First of all, I would like to welcome you to this press conference, where Volvo will present the report for the third quarter 2016. We will start with the presentation with the President and CEO, Mr. Martin Lundstedt, and Deputy CEO and CFO, Mr. Jan Gurander. After the presentation, there will be possibilities for questions, and we will mix those questions between the auditorium and the ones who's looking at the webcast. Please welcome Mr. Lundstedt and Mr. Gurander.
Thank you, Joachim, and also from my side, most welcome to this presentation for the quarter three results for the Volvo Group. To start with some of the highlights from the third quarter. As you have already seen, we saw a quarter more in line with our own expectations, with continuous underlying improvement in performance, not at least also coping with the slowing North American market, as well as coping with the continuous low levels in many of the emerging markets. The group managed to maintain profitability despite lower volumes and adjusted operating margin improved somewhat to 7.0%. In particular, the trucks business managed to improve margins to 8.2% from 7.2%, despite a volume drop of 13%. Also, just to remember everyone, with considerably bigger swings between the different regions.
When it comes to the volume development in general, for trucks, volumes were down 30%, as I said, mainly related down to North America, which is seen in the figures both for Volvo Trucks as well as for Mack Trucks. For Volvo Trucks, the North American downturn was somewhat offset by a stronger European market, as well as market share gains in Europe. Renault's negative figure relates mainly to non-European markets, where we see political turmoil in the areas where Renault is operating, as well as relatively high deliveries in quarter three last year for the heavy duty, where we had specific campaigns. For Volvo Construction Equipment, volumes were flat but with considerable and unfavorable changes in product mix. Both between the brands, Volvo down with approximately 300 units, and SDLG up with almost 300 units.
The difference, by the way, is Terex plus 20 units also, if you see the difference between the minus 23 and the figures on the right side here. We also saw a shift in the product mix for the Volvo brand as such. More pronounced volumes when it comes to compact and as a matter of fact, also in the heavy segment, more volumes when it comes to the light machines in the heavy segment. It was overall a movement to more light machines for the Volvo brand. When it comes to service sales in the group, it continued to develop somewhat positively with 2% overall and 1% FX adjusted, with pretty big gains for Volvo Penta and also for Volvo Bus, but with slight decreases both in the trucks and construction equipment business, both with approximately 1% FX adjusted.
For trucks, the decrease is mainly related to somewhat lower activity in North America, also in the service business, as well as a decrease in Renault Trucks to some extent as a result of a decreased rolling fleet. Volvo Trucks Europe saw improvements. Service will continue to be in focus to gain shares in the rolling fleet where we see a big potential. When it comes to trucks, some of the highlights that we have seen during the quarter, Volvo's fully autonomous mining truck is the first in the world to be tested in real operational environment, deep underground in the Kristineberg mine up in northern Sweden, operated by the Swedish mining house Boliden. This is a cooperation between the customers and Volvo, together with other stakeholders, to improve safety, productivity, and transport flows. The route is 7 kilometers, reaching 1,300 meters underground in narrow mine tunnels.
With different sensors, both fixed and moving objects are monitored and avoided. The onboard transport system continuously also optimizes routes and energy efficiency in this specific application than fuel consumption. That probably demonstrates our group's strong position in automation also going forward. Another highlight, of course, was the IAA in Hanover in September, the biggest truck show in the world. Volvo FH Euro 6 was declared the overall number one in a very prestigious test, the Fehrenkötter test . The reason why it's prestigious is that it's a life cycle test with over 300,000 kilometers in operation and 2.5 years in operations. Fehrenkötter tested the different European truck makes and Volvo FH Euro 6 came out in top position, both when it comes to total cost of operation, fuel consumption, and overall figures.
This is also showing a leading position for our offerings and also serves as an important boost in the whole organization internally. That was great news for us. We also presented a number of new features at the IAA. Some of them we have already showed to you. In particular, I would like to mention, if you're interested, the liftable tandem for our construction segment, where you have a decoupling of one of the rear axles, giving considerable savings, and it's a real innovation. When it comes to market environment for North America, we are remaining with our forecast of 2016 of 240,000 units and continue to see a slowing down. Our forecast then for 2017 is 215,000.
Keeping in mind also that for our production levels, you have seen that already, that we have taken down production more than where the retail sales are heading for 2016. From that perspective, we will have less delta as we see it between the retail level of 215,000 and our own production. I think a couple of quarters ago, we said that when the market was down 15%, we have taken down production with almost 30%. If we take the figures right now, market is down just south of 20%, and we have so far taken down production with 37%. That is more or less the same relations. For Europe, the activity is still high. We see that in different figures coming in also when it comes to the rolling fleet, when it comes to our connected vehicles, but also official figures such as amount.
In September, it was up 8%. That is following the same pattern as we have seen during the years of 8%-9%, actually, when it comes to amount, but also other similar measurement is showing that. It's interesting to see, actually, the amount figures, that it's compounded by the Eastern European flows. I think you got it also the other day here. Also what we see, you can see that we are keeping the level 295,000 for this year and somewhat cooling off of 280,000, mainly related to the fact that the replacement need, a little bit of the overswing when it comes to replacement is often in. Otherwise, the activity level is high. We think 280,000 will still be a good level for the coming year.
In our calculations, we have also a little bit considered slowing down in U.K. also following the Brexit effects, not at least when it comes to necessary corrections, given the pretty weak sterling. In Brazil, the market is expected to recover somewhat. We have seen signs of that lately, that we have reached the bottom. We expect a recovery of still from very low levels up to 35,000 next year. We are keeping the forecast of 30,000 for this year. In Asia, we are actually increasing the forecast for this year from 820,000 to 870,000 units and are forecasting a stable level than for medium and heavy duty. India is expected to continue in the growth momentum from some 330,000 this year to 390,000, whereas Japan expected to be stable on relatively high levels of 90,000.
When it comes to market shares, would like to start with North America. Obviously, the pressure from the declining market is mainly coming into on-highway segment, as you are all aware of. That is, in our case, hitting Volvo, that has a strong presence in the on-highway segment harder than Mack. We had a slow start in the beginning of the year. We have been also focusing on the quality in the business, prioritizing that higher than volume in itself. As you remember, we also had a hiccup when it comes to deliveries in quarter one due to a quality deviation that we were losing some volumes. We have had good feedback, by the way, from the customers on that activity. When it comes to volumes, that has been also one of the explanations here.
For Mack, given much stronger presence in the vocational segments, where we don't see the same decline, we are seeing also a slight increase in market shares of 0.5 percentage points. In Europe, Volvo is moving ahead in a good pace, improvement of 0.7 percentage points. It's pretty much across the board, actually, we are seeing improvements in the majority of the markets, whereas Renault is flat on 8%. It has also been one of the priority for us to remain with the quality in the business, not at least when it comes to the balance between price and residual values for Renault, given the introduction also of the relatively new Renault T Range, where also the first trucks now are starting to come back here.
In Brazil, market share is down slightly, but with those low levels that we see, it's more about sticking to your strategy when it comes to pricing and to be consistent vis-à-vis our customers. Japan, market shares also, as you can see, down. It started actually with internal transition of production systems beginning of the year, where we were losing out some volumes. During the year, given the relatively high level, we have been losing out some bodybuilder slots. As you know, the majority of the trucks shipped into Japan are with rigid executions and bodybuilder, and we are not having a captive bodybuilder operations. That has been following us during the year, but we are seeing better opportunities for that in the coming quarters here.
As you can see also, we are glad to see that other important markets like South Africa, Australia, and also, as a matter of fact, Korea, that we don't get any official market share figures, are developing well. When it comes to just a small comment on our joint ventures also in China with the strong market, we have, for our joint venture, DFCV, we seen a slight decrease in the market share. Also in that case, given the increase in the market, priority has not been to follow that directly, but to also get the right type of pricing into the market that we also have seen coming into the improvement of the result then. In India, the main achievement has been actually improvement in the heavy-duty segment from 3.5% to 5.1%, and still continue with a strong level of 33.4% in medium duty.
That is also a slight improvement, actually. Maybe comment Russia, even that we are hovering on very low levels, some improvements in the total market, but still on very low levels. Also in our internal market shares or in the market shares for Volvo. Last year, at this period in time, we were just north of 10%, and now we are just below 20%, actually. That is important for the future and has helped us also to restart in a good way Kaluga also where we have just increased production a little bit. I will come back to that in a minute. Order and deliveries. North America, again, order and deliveries was down considerably due to the current correction of the market, mainly in on highway, but also that the dealers are focusing on continuous to decrease the inventory levels.
We have seen inventories coming down, but there are still a number. You're always more optimistic when it comes to the speed, but we are very firm to balance actually, orders, deliveries, inventories, and we will not produce anything more than we need here, and not be tempted doing so. In Europe, orders increased by 6% with Volvo up with 12% and Renault overall flat. I think it's important to mention also that in the heavy-duty range, Renault was up with 7%. Production in Europe, mainly for Volvo as you know, has been adjusted upwards to meet two factors, the increased demand and also to take down lead times and to have a reasonable order backlog.
We feel now that with increases we have done and we have in pipeline, that the second reason, correcting, so to speak, the lead times, is gradually going away and we will see some slight adjustment in the fourth quarter when it comes to our production levels for the European system. In South America, orders increased by 36% from, as you know, low levels. It was mainly resulting from a better export to neighboring markets out from Brazil, but also actually now we see dealers starting to place orders after an extensive period of destocking in the Brazilian market. In Asia, both orders and deliveries decreased slightly, mainly due to decreases for Volvo Trucks and Renault, not then at least in the Middle East. We also saw increases for UD Trucks.
As I said, the slight recovery in Russia and market share gains have resulted in increases from low levels in Kaluga operations in Russia, where we are running now with at least what you can call an industrial flow, which is good for us. Moving into construction equipment, also start on the innovation side of the business. We had what we call the Xploration Forum. I don't know if any one of you had the chance to be there, where Volvo Construction Equipment showcased a number of actually leading technologies, aiming obviously for CO2 reduction, but also very important other factors like noise and safety, not at least, and also productivity.
First of all, the LX1 hybrid wheel loader on the left here, potential to save up to 50% of fuel and also featuring a new type of design, because when you really start to use the new technology when it comes to electric mobility, you can use the mass centers in a different way, which makes the design much easier, actually. When you see the lifting arm, for example, it's only one, if you're interested in technology. Also when it comes to the length, and thereby also improving turning radius, for example. There are a lot of opportunities coming up now, and shared ideas also with other parts of our group.
The HX1 hauler prototype, as you can see, is a battery electric load carrier and will take part actually also in the similar type of product that we are running with Boliden that we call the Electric Site with one of the big construction companies in Sweden, where we are focusing on obviously improved productivity, also, as we said, a completely new level of CO2 functionality. The aim in this project now is to reduce carbon footprint for a quarry with 95% and gain productivity with 25%, also with substantial effects when it comes to safety and noise emissions. The leading position in autonomous electrical and connected operations demonstrated also how the shared technologies across the Volvo Group is very important for the future, both for hardware, components, and modules, but also for software, time to market, volumes, and business models.
When it comes to the market environment for our construction equipment business, for North America, leaving the forecast for 2016 unchanged, a drop of between 0% and 10%. We also anticipate a further decrease in that market of somewhat 0%-10% also for 2017. The European market continued to grow through August with 8%, mainly driven by recovery in France, also pretty strong markets in Germany and Italy. As we start to see them slowing markets in the U.K. and further decline in Russia. Europe is forecasted to be stable for 2017, and we leave again the forecast unchanged for 2016 with a slight increase here. In China, there are more signs now that the market has reached the bottom, even to start to stabilize, and our forecast is that the market will grow between 0%-10% during 2017 from low levels.
We have already started to see that in the excavator segment, even if wheel loaders are still on the decline, but at a slower pace here. In Asia, excluding China, the main decline this year has been related to Japan, where we are not present, whereas India is growing in a good pace. Volumes for next year in that market area is expected to be flat. When it comes to order and deliveries, order intake was up with 17% compared with the same quarter last year, with contributions more or less, you can say Europe was flat, but from all regions. Deliveries for the quarter was flat. As I already said in the beginning, the product mix has been unfavorable with the movement both between the brands and to lighter equipment in the Volvo brand.
North America specific, order intake was +6%, also partly driven by the fact that we have introduced more products here for final execution for the compact segment. Deliveries were down, as you can see, with -24%. In Europe, order intake was more or less flat, with better order intake in France and Germany, but offset by weaker markets, again in Russia, but also in Norway. Deliveries were up 9%, and we see still having positive momentum in market shares in the heavy segments. South America, the strong order intake, +69% for low levels, was related to SDLG machines in Brazil, but still deliveries are somewhat on the decline here. In Asia, including China, order intake was +24%, backed by higher order intake for Volvo excavators in China, Volvo general growth in India, and SDLG in China and Southeast Asia.
Deliveries for Asia was up somewhat, mainly thanks to SDLG deliveries in export markets in Asia. For buses, the general market development, just to give a flavor of that, Europe +10% and North America stable, but still both are running on pretty good levels. Whereas demand is weakening in important bus markets such as South America and Asia. Asian markets affected by lower export to China and lower domestic demand in many markets. Both orders and deliveries decreased with 7%, mainly Asia and South America. In South America, it was more or less everything related so far to Brazil. In addition to a decrease of delivered volumes, the quarter also had a negative product and market mix offset by continuous improvements in the service sales, somewhat 1%, so maybe nothing to write home about yet.
During the quarter also, the first order for the series produced Volvo 7900 Electric we got in from Luxembourg, which is very good. Reduces fuel consumption with 80%. We presented also a number of very innovative solutions at the IAA fair, not at least when it comes to ergonomics. If you take Volvo Dynamic Steering just as an example, it actually reduces the muscular strain for drivers with 20%-30% in normal conditions and up to 70% in specific conditions. We know from research that that is one of the main parameters to have drivers to be attentive, actually. We also introduced pedestrian and cyclist detection, and we had energy and urban transport focus with our different executions from hybrids and all the way through to full electric executions on the city bus side.
Some major orders also important for us, 126 double-deck hybrids to the U.K., almost 140 buses to San Antonio in the U.S., and 100 units to a big customer in Taiwan, to mention some. When it comes to Volvo Penta, if you start with the market situation, marine leisure segment remains flat, but we see some signs of a slight increase, but the sub-segment gasoline still declining, actually. We are gaining market shares in a declining market, but it's declining. Interesting enough, also, we were awarded Engine and Propulsion System of the Year by Yachts France Magazine at the World Yachts Trophies 2016, recognizing our IPS innovations also for the new introductions we have done in this segment.
In Marine Professional, it is what we see continuously affected by the oil and gas segment, whereas our industrial off-road showed a scattered picture when it comes to the demand, but we are gaining new customers in a good pace. In Power Generation, there is a slight improvement related to Asia, Middle East, Africa, and export-oriented European markets, whereas Europe domestic, if I may say so, Europe internally and North America are weaker. Finally, also, while both orders and deliveries were down, driven by the slowdown in the marine gasoline segment, sales continue with 5% up, driven by a more heavy product mix. Also positive was the increase of 14% service sales with strong momentum in Marine Leisure. In this particular business, it's very good with a long and good summer as a matter of fact, and we saw that, as you know.
All in all, Volvo Penta is showing good progress. I would, in particular, like then to highlight the awards of new customers in the off-road segment moving forward. With that, I will leave the word to Jan to go through the figures for the quarter.
Thank you very much. Third quarter this year, I think it is a quarter that is in line with our own expectations, broadly. What it is all about right now, as you see, is that the demand, if you take the global demand, is downwards a little bit. You see that the regions are behaving very different. This means that our task is very much to manage the upswings and downswings in the different regions, and to do that in an efficient way. Which means that we basically don't have any help for the markets, means also that we have to continue to work with our continuous improvement work with the internal efficiency in the company. Flexibility and efficiency is very important from that point of view. Sales are down 6%, limited currency effects in this quarter.
We see, actually the biggest driver of the downturn of the sales is coming from vehicles down 10%. Service is a little bit, you could say, almost flat. Region-wise here, that is what I talked about before. You can see that Europe is coming up for the group, while North America is coming down. We can see that, of course, also South America, talking about regional swings, is down compared to one year ago. Asia is a little bit up, and Africa and Oceania is a little bit down. Here you see what we really are working with our regional value chains to make this in an efficient way. The operating income, adjusted operating income. Here we, as you know, before we have also disclosed the one-timers. We make it a little bit simple now and talk about adjusted.
I can promise you that we will only have the big major things here, and we will be perfectly clear on what it is as well. I think it makes life a little bit easier, both for you and for me, when we do this. Basically coming from a SEK 5.1 billion in profit last year to the SEK 4.8 this year. As you can see, when it comes to the different business areas, they are all, with the exception of buses, actually contributing to the improvement. I will come back on the different business areas a little bit later. Group Functions and Other. Actually, we are a little bit on the low level Q3 last year. This year, we see that it is related to IT. As you remember, we had an external IT business with gross profits that we sold that were included in this item. We have also a transition cost when we do the outsourcing as well. That is going according to plan. The business case is still there. That is what explaining the higher figure that we see in Group Functions and Other. Looking into the different parts of the P&L, that explains the difference.
Of course, it is the gross income that takes down the profit. As you can see, the gross income margin is more or less on the same level as last year. This is to a large extent driven then by, or is driven basically by volumes. The efficiency programs or the structure programs that we are running, actually both are contributing here, as you can see when it comes to cash, R&D, selling, and admin, and it actually goes according to plan.
Here in the other, which you should not compare to the others that we had on the previous slide. Here is mainly related actually to the credit losses in China. Last year, we had approximately SEK 300 million in credit losses in China. This year is a little bit just short of SEK 100 million. That's the main reason for this improvement. Apart from that, you can see here that we have actually favorable market mix. The good markets that we have in Europe actually helps us from that point of view, while the lower markets in North America is taking us down. Service business is actually, although not from a volume perspective, but actually this quarter from a margin perspective, helping us also on the positive side. Cash flow in the quarter, SEK 2.1 billion. Third quarter is usually, from a season point of view, a weak quarter.
As you know, it's the first and the third quarter I think here what maybe sticks out a little bit is that the payable side usually is a little bit on the weaker side compared to what we had in this quarter. As you know, the fourth quarter is also then the strongest cash flow quarter. As you saw today as well, we are divesting some of our, or actually more or less all of our real estate in Gothenburg as well. It's SEK 2.7 billion, that will, of course, then further strengthen our balance sheet. We are currently at a net debt of SEK 7 billion, approximately 9% net debt to equity. You should also remember then that we have the fine for the EU investigation or the EU settlement that we have as well. That will come in the fourth quarter.
Looking closer into trucks then. Delivered trucks is down 13% and of course it comes from almost half of the sales compared to one year ago in North America, while Europe is up a little bit more than 10%. Sales then in terms of vehicles down 13% and service 1%, both currency adjusted. Despite that drop then in volumes and sales that we see, we can see here that we go from an operating margin of 7.2% up to 8.2% for our truck operations. Of course, we have some currency effect as a positive of a little bit less than SEK 200 million for trucks. You saw on the group level it was almost flat. You always ask me, so I can say it immediately, what do you think for the year?
When it comes to the transaction effect on the P&L for the whole year, we think it will be around SEK 1.5 billion, with all the other conditions that I always say as well, given the flows and so on. Here we have in the truck business for the quarter, SEK 200 million. Of course, since the truck is such a big part of the group, you will have exactly or more or less the same explanations as we had for the group on the group level. The market mix, the effects of the efficiency programs, service business also, then also, of course, on the negative side, volumes and how it affects our capacity utilization. CE, flat in terms of machine deliveries, but here, as Martin mentioned, I think it's quite an important factor.
We see now that the product mix is going in the wrong direction, with actually Volvo, the Volvo machines coming down, SDLG machines coming up, which is not good for the profitability. Within the GPE segment, we are coming from the bigger machines into the slightly smaller machines, and also compact is growing more than what the big machines are. There's a lot of movements in the product mix, but you can say that all of them are right now on the negative side. Fairly flat in terms of machine sales when it comes to both machines and service. The operating income is slightly better compared to one year ago, 5.2% compared to 4.8%. A little bit small improvement, SEK 600 million in the quarter.
Here you can see that on the positive side, you have the lower credit losses from China, approximately SEK 200 million, while we are hit here on the product mix and on the currency side. I would say that this might give you a little bit of a picture, are we not doing anything ourselves? You can say that the product mix are actually overshadowing a lot of the good work that we are doing within Volvo Construction Equipment that you basically cannot see because it is overshadowed by the product mix. The improvement programs in CE is ongoing, and they are there, and they give result. When we do this kind of presentations, we take the major factors, so that's why it gets overshadowed. On the bus side, flat in terms of vehicle sales and service sales as well.
The operating income comes down compared to one year ago. Here we have quite a few interesting currency pairs within buses, I can tell you, since you know we have operations in India, Mexico, Brazil, and it's not always easy to. Buses from a currency perspective does not always behave as the group does as a whole. This quarter was a negative, almost SEK 140 million on the currency side. Apart from that, we have also lower volumes worth to mention. We have also the product and market mix, mainly mix related within Europe, with this quarter being a little bit less on the hybrid side compare, which is actually good for our profitability. We also see some market mixes actually within the Nordic region that have been unfavorable to us. Also here you can say that the cost programs are going in.
It's not only structure, but it's also in terms of cost when it comes to our products and so on. EBIT margin was 4.3% compared to 6.1% one year ago. Volvo Penta continues to deliver, 14.5% compared to 13.5% last year. Here we see that flat on the product side, on the engine side, 14% up. It's actually so that we got almost one more month of service sales in the third quarter. Big parts of the regions, actually had a very good autumn for us. We of course, especially noted that in the Nordic region, but it is actually what gives us a good development on the service side. Here also from a profitability point of view, good product mix as well, related to bigger engines, 16-liter engines, gensets, and these kind of things. While gasoline leisure is lower.
That's also helped the profitability in Volvo Penta. Financial services on a good level, not much to talk about. We see that the profitability is actually improving compared to one year ago. In terms of credit risks, Europe is right now very good. We come from a situation, you can say, where we have been in an extremely good and low level in terms of credit risk in Americas or North America, when it now starts to come back to, you can say, normal level, which is no worrying signs, what we see in the U.S. We managed the downturn in Brazil in a way that we still actually make money in Brazil on the financial services operations, which I think is good. By that, you want to summarize, Martin?
Thank you, Johan. I think when it comes to the three points we have already discussed, that maintained profitability on lower volumes and then in particular, the improvements that we have seen in trucks. Also just to come back to what we have talked about during the last quarterly reports also, that we are continuing to drive the organization brand and business area centered, clear, and also regionally centered, which will be even more important now for the coming periods, also with the strength of the regional value chains. Not at least when it comes to flexibility and following the different demands, but also when it comes to continuous improvement and connecting a more customer-centric organization. We feel that we have good momentum in that change as well, actually, for the 10 business areas of the group.
A clear direction, steady deliveries for this quarter, and just moving ahead as a group. I think that's the summary.
Okay. Thank you very much. Now we open up for questions. We start here.
Hans Singer, Handelsbanken. I have three questions. From the cash flow. You had a negative working capital effect last year, -SEK 8 billion, so it is a significant step up. Maybe you could talk a little bit about that, and also if it is a result of cutting production in North America. Second question is on North America. If I do my numbers on ACT numbers , your production was down around 42%. Given your guidance for next year, what kind of a delta in terms of production change do you need to do? Last on Europe, summarizing an offer exhibition, people are still talking about tough pricing and also Daimler coming back, but you will continue to grow your business. Maybe you could talk a little bit on that. Thanks.
I can take this.
We start with North America when it comes to pre-inventories, as we already say, the 240,000 that we are forecasting for 2016 is less than the production cuts we have done, both in the calculations and also what we have announced, so to speak. We are saying around 40%. That means that the delta between the two. Partly, we have also lost market shares, in all fairness, to calculate, call a spade for a spade. The second part is obviously that we are seeing also decreases in the inventories. From that perspective, the 215, from a production delta, it will be less, so to speak, than we have seen this year.
We are extremely firm that we will continue to have the right balance between what orders we are getting in, deliveries, and inventories, and not have a strategy of hoping for the best, so to speak. Therefore, we are working very close. We will have a number of stop days and adding up to maybe a couple of weeks during the fourth quarter. I think the main message about that is that the balance and the discipline regarding, as I said, deliveries, order intake, and inventory is the main priority. Also balance that with the right quality in the business, because with the down pressure. I will not guide more than that when it comes to the production level, but that is the thinking behind what we are doing.
When it comes to Europe and pricing, et cetera, I think, as I said, we have had a good momentum, not at least for Volvo when it comes to market share and development and order intake, et cetera. Price-wise, it is still a tough market in Europe, and an obvious reason is that there are so many rainy days out there in the other regions, and a lot of the OEMs are using, obviously, Europe for supplies to other parts of the world as well. In a market that is on high levels in Europe, everyone wants to be there. I should say it is a stable, if something, pricing. Stable pricing in Europe, so to speak.
Now working capital if anything, if you look North America with the down, it is actually negative more than it is positive. I would rather put it on the fact that I think we were also a little bit surprised on the payable side because we ramped up after the summer holidays to high levels in Europe.
We maybe did that a little bit quicker and bigger than what we did after the summer holidays last year. I think that is more of a thing. It might always be this kind of the payment dates that we have in the quarter as well. I think we were also a little bit surprised, but it is not related to North America, because if anything, that is a negative.
Erik Golrang, Nordea. Also three questions. The first one on services, particularly for trucks, which was down by 1%, I think currency adjusted. If you could elaborate a bit of the drivers there, and in that context, particularly North America, where you have been optimistic about the prospects for improving growth and services and when we might see that. Second question is on this production reduction you are planning for Europe, if you can quantify that in any way. The third question is on construction equipment. You made a few comments, talking about the shared knowledge across the group. We are also seeing that there are a number of construction equipment assets up for sale out there. We have Hyundai Heavy exiting their CE business. We have Doosan as well, doing something with Bobcat. No opportunity to join forces with any one of these?
Take the second question. I was writing. I cannot do two things at the same time.
European production.
Okay, sorry. Yeah, European production. If we start with services, what we saw in the quarter, obviously, as you know, services is a long-term game, so to speak, and for good and for bad, both when it comes to the increases, but also when it comes to decreases. That's the reason why we really are focusing on an increased share of wallet when it comes to the customers, because that is serving as a cushion also when it comes in relation to units. In North America, we saw a small decline. More or less trucks was on, you can say, steady levels, minus 1%. We saw somewhat decrease, and we are sure that it's related to somewhat lower activity on the highway segment. At the same time, one should know that our market share in North America when it comes to services is very low.
The real things that we are driving now is, for example, that we discussed last quarter, uptime, focus base, the connectivity, and where we are doing it. We have a big network. We see improvements in the services. From an activity level, we know what to do. We have a lot of discussions. I was over in the U.S. last week discussing with our dealers how to execute it together, because this is really teamwork, and the plan is there. From quarter to quarter, so to speak, I'm not worried more than I think it's activity level in the short run here. The opportunity in the rolling fleet exists. In Europe, we saw improvements for Volvo.
In Renault that is, again, as for North America, very important to continue to work on what we have in the rolling fleet since we have been shipping lower volumes the last years, and we need to capture what is out there, so to speak. Production levels in Europe, as I said, we have increased for two reasons during quarter three, and we will keep that to a large extent in quarter four. Somewhere during quarter four, we will slightly adjust that downwards, and the main reason is that we see that the lead times is coming back to a reasonable level. Because one of the deteriorating points is we have too long lead times, and once they are to a normal level, we will adjust with the same strategy as we are running in North America or South America.
We will not produce to stock, basically, or as low as possible. When it comes to Volvo Construction Equipment, the reason why I wanted to mention that is that it's interesting to see when you start to see the backbone of new technologies and the importance of sharing the modules and the software around that actually. When it comes to opportunities in market, we will continue to overlook that, but we will work on it before we are having working groups on the quarter three reporting, so to speak.
We will have a question from the telephone also.
As a reminder, if you would like to ask a question, you will have to press zero one on your telephone keypad. Our first question comes from the line of Graham Phillips from Jefferies. Please go ahead. Your line is open.
Yes. Good morning. Graham Phillips from Jefferies. Two questions, please. First of all, on Europe and looking at Renault Trucks. Can you talk a little bit about what's happening there in terms of, you obviously have the new T truck on the heavy side, but it looks like things have cooled off a little bit. What is the impact from the capitalization of R&D? Would that start to reverse in the fourth quarter? When it comes down to Renault and Europe, I think, in all fairness for quarter three, as we said, we had a flat quarter in relation to the total deliveries in the heavy segment. That is of course weaker than. We have still remained with a market share of 8%.
We are prioritizing the quality in the business for Renault. The good news was actually that we were up with 7% in order intake. I think we have the right focus. Also, the brand-based organization with Renault will actually also support that strategy, and that we are convinced and we have a good team in place.
When it comes to the capital statement.
When it comes to R&D, for the first two quarters this year, we capitalized more than we amortized. We have said that it will turn in the second half of this year, that we will amortize more than what we capitalized. If I remember correctly, it was SEK 41 million actually that we had more in amortization than capitalization in the third quarter, and that trend will continue into the fourth quarter. We will probably net for the whole year be a little bit more capitalized than amortized, though.
Okay, thank you. My second question is around the financial service activities. I see that the penetration rate has ticked up slightly, it's still lower than what your competitors are getting. When you think about the credit rating that you have, is there much more that you can do? What are the credit rating agencies saying about potentially upgrading your credit rating, which I think is 2 notches above junk?
When it comes to financial services, talking about penetration, I think we have the penetration. Of course, there are some markets that we want to improve the penetration, that's more out of a business perspective, it's not at all related to how we look upon rating. There are a few important markets where we should become better. I think I can mention France is not on a level where we want to see it. Japan is on a low level. We have new also market entries for financial services where we are building up our market presence, the best example of that is India, actually. We are currently on very low penetration levels, that, of course, affects the global figures.
We have room to continue to develop the good profitable business with good credit control in our financial services without having any kind of effect from the rating agencies. I don't think it's at all connected as long as you run it in a good way.
You don't think that the business would benefit from a higher credit rating?
Absolutely. That's another thing. The cheaper we can borrow money, the better it is for our business. Absolutely. That I agree with.
Exactly. What sort of things do you need to do to improve that credit rating?
To improve the credit rating is to improve the profitability in the long run, take down the swings in our profitability that we have had historically, i.e., to take care of global upturns, downturns, and regional upturns, downturns.
Increase services.
Increase services. That's what we can do. Be disciplined when it comes to the balance sheet and capital allocations. In that respect also, we announced this morning that we are, as maybe that you got also, that we are divesting real estate in Gothenburg in line with our strategy to concentrate our activities in Gothenburg to Campus Lundby. That is also in the short run. This is to simplify the portfolio to really concentrate around the items that Jan said here.
No, I understand that. Of course, in the fourth quarter, you've now indicated that the EU truck fine will be going out the door, and I think you've also got China credit losses that have to be reimbursed to banks. I think it's SEK 6 or 7 billion that goes out the door on those two items.
Okay. We have another question from the telephone before we turn back to the auditorium.
Our next question comes from the line of Klas Bergelind from Citi. Please go ahead. Your line is open.
Yes. Hi, Martin. Hi, Johan. It's Klas from Citi. I have three questions, please. Firstly, on Europe again, I understand that you're quite flexible looking at the workforce. I think you can cope with a low double-digit decline in volumes without seeing much margin impact. What about price versus cost? We see input costs increasing sharply, and we know that pricing is not great in Europe. You have Scania with a new truck range, and Daimler wants to take market share again. Do you believe price versus cost will get worse from here?
When it comes to the marketplace, when introductions are happening, normally that is changing a little bit, the dynamics, so that we have to overlook what is happening. As we have said also in this pretty harsh environment, not at least when it comes to the export markets out from Europe, I think we have maintained a good discipline on that, and that is what we're working on. Obviously, we need to continue to offset the different type of input costs with productivity gains and simplifications and taking out the type of cost. That is the basis that we're working with now with the brand-based organization, P&L responsibility, taking out, so to speak, via efficiency and quality improvements, et cetera.
Okay. My second question is on Europe and looking a little bit about how you look at the different countries. They're down 5% next year. How much is this driven by U.K., a market that already was near peak before Brexit, versus other countries? I assume that U.K. will be down quite a lot, and then maybe Northern Europe softens and Southern Europe perhaps flattish. If you could just help us a little bit about your thinking on a country level, please.
First of all, as I said, we see two main factors, and obviously then you have a little bit mix in the different forecasts for the region, so to speak. Still, obviously, Southern Europe has a potential upwards. You have, so to speak, an unrealized replacement need to some extent in Southern Europe. The two main factors that we have been looking into is not big
Really big swings in the normal marketplace. One effect is a softening U.K. following Brexit, as you said, peak, and also that we see that the average vehicle age is coming down. A little bit overswing that we had in replacement will come down. Still a market on good levels. That is what we are forecasting. We see good activity, as we said, also in Eastern Europe also, and not at least when you follow the flow activities, both with our connected vehicles and also when it comes to amount and other indicators.
Thank you. Finally, just thinking about construction equipment and looking at the margin. Again, perhaps more relevant for CE than for trucks. If steel prices are up quite a lot, then the impact on COGS typically lags steel prices a couple of quarters. The fourth quarter is always seasonally weaker on demand. How concerned should we be about the margin for construction equipment going into the fourth quarter? You have the negative mix headwind from brands now, and potentially you could have this price cost getting weaker.
I think first of all, when it comes to the raw material prices, as you correctly said, they usually kick in with a lag, both when it goes in the right direction and when it goes in the wrong direction, fortunately. I think that will probably take a little bit time before it kicks in. When it comes to, as you correctly said, the fourth quarter is a weak quarter and that from a season point of view, and I think you guys should be cognizant of that and of course, look into what we, in terms of the product mix as well. You saw the order intake for SDLG and so on, and I think that's what you have to watch out for.
Thank you.
More questions here.
Thank you. Andreas Brock from QIC Asset Management. A question on the service network and the strategy of opening up the Volvo service network and allowing Renault Trucks to be serviced there as well. Could you elaborate on how that strategy is going? For example, we heard that in Norway it's doing very well. Sweden is not really opening up its service network to Renault Trucks, how is that strategy going overall in Germany and other countries?
First of all, if we take the sales and service network strategy, generally speaking, our main strategy is to have that separated as much as possible when it's possible from a critical mass point of view. When it comes to sales, it's a given, that we are working hard on to really have that all the way to the dealers, et cetera. When it comes to service network, obviously we should use the force of the group. Where we don't have the right critical mass for one brand or for the two brands combined, we should obviously use the fact that we can combine it so we have the right presence, because presence is everything. When it comes to the work of using the different networks, it could also be vice versa. I think that is running according to plan.
In some areas, we did go too long, that we are correcting now, in some areas we still have work to do to have the right presence. It's an ongoing work, it's a good both coordination and understanding between the two brands. It might be in some places where it's not executed well, we need to correct that, obviously.
Excellent. Thank you.
Björn, Danske Bank. A short question on JVs and specifically then in China, I don't think. The results that we see in the P&L, is that a reflection of where you are in terms of where the market demand is? Is it very much burdened by ongoing investments?
I think when it comes to our joint venture in China, last year was, as you remember, 2015, truck markets went down quite a bit, if I remember, approximately 25%. For the whole year last year, it was making losses, including the third quarter. This year, with volumes coming back, the joint venture is turning into black figures again. It actually performs better compared to one year ago. I think, if anything, the focus in it is a little bit we try to focus on the quality and the business we are doing, and that's why you see a little bit of loss of market share. The market, there are some pretty aggressive players in the market as well for the time being, and we rather focus on actually keeping a good and sound business there.
Year-over-year, it's actually improving if you look upon the entity. You can get into the noble art of group reporting, you can talk to Christer afterwards why it's not shown more in this line that you have in the P&L. Christer will be more than happy to take you through that.
Cool. Thanks.
Yeah. One more question from the telephone.
Our next question comes from the line of Alasdair Leslie from Societe Generale. Please go ahead. Your line is open.
Yeah. Hi. Good morning. 2 questions, please. Firstly, just in trucks, obviously service down 1%, adjusted overall, but North America down only 1% as well. Can you call out what your service growth was in Europe, perhaps in the quarter? Because I guess we really should be expecting that to be improving quite nicely given obviously rising activity, utilization rates, et cetera. Obviously you have a sort of strong focus on service as well. Sorry, I missed part of the call earlier, and really as a follow-up to 2 questions before, but why is there a decrease at service in Renault Trucks? You mentioned a decrease in the rolling fleet, but shouldn't that installed base be relatively stable? Is there perhaps something more structural there? The second question, just on South American trucks, obviously orders were up very strongly in Q3, 36%.
You said you're starting to see dealers place orders again in Brazil, which is very encouraging, and yet you're still calling for fundamentally a flat market next year. Maybe you could give some more color there on what's happening and what you think we need to see from here to make you a bit more confident of a stronger rebound in the Brazilian market next year. Thank you.
Yeah. As we said, when it comes to the service business for trucks, we are down a little bit more than the average in North America, excluding FX, it's approximately 2%, actually. That is really the lower activity in the short run that we see on highway. We also have, as I said, activities going on because there is a big untapped demand. Through our uptime centers, specific activities, the dealers that are executing on this strategy, we see positive momentum. Also continuous penetration also of the captive powertrain, not at least now when it comes to mDrive for Mack Trucks. There are a number of good parameters, but in the short run in this quarter, we're down with 2% excluding FX. In Europe, coming back to what I said about the rolling fleet, we have had lower shipments.
We have come down from a level of north of 10% market share, not at least in the heavy segment. That is in the long run affecting. Even if you have a rolling fleet that is pretty stable, we know also that market shares are declining over time. We have a higher market share when the trucks are, so to speak, younger. That is something that we're working on, but that is a fact. I don't think you should look at it as structural more than the fact that we need to work on the volume. As we have said, also the share of wallet, what we can do for the customers to have a higher penetration. In some of the markets where we know it has been a big tradition also of customer workshops, for example.
I think in many cases, we have good discussions. Again, with a brand-based organization, you get the right focus of the full P&L and what you need to do for that specific brand, so to speak. I think that is more or less the main comment. When it comes to South America, as we said, the two reasons for, so to speak, the production levels and deliveries was export markets are okay-ish, actually, both Chile and Peru, and also Argentina moving in the right direction. We see then signs of that extensive de-stocking has made stocks coming down to the right level also in Brazil and started to place orders.
As we said in the forecast, we don't believe in a quick uptick, and therefore we need to continue to focus on efficiency in the regional value chain that we have in Latin America or in South America. They have done a very good job so far, and further adjustments will be done also during the fourth quarter to fine-tune that. That is.
Sorry, just as a follow-on to that. Sorry. Again, I didn't miss part. Of course, you might have commented on this earlier, but if you could just comment on profitability down in Latin America, Brazil at present, that would be great as well.
We usually don't comment on that one, but if you take Latin America as a whole, it's actually working in profitability.
Yeah.
Of course, we utilize the fact that we have a good production right now in Brazil with low cost there due to the currencies, while the other markets in Latin America is more dollar related. As a whole, South America is pretty good, and Brazil is not that bad either, to be quite honest.
I think this is exactly also one of the main messages from us, and also not at least internally, how we are operating now. We cannot hide behind average. This is a world where we have swings in the different regions, markets close by, but we have the strength in the group that we have the regional value chains. The more linked they are, the better we can operate. I think the uptick from 7.2 to 8.2 give an averagely -13, but all the movements you have between markets, regions, et cetera, is showing an underlying strength in performance and closeness, and that is what we will continue to focus on.
Any more questions from the auditorium? We continue with one more from the telephone. Last one.
Our last question comes from the line of Jose Asumendi from JP Morgan. Please go ahead. Your line is open.
Many thanks. José, JP Morgan. A couple of items, please. The first one, wonder if you could help me out a little bit on deliveries, trucks, North America, Q4. We're looking for a step down versus Q3, or what's your business sense? Are we looking for flat maybe versus Q3? Coming back to LatAm, are you looking also to see sequentially orders up in Q4 versus Q3? Final item would be what you think about the business into 2017, particularly in the truck business, regardless of the end markets, what kind of efficiency gains can you get out of the system to continue to offset incremental R&D, incremental depreciation charges? If you could maybe put a number to that will be very helpful. Thank you.
I think when it comes to North America, we have been guiding on the total market. Also a little bit what we expect when it comes to market shares, et cetera. I think it's possible to have maybe an idea about what deliveries, et cetera, should look like. You have to consider a little bit when it comes to the stock reduction that has to continue to take place. When it comes to overall industry stock, it peaked actually, if I remember correctly, now in October last year with some what, more than 70,000 units, 73,000, 74,000 units. I think now we are down to around 55,000 for the whole industry.
In that regard, we have been better off. We will continue to make sure that we have strong discipline on that. The industry needs to take down the level to somewhere around 40 or just north of 40, we think. There are all the parameters really to think about when it comes to the fourth quarter. When it comes to South America, as we said, we have seen some signs lately on stabilization, et cetera. It's very early days also to say what is what. Is it a refill a little bit now when we have executed the de-stocking? Again, we stick to the guidance of 30,000 or 35,000 next year when it comes to the market in Brazil, with knowing also that the stock levels are more normalized again.
In terms of efficiencies and so on, when we leave this year, we are leaving, you can say, the SEK 10 billion structural cost reduction programs. We have already before that, of course, what we have talked about, how we want to become much more efficiency along our value chain, working with continuous improvements. Get that flow to work in the company, connect the different parts of the company much better to what they've been before, an extremely functional organization. Work along the value chain. There are huge gains to take out of that when we do that in a good way. Everything from the sales and service person, all the way through the organization to R&D. There's been too many gaps there. That's been extremely inefficient. That is the thing that we are focused on going forward.
Of course, there is a potential in that, but we have not quantified that to the external world.
When do you plan to quantify that?
I have quantified it, but if we are going to tell it to the external world, that's another thing.
Okay.
Also, just as a reminder, what we said also during our capital market update in London, regarding capital expenditures, we said also that the level that we've had historically is not what we will see in the future. As a factor of 1.3 or 1.4 over depreciation, so to speak.
Thank you.
Okay. By that, I think we say thank you for this press conference, and thank you very much for attending. Thank you very much.