mining industry. Steel is a subset of metals, you have some more industries like aluminum production, for example. Also mining. We have contracts in railway, which is really interesting because I'm sure you know that's a growth market. We have also several discussions ongoing in wind, but not yet any contracts.
Yeah, a follow-up question from Rizk then, "How is the value proposition for those industries different from others?
In a way, if you look at in my presentation, I showed motors, pumps, compressors. Those machines actually don't know if they are in a steel mill or if they are in a paper mill. They just run, maybe under different conditions, but they run. The way we approach those would be the same. Of course, our industry knowledge is absolutely key here because we cannot come into a mine and talk in the same way as we do to a wind turbine runner or operator, of course. Our industry knowledge, what can break, what works, where are the costs for downtime, and where should we put the effort? That is very different. That is the real proprietary knowledge of SKF and of course our products, solutions, and the devices that we have. Yes.
Okay. Should we go to the next question then? We've got two questions from Guillermo Peigneux Lojo at UBS. "From your perspective then, Victoria, how is the Chinese competition evolving in terms of quality and performance?
Hi, Guillermo. Good to, well, normal see you again. The Chinese competition, they are absolutely on their toes, and we can not be complacent. That would be the worst that we could be doing. That's why you saw in my presentation I showed the EAM offering, the silent, low friction ball bearings made in China for the Chinese e-motor market, but also for the world. It's key to make it in China because that is where e-motor markets, where it's really growing. We are producing in China with a performance that is right for China and for the rest of the world. We are not being complacent. We are trying to do our best to beat them.
Guillermo had one more question then for you, and that was, "With the trade tensions, do you see them still trying to reach Western markets or somewhat retreating and focusing on emerging markets?
No. It would be nice to say yes, no, that is not so. The way we approach this is instead we are building up or have actually already built up our global competence center for ball bearings and for a few more product lines and industries in China, on location in China. We have built this while doing business, while still safeguarding knowledge and competence in Europe. Instead of waiting for the Chinese competition to come to our home turf, we are attacking them in theirs.
Okay. Thank you. Next question from Andrew Wilson at JPMorgan. Thank you for the presentation, Victoria. Can you please outline a typical contract structure? What's included or excluded, and how often are they renewed? Is it annually? How does profitability on the fee-based contracts compare to normal sales?
Hi, Andrew. Thanks for that question. The contracts, if we go to a processing industry, if we look at pulp and paper industries, we start with template contracts. We look at where would the reliability gains be because very often it is unplanned downtime that the customer wants to get to. They want to increase that. Usually a common KPI then becomes go from availability of the machine from X to Y. If this is reached, SKF gets the full fee. If it is not, we might not get it. To come to that situation, that is where, again, this industry knowledge and the machine knowledge comes in. If we would just go in there blind and say, "Hey, we can fix this," that would be bad.
We have our history, our databases, our documented knowledge, and now also the artificial intelligence where this is all built in. Typically, that would be one way of structuring a contract. With this kind of, I would say, consultative selling, you have to have very big ears and very small mouth and listen to your customer.
Listen
To come up with something that is a win for the customer and a win for SKF, and be quite open about that. To the question of how often they are renewed. Well, usually it's more than one year. If you have one of these contracts, it's way too much work to sit and negotiate every year about something like this. Also, it doesn't really add value. It's more than one year. It could be three years, five years, but it's more than one year. What we do need to do is to show a constant improvement of, could be productivity, could be uptime. It's not like we go away for five years and come back and show the KPIs. No, this is a constant work with the customer. That is also good for us because we find opportunities during the time.
Finally, the profitability. Well, the simple answer to that, we wouldn't be doing this if it was less profitable. I think the key thing here is that we get insight into the customer's problem, compared to if we were just selling a product, there was product, goodbye, and we wouldn't know. Working in these fee-based contracts, we get an insight to, oh, there were problems that was okay with that motor, but now we have something new over here. The customer is running a new paper quality, for example, and they need help to get up the ability to run at a higher temperature, whatever. We find opportunities throughout these contracts, and that is really worth more than what one would think, just looking at it from the outside.
Real value.
Yes.
Okay, now we've got three questions from Daniela Costa at Goldman Sachs, who we heard from earlier as well. The first one then, how long are usually the fee-based models?
How long in time then probably, I presume?
Yeah.
Yeah.
Yes.
What I just answered here, usually it is more than one year. It is over two, three, or even five years. That is, again, one year, you may not even see the big improvements. There might be investments needed to get to something that takes time. One year is way too short in process industry, for sure.
It's long-term investments there. Can you sign these contracts on bearings components from other players?
That's a great question, actually. That's the first time I got that question. Answer is yes, because it would be wonderful if we had 100% market share, but no, we don't. At our customers, there will be other bearings operating all the time. We also don't make every type of bearing in the world, so there will be other bearings. Yes, we can sign contracts where there are competitor bearings. Of course, when there is an upgrade, when we can see that we can do something better, then it would be replaced with an SKF-made bearing, for sure.
Daniela had a last question, which was also a great question. What can go wrong? What are the liabilities?
Yeah, that is a really great question. In my experience, I worked 25 years now at SKF, the liabilities when you do not have these contracts are actually bigger than when you have them. Why? Because again, in the old way of working, you provide a product, you don't really know for what, and you're not monitoring it, so you really don't know what the customer is doing. Compared to these contracts where you actually have built in a control of how the products are mounted, how they are tuned, how they are run, what is happening, you have the chance to do upgrades. The risk is actually smaller than if you don't have it, because I tell you, I know that if something goes wrong at a big customer of SKF's, in the old model, we would not have left that customer alone.
We would have helped, and we would have been there. I've been there myself many times to fix the problem. Even if it wasn't sort of our fault to begin with. For me and the technical people in SKF, we really embrace this model because we know so much more, and we can improve so much more.
Great. Thank you, Victoria. Next question from Sebastian Kuenne from RBC Capital Markets. Hope I said your name right, Sebastian. How do you assess the risk that the long-lasting bearings cannibalize on your replacement business, and could the net effect be negative for you?
Hi, Sebastian. That's another really good question. Cannibalizing is, I must say, no, we are not afraid that that would happen. Remember, we are now talking about a fee-based model. If I put in a bearing as a design that lasts so much longer, and I get paid by the hour, by the week, by the something, I have actually made something much better than if I kept selling bearings where the price pressure perhaps was lower and lower as time went by. No, I really don't think this is a risk at all. Cannibalizing, if we don't come with improvement or better bearings a competitor will. Then I would rather take responsibility, I would rather call it for the customers' uptime in this way.
Okay. That was from Sebastian. This one is from Madhvendra Singh at BofA: "How does the pricing differ for the hybrid bearings versus standard bearings?
Well, now I sound like a salesperson. It depends how many you need, because hybrid bearings, it also depends on the size of the rolling elements, because still today, the process producing these balls depends on how many you make. If it's an odd special size, then it can be 10 times a steel bearing. If it is a size that is in mass production, where we can use the same size of rolling elements or balls for many different bearings, then you can be at almost the same level. Our vision here is that, and I really hope this comes before I retire, but we'll see, that all bearings in the world would have ceramic balls. We are working on getting the cost down and the quality up so that we can do that. Look forward to that situation.
Retirement's a long way off for you.
Oh, yeah.
Yes. Do we have time for one more from Andre Kukhnin from Crédit Suisse: "How are revenues and costs recognized on fee-based contracts?
In fee-based contracts, this is something where we do check with customers on a more frequent basis. Even if the contract is a five-year one, there are regular checkups, three months, typically, where you look at the cost that you have occurred and what will still remain. There is, of course, a plan going forward, how should it be? You never know. When something comes up in the middle of a contract, that we have to assess together with the customer. Imagine the situation where you say that there should be a certain cost, there is an unexpected breakdown or something, and the cost is bigger. If it was something we should have seen, well, our bad then, yes, and then it's our problem.
If it is something where, I don't know, a customer employee went and banged a hammer into a bearing, then this is a different story. There is not really one answer to this. Niclas, our CFO, will talk more about this in his presentation as well.
Yeah. Niclas can get to that in the Q&A. I think we'll round off Victoria's Q&A now then. Joining me now via Teams is President, Bearing Operations, Kent Viitanen. Welcome, Kent. We heard there in the Zapp Metals case here in Sweden that SKF RecondOil technology, the DST technology, has really contributed to world-class manufacturing at their plant. How would you say customers like this really drive the transformation that SKF manufacturing is going through right now?
I think it's the same for us as for everyone inside SKF. Customers is the starting point in everything that we do, and we all work very hard to meet the needs of each and every single customer that we have. There are very many different needs, considering that we serve so many industries in so many regions, and with all their individual recipes on how they want to win their specific game in the market. Which of course means that we as a company have to be very well synchronized across the full value chain. We have to work so closely with Victoria's team and the application engineering team and the sales teams to make sure that our manufacturing setup is the one that brings most value to our customers, that fulfill all the needs that they have.
If it's speed, if it's flexibility, if it's quality, if it's performance, if it's noise, whatever it is. That's only possible if we have a very tight bond between all the different parts inside SKF. I think we do that in the context of driving the focus areas that we've been talking about a lot in SKF in the last number of years with the footprint and the technology step-up with our input cost optimization and our production system. These are all relevant parts, but they are also geared towards give the customer more value and eliminate everything that doesn't bring value.
How would you say these customer demands are really reflected in your sustainability work?
It's very well integrated in our sustainability work. We see that this continues to increase. Our customers demand more from us. I think we have ourselves been demanding a lot from ourselves over the last number of decades, I think we are very well positioned to do that. I think this is going to continue.
SKF RecondOil must be a huge contributing factor to being carbon neutral by 2030.
Absolutely. RecondOil it's of course not just interesting for our customers, it's actually something that we are rolling out at a high pace inside our own manufacturing. It's one of the contributors that makes us convinced that this carbon neutral target that we set for ourselves by 2030 is going to materialize. I think I can take the opportunity, actually, to talk a bit about that. I assume most people know it, but we have announced the ambition inside SKF to have carbon neutral Manufacturing by 2030. Priority setting number one is really to eliminate any use of energy or fossil oils for other purposes for that matter. Second ambition that we drive is to really switch all energy use from fossil to green energy whenever that is possible.
We will have some rest consumption of non-green energy, and there we will go for climate offsets or green offsets as the last remedy to really make sure that we are climate neutral by 2030.
You've spoken a lot then about footprint, and many associate that with just consolidations, closures, but what more does that mean for you going ahead?
I think it's important to realize that footprint is mainly about being very close to our customers and not just being close to our customers with manufacturing. We have to be a close speaking partner to our customer. Of course, the manufacturing side is an important dimension of that. We also need to have the engineering and the sales force. We need to have suppliers close to our delivery chains so we can be fast, and we can be a relevant speaking partner for our customers whenever they have an issue or whenever they need to develop something new. The first element is be close to customers. The second element in our discussions here is, of course, to be close to customers, we need to localize resources to where the customer sits.
This is also very relevant from a manufacturing point of view because today we have a situation where we are more or less self-supplied for our European needs with the manufacturing out of Europe, but we still have significant gaps in the Americas and in Asia. Here our ambition level is to improve the localization to these regions by around 2% per year, which means by 2025, we will have a localization level of some 60% in the Americas, and we will be up to 70% when we talk about Asia. In Europe, this will mean that we actually will have to give away production to some of the other regions, so we will be smaller in Europe.
We also have a challenge in Europe to really localize our supplier base to Europe because for some of our product lines, most of the component supplies is actually coming from remote, and that makes us slower and not as efficient as we need to be. In Europe, we clearly see the challenge of developing supplier base but also consolidating, and I think consolidation, it's not just Europe, but Europe is more affected by it. We see that we will have to shut down some five factories per year in the coming four or five years. It's really painful, but I think there's no way around it for us to stay competitive and efficient as a supplier to our customers.
If we turn to investments being made, if we look back over the past three to four years, how would you describe the payback there?
I would say the following. First of all, I would say that the range of investments that we've been doing over the last number of years is significantly higher than what we used to have inside SKF. We are now at a run rate of SEK 3 billion-SEK 4 billion, rather up to the higher end of this equation. Approximately SEK 1 billion out of those are related to keep-the-shop-open kind of investment. It's not a significant step-up necessarily. Whenever we can, we of course try to do that also on the keep-the-shop-open investments, but the remaining part, the SEK 2 billion-SEK 3 billion, which is more than double what we have done before, means that we are significantly stepping up our competitiveness inside SKF.
When you look at that math on those investments, I would say that typically on bigger projects, we have a start-up period of some two years before we start to get into the full payback amount. After that period, we go for a run rate of somewhere between 30% and 50% of the investment amount as an annual benefit. I think it's a very good business case for us and for our investors.
If you look at those savings then, how would you split that into the different areas of technology step-up, localization, and footprint?
I would say the number one saving comes from the technology step-up, but we have to realize that these are all very linked to each other. Typically, the life of a factory consolidation is an investment in technology step-up and some localization activities on the way, and then we come to the point where we do a consolidation at the end. The biggest chunk comes from technology step-up. The second-biggest part is actually related to the localization. That means that we move our manufacturing footprint close to our customers and the supply base, and don't have to take any transportation or additional inventory planning and so on because we are too far away from the customers. The third part of savings come from the consolidation in itself, but that's the smaller part at that point in time.
If we focus on the full value chain approach that you mentioned there in the beginning, what is it you're doing with DGBB production in China? Why expand your presence there?
First of all, Stephanie, I think the presence in China is extremely important for all our product lines. China is the biggest industrial market, and it's the fastest-growing market, so we have to be in China with everything that we are doing. DGBB, it's the biggest bearing product line in the world, and China is, of course, the biggest market for DGBBs, and if we want to be a relevant player to our customers in China, we have to be very good in responding to their needs. Just before 2017, we had the development center for the DGBB located in France, which is a different time zone, it's a different language, it's very far away from the Chinese customers.
We had some good manufacturing already at that point in time in China. It's not enough to be fully relevant and drive changes fast enough with our customers if we have part of our organization located in Europe to support these customers. We actually took the bold decision to really put a full value chain capability for DGBB in place in China. That opens up a different dialogue with our customers, and it definitely improves our speed in getting new products and adjustments needed from our customers' perspective.
Beyond DGBB production, what other steps are you taking to improve your manufacturing footprint in China?
Actually, when we go back to 2017, we did this evaluation very top-down on what do we need to have in China five, 10 years down the road. We started more or less from a white sheet of paper, trying to identify, starting from industries and products, which are the most important ones. What would our setup look like when we support these businesses in a good way some years down the road? We realized it's going to be a transformation time to get there. At the end of 2017, we had 10 factories making bearings. We didn't have a lot of expansion room in those existing factories, and we only had manufacturing in some cases, which meant to us that this is not going to make us so much better than everyone else, than our competition in China.
Realizing how much transformation we still have ahead of us moving manufacturing from other parts of the world to China, because we still import quite a lot to China, we said let's get the structure right first. Let's get all the capabilities in place. We actually ended up with a definition of maybe four, five, six key sites. We have actually built, in a fantastically fast way from the China team, a new footprint with new capabilities. We are now having a very clear idea on what our overall footprint will look like in China for the years to come. We continue to expand. We continue to add capabilities, products, and manufacturing equipment.
During 2020, you're expecting to spend about SEK 3.5 billion in total in your factories, including technology upgrades. What are the ambitions going forward?
We see that we will be around that run rate going forward. It might go a bit up and down based on the opportunities that we see, also based on the business environment that we have. I think it's going to be SEK 3.5 billion-SEK 4 billion per year. That's the run rate that we plan. With that run rate and the savings I alluded to before this means that when we reach 2025, we will have added more than SEK 5 billion annual benefit run rate to our bottom line.
What is the status then on the world-class investment implementation in Schweinfurt that you mentioned at last year's Capital Markets Day?
We have progressed on all our projects in Schweinfurt that we talked about, the CRB world-class, and we also went at that time to see the large size bearing world-class. All equipment is in place. We are ramping up. We are almost finished now on the CRB side. There is a bit more to be done on the LSB investment. And when we look at the benefits that we set out to get, there is no deviation on the end benefit that we see come out there, and those benefits are significant. Cost-wise, we are talking anywhere from 20%+ to even 30% cost down. We have a lot of customer value coming into it with increased flexibility, shortened delivery times, but also a shortened response time because now the information flow in Schweinfurt is very connected.
We get full traceability in place, and we have a step up also in quality controls to be even more preventive when we see problems happening in our process. I think this is an example of how important it is to really drive technology going forward. We create customer benefits at the same time as we take cost out.
What about on a slightly smaller scope, smaller investments? What has been done there?
We have a number of them as well. I think it's extremely important that we have this top-down, bottom-up kind of mix. I'm just going to refer to one of the more recent ones that we started up in Massa in Italy for our ball bearing units, our Y-bearings business, where we have now automated the assembly of bearings and housings, from depalletizing to quality control, to assembly, to dispatch. There are no people involved touching the products at all, which means that we can deliver a much more flexible setup to our customers without adding any cost. This is what we strive for, customer value and reduced costs.
Kent then, how do you think future technologies are really going to transform manufacturing across SKF?
Just a question of time. I think the more we move into this, and I think we see it in all the different areas where we drive it. We set off with one ambition, we get to that ambition. When we get to that ambition, we see that there is so much more potential going forward. I think a lot of focus is, of course, on the digital opportunities here with connecting data from factory level down to machine element or part level, connecting the full value chain from customer to suppliers, and tracing this data and following this data over time to keep a life cycle control of our products. That's the obvious one that many people talk about.
I would also highlight that for us in the bearing industry, even though we have been doing grinding and heat treatment and all these technologies for a long time, we see so much new opportunity, also in that field, to take new steps in terms both of cost down and performance up. I think we are still having so tremendous opportunities to reshape the bearing industry with what we are doing.
Finally, Kent, then. Manufacturing seems to really be rolling along here at a high pace at SKF. What would you say the one key success factor is for that?
If I can pick only one, it really has to be people and leadership. To have the leaders and everyone in the organization acting in a customer-centric, entrepreneurial way to make sure we always do the right things for our customers, we relentlessly try to do that in an even more efficient way. That is the most important.
Thank you very much for your insights today, Kent. Kent, our first two questions we have from Seb at RBC Capital Markets. His first question is, if you had to build SKF from scratch today, how many factories would you have globally? What's an ideal number?
I think, Stephanie, if you would have asked me this question three, four years ago, I would probably have ended up with a slightly lower number than what I see us having today. I would say probably around 35 factories. That's what we would have had if we would have started from scratch, considering all the different product lines, the geographies that we have to cover, and the different technologies that we need to run in our group.
Okay.
Okay.
If we look forward from today going forward, his next question is, how many facilities do you plan then to have by 2025?
As I mentioned before, I think we have a planned run rate of reducing by some five factories per year in the coming five years. That's going to take us from the current number, slightly over 100 facilities, to closer to the 70 facilities.
Okay, let's move on to the next question from Daniela at Goldman Sachs. She also has a couple questions for you. The first one, what will be the one-off cost to close five plants per year? Are the five plants a new net number, i.e., you will close more than that, but open some in new regions to meet the localization targets?
I think five is our ambition as a net number. Of course, there will be things happening in our outside world, but when we look at the current plan, we have the idea of netting down some five factories per year. The cost of closing down the factories will actually vary a lot depending on where the factory is located and what size of factory we shut down. If I take the total number here, I think we are in a bit more than triple digit on the overall level on the annual redundancy cost that we have for shutting down the factories that we are currently doing. There might be some modifications in factories what we close down, but the number is going to be basically the same now.
Okay.
Okay.
Daniela's follow-up question is ROCE. She wonders, will there also be an ROCE impact as new plants in Asia and Americas have a different capital intensity as older plants you're closing, i.e., given more digitalization, more efficient production lines? Asking because ROCE target is not changing while the margin is.
No, the ROCE target is not changing from what we do here. The overall benefits that we take into the context of the change see in the balance sheet, we still want to make the target.
Okay, we'll move on to James from Redburn. Can you talk about the bearings used in the wind industry? Are you more exposed to onshore-offshore wind, what's your current Chinese wind capacity? How much of your Chinese wind revenues are you sourcing locally currently, what's the plan for expanding Chinese wind bearing capacity to get ahead of the industry shortages and the loss of share to competitors making the most of your shortages?
To be honest, I have to pass on the details on our China wind capacity in an absolute number since we cover a number of different product lines here. We do a lot of our wind demands for China in our Dalian plant in northern China. Actually, the tremendous strong demand that we've seen from the China wind industry this year and that we will see also next year. We are importing products from Europe to fill up the gaps that we have from a China supply point of view. We are already now working on adding more capacity into China.
We are convinced that over time we should actually be completely self-supplied for China's wind industry out of China. I think that the step that we have already kicked off will not fully satisfy the Chinese demands, so we are already reviewing what to do and which priorities we will have on that side. We are playing in both offshore and in onshore wind. I think we have a good position in both areas. Of course, we see that on the offshore wind side, there is completely new demands, completely new size ranges of turbines coming in, and we are, of course, working very actively, using our R&D capabilities that Victoria described before, both in terms of the digital twins, but also in terms of our testing capability with wind tests that we have in China.
We are actually putting ourselves in a good position to serve the wind industry, both in China and in rest of the world.
Okay, the next couple questions are about the Chinese market as well. They're from Ben at Morgan Stanley. First one, in China, what's unique or different about the SKF offering versus local companies? What's your unique selling point?
I think it's difficult to generalize on what's your unique offering here, but a very, very strong point that I think that we have everywhere is that full value chain understanding that we have. I think that some players try to compete purely on a limited capability, either new manufacturing capability or engineering or sales capability. SKF has actually everything put together. We can work in a very, very connected way across our whole value chain, and we are doing that.
And-
I think this is an extremely strong point. Technology-wise, we are, of course, from my point of view, capitalizing on the learnings that we have from all parts of the world. We take the best of what we learn working in Europe, and we take the best of what we learn working in China and in the Americas, and we put it to one global offer for us in SKF.
We'll just take a quick final question, which also was a follow-up from Ben, and he's wondering about the business split in China between premium product, like complex bearings, versus mass market.
I understand the question. I think from a customer's perspective, they always need a premium product. In their view, they need a product that does the work for them in the right way. Sometimes their premium is load capability, sometimes it's noise, sometimes it's speed, and sometimes it's even cost. We try to be able to play on all these different parameters. I think it's been a change in how some people saw it and thought about SKF in the past, but we try to play in all these different areas. Technology advantage can be used for optimizing any of these needs for our customers.
We'll hear back from you again later in the summary Q&A. Joining me now then is CFO Niclas Rosenlew. Welcome.
Thank you.
We just saw the Big River Steel case, and that's a true example of SKF being a partner to its customers and having that close customer entanglement. You will be focusing a lot now on ways of working internally, but I can imagine that way of working won't be something changing anytime soon.
The case we just saw is an excellent example of how we want to work with our customers and actually what we want to do more of going forward. It's very much about how we work, again, with the customer. Equally so, it's about how we work internally, and we'll talk a bit more about that.
Yeah. If we focus then on the transformation you're going through, let's talk about the ways of working and where you are in that process.
Yeah. We've heard here earlier from Alrik, from Kent, and from Victoria about changes we are going through as a company, very much about the transformation, a really exciting transformation we actually are going through as a company. One important element of this is how we work, changing how we work internally as well as towards the customer. Can very much describe it as centered around how we work together. That's the whole concept. How we work together across organizational boundaries, how we work together around a particular topic, be it a product, be it a customer, be it a problem or an opportunity. How we all chime in and help out to solve a very concrete case. That's what we mean with transforming how we work.
Short term, it's about delivering on cost flexibility, which has come very handy in the recent quarters where we had extreme market volatility. Slightly longer term, it's about profitable growth above market. That's very much what we aim for. While I focus a lot on costs, it's actually a lot more than just costs. It's actually mostly about other things than costs. Again, the core of transforming how we work is working together.
Yet, do you have any concrete examples then of how you've changed this way of working?
Yeah, absolutely. A couple of examples. One of them is how we are transforming how we work within finance operations to be specific. In the past, up until now, we worked on finance operations or within finance operations from around 50 different locations all around the world. Going forward, it will be very much about working in seven operations hubs, performing the work from seven operations hubs. One outcome of this change is that we'll have a lower cost base. We target a 30% lower cost base. Again, more so than just the cost, it's very much about how we work, how we become more efficient. It's about sharing best practices. It's about having harmonized processes. It's very much actually about take-up of technology, make the best use of technology, but also make it easier to roll out new technology.
Rolling out new technology to 50 different locations is harder than doing it in seven locations. It's also about career opportunities, improving the career opportunities, and then very much about efficiency of the operations and also compliance. Another example, which we've kicked off quite recently, is automotive, where we have had a, you can say, a more traditional way of working within automotive, where we had many different management layers, and we've also have different organizations. You can call it organizational silos. When you think about what's going on in automotive as an example, the pace of change is really fast. We have emission regulation, we have new business models, we have electrification. In this sort of environment, we do feel that it's quite important to be quicker.
What we do there is that we transform again more into ways of working where we solve topical issues instead of having a more traditional organization. We organize ourselves around these topical issues and then solve them. As examples of the impact, what do we expect getting out of this? Again, it is about cost down. 25% fixed cost reduction is what we are aiming for. It is also about having a flatter organization, very much about being faster to make decisions faster, and then also being able to pivot along the process. Again, changing environment becomes more and more important to being able to adjust and change along the way as well.
Automotive, maybe those changes are more recent, but this transformation in other areas has been in the works even for a few years. What would you say the overall effects are of this? What has this led to?
We actually have a good track record, and very much as you said, the transformation is nothing that we invented yesterday and started to work on yesterday, but it's going on for some time already. You can see the impact of the past actions taken in our financials. We have a track record of growing above market. We do have a recent track record of being able to manage upturns and downturns out in the economy, delivering still good results despite the extreme volatility that we've seen recently. We've also taken down our debt levels consistently over some time already and have a strong liquidity position.
Yeah. More specifically, I know you've updated the financial targets. Alrik mentioned that briefly in the beginning. How will those updated targets support the strategy going forward?
We've now updated our targets, so they reflect the strategy and also reflect the transformation that we are going through as an organization. This is just a snapshot of the targets that we have. In terms of operating profit, we believe that SKF can deliver 14% operating profit over time. We also very much work towards growing above market rate, so 5% growth essentially. Very much about the return on the capital employed, so 16% return on capital employed. We absolutely want to continue to have a strong liquidity position going forward also, so 40% or less net debt to equity. A new element that we've introduced, which we are quite excited about and which is very much core of the strategy, is our environmental target, where we aim for carbon-free manufacturing in the future. Of course, a strong capital allocation.
If I go through these one by one, so you understand a bit more what's behind this and what we are aiming for. Starting with operating margin of 14%, and this is an increased ambition. Why do we think it's possible to get a higher operating margin? This very much comes from what we talked about earlier, what Kent described, what Victoria described. We have already an improved flexibility, and there's more to come. It's very much about the increased automation level, where we are working hard on increasing the automation level. It's about fixed cost leverage. Some of the things that we'll continue to work on and deliver on going forward is very much the investments in world-class, increasing the level of automation as well as regionalization.
It's about the acceleration of manufacturing footprint, having it in the right places close to the customers. It's about right-sizing the organization, and then very much about the overall concept of changing ways of working. That's operating margin. The second one is revenue growth above market. Growing stronger than competition. Here it's actually three elements. It's of course about our core business, where it's very much like we heard in the Big River Steel case, very much about delivering value. How can we deliver even more value to our customers in combination then with, of course, being cost competitive? Making sure that we have a strong cost competitiveness. The second element of it is very much about innovation.
Investing in innovation, investing in R&D, as well as then the new business models that we heard about, for instance, from Victoria with our service offer as well as RecondOil. Making sure that we are competitive and we are in the forefront when it comes to trends out in the market like electrification. The third element of growth is acquisitions. Here we can say that we'll look out for acquisitions in a more active way than what might have been the case in the past. The third element is very much about return on the capital we employ in the business. Again, a common theme across the whole kind of day-to-day has been the investments that we have already increased, and we intend to increase further. Investments into automation, investments into footprint, and so on.
Here, of course, we need to take responsibility for getting good returns on these investments. We continue to monitor them very much as Kent described. On a general level, how we deliver on a good return on the capital employed, it's very much about the automation, it's about the footprint, regionalization, and then, of course, a general good management of working capital also outside of inventories. Inventory, we believe over time will improve the inventory efficiency through automation and through regionalization, while then other elements of working capital is business as usual, and we continue to work on those. What comes to our liquidity, we very much want to keep a strong liquidity position going forward. That's described in our target of net debt to equity of below 40%. Here it's very much about being able to manage the company throughout cycles like we've seen recently.
That's where liquidity comes very handy. It's also about maintaining a good flexibility to act, and act with speed as needed. What drives the strong liquidity position, it's of course managing cash flow and want to keep a strong cash flow generation going forward. As a new thing, we very much want to introduce our environmental ambitions as part of the key targets. This is actually something I myself feel quite passionate about, and it's really fun to be part of a company whose core it is to actually help customers reduce their environmental footprint. Victoria talked about this earlier. It's elements like reuse, it's things like minimizing the downtime of customer machinery. Of course, we do need to take our own responsibility for our operations. Here we've introduced a target of carbon neutral manufacturing by 2030.
That's a tough target, but it seems like you're well on your way to reaching that. After I've heard all these six areas, these updated financial targets, what I've taken with me is strong cash flow, strong balance sheet. What will you do with the money?
Yeah. Capital allocation is, of course, something that we want to provide for an attractive capital allocation. A key part of this is our dividend payout, where we have a target of 50% dividend payout. It's also about investing or reinvesting in the business, CapEx, innovation, R&D. Also M&A is something that we look out for. Would there be attractive enough cases? We definitely take a look at them. Last but not least, an extra distribution to shareholders is something we have as an option.
You mentioned before about having to kind of change your route if you have to be flexible and adaptable to stay competitive, but in a company of your size, that can't be easy to make this major transformation, can it?
Well, I don't know easy or difficult, but it's a fun journey. It's a really rewarding journey because, as discussed, we've already seen the results of the transformation in our financials, and we definitely expect more to come. We are in the midst of this journey. We are by no means done, and there's much more to come, and it's really fun to see how it changes the clock speed of the company, how it changes people's behaviors, how it changes how we interact with our customers. It's a fun journey that we are on.
How would you like to summarize what are your key messages you want to leave the audience with?
Yeah. Key messages. We have a track record in place already, and we have the strategy in place. We know what actions to take, so now it's really about delivering on the transformation. It's about implementing the transformation. Of course, ultimately, we want to deliver on the ambitions we just discussed.
Being purposeful action takers, right?
Yes.
Yes.
Absolutely.
Let's go over to our Q&A. We probably have lots of questions for you now. Thank you.
Thank you.
Okay, let's get to the questions for Niclas now. This question Victoria addressed a little bit earlier, but we'll get a little bit more detailed answer from Niclas. It was from Andre at Credit Suisse asking, "How are revenues and costs recognized on fee-based contracts?
Very much based on IFRS. We split the contract into two parts. One is for product or consumables, and the other one is for the service part. What comes to the revenue for the product and consumables part, it's taken at the point of delivery, and then what comes to the service part, it's taken over the life of the contract. The costs, on the other hand, are taken as they occur.
Okay, we'll move on to the next question. We've got lots coming in here. From Andreas at Nordea: "Your average adjusted EBIT margin has been 11.5% since 2015, and you're now targeting 14%. How much of that improvement do you think will come from SG&A, sales general and admin, and how much will come from gross margin improvements? Maybe you can elaborate on what you expect for gross margins going forward.
Sure. As you understand, we are talking about a pretty long period here, so you can only kind of talk about this in rough terms. Very much as Kent explained, the SEK 5 billion improvement by 2025 is related to gross margins. That's a gross margin improvement that we expect. Of course, there might be other movements in the gross margin as well, but roughly speaking, SEK 5 billion related to gross margin, and then the rest is really SG&A related.
A follow-up question from Andreas: "What should we expect in restructuring costs? What will they be in the coming three years?
As we all know, restructuring cost or IAC restructuring cost being the main part of IAC, it's hard to estimate exactly. They occur when we take action, whether it's related to footprint factory or SG&A-related personnel. Just to give a rough idea of how we are thinking about this, it's going to be clearly higher in the next couple of years than what we've seen if you go back to 2018, 2015, 2016, 2017, 2018, something like that. On the other hand, we expect it, if you look at it annually, it to be somewhat lower than what we've seen in 2020. Somewhere there, higher than normal, lower than 2020.
Okay, let's move on. Lars at Barclays, his question is: "Why has the working capital target been scrapped, or has it? And why has the ROC target been lowered?
Sure. That's a good question, and it's of course, something that we thought about when we thought about the targets as well. The target is, of course, a reflection of the strategy as we see it going forward and the actions that we are planning over the strategy period. We try to capture kind of our activities over the strategy period in the updated targets. Working capital per se has absolutely not been scrapped. It's very much a part of what we do and very much a part of what we want to continue focusing on and actually make it more efficient. Essentially lowering the working capital as a percentage of sales also going forward. Even if it's not part of the main targets, it's very much part of what we work on. No question about that.
Inventories, to name the kind of the most important, the biggest weight of working capital inventories is something that we continue to work on. Not to spend the whole day on this per se, but you also heard from Kent and inventory management is very much related to the activities that we are doing within manufacturing and the world-class investments and regionalization and so on. What comes to Return on Capital Employed, as you know, we are not there. We are not at 16% today. So yes, you can say that it's changed in a sense that it's now adjusted. Previously it was reported, but we have some way to go to get to 16%. Of course we won't stop there when we are there, but let's take that step first.
Okay, next question from Daniela again at Goldman Sachs. You were just talking about ROCE target. It's 16%. It's unchanged despite higher EBIT margin target. Why? Does it have to do with the fact that working capital and sales target of 25% is not mentioned anymore?
I would say maybe to some degree the question was covered already. We are not at 16% today. We want to get there. We have a plan how to get there. Let us work on that and show that we can actually get there. What comes to the working capital target, again, we have not skipped it. It's very much, of course, part of capital employed. You can say that return on capital employed captures more than just working capital, but definitely working capital is part of it and it's also part of what we work on going forward.
We also have one more question from Klas at Citi. This one is now on operating costs. We have a clear target for the manufacturing savings of SEK 5 billion. How about OpEx savings? I get 200 basis points from temporary savings this year. Can you more than offset the temporary savings going into 2021?
Yeah, that's a good one. Yes, we now specified what we are targeting within manufacturing savings. We have not specified an exact OpEx savings. That's partially also related to the number of activities going on. I previously mentioned just two examples, what we are doing in automotive, for instance, and then in finance operations, and there's many other parts related to SG&A, more broadly speaking, that we actually are working on and improving. I would say that let us work on this and prove that there's more to come. We know that there's more to come outside of gross margin improvements as well. I'll leave it with that.
Any more questions for Niclas? It's another one from Klas. On the new targets. I just saw Klas' name there again. He's back again with a new question. On the new targets, growth and ROCE are key drivers of the valuation of SKF's shares. The ROC target is now adjusted, excludes the restructuring. How will you improve the underlying capital efficiency? You're still pretty far away from your working capital ambition, and I assume that the SEK 5 billion in manufacturing savings will still consume lots of CapEx.
Yeah. Working capital, again, is something that we'll continue to work on. Inventories is the main theme because it's the largest component of working capital. Of course, there's the other parts, receivables, payables. I would say again, we have not skipped this by any means. The other thing that we of course do, and that's a bit back to what Kent was talking about, is that the CapEx, the investments, we absolutely continue to scrutinize the returns. Kent gave you a flavor of what sort of returns on an average level that we get out of the investments, and that's something that we continue to scrutinize. Of course, CapEx, it's not only a spend, the return is, of course, a contribution to the margins, so higher margins.
Okay. One more from Devendra, who we heard from earlier at BofA. How much of the revenue growth target of 5% do you expect to achieve from mergers and acquisitions? Should we expect half and half?
We don't really think about it like that. We haven't set ourselves, and this is a bit back to what Alrik commented on earlier, per se, an M&A target, how much it should be. Because in worst case, that would lead us down a rat hole that we have to do something just to achieve a certain percentage. That's not really the way we think about it. The growth comes from three parts. One is, of course, organic growth, if you think about our current offering, and why do we think we are well-placed there to kind of outgrow the market. It's back to, for instance, customer-specific offers, application-specific offers, where we see a significant potential. The other part is related to our innovation and new businesses.
We do expect some upside from there as well, be it the service business models that Victoria was talking about, RecondOil, other innovation, by the way, within our core business as well. The third part is really related to M&A. M&A is something we just feel that we are much better positioned now to do, or at least take a look at acquisitions than we have in the past. We are much more centered now around the core, so we have a good handle of the business. We have the balance sheet in good shape. Saying that, we'll of course continue to be quite picky, so it's not growth at any cost that should come from acquisitions.
Okay. Thank you, Niclas. That's all the time we have for this Q&A with Niclas. Everyone is here with me in the studio, and Kent is with us live via Teams. We're here to take your questions, and I know they're coming in already, so we'll get to the first one, which is directed to you, Alrik, and it's from Anders at Pareto Securities, and he's wondering, "How much of sales in the automotive division is EV? Any new platforms? Any new product launches on the go?
Well, you know, Anders, today it's about 5% of the automotive business that directly to the EV. You can understand how all major car and truck companies who are now sort of gearing up for the next decade of a EV revolution. You can imagine that there are new platforms and new electrical motor manufacturers, and one of our dear customers just announced that they were even going to make their own electrical motors and so forth. You can imagine how dynamic this is. When you look at technologies around this, everything we can do now with the things that we've been discussing about also from Victoria's side, ceramic bearings, cleaner lubricants, new ways of producing bearings with higher precision and so forth, all this plays right into the EV changeover.
We can all intuitively understand that what's holding back. Cars actually started, as you know, as electrical vehicles. What's holding it back is really the storage of electricity, right? As soon as we sort of crack that nut, we are absolutely convinced that it's going to be EV. That's going to be the future of automotive drives. How long it will take? Well, it depends on development of batteries or fuel cell technologies and things like that. We're going to be right there to capture, as a component supplier to the automotive industry, not as a big system supplier, we're going to be right there to capture that market.
Okay. Thank you, Alrik, and the next one is maybe to Victoria from Denise at Morningstar, and this is about technology. If technology and automation are available to SKF competitors as well, is there anything that SKF can do to create unique efficiencies from technology?
There is certainly what you heard from Kent before, where we are using, for example, the RecondOil technology in our own plants. That is a technology where we are in the absolute forefront, and we'll be using for quieter, better bearings. The key thing here is that we have data from the field, from other people's sensors, from process data, through our artificial intelligence. This is information that we can use to improve our own processes, but also to forecast much, much better. The prognostics leads us, and combined with the flexible manufacturing, that is the winner.
If I just add a little bit, because I think you're absolutely right. When you innovate, it gives you an advantage of between five to seven, if you're lucky, 10 years. What we need to see, and this is, I think, if you really look back and you see, SKF is a more innovative company today. My assessment is, yes, this is going to eventually be available to everybody, but we intend to sort of continue to develop this and have new technologies in our manufacturing to keep that edge. Let's be honest about it. Of course, we don't believe that we are alone, and that we are absolutely clear that competitors will apply this as well.
Okay, moving on. Another one from Denise as well. This one may be to Kent. Kent, for several years already, SKF has been increasing the automation of its business. Why is it possible now to leverage automation to lower the cost structure versus before? Is there a new technology that maybe wasn't available before that helps you to do that?
I hope you can hear me well here, Stephanie.
Yes.
Yes.
No, I think it's been possible all the way. I think we're just getting better at it. I think technology is getting easier to use. It's getting less expensive to use. I think we are still learning a lot in this area. If we look at ourselves in the mirror a few years down the road, we will realize that we can do things even better going forward. I don't see the big game changer happening right now that makes it more possible. It's been a gradual development, and I think it's going to continue to develop gradually.
Thanks, Kent. A follow-up question, maybe if anyone else wants to take this, but how can you protect the margin gains from automation if competitors have access to the same technology?
Maybe I can take that one. I say, of course, you understand humanity's always innovating and always moving forward. What was good enough yesterday is not good enough today. What's good enough today is not going to be good enough tomorrow. You're absolutely right in this. It's like, this is the way it is. If you look at what SKF is doing now, the agile team and what have you seen, if you followed us, Denise, for a few years, rest assured, we're going to be one of the drivers of this change. To be one of the drivers, that means also that you're one step ahead and that's where we want to be. Your assessment is absolutely correct. That's the way it is.
Okay. Thank you, Alrik. Next one from Maddie at BofA, maybe to Niclas. Can you please compare the new margin targets of 14% versus previous one at 12% as the new target is on adjusted basis? Are you really raising the targets here? How should we look at the new targets versus the old ones?
Yeah, yes, we are raising the target. Of course, this is over a longer horizon, and when we talk about, I guess you, Maddie, refer to the one-off costs or the IAC here. We don't expect to have a higher level of IAC forever, but it's to support the transition and transformation that we are now going through, that we talked about. Yes, in the short run, you can say that we get some help from including IAC, but over time, this is really 12% compared to 14% or 14% compared to 12%.
Okay. Next question. This one is from Sebastian at RBC. We've heard from him earlier. This one is to Alrik. Pricing pressure for automotive bearings, engine and gearbox is intense. What is the current pricing situation for high performance bearings used in new electric vehicles?
Well, absolutely right, and whenever you have large series of products, it's always going to be more competition on price than you will have in more fragmented businesses. You're right. You can understand right now it's of course a difference. It's a highly differentiated product and there's a clear difference. By having unique solutions, the idea is now to keep part of that difference going forward. Of course, there are going to be always, as you have a pre-series and then a vehicle starts being produced in the thousands, there will be a difference. The way we see it, with the kind of technology that we're bringing to the table, we will be able to get a reasonable share of the value that we are creating.
Thank you, Alrik. From Ben at Morgan Stanley, maybe Victoria, you can take this one. This is a slightly unfair question he claims, but why are you spending so much time on the fee-based model, which is just 1% of sales today? Is it because this could be maybe 5% very soon? I'm just trying to understand the emphasis within the business.
It's not unfair.
No, it is not an unfair question. This to me is almost a personal question because it is the right thing to do, is the short answer. For customers, it is the right thing to do to keep their machinery running instead of trying to sell them more spare parts. In the long run, that must be the right thing to do, making the customer win and being part of that win to get a share. It's also the best to do for the environment. I think we have now also made the case that we might have found the key to the circular economy, to sustainable growth by this fee-based business models, because for the first time, we can actually earn money and help our customers and help the environment by keeping machinery running for a long time.
That must be the right thing to do. Therefore, we spend the time, and of course, 5% more. I am convinced it is going to be a lot more than 5% going forward.
Ben, it's not an unfair question. I think it's absolutely true. Maybe we can have a separate meeting and I will convert you into the firm believers of fee-based, because it's not only in our business where we will have fee-based. Ben, I invite you together with Patrick, maybe we can have a session on this. Fee-based is the future.
Okay. Thank you, Ben. I'm sure you'll be hearing more from Ben. From Andreas at Nordea to Niclas, a question about your cost savings in relation to your cost development line in your EBIT bridge. Do you think it will be possible for you to have a positive cost development line next year despite temporary savings likely coming back as costs next year?
Yeah, I realize now that I didn't answer the kind of question on temporary, permanent earlier, so good that you, Andreas, ask it again here. We are working on efficiencies across the board. We are working on ways of working. We're working on innovation. You name it, all the things that we've discussed earlier today. Of course, cost savings is part of this, but it's only one small part of this. Therefore, we would like to not only to mean on cost savings per se, but as we've commented in connection with Q2 and Q3, we've had roughly half and half coming from permanent versus temporary. We will continue to work on permanent cost savings. Let's see, let us show whether they completely offset or not, kind of the temporary ones. Rest assured, there's more to come.
Yes. From Gaël at Deutsche Bank: "As you aim to boost the company's growth profile, why not consider moving more into systems and/or adjacent areas in the transmission market, like drives, gears, couplings, chains, et cetera, in order to expand your addressable market size?
Interesting, Gaël. Now we're into technical matters.
Yeah
you can fill in. You're absolutely right. There is, of course, interest in gears and couplings and so forth. As long as it's truly differentiated, as long as it's truly the differentiated in the rotating shaft, then we will actually be looking at that and going into it. I'm not going to tell you right now which of these, if any of them, could be part of that. Some of them are actually also going to change. If you look at, for instance, the way electrical motors that we are developing together with our customers are going, it's like in the old days, you had a steam engine and a big belt. You had an electrical motor and a big belt. You started to put one motor on every machine, and you had belts sort of moving all the axles.
Now more and more, you're going to direct drives because that's when you get the efficiency, you get the precision, and you get the right setup for how you want to drive the machines. Some of the products that are tomorrow's project could very well be that we will be looking at that, but we will not go in and into something that just because it looks good today, but we understand that it's sort of yesterday's technology, that we will go in and acquire that kind of technology. Your question is right. We will do that, but we will only go into what we believe is the differentiator for tomorrow.
Maybe I can add to that, because there are even bigger systems like pumps, compressors, and this kind of stuff. We also have a possibility to work in ecosystems or in partnerships with providers of those systems. That is an absolute, and with digitalization, this is already reality. We hope to even be announcing such collaborations going forward.
We will not compete with our customers.
No.
Any customers listening in, don't worry. We will make our technology available to you and not compete with you.
Thank you. Okay. From Andre at Crédit Suisse again, he has a question to Victoria and really the entire panel here: "In fee-based contracts," it's a popular topic today, "how do you protect yourself against operator mistakes or negligence?" Interesting.
Yeah, that is a good question. We do it in many different way. One way is, of course, the surveillance and the artificial intelligence, where you can see what has been done, and you can see it immediately when it is being done as well. The other thing is, little helpers or nudges to help operators to do the right thing. Like the app that we released this summer, Bearing Assist, helps operators to actually mount and dismount and treat bearings in the right way. We help and guide the operators, and collect data, of course, at the same time, so that we can improve the products to make them more mistake-proof.
There is other things we can do, too, which we are doing. If you listen to Victoria when she talks about our sensor development, load sensors, for instance. One of the problem is that if a customer overloads a bearing in its process, of course, then we cannot be responsible for that. We can now, thanks to Victoria and her team, include in our offer to put in a load sensor and make it clear. What happens, as soon as you put in a load sensor, also the customer learns how not to overload this particular machine, and the problem sort of by technology is resolved. There's so much to do. I was visiting one of these companies where we have a fee-based comp, which had a problem.
They were slamming too-cold steel into the mill, and that was one of the reasons why they had failures. Of course, as soon as we could see that and eliminated that, well, there was no negligence anymore because we put in a sensor that measured the temperature, and then you knew if the temperature's too low, the machine sort of stops, and so forth. Again, Andre, technology is what's going to make us comfortable in being able to, and makes us comfortable in making these fee-based, and it's where we sort of take a bigger responsibility, make them work.
Let's go on to Lars from Barclays: "What's the total content value for SKF for a wind turbine, including bearings, lubrications, all the bells and whistles?
Well, an unplanned stop is very high value, so it a bit depends on how you answer that question, adding up the sum of the parts, but the part is bigger than the whole. If you lubricate wrong, yeah, well, then it's not that great.
The answer to the question, to put it in another way, when it's just to say, when you build the big windmills, the bearing is not such a big part of the total setup of a complete windmill. If it doesn't work, and if it isn't engineered right, and if it's not maintained right, and if you don't supervise it right and so forth, then the costs will come. You can understand that just if you have an offshore turbine, if you need to take off the nacelle and sort of take it down and repair it's almost like setting up a new one. As maybe the initial value of the total is not that great, which is not a problem. It's good for us. We make good revenue from that.
The afterlife, after setting up, making it work for 15 years, our understanding of how bearings works is absolutely crucial. In the design, when you look at what we can do with our new design software.
Oh, yeah.
our digital twins and what we can do in our Wingquist Center, where we can sort of help the customer to understand that now this setup with our help will actually work. It's incredible.
Okay, thank you. Another one from Gaël at Deutsche Bank. Do you still use the Siemens MindSphere platform for data collection and analytics? How does it work in practice for you and for them?
Well, I can-
Yeah.
The answer is yes, and we also work with other data collection platforms. This actually depends on what the customer prefers. Some customers use Siemens tools, others use other tools. We have created APIs or connections to many different tools. We actually use MindSphere in, I'm pointing to Kent over here, in our own factories so that we can make use of it in a different way. But it's working really well.
Exactly, the key is, you understand, SKF is not going to take the whole plant surveillance kind of software. The customer wants us to be able to plug in to give them that specific knowledge and that specific AI support around the rotating shaft. MindSphere is a perfect sort of partnership where Siemens takes the overall responsibility, and we plug in with our key sort of focused knowledge into their platform. It's the way forward.
Yes.
Thank you. Another one from Andre at Credit Suisse, and this one is to Niclas. "Could you please provide an update on the ERP program rollout, and what's the level of spend on this in 2020, and what's the outlook for 2021?
Sure. Yeah, I would say overall, we are making good progress on ERP. We've reshaped it quite a lot, as we've discussed before. There's tons of stuff still to do, so let's be a bit humble and modest about it, but making good progress. The cost level is and continues to be significantly lower than if you go back a couple of years, and we don't see a major change there. We'll keep it at a lower level. I would say more important going forward is to look at overall, call it IT or digitalization. ERP is more and more becoming a part but not the main part of things. We also work, we don't only kind of look at ERP per se, but we also work on overall digitalization and IT, including the spend of it.
I think the interesting thing is that all these technologies that we've been talking about also, they sort of plug in and leverage our possibility to have fee-based arrangement with our customers. It's really sort of all fitting together now, and I really compliment the R&D people and the development people, both in our factories, Kent.
Our R&D people for having created all these fantastic technologies that leverage our ERP and fee-based business going forward.
Okay, this last question is from me, final question of the day. When we see each other again at the next Capital Markets Day, maybe in a year to two years' time, don't know exactly when, My question is: What's the vision? What kind of SKF will we see then?
Well, maybe I'll take that.
Yeah.
I think what is the most rewarding, you have heard us now, hopefully you've followed us for a while, and I want to talk about the things that we're doing and less about the things that we're not doing, we're thinking about. We're sitting here, and we're talking about things that we're actually doing, and we're giving you sort of a flavor for how this is going to develop forward. If you look back, what we started to say five, six years ago basically is the same, is to understand, for the customer, it's about mean time between failure. It's going to be like that, and we're going to be that player. The rotating shaft is one of the absolute, if not the most common industrial application.
It is so differentiated, and there's so extremely many ways how you can add value in that, and we're going to continue to do that, and we're going to continue by that grow. You will see SKF having even more technology available for our customers, and not the least in the green tech or clean tech area, where we're really focusing. Here, I think intuitively you understand that friction, reducing friction is something that's good, but also this circular way of looking at the whole production system is something where we know we will be able to contribute and grow a lot.
If you look at our manufacturing footprint, we're looking at flexible factories where cost and flexibility are not mutually excluding like they were before we had the new kind of technology. We're looking at a more regionalized value chain, because as you take the differentiator of labor out of the equation, other things like closeness to the customer and transport and other things become the differentiator. You will see SKF actually being region for region kind of supply chain. You will see an SKF with a strong cash flow, with good dividend for our shareholders, and the money to continue to invest in technology, continue to invest in new ways how to do business and acquisitions, and an SKF that will make every investor who is short lose money.
Great way to end.
Yeah.
It'll be an exciting journey to follow this circular evolution of SKF.
It's really great. I must say, this is for real.
Thank you so much for all your insights today, Alrik, Victoria, Niclas, and Kent. Thank you to you all who have joined us here for our first-ever virtual Capital Markets Day. We look forward to seeing you next time.