Good morning, and welcome, everyone. We're so happy that so many of you have taken the time to come here to Gothenburg and to this brand-new building. This building is actually a combined office space for the Swedish sales organization. We have some engineers here as well, and also some communication people, so it's a very dynamic environment. Added to that, it's also some production environment in here. We have service workshops for bearings in here as well, so it's very new, actually, only one month old. So, going through the presentations and the agenda for the day, we have quite an interesting day ahead of us. There will be plenty of presentations covering both for the group, but also for the different business areas.
We'll have a thorough technology section towards the end of the day, but most importantly, there will be plenty of time to interact with the new management team, which is here, both during the breaks, but we will also have a Q&A session in connection with the different business area presentations. We will close the day with a summary Q&A, and followed then by a cocktail reception downstairs. So with that, I wish you welcome, and hope you will enjoy the day, and will leave the word to Alrik.
Thank you very much. Hello, do you hear me? Yes. Thank you very much for coming. It's especially for you who have come far away. I know some people have come from very far away. It's a big honor, and we will do our best to make this day worth your while. My intention is today, our intention is today to show you our thinking, how what we're gonna do, and you will see. I think we're going to be able to portray it in a good way, in a way that it's easy to understand. And it's interesting, it's not so much about rocket science, it's about hard work, isn't it?
And, you will also meet key people of the management team and people who are actually here, who have the executive responsibilities to do it, so you can sort of touch them and feel them. And do I believe that these people are the right ones to do it? And I think that's one of the reasons probably why you've come here instead of actually listening in on a webcast or something like that. There will be plenty of opportunity to do this. And, this building, just to take one minute on it, it's interesting when you talk about how are we going to work in a competitive way.
We have gone from having offices, for you who have been in the SKF headquarters, which is a building from 1966. We're all sitting in sort of blocks and actually don't even know the people on the other side of the elevator shaft sometimes. Here we have an area where people come in, and depending on what you're gonna do, you're sitting in a quiet section, or you're in a more loud section, and you have the application engineers just a couple of meters away, where you can actually, where you have a customer on the line, and there's an issue, you can actually grab the application engineer, say: "Can we solve this right now? Is this a possibility?" It's a fantastic opportunity.
This is the new way, where you're looking at the workplace as, "What am I gonna do this morning? And this is what, where I'm gonna be." Nobody has their own place, so to speak. But of course, it's a great challenge for some people who, you know, we're all different, right? The people who are really people of their own habits, and, you know, they get nervous when they don't have the same place to sit, et cetera. And of course, here, the basic how do we accommodate for this? And it goes back to one of the key issues. We think it's all about money, we think it's about technologies, but it's about people, right? It's about the people who will actually make it happen. And this isn't the first time we do this in SKF.
It's an experiment for us. Maybe this is the new way of doing it. So if you have a chance, take a look at it. It's interesting. So I'm gonna talk a little bit about the big picture, and you know, I'm now almost... Well, I'm over 12 months back into SKF after being outside 10 years. I came back because I think this is the best company in the world. I love the industry. You can ask yourself, why bearings? It sounds very boring. It's actually one of the most fantastic products, because you're everywhere. You're in all industries. If you make trucks, yes, you make trucks. We are with trucks, airplanes, industrial applications, you know, you name it. The bearing is probably one of the most common products, and we all own hundreds, and we don't know about it.
But we do, because we work with your applications, and this is one, the main reason, I would say, why I felt extremely privileged to be able to come back to SKF after being outside ten years. And, you know, there's a need for change, and it's not because SKF was doing something that wasn't appropriate, it's just that it's changing. The world hasn't probably been changing so fast in modern history as it's doing now, and it's because there's so many people around the world involved in making a change, and customers are changing, and markets are changing, applications are changing, the fundamentals of economics are changing. And I think I heard a saying once: If you don't like change, you will like irrelevance even less. And I think that is actually a little bit what it's about, change.
So I'm not saying it in a negative way, I'm actually saying it in a positive way, and we have to embrace change, and we have to understand that it's needed. I want to talk about the mission, and I want to summarize afterwards a little bit. So if I say, I mean, SKF is the greatest company in the world, I feel so. You may not believe me, but it's true. And we have a brand name that's fantastic, and of course brand equity is about not only having it, but building it. And of course, that's one of our main focuses now going forward, to build our brand equity. We have good strategies and good ideas. We've always had. You know, I joined in 1987.
I think some of the main issues around how the bearing industry has evolved, has originated from SKF. We have very good marketing ideas. Maybe we have not always been the best at executing, and that is what I hope to show you today, that we have a team now ready to execute. We're present around the world in all geographies, and with a globalized world, if you didn't like globalization, you should have probably protested from a European perspective after the Thirty Years' War, because the world is globalized, and it doesn't matter what we think about it, it's going to stay that way, and it will just accelerate. We have a broad product range, we have a relevant product range, and we have a good service offering. We have good technologies and very good people, and I think that's a fantastic foundation.
So changes, yeah, globalization, we have an increasing competition from China sometimes, yes, but I think it's more a conceptual understanding of what is different today from 20 years ago, and I'll come back to that. We need to be more understanding of what is actually the customer needing, and we need to be more responsive to that functionality. Because if you come with a product that is lasting the customer's warranty time, 50 times warranty, and there's a competitor coming with a less expensive opportunity, and I'm talking about product supply now, and it's 20% less expensive, well, in many markets, there's actually no option. The customer doesn't have an option. And if you understand what drives cost in your operations, there's no reason why you can't do the same.
I think that's going to be one of the strategic shifts that you will see, that we will present right now when we're talking about how to address a bigger share of the market. Because even though we have a fantastic market share, there's still the majority of the world market to work on. And grow. Grow in our main business, this is one of our main objectives. We have done a lot of things around the bearing, but we need to be better at growing our bearing business. And of course, energy efficiency is a key going forward. We see it from all customers all around. Lower friction rates, and there's a lot to do there. And it's a fantastic opportunity for us because here you're talking about innovating within an envelope, if you know what I mean, the difference.
You have innovation, where you actually have to change the application, and you have innovations where within the envelope that the customer is asking you, you can do wonders. If you believe that the bearing is, it's in the end of its maturity curve as far as development, you're wrong. I hope that we will be able to prove that to you today when you listen to the people coming forward. So what are we doing? Well, from our perspective, we're focusing five big challenges. We have to make our customers be... excel in their businesses, that by working with us, they become more competitive, and by that, making it obvious that they work better with us. It's like we have to work the value chain even more than we are doing, have been doing so far. Innovation.
It is absolutely clear in my mind that the long-term game is about innovation. It's about coming with these new materials, new technologies, new applications that will actually do the trick. Manufacturing. If you believe that in a business like bearings, you can excel without being absolutely world-class manufacturer, I think you're naive. We're putting manufacturing even higher on the agenda. It's always been high on the SKF agenda. We're putting it really high up on the agenda, and you, I hope you will see that today, especially during the presentation of Luc, where he will tell you about what we're doing. Cost. The increased competitiveness means that whatever costs you have in your organization and in your product or in, in whatever you do, that does not really add value to your customer, is going to be difficult to defend.
As globalization increases, this must be a higher part of our focus, especially now, when business times are not as strong as they usually are, they have been. Well, you know, it becomes more of a buyer's market, and of course, then the focus on having the right cost increases and capital. To endure ups and downs in life, you have to be solid, and of course, we need to strengthen our balance sheet. And how do we intend to do that? Well, by focusing. Again, why we put together, in the beginning of the year, our five priorities, which are really four priorities and one consequence. And why the consequence? Because we said we can't have five priorities in the group without talking about some sort of performance, and that's, in my mind, cash flow.
If I ask you, I've been asking you, if you give me one thing you want me to focus on, that's long-term cash flow. So it's about the customer, it's about innovation, and about World Class Manufacturing and cost competitiveness. And why four?... Because it doesn't have to be four. There are areas where we have one priority or two, you can't have ten. If you have ten, you don't have any priorities at all, and this is the idea behind these priorities. But we stay the same. I'm not-- This is not a revolution, this is an evolution of SKF. I think that what my predecessors and the teams in SKF, and, you know, me growing up in SKF, I think SKF has always been a fantastic company, and the SKF Care, and our values, and focus on people, and leadership is the same.
Empowerment, accountability, it's easy to say, it's not so easy to do, but I think that when you talk to the people today, you will see that we've taken that a little bit further. I believe that true leadership comes from understanding my boundaries, where I have my responsibilities, and feeling free to act within this, so I can engage my willpower as opposed to actually being told what to do. And the people who are emotionally engaged, they're so much powerful, more powerful than the ones who are acting because they're being told. And I think that you know that this is true in your own lives. And it's—yes, it's a soft thing, but it is so important because that is what truly makes the difference.
I hope that you, when you engage with my team, that you will feel that they are, and they feel empowered, accountable, and purposeful action takers. Why have we added this mission to what we're doing? It's because we wanna make it clear that over 70% of what SKF does is around bearings. The technologies we have around bearings are there to support us in our ability to create value to our customers around the rotating shaft. Yes, they have standalone, they're standalone businesses sometimes, but the reason for being in SKF is, of course, that they support the main business. Everything that supports us around the rotating shaft is core business for SKF.
The main areas here that we have today in these technologies are four of these platforms that we used to call them, or that we still call them: bearings, condition monitoring, seals, and lubrication, and services, of course. But it means also that we have then to look over our portfolio, and you have seen that we've acted on this, and I just show this slide to remind us of that we're actually acting on this. There are things that are not really core to us, and where we don't see how we can keep the technological leadership. Because if you ask yourself: why do you own a company? Or why do you have a business? Of course, the reason is, I believe I can keep some kind of technological leadership.
The five priorities, I will go a little bit more into them during the last five minutes of my presentation. So what do we mean? Well, basically, it's working the value chain, right? It's about understanding the customer, and sometimes the customer's customer, and work from that perspective into SKF. We've been doing that very professionally in the past, but now we're opening up some of our, our understanding that we need to be sometimes even more flexible in understanding what are the value propositions that we have to adapt to our customers. There will be some examples. I will not talk about them, but my colleagues will, and you will see some examples of this. And it's about playing in sync, right? With the customer value chain and our own offerings. And what are the offerings that we have? I argue we have two strategically different offerings.
One is the rotating equipment performance offering. You heard us, during the years, talk a lot about that. I think here, SKF has a fantastic opportunity still. What is it? It is an end user who needs the machine to work. Here, actually, you understand that the component price is irrelevant. This is the functionality that is relevant. Here we have a fantastic business model, and I tell you, this is one of the reasons, of course, that we are earning good money in our industrial business, that we're doing this. Can this be done in a better way? Of course, it can. Are there areas and pockets of opportunity out there where there are customers who do not have access to this? Of course, there is.
The other is a product offering, and a product offering is where actually the customer looks at the application, looks at what the customer needs to make it work, and then asks him or herself the question: Is this gonna last 100 years, or is this last for one harvest? And then define what is the kind of product and performance I need. And that's the market. And here we need to be more customer-centric. Today, if you know, SKF has two performance classes, basically, in the industrial business. We have a SKF, and we have Explorer. And of course, if we can't be more customer specific, there are parts of the market, substantial part of the markets, that we are not able to reach today. It's not about quality, it's about performance. The SKF quality is a given.
We are quality leaders, and we're gonna stay quality leaders. And this is a fantastic opportunity for SKF. So it means the rotating equipment performance market, we want to grow it, the product, we want to grow our share.... Innovation. It's basically the same theme, right? That through understanding the customer's value chain, there's so much more that we can do. Victoria will talk more about this later. I will not spend more time here now on this. World-class manufacturing, the same. You will hear Luc, I will not bore you with the same thing. Cost competitiveness. It's tough, you know, to understand that sometimes activities that you're doing are no longer adding value, and that there are new ways of doing it. It's really tough, because to get everybody engaged in new, fantastic opportunities, that's easy.
To get people involved in understanding that there is an opportunity here to cut out costs is difficult. I hope that you will be convinced when you talk to our people during these days, that we have this ability, and that we're prepared to take the steps. Understanding that we need to take care of our people and do the best things for SKF, so it's not about that, but to seek out these ways to cut out costs out of our operations. Christian will talk more about that. Yeah, maximize cash flow over time, Christian will also talk about that. So if I summarize, this is it. Our foundation, our competitive edges around the world, the way we are, and that we are now absolutely determined to deliver on these ideas that I briefly have presented to you.
The value propositions are rotating machine efficiency and a product offering, a simplified organization that is cost competitive, and clear targets, clear areas of responsibility where the people can act and become purposeful action takers, and by that, becoming and staying the undisputed leader in the bearing business. With those words, I end my opening, and we will have plenty of time for questions later. Now I give the floor to Christian. Please.
Thank you, Alrik. Good morning, everyone. I also would like to wish you a warm welcome to Gothenburg and to the SKF Capital Markets Day. Being a newcomer in this role in SKF, I thought I would just introduce myself briefly. Finance graduate from Stockholm University, worked soon 28 years in multinational industrial companies, started off in Alfa Laval, joined ABB 1990, where I spent 12 years in Sweden and abroad. Joined Volvo Group at the time when Volvo acquired Renault and Mack Trucks to become a multi-brand truck group. I had a role as CFO in the truck technology part of the global trucks for some six years during the integration phase, and then I was entrusted to become CFO of Volvo Trucks, a role I had for almost five years.
Left Volvo, took the position as CFO of Gunnebo, which I had, before joining SKF this summer. And as Alrik said, I'm very happy to get the opportunity to be part of the SKF management team and with the changes we have here, in front of us. So my agenda, since we just a couple of weeks ago, released our third quarter report, and it was discussed there. So I will not spend a lot of time talking about the past performance, just as a brief introduction. Then I will move over to talking about what are we actually doing, also from my role in the company in order to improve performance.
I will talk about cost reduction and focus areas, I will talk about capital efficiency, I will talk about our financial position and have some key messages in the end. So looking at the last seven years' performance and also adding the 3 quarters of this year, starting off with the operating margin and, in this case, excluding one-time items. The average over the last seven years, we are just about 12%, 12.2, and so far this year, we are at that level as well, 12%. Also, I would like to add that during this period, we have the amortization due to the acquisitions and the immaterial assets that have been added, goodwill, during these years, is added.
So if you compare, for example, 2014 to previous years, we have around 0.5%, which is amortization cost increase. Earnings before interest, tax, depreciation, and amortization, there we are then neutralizing that effect, and if you look at that same way, we have averaged close to SEK 11 billion during those seven years, and we are at SEK 8.7 three quarters into this year. Free cash flow, here, excluding then the effects from M&A and also the EU fine that we had 2013, we have averaged just below SEK 4 billion in the past period, and we are three quarters into this year at SEK 5.8. Return on capital employed, as you can see on the slide, has deteriorated during the period.
I would say the main reason for that is the add-ons or in the balance sheet following the acquisitions. We've added on around SEK 18 billion of immaterial assets, mainly goodwill, during this period, which is a big part of the total capital employed increase. If you look at the performance per, per business area, and as you know, the structure we have in terms of business areas, now with industrial market, automotive market, and specialty business, that's quite new, why I have just a shorter timeframe in this slide. Industrial market traveling on 14, 14.5% above the group average. Return on capital employed well above the group average, 24%.
Automotive market, we're talking about mid-single digit margins, and with about the same capital turnover as we have on the industrial side, giving them a return on capital employed around 10. Specialty business, margins at group level or just above group average. Here you see on the return on capital employed, that we are really, and especially in the specialty business, we are really having a burden then from the intangible side, on the goodwill side. So you see that the capital turnover on specialty business is less than one. So that's a little bit of where we come from. What are we then doing to improve performance? And as you've heard, one of the five priorities for us is cost competitiveness, and I thought it could be good if a CFO talk a little bit about cost.
So I intend to do that. So we have four focus areas here where we not only work on cost, we work on other things also, but where we expect to see effects on our cost base. And the first one, Alrik touched. It's about the white-collar side, about how we are organized. Organization is changed. You will hear more about that in the later presentations, what we have done in Industrial Market, for example. So it's about simplification. Reduce number of organizational boxes. My experience is that that's one of the biggest cost driver in the company. So enlarging responsibilities, also changing them slightly, sometimes coming from a profit center structure with some internal created top line, to changing the role to being more of a cost center, working on its own cost. That's some of the changes we have done.
So simplifying white-collar productivity, also to optimize support structures, in country organizations as well as from group level. Come back to that a little bit later. Second one, our footprint, our global footprint. Our footprint has grown due to acquisitions, due to also, our strong move into emerging markets when it comes to manufacturing base as well as our overall presence. So that's an area where we are also, reviewing now, seeing what we can find in terms of additional, consolidation, from a group standpoint. Purchasing, we have now, I would say, very globalized purchasing organization, especially in the times we are in now, low commodity prices, overcapacity in many of the markets we are, we are acting on.
We are utilizing that, and we are mobilizing a lot here in from next year in terms of sourcing activities. I come back to that also. Business excellence in terms of process improvements, it's an area we work with under several, I would say, initiatives, but particularly when it comes to Unite, which is our project for replacing our outdated IT platform, we have also an ambition to transform our way of working into more state-of-the-art processes. I come back to that as well. So this one, we commented, I will not spend a lot of time on that. It's not the future we talk about. We are doing things, we are seeing results. This program was announced almost a year ago now.
That has been executed during the year and per end of third quarter, as you see in the slide, we have agreements now with more than 1,400 of our employees to leave. We had a target of 1,500, and we have a cost on a full year basis, cost saving of SEK 940 million, coming through here. By end of third quarter, we have seen SEK 230 million of that, so that will increase going forward. So that's done. Back again to what we are working with, and, and if we, drill a little bit deeper here, and we separate our variable and fixed cost, and we focus the fixed cost base, we see here on the slide that the biggest part of our fixed cost we have in manufacturing. So on 43%....
Then follow sales and distribution around 30, management and administration around 20, and the remaining 7% in R&D. So for each of the functional areas, the focuses are slightly different, but the message is clearly you work with your productivity and with your waste. So if we walk it through manufacturing, and you will hear more about that today, world-class manufacturing in terms of best practices and business excellence or footprint, we expect to see effects from. In sales and distribution, we come from a complex organization, reducing and simplifying that, which is still a focus. I think you can also, of course, ask yourself the question: how much can you enlarge responsibility? How few boxes can you have in an organization? And I mean, in the end, it boils down to your people, huh? How much can a person take on?
How can people grow in terms of taking on broader responsibility? My experience is that you can go further than you think, of course, by supporting people. So simplifying site footprint also in our big countries, for example, in U.S., with acquisitions, we have quite a sizable footprint in U.S.. We are revisiting now and see how can we, maybe, base ourself a little bit, tighter, seen from a group level there. Still, of course, serving our customers in the different businesses we're in. Sales efficiency, in the management and administration side, we have now rolled out, what we call a value management framework, which is about right sizing of services internally. It's a way of coming through finding your waste.
We are also working on standardization of our support services, and I will give an example later today, and also outsourcing. And sometimes it is as easy as stop doing things. But as Alrik said, you have to agree, which is not always so easy. But what you are doing, let's stop do it, but on an individual basis, of course, it, it hurts. R&D side, R&D efficiency also have their priorities. Here, we talk about the right balance between R, research and development, to have enough depth technology-wise, which is the R, and at the same time, have a right-sized development organization to design and industrialize the concepts that you work with. So to have that right balance, is something that Bernd and Victoria, are working with. And it's also about prioritized and focused technology programs. We cannot do everything.
We have to decide what are the most important areas to work with, decide that in for us with business, and take away and wait for other things. So as a whole, we feel that we have a lot of actions ongoing. We have things in the pipe, and we are convinced that we have enough activities now in order to going forward to have a more efficient cost base. Purchasing, some more comments to that. We have a purchasing spend of close to SEK 40 billion, whereof SEK 22 billion is direct material. And here we have the market situation we have, which is good. As Alrik said, it's good to be a buyer today. With soft markets, low commodity prices, and we are, of course, taking that opportunity in terms of levering that.
We are driving business towards our strategic suppliers. We do it through sourcing waves, we do it through standardization, we do it through changing specifications, designs, of course, still, matching customers' specific needs. Should also say that it's not only purchasing when you talk product cost. To, to work with product cost in a company like SKF is a cross-functional thing. Working with engineering, working with manufacturing, and I would say around half of our cost reduction activities are what we call Integrated Cost Reduction activities. So no, it's not just a purchasing activity. On the indirect material side, we also see good opportunities from purchasing point of view, in today's markets, and, and we, we are increasing our ambition to, to sourcing, strategic sourcing, as we call it, opening up tendering with competition.
Some areas we work with there are transport and energy. So some more comment to this, and it was also up in the quarterly report. We call it Unite. It is a fact that we have an obsolete IT platform in SKF. It's been so for a while. It's old, outdated. It becomes increasingly difficult to maintain due to old technology, due to that it's difficult today in the market to find individuals to support us on this old technology, and we have to change. On top of that, we have a high complexity added by the fact that we have acquired companies that not yet are integrated IT-wise.
So it's been decided in 2012 to choose SAP as the platform for an SKF integrated ERP platform. And since then, we have started to build up the capabilities there, investing in infrastructure, adding the competence. And we have also had quite a—we should say that it's not been without complications, this project. Which it usually is, by the way, in IT. But the program was stopped late last year. It has been revisited, reshaped, and restarted. And now I would say we have a strong project team, strong project management, a strong backing from management, and full speed on this.
We have also decided on a roadmap, how to roll this out, and, we feel, for the moment, quite happy with how this progress. Unite is a sizable financial undertaking. We have so far spent, as you see on the slide, more than SEK 2 billion. We have capitalized, by end of this year, SEK 1.4 billion. And going forward, we are now in the build phase, software coding, and so on. Next year will be a lot of build activities, we will have around SEK 900 million, we think, in terms of spend on this, so somewhat up versus this year. 2017 is also build, but less. But after that, the cost for this is more internal resources to be allocated to support the rollout.
So when we reach that, we can say that we, we will control both the cost and also the speed of, of the project. But presently, we are in a, in a rather heavy project phase of this. So leaving the focus areas on cost with that, moving over to capital efficiency. The left graph shows our property, plant, and equipment in relation to sales. And there, I would say that we, we have, over the years, had quite a positive development. We have gone from somewhat 30%-20% of sales, and our ambition here is to sustain that level, and we are convinced that we can do that. In the right-hand graph, you see a somewhat different picture. It's the net working capital in relation to sales, and here we've had a negative development trend.
Here, our ambition is to reverse this trend going forward, and I will come back to targets and how we intend to do that in a couple of slides. Firstly, just one more comment when it comes to PPE investments. If you look at the seven-year period, we have invested around SEK 2.2 billion. And if you look at the pie there, you can see that the biggest purpose of the investments has been capacity increase, and which is logical, because we have expanded our footprint into the emerging markets, and that has been driving that. If you look at where we are now and looking forward, as I said, we still believe that SEK 2 billion is a good level for us in terms of investment.
But the purpose of the investment is somewhat different. It's more about efficiency or plant productivity, if you want it like that, and replacement of outdated plant technology. So it's in line with our ambition to step up our ambitions on world-class manufacturing, upgrading our manufacturing base. So back to working capital. At the last Capital Markets Day, a target of 27% in relation to sales was presented. We are today just below 30%, and I would say that in the business SKF is in, with quite a wide product portfolio and a global footprint, 27% is an ambitious target. Nevertheless, looking at peer industry, this is doable, and we are committed to reverse the trend on working capital that we've had in the past.
We have broken down that target in the different asset groups. Inventories, 19% of sales, receivables, 16, and on payable side, eight. But in order to get something different, as you know, you have to do something different. Your question is, of course, what we will do different now? On inventory side, we see two main areas where for improvement. One, first one is a global end-to-end planning and forecasting process, and I come back to that. The second one is to increase flexibility in our supplier manufacturing chain. On the first one, when it comes to the planning, global end-to-end planning, the end-state vision there requires some new IT support, and that we will get with Unite.
So if you look more in the short term, we don't have that part, but it all includes much more than IT. And there, we are working now. And for example, if you talk about regional and local stocks. We are now moving that responsibility, organizationally up, you can say, to more a global responsibility in order to enable us to plan from factory, finished goods, warehouse, to regional warehouse, to local warehouse in a holistic way. So there we are doing a change in the way of working. Same when it comes to assortment, what assortments to have, we are also moving that upwards. Still, of course, having a close dialogue to sales. Another area where we, in the short term, believe we can improve is how we manage strategic stocks. It's a bit further down to the right on the slide.
With that, we mean that to bring more transparency on the decision process on, for example, sales campaigns, also in the way we manage phasing out and phasing in old new products with our OEMs. I think we certainly have an area of improvement. When it comes to goods in transit, that's also partly an effect of how we are serving the markets from our footprint. And there, I believe we also will have some potentials then when we review our manufacturing footprint. And finally, then on the manufacturing flexibility, by increasing that, I think we should be able, and look, we'll come back to that, improve our stock levels when it comes to resetting the plants. So that's some of the things that we actually are working on right now in this area.
When it comes to receivable part, we have focused this year on the collection process, where we are doing some changes. We are outsourcing the collection process to an external partner. And as you see in the slide, we have done this already in a number of markets. We have some others ongoing, and we will have some going forward. But by end of the first quarter, we expect to be through this, and the benefits we see is less overdue and about SEK 400 million in freed up cash. On the payable side, I believe that the concept of supply chain financing was presented to you at last year's Capital Markets Day. I can say that now, this is not a concept, it's a reality. We do it, and it's a success.
So today, we have a spend, a purchase spend of around SEK 3 billion included in the program, and you see in the blue line there that we expect more to come. Additional suppliers are boarding. We will also roll out this in other countries. I mean, the purpose with this is to have a win-win. Suppliers get paid earlier, suppliers get lower capital cost, SKF get better cash by better payment terms. So it is a win-win, and it works. So as we see it now, we have a cash flow effect this year due to the gradual ramp-up in the same range as SEK 400 million, and we believe the potential of this program is to contribute with another SEK 400 million next year.
Moving to our financial position, and if we start on the right-hand side, we have a net debt equity ratio of 114%, lower than it was end of last year, and certainly lower than when we peaked in mid-2014, where we were above 140. Our debt has increased, if you take the longer, the seven-year period I talked about before, with SEK 23 billion, and it has increased SEK 13 billion since end during this period you have here, 2013, 2014. And what is driving that? I said that we have been a decent cash flow generator, but despite of that, we've had some out of ordinary, I would say, things. Firstly, we've had the EU payment done in 2013.
Secondly, we've had increasing part of this is an increasing pension liabilities due to the lower discount rates that we have. The main driver of this is the acquisitions in the last few years, and I will come back to that. Should also say that we are now lowering our debt to improve the balance sheet, as Alrik said, is a priority for us. We have reduced the debt since the end of last year with SEK 1.5 billion, which includes then the dividend payment. That's the direction. Just some words then on acquisitions. The seven-year period, as you have here, we have acquired companies for around SEK 19 billion. The big transactions have been the Lincoln in 2010, and the Kaydon transaction in 2013.
We have also divested non-core component businesses and some non-core businesses for SEK 2 billion, and a big part of that this year, in fact, the one of the transactions you saw on Alrik's slide. So net, we have acquired for close to SEK 17 billion during these years, and I would say that has, to the large extent, been debt financed. So as a summary and key messages, good performance. Some of you might would like to challenge that during the day, but certainly related to our bearing peers, we have a good performance, but we have clearly higher ambitions going forward. Our cost level is too high. Cost reduction and focus activities across the group as we have gone through. Quite strong cash flow generation in the past.
We have low PPE ratios, we have a working capital focus, and we are doing divestments. And this we do in order to focus our cash flow financial position and to deleverage our balance sheet. I will end there, and I will give the word to the President of Industrial Markets, Alrik Danielson.
Oh, thank you very much. Well, thank you, Christian. That was good. You see, we complement each other. Christian is a fantastic asset. We've had very, very competent people in finance for many, many years in SKF. Some of them are here today, but Christian, already you're so new into this, and you're already as if you had been in SKF for many, many years. So I am running the industrial market as well, together with the team. And there is, of course, two more people that will present with me today. John Schmidt, who's running the U.S., and there's you will see today, you will have Europe, presented by me and many of our colleagues. We are a Europe-centric company, so a lot of big people from Europe that you will have the possibility to interact with.
U.S. and also Asia in Patrick Tong, who will later come up, because Patrick, he has a dual role. As you know, he's running the Specialty Business Division, but he's also head of China. And when I say head of China, in new SKF, it's executively head of China. So if you want to talk about China, well, the boss is here. Well, starting a little bit, what is the industrial market? And you see here, some of the figures. You know this, but it's still, it's a good start to talk about where we are.
And these are the customer segments we are in, our main customer segments, the size, and you see that there are some sort of competitive landscape, where we look at our bearing peers that we compare ourselves to on this slide. And there is some of our then also, when we look at the lubrication, where SKF is actually a global leader in automatic lubrication systems. Through the acquisitions of Vogel, that I was personally involved in, and then the Lincoln one, we have become a key player in the automotive lubrication systems. And this is one of the big opportunities I think that we see, and you will hear that from Bernd later on, what makes a bearing fail?
And you realize that it's much more about external factors than actually internal factors. And there is an absolute fantastic opportunity on leveraging still more on the different technologies that we have. Some of our customers. Well, the industrial market segments are, and, and, and the strategy, of course, the same. You will see that we, you will see that going through, I think, all of SKF right now. We are aligned in what we're trying to do. And, with the new simplified structure that we have in place, there are a few things that we are trying to achieve, and I, I've alluded to them in my, my, my initial comments. And, of course, no matrix, in the sense that we live in a matrix world, yes, we do. But we should have one boss only.
We should to be able to take quick decisions in an organization, it should be clear that you have a clear understanding what is your responsibility, and you have one person together with whom you decide which are your priorities. Then, we have to work with different functionalities in the group. Of course, we do. But from an operational and implementation perspective, we only have one boss. And right now, this is the way we run it. And if you look at the P&L, for instance, the P&L responsibility is today in the geography. There's no. Take an example, previously, we were running P&L even in an organization like logistics.
Today, logistics has two priorities: with a given service level and the lowest possible capital requirement, lowest possible cost, as opposed to actually being a profit generator inside the company, as an example of changes that we have implemented. This reduced complexity makes us smaller. The other day, from one of our product line managers, he came up to me and said, "You know, SKF has become so small." What he meant, of course, is now he calls two people, and they agree, and then it's done, as opposed to having many, many different people in different silos that you have to interact with before you can actually take a decision.
Of course, the ambition is to be more cost-effective, more agile, and accelerating in how we work with the customer in our, in focus at all times. So how do we capture value? By creating value. It's, it's interesting, isn't it? When you talk about what is, creating value for a customer and what is capturing value, consultants are, are paid sometimes, a lot of money to tell us that value pricing is actually understanding what is the customer's alternative, and to understand how is the customer's value chain, and what can I do within the customer's value chain to improve my customer's performance?
And if I understand that thoroughly, I have an opportunity to actually focus on the things that are truly important to the customer and create myself a value proposition that's more interesting and giving me, in that difference between what is the alternative, a possibility of also, in all fairness, earning good money. And it seems so simple, but it's hard to do, of course, huh? Otherwise, you know, the world would have looked differently. But if you have it clear in your mind, and you have a simplified and good organization and purposeful people in the organization, it is absolutely possible. And I think there's one thing that we have to understand, and I started talking about it, and it's that traditionally, we have looked at the market like a pyramid.
We've said, you know, we have the low end, we have the mid-end, and we have the high end. But of course, in many cases, that's not really true, is it? The truth is that there are pockets of performance in the marketplace. And yes, if you focus on the high end and the, and there's a lot of markets that are truly interesting that you can't possibly address. Because in your product offering, there is maybe a cost element that the customer doesn't appreciate. And one of the big opportunities we are sure that we have in SKF is to work with different performance classes in the industrial business. Before, 10 years, 15 years ago, when I left SKF, there was a clear understanding that, you know, when...
Even though sometimes our products were very over-engineered and lasted 50 times the warranty time, the customer had no other option, you know? They had only to go to SKF or FAG or the rest of the peers. Today, they have. And many people are saying, "Well, you're getting a competition coming up from Asia and so forth." Well, you know, not really. That's not really what I think has happened, is that we have not been good enough at actually attending the true needs of the customer. And of course, as long as I have no option and I need to go to an over-engineered product, you know, that's what I'm gonna buy.
But as soon as I can go to a product that is less, more competitive for my specific needs, I will also, also do so. And our ability to drive cost in our operations will enable us to attend a bigger part of the market. It doesn't mean that we are. We are where we are, and there, we're doing fine, and, you know, this is where we are already at. But there is a big part of the market that we are not serving today, and you know that. And from my point of view, you're saying, "Well, this, this is a shift in, in strategy." Well, a little bit. I think we're doing it more in automotive. You've seen it.
You can see that when we work with automotive, when you talk to Stephane, he will tell you that we have a lot of customer-specific products. In the industry, industry segments, we've been more working with general catalog products. We will be better at this going forward, and by this, growing our product business. Asset life cycle. Why is there still such a fantastic opportunity? Because there is, I would argue, all end users of the world, they are not really interested in the product, they're interested in the function. And through working with our technologies on the functionality, there is so much more to do. And by working with the industry leaders, understanding their value chain, there is still a lot of things that can be done.
And here, Victoria, for instance, will talk a little bit more about things that we are doing now to strengthen this. And you understand, you've heard this for years. I grew up in this. I remember as a young graduate coming to SKF, we were starting the trouble-free operation concept in 1987. This is actually just building on this. And here, I think SKF is good. We can be better, but we are really good in this. And this is the foundation, of course, that we will continue to build. And when you look at then, the possibilities, I said before, you believe that the bearing is maybe sometimes at the end of its sort of maturity. I would argue it's not true.
If you look at materials and what you can work with, there is a possibility for us through this mechanism of even better understanding the customer and the customer's customers, to do much more, and we will hear more about that later. I will not dwell on this now because you will hear later. But what I think is a big difference is what's going to happen to industrial distribution. And it's already happening in a way. Traditionally, an industrial distributor has been providing logistics, so it's a product transaction. But of course, many of their customers have absolutely the same kind of needs that the direct customers that we work with, the big end users.
So the biggest challenge that we have right now is to be able to make our distributors and as a customer, but also as somebody who can deliver the same kind of value propositions to their customer. If I don't know if you saw coming in here, there's a cement mill, a small one, here in Gothenburg, and you can understand they have absolutely the same needs. They need their machine to work 24/7, and they need to be aware when there's a failure coming in. They have the same needs for condition monitoring, the same needs for products that will reduce their costs and increase their efficiency. And here, there needs to be a transformation.
You'll be surprised that still most of our distributor customers are working with logistics, and here is a fantastic opportunity because here's a market that we can grow. The need is there. We don't have the capacity to attend them. As we work with our distributor, teach them how to do, there will be an increased market opportunity for services, for lubrication systems, for sealing systems, for condition monitoring, and for high-end bearings. Because here, of course, this is where the high-end product is at its best position. This is where the cost of the bearing is irrelevant, and the functionality, it is what is irrelevant. You've heard SKF talk about this for years, but you understand there's still a fantastic opportunity to grow this market. This is what we need to do.
And here are some examples of what we're going to do to give them better access to the full products and solution portfolio. And it means that teaching them more and more to become like SKF. And how do you capture the customer then? When you need something where all of the end users, there's something where they need to come to an SKF distributor to find. And here's one of the examples that we are now launching. For you who went to the Hannover Fair, you saw us, and we're now in the midst of the launch of this. This is a Seal Jet, and this is gonna be at the distributor's facility, close to the customer, and here we can make seals to a diameter up to 200 mm in 2 minutes.
Basically, as a customer, whenever you have a problem, in two minutes, you can go to one SKF distributor who has a Sealm aster like this and find Seal Jet like this and find your product. It gives us a possibility then to actively, through our distributors, work with our product and service portfolio, where even the ones who are today relying maybe on a competitor, that they still need to come to SKF. These are the kind of key technologies that we are now looking at how we can develop to really get under the skin of a bigger range of end users than we have today. I think this is a fantastic—it's being in the rollout now, and there's a very interesting enchantment with this by our distributors.
Here, I really think this kind of technologies is what we will seek out to assess a bigger part of this market. The need is there. It's not always attended. Now, our ambition is to do it. I will now give over the word to John to talk a little bit about the U.S. and industrial distribution. Thank you. Thank you.
Okay, good morning. Well, first, I'll start off by introducing myself. My name is John Schmidt. I'm responsible for the industrial market sales in North America, and I won't go through my big career, a long career with SKF. I'll just say I've been with SKF for 20 years, and I started in application engineering. I'd be happy to talk to you on a break about the different things I've done in between. Today, I'm gonna talk about creating and capturing value. And doing that, I want to talk about, first, what are the key things that we do to do that for our customers? And then I want to talk about what we're doing in the organization and the culture change we're driving in SKF and the impact that's already having. And then we'll talk about a video.
We'll show you a video that's brief, but I think will give you a nice macro view of where SKF comes from and our origin, and what we've evolved to, and some, some tangible examples of how we touch our customers and how we can bring value to them. And then we'll do a deep dive into one specific customer, where I'll give you a practical example of how this works, and we'll kind of go through how it evolved, and you'll see what we mean by creating and capturing value for our customers. So first, to start out, there's three key things we would focus on, and the first is that we need to speak our customer's language and understand their needs, and, and Alrik had touched on this. To really get to a customer's needs and speak their language, you have to understand their business inside and out.
By that, we need to understand what their customers' needs are and how they become successful with their customers. Then, in turn, we can understand what are the needs that we can really address. The next part of this is leveraging the full SKF portfolio and all the technologies we bring. Clearly, when SKF does bring the full power of what we have, we have more capability than anyone in our industry to bring value to our customers, and that's our challenge, to do that for our customers. Then the next one, which is one that I think is really critical, because all we're talking about is about execution. It's one thing to create value and a nice value proposition for our customers. It's another thing to take the next step and help them realize it.
And by that, I mean there are obstacles that we have to help our customers overcome. I'll give you one that's very common. When you develop a new technology, they'll say, "Well, I want to validate it." I want to do field validation. I love the tools, but I want field validation. And what that normally entails is something that's very time-consuming. It's time, and it costs money. So if you don't have a solution for that, then that might be a deal killer that would say, "I like the opportunity you presented me, but practically speaking, I can't really realize that." So we have to put as much emphasis on helping our customers capture the value as we do in creating it, and that might also be coming up with a way to overcome some commercial obstacles and different ways of looking at doing business with them.
So that's how we create and capture value. Now, let's talk about the organization change and give you perspective of what's changed in SKF. I talked to somebody before; they said, "What's different in SKF?" If I look at some things that are fundamentally different in this organization, the first one is that we are focused on truly being a customer-centric organization. And if we're honest, where we come from, a bit internally focused at times. And customer-focused, it means that you're easy to do business with. This idea of really trying to understand what their needs are, that's about everything that brings value to the customer, and I think, as Christian and Alrik talked about, we have to stop doing things that don't add any value to the customer. If they don't value it, we shouldn't be doing it.
So then, if we look at the next thing is the simplified structure, which Alrik touched on, and I'd like to give you a little perspective because I think from in, in SKF, people in SKF can really appreciate what this means. If you're outside SKF, you might say: Well, that sounds good, but what does it... How big of an impact is that? I've been with SKF for 20 years, and in the 20 years I've been with SKF, there has always been an OEM and an aftermarket channel. We've called it different things throughout those years, and actually, you could go back, if I look at the U.S., you go back nearly 30 years, and that's the way it's been. So what does that mean? That means that all people have ever known in their life is this is just the way it is.
We have these different channels, we call it different things, and we have channel conflict at times, and we're not as efficient as we could be. When Alrik made this change, suddenly there was a lot of efficiency, not only with the structure in eliminating layers and coming up with a way to be faster, but it also helped us service our customers. I'll give you a practical example of how we leverage empowerment, accountability, and local decision-making, because that, for me, is kind of the supercharger in this whole thing, right? Because if you take the first two, you get a big step forward. You take the third bullet, this brings us to an entirely new level when we have an organization that's truly empowered, they're accountable, and they have the decisions to make locally.
So let me talk about a specific example of a customer in the U.S., and this customer is, they have a bit of a niche that they play in. They bring a lot of value in it, and for years within SKF, we've talked with this customer, and they wanted to do more with us, and we wanted to do more with them because they saw the value of SKF's brand, how we work together. But because of their uniqueness, they didn't fit perfectly in our different defined channels. So what ended up happening in the old organization? You would have a disagreement, and people would start escalating, right, through different channels. We'll make the decision higher up. And it didn't work. We couldn't come to an agreement. Why is that?
Because something that was tremendously important on a local level, when you start elevating it at the highest levels, maybe not as big an opportunity. People are not as familiar with the details, so it becomes almost impossible to make that decision at a very high level. Same result is we made no decision. So what happened in the new organization? I visited this customer a few months into the year with members of my team. The whole idea was to talk about the new structure, what are we doing? And they kind of looked at us a little bit skeptical and said, "What's... Okay, so what's this about with SKF? What does this mean?" And one of the things we were able to look them in the eye and say: You know what? There's something fundamentally different about SKF that you haven't experienced.
The people sitting in this room make the decision. We don't go to Gothenburg and ask for approval to do this. So if you tell me something that makes good business sense, we'll do it. They kind of looked at us and said, "Really? That-" We said, "We make the decision right here. Absolutely." And what came out of that? Suddenly, we got an agreement that we couldn't come to for years. The first agreement we signed, which gives SKF incremental growth in that market this year and next year and beyond, and now we're working on another agreement. And I met with one of their senior leaders a few weeks ago and asked, of course: Hey, how are we doing? How's the organization treating you, and how's it been working with SKF?
His exact words for me, he smiled and said, "It's 180 degrees different dealing with SKF. We actually feel like that when we talk about something, we agree on it, we can take some action to get moving." So what does that mean? They've now committed a resource to us. They're putting their bet on us because they say, "Now we, now we see if we make an investment with SKF here, we're going to work together and move." This is this execution element that you don't see when you look at this organization change. So now I'm going to talk about. We're going to show you a video that gives you this illustration.
It's three minutes, and this will give you an illustration of kind of the journey of SKF, where we've come from, the value we bring, and then we'll come back and we'll do a deep dive into a specific customer.
In 1907, Sven Wingquist founded SKF and invented the double-row self-aligning ball bearing to solve a customer's manufacturing problem. Since then, we have accumulated over 100 years of experience in designing and manufacturing bearings for every application. So now we don't just understand bearings, we understand the machinery they become part of and their problems. And today, our products and services are still focused on helping you, our customer, become more successful. Our core technologies have expanded over the years, but are still closely related to the bearing. For our customers, both OEM and aftermarket, that means we can now combine bearings with sealing and lubrication solutions, machine reliability technologies, services, and deep application knowledge to provide you with the very best solution for your needs.
We understand the complex language of the bearing, and since the bearing is at the heart of the machine, this can tell us the dynamic health of your machinery and the condition of your bearings... SKF technologies currently monitor over 1 million assets around the world, many remotely, and we continue to develop new and innovative ways to make it easier for our customers to interpret complex machine data, see at a glance what is happening in their plants, and get notification when things need attention. So we can help you to sleep better at night, knowing that your valuable industrial assets are in good hands. We also use the power of this data, together with our industry and application expertise, to help you improve your product designs. Of course, we recognize that it's not enough to monitor and predict when a problem will happen.
You want to eliminate the problem. We have experts in every industry who can help you identify the best maintenance practices and root cause of your machinery problems. They can suggest solutions that can include a combination of the best bearing, sealing, or lubrication solutions for your application and the optimal choice of machine reliability, technologies, and services. Every customer is individual, and so we offer a variety of ways to work with SKF. This ranges from simple products, transactions, and traditional service models to performance-based contracts. When maintenance is required to keep your machinery working smoothly, we can offer a wide range of services to help you. For example, our SKF services centers offer a controlled and guaranteed bearing manufacturing process as an alternative to replacement, and our network of certified maintenance partners can rebuild your electric motor, pump, or gearbox.
Finally, our extensive global network of SKF authorized distributors, local SKF offices, and SKF service centers ensure that you can get local access to the full range of SKF technologies and services. Visit skf.com and discover how SKF can help you realize the full potential of your rotating equipment.
So great macro view. Now let's just zero down to the Google Earth, and we'll go right into one customer, right? And we'll go into U.S. Steel in Granite City, Illinois. And so here's a case where if you look at the picture on the right-hand side, you don't need to know a steel mill to know that it's very hot and there's a lot of moisture. Those two things don't work well for a bearing, so obviously, they have a challenge here. And the area that we're focused on is these things called table rolls. So where this started was kind of a typical journey. They want us to reduce the grease consumption. So our lubrication team goes in there and looks at how we're gonna bring a new technology and lubrication system to improve that.
What they quickly find out is, we tested the grease here, we can make an improvement, but we're not gonna make the level of improvement we need to if we just focus on the lubrication system, right? So then all of a sudden, we say, "Okay, let's step back and talk to this customer. What are some of the other things we need to address here? Because clearly, it's bigger than just grease consumption." So clearly, there's two other things that they're interested in: of course, increasing the machinery uptime or availability and reducing the energy consumption. Now, if we look at all those, clearly, we're not gonna solve this with just one dimension of the SKF offer of lube system, so we're gonna work on the full SKF portfolio and offer and how we're gonna approach this problem.
So now, if you have one system and you look at it from a lube system, a seal, and a bearing, and we're gonna tackle this problem in that way, the next progression and the one that's most critical is the seal in this case, in this particular example. And here, what we ended up having to do is, as we analyzed the grease, we understood where the contamination was coming from. We realized we had to actually develop a new seal here for them. In developing the seal, we balanced this idea of you want something that has optimal wear characteristics but also does a good job of sealing. So in putting that in there, we help complement the lube system to reduce the grease consumption.
But then we opened the door to another solution that we could bring to the table, and that's the bearing, because now that we've solved the seal issue, the bearing they were currently using, it has seals, we don't need to have seals on it. So the end result there is now we use an SKF open spherical roller bearing, and this helps us reduce the friction. So now we've addressed those things the customer talked about. We've created value for them. And that we said, "Okay, now we've addressed these key things, created value, but if you remember the third bullet I presented, we actually have to help the customer realize the value." And here's where a practical obstacle comes in.
The normal approach to something like this, you would say, "We have this solution, you want to validate it." You would tell them and say, "Well, you have to, you're gonna have to shut it down at some point and take everything apart, and we'll analyze all the parts." Now, if you're running a mill like this and somebody proposes that to you, you would look at them and say, "You're insane, what you're asking. I'm not gonna shut things down to go look at this. Are you crazy? That's a deal killer." So the approach we took with the customer is we leveraged something that they're very strong with, as well as what SKF does.
They have something called the Carnegie Way at U.S. Steel, and it's a disciplined approach to how they create value, and how they work on reliability-centered maintenance. When you marry that with SKF's abilities to do, you know, that field of validation and some of our techniques for validating, we were able to come up with a pragmatic solution for them, where they could do the validation they wanted while they were running. So now we took that obstacle away. Now, all of a sudden, you don't actually have to shut the machine down to get what they want to prove that this works. So the good news is, the solution is validated, and it'll bring what they want and increase the machine availability, it'll reduce energy consumption and reduce that grease consumption. That's perfect.
But as Alrik talked about, that's not the customer's language. They're interested in that, but not as much as what's really what does this mean for their business? So if we look at this customer, the business impact of that is that you reduce the quality issue they have in their material, you then reduce lead time, and you improve their cost situation. And you say, "Well, why is that?...Well, if you look at a steel mill operation like this, if that bearing fails, it creates a defect on that steel. And you know, when you find that defect? Unfortunately, at their customer. And that creates a whole series of other problems for them, which addresses lead time, cost, and everything else. So by addressing this, we're helping them be more successful with their customer. We're helping them win.
Then, for our part, what is SKF getting? Well, we're taking this solution, and we're going to put it on 800 rolls at this mill. Now, if you think about the market condition we've touched on here, that's a challenge. You look at the steel industry in the U.S., and let me tell you, that's a challenging market. And here's a case in a challenging market, we come work with this customer, and we're helping them be more successful, and we're bringing a lot of value, and at the same time, we're growing our market because we're leveraging all the things we're doing here. So if I in summary, the three key things that I'd focus on here is we're focused on delivering value to the customer. We're obsessed with doing that, and we have to challenge ourselves every day.
What we're doing, is that really delivering value to the customer, like this example? Because if we fall short of them actually capturing that value, we have failed the customer. The next thing is this whole idea of being easy to do business with. This is something that we are focused on, and this is how you transact with them. It could be example, it's easy to do business with SKF. If you think of this customer, if you come and give me a solution to my problem, and you give me a painless way to actually implement it, that's pretty easy to do business with. I guarantee you, everyone in this room, you're like myself, you can think of somewhere where you spend your hard-earned money, and you don't go there because it's the cheapest price.
You go there because of the experience you have and the ease of doing business, and you get what you want, and everything is painless. Our customers aren't any different in that respect. So this idea of being easy to do business with and how we give them the technology is very, very important. And lastly, you know, Christian talked about taking cost out. Doing these things drives speed, efficiency, and cost reduction. So if I look at this example of U.S. Steel and say: Well, okay, well, how is this improving our efficiency as an organization and taking cost out? The old way that we would have attacked a problem like this, we would have only had some exceptional individual in SKF who would overcome all sorts of internal obstacles and delivered a great result.
And then we would celebrate it and say, "Okay, now how are we going to replicate this somewhere else?" And what we're doing different now is understanding that process. How exactly somebody does what this, this example does, how you walk through it, so that in the hands of ordinary people in the company, they can deliver those same great results. And that gives you something you can scale. You can't scale exceptional individuals who jump over hurdles. You take down hurdles, and you create processes on how people can work efficiently. These things drive efficiency and how we help our customers. Just think, as an example, if we have a number of salespeople out there, and they don't have this efficient process, just think how inefficient they are if you just hand them some success and say, "Hey, replicate this," and they don't know how.
They'll hit their head against the wall and not succeed. There's also some things we're doing to leverage technology. One small example is, you know, we're launching a software that for our service engineers, we'll put in their hands and their phone, everything they need to know about that job that they're doing, what they need to bring, their scheduling, they're billing the customer, everything real time, right there. That's just a small example of leveraging technology to drive a cost and efficiency. So in closing, what I would say is that while we have a tough market situation, hopefully, you will agree with me that I think SKF is better suited than we've ever been, certainly in my 20 years in SKF, to tackle this challenge and help our customers win.
We just had one classic example in a very tough market where we help them win. Thank you.
Okay, Luc.
Thank you, John. Morning, everyone. My name is Luc Graux, and I am Head of SKF Industrial Market Manufacturing and Product Line. You will soon recognize my French accent, so I don't need to tell you where I'm coming from, at least from a region perspective. From a business perspective, I've been manufacturing for a number of years in SKF, outside of SKF, and back to SKF. Kind of what Alrik said, SKF is a great company, and I must say, I've been in automotive, now industrial, and I'm very, very fortunate to be having that job right now in industrial market manufacturing. Hearing to what Alrik said earlier, that manufacturing is really anchored on the top of the agenda of SKF Group management, and that is extremely important. Extremely important.
On top of that, not only manufacturing is on top of the agenda, it is world-class manufacturing on top of the agenda. We're not talking about best in class, we're talking about world-class, so we are truly very ambitious here in what we want to achieve in terms of manufacturing. So what is world-class manufacturing? And we've heard, and we've seen a few names, flying around on the PowerPoint. And to me, I would say, and it was on one of the slide earlier, it boils down to three simple things: perfect quality, perfect service to a customer with the lowest possible cost. That's a starting point. I would, I could almost stop here, I would say, but I will take you a little bit further, at least until lunchtime, if you, if you allow, right? What, what can I say?
This is basically one page, where you have all of it on one page. On the top line, you see basically quality, and I said perfect quality. You see service or delivery, perfect service to a customer, and then the best possible cost. On top of that, we need to offer or we need to have a safe working environment to our, for employees, for workers. So we have safety, coming first. We don't want anyone to get hurt in our factory, and we want people to come to work in the morning, not being worried about their health, their safety, or going home in the evening.
...That's the only prerequisite for delivering a good quality type of job when they are in the premises; they have to feel safe. So that's one of our starting point. Working climate, I mean, Alrik mentioned, it all boils down to people. It is clear we need to offer the right working climate where people can be empowered, people can take decision, and can see the result of their decision. So this is also what we are doing, and approaching system, which I will talk about a bit later, is really supporting that empowerment of our people. And of course, we want to work according to the rules and support the environment with a full respect of the environment wherever we operate. So those are basically our six priorities. How do we deliver on those six priorities?
And you see four blocks right behind me. On the left side, you have two blocks, which are basically OpEx, operational excellence. Those are continuous improvement activity. On the right-hand side, you have another two blocks, which are more step up. And I will start quickly with the left side. On the left side, you have, on the top, you have Production System. What is Production System? This is simply how we work, how we work in SKF factory. So it's a set of methodology, principles, we're working, that we have synthesized into one booklet, and that we are rolling out, we are starting to roll out into all of our factories. And that's, of course, very important to involve our people, empower our peoples, which are engaged, and they support basically reaching the target of their own factory or their own sub-factory, depending on their responsibility.
That's Production System. Then we have integration, cost reduction activities. Christian mentioned that. That's together with purchasing and manufacturing and design office, by the way, to review how we can lower our cost. Taking three things at the same time, specs, are we having the right spec? Are we over specifying? Drawings by the spec, I mean, what - how do we design the component? And last, basically the sourcing base. How do we basically make, take advantage of a category purchasing management to get the best sourcing base? So this is also running, and I would say those two programs, Production System as well as integrated cost reduction, are really all, continuous improvement program to drive cost out, every week, every year, day, in a continuous way.
Then on the other side, we have step-ups program, and we have two main step-up program. One is technology and one is footprint. Footprint is basically where we produce and what do we produce at that place. And the rest of my presentation will be more focused on the technology step-up and on the footprint adjustment we're making right now. Starting with technologies, I mean, there are three main elements in technology where we are stepping up our activities. First one is standard. We need to have a standard, and we need to have only one standard on SKF when it comes to manufacturing, to technology. Second one is maintenance. Once we have defined the standard, we need to maintain the standard, and that's second point.
We are having heavy equipment, we are capital intensive, we need to make sure we have the highest up time in our factory. Last is flexibility, and this is becoming more customer-centric. We heard about being more customer-centric. The market has changed. I mean, the customer type of demand, pattern of demand has changed, and we need to be more flexible to answer to a customer in the right way. I will come back to each of them. I have one page on each of them. Starting with standardization. We looked at it at two different level. The plant level, where basically we've looked into a factory model. I'm not talking about the painting and the color and all that. I'm talking about the flow, I'm talking about the utilities, I'm talking about the layout.
We have a standard here, which makes us very effective if we have to build a, let's say, a greenfield factory, which is not part of our plan right now, but even if we are restructuring, if we have footprint adjustment, if we have whatever activities, we know what to do and how to do it in a cost-effective way, in a quick way, and with less risk in managing those projects. So this is available, it's a proactive type of work, which we have, and we can deploy at any point of time. Second level is machines, machine standardization, and here we need to, as I said, have one standard, only one standard in SKF per machine or per technology. We're working on that.
We have opened a couple of centers of excellence, and you see one picture on the bottom here, where we were opening with Alrik a couple of them in Europe already, in Germany and in France, and we have a few more to be opened. What is the role of the center of excellence? Basically, they have a clear role to bring innovation faster into the factory. We have a lot of innovation, we have a lot of technology at the group level, and Bernd and Victoria will talk about that later, that we need to bring into the factory faster, so we get the benefits faster into the bottom line and to our equipments, I would say. That's rule number one.
Then they also have a role to refurbish equipment, and that goes with the maintenance I will talk about in a few minutes. But when we refurbish, we don't want to refurbish equipment to the level they were when they were purchased five, 10, whatever, 20 years ago. We want to step up. We want to bring into those equipment, new technology. We want to smartify those equipment, taking the good base and make it- make them even better. And this is what those, those center of excellence are doing. Again, with only one standard, not everyone designing his own technology, his own machine, or his own, cabinets. I mean, it has to be one standard. So that is the direction we're taking. And this is valid across SKF. I'm talking here from industrial market, but this is valid for all the other factories in SKF.
We do it together with Automotive and also with Specialty Business when applicable. So this is basically our standardization part. Once we have the standard, as I said, we need to maintain the standard, and now we're going to the maintenance part. Maintenance, I see or we see two legs there. The first part on the left is more the methodology. This is Maintenance Excellence Program. This is basically improving up time, as I said earlier, using, let's say, the latest technology in terms of condition monitoring, vibration analysis, and you name it. Most of it, or a large number of it, by the way, being SKF property or technology, I would say. So we need to use it more into factories.
We even need to develop a factory as labs, so we can test and develop new technology that we can later on offer to the market. So this is started. We had some boot camps already this year, and we have picked up some pilots, and we're rolling out in a number of our factories right now. So that is basically the methodology, and then we have the people side, and we say to me, it all boils down to people. So we need to make sure we have the right people, and we bring up, we increase the competence level of our people. We're talking factory people here, and we have put a network of learning center close to every other factory, where basically it is a simple room where people can go in and have some hands-on training.
I mean, we're not talking about theoretical academic training. Yes, there is some of that, but a good part of it has to be practical, where they can test, they can dismantle, they can assemble, they can measure, et cetera. And then they, when they go back to the operations, they are much more effective, and they have done the training, not taking any risk for themselves, for the machine, and for the quality that we deliver to their customer. So this is also a clear program that we have rolled out already. We are adding learning centers every year. We started actually with a fast-growing market, very much into Asia, but we realized we need that also into the Western world, in Europe or in Americas, because we are stepping up technology.
I'll talk a bit later about the well-known Industry 4.0, and we need to be prepared for that. So we need to basically equip our factories with the right competence, and this, those centers will be absolutely supporting this step up into 4.0. Okay, one point more on technology, and that is flexibility. I will be very quick here because I come back to that point a bit later in my presentation. But basically, we realize, and we all know that the market has changed. We need to be customer-centric, and we need to be able to answer to the market changes and to the change of pattern, change of demand from our customers. And for that, we need to have the right technology. It cannot be one size fits all.
So today, we have in place, historically, I would say, a legacy production of high-volume model, which you see on the right-hand side. And don't get me wrong, this is good. This is a good model. It is not wrong, not at all. It is just it doesn't fit for everything. But that we need to keep, and we need to continue to develop, going forward. Then on the other side of the screen, you have the very super flexible, I would say, which is like one piece, one piece lot. That is in place. This is very much using the hard-turning technology, so we can simplify a lot the machining, and that is running, that is in place. We have made millions of pieces already, with this technology.
What we are missing, or what we were missing, I would say, is a middle part, flexi channel, where we combine, I would say, the advantage of the very flexible, low volume, and the low cost of the high volume production. And this, we have here some work ongoing. Bernd will talk about it when it comes to the group development, and I will show you a practical example happening right now here in this city, in Gothenburg, a few hundred meters away or this way, in the factory here. Technology, I will stop here for a minute, come back to technology later. Footprint. Footprint, we are very active right now, and we have been active, and we are even speeding up the rebalancing of our footprint. And that primarily means rebalancing towards Asia, fast-growing market, and primarily into China.
In China, we have two main factories that were fairly recently built, greenfield, in Dalian, China. One was started up in 2006, making large-size bearing up to 4-meter diameters, mainly for the wind industry, for the heavy industry, I would say. And a sister factory in Dalian as well, built a few years later in 2012, more medium-sized type of bearings, supporting the industrial gearbox, transmission, material handling, those type of application. So this is a fantastic base we have there in Dalian, in China. And we have been recently, very recently, adding capacity, and we have been very recently ramping up additional capacity in those two factories.
So we basically started this year, two new production line for spherical roller bearings. We have started one production line for deep groove ball bearing, and we have started also one production line for cylindrical roller bearing. So as we speak right now, the teams in China basically are ramping up those production line, and they are basically releasing production for customer on a weekly basis. So this is ongoing. Four new lines started and up to ramping up right now in China. Just one point. I think China, I mean, Patrick will talk a lot more about China later on in the afternoon. Yeah, there are some uncertainty probably in the macroeconomic aspect of China. I don't really want to go into that.
But from a manufacturing perspective, from an industrial perspective, we will continue to rebalance our footprint toward China. This is a clear strategic direction, and we'll continue with activities in this direction. Second part, I mean, it is not only about building greenfield factory in Asia, it is not only about rebalancing footprint, it is also taking the consequence of that rebalancing into basically our legacy footprint, primarily in the Western world, Europe and Americas. And that's what I will talk about me here, because the consequence of what you've seen earlier in moving production to China, to be closer to the customer, to be faster to respond to the customer, means there is an impact here in Europe, and very clearly an impact right here in Gothenburg.
Because some of, most of the SRB, spherical roller bearing business, that we are starting up in China with the two new plants, was produced here in Gothenburg. And that means, of course, that volume is not here. And on top of that, the equipment on which it was produced here in Gothenburg was very much developed, installed in the eighties. So this was kind of the good technology back then. Still good technology today, but for high volume, not so much flexible for low volume and more variance as we need right now. So what we have decided, I mean, there was clearly a need for an upgrade, there was a need for reshaping of our footprint, of our manufacturing factory here.
And as you might recall, I mean, we have announced in April this year an investment, a fairly significant investment here in Gothenburg, SEK 190 million, in order to upgrade our facility and to make it more competitive going forward for the spherical roller bearing market. Where is this upgrade? I mean, this is really the latest technology, and this is really moving into the Industry 4.0 type of activities and technologies, I would say. First of all, it has to be low cost and it has to be flexible. And this has been clearly a challenge, I was showing earlier. Now, the high volume we have, the low volume we have, now we've been focusing on the middle part, low cost and highly flexible equipment. How to be flexible? Zero reset time. That sounds impossible.
It is reality. We've done it. Not on all machines, I must admit, but we have a number of clear machines where we went down to no reset. Why is that? Because basically, the components are arriving on the machine, the machine is detecting what component is, based on that, pulling basically the program, machining according to the program, adding the measuring, and then releasing the ring, and takes the next one, next one, and so on and so forth. So we have achieved here some zero reset on some of our equipment. Highly flexible. We have also, of course, added some of the technology that we have in terms of grinding, machining, in order to optimize the cycles, to have a low, low, the lowest cycle time, with smart grinding device for acoustic emission, force control, and those type of things.
That is built into the machine. We have automatized, quite significantly, number of operation, and very much the flow. You see, we automatized basically the assembly, where, as far as I know, this is the only factory in the world making spherical roller bearing of this size, medium range, where we have a fully automated assembly. That was never done before. This is really a big step forward. We have automatized, of course, also the storage of component, where we have some material handling storage, guided vehicle, automated guided vehicle, so no forklift or no forklift drivers, and a guided vehicle feeding the machines based on machine availability, based on machine performance, out of the storage of components.
So that is really, an impressive setup, I would say. We have worked quite significantly on the quality as well, with two main element, the RF, RFID tagging, so we can have individual ID bearing marks, and then we can have a record of all the manufacturing, basically measurements, quality measures during the different manufacturing steps. So this we record and we can store, so we can trace every bearing, and we know every point of the operation during the manufacturing process. So that's extremely important for a quality perspective. We're working on environment, as I said earlier, environment, basically low energy, with another feature in the machine, like automatic switch off, machine stop when there is no work coming up, no need for the operator to come in.
We have worked, of course, on the lighting and those type of thing in the building in order to reduce the consumption bill. And then the last two points, I would say, come together. We have put there also a number of features with condition monitoring in order to improve the uptime of this equipment, and also mobile connectivity. And Bernd will talk a bit more about that, the details in the afternoon, but basically giving the operator a chance to in real time follow up the performance of his equipment. And you can see a picture on the bottom part, you know, this is really having information at hand. And the guy is having on his iPhone, you know, the information on how the line is performing, if there's a stop, et cetera.
So we can react much, much faster, and we can avoid downtime, I would say, and loss, loss of production. So that is basically the direction we are, we are taking on this channel. And I, I just want to, basically, conclude with one, simple picture here. That is really a step forward, that we're taking, in SKF, in manufacturing. That gives us shorter, time to market, so we are closer to the customer, we are reactive to the customer for any, changes. We are much more flexible, lower production size, batches, I would say. That is gonna help us, of course, with our balance sheet, Christian mentioned earlier today.... And that's also boosting up efficiency in terms of cost and, and, and performance.
So all this fits very well into the well-known Industry 4.0, and entering into the fourth industrial evolution, revolution. This is not a dream, this is reality. This is happening right now. You know, as we talk, we are tearing down the old machine, dismantling the old machine. We are redoing the ground, I would say, the surface, and we are gradually installing the new technology here. So within a year time, less than a year time, we will be fully in operation with this technology here in Gothenburg. And of course, the intention is to use that as a good base, so we can replicate into other units in the world, so that becomes a standard when it comes to world-class manufacturing. Thank you.
Thank you, Luc. Well, I am so happy you're with me in this journey. Here, I really feel like Salieri. You know, I know I, I realize what he's doing is brilliant, but of course, I couldn't do it myself at all. If we summarize what we're trying to do in the industrial business, and now we're soon starting with the Q&A, and we will accept questions from you. But I hope you stay at the industrial market, and then we can talk about general SKF in the end, where we'll have sort of the final Q&A. But to remember, well, we're becoming smaller in the sense that new, more simplified way of working. And why is organization important? Because it's a way of distributing responsibility. That's why it's important.
So we're trying to be simpler, more nimble, work the value chain, and through that, a clear customer focus. If you work the value chain and you understand that, you keep the ball on the customer. We're going to develop our customers to become capable of delivering the same kind of value propositions as we do. This is what is going to enable us to grow that market, the market around rotating machine efficiency and world-class manufacturing. In no way can SKF stay the undisputed leader of the bearing business without being absolutely best at manufacturing. I think you can all recognize this truth. This is not an assembly operation. This is where we need to stay on top of all the steps of actually making the production come to fruition. With those words, I open for questions.
Do you want to moderate, Patrick, if there are... With the mics, if there are any questions for us? Yes, here. Here's a-
Please use the mic.
Hi, everyone. Sorry. I have a couple of questions on the industrial market business then. You talk about moving more to China over time. Could you give us a sense for what the production is in China versus the revenue today? And is it that you want to rebalance, or is it that you want to make out of China because it's cheaper to re-export more? What's the goal on that? And the second question is really about the cost savings. You've talked about the SEK 940 million, and you've talked about that plan already, but you talked about a lot of other fixed cost reduction actions that you have in the pipeline.
Can you help us in terms of what sort of magnitude of future saving or how much there is from the plans beyond the communicated plan to come? Because, obviously, it'd be quite helpful to have some idea of how much there is ahead.
You start?
I can take the first one, probably.
Yeah, I'll take the other.
Yeah, the intention is to rebalance to China, meaning moving to China what basically is sold in China, right? That's clearly our activity, and we still have some work to do here, not only for the finished product, but also for some components that we're still importing out of other parts of the world. So that is clearly our top priority right now.
And there's an interesting thing happening in China right now. I think that never before have we, during the last few months, been approached with, by so many Chinese customers who realized that the previous market they had when they were looking at, a mid-end, kind of, good enough quality on some of their products for the Chinese market. As China is now changing, they're all of the ambition of becoming global. So right now, there's a technology step up at the customer level in China, and that makes two things. Of course, that's an increased, maybe competition, sometimes globally, but it also means that they are adding costs, right? They are now doing the same things as we have been doing in Europe for, for, for ages.
This is, again, I think what we will see going forward, that there will be... There will not be so much difference between what you're seeing made in China and made in Germany, for instance. And therefore, back to the formidable initiative that the German government has started with Industry 4.0, not so much because everybody understands exactly what I should do-
Mm-hmm.
And it's like a military rollout, but it is somebody understanding. If we work with technology, if we work with information, IT, we can be as competitive as anybody, and it's possible. So there's an interesting thing, dynamics now, you know, Asia moving up, but adding costs at the same time, and Europe being and U.S. and established market, more understanding fit for the purpose, understanding I need a special gearbox that I or a wheel bearing that's going to attend the needs of the Indian market, which is not the same as the market that you see, for instance, in Europe. Stephane, we come back to this kind of dynamics before, but it's the same in the industrial business, if you understand, it's the same.
And we talk about, I will give you part of the answer, and then you can hammer on Christian later. But our aim is that you will understand that, yes, we started a program, and it's like the cheese slicer program, where you go in, and you see that there's an opportunity to reduce costs. You put together a program, and you drive it very diligently and make it happen. What we need to do now is to get away from the programs. I would like to see a situation where there is only one result of SKF that we sort of show you, and that then we explain the deviations, and the things that have happened, whatever actions we have taken with footprint or rationalizing and so forth, and we explain that to you.
That's not like a double, where we have a result, and then we have a deviation from reality. So what we're saying with this is, we're not going to launch any more programs. We're diligently going to work to simplify our way of operating, to stop doing things that do not add value, and we will inform you as you go. I will not add another sort of program to the list, and I want to convince you to believe me that we will drive costs. That's what I'm trying to do.
Thanks.
Thank you. Erik Golrang, Nordea. I have two questions. The first one, on this, what you talked about initially, Alrik, on the moving, perhaps trying to go a bit more on the product side of the bearing market. What—and I guess reducing cost is an important part of being able to achieve that. Could you describe in any way, how much do you need to bring down cost or increase efficiency to be competitive there? And when you think about growing in that part of the market, what point that to returns or margins from a mix perspective? That's the first one.
There are two answers. One answer you will get later when you... So park that thought in your head and listen to Victoria later on today, and you will see an absolute fantastic example where you actually make a better product at a lower cost. And there's plenty of those opportunities. And then you can grill Victoria on that one. And the other thing is, it's interesting, isn't it, that we're already doing it, in the sense that today there is a customer in the U.S., and I will not say the name, not to, but there's a customer where SKF, with our product that we have today, have not been able to sort of enchant the customer. We are over-engineered.
It works fine with a different kind of product, and we don't have that in our range in SKF. But there's another company who is negotiating to take a big, already big supplier to this company, and they are negotiating now to take a major stake. And, you know, when I say this internally, and then I ask: Do you know what that company is? And people start saying: Can it be this one, competitor, this? Well, you know, it's SKF. It's Patrick Tong through GBC. So we're already doing it, you know? We are already doing it in our own second brand initiative. And when you look at the...
The interesting thing is that when you start looking at the machine that Patrick is running in his factory and comparing that to an SKF machine that Luc is running, you know, the cost is not different. Sometimes even the SKF machine is as good or better. So suddenly, you come down to completely different things that are actually driving cost. And when you start analyzing that, you understand that you can do it. We can do it, too. We can also address market segments that we have today decided not to do because the product is not engineered for that application. And this has nothing to do with quality. This is still perfect quality. It's just a different performance. Interesting.
Yeah.
And then the second question on, on seals, we have an interesting example of how you, you combine the offering there with, with U.S. Steel. And if you look at seals separately, and perhaps particularly on the industrial side, what's the say anything about the opportunity to, to grow seals from an industrial perspective compared to what's been done historically? It's a very good market for quite a few players.
Oh, yeah. Yeah, I mean, I guess what I would say is that that example, I think, shows that there's a tremendous opportunity in the... What we're doing differently is how we take the team, and it's more of a team approach versus individuals saying, "I'm a seal person, and I'm gonna go talk about seals, or I'm a lube person, talk about lube." But to me, it's if we look at end users and how we tackle them, we have many people who touch that customer, but we have a team approach now that we're focused on how are we gonna capture all these different things that touch them and make sure that we're, so to speak, connecting the dots, because we do that.
So I think in seals, there's a number of things we're doing in that area to make ourselves a lot more efficient in terms of how we take that technology and bring it to the customer and make sure that we're not just solving a seal problem. We're looking at how the benefit of addressing the seal, how that impacts the bearing and everything else we're doing, because that's, to me, where you can take a significant step and also leverage the fact that SKF has tremendous relationships in a number of these customers who are already doing a lot of business. But it's a chance for us to really leverage that technology a lot more.
...And there's another take on it. I think that one of the differences, Seals is a standalone business, and when you go to a customer, you need a seals expert sometimes. That's absolutely clear. But of course, the more you start looking at CRM, customer relationship manager, have, knowing the difficult, different people within the different companies, that's a cost, that's difficult, that takes time. The more we now enable ourselves to leverage on the contacts we already have, to bring the expert around all of the technologies that we're running in a more integrated way, it creates opportunity. It definitely does, and we've seen some of it. One example here, but you can understand this is happening, this potential is everywhere.
Who starts? You start over there.
Okay.
And then you. Is that okay? Yeah.
So if I can just come back to the competitive position again. I think the call, the comment was made on the second quarter call about pressure in the U.S. from Asian, perhaps Japanese, companies putting pricing pressure. But when you talk about China and moving towards that, rebalancing the cost base, if I understood the answer to the earlier question, you weren't looking to export out of China, you're just looking to produce locally, to sell locally. And again, when you look at the market share figure you provided earlier, it's clear the Chinese have about a 30% market share in industrial bearings.
Is there not a need for you to be able to use these lower cost production sites and perhaps even Europe, because it is lower cost than Europe, to be exploiting where you have a cost advantage or where you can perhaps gain more from producing more in lower cost countries?
Now we're talking about when we talk about the Q3 sort of discussion, we're talking about what's happening at this moment. Currencies change, and we are living in a situation where there is an increased buyer's market, as we understand. What we're now talking about is, of course, that there's still an opportunity to penetrate the Chinese market. But there's of course, I'm sure, Luc, that there will be opportunities to export out of China. But on the other hand, when you look at this flexible channel that Luc showed us before, it's gonna be difficult to beat, even in China. You understand what I mean? That's gonna be a very, very competitive channel.
What you're saying is-
I'm saying that there's opportunity to be competitive also in Sweden.
Yeah.
Going forward.
So are you increasing your production out of Europe to try and compensate against that, then?
Well, yeah. Patrick, you wanna-
If I may.
Mm-hmm.
I know this is already touching a little bit the high complex as such. So while we are thinking about cost reduction, locally made in China products, one thing very important for us to be well present in China is not just to achieve the cost of producing a product, but the cost in our mind. So if you use the engineering know-how that SKF has and the knowledge you have about the local competition, how things are done, imagine how you can actually migrate those learning and take it to the global market, take it to our global operation. So you combine your engineering know-how with your knowledge of how competition are doing in China, that we can migrate it out as well. You, you don't export the product as such, being low cost in our opinion.
Export the way of competing, the way of doing things, then we can take costs down. So I, I would say that the, it's not just the product cost as such, I think there's a lot to take-
If you don't mind, I will just add one point here. The question earlier was regarding China. It is clear, China, we are rebalancing because we see an enormous opportunity to produce locally for the local demand right now. But we have other factories in the world, you know, and we have a factory, let's say, in Eastern Europe, and we have factory in India, and that footprint is low cost, and we are using very much for export as well. So to your answer, yes, we are also reviewing our global product line, basically footprint, so we make sure we use the right unit factory with the best cost to supply the, to supply our customer. But China was a very specific example. I was just basically narrowing on earlier for the presentation.
My point is to say that you can be competitive in Europe, too.
Mm-hmm.
You actually can.
Mm-hmm.
And that is something we have to understand.
Mm-hmm.
Thank you. It's Andre from Credit Suisse here on your left. Three questions, please. Firstly, just a simple one on the business mix. If we take the industrial business and the bearings portfolio within that, how much of it is the piece that is high-end, where you say the actual component cost does not matter to the customer, versus the part that is more standard sized products that are not application specific? Just so that we understand that better.
Yeah. And, you know, it's of course very difficult to say because it's very dynamic. It's thousands of integrations with customers, and depends very much on what is your relationship to the customer and how have you been able to sort of add value through actually being able to interact with your customer, to give them the opportunity to capture the value that you can actually provide. So my point is to say that the opportunity to grow that market, where SKF works, not with a product offering, but a functional offering, if you understand, is there. There's a fantastic opportunity for us to grow that market. At the same time, as there is a possibility to access markets where sometimes, actually, today, we're not even there. So it's not that we are sort of saying, "Oh, you're losing this market." No, no, no.
It's a market that we are not attending today, but that it's attractive if we can work in the way we've been discussing before, and you will see some examples later on. So that's more the kind of dynamics I'm trying to give you an example, you know, it's not gonna give you. Do you understand? We are in good position in the industrial market, means that we are differentiated, because otherwise we wouldn't. But there's still a fantastic opportunity to grow that.
Or maybe simpler than, how much of these products with you've got a sensor on it versus the one that doesn't?
Yeah, but the sensor, we have a lot. You saw we have millions. One is the sensor on it, the other thing is the sensor on the machine.
Mm.
We have millions of points where we are measuring vibrations around the world. But the potential is humongous, if you understand.
Mm.
This technology is still in the making. So here, there's a fantastic opportunity to increase that market.
Thank you. And can I ask on that 1 million assets that you're monitoring at the moment, where was that number a couple of years ago or three years ago? And could you talk about how you get paid for that monitoring?
Well, honestly, three years ago, at least I don't know where it was. It's been growing. It's been growing, and of course, as the sensor technology becomes less and less expensive, it becomes less and more and more accessible to more and more customers, it becomes easier to penetrate. And how you capture value is because, you know, for an end user, the failure of the machine is the key.
Mm.
If I have access to the information and proactively can work with SKF product and service portfolio, I can see to it that the customer's machine does not stop when it's not supposed to stop, so to speak. I can also work with him, like the example that John showed us, to reduce his quality of his product and his overall cost of running his factory. That's how I create the value. How I capture the value is to make the customer understand that, you know, working this way with me will create so much more value, because here, the product cost is irrelevant.
When the customer comes and says to a competitor who comes with a bearing that may be of a different price, he will understand that it's only when you can provide this complete, holistic view on my machine, that you are truly a competitor.
But sorry to labor it, but in terms of just transaction itself, is this in the equipment price, or do you have customers paying-
We have everything.
... monthly or?
We have everything. You know, we started, myself, I was part of that, actually, developing what we call the IMS contract, you know, integrated maintenance systems, you know, where we're working with—where actually there's no transaction of product. It's all included in a, in an overall contract where the customer is paying. Two hybrids of this, because the truth is, the customer is king, right?
Mm-hmm.
Or queen, maybe we should say.
Mm-hmm.
We have to adapt our way of doing business to their wants. But when they understand that there's value in this, we get the business. And I think our results and the way we're running in the industrial market shows this. Otherwise, we wouldn't have these kinds of margins that we have.
Great, thank you. And sorry, a very, final follow-up. Those market shares that you presented, are they in value terms or unit terms?
They're indicative. It's indicative. I mean, it's, it's a view.
But closer to value, I presume, because in units-
Yeah. I mean, it's a view. It's a view.
Mm-hmm. Thank you.
You have a question over here.
Thank you very much. My first question is on restructuring. You talked about the continuous approach to restructuring rather than the big programs-
Mm-hmm
... in terms of the industrial business for the footprint. Maybe you come back to automotive later, but-
Mm-hmm
What do you see as a normal level of spending on restructuring, going forward? And the second question is, you talked about the supply chain financing and the outsourcing of the-
Mm
Receivables collection earlier, which helps cash flow. But what's the cost in of these programs, and where do you book this in terms of, is it in terms of factoring or selling receivables? So just how does it work? Thank you.
Christian.
I wait for something?
Yeah.
Yes, of course. So, so the cost of the program of, of supply chain financing, that's, that's to develop the IT platform, I would say, in order to handle the transactions, and that's taken. Part of this is, is included in the, in the setting, of, of the pricing with the, with our banking partner. So it's not nothing that you can, you know, supposed to come or, or burden the, the books going forward here. And, on the other, on, on the receivable side, we have said there that because... I mean, there we are outsourcing the, I mean, some people as well, as part of that, or we are, I mean, we are buying that service. In this case, we, we are- that has not been the main, cost saving has not been the main driver.
It's because we think we haven't been good enough in the way we have been running the collection. So we were more after to step up to have a stringent way of handling the customer interface when it comes to payment. So in this case, we buy a service which is cost neutral, hopefully with the upside I indicated on the cash flow.
And on the other question, actually, it's impossible to give you an exact number of this, because it will depend on our ability of finding technologies and changes that enables us to make these changes, and it will also depend on what happens to the macroeconomic situation, et cetera. What I'm trying to portray here is a resolve, you know, for you to understand, just because we are saying we're not going to launch any new programs, we are diligently working to lower our costs and increase our competitiveness. This is what I'm trying to portray at this moment.
Question.
Thank you. And we will have to close for-
We need one more here, otherwise I will be strangled. Otherwise, I will be strangled.
Very last question.
Look at those hands, you know?
One more of my questions then. Thank you, [Peter Fri and Anders Boiken]. When we look at the focus, you talk about the bearings and the surrounding rotating shaft. How should we think about the former platforms and additional potential platforms? I'm particularly thinking about the rollout of power transmission products that was initiated a couple of years ago.
Yeah. Yeah. You know, when you look at the platforms, the issue I have with the semantics around platforms, and a little bit the way we were running it, is that they were run like in silos. So they were driven by their own sort of revenue opportunity, as opposed to saying, "Yes, I have a revenue opportunity, but I also have a strategic support function where I can leverage on, around the rotating shaft for all of the products of SKF," like we saw in the... And there was a tendency, we were doing it, but there was a tendency a little bit to drive things maybe in silos. Therefore, when we semantically, we still run with the platforms.
We semantically call them technologies, well, to make it more clear that we are looking to leverage, taking the strong position, for instance, on lubrication system now and leverage into our customers. Because believe it or not, when you come to a customer and say, "Let me work on your warranty issues," an excavator producer, for instance, you know, and you come with the kind of technologies we have, and you come together and sit with their, with their engineers and look at their warranty issues, how interesting it is, and Bernd will come back to this, where you find that the problem is not in the bearing, it's, it's in the lubrication system, together with the sealing and the grease and, and the oil and so forth. And this is how we, how you...
When you look at other technologies, you know, I think that we will constantly be looking at adding on, in partnership or directly, where there are strong technologies that can continue to sort of strengthen our ability to work around the rotating shaft.
Okay. Thank you.
We give the word to you.
Thank you. With that, I think we need to continue the discussion over lunch. We will have lunch just outside here, and we will have slightly more than an hour, so we'll be back here at 1:30 P.M., so half past one. Thank you.
Thank you very much.
Thank you.
Thank you.
Great work. It was good?
We are facing a couple of challenges for automotive industry today, but one of the biggest, I would say, is the fuel efficiency. We have more cars on the road, we have more CO2 emissions, and continuously reduce the friction in order to make high efficiency on fuel is our objective always.
In today's automotive industry, it's all about reduction: reduced weight, reduced CO2, reduced friction. SKF is working with car makers, providing technology and products to help them meet those demands. One example is a new wheel end solution, the SKF L ow Friction Hub Bearing Unit, developed in Turin, Italy, a city with a long and rich automotive history.
We collected all the data from the several components, the bearing, the seals, the lubrication, and we analyzed the complete module. We take this module and place it in a simulation model of a generic mid-size car. We let this mid-size car run the normal duty cycle, and with this simulation, we can calculate what—how much fuel the car would consume on the cycle, and then we compare it with the old product.
The SKF Low Friction Hub Bearing Unit is capable to reduce the friction up to 20% in respect to a standard bearing. This means that we are able to reduce also the CO2 emission of up to 0.3 gram per kilometers.
The reduction in CO2 adds up to about 4.3 kilograms per year for a mid-size vehicle. These numbers qualified the Low Friction Hub Bearing Unit for SKF BeyondZero Status, solutions with significant environmental benefits. The Low friction HBU concept can be applied to a range of HBU generations and can be used as a retrofit, replacing a standard solution.
It was a cooperation between interfunctional areas, including the research center, ADC, in Nieuwegein, the process development and business development in the areas. And of course, the main role was to drive the engineering, to drive that, the development of this project.
The SKF Low Friction Hub Bearing Unit is now being tested at several car makers and should be on the roads within a couple of years.
We are also working some other features, for instance, low friction seals, low friction grease, and some other technology to further reduce the friction.
Good afternoon. Can you, can you hear me? It's clear? Loud. So welcome back. Thank you for coming after lunch and joining the automotive session. I'm very pleased to be here. My name is Stephane Le-Mounier.
... as you can understand from the name, I'm French. I'm an old-timer in SKF, as some of my dear colleagues, as you can see, by the way. And I have been working in the company for more than 20 years, working in different business environment within different countries, from in and out of different countries, in industrial market, in the automotive market. And lately, before I was offered the opportunity to lead our automotive business, which I started in January first this year, I was running the aftermarket, the aerospace business for SKF. So that's, that's me, briefly. The agenda today that I will try to take you through is basically sharing with you some observations that I've had, collected, the past months I have been in the business, in this industry.
Trying to share with you also some of the comments I had from our key customers, which I have interacted the past nine months. And from there, take you to what does it mean to us? What is the situation of SKF Automotive today within SKF and on the marketplace, and what is that we want to do from there? No surprise to you, I think you understand that the prime challenge that we have is to step up the level of financial performance, and this is what I will try to explain to you today, how we intend to do it.
And how we intend to stepping up the level of performance in finance, and how we intend to stay at this level, sustaining this level of performance, bringing innovation into the picture. This is when Aurelio will come on stage. Aurelio is our business and product development for the division, and he will tell you our innovation path and the solutions that we have in the pipe. The sort of incremental innovation, but also the more potential game changers for the future. Then after Franco Ferro, who is heading our sales operation for the bearing business in automotive, which is roughly 65%-70% of our business. So you're talking to the guys managing most of our customer relationship.
And Franco will take you through our recent successes in the industry and how benefiting from the repositioning of our value proposition, we're gaining, we're gaining shares in the market. So that's the agenda. Right, so as I said initially, and if you look at the current dynamic in the industry and very recently, actually, and if you combine that with the interaction that I've had with the customer, I can tell you that most of them are talking about two challenges that they are confronted to. And one is a moderate growth. This is an industry that is showing moderate growth, and especially since China is slowing down, this is even bigger.
The second challenge, of course, that they're facing today is the technological challenge, especially with the traditional combustion engine being challenged by consumer, but actually even more by the regulations. So it's no surprise that very high on the agenda of these people's day, it is about efficiency. Efficiency in the way they are addressing the product performance, efficiency in the way they are improving their own operations. And of course, they are, and that's the nature of our business, they are very much under cost pressure. So capturing the potential for growth that they see in the industry is very critical to them. So this is how they sort of paint the picture to us and the sort of challenges that they confronted, too.
From there, what does it mean to us? It is important that, I mean, as I said, the automotive industry is and will remain a very competitive environment due to the nature of the business. At the same time, if you can read through very quickly, we had a video before. We talked about friction reduction, we talked about weight reduction, what you hear today, also in the news, is taking you back to this discussion more and more. So what I think is, of course, the challenges that our customers are facing are very demanding to us, but at the same time, they offer a lot of opportunities. And I truly mean it.
I think, SKF historically has demonstrated its ability to reduce friction, provide weight reduction into the industry in the various applications we've been involved in, and specifically in automotive. So I would say that the challenges we are facing and the implication of the challenges that our customers are facing is very much in connected to our DNA in SKF. This is in the genes of the company to address weight and friction reduction. So the question to us is... This knowledge that we have internally acquired over time, where do we want to apply it and how we want to apply it? To make sure that this expertise that we have is matching in a better way the internal capabilities that we see in the business to our customer needs.
That's what I will try to elaborate further in my presentation today, and we will try to give you some examples of how we do that. This is a snapshot of our business. I think it's important to remind you that we are roughly a SEK 18 billion revenue, I mean, on the external sales, of the division. It's a business that is today generated out of Europe, mainly, which is probably not a bad place to be these days. Probably some time ago, we were more skeptical about the weight of the European market, but I have to say, these days, it's probably not a bad place to be in Europe.
A second area where we are strong is North America, which is another good place to be probably in these days. Then we have Asia, which Asia as such represent, in terms of revenue, pretty much the same as North America. And you see the weight of of China in this business. The Chinese business has been growing very, very significantly the past years. And you will see example of success stories later on. So that's a business which is truly global, obviously. We have a wide, and I would say too wide, probably product offer today in the market. You've seen here, there's a line that called Others, which is more than 10 product lines.
What is important to read here is that basically 50% of our business is around the core corner of the car. So the majority of what SKF is doing today is in the hub and the wheel, the suspension bearing applications. That's the core of our business, and I think it's important that we clarify that. And then, of course, we have ball and tapers for other kind of applications, and seals that we see today are the core component, helping us to differentiate our hub wheel bearing business. So that's the business we are in today. We are leading the market. We are the world leader in hubs.
As you can see here, we're number one, and if you look at the entire product portfolio, we are among the top three. We do that by serving all the customers all over the place. We work with car makers globally, locally, in emerging and developing countries. We work with car, we work with trucks, and we work with motorcycle manufacturers. Where is this business coming from? I think it's worth mentioning again, that historically, we pioneered the hub wheel business. SKF was the one created the hub concept, which is still regarded as a market leadership today. We also created the kit concept in the aftermarket business. So that's a strong heritage which we built on.
And we built on that strong heritage, developing our business through our ability to reach, our customer platform, our customers, globally through application engineering and global reach, and more important, a strong footprint. We had a discussion this morning about how you reach our customers. I can tell you that on the core of our business, the hub bearings, we have a localization rate, which is 95%, so we're very, very close to our customers. Then, the business has not developed financially, or it has not stabilized, a financial performance to where we want to be. So what is it that we're doing today? The very, very key thing that we do today is that, we launch a turnaround plan. The turnaround plan is aiming predominantly to set up the level of our financial performance.
To do so, we will actively, and we are working very actively on the, what we call the pain points, with a very focused agenda and a very strong speed in executing, the plan. And by doing so, what we are doing is we're also reviewing, the value proposition that we offer our customers. So what we wanna do is, number one, we wanna do less in terms of product. We wanna do less, but we wanna go where we have more impact, and we have, potential ability to differentiate, from the competition. The second element that we want to do is we want to, sort of enlarge, to do more in terms of, segment.
The thinking here behind that is that we have to review and reconsider the way we spec our solutions and to better satisfy the customer needs in a way to address more customer segments. The last thing that we want to address as well is the aftermarket business. I said before, we pioneered, but that business has changed very rapidly over time, and we have here a challenge in SKF to adapt both our market offers to the customer needs, and second, to take benefit of all the sales channels that we can see now happening in the market. So if I go one step further and provide you with more details in terms of what's the content of the turnaround plan, it's based on five tactical priorities.
The top two basically are aiming for improving our competitive structure, being in the way we address the market, the customers, our cost of running the business. And the second part, number two, is more addressing our footprint. But the one and two is about being more competitive in our structure. Three and four is probably more about how we can, by fine-tuning, right-speccing, our solutions, address more business. And by doing so, we want to specifically reduce the cost of our value proposition with also a stronger interaction with our supplier base in doing so. The last part is very connected to what Luc was presenting this morning. We are always chasing for operational excellence.
I mean, automotive is quite in the forefront in that area, but there is still more to do. There's new technologies now in the field that we have to bring into our factories in order to improve the operational excellence. So this is basically the backbone of our turnaround plan. What is interesting is that this is basically what we think is the main contributor to what will help us to step up our financial performance. What is worth mentioning at this stage is that the turnaround plan has been based very much on a sort of base, zero base growth scenario. So in other word, the things that we want to improve are very much internally driven.
So, as I said before, it's about addressing the cost in many areas and right-speccing to address more business. So it's a lot driven by our ability to implement this, rather than expecting a market helping us. If the market is stronger in the coming years, this is, of course, a double benefit to us. You see here some examples of activities that we have implemented, and I talked before about speed and execution. You see here how, for example, we have started to reduce our cost of doing the business by reducing the white collars in our operation.
You have here some examples of activities that we are implementing today, and you see the end date, so that gives you an indication of how quick we are proceeding in implementing these activities. VSM, I said it before, we used to pioneer in VSM, but the market changed very quickly. Now we have to catch up. So these things we're doing here, it's basically adapting the offer and the product content that we have in our kit, adapting it to the customer needs. And I've—if I would like to give an example, is that why should we have a bearing that can last 300,000 kilometers in a kit that you sell to an end user for secondhand car in China?
I mean, almost the value of the bearing is more expensive than the value of the car itself. So, it's very important for us then to understand the customer needs, translate that, and design it rightly, speccing it in a way or sourcing it and manufacturing in a way that it corresponds to the customer need. It's quite a different way of looking at the business. I said it before, we want to capture more growth, secure market share, by addressing basically all major sales channel that you see in the industry, including e-commerce. E-commerce is an area that we have to do more. We are stepping into this business. We are more in a phase of, how could I say, experimenting, alternatives and scenario to get into this business.
Obviously, the solution might be different from one country to the next. Supporting this, logistic solutions, we work a lot on defining logistic solution that can sustain the new business model we have in place, one-to-one shipment, cross-docking station, and as well, decoupling our manufacturing capabilities from OEM to aftermarket, so that can bring flexibility and availability. And Luc was showing this morning, the super flexible channel, which is actually one of the channel we have to make bearings for the aftermarket business in Italy. A very vital part... If it works. Doesn't work. Can you help me? Oh, yep, yep, step back. Yep. Thank you. A very vital part of this, the activity we have in place today is refocusing.
It is important for us to understand first of all, which business we want to be in, and allocate properly our resources and competencies accordingly in that very specific business we want to be in. And secondly, make sure that from an innovation perspective, and this is what Aurelio will elaborate further, we are concentrated our capabilities in that field. So we have here elected some clear product lines, which are basically based on our core business, and we define the core by where we have the major revenues, where we see we have a technical advantage to differentiate from competition. So starting from this platform, this is how we will further develop, either through incremental solutions or more potentially game-changing solutions to define the next generation of bearings.
And again, Aurelio will show that. So to conclude my presentation, my message to you is that we have here a plan that is in place to target a 8% operating margin mid-term. The plan is built up on a more competitive structure, taking out cost of our operation, increasing efficiency, working more with our suppliers, right-speccing our solutions. We will reallocate and make sure that our team is concentrated, and this is what we've done actually already, because we put in place an organization accordingly around the core business, that we believe will allow us to deliver more application-driven applications and the necessary ability to innovate if we want to stay in the forefront. And this ability to innovate will now be presented by Aurelio.
Thank you, Stephane. Good afternoon. My name is Aurelio Nervo. I'm Italian, and I am even more than Stephane, an old-timer, not only from the age and the appearance, unfortunately, but also in SKF, because I've been more than 33 years in this company, in different function, in different places. And, I don't add what you were saying, Alrik, is a great company, and, it was- it's been always a pleasure working in this company. What I would like to do today, it is to show to you what we are doing in automotive to address one of the five strategic directions, priorities that we are having in the company, that is the application-driven innovation. And for doing so, I will do it with examples.
Examples of what we are doing in automotive in the short term and in the longer term for refreshing and establishing the leadership that we want to have in the selected application, in the selected products that Stephane has just shown two overheads before. But let me tell you how we are working in this innovation and how we are deploying our resources. Basically, what we have been focusing our resources, it is in two streams. The first stream is connected to the core application, to the core products that we said, in that it has obviously two time horizon. It has a short time horizon, where I will say something with some examples on the incremental features, incremental addition to our product line that we are doing for staying on the top and gaining profitability.
And the other one, it is the radical breakthrough, what we are planning for the future of this application. And not negligible at all, it is the second point, that is the application specific, where we really see a game changer from the past in our product development and in our offer, where we position ourselves in the market, and I will talk a little bit more about that. But I would say that innovation is not complete if we don't use as well one of the strengths of this company. I mean, this company has been fighting against friction for more than 100 years.
We have strong competencies, we have strong people working on that, and we can put that in the hands of our customer, in the hands of the market, to help our customers to reduce friction and to gain in the car business, in the transport business, fuel efficiency. I will show you some example where we are applying on specific pocket of application, in specific pocket of the market, some of these competence, capability that this company has. The first one, I made just some example to tell you where we are looking at. That is not uniquely the product development itself, the product itself, sorry.
But if you look into that, the first one, it is an optimized wheel bearing unit that requires a lot of effort in the manufacturing, in the control of the tolerances, to guarantee an absolute precision and stiffness of the product. That seems trivial, but it is not, because today in the cars, you have a lot of electronics that can handle basically all your driving. But if the system, mechanical, because you still have some mechanic in the car, do not respond in the right way, you are wasting a lot of capabilities of the electronics that can give you as comfort, as straightness, as, pleasure or safety in driving. The second one, it is another aspect that we are taking care very much, and it is guaranteeing not only the quality of our product when we deliver it-...
but also guaranteeing that this will not be damaged, even by our customer. And this is very simple. When you transport cars in trains, in trucks, in a boat from one place to the others, the vibration that the cars with the wheel mounted are getting, it is just sliding on the metal to metal, and this is creating a lot of problems into the warranty failures and the warranty returns. So development of greases, development of specific surfaces will help that, and that it is helping on top of what we are delivering to the customer. It is preventing some problems for them. Very quickly, we have seen the picture before, the small film before on the innovative seal for wheel bearings. This is something that we are continuously updating. This is extremely important.
Just imagine that what we have today, what we are developing today, it is, wheel bearing with seals that have a friction that is 30%-40% lower than what are currently into the cars. What does that mean? That means that we can reduce the fuel consumption by a degree of 0.06, 0.08, 0.09 grams per kilometer. For putting in perspective of money, today, the regulation in Europe says that 1 gram of CO₂ exceeded by the threshold is EUR 95. So you can imagine that, that has a clear value, and I can tell you that our new seals, very low friction, high performance, are top of the class and are outperforming the competitors. Quickly, functional integration on a suspension bearing unit. This is another core product that we are having, and integrating more function with polymers, specifically designed for this.
We can isolate the spring with the vibration from the road, and it is increasing a lot, the comfort of the driver. Let me tell you the second, sorry, the second part, that I said before going to the breakthrough innovation. This is basically what we are really doing different today. One of the main points that we have, let's say, we are applying, it is that one product for all, as Alrik was saying, and also as Stephane was saying, do not fit well into the financial performance of our company.
We need to address the real need of the top of the class or the market, the mid-market, but also a lot of pockets here and there of application, where specific requirements are allowing us not to design in the same way the products. That means to fine-tune the design to the right cost and to the right competitiveness. Let me make you one example here. I mean, a city car, a city car does not need the same material of the seal, the same grease, the same things of a E-Class driving on a German autobahn. But simply because the lateral strength is not the same, the temperature is not the same.
Braking in a, in a city, from 40 km to 0 on a traffic light, or braking from 200 km on an autobahn, it is developing a completely different heat that you have to dissipate in the bearing with specific grease, with specific seals, with specific design. That is not needed there. And that is simply an example of what we are doing for designing specific product for specific application. And I can mention also, obviously, certain specific Chinese requirement or budget Indian car. But even more, what was said before, fine-tune the design of our product for the aftermarket, for the specific requirement of the life of the product. If you buy a 5, 10-year-old car, you don't expect it will last the component that you replace, as it was for the new car.
That will put us-- That put us new role in the design, new role in manufacturing, new role in the purchasing of components. That is putting us in a much better position from a competitive and ultimately, into a profit point of view. Let me just go very quickly into the breakthrough innovation. I will just touch a few of them. The first one goes into the, let's say, focusing on different material for our products. You can imagine a wheel bearing, a wheel unit that is made of steel with a combined polymer injection onto the steel. That is a very different design, is not existing today in the market, and will have a lot of advantage, like weight, like cost, because you will not have to machine steel for all the parts that you inject from polymer.
That is extremely an interesting project that we want to develop for small city cars. The other one, it is an application of a very futuristic application, sorry, to repeat the word. For our product, it is the in-wheel motor. I mean, basically, it is an electric motor driving the car in the wheel of the car. For doing that, we had to design a very tight tolerance and very rigid product, because you can understand that if this is the stator of the electric motor that is large like this, and then you have the rotor, sorry, this is the rotor, and then the stator is inside, then you have a very narrow gap, and this narrow gap cannot touch one each other when you are in curve.
And that, the bearing there, it is absolutely paramount for the functioning and the efficiency of this motor. Suspension bearing, we go even further on this suspension bearing strategy of continuous innovation. Franco will show it to you, how we have deployed this product in the years, and how we are getting market share with premium customers. This is integrating also the part that is on top of the suspension, and this one, this project, it is allowing, we have already tested that, to reduce with the same comfort of the spring of the suspension, to reduce 20-30 millimeters, the height of the car, the front end of the car, because it is more compact.
That is extremely important because, first of all, it is increasing the ability of the Cx of the car, so less fuel consumption, but especially from the regulation today, very tight on pedestrian safety. Every inch that you can lower the front of your car, it is a lot of points into the safety of the car. That is extremely interesting development. Let me touch on this.
This is basically leveraging of our, of our, let's say, competence, of our development that we have done, and you will see it from you, Victoria, on the railways application, to try to have a condition monitoring of the wheel, of the truck, and then to be able to monitor that in real time in order to prevent failures and unexpected and unplanned stoppage of the truck. If you have a big fleet, then the uptime and the total cost of ownership of this fleet and this truck, it is extremely important. Last, it is a big development that we are undertaking. It is a wheel end, enlarged, compacted with the CV joint, almost on the axial side, and that is allowing what?
It is allowing to redesign completely the suspension, completely the knuckle, in order to save up to 1.3 kilos per wheel. So 5 kilos on a car of weight reduction, it's a lot in terms of CO2. It is a lot in terms of performance of the car, and that is, it is not an easy product, but you can understand that what we want to do, it is to focus on few that makes the difference for the future for our customer. And I conclude with this. I said before, our company knowledge, the capabilities of our company, is on leading friction reduction. This is a very challenging product development. It is basically replacing the plain bearings with rolling bearings into all engine, crankshaft, and conrod. It's very difficult. You have to have bearing that are split in two.
So it's not an easy application, but you know what? The saving here is between 3% and 4% of fuel, and that is a lot. 3%-4% fuel reduction in a car, it is enormous if you think about how much weight you have to take away from the car for reaching that. Another application, it is the high speed rotating equipment. This is basically leveraging on our strength, on our capabilities, high precision manufacturing, to replace, again, journal bearings, plain bearings, with this cartridge, self-contained, self-lubricated in turbo, in the turbo device, that can really save another, we calculate with our customer, around 1% of fuel reduction.
The last two, very quickly, it is new generation of product, still for weight saving, for better response of the engine, and this is a valve tappet on all valves of the engine. What it is in our development, it is to replace all of the external part of metal with polymers for having a much greater response of the engine, and again, fuel saving. And the last one, it is leveraging as well on the big development we have done on ceramic rollers, on ceramic material, to prevent electric current, electric damage in the new powertrain, both electrical and hybrid.
I hope that with this very quick picture on real examples to convey that we are really focusing on specific things, refocusing and repositioning our automotive efforts into fewer and more qualified product development that will be deployed with a product plan into the market, and that it is for gaining both share and profitability. I will give it the word to Franco, that will tell you how we capture the customer with this strategy. Thank you.
You can imagine that with this presentation, it's easy now, so it can just fail into this moment. I just want to add to the introduction that I am 35 years in the company, out of which 20 spent in the industrial and service, and 15 between the old electrical and automotive. So I am one having covered four, four division. We have a task, a clear task, having so many very good solutions in our hands to really convey this into our customer, and transform into win-win solutions that have as an ultimate scope on the customer side, to provide them a higher competitiveness. We want our customers to be successful, and on our side, of course, to have profit out of it.
Having so, the money that are required to continue investing, researching, and having a future into this business. Let us start to see where are and who are our customers. Stephane has talked that we are in a market that is not really growing two digits per year, and in fact, you see here. This year, the car passenger market is growing less than 1%. And you see in this picture that the growth is driven by Europe, in part, the West European part, and North America. While we have a small, but I guess, Patrick, you agree, below expectation contribution from China, that represent, by the way, over 25% of the total market, and a big drop due to the Latin America, meaning Brazil situation.
We have an expectation that the coming year, this is not our number, it is IHS source, that the growth will be there, will be with an average of around 3%, so we can confirm that this is not a market that will grow significantly two digits. And so we have to accept the way of working in a competitive environment. When we come to the heavy vehicles, heavy truck, the situation is even more unbalanced in terms of production, of where our customers are located. You see that over 50% is in Asia, and China is taking the big, big majority of that.
Of course, in a year like this, when China demand for trucks, due to the overall economy, has dropped, it is enough to impact and contribute to a very negative trend to the entire world production. In fact, collapsed to basically 9% reduction. But you know, this market is also very fast reacting. And in fact, it is quite typical for trucks that you go from very deep situation to significant and fast recovery up. And the expectation for the future, by the way, are very good, of a quite robust growth. What are the drivers for our customer development? I believe, having had the presentation before mine, you can have imagined that energy efficiency can be important. I guess you heard this word quite a lot. And what is driving that?
It is very simple. It is the need to meet the target for the regulations, Euro 6, 7, 8, and so on, and each country has the same. This is really driving the energy efficient. But there is another factor that is more and more becoming important, and it is that one buying criteria for somebody going and buying a car, is also the consumption. How much I have to pay per kilometer? This is more and more important. This doesn't means that a customer that is going to buy a small car or ... Sorry, that is going to buy an SUV, will buy a small car to consume less. No. It means that when you have two models, you will be attracted by the one that is consuming less, and this is a fact. I can guarantee you, because customers are telling us that very openly.
So how we contribute to that? We contribute, of course, with the solution that have optimized the design, with optimized lubrication, and with optimized sealing. These are the three key functions that we are primarily, then we have many other smaller, let's say. But these are the three important. Then, of course, extremely important is also to have parts, component solution that have a lower weight. This is another big impact on the total consumption. Another driver is safety. Safety, I would say, like it is for our factories, is first for car manufacturers. You know what can be the impact when something in a car is not safe, and you have to get recalls and replacement, if not liability aspects. And here, we can clearly contribute a lot with that. Aurelio mentioned what we are doing for the suspension solution.
That is really enabling the customers to optimize versus passenger accidents versus pedestrian accidents, sorry. But safety is sometimes, talking with customers, also getting a more subtle, I would say, meaning. For instance, the sensation of driving a car when you go straight, and so basically, you don't have lateral load, is different than the one when you are bending, when you are having a curve. And if you optimize you have an optimized solution to keep the load in the curve, you will not feel very comfortable in when you go straight forward. It is what is called stiffness at low load. That is today extremely important features for wheel bearings, for instance.
And then, of course, I guess, comfort, and, what is below in term of noises and precision is quite, I would say, automatic to be understood. The market, we are focusing in term of application, wheel bearings, has had an evolution in the past years, let's say, since the nineties. And this evolution has moved from a simple double row bearing to units that, having flanges, are enabling a much easier handling and safer handling of, the wheel corner. But, aside of that, and SKF was pioneering this, as Stephane said, we have also had a tremendous increase of the value of what is today around the bearing, and it is not finished. You have just seen something in the presentation from Aurelio that will further increase the value of that.
This is another very important factor we have to keep in consideration when focusing on this application. But now let's come to the facts. We have targeted very clearly wheel bearings as one application we want to grow. And what we have today in our hands will move us to deliver from one to four, to five, one out of five bearings today, to almost one out of four bearings in 2020. And this is not only confirmed, I would say it is coming as expected, and only during this year, we have already exceeded an important part of this growth gap. Here it is written 35%, but I must say that in the last days, this has changed, and it is further up, already exceeding the 40%.
This is strengthening the leadership that you have seen in the presentation in the, over that from Stephane. And of course, we will continue working with our customers that are the global leaders, but we will also keep a strong eye to the new emerging segments, like the full electrical, and to the new emerging markets, like, of course, it's easy to say China, but not only China. And in fact, in our portfolio, more and more, we have customers belonging to new segments and new markets, getting themselves important and making, I would say, the trend and the credibility for us in the market. Moving to another application that has been mentioned in our focused application, that is the suspension. I believe what has happened is a very clear demonstration of what Alrik mentioned as the innovation virtual circle.
Because basically, we 20 years ago started working on this application with a very simple solution that was almost the actual bearing. We have created clear trust and credibility with that, and then we have every, I would say, second year, always innovated, moving up to what you see here, that is the last step. That is not the final, because you have seen something that will come middle of next year that is already exceeding this one. And by doing this, every time we are proposing to our customers these extra features, we basically keep the leadership in differentiating versus competition. And this is resulting into a phenomenal growth that will move us to basically have 40% of market share into this. And already today, we are above one quarter of that.
What is impressive here is that the customer portfolio is absolutely the same in all the areas, let me add, including Japan. That has been historically something that was an ache for SKF. Here, we are leading also in this market, completely. I would say that this is really a master example of how you can really be successful by having a balanced ratio of what you offer and what the customer has to pay. In other words, a win-win solution purely based on innovation. Some example of successes we have plenty of them. We have taken just a few to illustrate a different reason why a customer should buy from SKF. In this case, it is Geely, Chinese company.
The key aspect for winning was really to provide exactly the top technology that we are using with the top customers we have around the world. Because when you have to produce a certain level of car, it is independent on the market where you are. The requirements are absolutely the same. A big SUV in China has the same, exactly the same requirement of a big SUV in Europe or in North America. And this is something that we have been able to provide, of course, together with our local competence assets for developing, for designing, for testing, and lately, what we just announced, that we have basically 95% of coverage in what we produce to be sold in the area with the production, so with the factories.
This is creating, of course, a very important trust into the customer. Another example is with Volvo, and here, I would say we are in presence of a top car, where we really had to investigate every possible improvement to optimize the drivers I have just illustrated. This was, of course, achieved and successfully with both the wheel and the suspension. Here, I would say, the tradition, the ability to make simulation, Victoria later on will go deeper into that with Bernd, I think has been a key for confirming a relation that is there, of course, since a long time. But it is not only for cars that we are successful. In fact, this is an example with Scania in a truck.
If efficiency and low consumption is important in a car, you can imagine in a truck, where basically you have to be on the road 24 hours a day. In fact, by being able to supply solutions that are optimizing the Scania program, Ecolution or Ecolution with the T, is the same, of course, we have immediately been into a win-win situation with them. There is a long tradition for energy-efficient bearings, you know, the two product line, covering many of our product lines. This is a further application of that into specific wheel units and sealing solution. With that, I think we are at the conclusion.
Because of time, yeah, sorry. That's just a summary slide, but I mean, I think we said it all. We redefine the business we want to be in. I think that message was hopefully carried in a with clarity. We're redeploying our competencies, the team, with a prime focus to take out cost of the operation, increasing efficiency, bringing more productivity, so obsession in reducing the cost. The plan is quite clear. It has been fully deployed and committed. You've seen in some of the slides that it has already started to give effect to the financial performance of the business. And we have now a team which is fully committed and behind that.
So, the challenge, as Alrik was saying this morning, is probably not to define something that is rocket science, but more in the execution of the plan. So, for us, this is the key word today. Let's work on it and execute. We know where we want to be midterm from a financial perspective, and this is how we commit ourself. As for my session, Patrick, with very-
We have time for some questions as well.
Just to open some questions. Yes, a lot of questions, obviously.
They are behind you.
Yes, hi, it's Klas from Citi. Can I just ask you, so is 8% margin, that's obviously a lot of internal measures to get there. But if volumes come back, what is the new peak margin for this business? I mean, how much can you retain in terms of this structural change?
I, I must say, this operating margin that we're targeting is, is, by itself, a good challenge. It's quite a stretch already to get there. I mean, you follow the business, you know that me, as I do, I mean, the average operating margin performance in this industry is probably more around seven for the components, for the automotive suppliers, all of them, the integrators as the component suppliers. So stretching yourself to reach 8%, I think, is quite an ambitious target. You know, that's what we were working for.
Okay, thank you.
No, let me also add on what good on it. You know, I think we—there's a lot of questions about the margins here, and why am I not saying anything about the group margin, et cetera? You know, this with margins is such a difficult thing you are pushing me on all the time. I tell you, it's—the margins is a simplification of reality, isn't it? And, I realize that if I could find a good measurement on something else, like cash flow or capital employed, return on capital employed, et cetera, in a good way to make you understand what we think is possible, I would do it. I'm not gonna mention anything more about the group margins today.
I'm still taking my time to see what kind of targets that I would publish, because I think I have one shot at it, don't I? I mean, that's. And then I better deliver. This time, what we felt was we felt that we have to give you something that you can understand what we believe is achievable in this business. And this is why we're now giving you this figure, because we believe, honestly, we believe this, this can be done in the midterm. Of course, it will depend on, of course, how quickly. If we see a rebound in the industry, in the automotive market and becomes the seller's market again, this is gonna go much quicker.
If we, on the other hand, see a sluggish market and something more, more headwinds on the macro side, this will take longer time. But we believe that with the kind of innovation we can do, and now we're not really talking about this new innovations going beyond 2020 and so forth, where you have redesigns at the customer. But we are talking about within existing envelopes that we believe that we can innovate, and we can run our business in a more efficient way to reach this target. And I hope that you allow me to stay with this answer. Yes.
Thank you. Having said that, I actually have a follow-up on the margin, but this is more sort of relating to business mix. If you think about how much of sales in automotive currently is operating at sort of loss-making, break even? Is it a third, is it more? And also trying to understand, this cost takeout or all the efficiency improvements, is that downsizing part of that, or is it improving all sort of end segments?
I mean, the turnaround plan as such is, as I said earlier, one of the major contribution to the increase of the operational the financial performance. I wouldn't like you to stay with the impression that everything is there. There have been activities started before, and we should not neglect that. I mean, running a business like this at the level of performance that we have, although not satisfying, requires already a lot of activities. So, it is the major contributor to it, but there are other activities behind taking place already. That's very-
Yeah, because I'm trying to understand how much is mix versus cost. But-
Yeah, yeah. But it's... Again, the numbers and what we're trying to highlight here is, and that's what I was saying before, we're driving the team to be very, very focused around our ability to take cost out of the operation. That's the prime focus.
Thank you.
Over here, James from, James Moore from Redburn. A couple of questions on the profitability story-
Yeah
If I could again. But firstly, could you help us understand if nearly half of the sales are wheel hub and suspension, how much is wheel hub and how much is suspension? And when we think about the margin potential, is it that you see hub, suspension, seal, ball, VSM margins all moving equally, or do you see some particular areas where that's easier to achieve? And finally, I get the sense over the years that the VSM profitability has come down with online visibility and other challenges. Could you, could you help us understand or size that, or, or talk about where we're at on the profitability in VSM?
Mm-hmm. Now, I mean, what I was showing on the turnaround plan, it was probably addressing very much the OE side of the business and the core of the business. Additionally to that, I was showing the VSM rethinking of the business model that we have. We were the pioneer in this business. The business has changed a lot. We probably have not adapted ourself from a product offering, our ability to reach our customers fast enough. There are a lot of pockets where we can gain more market share with, of course, if we redesign the content and redefine the content of our kit concept, we can reach this business quite quickly. That's very clear.
So, I think when it comes to speed of implementation, I have some expectation that the VSM business could help us. Yeah, clearly, quicker than the OEM business.
Just one follow-up. I see one of your peers has a lot more content that's away from bearings, and you have a lot more bearings within the car. Do you have a wider ambition to move into other areas like engine, power transmission, steering, et cetera?
No, but this is historically, I mean, if the one of the pie I was showing and was that we had probably almost 25% of our business being other, right? And that's what it is. Historically, we've developed ourselves in many kind of applications, multiplying our product offers, and trying to be in the forefront of all of them. That, for me, leads us to a situation where we need to, and that's what we're doing, go back to where we think we are a clear leader, where we think our customers recognize the knowledge we have, and they're ready to pay for it, if I may say. So there are other areas of the business, historically, but that's not the ones that we're going to focus in the future.
What happens after when we have reached and we've done this, it's too early to say what, what happens to the automotive business. We have, this is not, let's say, Stephane says that many times, I think he's right. This is more of a, an operational refocusing within an existing strategy than actually a complete repositioning of the strategical basis-
Yeah.
-of what we intend to do, and I think this is the way to go. And you can imagine, what focus does to the ability to cut out cost, what looking at, a performance that is truly focused on the aftermarket, as opposed to having one size fits all, what does, does that, is that mix or is it cost? Well, you can actually argue, you know, that that's actually also a part of a mix where you're suddenly coming out into the marketplace with a more competitive product, not necessarily because you have lowered your margin, but because you have redesigned for a different kind of performance. And, and when you have not been doing that in, in, in a focused way, there is some very, very interesting perform, possibilities in this approach-
Mm.
at a relatively midterm kind of timing, because it's not rocket science. You already have it. I joke sometimes when we talk about it, I say, "Our competitors, they're not Harry Potter." So they're doing, when they're doing it, they are doing it in a smart way, and when we look at what they have to do it, we have it, too. Sometimes it's just to be able to get rid of the dogmas. And actually, Aurelio, the other day, he founded a new dogma. He said, "The dogma of the non-dogma," and saying that, you know, we have to be customer focused. We have to understand what the aftermarket customers in the U.S. for tapers, what they truly need, and we know that we can deliver this.
Thank you. Danny Schmidt from SEB. I just wanted to ask you, maybe Alrik, but also, also you. You have been maybe partly deliberately, it's hard to say, but you've been losing market shares in automotive in the U.S. in the past couple of quarters. You've been stating that your negotiations with the customers are looking sort of bright and that you will come back in these areas. Could you shed some more light on this issue, and then sort of give some sort of timeframe, what we should expect?
I mean, there are a couple of key customers where today... And since we reposition ourself into the business, the way I was trying to explain you, I've interacted a lot with lots of them, and it was an interesting exercise that we call strategic realignment. What is SKF in automotive? Where do you want to be? Do you want to be a system supplier or not? And I answered that question. So I've had the opportunity the past months to go and meet all the key guys around the world, redefining or clarifying how we see our contribution to the business and what we can bring to them. I can tell you that, the response of these customers has been extremely positive. There were some roadblocks in some areas with some of them.
We tackled them, one after the other. So, in the region you mentioned, I think we've made significant progress to strategically realign with the guys. We have now set the base for a stronger cooperation in the future.
... we back into business, at least in terms of working on opportunities, significant opportunities for the future. So I wish, I wish soon we can, we can come back to you and, and, and, and communicate good successes there.
But you can't say anything about sort of more precise timing when you-
I would not at this stage, I would not. Let us work with these guys. They have a strong desire to work with us, I can tell you, as we have a strong desire to work with them. So we are now in a sort of operational mode. Then we've passed the strategic alignment step at a very high level with these people. Now we're back to the operation, and we get our operational people working. And I wish that's when I can go back to you and share some good news and some successes that we will have. I'm quite confident there.
Thank you.
This is from Graham Phillips from Jefferies on pricing, but more specifically around the example that was given on an earlier slide, where you're talking about innovative wheel-bearing product, and it saved EUR 95 per car. I'm not quite sure if that was off the cost or off the running cost of the vehicle. But if that's the case, I mean, how do you think about then pricing that unit? Do you say, "Well, let's have 50% of that," or, "We're just gonna increase the price of the old unit by 10%?" I mean, just a general question, but more specifically about that particular example.
The price a customer can pay is very much depending on the content of innovation that can make use of. When we talk of content of innovation, we have, of course, several aspects. Some of them are in the design, some of them are in the lubrication, in the way you fix the bearing feature in versus efficiency, in the sealing aspect, but also in other aspects, like, for instance, protection against corrosion and that. All these aspects, all these features have a value that a customer can afford to pay because it moves them into an increased competitiveness for them. We don't have a fixed setup for each customer and each application. So the price can change, not 50%, but the price can change, definitely, according to the number of this content of innovation that are taken case by case.
It is a sort of modular approach that each customer, for each model, is selecting according to the situation of the vehicle.
Okay, and I guess perhaps just generally on pricing, if we talk about demand rising 3%, you know, roughly next year, should we be thinking just, you know, as a general rule, that pricing is minus on that, or are we still sort of punching for around the same sort of figure in terms of growth?
No, it is exactly fitting into the same, subject of what I told you. The pricing is depending on what kind of content of innovation you have for each specific. I have shown examples there where the content of innovation has contributed two digits on the price of the unit.
But that-
But not all of them-
Yeah
... are the same.
But that was obviously on one specific product. I guess I'm looking at for the group.
In the end, I hope you hear me. I need to talk in the microphone a little better. In the end, it's a theoretical exercise now, because, you know, the price is determined by the alternative of the customer.
Of course.
So if the customer has somebody who can provide the similar kind of value that we do at a lower cost, we will have difficulties in getting our money's worth. But if we're really good, and we're ahead of the game, which we believe we are, and we have the right value propositions, and they really understand that they can go over that threshold, so they can write in the car, that it's actually a lower CO2 emission, it has a lot of value, and we can capture on that. And then, this man needs to look tough, because negotiating with automotive customers, and I tell you, when I was a younger man, I'm still young, and I left the automotive. I spent most of my time in automotive in SKF, but I left for industrial.
I said: I'll never go back to automotive again, because the negotiations are so tough. They are so, so extremely tough. So sometimes you also have to take, you have to take a risk on trying to understand what is truly the differentiation you have, and a little bit of take it or leave it. Take some risk on some accounts, and temporarily, maybe then go out and go back, take it again. Because if you think that in the end, they're always gonna go on what is sort of like some kind of matrix on value, it's not true. In the end, what's your alternative, and do I know that? And the truth is that I feel that in my interactions, and I've actually also participated in some of these meetings together with... We have good value propositions coming up.
Will we be able to take, capture all the value? No, I don't think so. Will we be able to improve our, margins? Definitely. And the problem with your question is that it's so theoretical that it, the answer can't be anything but, you know, it's case by case. It's even vehicle by vehicle.
Yes, absolutely. It is vehicle by vehicle. Absolutely. The same solution in suspension bearings, as an example, you can have for half the price, but you have a different content, and you have a different value when you sell your car.
... Okay, back here.
Okay, thank you. Sorry, Andreas, we'll need to move on to Patrick in China. We'll have more time for Q&A towards the end of the session. Otherwise, we will be running late.
Later today, I'm here anyway.
Thank you.
Stephane, I will need the switch. Do you have the switch, Stephane? Thank you. Good afternoon, ladies and gentlemen. So, Patrick, just for some housekeeping, should I keep it until 3:30 P.M. then, for my two sessions?
You got 2 hours.
Okay, good. Thank you for allowing me to talk a little bit about China and specialty business. Firstly, about myself. I've been with SKF now for 26 years. This is my 27 years. I started off from China, very much in the sales operation, but lately I've been going around the world. Spent 4 years in Sweden, taking a global marketing job, and then spent 5 years in Chicago when we first bought the second, one of the first second brand company PEER. So I went there to pick up the business. And since January this year, Alrik asked me to come back to this position now, in the SKF world from the second brand side. So I took the specialty business, which I will explain to you a bit more later on.
Since May, I was also asked to take care of China. I basically have two job. One is operationally running the China business as the division, but also the specialty business. If I start talking a little bit about China, this is the agenda I will take you through. I have less data and words, more to try and explain to you in a qualitative manner. During the lunchtime, I was given a lot of quantitative questions. Allow me to talk to you a little bit about, at least from the impression point of view, from qualitative point of view, my view about China.
So where we are today, the challenges and opportunities we saw with a Chinese eyes, hopefully, and also how we create and capture value from the customers, and share with you a few success story. And these success story actually are very well aligned with what you already heard earlier today. So the overview of China for those of you who do not know, SKF actually went into China very early. So we started a company here in Gothenburg in 1907. We started our business in China in 1912, so shortly, five years after we started the company here. We operated until 1951, so all Western company were asked to leave the country. We went back in in 1988 to restart our business as with sales operation in the beginning. And during the early nineties we started to put up production operations.
So in this period, we have, until now, 18 manufacturing site, all over China. And if you see the spot, they are very much concentrated in the coastal region, which is, of course, the, better developed regions. And we have 27 sales operations. Some of them are more far out, in the west, where you have some specific sector to serve. We also put up a rather advanced, technology center, in China, which I think is one of the important step that SKF has taken, and we, down the road, will be able to make use of this investment, in a much better way. We also set up a logistic operation, in Shanghai.
The target is actually not only China as such, but this will also serve the Northeast Asian market, meaning, Japan, Korea, Taiwan, for that matter. We have three Solution Factories, not as big as the one you see here, but they are well present in different region. We have 100+ distributors. They're operating at the 400 outlets throughout the country. So during the last 10 years, w e kind of grow the business, grew the business by 4x , from SEK 2.8 billion up until now, roughly SEK 8.2 billion. So exactly during this period of high-speed growth in the marketplace, I would say that SKF was able to quite well follow this trend going on.
And, of course, what you have already seen and experienced about a new trend on the growth, we will try to win in this new dimension. So how the organization is organized, this is exactly a mirror, as you can see globally. So we have three teams in the industrial side, automotive market, and also specialty business. And this is the core part of the activity that they are fully integrated. So we have sales operation, we have factories, and they're supported by two important function. One is clearly the engineering side. So engineering activity include from customer application engineering to product development, testing, validation. This is the full capability. And on the right-hand side, you see is the supporting partners in the logistic area and the customer service area.
And purchasing, I would say, is the next month to go, which you already heard something from Christian, this morning. I think there are more potential to capture in this area. So if I will take you to... I, I'm trying to now to explain to you some of the industry sectors that, SKF operated in China. I was given a lot of these questions, over lunchtime, so I would like to take this opportunity to say a few words to you. There are a few segments, in China that is, taking a big part of our business, so automotive, obviously being one of them.
But our biggest activities are in the wind energy side and in the railway side. And because of the high growth that you have observed over the last few years in these two industries, SKF has been able to actually engage ourselves in a quite good position with the industry and with the customers. So besides the renewable wind energy and railway, another big sector for SKF is in the industrial drive business. So when you talk about industrial, industrial drive, you're talking about compressor, electric motors, gearbox, so that matter. And China, in the industrial drive sector, is dominating the world.
So if I just to give you some impression, if you look at electric motors, approximately 60% of the world motors are produced in China, be it from Chinese brand or be it private branding for global company or global brands operating in China. And this is actually quite the same in many places. Even if you look at renewable as such, China actually take up nearly half of the world output at the moment. So these three area are the very important area for us. Distribution is also an important sector for SKF in China. As I explained, about the 400, our last 100-plus distributors, so we are well present.
Another good thing I would say is that in this market, we basically partner with monobrand distributors, so they are selling primarily SKF brand. And this partnership is, of course, important. I think already in the morning talked about how we can work better with the distributors, and this is exactly how we see ourselves becoming successful, because they need us to work with them. I would not use the word teach, but at least working together to see how we become successful together. So if you look at the other area, the SKF is also strong in terms of market share. This will be in the heavy industry, and this is the problematic sector in China.
I would say already starting somewhere last year, even beginning of last year, and it becomes worse in this year. So these areas, of course, you see you're seeing less investment. The capital asset purchase is slowing down by a lot, and we are affected. On the other hand, because of our well-developed infrastructure with this industry, we are also very active with the user market, which is actually a very important sector that drives the value that SKF can deliver. And then if you look at the specialty business, this is rather new, and I would say that there are... Some colleagues asked me during lunchtime, which are the industry that will be growing in China, for us and for the market?
I would say that we need to go faster and bigger into the industry that relate to domestic consumption, related to populations. So if you typically look at the food and beverage industry, you look at medical healthcare industry, these are the growing industry. If you look at even agricultural, nobody will actually realize that China will go for automation, mechanization of agriculture, but they are. Because the land, usable land is shrinking for farming, they need to have a lot more production, output from these farmlands. So this is the sector that we see, clearly will be growing. Another very important sector that will, it is already growing very fast, this is in the automation area. Not exactly the same thing that, Luc talked about in the intelligent machine, but we see people also moving there.
The government put a heavy subsidy or sponsorship to company that will advance their automation capability. So these are also the area that could be very interesting for us. So all in all, our biggest size of business is industrial, is, is in industrial market. We have some 70+, 70+% going into this business. And then the second sector is, is the automotive, and the specialty is the smallest one at the moment. So what are the challenges and opportunities when you look at it? I would like to look at it in a three context starting with the business environment. So yes, I think everybody is talking about the slowing down, but I must emphasize that we are talking about a growth of 5-6% in a very sizable economy.
I would say that the Chinese industry competitor, customer, whatnot, they are very well adapted now to what we call the new normal. So from a mindset point of view, everybody realize that we now don't have that high-speed growth, so we must challenge ourselves much more and to become how we can be more competitive. And in that, we will find opportunity as well. Structural changes. So if you look at industry sectors, the labor-intensive industry is now being kicked out of China, so they are not motivating any garment or toys of that kind of industry, but going more into mechanical machineries. That is being one. They are also moving a lot into, let me say, more efficient and productive structures, so they're shutting down small plants, they are building bigger plants.
Another major change, I would say, is that the export will change from the consumer type of product, which is still a very large part of the export, but much more into mechanical industry, much more into things that they can take it globally. And this is actually the ambition of almost all people involved in the mechanical area. Compliance. This is really a good news. We are so happy to see all these cleanup efforts you can observe from the government, but very much now, this is going beyond the government official. It's really going into the industry, and I will cover this point a little bit later on. From a customer point of view, as I said, they adapted very much.
I mean, the over and misaligned capacities from the past, everybody was chasing for the growth. So we follow a customer with our business, let's go and invest first. So this is something that we need to address, for sure, from the customer side. But how do we work on the flexibility speed, in order to win in a new normal, environment? That will be, of course, their attention as well. A lot of colleagues ask me about China competition, talking about that the China competitors took some 30% of the world market share. It is true, but we also need to realize that this 30% is occupied by some 1,000 competitors. That is the perspective. So what we really are looking at, is not the 30%. It's a group of, very strong competitor that we look at.
We observe also that they are moving from the follower. Basically, in the past, you don't see a lot about designing the product, but also into innovation. And I would say that one of the focus area of the competency innovation in China is also about cost, and that is an element that I think we can learn a lot more about. Counterfeit, this is a different group of competitors, but I must say that we also receive a very strong effort from the government to work on this area. So how do we now see this as opportunities then for SKF? From a compliance perspective, of course, the transparency is a very good news. It increased the fairness of competition. It will make it easier for us to conduct business in the way that SKF always does.
So that will be good. And if you look at the maturity of the China market as such, again, I talk about already about the advancement of the machines and how they want to improve the quality. That will also mean opportunity for us. There are also a few important developments from the customer's point of view. So because of the overcapacity, we will see some consolidation, not everywhere, because some of the industries are still very much occupied by state-owned company, and state-owned company is very difficult to consolidate. The stability is the top priority, but that something will happen there. I mean, even if you look at big state-owned company, like the railway company, in June this year, they just put the two very big company into one.
So that is also a sign to show that the efficiency is becoming more important. Actually, in the past, you never heard about the railway people talking to you on competition, but today, in their daily language, they talk about who they are competing with. From another area, which I thought worth to mention, is also the going global. So it's not unusual to see very, very big Chinese player, which is actually the leading company in the world. I will share with you one case with regards to a harbor crane company. This company alone has 60% of the global market share, one company.
So the intention for them to go global, making use of the base that they have already developed in the Chinese market, to go out to the world and take a better global position. We also observe, from an environmental standpoint, there's huge investment coming from the government, and this actually, as I mentioned, towards this consumer-related of industry, will be an interesting area. So a lot of investment are now put into sewage type of business, and that will create some opportunity for our type of business as well. And from a competition point of view, yeah, there will be... I think I don't need to repeat much of what you heard from the colleagues this morning.
I think you, you talk about these two area, one being the product and the other being the machine efficiency. On the machine efficiency side, we see clearly that there will be an increasing demand in China because of the need for the customer to become a lot more efficient and competitive. When it comes to the product side, it is, Alrik talked about it being a sector that we can actually go in, but that is exactly the point. This is not the business that we used to have, so I would rather look at it as a market that we can go in. And, and I, I look at it this way, as I said also earlier this morning, I think what is important for SKF is to realize that we have a very, very strong engineering knowledge.
And if we use that strong engineering knowledge, equip them with a thorough understanding of the marketplace, and you try to combine the two, which mean that you are using your knowledge to develop competitive offer in a very reliable way. Because if you look at many of our competitors from China, yes, they may be able to deliver to you a cheap unit price bearing, but it's not all the time that is reliable. So, this will be my focus. I would like my team in China to have a thorough understanding of what is available and use the global technology in SKF, which we already have some success cases that I will share with you, and combine the two to first engage ourselves and take the business in China.
But with that learning, we can also bring it to our global operation so that we improve our, increase our competitiveness globally as well. To that point, I will also say that, if you look at China, what is China offering us, like SKF? Many people talk about two things. You talk about the cost when you produce there, and you talk about also the big demand. One thing I would say is also that if you look at bearing industry, specifically, China actually offer the most complete value chain and in a very scalable way, very competitively. So this is clearly a point where we can make use of and increase our competitiveness. You talk about the purchasing, Christian showed to you how much we spend, where we are spending.
So apart from the efficiency that we can grow from what we already used to, the way we were doing things, but maybe we can increase a lot our purchasing also in China. And once again, not to just buy cheap things, but buy competitive products with good engineering knowledge. I think this is what I'm trying to explain to you. So I will now talk a little, show a few key segments that SKF operate quite a lot with China. The first one is railway. Railway is still a very good market for SKF. So if you look at the different sectors in the freight wagon, the freight carrying wagon, this is actually on a decline, and they are losing business to the truck transportation, by the way.
But the two other sectors, in terms of passenger trains and also metro subway, the subway is like in an exploding situation. So we have 42 cities in China that are building subways. And if you look at trains, we have two types of trains. One is the, what we call normal speed, 160 km per hour. The other is high speed, which is in the range of 250-300 km. SKF has good position in both of these sectors, and we are also very ready to become bigger and follow the growth trend in the metro business as well. So the government will continue to invest in the railway in the next foreseeable future. If you look at the high-speed trains today, they are very much concentrated in Eastern China.
For those of you who are familiar with what the government has explained to the world about the Belt and Road concept, this is for them to extend the rail and road on the land, on the seaside, reaching Asia and India, on the road and the rail reaching Europe. This will also be a key reason why they will have to continue to invest. So for SKF, we have two parts of the business. On the OEM side, I talk about this merger of north and south railway. They are good and more challenging things for SKF in this way. But actually, the concentration increased the opportunity for a technological company like SKF to gain the trust and be able to get the programs.
Right now, I would say that most of the new vehicle or new design, we are in it. We are working in the last one. If we are in that one as well, we are in all of them. And another point, very importantly, because of the good presence that we have in the last few years on the OE side, it created a very good opportunity for us in the aftermarket. And SKF is actually one of the global company, maybe even more advanced, when it comes to serving the aftermarket. So in terms of refurbishing the bearings and so on, we have already multiple years of experience.
You can imagine that if you are riding on a train that is 250 km, you want somebody who has the knowledge and experience to repair your bearing, and that, I mean, SKF is of course a good choice. So personally, I look upon railway as an important sector. I will continue to increase the investment in this sector, so we are as well equipped, if not better, than what we can achieve in the market. Another sector that is not so good at the moment in the market, that is the metal and steel market. So China has 1.2 billion tons of steel production capacity. So if you look at the forecast for this year, they are producing somewhere around 800 million tons, which is then not utilizing the capacity, of course.
Then on top of that, if you look at the real consumption in the market, it's absolutely not 800 million tons. It will be less than that. So all the financial challenges for our customers is very bad at the moment. But on the other hand, we also see a great prospect in the aftermarket side. Because the new investment, yes, it will go down. We now concentrate our energy on the aftermarket. So when it come to the performance, we already talked about the machine efficiency and so on, and I will share one case also related to this. What I see in metals is that we can use our technology to at least defend our position with the customer. And there will be some structural change in the steel industry.
The rough products will go down, the precision product will go up, and when the precision product go up, it put higher challenges on the equipment, and that is where SKF will have the opportunity. In fact, just so that you know, the most advanced continuous caster in the world is actually in China, not in Germany, and that is the kind of market that we are facing today. Renewable, SKF has benefited from it, a lot during the years, and this year is still growing, quite a lot as compared to last year. The fourth quarter has slowed down somewhat in this sector, but SKF also has a quite strong position in this market. People talk about large turbine, which way to go.
We saw from the Chinese customer, they stay more at the medium range, 2, 2.5, 3 MW. There's less incentive or interest to go to the extra large in 5, 6 MW. We stay very close with this development. Then we are engaging ourselves quite well with most of the major players. The aftermarket will come up, and we have already quite a few cases working with some customers, so I expect that that will also help us in the life cycle profitability that we can gain from this business. So the key thing for SKF in the wind energy in China, in my view, is to make sure that we work with the winners.
Because, if you look at very peak time, I would say during 2012, somewhere there, at least in the last peak time, there were 300 companies operating in this sector. Now it's just 100, and I believe that it will go down to 30, 40. So the question for us is, of course, we only want to work with the one that will stay or we will lead. Another key trend is also that we see some strong players also going global. So actually, this year, a Chinese company will surpass Siemens to become the biggest, wind turbine manufacturer in the world, and this company is called Goldwind. So they will slightly surpass, Siemens globally, and they are exporting. They are investing in Europe. They are acquiring engineering company in Germany.
They are putting up service centers in the U.S. So these are the real player that we will focus our energy with. Automotive, I wouldn't repeat quite much what our colleagues have said to you just now. I put this word here, Internet Plus. It's also a new trend now in the city. So you basically can go on Internet and hire your car, which means that the ownership of the car is no longer your choice. So you will go for perhaps more challenging and cost-effective solutions. So we will continue our... I think we have already had quite some successes in China to be able to actually adapt ourselves with the demand of our customers and develop a competitive offering.
I use the word here, frugal design, which is really the mindset of our OE customers. Maybe one perspective important to share is that, we traditionally were very engaged with global brands, and with the efforts of our colleagues in the last few years, we are now gradually going more into the local brands. Several local brands are obviously the winning one, as we see them in the last few years, and I believe, some of them will continue to win. Geely is one example, but we are also recently going into Great Wall, which is a very good step, I must say. Lastly, maybe just very quickly go through this. This is a very similar case, if you look at what John has told you early on, so I'm not going to repeat it.
In this case now, what is the difference between the U.S. Steel is that this customer is absolutely not as sophisticated. So this is a privately owned steel mill. They really need help, and this is where we can come in with knowledge and value that we can sell. So just, just so that you know that our bearing product price is probably double of what the competitor is selling. But in this case, for the customer, it is the long-term sustainable performance that is important for them. So we succeeded in a three-year integrated maintenance solution contract with them. And the other case, I talk about this world leader. This is a company who had 20 factories on the boat, so they produce as they sail along to deliver the product to the customer.
Therefore, you can imagine this is how they want to go global. They had been selling a lot globally, but they realized that their local presence and capability is also, let's say, failing them if they don't bridge that gap. What they saw in SKF is that with long years of relationship working with us in the bore, bearing supply, in the design of the machines, in the selection of bearings, now they realize also that SKF can offer them the global support. In several countries, our operation is now supporting this customer to improve their capability in those country to serve their customer.
And I would say that, in fact, maybe there are some global company who is also able to do that, but I think SKF took a much more advanced step than any of our other competitors. This is another example on the... Franco has already mentioned about the customer seeing the challenge the same, be it China, be in Europe, and this is one of the case that we did. So we were fighting with a very hostile competitor, primarily on price of the product, but this competitor cannot fight us when we talk about helping the customer on both end, in the, in their Europe-European operation, but also in China operation. And this is also another great success story, I would say, how SKF is able to work globally and locally.
This project, without a seamless cooperation between the global team and China team, it will not be possible. Okay, this last example is more about the wind energy again. So in this case, we are helping the customers to reduce their warranty costs, the cost of production. And I would even say that if I read this story in the beginning, the customer did not even know what was the problem. So we started from hearing the problem all the way to analyzing where they should work on and come with the solutions. And this is what the customer perceive as the value we can... And in this product, you never really talk about the price of the bearing, because it's a problem that they need to solve.
But don't get me wrong, it seems I'm showing you a lot of this, let's say, solution or capability type of products and services, solutions we are offering to the customer. If you look at the wind energy, in fact, in the wind energy, SKF has a very localized, competitive solutions for the market. And this is also why these customer are able to grow. And when I talk to Goldwind, for instance, their feeling or their experience is that because of this capability from the SKF side to support them with this cost competitiveness that they need. They actually have brought down quite significantly the cost of the product, whereby it becomes less dependent on the subsidies from the government or the tariff that a lot of people are talking about is one of the driver.
So it seems like, at some point, China will become less dependent, or in the wind industry, on the tariff support from the government. So summary, the perspective of China as such for SKF is that it's such an important market. Right now, China, you consume something like one quarter of the global bearing demand. So it is not a battle we can afford to lose. We must win this battle. Winning this battle will mean several perspective. One is obviously in itself already a very big market, but I must repeat again, that we can utilize the cost competitive model that they have on the product side, to bring it to become a kind of global capability for SKF as well, and also some of the supply chain that we can make use of.
So the perspective for me is really a local and global perspective. Use our people on the ground, run with our feet, know very well what is going on, and know all the, let's say, major customer requirement, bring it back to the global society of SKF, use the knowledge, so we capture that value. So these are the key points that I will focus on. We must select the right industry and also the right customer. We are already quite well present in the strong industry. We may need to put some effort into some high-growth industry. That will be something we will work on as well. But more importantly, is to really work with the winning customers.
I talk about the competitive offering, and this has to be a full value chain capability locally in China, that we are able to do most of it as well. The organization development is also important, which I think relatively, we have a good strong organization there, but there are room that we can bring them even further on. There's one point here I want to also mention, that is making sure that at this time in some industry and customers, that we don't run into risk from a cash perspective. So we'll be careful with that. So this conclude a little bit of my China part. If you may allow, then I move on to the specialty part, and we can come back to the Q&A sessions later on. So specialty. What is specialty?
Specialty is quite lean, because I'm the only one standing up here now talking. Just to tell you the truth, that I only have two staff. That is my business development person and the controller. I have my controller understand. That's all. I don't have any other staff. So I do most of the things myself as well, but it is not the main reason to be lean. But I also want to take you through why we do it this way. I will talk about a few points. The overview of who is specialty, what is our strategy going to the market, and show you some example about the application-driven innovation, and share with you some success stories. So specialty is constructed with four standalone business units.
One shall say that almost half of this business were acquired over the years, and the other half has been in SKF for some years. In this units, they also acquire some small operation over time. So we have a turnover of SEK 11 billion, operating at 10% margin. If you did not notice, when I changed from China to a specialty, now my EBIT actually reduced somewhat because I'm carrying a very heavy balance sheet from all the goodwill. And obviously, this must be one of my key tasks. So we acquired this business, but I must say that they, because of the way they operate, they focus on the application of the customer, nothing else. So that is the most important point.
And with that, they channel all the energy throughout the organization so that make sure that everybody understand you have to serve that application. So the full value chain model is one unique differences of specialty. And then the other model is, of course, the application focus that I talk about. From a profitability point of view, they operate, most of them, with the exception of linear motion, they operate in quite a good margin level. So on the left-hand side is the linear motion. I will take you through the four of them in the next slides. So just before I talk about the units, the spread of our business is a very U.S.-centric business. This is also due to the second brand organization, the Kaydon organization that we acquire. They are very, very U.S.-focused.
The aerospace business is a little bit more European focused. If you look, look at linear actuation, it is also rather European. So this is how we have our business split in the three regions. The blue color is where we have our production footprint. So in a way, you can also say that we are quite globally present from a manufacturing standpoint. And if I take you through the four units, aerospace is a European-based business. You can see that the two-thirds of business is in Europe, and U.S. is one-third. Asia is just in the starting point, and in this case, primarily in China. So on the product side, again, almost everything is customized for the application.
I would even argue that almost 0% of the product is going to the catalog. So you have to channel your energy from understanding of the customer's problem to developing the solution, even in an innovative manner throughout the value chain. These are the very familiar global customers that you will know. And I will explain that in this industry, in the last year, in the last 3-4 quarters, what we saw is, of course, one thing we have been quite affected is by the oil and gas prices. So on the one hand, there's push out. There's less pressure for the customers to acquire new energy efficient planes. But on the other hand, also, the oil industry is hurting a little bit on the helicopter market.
There will be less traffic going out to the oil rig, and also you see some military cuts. So there are the several challenging area. But on the other hand, in this business for SKF, we have a very, very strong order book. This is now going out to the next—this is actually thanks to Stephane. At his time running the Aero, he has already built a very strong order book. So my mission is, of course, to... Sorry?
Is to produce.
Produce, serve the customer, but don't forget about the innovation, because this is actually a very important part of this business and a very strong strength of, SKF as well. Kaydon. This business, three-quarters is in the U.S.. The European part, is more on the velocity, motion control, the activities. The bearing side is very heavily concentrated in the U.S.. Very similar, once again. With the exception of the thin section bearings, everything is really focusing on the, customer application. So you will also recognize here that we have more brands now, so, ACE, Hahn, Cooper, and Kaydon. So all these different product line, they go to market with a specific brand, and these brand are actually very strong in their own industry.
From an industry segment point of view, the medical, renewable, construction, and aerospace are the main business. I will, I will talk a little bit about aerospace of Kaydon later on. Linear actuation. So there are three major product line, and this business is more with the European area. This is the business where we need to take them more to the Asian perspective as well. If you heard about the automation that I talked about in China, for instance, this is one of the capability that we can go there. And there are some similarity in terms of customer segment and even product line, let's say, complements between Kaydon, Velocity, and Lutz. So if you look at the automation medical industry, we can actually find some synergy there.
Second Brands, we acquired PEER in 2008, and then 2012, we acquired General Bearing. PEER is more of an industrial brand, and GBC is more the automotive brand. So this business is certainly American-centric. Asia is largely China, so the 20% of business is in China. Again, they really focus on the area that they can win. They don't have a full product portfolio, but very targeted to applications that they can be successful. Besides the general bearing that Alrik mentioned about in some customer, customer base, if you look at PEER as such, and go to agricultural applications, the brand is actually a leading brand. It's acknowledged as a leading brand. So what is the strategy then? We basically have the same left-hand side as the group. They are all applicable.
What is very important for us is to put the right focuses in the area. So typically, if you look at this kind of application-focused operations, speed is very important. The way that you can respond to the customer, that will continue to be a key driver for this unit. The customized solution, so, it's typical for them that the 60-70%, some of which is even 90%, are customized solutions. So you have to really organize your value chain to be able to fulfill that need of a customized solution, but yet in a cost-competitive manner. Highly flexible, this is totally aligned with the customized solutions. And I would say that the cost is a key driver. So people ask about this so-called mid-market, do you have money to make?
What I learned from the two second brand is, of course, the way we manage costs, and this will continue to be a key driver going forward. I put underneath here synergy, because there are synergy within these units, which I will show in the next slide, but there are also synergies with the SKF operation that we can utilize, at least to make the weight a little bit lighter. So footprint. We have in the U.S. side, Christian already talked about it just now. There is opportunity for us to maybe better organize the footprint, so we utilize them better. And I would say that the manufacturing and supply chain in the second brand is something we can look at as well.
When you talk about go-to-market, then in the linear actuation technology, in the Kaydon motion control, we are already putting the go-to-market organization somewhat better aligned together, so they can actually offer a full portfolio for their same target customers. Manufacturing. This is where we are bringing in the SKF know-how now to help these operations. I can see that if we upgrade this capability in these units, we'll be able to not only bring costs further down, I see opportunity there, but more importantly, of course, is in the quality persistency. Then lastly, as already also alluded to this morning, because all these companies were acquired, even in Kaydon alone, we have 10, 15 systems operating in this different unit.
So our activity now going forward is for two things here when you look at the IT platform for these units. One is how we can consolidate them into a more cost-effective and efficient operation. The other is actually to improve the friendliness to the customer, because while some of this unit were operating in the SKF platform, the way that they need to serve the customer in terms of selecting the product can be different. So these are the four areas that we will work on to increase the synergy. If I take example of Kaydon, what we have done during this last 10 months. In the beginning, we already in January, integrated the slewing bearing business of SKF into the Kaydon Bearing Group.
And then during quarter two, quarter three, we divested several non-core business. So this will be in Canfield. We also closed down Indiana Precision, and in here, we also divested Purafil and Kaydon Filtration. And in quarter three, we also integrated these operations into SKF Aero, because these business are concentrated with aero customers. So in this way, we can maximize our ability. The good news is that this group have more presence in the U.S. Aero area, but SKF has more presence with the European customers. So bringing the two together, we can utilize the channel and the customer relationship in a better way. And on this side, this is then become a very focused group. This is also the most profitable group within specialty.
So we will continue to run and manage them in as profitable as possible. And in terms of synergy, we also utilize the SKF presence in Brazil, and now we are able to also serve the South American market on the wind energy with this new operation that we are investing in. So about the application focus. A couple of examples now, the application focus. So if you look at the synergy as such, for this particular application, we have actually a total solution for the product, for the customers on the bearing side, on the linear motion side. And this is now how we put ourselves together so that we enrich our total portfolio for the medical industries. And then if I go to another example, looking at PEER, this is the industrial, the second bearing company.
I talked about the agricultural leadership as such. This company has probably the most, the richest portfolio, offering portfolio, from very simple, straightforward bearing to maintenance-free solution. So this is the way also by means of the company knowing very well about the customer problem on the application side, and be able to actually go faster to develop the offering to meet the customer requirement ahead of the competition. Aerospace, I would say in some way, quite similar to what you heard from the automotive colleagues earlier on. But of course, in here, there is also a very strong element when it comes to innovation. So be it from a material perspective, from the design of the products, and also on the aftermarket applications.
So we have, actually, one example is that, based upon the customer requirement in terms of, energy efficiency and saving, weight saving, we have now composite material, to be put on the frame of the bearing, the, the connecting rod and the mounting frame. And this technology, of course, significantly reduce the weight of the plane from the previous metallic, kind of, technology, to this new technology. And when we look at this, we are not staying, from an innovation perspective, we are not staying with the material as such.
We have now already invested into the production process, so we will make it a much higher barrier of entry for the competition, so that we don't only have the technology of the material, how it can be applied, we have full knowledge on testing and validation, but also we invest into production technology. So if anybody will come in some years down the road, it will be very costly for them. And then maybe I will just stay with one last slide. As an example then, I showed previously, if you look at the aero industry, energy saving is absolutely very important.
If you look at these success cases and success story, how we were able to not just follow the customer, I would say, maybe work hand in hand with the customers, and very, very long time ahead of the real industrialization. So today, I think when this success story is now written here, job has been done eight and 10 years ago when we first started. But of course, the colleagues take it and then able to industrialize it. So today, we are working with the aero industry, for example, on programs that is going to launch in 2025. So we need to be able to be already in there today. Okay, so this will be now my summary slide, so I can have some minutes to take the question.
The story for specialty business is really to continue to really maintain this great capability when it comes to application knowledge, application focus, and be able to very rapidly, speedily respond to the customer needs. And also there are pockets that we can bring this operation more global. As you can see, that we are still very much U.S.-centric. There are some European market that we can go in, and, oh, absolutely in Asia as well. And these are the several points I already mentioned from the synergy. We will continue to work on capturing it. Then the last point is make sure that we continue to have profitable performance. We have one unit that we have to work harder on to actually even improve the profitability from the single digit. This will be the linear actuation technology.
With that, it wrap up all I have to say. I hope I don't confuse you with my Chinese English. It would have been better if I can speak to you in Mandarin. So please, if I can take some questions. Yeah.
You earlier talked about, the weight on your shoulders, the goodwill. And that was mentioned earlier today already. I mean, is, what's the assessment of the Kaydon acquisition and some of the other acquisitions in terms of actually are they, are they good? Do they bring what SKF hoped from them? And is there potentially plan to lift some weight off your shoulders by writing some of that goodwill down at some point?
Well, first of all, I was not involved in that acquisition. As such, now I focus on how I create, how I can create value out of it. And from what I explained to you, there are good pockets we can utilize as the synergy. If you look at the Cooper business, for instance, the Kaydon Bearing business, we have a very powerful SKF industrial market that can actually take them much better to the market. When you talk about writing down goodwill, of course, this is an element for us together to look at what is a right or wrong thing to do. And if you think about divesting any operation, I mean, I will stay focused on making sure that I have a good performance.
In that sense, financially, if it is strong, and if the opportunity come, if it is a right decision, supported by the shareholder as well, of course, we will take the needed action, and at that point, we will communicate. But right now, I focus on making sure that they have good financial performance, continue to have good financial performance, because it's not contradictory. I actually make it even more possible, if you like. It easier to, more flexible to make a decision, but I must make sure that we continue to deliver good profits. Yeah.
Hi. Two questions on China, please. First of all, could you mention a bit about how profitability is looking right now compared to maybe a couple of years ago, and what you see ahead in relation to whatever number you want to use? And secondly, if I look at the Chinese business, and I try to capture what is mid-market, both the product joint ventures, SKF branded, but also the product that derives from the GBC and the PEER brands. How large a part of that, how large is that part of the Chinese business today? And could you maybe shed some light on the potential here?
To your first question about profitability in China, I would say that from our performance point of view, it is not deteriorating. But if, if you talk about the available profit in the market, yes, it becomes tougher.
Mm.
Down the road, I believe we will still have a couple of good years to stay in that tough situation. So what we need to focus on is obviously our cost of doing business, the cost of our product, and also where we can add value for the customer. To your second question about the PEER and GBC, they both are sold, the product is being sold today largely in U.S.
Mm, right.
So we produce the product in China, ship it to the U.S. If your question is related to in China?
Exactly. I try to square the quality, the mid-market part of the Chinese business, and if you spin that thought, given what the market trends in China, what you see this could eventually sort of grow to?
From the customer perspective? From the market in mind, you mean?
Yeah.
I mean, the competition, if you look at it, most of our competitor in China today, are operating with, a quite much lower margin or prices than the GBC operation. But, we also are growing quite well, actually. So there are specific pockets, in China that we can continue to continue to grow. But I believe, maybe the better, success is that how SKF can also go into that market. As you heard earlier on today, I think there is still great opportunity for SKF brand to take those, market.
Thank you.
You...
Thank you, Erik Golrang, Nordea . A follow-up on Peter's question there, on PEER and GBC. Did I hear you correctly that their price points are above most of the local competitions also in China?
Correct.
Are they, are PEER and GBC sort of crucial elements in, in, Can you utilize some of the knowledge there to bring down the, the cost level for, for the SKF brand as well? Will they, are they an important part of this whole, moving towards the, the simpler bearing part of the market?
I would say I learn a lot from running those two operations. And yes, we will bring some of those knowledge in helping SKF also to grow the competitiveness, if that answers your question?
Yeah.
We will be able to use the knowledge in those two companies.
Okay, and the second question is on just on medical, how big is that of the total?
Today, it's very small. We are largely in the slewing bearing business and the thin section bearing business today in that market. It's a very small part, and I would say that we follow today mainly the global customers going to China. But we are also starting to work with two very big giants in China that we see them as... It's very similar to the automotive industry. Today, it's a very small part of our business.
Thank you.
Thank you. It's Andre from Credit Suisse. Can I ask you, do you need to acquire in China?
Do I need to acquire in China?
Yeah.
My answer is no. Let me qualify my answer.
Yeah.
Because if you look at the why you need to acquire Chinese company, then there are probably two things you want to look at. One is, do they have a strong occupation of the market in China that we can, by acquiring, also go into that business? Two is, can they give us a cost advantage that we can take it elsewhere? For the first question, I'm not so sure, the business that they are in today are all the business that we want to be in. So, so buying them may not give us a lot of, benefit. And you have to be aware that many of these players, they're also private brand for some other competitors. So once you buy them, you basically lose the business. So there's no added benefit from a marketplace point of view.
From a cost perspective, I would say that, we can also do a lot of things. Not looking at them... Let me say that I would not look at them as somebody that I shall be frightened about, so that I take them in. There's no need to do that. And also, they did not really bring us very attractive business and market. If you look at PEER and GBC when we bought them, they have very, very strong business organization in U.S., and I think that is really the true value. And on top of that, they do have a good, efficient production operation in China. And today, you asked me if there are other similar company out there. Yes, there are, but if I acquire a few more, it's not going to help me a lot.
I might as well work very hard to bring down our cost.
Just to follow up on this, is there no risk of the brand dilution or brand kind of equity dilution that you're basically taking SKF brand, making the product of same kind of quality and consistency, but less performing and therefore cheaper and addressing the mid-market that way in China?
I think the word fit for purpose is very important, though. You're not delivering an inferior product. Actually, from the customer point of view, they like it. You know, I have such a great brand behind me, and they are able to serve me with this competitive competitiveness that they want. So I hate to say that we are downgrading the brand. It's actually to be able to get closer to the customer.
There are things where you have to be very careful, and I think that one of the risks, of course, if you misinterpret what we're talking about here, SKF is a prime quality producer, will always be. But when we are talking to one of our customers making hand tools, for instance, in China today, and they're telling us: "You know, I'm buying 2% of my demand from you. If you could make it special for me, I could go to over 50." And if we know how to make that special for him, why shouldn't we? You tell me, why shouldn't we? So don't misunderstand this, and I think this is a big, big thing that we have to keep our tongues well calibrated when you talk about this.
This is targeting on specific OEM customers making specials, just like we've done in the automotive for a long, long time. It's capturing markets that we don't have today. So it's not selling a, the SKF brand to distribution, et cetera, et cetera, is there. Our prime quality to all the end users is going to be there. I was asked: "Well, what about, what about the aftermarket if you combine PEER and..." No, no, then you haven't understood. In the performance aftermarket, where you are selling a product that's actually, where the performance is the key, it's SKF, it's prime. It's not about that at all. This is about accessing a growth opportunity that is there and with that, we used to have.
You know, when these products, these hand tools, when they were produced in Germany, when they were produced in Sweden and so forth, we had the business. It was ours, but we were doing it with bearings that lasted 50 times the warranty. Now, there's an alternative that lasts 5 times the warranty, we've lost the business. Do these competitors have a magic wand? No, they don't. Can we engineer bearings that are very good, consistency in quality, with a perfect quality, but are engineered for a different performance? Yes, we can. Should we not take that opportunity, especially as we have capacity? I'm asking you, should we or should we not? Everybody who says we should not, raise their hands.
...But I think this is very important, huh? Because your, your question is interesting, but if it's misinterpreted out there, it's nasty.
No, I didn't mean to misinterpret.
No, no. Good. Good. Thank you.
Can I just ask a follow-up on the freight part and rail in China? Can you just walk us through what's going on in there? You said the market is declining, but how are you doing in that?
Well, we are one of the key players in the freight wagon business. Although over the years, we have not really been very big with the freight market. So we are somewhat affected by this trend during this year. But what we are doing now is to increase much more focus in the aftermarket of the wagon, because that's where we can get much better money from. Instead of, in the past, we were very concentrated with the OE market. So in the refurbishment, this is a big opportunity, and it will continue to go on in the aftermarket. Mm-hmm.
Thank you.
Thank you so much. Very interesting questions, and I know we can continue the discussions over coffee, and we will reconvene here in about 20 minutes or so. Thank you.
Thank you.
Yeah.
Once upon a time, in the West Coast town of Gothenburg, Sweden, a great invention was born that would change industry forever. SKF's self-aligning ball bearings led to the creation of spherical roller bearings, spherical roller thrust bearings, and the revolutionary CARB Toroidal Roller Bearings, all designed and manufactured behind the same factory walls. A factory still going strong today.
We've been in business for such a long time with these self-aligning roller bearings, and in fact, we invented them, and we built our market around them. So during this time, we have gained so much knowledge, and we can still draw conclusions based on old existing machinery. Also, when it comes to the development of new machines, we can always recycle something. We have seen it all.
That experience has gone into continuously improving the performance of our roller bearings. Extensive testing and simulation have led to a state-of-the-art, robust design, just one of the secret ingredients to being the best.
The core of the robustness sits in the floating roller principle, meaning that the roller will always find its equilibrium position where the stress is minimized, and that's where you find the endurance. Then, the rollers are actually guiding themselves by the contacts with the raceways, and this provides the low friction.
Even though the robots on the factory floor contribute to efficiency, we know it's our dedicated personnel that really make a difference.
Our people are involved in the whole manufacturing process, both the planning, the control, the execution, and the improvement of the manufacturing process. This close involvement between the people, the product, and the machinery, gives us a high level of standardization, but also, the possibility to take everybody's creativity to improve.
Our channel concept, introduced in the early 1990s, immediately had a positive effect on the manufacturing process. It led to a shorter throughput time from raw material to finished product. All steps are linked with visual buffers, so deviations are picked up on quickly and solved to maintain a continuous flow. This efficient manufacturing can also be linked to our unique heat treatment process. We use only the best steel, and this provides a longer bearing life and higher reliability.
The new heat treatment process gave us better products into our manufacturing process, the grinding process, with a lower allowance of the rings and ovality of the rings. This has given us the opportunity to reduce cycle times and to get a more stable manufacturing.
It's in the heat treatment process that you set the main part of the bearing performance properties. You increase the hardness, that's one thing, but also equally important is that you have very good process control and repeatability, so you get the same results every time. This has been understood by SKF, who has invested millions of SEK in new heat treatment equipment, so we can produce this same quality, a good quality, two-step bainite process all the time.
So as you've heard, there is no one factor that makes our self-aligning roller bearings the best the market can offer. Our bearings are suitable in the most demanding industrial applications, able to handle heavy loads and accommodate misalignment. This is thanks to a combination of our patented hardening process, our robust design, our competent personnel, our efficient manufacturing process, and the use of only the best steel, and of course, that SKF was first. More than 100 years of competence is built into every single bearing rolling off the line in Gothenburg.
So thank you, that you're all welcome back here. So now we go to a short technology journey. I bring you a little bit into Albert Einstein's world, no? Yeah, but not too deep, I think. So, my name is Bernd Stephan. I am, since first of January, the CTO here in SKF. I am also since more than 20 years in the company, and I was responsible, let's say, for different businesses in automotive and later in industrial. So now I have taken from first of January, the R&D position as CTO in SKF. So I know, also a lot about business, and maybe it helps me also to bring the technology, very well connected with the business. So let's start... After me, Victoria will talk about the industrial product development and will bring some good examples.
What I show you here is two things. One is our new generalized bearing life model. So that's a little bit theory, but I show you also how that is connected with the real world. And then I talk also, again, about smartifying industry, that is our Industry 4.0, what we are doing there. So, here we have a guy, who works for us, is Professor Morales, in our engineering and research center in the Netherlands. And he and his, colleagues have developed, in the last year, this new general bearing life model. So SKF has a long history in that, and, you see that here, the journey. We started in 1938 to talk about bearing life, to calculate that, to understand how a bearing is functioning. And there was Weibull with his weakest link theory, who started this calculation of bearings.
Before, it was more on the trial-and-error side, but with these tools, it was possible to calculate a bearing life. And then SKF has added here in the years with Lundberg Palmgren theory, which was more complex. Mr. Stathis Ioannides and Harris came up with the fatigue limit model in 1985. We also started in 2012 to really have a bearing surface life model, which we developed. When in 2013, SKF came up with the SKF Insight Bearing Health Management. And even in 2015, now this year in April, we launched the new general bearing life model. So that is the journey of bearing life calculation. Why is that a journey?
We try always to say, "Okay, how close can an engineer calculate what will happen with that bearing in his machine?" So he has to understand what happens in his machine, and what can he expect, what will be the life of that bearing. So let's look into that. Here, it looks a little bit theoretical. It is not a Einstein formula, but it is ours, yeah? It's our Einstein formula. So you can see here, there is a raceway. You see the bearing has different raceways, inner ring, outer ring, roller raceways. They are in contact with each other, and they are operating in the machine. And if you show that raceway here, and the load on that raceway, when you see there's two issues. One is that there is a subsurface fatigue problem.
That means the Hertzian Rolling Contact Fatigue, and that shows that in this area, in the steel, you will find cracks if that bearing comes to the end of life. So there will be a crack development subsurface, and that was, for all the years, the real fatigue theory to calculate when are these cracks starting and this crack network, and when will that then come to a failure on the bearing? So I think that you find also in the catalog, is our C- value, the carrying capacity of a bearing, and that is well described here. And I think also the engineers can calculate quite well today with our tools, how the subsurface fatigue behavior of a bearing will be in that machine. That is well known.
But when we looked into the real failures in the world, we saw that it's not all about subsurface fatigue failures, which we calculate quite well, and also our customers calculate quite well. There's a lot of things which are directly related to the surface of a raceway. And that is, for example, lubrication problems or contamination problems or friction problems in the bearing. So and that was not really well calculated in the past, and we made now a clear split between these two things that we have here in our new calculation, the standard subsurface fatigue calculation, and we have a new surface-related calculation. So and that is a big step forward because you can say, if you see field return bearings, and you look, why have they failed?
Most of them are failing due to surface-related defects, and therefore, this is a very important thing to understand. So it means we have now integrated this theory in our new calculation models. What you see here, that is a general bearing life calculation tool, and we can here show that we have the green area and the area in the blue here. But you can see, is there a more subsurface fatigue problem in your machine, or is there more surface-related problem coming up? You get here, when in this calculation so named relative surface risk factor, and if that number is high, then you can see, or 100%, let's say, as an extreme, when you would see that in your machine, the bearing risk of failure is coming from the surface.
If that number is zero, then you would say it is all subsurface fatigue related. But it means the engineer has now a chance with this tool to find out which failure mode will happen in his machine. So is it more of a standard subsurface fatigue problem, or is it more of a surface-related failure which is, important? With this knowledge, the designer can also take, protective actions in his machine. He can for sure say, "I need a better lubrication, I need a better sealing, I need a different grease," or whatever, to reduce this factor to an acceptable level. So that means in the design of a machine, with this calculation method, he can say: I can make a more reliable machine knowing this effect. So that was an important step.
We have that now in, that comes in our calculation tools, and if the designer, machine designer, and our customer takes this tool, he will have not only the classical calculation, he will also understand his machine and the effects of it. So to bring that together, and that is new really for this year. SKF so far had this modified rating bearing model, where SKF and also the DIN ISO had a calculation method, which took partly in the calculation, what are the surface effects. Now, with this new model, we have a very clear separation of surface and subsurface, and that gives us huge opportunity to make a better machine or a better bearing in the machine. So we are developing these so-named performance factors.
That means that the designer of a machine, if he selects a certain bearing type, finds then also this performance parameters in our data, and he can use that then also for calculation and sees the effect of that in his machine. But it's not only about calculation and design; also this theory and the approval or validation of that theory gave us an additional advantage. With our SKF Insight sensor technology in the bearing, we could now also take corrective action in the running machine, so to improve the life of that equipment, and I'll show you how that works. If you see here, the traditional condition monitoring is that you measure a certain signal from the bearing, and you see, okay, everything is fine.
Then at a certain point, you see, okay, there is a signal coming which is not completely healthy, and we know when from where, and we can also monitor how the damage is progressing. At the end, we also see, okay, when will the bearing fail? You can take some corrective action in that machine, but only very limited. It is a typical process only to check when is the end of life of this bearing in the machine. If you go now with that theoretical model, plus better sensor technology into the bearing, then you see a different thing. You see we have much more signals here, and we see when something is not fully in line, as here, we can take corrective action in that machine, changing the speed, changing the load, changing the lubrication.
There are so many parameters which you can influence, and the effect of that, if you have that, combined with our surface-related model, what we have, we know which action to take and can with that technology, extend the life of that bearing or the usage of that machine. But it's a big benefit for the user of that machine to extend the life of a machine, to reduce the maintenance cost, and to increase the uptime. So this is a big step forward, where the theoretical model fits with the reality, so and the benefits out of it. So the next point is now, what I want to talk is about smartifying industry, what we say. That is the Industry 4.0 German approach. They say it is a revolution. So is it a revolution, what they say? We don't think so.
It is, for us, an evolution, so it will improve the way of working in the industry, not only in the factory, but from the design phase, early design phase, to the production. So and what we do here is that, what Luc before also said, standardization in the manufacturing is a key point here. Also, our Production System is for sure very important, but now we are also digging into standard machines and also controllers of these machines, and the connection of them into our intranet or cloud or whatever you name it, you can connect each and every equipment and machine to that digital platform, and to collect the data there. But also, in the design process, we have to switch from, let's say, drawings, to design a product into a 3D model.
Not in a simple 3D model, we have to go in a detailed 3D model. So that is the core of the digital process, that we design a product in the computer as a detailed 3D model, and this 3D model then is able to generate all data which are needed in whatever process. If you go into manufacturing, you can take this data directly and design your manufacturing tools, what you need to have, or your stamping tools for a stamped part. So what you also can do, you can use this data in the production for your quality control, CAQ. To say, "Okay, I download this data and can measure that ring in the production without punching anything into a computer. It's directly digital connected." You know? And for sure, you end up with a complete paper-free digital production process.
Everything is connected, fits together, and the flow of data is managed in a way that you eliminate all this waste, what you have in between. I show you now three examples here, what we have in the Smartifying industry. One is, for example, in layout of a super flexible manufacturing for medium and low volume. The next is when our Mobile Operator Support Tool, and also what it means with big data analytics, what it could be mean for SKF or what it is today. Look, a super flexible production channel is not a physical channel anymore, which we have to say, okay, here, let's say, a turned ring is entering the process, and at the other end of the channel, a finished bearing, it comes out. So the flow of these products is virtual in that manufacturing.
The advantage of that is that you have not only one bottleneck machine in the channel, which is delivering you the cycle time of production. You have here the number of machines in a factory, which are balanced in a way that you have all of them as bottlenecks. So that means the flow of the products through the channel is that you use the machines much better, and to have the same output, you need also less machines than before. So that means these machines are smarter. That, for example, is an important step, that we need an automatic CNC resetting, that the machine is not reset by an operator, and the operator changes parts and tools in the machine. It is that the machine is reset by software, by the program. That's one important step. The other is that it is a flexible handling of parts.
That means you have not products which are for part dependent tooling going entering the machine and exiting the machine. You do that by smarter devices like robots. The second point is that the machines which are today only making one operation, maybe track grinding, they can do more than one operation. So that means we have today machines which are able to making multitask processes with their CNC programs, and they work on different surfaces on our bearing rings. So we have today machines, which we are testing, where you put in a hardened, not machined black ring, and you get the final ring out of that machine. So all operations on that ring happens in that work center, in that machine, step by step. And then you will have, for sure, the ability to have a full, flexible digital production flow.
That means the parts are entering somewhere and find their way through the factory, through all the work steps, and end up in assembly somewhere. And it could be that the next ring is going a different way, using different machines. So it is a full virtual flow through a factory, and the parts find always their way. So that is an idea about super, super flexible production, and it is on the way to be reality. It means we need different technology, we need the digital process, and we need, for sure, also different machines and equipment. The other is here, how is the operator in that factory in the future? We are testing this. This is reality here in our Swedish production, and we try to connect all the operators in a mobile way with their equipment, with their factory.
So, so far, he could look on a screen or on a computer which was standing there, yeah? Here, he can walk around in his factory, and he gets, he gets all the information he needs on his personal, mobile device. So he can control the process, he can ask for support, for example, maintenance support. He can see what is the next order coming in, where the parts are. So he gets all information about his manufacturing flow and the status of his machines, always mobile. So he knows immediately if something goes wrong, when he gets an alarm on his mobile. In the older setup, you saw in factories, all these green and red lights on the machine, and they showed, okay, this machine is green and operating, and this machine is red, is not operating.
So the operator had always to watch which machine is red now. I have to go there. That is not needed at all anymore. He gets all the information immediately. And if it is an emergency call, also that device will show him that it is an emergency call, yeah? So this is a much better connection between the operators and their processes. And for sure, it is not only the operator in the factory; it's also the maintenance guy in the maintenance shop who gets the same information, and said, "You have now to go to this machine and fix the problem immediately," if it is an emergency call. So we name that MOST, and you see here what it is.
We are testing this here in the Gothenburg environment, and it looks very good, so we have now decided to roll it out in the full factory, so that we get it for each and every operator here, and it will give us then also a productivity advantage. Another thing for big data analysis, what is that? In the past, we have not looked into that, but if you see today manufacturing, we want to have full traceability on each and every bearing we are producing, or each and every product we are producing. Therefore, an example here is for the quality technology. If you produce a bearing in our factory, you collect roughly 1 MB of data for the production flow.
It is full traceability from the supplier, which batch of the supplier was it, and which working step was it, and what was really the result of each of these working step to the final bearing. So at the end, you have a full quality tracing of each and every bearing, connected with a unique number on the bearing that you can identify. So each and every piece has the whole history connected with it. If you copy that now to what we do in our remote diagnostic centers, and you, I'm not talking here about a bearing, you are talking about a wind turbine, as an example. When you see here in Hamburg, we are watching 2000, more than 2000 wind turbines. And if you see the data there, when we generate for these 2000 wind turbines, 29 TB data per year.
So that is all the Condition Monitoring measurement data coming from these wind parks. So and that is analyzed, these 29 TB data, every day, every hour, to see which turbine could run into a problem. To understand, is there an issue on that turbine? What should we do? What action should we take? What advice do we give to the utility company which is running this wind park? So that is big data management and analysis, which comes more and more. So that means it is important for SKF in the future to analyze huge amount of data and give him the customer advice, what he should do, either automatically or direct in contact with the customer. So what is it all about? The digital platform, which is coming everywhere. We have our digital cloud, let's say, in SKF, and we connect all things together.
From the supplier side, via our demand chain, from the engineering side, our PLM process, our CAx tools, which are connected with our complete design process, to the manufacturing, with manufacturing execution system, with our customers, with sales and marketing, and exchanging their designs and models and data to the final service side, to maintain the product in the market. All this comes together to one digital platform with huge amount of data, and it has to be managed in the future without sending mails back and forth, let's say. So that's it, what I wanted to show you, how is SKF changing, on the one side, on the bearing development, but also on the other side, in our digital process. So now I want to switch over to Victoria.
Thank you, Bernd. So good afternoon. I'm the only thing that keeps you from cocktails. No, sorry, Q&A it was. That's right. Hi, my name is Victoria Van Camp, and I've been 19 years with SKF. I'm a mechanical engineer from Luleå, and I'm in charge of product development, engineering, software development, and condition monitoring equipment. You recognize this picture from this morning, rotating machinery, performance and products that are outstanding, and that you can select and find, because there are quite many of them. We translate that into product development as we need engineering tools that help the customer find and select the right products, and optimize their own design.
We need products that you can trust, meaning they fit your application, they will work, either in that new car or in that old car, or in the wind turbine or in the fan. We need systems that assist and recommend, and hopefully also take action when real life isn't as ideal as it might be in the computer tools. That happens a lot. Our customers' design process usually looks like this. If you design a new, let's say, a gearbox, or you re-engineer one, you start from exploring. You may be even using some napkin sketches. Then you go into more defined concepts. You get into purchasing and production. In this, you might do some changes, but engineers, maybe they're not lazy, but they certainly don't like changes.
You have to understand that every change usually means you have to go to a change committee. If you go back, you have to actually make some changes, and also on the drawings. For SKF, to be easy to do business with in the design process, we need to be with our customers from the early phase and not lose them during the way. We have to make their design life easier. How we do that? Also, the other thing, I'm sure you understand, that today's engineers are not using so much napkins, they're using computer software tools. SKF, we have, tools that help customers throughout. In the past, we used to keep these tools really close to ourselves. Our application engineers were the only ones that could use it.
You had to call them, and it was a mystery how they worked. Some years ago, we started putting calculation tools on the web. We have apps that can help you calculate. And actually, four days ago, we launched also a product selection tool, an online product catalog. There was always such a thing, but if you try it now, it's that much easier to use, and it helps the engineers to find the right products from the very beginning. Now, apps help you only so far. They're today's modern version of the napkin, perhaps, so you have to go further and do more advanced calculations. These tools, I said, we used to keep them close to our hearts. What we're doing now is something different.
Christian said this morning, "If you want a different result, you have to do something different." We are opening up, we are giving licenses to our customers, not just with the app, but with the more advanced tools, and even with the higher level tools. At the same time as our customers are sitting there with the first sketches, we catch them as early as possible, and we help them through chat functions, to call functions, as much application engineering as they want. But we are easy to do business with. They don't need to call us the first thing they have to do. They can actually do some work on their own and come to us later. So that is quite a difference. On the right-hand side, you see a tool called BEAST.
I will show you a bit later what we do with that one. That is not... You have to be a real bearing nerd to use that one. It is necessary for certain applications, when you change speed really quickly and the cage might break, but it's not something for the normal design engineer at the gearbox company. Now, so the web and mobile app, today's version of the napkin, every condition is ideal. You can do a quick selection, and you can get an idea what is what is useful. But if you do that, you might—Let's say you get a calculate your life, and it becomes one one year or something.
If you go to the next step, the next tool, this tool takes into account the real surrounding of the bearing, the housing, and the shaft, a bit more of what happens. In a typical example, you can easily, the same bearing, the same conditions, you get five times longer life if you take in the real housing, you allow the housing to move a little bit. So this means you could actually downsize. You could get a smaller, maybe even less costly bearing. You certainly get a lighter machine. So this tool gives our customers a much more powerful way of designing, and hopefully, makes their design more right from the beginning. Also, the life method that Bernd talked about, is implemented in this tool.
As of mid-November, which is very soon, we will make this tool available to a first group of users. It's also connected with a technical support organization, because we know that people need to have somewhere to contact. So it's a tool with the support function, with a direct link into application engineering. Then, if you are doing an even more complicated design, some customers actually want to use this tool as well, and they will have it. Then, like what you see, you see the colors changing, that's actually a temperature calculation on a real gearbox. And what you wanna know here is my outer ring temperature of the bearing should be as low as possible, and I need to take into account a lot of parameters to do that, and we have a tool that can do it.
There are customers in wind and gearboxes, in fans, that really want and use this tool, and our application engineers use it every day. Then, I promised you the BEAST as well. So BEAST is a tool that mainly is used by our own product development people, also by some customers. And what you see, you see the cage moving and the rollers moving here. And if you have... You can actually see here in the computer, is the cage gonna break, or what will happen here? And you can redesign the bearing accordingly, which is what we have actually done for this particular example, which is a new, new product, spherical roller bearings, that are gonna come out. They're specifically designed for wind turbines.
Wind turbines are different from a normal gearbox application in the sense that you have very low speeds. This main shaft rotates slowly. You need a long life, but not so many revolutions, high loads and varying loads, and of course, low weight... So using these computer tools, we can actually do these simulations on the ground in a computer instead of starting to experiment up in a windmill with our customers; they don't really want that. Out of such simulations, we have come up with the spherical roller bearing for wind, and here is what Alrik mentioned this morning. I would show you a bearing that is actually better performance and can be made at lower cost. Because here, we have taken out one thing we've done is to make the rollers bigger. The rings are thinner, which will not influence performance.
You can do that here. We have taken out what is called the guide ring. That's a big piece of steel that used to sit in between the rollers. So we have less material, we have one component less, we have a bearing that is lighter, has longer life, and can carry bigger loads, exactly what the customer wanted. Now, computer tools are fine, but when it comes to big bearings, you actually also need to test them. And that is why SKF, we announced in April at the Hanover Fair that we are building a large-sized bearing test center in Schweinfurt, Germany. You can see the size of this. There is a man standing next to the test rig here.
This test rig, this test center will be for wind turbine bearings, but also for other large-sized bearings, for the industries that Patrik talked about, metals, for example, paper. And here, we can run tests, basically trying out before the customer puts the bearing up in the wind tower. And we can also use customer parts so the customer can test our products in his design. That's a lot better than doing it up on a pole. This center will open first quarter of 2017. The project is on track and progressing very well, so we're hoping for a mild winter in Schweinfurt. So, I was actually lying to you before. It's not just simulation tools.
Testing has to be done, and when you then go out into the field, that's when the Insight technology that Bernd talked about, and you might have heard and seen that from SKF for a couple of years. We are now putting that into the field, and this, these pictures are from LKAB, up in the north of Sweden, where we are monitoring railway wheel bearings. It's pink, so you can find it, because prototypes often get lost, so it's painted pink, so you can find it. They will be different in the serial production. Besides LKAB, we are also running trials with Swedish SJ. We have run that since March, and we have actually since then found, before failure, three bearings that we picked.
We told SJ, "This train should now go into, into service before something happens," and this would not have been possible with any other technology. So SJ are very pleased with this, and we have three other trials running with rail operators in Europe. But it's a really promising technology. Now, Bernd talked a bit about big data. I can tell you, you do not want eight bearings per wagon in a train with 52 wagons to start sending you text messages when they don't feel well. You want to have some kind of, yeah, it can be called cloud or big data, but what you basically do is you take the signals from inside sensors or from other sensors. You employ some kind of smart analysis, and that analysis will be different for a train or a fan or a gearbox.
And it's something that SKF, we are very good at. With the life models that Bernd talked about, this is what we know. Then we show to the customer what they need to see, which is not several hundred text messages, but information that is actually coming, becoming knowledge or actionable knowledge, because that is what will happen as the last step. It's either us informing the customer, "Do something," or it's us sending out a service technician before something happens, or it's even a distributor perhaps ordering in bearings before he needs to be replacing them. So by this, I hope I can. I've shown you a little bit different approach, where SKF is opening up our engineering tools, bringing in the customers in the design process, designing for application, and also monitoring and helping the customers to performance afterwards. Thank you.
So, yeah, then we have. Yeah. Stage time, Bernd.
Q&A. Everybody feels happy, so.
Yeah. No bearing calculation that you need.
So good.
There is a-
Yes. Oh, on condition monitoring, can you talk a bit about the competitive landscape there? Because as I understand it, you are now meeting different competitors to the normal bearing market, like you're meeting Siemens and peers of them.
Yes, this is, of course, true, but we think that, I mean, sometimes they are competitors, sometimes they can be collaboration partners, because we don't think we can monitor everything around... You can imagine on a train, there are lots of things that need to be monitored, and then we can actually collaborate. So when I show a big cloud, it might be a combined cloud with somebody else and combined analysis. So yes, there are new competitors, but we see that our knowledge around the bearing and the rotating shaft is so unique that our piece of the puzzle fits like a glove, hand in glove in the competitor's offering or partner. But sure, there is competition, but... It's a different type of competition.
Thank you. Coming back to the question-
If I just add to this to clarify. In this case, Siemens is a typical partner, so there are other competitors that are not the Siemens of the world. There are other competitors-
Mm.
that are trying to do the same thing as we. It's not the Siemens.
Mm.
Coming back to the question we had earlier today, how do you get paid for this?
Same answer, through different contracts. It depends on the customer, because different customers have different business model that models themselves. It is, there are many different options, which I think it will continue to be.
Thank you.
For me, again, you know, I think, I think this is one of the big things. If you really think about it, the one who has access to the information from the machine, and if it is with the Insight technology, can you imagine what a fantastic opportunity that you have? Where you can, way ahead of any failure, even appearing, starting to proactively work on the solution. This is something that is absolutely on. Here, Victoria feels like Patrick, you know, a lot of weight. Not from, not maybe from the balance sheet, but from actually making this happen. This is a fantastic opportunity for—this is, this is potentially as big of a revolution for machine health as Industry 4.0 is for manufacturing.
Yep.
A follow-up. If you're, if you have a collaboration with Siemens, for example, who is actually the owner of the information? Is it Siemens, or is it you, or do you share the data as well between you?
I think this is me again, as the head of the industrial division. Because this is a business issue, of course. You know, it's actually interesting. It's not the data as such that has the value. It is analyzing the end data, understanding what the data actually means. And of course, if we are the ones, through Victoria's and Bernd's excellent development projects, that we have, we are the ones who can analyze and understand what this data means. That's where the value is.
Mm-hmm. The answer is that you share the data between you?
Yeah, but it's... The value is when we get it, so we can analyze it. That's when it has value. When it just comes out of the sensor, it has no value.
Mm.
It's just when you have interpreted it and understand what it means, that it has value.
Thank you.
Hi. You're the experts on the life cycle estimation for how long a bearing will last, and we've heard a lot today about a bearing that is maybe built to last 50 or 80 years, and then the alternative possibility of a bearing that is only guaranteed to last 5 or 8 years. And could you comment on, you know, given that technical understanding, what would be the sort of percentage cost reduction in the variable cost of manufacturing such a bearing with a shorter life guarantee?
I think there's for sure not a fixed number on which, it depends always on the application. But I think if you have, if you compare a bearing which will last 50 times the warranty life, for example, which the customer doesn't need at all, and you switch that to, let's say, a version which is lasting the warranty life or 5 times or whatever you want, you could go different directions. You could say, "Okay, the customer is able to redesign his machine in a smaller version, and then he has the cost advantage to take a smaller bearing." That's one-to-one in his cost, yeah? That's one solution.
If he doesn't go for that way, for example, he could also say, "Okay, I can run this bearing also with a cheaper bearing steel, which has not this highest cleanliness level or whatever." And then you can say, "Okay, maybe the steel is cheaper in the bearing." So therefore, it is not easy to answer how much is it now, but there is, in each case, potential. Yes.
Hi, it's Andre again from Credit Suisse. Can I ask you on the bearing life model that you started with your presentation? Is this just for SKF bearings, or can customers use that on other bearings?
No, it is for SKF bearings. Yeah, we have connected that directly with tool, what I showed with our catalog. So if he selects then a bearing, he can directly download this data from this SKF catalog with his additional performance parameters into the software and calculate it. We have not, let's say, measured the performance parameters of our competitor bearings, yeah?
It sounds like your previous model became more of an industry standard.
Yes.
Do you want this to become industry standard as well?
It will come, but not immediately. If you see how long it has taken that the SKF model was taken over in the DIN ISO, that was quite a long time, yeah? And then it was industry standard, and also this model will be industry standard in the future.
You will be able to compare. Also with this new model, you can take away the surface factor, and then you can compare one to one with others. So it's, it's still the same base, but it's yes, the answer is, we want this to be the new industry standard.
Thank you. And just on condition monitoring, we've seen some evidence of there are sort of continuous monitoring, what you described as kind of sending information back all the time. And there's also when an engineer comes in and just basically attaches some sensors on magnets or something like that, and takes the readings. And where, where do you think this is going? Because it looks like continuous monitoring is a lot more expensive.
You know, there is a market for, for all of those, what you mentioned. There are, there are places where you definitely want to place a sensor, and it should be wireless because you don't want to climb up there. There are also places where there is any way a person going around and, yeah, kick the tires, if you wish, but doing something else. And then handheld monitoring is a very powerful thing to do because you are anyway doing, so if you're anyway sending a guy there. So it's a, there is a market for all of these, but you have to make sure that it's the right... You don't put a wireless sensor on something you walk by every day. But the handheld monitoring, for sure, will be some kind of smart device-based. That, that is sure.
Finally, just sorry to label this, but how do you exactly can you monetize that when, say, the sensor is someone else's, an engineer is someone else, and your value add in there is very clear in the knowledge of the rotating parts. But to really get paid for that, do you need, is this sort of software licensing type arrangements that you would be going to if you think about sort of 5, maybe 10 years down the line?
We actually already today have a software, monitoring software. It's not, called the, the cloud, but it is, it's called @ptitude, the @ptitude Suite, and that one we do license. But the big power is in the examples, what John showed with U.S. Steel, for example. That is where we use also monitoring, to predict what is happening with the bearings, and then we get a much bigger contract than only the monitoring or data. But there are, again, this is, there are different models, and it fits, different customers have different approaches to this.
Great, thank you.
Can I ask a question about how this fits into the wider world of CAD, CAM, CAQ, and what Siemens PLM, and Dassault offer? So these are the guys who are giving people the tools to design the world's plants, and in that, there's a load of components, of which the bearing is one. So do you provide all of the information to Siemens, and does that become part of that, or do they have to buy something separate and go direct to you? I'm trying to understand how it works.
That is, that is a good question because, most, most customers work with what they call seamless engineering, and they don't want to switch between one tool and the rest. Right now, our tools are separate, but we are discussing with certain, software partners to export bearing data. What you can already do with these tools is to export, the data in many different formats, so you can import them into your CAD tool, whatever it might be, SolidWorks or Creo or something else.
While I understand that the value is in the data and your knowledge of how you use that data, is there some concern about monetizing it between the guys who control Siemens, Dassault, all of the component knowledge into their system and getting the right monitor? How, how do you strike that balance?
Yeah, it's true, but what is important is that we actually become specified in the beginning, and that's why we would work with them. There are some trade-offs, of course. There is a risk, but if you're not specified in, you won't have an aftermarket. You're not in the service manuals either. So it's a win for them because they get more accurate bearing data. It's a win for us because we are in the tool that is on every engineer's desk.
And just one last one. I know you don't break out the... Although in the past, sometimes you did the pure service, not aftermarket distribution revenue, but the pure service revenue of SKF. Is that the line that we should see this in, or will we actually see it spread into the product revenues because there's a product contract that contains a bit of this in it? Is it where will we see the sales and profit of this?
Please.
You, that's a business question.
Yeah, I, you can understand that there is, of course, a market, a standalone market for this. And right now, when you talk about machine safety, we have a big contract that we are delivering on successfully in Saudi Arabia on a refinery. And there, the amount of bearings in there is relatively low, and the value proposition is purely getting paid for the condition monitoring system that we're installing. But the main reason for SKF being in this business is to support our ability to serve the rotating machinery.
Again, can you imagine when you have the opportunity to, with our combined technology offering, proactively understand more about what's happening in the machine or working with an OEM to develop a new gearbox, where you can provide a complete knowledge about how they can downsize or increase the speed, or increase the loads to have a completely new offering, where we are the engineering partner, where our bearings are specced in, where the heart of their machine is actually the knowledge that we have provided. That is, I think, the big take on it. This is the reason why we should be there. It's not to make it—there isn't a standalone kind of business case for it, that's interesting. But why SKF? Because it's related to the rotating machine.
The opportunities are so vast, you know, in reengineering machines through more thorough knowledge. Can you imagine, you saw a value here that Bernd, now maybe this is too difficult, but you saw something called the C value? And if you understand that today, most designers use that C value, that's all that they have. But if you saw the theory, what's really happening in the bearing, the C value is just a small part of what limits or enables the performance of the bearing. The more we can teach the world to understand what's beyond the C value, the more they can use and reengineer their products based on thorough knowledge about the bearing performance, and the more SKF can come to its right.
It's a little bit like, you know, iPhone selling the iPhone. If you just buy an iPhone, you get it for $34 a month, and you will get a new one every 2 years, et cetera. Because the revenue stream is not really the phone, it's the added services around. Look at condition monitoring to a large extent the same thing. This is the way to capture the information that you need to proactively provide value to the customer, both OEMs and aftermarket customers.
Thank you, Alec. And just, before moving on to the general Q&A session, some practical details. We will have a bus moving from here, leaving from here, quarter to six for the airport. And speaking about airports, you might want to check your connections because there are some serious disturbances. There's no traffic in southern Sweden. All airports are closed for the time being. There is information posted on the websites on when they will be opening again. There's apparently a problem with radar systems. So with that, I think we move to. We would probably continue.
Okay.
Exactly.
If you're stranded, let's have a-
We have 194 slides, we can start again.
Wow! I apologize for this, but apparently, Landvetter is at this moment, closed. Who is leaving with the plane today? Ooh. Ingela, can we check what the current status? Can we call somebody to give some information? They are starting to open up. Oh, great, great, great. We're back to normal. You will be flying. Okay. Okay, now. Okay, here we are, ready.
You are newly shaved, so.
Do we have a microphone here?
Sorry.
We can take this also.
Hi, Klas. Sorry, can you hear me? Klas from Citi. I know that it was a bit sensitive when I asked you about the automotive margin, but, but-
No.
Hope this is okay. In terms of... Just want to come back-
Nothing is sensitive.
No, nothing is sensitive.
No.
That's good. When I look at the cost program that Tom did, and I look at your cost program that you're running right now, I get this to around 300 basis points on margin. Then when I look since 2012, and I basically adjust for amortization, R&D, the currency, the margin is basically flat. So underlying, there is a lot of margin pressure here. I mean, this is not something that is specific to SKF. This is across the whole sector. Cost cutting is basically running to stand still. So my question really is, if we are in a lower growth environment, is it this cost cutting that we've seen? Is that just going to be a recurring feature?
I think as we have said, I mean, where we have to come as an organization is that we get a built-in. I mean, we have talked about program and not having a program. We need to have a built-in way to work with cost all the time. And what you say then, what we do, is that enough to get a margin improvement, or is it eaten up by general inflation in the EBIT bridge or by simply that we have to give some of it away to our customers? Which is, again, what Alec has talked about, also, what is the customer's alternative and all that, and the pressure we have on the business. I mean, it's difficult to say.
I mean, the question on if we have to work with cost, yes, and we will do that certainly going forward, in the way we have set out and described today. I think at least that's a clear priority, to get the optimization in our working with our cost base.
Basically, I think you are right in a sense. I can't relate to the previous programs, really, so I'm going to refrain from talking about them. But of course, in a deflationary environment that you would argue that we have, when raw materials are going down, et cetera, and when there is a... The market is served, one of the key things, of course, is on one hand, which is what we have been trying to show, that you have to stay ahead on innovation so that you can provide those solutions for your customer to be able to reduce costs. That is not based on the unit price of your component, and you have to stay ahead of the game of actually getting cost out of your systems, too. You have to do both.
As I said, without sounding presumptuous or anything, one of the things what we like—would like you to believe is in our resolve to actually do this, to actually do the things that are needed to stay on the top of the game.
My follow-up question is for you, Christian. In terms of if we leave the margin targets sort of behind, I'm not going to mention that again, sorry. But if we focus on ROCE, thinking about the working cap program, how much of that can improve capital turn, so at a flat margin, you can basically reach that ROCE target?
The ROCE target we have set out?
Twenty percent.
Yeah, I mean, that is quite a big gap to the 20, certainly. But I mean, the only thing we can say is that we are focusing on that, and we should be able to show you an incremental improvement from the trends we have had in the past. And then, I don't have the numbers clear for me. I mean, the weight of the intangible and so on in the old capital employed base there. But, I mean, we should at least be able to show you that we are trending in the direction from, let's say, the 14 where we are today now, towards the 20, yeah.
If you see, if you take away the fact that the pension liabilities due to the very low interest rates have been increasing, we're doing quite a lot, I think, to actually deleverage the balance sheet in this sense. And with this end-to-end planning and what we're doing on in the logistics, there are things that we can do. And of course, our ambition is then to really have focus on this and show you effect. It's a pity that these things that are non-operational give you such a big swing, but you know the, you know the, the underlying actually deleveraging that we have sort of achieved, even though it's not seen as we would like it to be seen yet.
My final question is on this slide with Unite out to 2022. There's a lot of costs here.
Yes.
So, how should we look at the sort of cash out and trying to think about this on a yearly basis?
Mm-hmm. I think you can say, and we've discussed that in some of the breaks earlier, that we, we had a cash out of around SEK 900 million last year. We, due to the fact that we have stopped the program and reshaped it and restarted, we are a bit lower this year, somewhere 600-700. We will step up again next year, cash out a level of SEK 900 million, as I said. When we are through the build phase, somewhere second half 2017 or so, it's more under our, our control. It, it will still be a sizable cost, somewhere, as we said, between SEK 700 million and SEK 1 billion, depending on the environment we're in, depending on how fast we want this roll out. If we can decide, we will roll it out as according to the slide we, we set up.
If we don't have the possibilities to do that, we can hold it back a bit. But that's about what we talk about in cash out.
Thank you.
Oh, down there.
Yes. Hello? You hear me? Perfect.
Uh.
So first of all, Alrik, Christian, and all of you at SKF, thank you for a good day. I have a question on the cost base, because in the beginning, you were talking about that the fixed cost base is too high. I think the fixed cost base is about SEK 25 billion in 2014, accounting for 36% of sales. Can you just give us a feeling of how much too big the cost base is?
I think we had some discussions during lunch on that. I mean, certainly, I think you're about right on your calculations, so it's... That's the size we are working at. That's the structure we are working with. And what I expect us to be able to show you going forward is that that base is moving in the direction of being leaner, huh? If the pace we are at now in terms of activity is enough to show you improved margins and so on, there is a lot of other factors playing in on that, on end market and growth and all that. So, of course, it's all about being ahead of the curve.
I mean, we are in a cyclical business. The worst thing you can do is that you wake up too late, and you have to run after, and you have to launch big programs to catch up, and it becomes some kind of sizing exercise. I think we are with the program that was initiated early December last year. The fact that we acted on the signals we had from the market earlier this year quite agile. I think we are at least on the curve. I mean, if we are ahead of the curve, we'll see going forward here, but at least we are on the curve in a good way. Then, depending on where the market take us and so on, we have to see if it's enough or not.
Certainly, you can trust that we get the same questions from our board, huh?
Mm-hmm. But you also have to understand that these are sometimes when you look at this, these are bigger undertakings. If you understand what drives costs, you can understand that some of these things are things that we need to plan, and when we do it, it's a major undertaking. So it's also a little bit, what can you do? How can you do it? When can you do it? And it's difficult to give you sort of a fixed figure on this, because it's gonna be dependent on how quickly we can work on our manufacturing footprint, kind of discussion, for instance. Having said that, this is one of our top priorities.
That's why we mention it so much, and then we see that there are things that can be done. It has not been so focused in SKF going.
... in the past as, and with this simplified structure that we're working on and working to simplify more, there are, of course, opportunities to do more, huh?
Just coming back to the deleveraging discussion that you've talked a lot about today, and I think you had recently given a negative outlook from S&P, from your triple B rating, and so on. How should we think about the rating? How important is that for you to defend that? And sort of what level of debt should you be sort of more happy with?
Mm.
When can you start to be less defensive, so to speak?
I think we have a lot of financial targets, and we've discussed about that. We have a financial target on leverage as well. Somewhere in the book, it's stated, on a wanted level, and we are well above that if you go on that reference, which is, I believe somewhere around 80. That has been set in the past, 80%. I would say on the rating, and you can talk with Palle, our treasurer, we were together there with S&P, the other week.
Tell us-
And, and, uh-
Stand up so they can attack you later.
Yeah, yeah, yeah. How close were we to not getting the downgrade?
You need a microphone now, because otherwise the people listening in can't hear you.
Ah.
There were a lot of discussion in that committee, and some guys wanted us to put us directly down, but the majority said negative outlook. So negative outlook was in the pipeline.
Oh, okay. So,
Because and their issue is what we were talking about. It is too much debt. That's their point of view.
Yeah.
And-
I mean, what you have in those talks is they recognize what you do, huh? I mean, in terms of working with the balance sheet, cash flow, what we have done and the divestment so far. So I would say that on that side, it's recognized. Then, of course, they have also the view of the market and what that might cause to our top-line developments and so on. So but, I mean, I wouldn't say that that steers our activity, but, I mean, we, as a company and as a management, would like to see it somewhat lower, the leverage than what we have now.
Of course.
Again, sorry, I don't give you a number on where we want to reach before we get more aggressive, but-
The target of 80 that you mentioned is something that you have in your mind?
No, a target of 80 is where the group has been, if you go back to the years when actually the acquisition increased, and that's three or four years back. I'm not saying that we need to reach 80.
Okay. Thank you.
Hi, a question on automotive. You have launched a plan that seemed to be well thought through, and you talk about that the profitability improvement is set to be reached without any sort of help from the market. How should we think about the size of the business? You talk about fewer products, more focused. Is this a significant scale down of your offering? I'm thinking sort of Timken Mobile, trying to get out of some part of the business. It doesn't seem that way, given your efforts on the wheel hub side.
Yeah.
But please shed some light on the portion of fewer products.
Yeah, you're right. It's. We don't see it like that. We actually think that we'll be able to grow in money, monetary terms. It's more about getting rid of the distractions, because what you need to understand is that when you are in a component business that we are, there's less of a bundle than you think, if you understand what I'm trying to say. So just because one of our competitors is a big system supplier to the engine, doesn't mean that they can bundle that with the wheel bearing hubs. So what we're saying is that we're going to be less distracted in areas where we don't see the possibility of growth and profitability, and focus on the areas where we do feel that we have a competitive advantage. And there's a lot of...
That distraction costs money.
Thank you.
I think it was, yeah.
Hi, Alrik. This is Bob Gottesman from First Manhattan. I wanted to ask you, at the end of this investor day, to perhaps put some things in context, because I'm a little uncertain about the takeaways from today's session. And one of the questions is: What is the timeframe? What is your vision?
Mm.
What's your vision? You say that SKF is, you think, the greatest company. What is your vision to back the... You know, to give me a sense of what you mean.
Yeah.
What is your timeframe? What might you tell us 2 years from now in terms of how we're tracking in terms of this vision?
Mm.
Finally, on financial terms, I think I would like to hear a little bit more than simply you're not talking about margins. You're essentially saying, "We're going to generate cash flow. We're gonna pay down debt." But relative to what the company has been telegraphing in terms of their targets, and I'm not expecting targets-
Mm.
but what are the two or three important financial metrics that we really should, that we know you're paying attention to?
Mm.
and that we should be paying attention to?
So, the vision, the vision is, you know, this company, when I say it's the, the greatest company that I know, is because I think we have a fantastic understanding of around the rotating shaft. And there's a fantastic opportunity for us by focusing around the rotating shaft to provide a lot of value to our customers, and make the ones who work with us truly leaders in their fields by the kind of things that you've seen here today.
I'm absolutely convinced that the more we can be agile and focus on the applications from working the value chain with the application, from the application into SKF, and be able to provide value out there, we will be able to create value propositions both in the service and rotating machine environment in the aftermarket, as well to the OEM installers. Where our value proposition, our products, our services, will be the most interesting ones, and where there's a possibility between their alternatives for us to earn good money and grow. I hope to be able to stand here in front of you in a couple of years and say: Look, we have sustained our profitability and our ability to create cash, increased it even.
We have been able to manage our balance sheet in a good way, so the return on the capital that we are investing in our business is interesting as an investment, as opposed to other companies, and that we are growing. I am determined to do my best together with the team, and this is what I've been trying to say here today, bringing these people on stage for you to be able to sort of talk, touch them, and see to them. We haven't been talking so much about blue sky things today. We're talking about the real hard work, because this is what it's all about. I think we have the technologies, we have the structures, we have the people, and now it's about real hard work. This is my vision.
And with that, I am absolutely convinced that we have everything that it takes to win the game. Our... I joke sometimes and say: You know, our competitors are not Harry Potter. You know, they don't have a magic wand. They live in the same reality as we do. And when I look at some of these, we are talking about acquiring Chinese companies. When we look at some of these Chinese companies, yes, they are doing some things differently than we are, but do they have some magic technology that we don't? No, sometimes it's just understanding and having the guts to actually do the things that will do the difference.
The simplification that we're talking so much about is that because that is, in essence, what enables people to act when they have a clear responsibility, clear views of what is to be achieved, what is my playing field, and I'm allowed to execute. And I hope that if you, when you have time tonight, take Stephane, you know, and look him in the eye and say: Are you empowered? Can you deliver on this? Do you feel that, you know, you have to ask Alrik for taking any every decision when we have already agreed on what we're gonna do? I hope he will tell you, "Well, no." He will tell you the truth, and the truth will be, "Yes, I'm empowered."
Can I ask you?
Yeah?
What are the two or three key financial metrics? Yeah, the metrics are cash flow and capital employed. We need to be managing that. And of course, we need to look at the margins as well. It's very important. But there is always a matter of you being able to take a business, even though the absolute margin makes it so that you can actually come further away from your official target, where you generate excellent cash flows. It depends on your capacity utilization in the factory, it depends on the opportunities in the marketplace. And I think that when you look at SKF, isn't it interesting that we've been able to produce good cash flows in almost all environments going back in time?
And isn't that, as an owner, a valuable owner, isn't that one of the key things that you're actually looking at? And not growth? Growth, yes. Of course, growth—cash flow and capital employed, that goes so far. Growth has got to come. Yes, growth, growth is a part of it. There are two ways of growing, right? There's a growing, utilizing the already capital base that I have to leverage on growth. Can you imagine when we go into a factory and we look at this upgrade that Luc is talking about? When you look at our production lines, you've seen how we've spent money going to Asia for quite a while. Maybe we haven't invested in the existing factories as much as we could.
Can you imagine when you go in and say, "What leverage is there on a technological upgrade?" When we're looking at not necessarily buying new machines, but taking existing machines, giving them an upgrade, and suddenly you have a completely different base for efficiency on a relatively small capital increase. There's so much to do, so and we need to grow, definitely, definitely. And, you know, what is our market share? And, you know, it's easier if our market share would have been 50%, I would have said it's more difficult to grow. When it's clearly far away from that, there's still a big part of the market to create, because there are application areas which are still not there.
We saw some examples now from automotive, where today they're using bushings, and tomorrow they, if we are successful, they will be using bearings, create market, but also a big part of the market where the kind of deliverables that we have, they're just waiting. The customer has the need. If we just can get our act together, the market is there. So I am, as I say, at long term, I am extremely bullish about SKF. Now we have to do it.
We are all right. Okay.
Hi, it's Fredric from UBS. I just wanted to know if you, Christian, can give us an idea what acquisition-related amortization will be in 2015, and how you see it developing over 2016, 2017 as well?
Acquisition-related amortizations, what I talked about. You have a bit of currency effects coming into that, as you might imagine this year. So, I would say between SEK 500 million and SEK 600 million.
How do you see it developing if you look into 2016, 2017?
Yeah, I mean, if you don't do anything else, that, that's the level we are at. Then if you will do some divestments or so, of course, that will impact, but otherwise, that's where we are, and also in the year after. We are quite recent acquisitions, the big ones we are talking about.
Thank you.
Yeah.
Yeah, thank you. Ben from Morgan Stanley. You made some small disposals this year already, which have helped with cash flow. When you look at the portfolio and the desire to kind of focus the business around this the rotating shaft concept, I mean, are there areas that are peripheral? Do you need to make further disposals? Anything material that you would say is non-core or less attractive?
Yeah. You know, it's interesting when you think about it. First of all, it's a very delicate question because, you know, there's nothing worse than to be in a business, in a group where you're not considered to be core. And I try to say to all the people in SKF that, you know, reach your targets and make good money, and there will be room for maybe some activities that are not absolutely on track. For instance, you know, we purchased BVI for the marine segment to be able to leverage on a fantastic product around the propeller shaft, and to be able then, through their excellent channels into the market, leverage on our total offering. There, we have something called stabilizers.
You know, so we have just taken a fantastic order on stabilizers for ships, and of course, you would argue, what does SKF do in this business? But of course, if this is at heart of this team, and they're doing a very good job, and it's not obviously so easy to get that kind of cash return, and it's working fine, and we are having a technology leverage, and we can keep that, that is not gonna make it or break it for SKF. But of course, if you have a larger part of the business that's not related to the rotating shaft, and we wonder how we can keep our technological leadership, because that's the only reason, right, to keep a business long term. Well, there are two things you do.
Either you look at it, and you say, "Well, maybe there's somebody else who can cater for this business better," or if it's not performing as it should, well, you know, if I fix it, I get that money. If somebody else's fixes it, then they will get the money. But I say to all SKF employees, "Let's make a good performance, and that's the best way if you want to stay in SKF." Having said that, on the other hand, if you make a good performance, it's not so bad to be somewhere else either, because probably these people will cater for you better, and you will have a better home. So there are always, there's no dogmas here, huh? We have to be pragmatic, and we have to look at where our possibilities are.
But this is always a difficult question because the moment you say, first of all, that you want to sell something, the price goes down, and the people working in that organization may not feel as motivated as they are, which you need to have a good possibility of selling at a good price. So the questions are difficult to be exact on until we actually do them.
Mm-hmm. Okay, thank you.
Can I just ask a question?
Sorry, can you just clarify what you said on restructurings? You said no more big programs, and you do it on a kind of pay-as-you-go basis as opportunities arrive.
Yeah.
In the past, SKF always took a few hundred million SEK of charges every year. Is this the kind of run rate we should assume, do you think, or... And how would you treat it? Would you treat it as an exceptional cost if you had a factory that you look to close, or this would be above the line, you know, running cost?
My ambition or our ambition, I would say Christian and I, when we're looking at this, a sound business has one profit number, right? And then the rest of things that you do are part of normal business, they are disclosed very clearly, and you understand, and you can follow the profitability. You don't have this before and after restructuring. That's the kind of ambition that we have to get away from that. That there is a profitability in SKF, and when there are things happening, we disclose it, we explain very well, and you follow this, and nobody gets nervous about understanding what we're trying to do and how we run the company. And that's, of course, our ambition. But the difference between a program and what we're trying to do now is what you have to understand.
When you do something particular, it's something here, you have an opportunity, you do it... And you disclose what you're doing, as opposed to saying, "I'm now gonna take the cheese slicer here, and I'm gonna have a program," and et cetera. And that's the kind of dynamisms that we want to get into. But of course, the effect of the activity we go forward has to be on par what we are doing, of course.
Thank you.
We have one over here now. Thank you.
Okay, just finally then, on the CapEx, and the increased guidance you gave for this year, and just squaring that with this desire to reduce the capital employed, and what would you say about 2016 CapEx, and where is this being spent?
Yeah, on the CapEx, I think we commented that we went from SEK 1.7 billion to SEK 2 billion. I mean, it's not big. Partially, it's currency. I mean, the fact where we are doing those investments, so that's not a drama, and the level change is not... I would say it's in line with what we have done in the past, around SEK 2 billion, and I think that's the level. And if you see it as a ratio and compare it to peers, I mean, we are quite low on CapEx. That's the level a company like SKF needs, huh? I would say it's
Okay. Thank you very much. Oh. Oh, it's fine.
You were-
Okay.
Okay.
Patrick, you wanna round up? Thank you very much. I, I am very grateful, and the team-
You as well.
We're very grateful that you have come here to listen to us today. I hope you had some fun, and I think we did. It's important, you know, when you that you also have some fun. And we will be staying on now. There's a cocktail, and then, you know, I'll be following also in the evening to into town, if there's somebody, to be available as long as we can to interact with you guys, for the ones who are not flying off. Thank God you're flying off, right? So thank you very much for coming. And I hope we will see you again.
Yeah.
Thank you very much.
Thank you.